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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO RULE 14(D)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
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HALLWOOD ENERGY CORPORATION
(Name of Subject Company)
HALLWOOD ENERGY CORPORATION
(Name of Person Filing Statement)
COMMON STOCK, PAR VALUE $.50 PER SHARE
(Title of Class of Securities)
40636M208
(CUSIP Number of Class of Securities)
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CATHLEEN M. OSBORN
VICE PRESIDENT AND GENERAL COUNSEL
4582 S. ULSTER STREET PARKWAY, SUITE 1700
DENVER, COLORADO 80237
TELEPHONE: (303) 850-7373
(Name, address (including zip code) and telephone number (including area
code) of person authorized to receive notices and communications on
behalf of the persons filing statement)
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is Hallwood Energy Corporation (the
"Company"). The address of the principal executive offices of the Company is
4582 S. Ulster Street Parkway, Suite 1700, Denver, Colorado 80237. The title of
the class of equity securities to which this Statement relates are the shares of
the common stock, par value $.50 per share, of the Company (the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER.
This Statement relates to the tender offer made by The Hallwood Group
Incorporated, a corporation organized under the laws of Delaware ("Purchaser"),
to purchase all outstanding Shares not currently beneficially owned directly or
indirectly by the Purchaser at a price of $19.50 per Share (the "Offer Price")
net to the seller in cash, without interest thereon, upon the terms and subject
to the conditions set forth in the Offer to Purchase, dated October 15, 1996
(the "Offer to Purchase") and the related Letter of Transmittal (which together
constitute the "Offer"), copies of which are filed as exhibits hereto and are
incorporated herein by reference. The Offer is disclosed in a Tender Offer
Statement on Schedule 14D-1 (the "Schedule 14D-1") filed with the Securities and
Exchange Commission (the "Commission") on October 15, 1996. The address of the
principal executive offices of the Purchaser, as reported in the Schedule 14D-1,
is 3710 Rawlins, Suite 1500, Dallas, Texas 75219.
The offer is being made pursuant to an Agreement and Plan of Merger, dated
as of October 9, 1996 (the "Merger Agreement"), among the Purchaser and the
Company. The Merger Agreement provides that, among other things, promptly after
the purchase of Shares pursuant to the Offer and the receipt of any required
approval of the Merger Agreement by the Company's stockholders and the
satisfaction or waiver of certain other conditions, the Company will be merged
("Merger") into the Purchaser. Following consummation of the Merger, the
Purchaser will continue as the surviving corporation. Upon consummation of the
Merger ("Effective Time"), each then outstanding Share not owned by the
Purchaser (other than Shares held by stockholders of the Company who have
properly exercised any appraisal rights they may have in accordance with Article
5 of the Texas Business Corporation Act ("TBCA")) will be converted into the
right to receive an amount in cash equal to the per Share price paid pursuant to
the Offer.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and business address of the Company, which is the person
filing this Statement are set forth in Item 1 above.
(b) Except as described herein, to the knowledge of the Company, as of the
date hereof there are no material contracts, agreements or understandings (other
than in the ordinary course of business), or any potential or actual conflicts
of interest between the Company or its affiliates and (i) the Company, its
executive officers, directors or affiliates or (ii) the Purchaser or its
executive officers, directors or affiliates.
Interests of the Special Committee
On June 7, 1996, the Board of Directors of the Company (the "Board" or
"Board of Directors") created a special committee comprised of those directors
of the Company who are neither officers or directors of the Purchaser nor
officers of the Company (the "Special Committee") to evaluate strategic
alternatives for the Company. The members of the Special Committee are Messrs.
Sebastian, Holinger and Collins.
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Interests of Certain Persons
The Purchaser already owns approximately 81.6% of the outstanding Shares
and, after the consummation of the Offer, it is expected that the Chairman of
the Board of the Company will continue to serve on the board of directors of the
Purchaser and that the President and Chief Executive Officer of the Company will
continue to be officers of the Purchaser. Three of the six members of the Board
are also members of the board of directors of the Purchaser or are officers of
the Purchaser. In addition, the law firm of Jenkens & Gilchrist, a Professional
Corporation, has provided legal services on an on-going basis to both the
Purchaser and the Company. Jenkens & Gilchrist are acting as legal counsel to
the Purchaser in connection with the Offer, the Merger and the other
transactions contemplated therein.
The following table sets forth the number of Shares owned beneficially as
of October 8, 1996 by (i) each director and executive officer of the Company who
owns Shares and (ii) the directors and executive officers of the Company as a
group. Mr. Guzzetti has sole voting and investment power with respect to the
shares reported. Mr. Guzzetti currently intends to tender his Shares in the
Offer.
<TABLE>
<CAPTION>
Amount
Name and Address Beneficially Percent of
of Beneficial Owner Owned Common Stock
<S> <C> <C>
William L. Guzzetti, President 285 *
All directors and executive officers
as a group (nine individuals) 285 *
<FN>
* Represents less than 1% of the outstanding Shares.
</FN>
</TABLE>
The table above does not include the 633,917 Shares held by the Purchaser
(81.6% of all outstanding Shares) of which Mr. Gumbiner is Chairman and Chief
Executive Officer and Mr. Troup is President and a director. Messrs. Gumbiner
and Troup are Directors of the Company, and Mr. Gumbiner is Chief Executive
Officer of the Company.
The Company is general partner of HEP. Mr. Guzzetti owns 100 Class A Units
of limited partner interest and six Class C Units (less than .01% of each class)
and currently exercisable options to acquire 42,500 Class A Units (less than 1%,
assuming exercise of the options) of HEP. Mr. Sebastian owns 400 Class A Units
and 26 Class C Units (less than .01% of each class) of HEP. Mr. Troup owns
currently exercisable options to acquire 56,666 Class A Units (less than 1%,
assuming exercise of the options) of HEP, and Mr. Gumbiner owns currently
exercisable options to acquire 85,000 Class A Units (less than 1%, assuming
exercise of the options) of HEP. No other director of the Company owns Units of
HEP. Executive officers of the Company, including Messrs. Gumbiner and Guzzetti,
own 403 Class A Units and 26 Class C Units and currently exercisable options to
purchase 201,166 Class A Units (2%, assuming exercise of the options) of HEP.
The Merger Agreement provides for the indemnification of the current and
former directors and officers of the Company from and after the Effective Time
(as defined below), and the maintenance of a policy of directors' and officers'
liability insurance for a period of six years after the Effective Time. See "The
Merger Agreement--Certain of the Covenants of the Company and the Purchaser"
below. The directors, officers and employees of the Company may be indemnified
against certain actions, claims and liabilities pursuant to the Company's
By-Laws.
Indemnification
The Company's Articles of Incorporation contain provisions which state that
no director shall be liable to the Company or its stockholders for monetary
damages with respect to claims by the Company or the stockholders for an act or
omission in the director's capacity as a director. The provisions do not limit
director liability for monetary damages for (a) any breach of the director's
duty of loyalty to the Company or its stockholders, (b) acts or omissions not in
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good faith or which involve intentional misconduct or a knowing violation of
law, (c) an act related to unlawful stock repurchase or payment of dividend, (d)
any transaction from which the director derived an improper personal benefit, or
(e) an act or omission for which liability of the director is expressly provided
for by statute.
The Company, its directors and its officers are covered under a Directors
and Officers Insurance Policy (the "D&O Insurance") effective for the period
from August 1, 1996 to July 31, 1997. Pursuant to the policy, the insurer agreed
(1) to pay on behalf of the Company's directors and officers loss from certain
claims arising from such directors' or officers' wrongful acts, except for any
loss which the Company pays to or on behalf of such directors or officers as
indemnification and (2) to reimburse the Company for loss from certain claims
which the Company pays to or on behalf of the directors or officers as
indemnification.
Contracts and Transactions between the Company and the Purchaser.
Certain contracts, agreements, arrangements and understandings between the
Company or its affiliates and certain of its directors, executive officers or
affiliates are described at pages 6 through 8 of the Company's Proxy Statement
dated March 31, 1996 relating to its 1996 Annual Meeting of Stockholders (the
"1996 Proxy Statement"). A copy of the 1996 Proxy Statement is attached as an
exhibit hereto and the portions thereof referred to herein are incorporated
herein by reference.
The Purchaser currently owns approximately 81.6% of the outstanding Shares
and, therefore, has the ability to control the Company through the election of a
majority of the Board and voting at meeting of stockholders. Three of the six
members of the Board also serve as directors and/or officers of the Purchaser.
Share Repurchases.
During the period from January 1, 1994 to the date of this Offer to
Purchase, the Purchaser purchased an aggregate of 37,312 Shares for a total
consideration of $615,621, with per Share prices ranging from $15.00 to $16.50,
and the Company purchased an aggregate of 163,912 Shares for a total
consideration of $2,388,335, with per share prices ranging from $11.36 to $20.50
(assuming that certain purchases of shares of the Company's Series D preferred
stock are treated on an as-converted basis). The average purchase price paid
during each quarterly period since January 1, 1994 is as follows:
<TABLE>
<CAPTION>
Average Purchase
Fiscal Year Ending Price Paid
<S> <C>
December 31, 1994
First Quarter..................................... $ na
Second Quarter.................................... na
Third Quarter..................................... na
Fourth Quarter.................................... na
December 31, 1995
First Quarter..................................... $ 11.36
Second Quarter.................................... 11.48
Third Quarter..................................... 20.50
Fourth Quarter.................................... 16.50
December 31, 1996
First Quarter..................................... $ na
Second Quarter.................................... 10.50
Third Quarter..................................... na
</TABLE>
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In addition in October 1994, the Purchaser exchanged 356,000 Shares for the
same number of shares of Series E preferred stock ("Series E Stock") of the
Company that had rights identical to the Shares except that the Series E Stock
had no rights to vote in the election of directors. In December 1995, the
Purchaser converted all of its Series E Stock into the same number of Shares, as
permitted by the terms of the Series E Stock.
The Merger Agreement.
The following is a description of certain provisions of the Merger
Agreement. Such description does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, a copy of which is filed as
an exhibit hereto.
The Offer. Pursuant to the Merger Agreement, Purchaser is obligated to
commence the Offer no later than five business days following the date of the
Merger Agreement. The Merger Agreement provides that the obligation of Purchaser
to consummate the Offer and to accept for payment and purchase the Shares
tendered pursuant to the Offer shall be subject only to the conditions set forth
in the Merger Agreement, which are described below under the caption "The Merger
Agreement--Conditions to the Offer." Subject to the terms and conditions of the
Offer, Purchaser will promptly pay for all Shares duly tendered that it is
obligated to purchase thereunder. The Board of Directors and a majority of the
members of the Special Committee shall recommend acceptance of the Offer to its
stockholders in a Solicitation/Recommendation Statement on Schedule 14D-9, as
such statement may be amended or supplemented from time to time, to be filed
with the Commission upon commencement of the Offer; provided, however, that if
the Board of Directors or the Special Committee determines that its fiduciary
duties require it to amend or withdraw its recommendation, such amendment or
withdrawal shall not constitute a breach of the Merger Agreement. Purchaser will
not without the prior written consent of the Company and the Special Committee
decrease the price per Share or change the form of consideration payable in the
Offer, decrease the number of Shares sought or change the conditions to the
Offer. Purchaser shall not terminate or withdraw the Offer or extend the
expiration date of the Offer unless at the expiration date of the Offer the
conditions to the Offer set forth below have not been satisfied or waived.
Conditions to the Offer. The Merger Agreement provides that,
notwithstanding any other provision of the Offer, the Purchaser shall not be
obligated to accept for payment any Shares or, subject to any applicable rules
and regulations of the Commission, including Rule 14e-1(c) (relating to
Purchaser's obligation to pay for or return tendered Shares promptly after
termination or withdrawal of the Offer) or pay for, and may delay the acceptance
for payment of or payment for, any tendered Shares unless there have been
validly tendered and not withdrawn prior to the expiration date of the Offer a
majority of the Shares not currently owned by the Purchaser which, together with
any Shares currently beneficially owned directly or indirectly by the Purchaser,
also constitutes at least 90% of the total Shares outstanding and issuable as of
the date the Shares are accepted for payment pursuant to the Offer (the "Minimum
Tender Condition"), or if on or after October 9, 1996, and at or before the time
of payment for any of such Shares (whether or not any Shares have theretofore
been accepted for payment or paid for pursuant to the Offer), any of the
following events shall occur:
(a) there shall be any statute, rule, regulation, judgment, injunction or
other order, enacted, promulgated, entered, enforced or deemed applicable to the
Offer or the Merger or any other action shall have been taken by any government,
legislative body, court or governmental, regulatory or administrative agency,
authority, tribunal or commission, domestic, supranational or foreign (each, a
"Governmental Entity"), or any other person, domestic, supranational or foreign
(i) challenging the legality of the acquisition by the Purchaser of the Shares;
(ii) restraining, delaying or prohibiting the making or consummation of the
Offer or the Merger or obtaining from the Company or the Purchaser any damages
in connection therewith; (iii) relating to assets of, or prohibiting or limiting
the ownership or operation by the Purchaser of all or any portion of the
business or assets of, the Company or the Purchaser (including the business or
assets of their respective affiliates and subsidiaries) or imposing any
limitation on the ability of the Purchaser to conduct such business or own such
assets; (iv) imposing limitations on the ability of the Purchaser (or any
affiliate of the Purchaser) to acquire or hold or to exercise full rights of
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ownership of the Shares, including, without limitation, the right to vote the
Shares purchased by them on all matters properly presented to the stockholders
of the Company or (v) having a substantial likelihood of any of the foregoing.
(b) there shall have occurred and be continuing (i) any general suspension
of, or limitation on times or prices for, trading in securities on any national
securities exchange or in the over-the-counter market in the United States or
(ii) a declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States (whether or not mandatory);
(c) the Company shall have breached or failed to perform in any material
respect any of its covenants, obligations or agreements under the Merger
Agreement which breach or failure shall not have been cured within the earlier
of 30 days or the time for any payment causing such breach or failure, if
curable, or any representation or warranty of the Company set forth in the
Merger Agreement shall have been inaccurate or incomplete in any material
respect when made or thereafter shall become inaccurate or incomplete in any
material respect;
(d) any change, including, without limitation, any change arising out of or
related to any natural disaster, shall have occurred or been threatened or
become known (or any condition, event or development shall have occurred or been
threatened or become known involving a prospective change) in the business,
properties, assets, liabilities, condition (financial or otherwise), or results
of operations of the Company or any of its subsidiaries that could reasonably be
expected to be materially adverse to the Company and its subsidiaries taken as a
whole;
(e) all consents, registrations, approvals, permits, authorizations,
notices, reports or other filings required to be made or obtained by the
Company, the Purchaser or any stockholder of the Purchaser with or from any
Governmental Entity in connection with the Offer and the Merger shall not have
been made or obtained except where the failure to make or to obtain, as the case
may be, such consents, registrations, approvals, permits, authorizations,
notices, reports or other filings could not reasonably be expected to have a
material adverse effect on the condition (financial or otherwise), properties,
assets, liabilities, business or results of operations of the Company and its
subsidiaries taken as a whole;
(f) the Special Committee of the Board of Directors shall have adversely
amended or modified or shall have withdrawn its recommendation of the Offer or
the Merger, or shall have failed to reconfirm publicly such recommendation upon
request by the Purchaser, or shall have resolved to do any of the foregoing; or
(g) the Agreement shall have been terminated in accordance with its terms
or Purchaser shall have reached an agreement or understanding with the Special
Committee providing for termination of the Offer which, in the reasonable
judgment of the Purchaser with respect to each and every matter referred to
above, and regardless of the circumstances (including any action or inaction by
the Purchaser or any affiliate of the Purchaser) giving rise to any such
condition, makes it inadvisable to proceed with the Offer or with such
acceptance for payment or payment.
The foregoing conditions are for the sole benefit of the Purchaser and may
be asserted by the Purchaser regardless of the circumstances (including any
action or inaction by the Purchaser or any affiliate of the Purchaser) giving
rise to any such conditions or may be waived by Purchaser in whole or in part at
any time and from time to time in its sole discretion, other than the Minimum
Tender Condition, which the Purchaser may waive only with the consent of the
Special Committee. The failure by Purchaser at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time. Any determination by the Purchaser concerning the events
described above will be final and binding on all holders of the Shares.
The Merger. The Merger Agreement provides that, upon the terms and subject
to the conditions thereof, at the time at which the Company and the Purchaser
file a certificate of merger with the Secretary of State of the State of
Delaware and articles of merger with the Secretary of State of the State of
Texas and make all other filings or recordings required by the Delaware General
Corporation Law ("DGCL") and the TBCA in connection with the Merger, the Company
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shall merge with and into the Purchaser in accordance with the DGCL. The Merger
shall become effective on the date on which the Certificate of Merger is duly
filed with the Secretary of State of the State of Delaware and Texas Articles of
Merger have been duly filed with the Secretary of State of the State of Texas
(the "Effective Time"). As a result of the Merger, the separate corporate
existence of the Company will cease, and the Purchaser will be the Surviving
Corporation (as defined in the Merger Agreement).
At the Effective Time, (i) each Share issued and outstanding immediately
prior to the Effective Time (other than Shares owned by the Purchaser or any
other direct or indirect subsidiary of the Purchaser (collectively, the
"Purchaser Companies") or Shares that are owned by the Company or any direct or
indirect subsidiary of the Company or Shares ("Dissenting Shares") which are
held by stockholders ("Dissenting Stockholders") properly exercising appraisal
rights pursuant to Articles 5.11 and 5.12 of the TBCA, if applicable
(collectively, "Excluded Shares")) shall be converted into the right to receive,
without interest, an amount in cash (the "Merger Consideration") equal to $19.50
or such greater amount which may be paid pursuant to the Offer and (ii) all
Shares, by virtue of the Merger and without any action on the part of the
holders thereof, shall no longer be outstanding and shall be canceled and
returned and shall cease to exist, and each holder of a certificate representing
any such Shares (other than Excluded Shares) shall thereafter cease to have any
rights with respect to such Shares, except the right to receive the Merger
Consideration for such Shares upon the surrender of such certificate in
accordance with the Merger Agreement or the right, if any, to receive payment
from the Surviving Corporation of the "fair value" of such Shares as determined
in accordance with Article 5.12 of the TBCA. At the Effective Time, each Share
issued and outstanding at the Effective Time and owned by any of the Purchaser
Companies or held in the Company's treasury or owned by the Company or any
direct or indirect subsidiary of the Company shall cease to be outstanding,
shall be canceled and retired without payment of any consideration therefor and
shall cease to exist.
The Merger Agreement provides that the Dissenting Shares will not be
converted into or represent the right to receive the Merger Consideration.
Holders of such shares will be entitled to receive payment of the "fair value"
of such Shares held by them in accordance with the provisions of Article 5.12 of
the TBCA, except that all Dissenting Shares held by stockholders who fail to
perfect or who effectively withdraw or lose their rights to dissent will
thereupon be deemed to have been converted into, as of the Effective Time, the
right to receive, without any interest thereon, the Merger Consideration, upon
surrender of the certificate or certificates that formerly evidenced such
Shares.
The Merger Agreement provides that, at the Effective Time, the Certificate
of Incorporation and the By-Laws of the Purchaser in effect at the Effective
Time will be the Certificate of Incorporation and By-Laws of the Surviving
Corporation.
The Merger Agreement provides that in the event that the Purchaser or any
subsidiary of the Purchaser shall acquire at least 90% of the outstanding Shares
pursuant to the Offer or otherwise, the Purchaser and the Company have agreed,
at the request of the Purchaser, to take all necessary and appropriate action to
cause the Merger to become effective as soon as practicable after the acceptance
for payment and purchase of Shares by Purchaser pursuant to the Offer without a
meeting of stockholders of the Company in accordance with Section 253 of the
DGCL and Article 5.16 of the TBCA.
The Merger Agreement provides that the directors and officers of the
Purchaser as of the Effective Time shall be the directors and officers,
respectively, of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until the earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and By-Laws.
Certain of the Covenants of the Company and the Purchaser. The Company has
agreed that, prior to the Effective Time (unless the Purchaser shall otherwise
agree in writing and except as otherwise expressly contemplated by the Merger
Agreement), the business of the Company and its subsidiaries shall be conducted
only in the ordinary and usual course consistent with past practice and, to the
extent consistent therewith, each of the Company and its subsidiaries have
agreed to use its best efforts to preserve its business organization intact
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(including maintaining all of its Permits (as defined in the Merger Agreement))
and to maintain its existing relations with customers, suppliers, employees and
business associates and it shall take no action that would adversely affect the
ability of the parties to consummate promptly the transactions contemplated by
the Merger Agreement.
Pursuant to the Merger Agreement, if required following termination of the
Offer, the Company will take all action necessary to convene a meeting of
holders of Shares as promptly as practicable to consider and vote upon the
approval of the Merger Agreement and the Merger. The Company has agreed that the
Board, subject to their fiduciary requirements of applicable law, shall
recommend such approval and that the Company shall take all lawful action to
solicit such approval. The Purchaser has agreed to vote all Shares then owned by
the Purchaser Companies (including all Shares currently owned by the Purchaser
Companies) in favor of the Merger Agreement.
The Purchaser and the Company have each agreed in the Merger Agreement,
subject to the terms and conditions provided therein, to make promptly their
respective Regulatory Filings and Purchaser Regulatory Filings (as each term is
defined therein) and thereafter to make any other required submissions with
respect to the Offer and the Merger and to use their respective best efforts to
take promptly, or cause to be taken promptly, all other action and do, or cause
to be done, all other things necessary, proper or appropriate under applicable
laws and regulations to consummate and make effective the transactions
contemplated by the Merger Agreement as soon as practicable.
The Purchaser and the Company have agreed that from and after the Effective
Time, the Surviving Corporation and the Purchaser will indemnify and hold
harmless each present and former director and/or officer of the Company,
determined as of the Effective Time (the "Indemnified Parties"), that is made a
party or threatened to be made a party to any threatened, pending or completed,
action, suit, proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she was a director or officer of
the Company or any subsidiary of the Company prior to the Effective Time and
arising out of actions or omissions of the Indemnified Party in any such
capacity occurring at or prior to the Effective Time (a "Claim") against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
amounts paid in settlement pursuant to the Merger Agreement, losses, claims,
damages or liabilities (collectively, "Costs") reasonably incurred in connection
with any Claim, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that the Company would have been permitted under
Texas law. The Surviving Corporation and the Purchaser shall also advance
expenses (including attorneys' fees), as incurred by the Indemnified Party to
the fullest extent permitted under applicable law provided such Indemnified
Party provides an undertaking to repay such advances if it is ultimately
determined that such Indemnified Party is not entitled to indemnification.
Any Indemnified Party wishing to claim indemnification under the Merger
Agreement, upon learning of any such claim, shall promptly notify the Surviving
Corporation thereof, but the failure to so notify shall not relieve the
Surviving Corporation of any liability it may have to such Indemnified Party if
such failure does not materially prejudice the indemnifying party. In the event
of any such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), (i) the Surviving Corporation shall have
the right to assume the defense thereof and the Surviving Corporation shall not
be liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if the Surviving Corporation
elects not to assume such defense or counsel for the Indemnified Parties advises
that there are issues which raise conflicts of interest between the Surviving
Corporation and the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and the Surviving Corporation shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, however, that the
Surviving Corporation shall be obligated to pay for only one firm or counsel for
all Indemnified Parties in any jurisdiction unless the use of one counsel for
such Indemnified Parties would present such counsel with a conflict of interest,
(ii) the Indemnified Parties will cooperate in the defense of any such matter
and (iii) the Surviving Corporation shall not be liable for any settlement
effected without its prior written consent, which consent will not be
unreasonably withheld; and provided further that the Surviving Corporation shall
not have any obligation hereunder to any Indemnified Party when and if a court
of competent jurisdiction shall ultimately determine, and such determination
shall have become final and non-appealable, that the indemnification of such
Indemnified Party in the manner contemplated hereby is prohibited by applicable
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law. If such indemnity is not available with respect to any Indemnified Party,
then the Surviving Corporation and the Indemnified Party shall contribute to the
amount payable in such proportion as is appropriate to reflect relative faults
and benefits, with any aspect of "fault" otherwise allocable to the Company
being allocated to the Surviving Corporation.
If a claim for indemnification or advancement is not paid in full by the
Surviving Corporation within thirty days after a written claim therefor has been
received by the Surviving Corporation, the Indemnified Party may any time
thereafter bring suit against the Surviving Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the Indemnified
Party shall be entitled to be paid also the expense of prosecuting such claims.
Neither the failure of the Surviving Corporation (including its Boards of
Directors, independent local counsel or shareholders) to have made a
determination prior to the commencement of such suit that indemnification of the
Indemnified Party is proper in the circumstances because he or she has met the
applicable standard of conduct, nor an actual determination by the Surviving
Corporation (including its Boards of Directors, independent legal counsel, or
shareholders) that the Indemnified Party has not met such applicable standard of
conduct, shall be a defense to the suit or create a presumption that the
Indemnified Party has not met the applicable standard of conduct.
In addition, for a period of six years after the Effective Time, the
Surviving Corporation agreed to maintain the Company's existing officers' and
directors' liability insurance or equivalent liability insurance ("D&O
Insurance") providing to the individuals who are directors of the Company
substantially the same coverage as is currently provided to the directors of the
Company, so long as the annual premium therefor is not in excess of 125% of the
last annual premium paid by the Surviving Corporation prior to the date of the
Merger Agreement (the "Current Premium"). If the Surviving Corporation
determines that it is unable to maintain the existing or equivalent D&O
Insurance that includes coverage for those persons who are directors and
officers of the Company as of the Effective Time, for a premium not in excess of
125% of the Current Premium, but maintains D&O Insurance for persons who are
directors and officers of the Surviving Corporation, then, for the six-year
period after the Effective Time, the Surviving Corporation will provide D&O
Insurance for those persons who are currently directors and officers of the
Company on the same basis as the Surviving Corporation maintains D&O Insurance
for persons who are then directors and officers of the Surviving Corporation. If
the existing D&O Insurance expires, is terminated or canceled during the
six-year period after the Effective Time and the Surviving Corporation does not
then maintain D&O Insurance for persons who are directors and officers of the
Surviving Corporation, the Surviving Corporation will use its reasonable best
efforts to obtain D&O Insurance providing for such period at least $2,000,000 of
coverage for those persons who are directors or officers of the Company at the
Effective Time.
If any takeover statute shall become applicable to the Merger, the Offer or
the other transactions contemplated pursuant to the Merger Agreement, the
Company has agreed in the Merger Agreement that the Company and the members of
the Board shall grant such approvals and take such actions as are necessary so
that the transactions contemplated pursuant to the Merger Agreement may be
consummated as promptly as practicable on the terms contemplated by the Merger
Agreement and otherwise act to eliminate or minimize the effects of such statute
or regulation on the transactions contemplated by the Merger Agreement.
The Company and the Purchaser each have agreed in the Merger Agreement to
use (and cause its subsidiaries to use) its best efforts to cause the conditions
set forth in Article VIII of the Merger Agreement to be satisfied and to
consummate the Merger and the other transactions contemplated by the Merger
Agreement. The Company further agreed to use (and to cause its subsidiaries to
use) its best efforts (including providing information and communication) to
obtain all necessary waivers, consents and approvals from other parties to
material agreements, leases and other contracts and to obtain as promptly as
practicable all necessary approvals, authorizations and consents of Governmental
Entities (including applicable insurance regulators) required to be obtained in
order to consummate the transactions contemplated by the Merger Agreement, and
each of the parties to the Merger Agreement agree to cooperate with the others
in obtaining all such consents, waivers, approvals and authorizations.
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In the Merger Agreement, the Purchaser agreed to vote (or consent with
respect to) or cause to be voted (or a consent to be given with respect to) any
Shares (including all Shares currently owned) beneficially owned by it or any of
its subsidiaries or with respect to which it or any of its subsidiaries has the
power (by agreement, proxy or otherwise) to cause to be voted (or to provide a
consent), in favor of the adoption and approval of the Merger Agreement at any
meeting of stockholders of the Company, at which the Merger Agreement shall be
submitted for adoption and approval and at all adjournments or postponements
thereof (or, if applicable, by any action of stockholders of the Company by
consent in lieu of a meeting).
In the Merger Agreement, the Purchaser and the Company agreed that no
amendment to the Certificate of Incorporation or By-Laws of the Surviving
Corporation shall reduce in any way the elimination of personal liability of
directors of the Company contained therein or adversely affect any existing
right of any director or officer (or former director or officer) to be
indemnified with respect to acts, omissions or events occurring prior to the
Effective Time.
Representations and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto including among
others, representations as to corporate organization and qualification,
capitalization, corporate authority, no violation of charter or by-laws, debt
instruments or material agreements of the Company or applicable law resulting
from the transaction, accuracy of the Company's public filings, including
financial statements, absence of any material adverse change in the Company's
business and absence of undisclosed liabilities.
Conditions to Certain Obligations. The respective obligations of the
Company and the Purchaser to consummate the Merger are subject to the
fulfillment of the following conditions: (i) in the event of a Company
stockholder meeting upon termination of the Offer to vote for the approval of
the Merger Agreement and the Merger, the Merger Agreement shall have been duly
approved by the holders of a majority of the Shares, in accordance with
applicable law and the Articles of Incorporation and By-Laws of the Company;
(ii) the Purchaser (or one of the Purchaser Companies) shall have purchased
Shares pursuant to the Offer; (iii) no court or other Governmental Entity of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect and
prohibits consummation of the Merger; (iv) the Company shall have obtained the
consent of its principal lender to the Merger or the Purchaser shall have
obtained a refinancing of such obligation on terms satisfactory to the Purchaser
in its sole discretion; and (v) the Minimum Tender Condition shall have been
satisfied and none of the events listed in "Conditions to the Offer" above shall
have occurred.
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned (i) at any time prior to the Effective Time, before or after the
approval by holders of Shares, by the mutual consent of the Purchaser and the
Company, by action of their respective boards of directors; (ii) by action of
the board of directors of either the Purchaser or the Company if (a) the
Purchaser or any Purchaser Company, shall have terminated the Offer without
purchasing any Shares pursuant thereto, provided, in the case of termination of
the Merger Agreement by the Purchaser, such termination of the Offer is not in
violation of the terms of the Offer, or (b) without fault of the terminating
party, the Merger shall not have been consummated by December 31, 1996, whether
or not such date is before or after the approval by holders of Shares; (iii) at
any time prior to the Effective Time, before or after the approval by holders of
Shares, by action of the board of directors of the Purchaser, if (a) the Company
shall have failed to comply in any material respect with any of the covenants or
agreements contained in the Merger Agreement to be complied with or performed by
the Company at or prior to such date of termination, or (b) the Board of
Directors or the Special Committee shall have withdrawn or modified in a manner
adverse to the Purchaser its approval or recommendation of the Offer, the Merger
Agreement or the Merger or the Board of Directors or the Special Committee, upon
request by the Purchaser, shall fail to reaffirm such approval or
recommendation, or shall have resolved to do any of the foregoing; (iv) at any
time prior to the Effective Time, before or after the approval by holders of
Shares by action of the Board of Directors, if the Purchaser (a) shall have
failed to comply in any material respect with any of the covenants or agreements
11
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contained in the Merger Agreement to be complied with or performed by the
Purchaser at or prior to such date of termination or (b) shall have failed to
commence the Offer within five days of the execution of the Merger Agreement.
Payment of Expenses. Whether or not the Merger shall be consummated, the
Company and the Purchaser shall pay its own expenses incident to preparing for,
entering into and carrying out the Merger Agreement and the consummation of the
Merger.
Modification or Amendment. Subject to the applicable provisions of the DGCL
or the TBCA, at any time prior to the Effective Time, the Company and the
Purchaser may modify or amend the Merger Agreement, by written agreement
executed and delivered by duly authorized officers of the respective parties.
Waiver of Conditions. The conditions to each of the Company's or the
Purchaser's obligations to consummate the Merger are for the sole benefit of
such party and may be waived by such party in whole or in part to the extent
permitted by applicable law.
Background of the Offer and the Merger.
On June 7, 1996, the Board appointed a Special Committee, composed of
Messrs. Sebastian, Holinger and Collins, to assess strategic alternatives for
enhancing the value of Shares not held by the Purchaser. Also, on June 7, 1996,
the Company issued a press release announcing the formation of the Special
Committee. After consideration of possible counsel and financial advisers for
the Special Committee, at a meeting of the Special Committee held on June 21,
1996 the Special Committee determined to engage Donohoe, Jameson & Carroll, P.C.
as its outside legal counsel and Principal Financial Securities, Inc.
("Principal") as its financial advisor. Principal was instructed to evaluate
strategic alternatives for the Company.
At a meeting of the Special Committee on August 8, 1996, after reviewing
information provided by management of the Company and meeting with members of
the Company's management, Principal presented its preliminary analyses of
various strategic options available to the Company and its stockholders,
including public offerings of equity securities, growth through acquisitions,
divestitures of certain assets of the Company, the acquisition of all of the
Shares by the Purchaser, and the sale of the entire Company to a third party.
Principal analyzed both the benefits and the costs to the minority stockholders
and the tax effects of each of the strategic options. In connection with its
analysis, Principal preliminarily valued the Company at $15.38 to $17.14 per
Share. Based upon the preliminary analyses provided by Principal and the
discussions had by the Special Committee to such date, the Special Committee
determined at that meeting that the most viable strategic alternatives were to
sell the entire Company to a third party or to seek an offer from the Purchaser
for those Shares not currently held by the Purchaser. The Special Committee
directed Mr. Holinger to contact the Purchaser regarding these two alternatives.
Mr. Holinger contacted representatives of the Purchaser on August 10, 1996.
In Mr. Holinger's discussions with the Purchaser, the Purchaser indicated that
it had no desire to participate in the sale of the Company to a third party.
Therefore, Mr. Holinger, as instructed by the Special Committee, asked if the
Purchaser would be willing to make an offer to acquire all of the Shares not
currently held by the Purchaser. After discussion among management of the
Purchaser, on August 13, 1996, the Purchaser determined to make a proposal to
the Company to acquire the Shares not owned by the Purchaser at a price of
$17.50 per Share and sent the following letter to the Special Committee:
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August 13, 1996
Special Committee of the Board of Directors
Hallwood Energy Corporation
3710 Rawlins
Suite 1500
Dallas, Texas 75219
Gentlemen:
This letter is in response to your request for a specific proposal from
The Hallwood Group Incorporated ("HWG") with respect to the acquisition of the
shares of Hallwood Energy Corporation ("HEC") not currently held by HWG (the
"Minority Shares"). We are prepared in principal to purchase the Minority Shares
on the terms described below. If accepted by the Special Committee, this offer
is intended to be, and will not be legally binding until, embodied in a legally
binding definitive agreement (the "Agreement") executed by all parties and which
will be subject to the approval of the boards of directors of both parties and
the Special Committee of HEC. Our offer is as follows:
1. HEC will merge with HWG. The price paid will be $17.50 cash per share
for each share of HEC Common Stock not held by HWG.
2. The Agreement will contain customary warranties, representations and
covenants usual to transactions of this type.
3. The Closing of the transaction will be subject to the satisfaction of
the following conditions:
(a) The receipt by HEC of an opinion of an investment banker selected by
the Special Committee that the terms of the transaction are fair, from a
financial point of view, to the holders of the Minority Shares.
(b) The approval of the transaction by a majority of the shareholders of
HEC other than HWG.
(c) The receipt of all required approvals of federal and state governmental
agencies and boards and of all other necessary consents and authorizations.
(d) There shall have been no material adverse change in the business,
consolidated earnings or consolidated net worth of HEC, its subsidiaries or
Hallwood Energy Partners, L.P.
(e) No action, proceeding or claim shall be pending to prevent consummation
or seek damages by reason of the transaction; no governmental authority
shall be then claiming that the transaction constitutes a violation of law.
(f) All warranties, representations and covenants contained in the
Agreement shall continue to be true and correct in all material respects as
of the day of closing.
4. It is understood that the Agreement will contain many of the other terms
and conditions which will have to be negotiated and agreed to before the
Agreement can be finalized. Until the Agreement is finalized, approved by the
respective Boards of Directors and by the Special Committee (which approval
shall be in the sole subjective discretion of each of them) and properly
executed, neither party shall have any legally binding obligation to the other.
If the terms outlined in this letter are satisfactory, we can proceed
immediately with the preparation of a definitive agreement embodying these
terms. If we can provide any additional information, please let me know.
Sincerely,
THE HALLWOOD GROUP INCORPORATED
/s/ Melvin J. Melle, Vice President
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Upon receipt of this letter, the Special Committee instructed Principal to
evaluate the Purchaser's proposal.
Principal distributed its evaluation materials to the Special Committee on
August 28, 1996. The Special Committee held a meeting on August 30, 1996 to
discuss Principal's evaluation materials and the Purchaser's offer. The Special
Committee noted that Principal's valuation of the Shares had increased, based
upon various factors described below, from Principal's previous valuation. The
Special Committee determined that it would be appropriate to pursue a
transaction in which the Purchaser would offer to purchase the Shares currently
held by the minority stockholders. The Special Committee further concluded that,
based upon all of the foregoing, it would seek a price of $19.50 per Share for
any such transaction, while acknowledging that if the Special Committee were not
able to obtain that price, such a transaction might still be in the best
interest of the minority stockholders. The Special Committee directed Mr.
Sebastian to contact Mr. Guzzetti, Executive Vice President of the Purchaser.
Mr. Sebastian was directed to propose a counter-offer of a transaction at $19.50
per Share.
Mr. Sebastian communicated the Special Committee's counter-offer to Mr.
Guzzetti on August 30, 1996. Representatives of the Purchaser met that day to
consider the counter-offer. On the evening of August 30, 1996, Mr. Guzzetti
communicated to Mr. Sebastian that the counter-offer of $19.50 per Share
appeared to be acceptable to the Purchaser. Mr. Sebastian reported this to the
Special Committee on September 3, 1996.
On September 4, 1996, the Board of Directors of the Company held a
regularly scheduled meeting at which the Special Committee recommended to the
Board of Directors that a combination of the Company with the Purchaser in which
the minority stockholders of the Company would receive $19.50 per Share be
approved in principal by the Board of Directors. Upon receiving this
recommendation, the Board of Directors of the Company approved a transaction as
recommended by the Special Committee, subject to the preparation, negotiation
and execution of a definitive agreement embodying the terms of the transaction
and the approval by the Special Committee, the Board of Directors and the board
of directors of the Purchaser of the definitive agreement. On September 6, 1996,
the board of directors of the Purchaser approved in principle the transaction
recommended by the Special Committee of the Company, subject to the preparation,
negotiation and execution of a definitive agreement by the parties and approval
of the definitive agreement by the boards of directors of the Company and the
Purchaser.
On September 9, 1996, the Company and the Purchaser issued a joint press
release announcing an agreement in principal regarding a combination of the two
entities, as follows:
The Hallwood Group Incorporated (NYSE:HWG) and Hallwood Energy
Corporation (NMS:HWEC) announced today that the Board of Directors of
Hallwood Energy, upon the recommendation of the previously appointed
special committee of independent directors, has accepted in principle
the offer of Hallwood Group to effect a combination of Hallwood Energy
and Hallwood Group in which the minority shareholders of Hallwood
Energy would receive cash in the amount of $19.50 per share for each
share of Hallwood Energy they hold as of the record date. The agreement
is subject to, among other things, the determination of the structure
of the combination and the execution by both companies of a definitive
agreement.
Hallwood Group owns approximately 82% of the issued and outstanding
stock of Hallwood Energy. It is anticipated that the completion of the
transaction will be conditioned on the approval of the holders of a
majority of the shares of Hallwood Energy not currently held by
Hallwood Group. It is the intention of the companies to complete the
transaction before the end of the year.
On September 5, 1996, counsel for the Purchaser distributed a draft of the
Merger Agreement to counsel for the Special Committee. After receiving comments
to the Merger Agreement from the Special Committee's counsel on September 13,
1996, the Purchaser's counsel distributed a revised draft of the Merger
Agreement to the Special Committee's counsel on September 17, 1996.
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After receiving further comments to the Merger Agreement from the Special
Committee's counsel and from the general counsel of the Company on September 18,
1996, the Purchaser's counsel distributed a revised draft of the Merger
Agreement to the Special Committee's counsel on September 19, 1996. The
Purchaser's counsel distributed revised indemnification provisions of the Merger
Agreement to the Special Committee's counsel on September 30, 1996.
On September 30, 1996, the Special Committee's counsel, the Purchaser's
counsel and the general counsel for the Company had a conference call to discuss
the timing of certain items related to the Offer and the Merger. On October 1,
1996, the Special Committee's counsel, Principal, the Purchaser's counsel and
the general counsel for the Company had a conference call to discuss comments to
the Offer to Purchase and the other documents related to the Offer. Counsel for
the Purchaser distributed revised drafts of such documents on October 1, 1996.
On October 4, 1996, the Special Committee's counsel, the Purchaser's
counsel and the general counsel for the Company had a conference call to discuss
the timing of certain items related to the Offer and the Merger and to discuss
comments to the Offer to Purchase and the other documents related to the Offer.
Counsel for the Purchaser distributed revised drafts of these documents on
October 4, 1996.
On October 9, 1996, the Special Committee and its legal and financial
advisors met to discuss the Offer and the Merger. At that meeting, the Special
Committee discussed several remaining outstanding issues on the draft Merger
Agreement and Offer. At that meeting of the Special Committee, Principal
delivered its written opinion to the Special Committee that the consideration to
be received by the holders of Shares (other than the Purchaser) is fair to such
holders from a financial point of view as of such date. The Special Committee
unanimously approved, subject to certain changes being made, each of the Merger
Agreement, the Offer and the Merger and determined that the terms of the Offer
and the Merger are fair to, and in the best interest of, the stockholders of the
Company and recommended that the stockholders of the Company tender their Shares
and that the Board of Directors of the Company approve the same. After that
meeting of the Special Committee, a meeting was convened of the members of the
Special Committee, their counsel, representatives of the Purchaser, its counsel
and the general counsel of the Company. At that meeting the remaining issues
were resolved to the satisfaction of each of the members of the Special
Committee. Immediately thereafter, the Board of Directors of the Company met.
After receiving a report from the Special Committee on its deliberations and a
recommendation from the Special Committee that the Board of Directors approve
the Merger Agreement, the Offer and the Merger, the Board of Directors
unanimously approved the Merger Agreement, the Offer and the Merger, determined
that the Offer and the Merger are fair to, and in the best interest of, the
stockholders of the Company and recommended that all stockholders of the Company
accept the Offer and tender their Shares pursuant to the Offer. The board of
directors of the Purchaser approved the Merger Agreement, the Offer and the
Merger by unanimous written consent dated October 9, 1996. A copy of the Merger
Agreement has been filed as an exhibit to this Schedule 14D-9 and the Merger
Agreement is summarized above.
The Merger Agreement was executed by the parties thereto as of October 9,
1996, and the transaction was publicly announced on October 10, 1996.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Recommendation of the Special Committee and the Board.
On October 9, 1996, the Special Committee determined that each of the Offer
and the Merger is fair to, and in the best interests of, the stockholders of the
Company and determined to recommend that the Board approve and adopt the Merger
Agreement and the transactions contemplated thereby, including the Offer and the
Merger, and to recommend to the Company's stockholders that they accept the
Offer and tender their Shares pursuant to the Offer. At a meeting held on
October 9, 1996, the Board unanimously determined that each of the Offer and the
Merger is fair to, and in the best interests of, the stockholders of the
Company, approved and adopted the Merger Agreement and the transactions
contemplated thereby, including the Offer and the Merger, and determined to
15
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recommend that the Company's stockholders accept the Offer, tender their Shares
pursuant to the Offer and approve and adopt the Merger Agreement.
Copies of a letter to stockholders communicating the Board's determination
and recommendation and of a press release relating thereto are filed as exhibits
hereto and are incorporated herein by reference.
(b) Reasons for the Board's Recommendation; Opinion of Financial Advisor.
Reasons for Recommendation.
The Special Committee received presentations from, and reviewed the Offer
and the Merger with, senior management of the Company, counsel for the Special
Committee and the Special Committee's financial advisor, Principal. The Special
Committee, in determining whether to recommend the approval of the Merger
Agreement and the transactions contemplated thereby to the full Board of
Directors, considered a number of factors, including, but not limited to, the
following:
(i) The belief, based on its familiarity with the Company's
business, its current financial condition and results of operations and
its future prospects, and the current and anticipated developments in
the oil and gas industry, that the consideration to be received by the
Company's stockholders in the Offer and Merger fairly reflects the
Company's value.
(ii) The verbal presentation made by Principal at a meeting
held on August 30, 1996 as to various financial and other
considerations deemed relevant to the evaluation of the Offer and the
Merger, including, but not limited to, a review of (A) the business
prospects and financial condition of the Company, (B) historical
business information and financial results of the Company, (C)
nonpublic financial and operating results of the Company, (D) financial
projections and budgets prepared by the Company's management, (E)
information obtained from meetings with senior management of the
Company, (F) the trading range and volume history of the Shares, (G)
public financial information of comparable companies and (H) public
information of comparable acquisitions.
(iii) The opinion of Principal that the consideration to be
received by the Company's stockholders pursuant to the Merger Agreement
is fair to such stockholders (other than the Purchaser) from a
financial point of view. In considering Principal's opinion, the Board
was aware that Principal is entitled to a fee in accordance with the
terms of its engagement described below.
(iv) The relationship between the consideration to be received
by stockholders as a result of the Offer and the Merger and the
historical market prices and recent trading activity of the Shares. The
Special Committee considered as favorable to its determination the fact
that the $19.50 per Share price to be paid in the Offer and the Merger
represents a premium of approximately 81% over the $10.75 price at
which the Shares had traded most recently before September 8, 1996, the
last trading day before the public announcement of the proposed
transaction.
(v) The recognition that, following consummation of the Offer
and the Merger, the current Stockholders of the Company will no longer
be able to participate in any increases or decreases in the value of
the Company's business and properties. The Board and the Special
Committee concluded, however, that this consideration did not justify
forgoing the opportunity for stockholders to receive an immediate and
substantial cash purchase price for their Shares.
(vi) The fact that the terms of the Offer, and the increase in
the consideration offered to the minority stockholders from $17.50 per
Share to $19.50 per Share, were determined through arm's-length
negotiations with the Purchaser by the Special Committee and its
financial and legal advisors, all of whom are unaffiliated with the
Purchaser, and the judgment of the Special Committee and Principal
16
<PAGE>
that, based upon the negotiations that transpired, a price higher than
$19.50 per Share could not likely be obtained and that further
negotiations with the Purchaser could cause the Purchaser to abandon
the Offer, with the resulting possibility that the market price for
the Shares could remain substantially below $19.50, and possibly
$17.50, per Share, or to commence a tender offer without the
involvement of the Special Committee at a price less than $19.50 per
Share.
(vii) The Purchaser's ownership of approximately 81.6% of the
currently outstanding Shares and the effects of such ownership on the
alternatives available to the Company, the response given by the
Purchaser to the Special Committee that the Purchaser had no desire to
participate in the sale of the Company to a third party and the fact
that, as a practical matter, no strategic alternative could be effected
without the support of the Purchaser; and the consequences of
continuing to operate the Company as a majority-owned subsidiary of the
Purchaser.
(viii) The terms and conditions of the Merger Agreement, the
fact that there are no unusual requirements or conditions to the Offer
and the Merger, and the fact that the Purchaser has the financial
resources to consummate the Offer and the Merger expeditiously.
(ix) The fact that the consideration to be paid to the
Company's minority stockholders in the Offer and the Merger is all
cash.
(x) The fact that the Offer and the Merger have been
structured to include a first-step cash tender offer for any and all
outstanding Shares, thereby enabling stockholders who tender their
Shares to promptly receive $19.50 per Share in cash, and the fact that
any minority stockholders who do not tender their Shares or properly
exercise appraisal rights will receive the same price per Share in the
subsequent Merger.
(xi) The fact that, while no appraisal rights are available to
stockholders as a result of the Offer, stockholders who do not tender
pursuant to the Offer may have the right to dissent from the Merger and
to demand appraisal of the fair value of their Shares under the TBCA.
The Special Committee considered each of the factors listed above
during the course of its deliberations prior to recommending that the Company
enter into the Merger Agreement. In light of its knowledge of the business and
operations of the Company and its business judgment, the Special Committee
believed that each of these factors supported its respective conclusions. The
Special Committee also considered the possible conflicts of interest of certain
directors and members of management of both the Company and the Purchaser
discussed in "Item 3(b) -- Interests of Certain Persons" of this Schedule 14D-9.
In view of the wide variety of factors considered, the Special Committee did not
find it practicable to, and did not, quantify the specific factors considered in
making its determination, although the Special Committee did place a special
emphasis on the opinion and analysis of Principal which was based on its
analyses as outlined below.
The Special Committee and the Board did not attempt to solicit
competing acquisition proposals because they believed that the absence of any
"break-up" fee or other "lock-up" provisions in the Merger Agreement and the
freedom of the Board to consider any transaction proposed by a third party after
the signing of the Merger Agreement meant that a third party interested in
submitting a competing bid is free to do so despite the execution of the Merger
Agreement. To date, the Company has received no inquiries whatsoever regarding a
possible competing bid. Furthermore, the Board considered that, given the
Purchaser's beneficial ownership of approximately 81.6% of the outstanding
Shares, no acquisition could be approved by the stockholders without the
affirmative vote of the Purchaser and that, if any other acquisition proposal
were presented to the stockholders, the Purchaser could prevent the approval of
any such proposal by exercising its right to vote against any such proposal.
The Board of Directors of the Company, three of the six members of
which were members of the Special Committee, approved the Merger Agreement and
the transactions contemplated thereby after receiving a report from the Special
17
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Committee on its deliberations and recommendation. In reaching this decision,
the Board of Directors principally considered the recommendation of the
Committee and the Board's familiarity with the Company's business, the
Company's current financial condition and results of operations and future
prospects, and current and anticipated developments in the Company's industry.
The Board also noted that the price offered by the Purchaser was within the
range of value estimates contained in the Petroleum Industry Profiles, published
by Kirkpatrick Energy Associates, Inc. in July 1996, a collection of analytical
reports covering 111 publicly held independent producers, which estimated that
the pre-tax asset liquidation value per primary common share of the Company at
December 31, 1995 ranged from $11.84 to $29.46 per share, based on varying
assumptions of prices and discount rates, with an "expected value" of $20.69 per
share. The Board did not endorse any of the specific assumptions or conclusions
contained in the Petroleum Industry Profiles, however, and believed that
Principal's analysis was more thorough and took into account certain information
specific to the Company and not available to Kirkpatrick Energy Associates, Inc.
Additionally, the Board of Directors acknowledged that the Company had recently
received a letter from an attorney purporting to represent a shareholder of the
Company requesting certain information. In the letter, the attorney states his
client's belief that the price to be offered in the transaction may not be the
fair value of the Company's Shares, noting the Company's purchase of 58,000
Shares at $21.50 per Share in 1995; asserting that 1996 earnings per Share could
approach $3.00, purportedly implying a per Share value of $27.00; and estimating
the Company's liquidation value at $30.00 per Share. Accordingly, the attorney
requested the opportunity to review the report of Principal, minutes of various
meetings of the Special Committee and the Board, and shareholder lists of the
Company. The Board concluded that Principal's analysis of the Company thoroughly
addressed each of the valuation issues raised by the attorney.
Opinion of Financial Advisor.
On October 9, 1996, Principal delivered its opinion to the Special
Committee to the effect that the consideration to be paid to the holders of
Shares pursuant to the Merger Agreement is fair to such holders (other than the
Purchaser) from a financial point of view as of the date thereof. A copy of
Principal's opinion is attached hereto. The summary of the opinion set forth
herein is qualified in its entirety by such opinion which is incorporated herein
by reference. Stockholders are urged to read the opinion in its entirety for a
description of the assumptions made, matters considered and procedures followed
by Principal. The consideration to be paid pursuant to the Offer and Merger was
determined by negotiations on behalf of the Company and the Purchaser and was
not determined by Principal. In arriving at its opinion, Principal, among other
things, (1) reviewed certain publicly available business and financial
information relating to the Company; (2) reviewed the reported price and trading
activity for the Shares; (3) reviewed certain internal financial information and
other data provided to Principal by the Company relating to the business and
prospects of the Company, including financial projections prepared by the
management of the Company; (4) conducted discussions with members of the senior
management of the Company; (5) reviewed the financial terms, to the extent
publicly available, of certain acquisition transactions involving other
companies which Principal considered relevant; (6) reviewed publicly available
financial and securities market data pertaining to certain publicly-held
companies in the oil and gas industry; and (7) conducted such other financial
studies, analyses and investigations, and considered such other information as
Principal deemed necessary and appropriate. In reaching its opinion and
conducting its analysis, Principal did not assume any responsibility for
independent verification of any of the foregoing information and relied upon it
being complete and accurate in all material respects. Principal was not
requested to and did not make an independent evaluation or appraisal of any
assets or liabilities (contingent or otherwise) of the Company or any of its
subsidiaries, nor were they furnished with any such evaluation or appraisal.
Principal also assumed that all of the information, including the projections,
provided to Principal by the Company's management was prepared on a basis
reflecting the best currently available estimates and judgments of the Company's
management as to the future of the financial performance of the Company and was
based upon the historical performance and certain estimates and assumptions
which were reasonable at the time made. In addition, Principal was not asked to
and did not express any opinion as to the after-tax consequences of the sale of
such Shares by the stockholders. Principal's opinion is based on economic,
monetary and market conditions existing on the date thereof. In rendering their
opinion, Principal did not render any opinion as to the value of the Company and
did not make any recommendation to the stockholders with respect to the
advisability of tendering their Shares. No limitations were imposed by the
Special Committee, the Company or the Purchaser upon Principal with respect to
18
<PAGE>
the investigations made or the procedures followed by Principal in rendering
its opinion, and the Company and the members of its management cooperated fully
with Principal in connection with its investigation.
In arriving at its opinion Principal used five separate analyses
including discounted cash flow analysis, comparable reserve acquisitions
analysis, comparable companies trading analysis, premiums that were paid to
acquire residual share interests by a majority shareholder analysis, and book
value per share analysis. The following describes each method in summary.
Discounted Cash Flow ("DCF") Analysis - Principal performed a DCF
analysis pursuant to the present value of the future after-tax cash flows of the
Company's proved reserves as of June 30, 1996 based on reserve reports provided
to Principal by the Company. In addition, representatives of Principal met with
representatives of the Company's management to discuss the Company's current and
projected operations. In developing its Discounted Cash Flow Analysis, Principal
took the free cash flow (defined as net income plus non-cash expenses less
required capital expenditures) that the Company was expected to generate
throughout the life of the reserves (as presented to Principal in the reserve
reports provided by the Company) and discounted the cash flows to a present
value using a 10% discount rate. The assumed tax rate was 34% and taxes were
calculated giving effect for net operating loss carryforwards and depletion
carryforwards available to the Company. Principal then analyzed a subsequent
acquisition that occurred after the June 30, 1996 reserve report and calculated
a value based on management's base case economics presented to Principal by the
Company. Finally, Principal added net working capital, estimated book value of
other assets, the value of the Company's stock investment in its parent, and the
book value of other noncurrent assets and subtracted the long-term liabilities
of the Company. Based on these assumptions Principal calculated an approximate
imputed equity value for the Company of $19.40 per Share.
Comparable Reserve Acquisition Analysis - In calculating the relative
value of the Company's oil and gas reserves, Principal examined comparable oil
and gas reserve acquisition transactions that occurred during 1994, 1995 and the
first quarter of 1996 in the Mid-Continent and Rocky Mountain regions of the
United States as reported by John S. Herold, Inc., an independent petroleum
research company that tracks such data. There were 51 such transactions that
occurred during the aforementioned period with a mean purchase price of $4.37
per oil barrel of equivalent reserves. Principal applied a multiple range of
$4.00 to $4.50 per oil barrel of equivalent to the Company's proved reserves as
provided to Principal by the Company. Principal then adjusted the equity value
ranges to account for certain assets and liabilities of the Company that were
not included as part of such analysis. Based on this analysis, Principal
calculated an approximate imputed equity value range for the Company of $18.15
to $20.06 per Share.
Comparable Companies Trading Analysis - Under this method, Principal
examined nine companies Principal believed to be comparable to the Company on
various financial and operational parameters. The comparable companies included
were Abraxas Petroleum, American Exploration, Bellwether Exploration Company,
Columbus Energy, Lomak Petroleum, Maynard Oil, Prima Energy, Unit Corporation,
and Wiser Oil (the "Comparable Companies"). With respect to the Comparable
Companies, Principal analyzed, among other things, current market value
multiples relative to proved reserves, operating cash flows, after-tax cash
flows and the present value of after-tax cash flows as determined pursuant to
the standards established by the Commission for discounting the present value of
proved reserves. Principal then established trading multiple ranges for each
data point based on Principal's analysis of the Comparable Companies and
multiplied the Company's relative data (provided to Principal by the Company) by
the corresponding multiple range to establish hypothetical relative values.
Principal then averaged these implied relative market values. Based on this
analysis, Principal calculated an approximate imputed equity value range for the
Company of $18.68 to $22.72 per Share.
Premiums Paid for Residual Interest Analysis - Under this method,
Principal examined transactions whereby a majority shareholder acquired the
residual interest it did not own in a company. According to Securities Data
Company, Inc., an independent research company, from 1987 to June 1996 thirteen
19
<PAGE>
such transactions occurred in the oil and gas industry and one was pending
with an average 30.6% premium paid over the trading price four weeks
prior to announcement. Principal applied the 30.6% premium to the Company's
average Bid/Ask trading price for the period from January 1, 1996 to August 27,
1996. Based on this analysis, Principal calculated an approximate imputed
equity value for the Company of $15.14 per Share.
Book Value per Share Analysis - Principal examined the book value per
Share as it related to a premium or discount to the value per Share of the
transaction. The book value as of June 30, 1996 (after giving effect for the
acquisition that occurred subsequent to June 30, 1996) was $13.52 per Share.
Principal calculated a Summary Reference Value Analysis which places
individual weights on each of the five aforementioned analyses to generate a
weighted average total. In general the analyses weighted most heavily are those
that best reflect valuation criteria emphasized in the private acquisition
market and the public trading market and include the Discounted Cash Flow
Analysis, Comparable Reserve Acquisitions Analysis, and Comparable Companies
Trading Analysis. Valuation parameters that are not direct indicators of market
value were weighted less heavily and include Premiums Paid For Residual Interest
Analysis and Book Value Per Share Analysis. A weighted average of the five
analyses as of August 28, 1996, resulted in an imputed equity value range for
the Company of $18.19 to $19.67 per Share.
The summary set forth above does not purport to be a complete
description of either Principal's analyses or presentations to the Special
Committee. Principal believes that its analyses must be considered as a whole
and that selecting portions of its analyses and of the factors considered by it,
without considering all factors and analyses, could create an incomplete view of
the processes underlying its opinion. The preparation of a fairness opinion is a
complex process and not necessarily susceptible to partial analyses or summary
description. In its analyses, Principal made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the Company's control. Any estimates contained
therein are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of
value of companies do not purport to be appraisals or necessarily reflect the
prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, none of the Company, the Purchaser, Principal
and any other person assumes responsibility for their accuracy.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The Company has retained Principal as the Special Committee's financial
advisor in connection with the Merger, the Offer and other matters arising in
connection therewith pursuant to an engagement letter dated July 17, 1996
("Engagement Letter") between the Company and Principal. The Engagement Letter
provides, among other things, that the Company will pay to Principal a fee equal
to $65,000. In addition, the Company has agreed to reimburse Principal for its
reasonable out-of-pocket expenses, including reasonable legal expenses, and to
indemnify Principal against certain liabilities.
The Special Committee selected Principal as its financial advisor
because Principal is a recognized investment banking firm with emphasis in the
oil and gas industry and regularly engages in the valuation of businesses and
their securities in connection with mergers and acquisitions.
Neither the Company nor any person acting on its behalf intends
currently to employ, retain or compensate any other person, other than current
employees of Hallwood Petroleum, Inc. who will not receive any compensation in
addition to their regular compensation, to make solicitations or recommendations
to stockholders in connection with the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) No transactions in the Shares have been effected during the past 60
days by the Company or, to the best of the Company's knowledge, by an executive
officer, directors, affiliate or subsidiary of the Company.
20
<PAGE>
(b) To the best of the Company's knowledge, except for Shares the sale
of which may trigger liability for the holder(s) under Section 16(b) of the
Exchange Act, each executive officer, director and affiliate of the Company
currently intends to tender all Shares over which he or she has sole dispositive
power to the Purchaser.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as described in Item 3(b), no negotiation is being
undertaken or is underway by the Company in response to the Offer which relates
to or would result in (i) an extraordinary transaction, such as a merger or
reorganization, involving the Company or any subsidiary of the Company, (ii) a
purchase, sale or transfer of a material amount of assets by the Company or any
subsidiary of the Company, (iii) a tender offer for or other acquisition of
securities by or of the Company, or (iv) any material change in the present
capitalization or dividend policy of the Company.
(b) Except as described under Item 3 and Item 4, there are no
transactions, board resolutions, agreements in principle or signed contracts in
response to the Offer which relate to or would result in one or more of the
matters referred to in paragraph (a) of this Item 7.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
None
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
Exhibit 1 -- Offer to Purchase, dated October 15, 1996.
Exhibit 2 -- Letter of Transmittal.
Exhibit 3 -- Proxy Statement dated March 31, 1996 relating to the Company's
1996 Annual Meeting of Stockholders.
Exhibit 4 -- Agreement and Plan of Merger, dated as of October 9, 1996 between
the Company and the Purchaser.
Exhibit 5* -- Letter to Stockholders of the Company dated October 15, 1996.
Exhibit 6 -- Press Release issued by the Company and the Purchaser on October
10, 1996.
Exhibit 7* -- Opinion of Principal Financial Securities, Inc. dated October 9,
1996.
Exhibit 8 -- Engagement Letter, dated July 17, 1996, between the Principal and
the Company.
Exhibit 9 -- Report of Principal to the Special Committee of the Board of
Directors of the Company dated August 28, 1996.
* Included in copies of this Schedule 14D-9 mailed to stockholders.
SIGNATURE
After reasonable inquiry and to the best of its knowledge and belief,
the undersigned certifies that the information set forth in this statement is
true, complete and correct.
HALLWOOD ENERGY CORPORATION
Dated: October 15, 1996
By: /s/ William L. Guzzetti
------------------------------
William L. Guzzetti
President
21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
Exhibit 1 -- Offer to Purchase, dated October 15, 1996. 23
Exhibit 2 -- Letter of Transmittal. 82
Exhibit 3 -- Proxy Statement dated March 31, 1996 relating to
the Company's 1996 Annual Meeting of Stockholders. 86
Exhibit 4 -- Agreement and Plan of Merger, dated as of October 9,
1996 between the Company and the Purchaser. 97
Exhibit 5* -- Letter to Stockholders of the Company dated October
15, 1996. 120
Exhibit 6 -- Press Release issued by the Company and the Purchaser
on October October 10, 1996. 122
Exhibit 7* -- Opinion of Principal Financial Securities, Inc. dated
October 9, 1996. 123
Exhibit 8 -- Engagement Letter, dated July 21, 1996, between the
Principal and the Company. 125
Exhibit 9 -- Report of Principal to the Special Committee of the
Board of Directors of the Company dated August 28, 1996. **
* Included in copies of this Schedule 14D-9 mailed to stockholders.
** Filed under Form SE
22
<PAGE>
Offer to Purchase for Cash
All of the Outstanding Shares of Common Stock
of
HALLWOOD ENERGY CORPORATION
at
$19.50 NET PER SHARE
by
THE HALLWOOD GROUP INCORPORATED
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW
YORK CITY TIME, ON FRIDAY, NOVEMBER 22, 1996, UNLESS THE OFFER IS
EXTENDED.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING
VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE
OFFER A MAJORITY OF THE SHARES (AS DEFINED HEREIN) NOT HELD BY THE
PURCHASER (AS DEFINED HEREIN) WHICH, TOGETHER WITH ANY SHARES
CURRENTLY BENEFICIALLY OWNED DIRECTLY OR INDIRECTLY BY THE
PURCHASER, WILL ALSO CONSTITUTE AT LEAST 90% OF THE TOTAL SHARES
OUTSTANDING AS OF THE DATE THE SHARES ARE ACCEPTED FOR PAYMENT
PURSUANT TO THE OFFER. THE OFFER IS ALSO SUBJECT TO OTHER TERMS AND
CONDITIONS CONTAINED IN THIS OFFER TO PURCHASE. SEE "THE OFFER -- 1.
TERMS OF THE OFFER" AND "THE OFFER -- 13. CERTAIN CONDITIONS OF THE
OFFER."
---------------------
THE BOARD OF DIRECTORS OF THE COMPANY AND THE SPECIAL COMMITTEE
(AS DEFINED HEREIN) HAVE UNANIMOUSLY DETERMINED THAT THE OFFER AND
THE MERGER (AS DEFINED HEREIN) ARE FAIR TO AND IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS, HAVE APPROVED THE OFFER AND THE
MERGER AND RECOMMEND THAT THE COMPANY'S STOCKHOLDERS ACCEPT THE
OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER. SEE "SPECIAL
FACTORS -- 6. RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS AND
THE SPECIAL COMMITTEE."
--------------------
IMPORTANT
Any stockholder desiring to tender all or any portion of such
stockholder's shares of common stock ("Shares") of the Company (as defined
herein) should either (1) complete and sign the blue Letter of Transmittal
accompanying this Offer to Purchase ("Letter of Transmittal"), or a facsimile
thereof, in accordance with the instructions in the Letter of Transmittal, have
such stockholder's signature thereon guaranteed if required by Instruction 5 to
the Letter of Transmittal, and mail or deliver the Letter of Transmittal (or
such facsimile) and any other required documents to the Depositary (as defined
herein) together with the certificate(s) representing the tendered Shares or (2)
23
<PAGE>
request such stockholder's broker, dealer, commercial bank, trust company or
other nominee to effect the transaction for such stockholder. Stockholders whose
Shares are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee are urged to contact such broker, dealer, commercial
bank, trust company or other nominee if they desire to tender their Shares.
The Purchaser makes no recommendation to any stockholder as to whether
to tender or refrain from tendering Shares. Stockholders must make their own
decisions whether to tender Shares and, if so, how many Shares to tender.
Questions and requests for assistance may be directed to the Depositary
at its address and telephone number set forth on the back cover of this Offer to
Purchase. Requests for additional copies of this Offer to Purchase, the Letter
of Transmittal and other tender offer materials may be directed to the Purchaser
or to brokers, dealers, commercial banks or trust companies, and copies will
be furnished promptly at the Purchaser's expense.
--------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION ("COMMISSION") NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR THE MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
The date of this Offer to Purchase is October 15, 1996
24
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION.................................................................1
SPECIAL FACTORS..............................................................3
1. HISTORY OF THE COMPANY.....................................3
2. REASONS FOR THE OFFER AND THE MERGER.......................3
3. FAIRNESS OF THE OFFER AND THE MERGER.......................4
4. INTERESTS OF CERTAIN PERSONS IN THE OFFER; POTENTIAL
CONFLICTS
OF INTERESTS...............................................5
5. BACKGROUND OF THE OFFER AND THE MERGER.....................5
6. RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS AND
THE SPECIAL COMMITTEE......................................9
THE OFFER...................................................................13
1. TERMS OF THE OFFER........................................13
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES.............15
3. PROCEDURE FOR TENDERING SHARES............................16
4. RIGHTS OF WITHDRAWAL......................................18
5. CERTAIN UNITED STATES TAX CONSIDERATIONS OF THE OFFER
AND THE MERGER. ..........................................18
6. PRICE RANGE OF SHARES; DIVIDENDS..........................20
7. EFFECT OF THE OFFER ON MARKET FOR THE SHARES; STOCK
EXCHANGE LISTING; AND EXCHANGE ACT REGISTRATION...........20
8. CERTAIN INFORMATION CONCERNING THE COMPANY................21
9. CERTAIN INFORMATION CONCERNING THE PURCHASER..............29
10. CONTACTS WITH THE COMPANY; CONTRACTS AND ARRANGEMENTS.....31
11. THE MERGER AGREEMENT; APPRAISAL RIGHTS....................34
12. SOURCE AND AMOUNT OF FUNDS................................37
13. CERTAIN CONDITIONS OF THE OFFER...........................38
14. DIVIDENDS AND DISTRIBUTIONS...............................39
15. CERTAIN LEGAL MATTERS.....................................39
16. FEES AND EXPENSES.........................................40
17. MISCELLANEOUS.............................................40
SCHEDULES AND APPENDICES
SCHEDULE I - Directors and Executive Officers of the Purchaser..............S-1
SCHEDULE II - Appraisal Rights of Dissenting Stockholders under Texas Law...S-3
SCHEDULE III - Opinion of Principal Financial Securities, Inc...............S-6
Appendix A - The Company's Quarterly Report on Form 10-Q for
the Period Ended June 30, 1996; the Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31, 1995; and
Proxy Statement of the Company dated March 31, 1996
25
<PAGE>
To the Holders of Common Stock of Hallwood Energy Corporation:
INTRODUCTION
The Hallwood Group Incorporated, a Delaware corporation ("Purchaser"),
hereby offers to purchase all of the outstanding shares of Common Stock, par
value $0.50 per share ("Shares"), of Hallwood Energy Corporation, a Texas
corporation ("Company"), not currently directly or indirectly owned by the
Purchaser at a price of $19.50 per Share, net to the seller in cash, without
interest thereon, upon the terms and subject to the conditions set forth in this
Offer to Purchase and in the Letter of Transmittal (which together constitute
the "Offer").
Tendering stockholders will not be obligated to pay brokerage fees or
commissions or transfer taxes on the purchase of Shares by the Purchaser. The
Purchaser will pay all charges and expenses of Hallwood Petroleum, Inc., as
depositary ("HPI" or "Depositary").
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A MAJORITY OF
THE SHARES NOT HELD BY THE PURCHASER WHICH, TOGETHER WITH ANY SHARES CURRENTLY
BENEFICIALLY OWNED DIRECTLY OR INDIRECTLY BY THE PURCHASER, WILL ALSO CONSTITUTE
AT LEAST 90% OF THE TOTAL SHARES OUTSTANDING AS OF THE DATE THE SHARES ARE
ACCEPTED FOR PAYMENT PURSUANT TO THE OFFER ("MINIMUM TENDER CONDITION"). SUBJECT
TO APPLICABLE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION
("COMMISSION"), THE PURCHASER RESERVES THE RIGHT, WHICH IT PRESENTLY HAS NO
INTENTION OF EXERCISING, SUBJECT TO APPROVAL OF THE SPECIAL COMMITTEE (AS
DEFINED HEREIN) TO WAIVE OR REDUCE THE MINIMUM TENDER CONDITION AND TO ELECT TO
PURCHASE, PURSUANT TO THE OFFER, LESS THAN THE MINIMUM NUMBER OF SHARES
NECESSARY TO SATISFY THE MINIMUM TENDER CONDITION. THE OFFER IS ALSO SUBJECT TO
OTHER TERMS AND CONDITIONS CONTAINED IN THIS OFFER TO PURCHASE. SEE "THE OFFER
- -- 1. TERMS OF THE OFFER" AND "THE OFFER -- 13. CERTAIN CONDITIONS OF THE
OFFER."
THE BOARD OF DIRECTORS OF THE COMPANY AND THE COMMITTEE OF THE BOARD OF
DIRECTORS OF THE COMPANY COMPRISED OF ALL DIRECTORS OF THE COMPANY WHO ARE
NEITHER OFFICERS OR DIRECTORS OF THE PURCHASER NOR OFFICERS OF THE COMPANY
("SPECIAL COMMITTEE") HAVE UNANIMOUSLY DETERMINED THAT THE OFFER AND THE MERGER
ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS, HAVE
APPROVED THE OFFER AND THE MERGER (AS DEFINED HEREIN) AND RECOMMEND THAT THE
COMPANY'S STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE
OFFER. SEE "SPECIAL FACTORS -- 6. RECOMMENDATION OF THE COMPANY'S BOARD OF
DIRECTORS AND THE SPECIAL COMMITTEE."
26
<PAGE>
The Special Committee's financial advisor, Principal Financial Securities,
Inc. ("Principal"),verbally delivered to the Special Committee its opinion on
August 28, 1996 and has delivered to the Special Committee its written opinion,
dated as of October 9, 1996, that as of such date the $19.50 per Share cash
consideration to be received by the holders of Shares (other than the Purchaser)
pursuant to the Offer and the Merger is fair to such holders from a financial
point of view. A copy of the opinion of Principal is set forth as Schedule III
hereto and is contained in the Company's Solicitation/Recommendation Statement
on Schedule 14D-9 ("Schedule 14D-9"), which is being mailed to stockholders
together with this Offer to Purchase. See "SPECIAL FACTORS -- 6. Recommendation
of the Company's Board of Directors and the Special Committee."
THE PURCHASER DOES NOT INTEND TO INCREASE THE OFFER PRICE (AS DEFINED
HEREIN). IF, HOWEVER, PRIOR TO THE EXPIRATION DATE, THE PURCHASER INCREASES THE
OFFER PRICE, SUCH INCREASE SHALL BE PAID TO ALL HOLDERS OF SHARES THAT ARE
PURCHASED PURSUANT TO THE OFFER, WHETHER OR NOT SUCH SHARES WERE TENDERED PRIOR
TO THE INCREASE. ANY HOLDER OF SHARES WHO TENDERED SHARES PRIOR TO THE INCREASE
IN THE OFFER PRICE WOULD BE ENTITLED TO RECEIVE THE INCREASE WITHOUT FURTHER
ACTION ON THE PART OF SUCH HOLDER.
The Company has advised the Purchaser that, as of October 9, 1996, there
were 777,126 Shares outstanding. The Purchaser owned 633,917 Shares, or
approximately 81.6% of the outstanding Shares, as of such date. According to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, there were approximately 667 recordholders of the Shares as of February 2,
1996.
Based on the foregoing, assuming that no additional Shares are issued after
October 9, 1996, the Minimum Tender Condition would be satisfied if at least
71,605 Shares are validly tendered prior to the expiration of the Offer and not
withdrawn.
The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of October 9, 1996 ("Merger Agreement"), between the Purchaser and the
Company. The Merger Agreement provides that, among other things, promptly after
the purchase of Shares pursuant to the Offer and the receipt of any required
approval of the Merger Agreement by the Company's stockholders and the
satisfaction or waiver of certain other conditions, the Company will be merged
("Merger") into the Purchaser. Following consummation of the Merger, the
Purchaser will continue as the surviving corporation. Upon consummation of the
Merger ("Effective Time"), each then outstanding Share not owned by the
Purchaser (other than Shares held by stockholders of the Company who have
properly exercised any appraisal rights they may have in accordance with Art. 5
of the Texas Business Corporation Act ("TBCA")) will be converted into the right
to receive an amount in cash equal to the per Share price paid pursuant to the
Offer ("Offer Price"). The Merger Agreement is more fully described in "THE
OFFER -- 11. The Merger Agreement; Appraisal Rights."
27
<PAGE>
If the Minimum Tender Condition is satisfied, the Purchaser will hold 90%
or more of the outstanding Shares, and the Purchaser intends to effect the
Merger without a vote of the Company's stockholders pursuant to the short-form
merger provisions of the TBCA and the Delaware General Corporation Law ("DGCL").
The Merger Agreement provides that, if the Minimum Tender Condition is
satisfied, the Company and the Purchaser will take all necessary and appropriate
action, at the request of the Purchaser, to cause the Merger to become effective
as soon as practicable after the acceptance for payment and purchase of Shares
by the Purchaser pursuant to the Offer without a meeting of stockholders of the
Company or the Purchaser pursuant to such short-form merger provisions of the
TBCA and the DGCL. If the Purchaser were to waive the Minimum Tender Condition
and the number of outstanding Shares validly tendered and purchased pursuant to
the Offer results in the Purchaser holding less than 90% of the outstanding
Shares, then the Merger, which has already been approved by the Company's Board
of Directors, would have to be approved by the Company's stockholders as well as
the Purchaser's stockholders. Under the TBCA and the Company's Articles of
Incorporation, the vote of the holders of a majority of the outstanding Shares
would be required to approve the Merger under such circumstances. Since the
Purchaser currently owns approximately 81.6% of the Shares outstanding, the
Purchaser would have sufficient voting power to, and intends to, cause the
approval of the Merger without the affirmative vote of any other stockholders of
the Company. However, it is a condition to the parties' obligation to complete
the Merger that the Purchaser have purchased Shares pursuant to the Offer.
Accordingly, if the Minimum Tender Condition or any other condition to the Offer
is not satisfied and the Purchaser elects not to waive any such condition,
neither the Purchaser nor the Company will be obligated to effect the Merger.
Furthermore, the Purchaser may not waive the Minimum Tender Condition without
the consent of the Special Committee. Therefore, if the Minimum Tender Condition
is not satisfied and the Special Committee does not consent to the waiver of
that condition, neither the Purchaser nor the Company will be obligated to
effect the Merger.
No appraisal rights are available in connection with the Offer.
Stockholders will have appraisal rights in connection with the Merger, subject
to compliance with the requirements of the TBCA, even if the Merger is
consummated pursuant to the short-form merger provisions of the TBCA. See "THE
OFFER -- 11. The Merger Agreement; Appraisal Rights."
By accepting the Offer through the tender of Shares and upon receipt of
payment for Shares, a tendering stockholder will be (under the Purchaser's view
of applicable law) barred from thereafter attacking in any legal proceeding the
fairness of the consideration received by stockholders in the Offer. For this
reason, the Letter of Transmittal to be executed by tendering stockholders
includes a release of any such claims, which will be effective upon receipt of
payment for tendered Shares.
THIS OFFER TO PURCHASE AND THE LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
28
<PAGE>
SPECIAL FACTORS
1. HISTORY OF THE COMPANY.
The Company is a publicly traded Texas corporation engaged in the
development, production and sale of oil and gas through its ownership of oil and
gas properties and its investments in entities with oil and gas activities. The
Company is the general partner of Hallwood Energy Partners, L.P. ("HEP"), a
publicly traded oil and gas limited partnership. The Company is also the general
partner of HEP Operating Partners, L.P. ("HEPO"), one of the operating
partnerships for HEP. The Company's wholly-owned subsidiary, Hallwood G.P.,
Inc., is the general partner of EDP Operating, Ltd. ("EDPO"), the other
operating partnership for HEP.
2. REASONS FOR THE OFFER AND THE MERGER.
The purpose of the Offer is to enable the Purchaser to acquire for cash as
many outstanding Shares as possible as a first step in acquiring the entire
equity interest in the Company, subject to satisfaction of the Minimum Tender
Condition and the other conditions of the Offer. See "THE OFFER -- 13. Certain
Conditions of the Offer." If the Minimum Tender Condition is satisfied, the
Purchaser will hold 90% or more of the outstanding Shares. The Merger Agreement
provides that, promptly after the purchase of Shares pursuant to the Offer and
subject to the satisfaction or waiver of the terms and conditions of the Merger,
the Company will be merged into the Purchaser. If the Minimum Tender Condition
is satisfied, the Merger would be effected without a vote of the Company's or
the Purchaser's stockholders pursuant to the short-form merger provisions of the
TBCA and the DGCL. In the Merger, each Share not owned by the Purchaser (other
than Shares held by stockholders of the Company who have properly exercised any
appraisal rights they may have under Art. 5 of the TBCA) at the Effective Time
will be converted into the right to receive an amount in cash equal to the Offer
Price. The purpose of the Merger is to enable the Purchaser to acquire any
remaining Shares not acquired pursuant to the Offer. Following consummation of
the Merger, the Purchaser will continue as the surviving corporation. THE BOARD
OF DIRECTORS OF THE COMPANY AND THE SPECIAL COMMITTEE HAVE UNANIMOUSLY
DETERMINED THAT THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS
OF THE COMPANY AND ITS STOCKHOLDERS, HAVE APPROVED THE OFFER AND THE MERGER AND
RECOMMEND THAT THE COMPANY'S STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR
SHARES PURSUANT TO THE OFFER. In determining to seek the purchase of the
outstanding Shares and effect the Merger at this time, the Purchaser focused on
a number of factors, including those set forth below.
One reason for the Offer and the Merger is to permit both the Purchaser and
the stockholders of the Company to achieve more efficient tax results. As the
general partner and a holder of significant limited partner interests in HEP,
the Company realizes substantial cash flow that it does not utilize directly in
its operations. The Company has in the past distributed unused cash to its
29
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stockholders in the form of dividends. Because the Purchaser owns approximately
81.6% of the outstanding Shares, the remainder of the dividend has been paid to
stockholders other than the Purchaser. Because the Company is consolidated with
the Purchaser for federal income tax purposes, the Purchaser pays no federal
income taxes on the dividends it receives from the Company. Other stockholders
of the Company, however, must pay federal income tax on the dividends they
receive, which are taxable as ordinary income. Therefore, the economic benefit
of the dividend payment to the stockholders of the Company, other than the
Purchaser, as a group is significantly reduced. The Purchaser believes that the
purchase at a fair price of the Company's Shares that it does not already hold
will benefit both the Purchaser and the other stockholders of the Company. After
the Offer and the Merger, the Purchaser will benefit from being permitted to
realize all of the dividends paid by the Company on a tax-effective basis. In
addition, the stockholders of the Company that receive cash in exchange for
their Shares pursuant to either the Offer or the Merger should benefit because
they should generally receive capital gains or capital loss treatment on the
sale of their Shares, rather than ordinary income on the dividends received from
the Company, provided they hold such Shares as a capital asset at the time of
the sale. See "THE OFFER -- 5. Certain United States Tax Considerations of the
Offer and the Merger."
The Company has available net operating loss carryforwards which aggregated
approximately $107,000,000 at December 31, 1995, and expire in various amounts
from 1996 to 2006. Under its current structure and with its present assets,
management of the Company does not foresee that the Company will likely be able
to utilize any substantial portion of the net operating losses before they
expire. The Purchaser intends from time to time to sell various of its non-core
assets, which may generate taxable income that could effectively be offset by
the utilization of the Company's net operating losses. However, the Purchaser
will be able to utilize the Company's net operating losses in this manner only
if the Company is combined with the Purchaser.
Another reason for the Offer and the Merger is that, in the Purchaser's
view, the costs associated with the Company's status as a publicly traded entity
now outweigh any benefits of that status. Because there are only a small number
of Shares available for trading, the Shares generally have a low trading volume
and are illiquid. The requirements under the Securities Exchange Act of 1934, as
amended ("Exchange Act") to prepare and file with the Commission periodic
reports impose on the Company significant direct and indirect compliance costs.
The Purchaser intends to seek the termination of registration of the Shares
under the Exchange Act as soon as possible after consummation of the Offer and
the Merger, if the requirements for the termination of registration are met.
In addition, the Purchaser believes that the Company's status as a publicly
traded entity unnecessarily creates potential conflicts of interest between the
interests of the Purchaser and the other stockholders of the Company. Although
potential conflicts of interest that have arisen in the past have been addressed
through the formation of special committees of the Board of Directors of the
Company, the Purchaser believes that terminating the Company's status as a
separate publicly traded entity would more effectively reduce the potential for
future conflicts of interest of this type.
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3. FAIRNESS OF THE OFFER AND THE MERGER.
The Purchaser believes that the $19.50 per Share cash consideration
proposed to be paid in the Offer and pursuant to the Merger is fair to the
minority stockholders of the Company. It provides a substantial premium over
pre-announcement market prices to holders of the Shares and enables the
Company's stockholders to receive cash for their stockholdings now, at a premium
per Share price. The $19.50 per Share offer price represents a premium of
approximately 96% over the weighted average of the market price of the Company's
Common Stock during the period from January 1, 1996 to September 10, 1996, and a
premium of 81% over the market price of the Company's Common Stock as of
September 8, 1996 of $10.75 per Share. Based on the foregoing and in light of
the Company's historical results and the prices paid by the Company and the
Purchaser in prior purchases of the Company's stock, the Purchaser believes the
consideration proposed to be paid in the Offer and the Merger is fair to the
minority stockholders of the Company.
As a result of the Minimum Tender Condition, the tender of more than a
majority of the outstanding Shares not owned directly or indirectly by the
Purchaser is a condition to the obligation of the Purchaser to accept Shares for
payment. Such condition, however, may be waived at the discretion of the
Purchaser, with the consent of the Special Committee.
Neither the Purchaser nor any of its affiliates solicited other offers for
the Company or its assets, and there can be no assurance that the terms of the
Offer are as favorable to the minority stockholders of the Company as could be
obtained in a transaction, or one or more transactions, with an unaffiliated
party or parties. Neither the Purchaser nor any of its affiliates has received
any firm offers or inquiries with respect to the business and assets of the
Company or its investment therein from any unaffiliated party during the
eighteen months preceding the date of this Offer to Purchase.
The Purchaser has not obtained any opinions as to the fairness of the Offer
or the Merger to the minority stockholders of the Company or any valuation or
appraisal of the Company's assets from any independent party in connection with
the Offer or the Merger. In connection with a contemplated sale of debt by the
Purchaser that was later abandoned in April 1996, the financial advisor engaged
by the Purchaser advised that the Shares held by the Purchaser had a value of
approximately $17.96 per share.
Representatives of the Purchaser have had access to certain non-public
information concerning the Company, including the projections which are
summarized elsewhere in this Offer to Purchase. See "THE OFFER -- 8. Certain
Information Concerning the Company."
On June 7, 1996, the Company formed a Special Committee to evaluate
strategic alternatives for the Company. The Special Committee is composed of the
three directors of the Company who are neither officers or directors of the
Purchaser nor officers of the Company. The Special Committee retained Principal
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as its financial advisor to analyze the terms of the Offer and the Merger.
Principal has provided the Board of Directors with its verbal opinion on August
28, 1996, and its written opinion that, as of October 9, 1996, the $19.50 per
Share cash consideration to be received by the holders of Shares (other than the
Purchaser) pursuant to the Offer and the Merger is fair to such holders from a
financial point of view. The Board of Directors of the Company and the Special
Committee have each unanimously determined that the Offer and the Merger are
fair to, and in the best interests of, the Company and its stockholders, have
approved the Offer and the Merger and recommend that the Company's stockholders
accept the Offer and tender their Shares pursuant to the Offer. See "SPECIAL
FACTORS -- 6. Recommendation of the Company's Board of Directors and the Special
Committee."
4. INTERESTS OF CERTAIN PERSONS IN THE OFFER; POTENTIAL CONFLICTS
OF INTERESTS.
Stockholders should be aware that members of the Board of Directors of the
Company (collectively, the "Board" and each a "Director"), other than the
members of the Special Committee, have certain interests which are referred to
below, and which may present them with actual or potential conflicts of interest
in connection with the Offer. Among other things, the Purchaser already owns
approximately 81.6% of the outstanding Shares and, after the consummation of the
Offer, it is expected that the Chairman of the Board of the Company will
continue to serve on the board of directors of the Purchaser and that the
President and Chief Executive Officer of the Company will continue to be
officers of the Purchaser.
Three of the six members of the Board are also members of the board of
directors of the Purchaser or are officers of the Purchaser. In addition, the
law firm of Jenkens & Gilchrist, a Professional Corporation, has provided legal
services on an on-going basis to both the Purchaser and the Company. Jenkens &
Gilchrist are acting as legal counsel to the Purchaser in connection with the
Offer, the Merger and the other transactions contemplated herein.
5. BACKGROUND OF THE OFFER AND THE MERGER.
On June 7, 1996, the Board appointed a Special Committee, composed of
Messrs. Sebastian, Holinger and Collins, to assess strategic alternatives for
enhancing the value of Shares not held by the Purchaser. Also, on June 7, 1996,
the Company issued a press release announcing the formation of the Special
Committee. After consideration of possible counsel and financial advisers for
the Special Committee, at a meeting of the Special Committee held on June 21,
1996, the Special Committee determined to engage Donohoe, Jameson & Carroll,
P.C. as its outside legal counsel and Principal as its financial advisor.
Principal was instructed to evaluate strategic alternatives for the Company.
At a meeting of the Special Committee on August 8, 1996, after reviewing
information provided by management of the Company and meeting with members of
the Company's management, Principal presented its preliminary analyses of
various strategic options available to the Company and its stockholders,
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including public offerings of equity securities, growth through acquisitions,
divestitures of certain assets of the Company, the acquisition of all of the
Shares by the Purchaser, and the sale of the entire Company to a third party.
Principal analyzed both the benefits and the costs to the minority stockholders
and the tax effects of each of the strategic options. In connection with its
analysis, Principal preliminarily valued the Company at $15.38 to $17.14 per
Share. Based upon the preliminary analyses provided by Principal and the
discussions had by the Special Committee to such date, the Special Committee
determined at that meeting that the most viable strategic alternatives were to
sell the entire Company to a third party or to seek an offer from the Purchaser
for those Shares not currently held by the Purchaser. The Special Committee
directed Mr. Holinger to contact the Purchaser regarding these two alternatives.
Mr. Holinger contacted representatives of the Purchaser on August 10, 1996.
In Mr. Holinger's discussions with the Purchaser, the Purchaser indicated that
it had no desire to participate in the sale of the Company to a third party.
Therefore, Mr. Holinger, as instructed by the Special Committee, asked if the
Purchaser would be willing to make an offer to acquire all of the Shares not
currently held by the Purchaser. After discussion among management of the
Purchaser, on August 13, 1996, the Purchaser determined to make a proposal to
the Company to acquire the Shares not owned by the Purchaser at a price of
$17.50 per Share and sent the following letter to the Special Committee:
August 13, 1996
Special Committee of the Board of Directors
Hallwood Energy Corporation
3710 Rawlins
Suite 1500
Dallas, Texas 75219
Gentlemen:
This letter is in response to your request for a specific proposal from The
Hallwood Group Incorporated ("HWG") with respect to the acquisition of the
shares of Hallwood Energy Corporation ("HEC") not currently held by HWG (the
"Minority Shares"). We are prepared in principal to purchase the Minority Shares
on the terms described below. If accepted by the Special Committee, this offer
is intended to be, and will not be legally binding until, embodied in a legally
binding definitive agreement (the "Agreement") executed by all parties and which
will be subject to the approval of the boards of directors of both parties and
the Special Committee of HEC. Our offer is as follows:
1. HEC will merge with HWG. The price paid will be $17.50 cash per share
for each share of HEC Common Stock not held by HWG.
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2. The Agreement will contain customary warranties, representations and
covenants usual to transactions of this type.
3. The Closing of the transaction will be subject to the satisfaction of
the following conditions:
(a) The receipt by HEC of an opinion of an investment banker
selected by the Special Committee that the terms of the
transaction are fair, from a financial point of view, to the
holders of the Minority Shares.
(b) The approval of the transaction by a majority of the
shareholders of HEC other than HWG.
(c) The receipt of all required approvals of federal and state
governmental agencies and boards and of all other necessary
consents and authorizations.
(d) There shall have been no material adverse change in the
business, consolidated earnings or consolidated net worth of
HEC, its subsidiaries or Hallwood Energy Partners, L.P.
(e) No action, proceeding or claim shall be pending to prevent
consummation or seek damages by reason of the transaction; no
governmental authority shall be then claiming that the
transaction constitutes a violation of law.
(f) All warranties, representations and covenants contained in the
Agreement shall continue to be true and correct in all
material respects as of the day of closing.
4. It is understood that the Agreement will contain many of the other terms
and conditions which will have to be negotiated and agreed to before the
Agreement can be finalized. Until the Agreement is finalized, approved by the
respective Boards of Directors and by the Special Committee (which approval
shall be in the sole subjective discretion of each of them) and properly
executed, neither party shall have any legally binding obligation to the other.
If the terms outlined in this letter are satisfactory, we can proceed
immediately with the preparation of a definitive agreement embodying these
terms. If we can provide any additional information, please let me know.
Sincerely,
THE HALLWOOD GROUP INCORPORATED
/s/ Melvin J. Melle, Vice President
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<PAGE>
Upon receipt of this letter, the Special Committee instructed Principal to
evaluate the Purchaser's proposal.
Principal distributed its evaluation materials to the Special Committee on
August 28, 1996. The Special Committee held a meeting on August 30, 1996 to
discuss Principal's evaluation materials and the Purchaser's offer. The Special
Committee noted that Principal's valuation of the Shares had increased, based
upon various factors described below, from Principal's previous valuation. The
Special Committee determined that it would be appropriate to pursue a
transaction in which the Purchaser would offer to purchase the Shares currently
held by the minority stockholders. The Special Committee further concluded that,
based upon all of the foregoing, it would seek a price of $19.50 per Share for
any such transaction, while acknowledging that if the Special Committee were not
able to obtain that price, such a transaction might still be in the best
interest of the minority stockholders. The Special Committee directed Mr.
Sebastian to contact Mr. Guzzetti, Executive Vice President of the Purchaser.
Mr. Sebastian was directed to propose a counter-offer of a transaction at $19.50
per Share.
Mr. Sebastian communicated the Special Committee's counter-offer to Mr.
Guzzetti on August 30, 1996. Representatives of the Purchaser met that day to
consider the counter-offer. On the evening of August 30, 1996, Mr. Guzzetti
communicated to Mr. Sebastian that the counter-offer of $19.50 per Share
appeared to be acceptable to the Purchaser. Mr. Sebastian reported this to the
Special Committee on September 3, 1996.
On September 4, 1996, the Board of Directors of the Company held a
regularly scheduled meeting at which the Special Committee recommended to the
Board of Directors that a combination of the Company with the Purchaser in which
the minority stockholders of the Company would receive $19.50 per Share be
approved in principal by the Board of Directors. Upon receiving this
recommendation, the Board of Directors of the Company approved a transaction as
recommended by the Special Committee, subject to the preparation, negotiation
and execution of a definitive agreement embodying the terms of the transaction
and the approval by the Special Committee, the Board of Directors and the board
of directors of the Purchaser of the definitive agreement. On September 6, 1996,
the board of directors of the Purchaser approved in principle the transaction
recommended by the Special Committee of the Company, subject to the preparation,
negotiation and execution of a definitive agreement by the parties and approval
of the definitive agreement by the boards of directors of the Company and the
Purchaser.
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<PAGE>
On September 9, 1996, the Company and the Purchaser issued a joint press
release announcing an agreement in principal regarding a combination of the two
entities, as follows:
The Hallwood Group Incorporated (NYSE:HWG) and Hallwood Energy
Corporation (NMS:HWEC) announced today that the Board of Directors of
Hallwood Energy, upon the recommendation of the previously appointed
special committee of independent directors, has accepted in principle
the offer of Hallwood Group to effect a combination of Hallwood Energy
and Hallwood Group in which the minority shareholders of Hallwood
Energy would receive cash in the amount of $19.50 per share for each
share of Hallwood Energy they hold as of the record date. The agreement
is subject to, among other things, the determination of the structure
of the combination and the execution by both companies of a definitive
agreement.
Hallwood Group owns approximately 82% of the issued and outstanding
stock of Hallwood Energy. It is anticipated that the completion of the
transaction will be conditioned on the approval of the holders of a
majority of the shares of Hallwood Energy not currently held by
Hallwood Group. It is the intention of the companies to complete the
transaction before the end of the year.
On September 5, 1996, counsel for the Purchaser distributed a draft of the
Merger Agreement to counsel for the Special Committee. After receiving comments
to the Merger Agreement from the Special Committee's counsel on September 13,
1996, the Purchaser's counsel distributed a revised draft of the Merger
Agreement to the Special Committee's counsel on September 17, 1996.
After receiving further comments to the Merger Agreement from the Special
Committee's counsel and from the general counsel of the Company on September 18,
1996, the Purchaser's counsel distributed a revised draft of the Merger
Agreement to the Special Committee's counsel on September 19, 1996. The
Purchaser's counsel distributed revised indemnification provisions of the Merger
Agreement to the Special Committee's counsel on September 30, 1996.
On September 30, 1996, the Special Committee's counsel, the Purchaser's
counsel and the general counsel for the Company had a conference call to discuss
the timing of certain items related to the Offer and the Merger. On October 1,
1996, the Special Committee's counsel, Principal, the Purchaser's counsel and
the general counsel for the Company had a conference call to discuss comments to
the Offer to Purchase and the other documents related to the Offer. Counsel for
the Purchaser distributed revised drafts of such documents on October 1, 1996.
On October 4, 1996, the Special Committee's counsel, the Purchaser's
counsel and the general counsel for the Company had a conference call to discuss
the timing of certain items related to the Offer and the Merger and to discuss
comments to the Offer to Purchase and the other documents related to the Offer.
Counsel for the Purchaser distributed revised drafts of these documents on
October 4, 1996.
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<PAGE>
On October 9, 1996, the Special Committee and its legal and financial
advisors met to discuss the Offer and the Merger. At that meeting, the Special
Committee discussed several remaining outstanding issues on the draft Merger
Agreement and Offer. At that meeting of the Special Committee, Principal
delivered its written opinion to the Special Committee that the consideration to
be received by the holders of Shares (other than the Purchaser) is fair to such
holders from a financial point of view as of such date. See "SPECIAL FACTORS --
6. Recommendation of the Company's Board of Directors and the Special
Committee." The Special Committee unanimously approved, subject to certain
changes being made, each of the Merger Agreement, the Offer and the Merger and
determined that the terms of the Offer and the Merger are fair to, and in the
best interest of, the stockholders of the Company and recommended that the
stockholders of the Company tender their Shares and that the Board of Directors
of the Company approve the same. After that meeting of the Special Committee, a
meeting was convened of the members of the Special Committee, their counsel,
representatives of the Purchaser, its counsel and the general counsel of the
Company. At that meeting the remaining issues were resolved to the satisfaction
of each of the members of the Special Committee. Immediately thereafter, the
Board of Directors of the Company met. After receiving a report from the Special
Committee on its deliberations and a recommendation from the Special Committee
that the Board of Directors approve the Merger Agreement, the Offer and the
Merger, the Board of Directors unanimously approved the Merger Agreement, the
Offer and the Merger, determined that the Offer and the Merger are fair to, and
in the best interest of, the stockholders of the Company and recommended that
the stockholders of the Company accept the Offer and tender their Shares
pursuant to the Offer. The board of directors of the Purchaser approved the
Merger Agreement, the Offer and the Merger by unanimous written consent dated
October 9, 1996. A copy of the Merger Agreement has been filed as an exhibit to
the Rule 14(d)(1) Tender Offer Statement on Schedule 14D-1 ("Schedule 14D-1")
and the Rule 13e-3 Transaction Statement on Schedule 13E-3 ("Schedule 13E-3"),
and the Merger Agreement is summarized in "THE OFFER -- 11. The Merger
Agreement; Appraisal Rights."
The Merger Agreement was executed by the parties thereto as of October 9,
1996, and the transaction was publicly announced on October 10, 1996.
6. RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS AND THE SPECIAL
COMMITTEE.
At the October 9, 1996 meeting of the Board of Directors of the Company,
the Board of Directors of the Company, including those members of the Board of
Directors of the Company constituting the Special Committee, acting upon the
unanimous recommendation of the Special Committee, unanimously approved the
Merger Agreement, the Offer and the Merger, determined that the terms of the
Offer and the Merger are fair to, and in the best interest of, the stockholders
of the Company and recommended that all stockholders of the Company accept the
Offer and tender their Shares pursuant to the Offer.
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<PAGE>
Reasons for Recommendation.
See "SPECIAL FACTORS -- 5. Background of the Offer and the Merger" for a
description of certain events preceding the Board of Director's consideration of
the Offer and the Merger.
The Special Committee received presentations from, and reviewed the Offer
and the Merger with, senior management of the Company, counsel for the Special
Committee and the Special Committee's financial advisor, Principal. The Special
Committee, in determining whether to recommend the approval of the Merger
Agreement and the transactions contemplated thereby to the full Board of
Directors, considered a number of factors, including, but not limited to, the
following:
(i) The belief, based on its familiarity with the Company's
business, its current financial condition and results of operations and
its future prospects, and the current and anticipated developments in
the oil and gas industry, that the consideration to be received by the
Company's stockholders in the Offer and Merger fairly reflects the
Company's value.
(ii) The verbal presentations made by Principal at a meeting
held on August 30, 1996, as to various financial and other
considerations deemed relevant to the evaluation of the Offer and the
Merger, including, but not limited to, a review of (A) the business
prospects and financial condition of the Company, (B) historical
business information and financial results of the Company, (C)
nonpublic financial and operating results of the Company, (D) financial
projections and budgets prepared by the Company's management, (E)
information obtained from meetings with senior management of the
Company, (F) the trading range and volume history of the Shares, (G)
public financial information of comparable companies and (H) public
information of comparable acquisitions.
(iii) The opinion of Principal that the consideration to be
received by the Company's stockholders pursuant to the Merger Agreement
is fair to such stockholders (other than the Purchaser) from a
financial point of view. In considering Principal's opinion, the Board
was aware that Principal is entitled to a fee in accordance with the
terms of its engagement described below.
(iv) The relationship between the consideration to be received
by stockholders as a result of the Offer and the Merger and the
historical market prices and recent trading activity of the Shares. The
Special Committee considered as favorable to its determination the fact
that the $19.50 per Share price to be paid in the Offer and the Merger
represents a premium of approximately 81% over the $10.75 price at
which the Shares had traded most recently before September 8, 1996, the
last trading day before the public announcement of the proposed
transaction.
(v) The recognition that, following consummation of the Offer
and the Merger, the current Stockholders of the Company will no longer
be able to participate in any increases or decreases in the value of
the Company's business and properties. The Board and the Special
Committee concluded, however, that this consideration did not justify
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<PAGE>
foregoing the opportunity for stockholders to receive an immediate and
substantial cash purchase price for their Shares.
(vi) The fact that the terms of the Offer, and the increase in
the consideration offered to the minority stockholders from $17.50 per
Share to $19.50 per Share, were determined through arm's-length
negotiations with the Purchaser by the Special Committee and its
financial and legal advisors, all of whom are unaffiliated with the
Purchaser, and the judgment of the Special Committee and Principal
that, based upon the negotiations that transpired, a price higher than
$19.50 per Share could not likely be obtained and that further
negotiations with the Purchaser could cause the Purchaser to abandon
the Offer, with the resulting possibility that the market price for the
Shares could remain substantially below $19.50, and possibly $17.50,
per Share, or to commence a tender offer without the involvement of the
Special Committee at a price less than $19.50 per Share.
(vii) The Purchaser's ownership of approximately 81.6% of the
currently outstanding Shares and the effects of such ownership on the
alternatives available to the Company, the response given by the
Purchaser to the Special Committee that the Purchaser had no desire to
participate in the sale of the Company to a third party and the fact
that, as a practical matter, no strategic alternative could be effected
without the support of the Purchaser; and the consequences of
continuing to operate the Company as a majority-owned subsidiary of the
Purchaser.
(viii) The terms and conditions of the Merger Agreement, the
fact that there are no unusual requirements or conditions to the Offer
and the Merger, and the fact that the Purchaser has the financial
resources to consummate the Offer and the Merger expeditiously.
(ix) The fact that the consideration to be paid to the
Company's minority stockholders in the Offer and the Merger is all
cash.
(x) The fact that the Offer and the Merger have been
structured to include a first-step cash tender offer for any and all
outstanding Shares, thereby enabling stockholders who tender their
Shares to promptly receive $19.50 per Share in cash, and the fact that
any minority stockholders who do not tender their Shares or properly
exercise appraisal rights will receive the same price per Share in the
subsequent Merger.
(xi) The fact that, while no appraisal rights are available to
stockholders as a result of the Offer, stockholders who do not tender
pursuant to the Offer may have the right to dissent from the Merger
and to demand appraisal of the fair value of their Shares under the
TBCA. See "THE OFFER -- 11. The Merger Agreement; Appraisal Rights."
The Special Committee considered each of the factors listed above during
the course of its deliberations prior to recommending that the Company enter
into the Merger Agreement. In light of its knowledge of the business and
operations of the Company and its business judgment, the Special Committee
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<PAGE>
believed that each of these factors supported its respective conclusions. The
Special Committee also considered the possible conflicts of interest of certain
directors and members of management of both the Company and the Purchaser
discussed in "Item 3(b) -- Interests of Certain Persons" of the Company's
Schedule 14D-9. In view of the wide variety of factors considered, the Special
Committee did not find it practicable to, and did not quantify the specific
factors considered in making its determination, although the Special Committee
did place a special emphasis on the opinion and analysis of Principal which was
based on its analyses as outlined below.
The Special Committee and the Board did not attempt to solicit competing
acquisition proposals because they believed that the absence of any "break-up"
fee or other "lock-up" provisions in the Merger Agreement and the freedom of the
Board to consider any transaction proposed by a third party after the signing of
the Merger Agreement meant that a third party interested in submitting a
competing bid is free to do so despite the execution of the Merger Agreement. To
date, the Company has received no inquiries whatsoever regarding a possible
competing bid. Furthermore, the Board considered that, given the Purchaser's
beneficial ownership of approximately 81.6% of the outstanding Shares, no
acquisition could be approved by the stockholders without the affirmative vote
of the Purchaser and that, if any other acquisition proposal were presented to
the stockholders, the Purchaser could prevent the approval of any such proposal
by exercising its right to vote against any such proposal.
The Board of Directors of the Company, three of the six members of which
were members of the Special Committee, approved the Merger Agreement and the
transactions contemplated thereby after receiving a report from the Special
Committee on its deliberations and recommendation. In reaching this decision,
the Board of Directors principally considered the recommendation of the Special
Committee and the Board's familiarity with the Company's business, the Company's
current financial condition and results of operations and future prospects, and
current and anticipated developments in the Company's industry. The Board also
noted that the price offered by the Purchaser was within the range of value
estimates contained in the Petroleum Industry Profiles, published by Kirkpatrick
Energy Associates, Inc. in July 1996, a collection of analytical reports
covering 111 publicly held independent producers, which estimated that the
pre-tax asset liquidation value per primary common share of the Company at
December 31, 1995 ranged from $11.84 to $29.46 per share, based on varying
assumptions of prices and discount rates with an "expected value" of $20.69 per
share. The Board did not endorse any of the specific assumptions or conclusions
contained in the Petroleum Industry Profiles, however, and believed that
Principal's analysis was more thorough and took into account certain information
specific to the Company and not available to Kirkpatrick Energy Associates, Inc.
Additionally, the Board of Directors acknowledged that the Company had recently
received a letter from an attorney purporting to represent a shareholder of the
Company requesting certain information. In the letter, the attorney states his
client's belief that the price to be offered in the transaction may not be the
fair value of the Company's Shares, noting the Company's purchase of 58,000
Shares at $21.50 per Share in 1995; asserting that 1996 earnings per Share could
approach $3.00, purportedly implying a per Share value of $27.00; and estimating
the Company's liquidation value at $30.00 per Share. Accordingly, the attorney
requested the opportunity to review the report of Principal, minutes of various
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<PAGE>
meetings of the Special Committee and the Board, and shareholder lists of the
Company. The Board concluded that Principal's analysis of the Company thoroughly
addressed each of the valuation issues raised by the attorney.
Opinion of Financial Advisor.
On October 9, 1996, Principal delivered its opinion to the Special
Committee to the effect that the consideration to be paid to the holders of
Shares pursuant to the Merger Agreement is fair to such holders (other than the
Purchaser) from a financial point of view as of the date thereof. A copy of
Principal's opinion is attached as Schedule III hereto. The summary of the
opinion set forth herein is qualified in its entirety by such Schedule III which
is incorporated herein by reference. Stockholders are urged to read the opinion
in its entirety for a description of the assumptions made, matters considered
and procedures followed by Principal. The consideration to be paid pursuant to
the Offer and Merger was determined by negotiations on behalf of the Company and
the Purchaser and was not determined by Principal. In arriving at its opinion,
Principal, among other things, (1) reviewed certain publicly available business
and financial information relating to the Company; (2) reviewed the reported
price and trading activity for the Shares; (3) reviewed certain internal
financial information and other data provided to Principal by the Company
relating to the business and prospects of the Company, including financial
projections prepared by the management of the Company; (4) conducted discussions
with members of the senior management of the Company; (5) reviewed the financial
terms, to the extent publicly available, of certain acquisition transactions
involving other companies which Principal considered relevant; (6) reviewed
publicly available financial and securities market data pertaining to certain
publicly held companies in the oil and gas industry; and (7) conducted such
other financial studies, analyses and investigations, and considered such other
information as Principal deemed necessary and appropriate. In reaching its
opinion and conducting its analysis, Principal did not assume any responsibility
for independent verification of any of the foregoing information and relied upon
it being complete and accurate in all material respects. Principal was not
requested to and did not make an independent evaluation or appraisal of any
assets or liabilities (contingent or otherwise) of the Company or any of its
subsidiaries, nor were they furnished with any such evaluation or appraisal.
Principal also assumed that all of the information, including the projections,
provided to Principal by the Company's management was prepared on a basis
reflecting the best currently available estimates and judgments of the Company's
management as to the future of the financial performance of the Company and was
based upon the historical performance and certain estimates and assumptions
which were reasonable at the time made. In addition, Principal was not asked to
and did not express any opinion as to the after-tax consequences of the sale of
such Shares by the stockholders. Principal's opinion is based on economic,
monetary and market conditions existing on the date thereof. In rendering their
opinion, Principal did not render any opinion as to the value of the Company and
did not make any recommendation to the stockholders with respect to the
advisability of tendering their Shares. No limitations were imposed by the
Special Committee, the Company or the Purchaser upon Principal with respect to
the investigations made or the procedures followed by Principal in rendering its
opinion, and the Company and the members of its management cooperated fully with
Principal in connection with its investigation.
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In arriving at its opinion Principal used five separate analyses including
discounted cash flow analysis, comparable reserve acquisitions analysis,
comparable companies trading analysis, premiums that were paid to acquire
residual share interests by a majority shareholder analysis, and book value per
share analysis. The following describes each method in summary.
Discounted Cash Flow ("DCF") Analysis - Principal performed a DCF analysis
pursuant to the present value of the future after-tax cash flows of the
Company's proved reserves as of June 30, 1996 based on reserve reports provided
to Principal by the Company. In addition, representatives of Principal met with
representatives of the Company's management to discuss the Company's current and
projected operations. In developing its Discounted Cash Flow Analysis, Principal
took the free cash flow (defined as net income plus non-cash expenses less
required capital expenditures) that the Company was expected to generate
throughout the life of the reserves (as presented to Principal in the reserve
reports provided by the Company) and discounted the cash flows to a present
value using a 10% discount rate. The assumed tax rate was 34% and taxes were
calculated giving effect for net operating loss carryforwards and depletion
carryforwards available to the Company. Principal then analyzed a subsequent
acquisition that occurred after the June 30, 1996 reserve report and calculated
a value based on management's base case economics presented to Principal by the
Company. Finally, Principal added net working capital, estimated book value of
other assets, the value of the Company's stock investment in its parent, and the
book value of other noncurrent assets and subtracted the long-term liabilities
of the Company. Based on these assumptions Principal calculated an approximate
imputed equity value for the Company of $19.40 per Share.
Comparable Reserve Acquisition Analysis - In calculating the relative value
of the Company's oil and gas reserves, Principal examined comparable oil and gas
reserve acquisition transactions that occurred during 1994, 1995 and the first
quarter of 1996 in the Mid-Continent and Rocky Mountain regions of the United
States as reported by John S. Herold, Inc., an independent petroleum research
company that tracks such data. There were 51 such transactions that occurred
during the aforementioned period with a mean purchase price of $4.37 per oil
barrel of equivalent reserves. Principal applied a multiple range of $4.00 to
$4.50 per oil barrel of equivalent to the Company's proved reserves as provided
to Principal by the Company. Principal then adjusted the equity value ranges to
account for certain assets and liabilities of the Company that were not included
as part of such analysis. Based on this analysis, Principal calculated an
approximate imputed equity value range for the Company of $18.15 to $20.06 per
Share.
Comparable Companies Trading Analysis - Under this method, Principal
examined nine companies Principal believed to be comparable to the Company on
various financial and operational parameters. The comparable companies included
were Abraxas Petroleum, American Exploration, Bellwether Exploration Company,
Columbus Energy, Lomak Petroleum, Maynard Oil, Prima Energy, Unit Corporation,
and Wiser Oil (the "Comparable Companies"). With respect to the Comparable
Companies, Principal analyzed, among other things, current market value
multiples relative to proved reserves, operating cash flows, after-tax cash
flows and the present value of after-tax cash flows as determined pursuant to
the standards established by the Commission for discounting the present value of
proved reserves. Principal then established trading multiple ranges for each
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data point based on Principal's analysis of the Comparable Companies and
multiplied the Company's relative data (provided to Principal by the Company) by
the corresponding multiple range to establish hypothetical relative values.
Principal then averaged these implied relative market values. Based on this
analysis, Principal calculated an approximate imputed equity value range for the
Company of $18.68 to $22.72 per Share.
Premiums Paid for Residual Interest Analysis - Under this method, Principal
examined transactions whereby a majority shareholder acquired the residual
interest it did not own in a company. According to Securities Data Company,
Inc., an independent research company, from 1987 to June 1996 thirteen such
transactions occurred in the oil and gas industry and one was pending with an
average 30.6% premium paid over the trading price four weeks prior to
announcement. Principal applied the 30.6% premium to the Company's average
Bid/Ask trading price for the period from January 1, 1996 to August 27, 1996.
Based on this analysis, Principal calculated an approximate imputed equity value
for the Company of $15.14 per Share.
Book Value per Share Analysis - Principal examined the book value per Share
as it related to a premium or discount to the value per Share of the
transaction. The book value as of June 30, 1996 (after giving effect for the
acquisition that occurred subsequent to June 30, 1996) was $13.52 per Share.
The Principal then calculated a summary reference value, which places
individual weights on each of the five aforementioned analyses to generate a
weighted average total. In general, the analyses weighted most heavily are those
that best reflect valuation criteria emphasized in the private acquisition
market and the public trading market and include the Discounted Cash Flow
Analysis, Comparable Reserve Acquisitions Analysis, and Comparable Companies
Trading Analysis. Valuation parameters that are not direct indicators of market
value were weighted less heavily and include Premiums Paid for Residual Interest
Analysis and Book Value per Share Analysis. A weighted average of the five
analyses as of August 28, 1996, resulted in an imputed equity value range for
the Company of $18.19 to $19.67 per Share.
The summary set forth above does not purport to be a complete description
of either Principal's analyses or presentations to the Special Committee.
Principal believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create an incomplete view of the
processes underlying its opinion. The preparation of a fairness opinion is a
complex process and not necessarily susceptible to partial analyses or summary
description. In its analyses, Principal made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the Company's control. Any estimates contained
therein are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of
value of companies do not purport to be appraisals or necessarily reflect the
prices at which companies may actually be sold. Because such estimates are
inherently subject to uncertainty, none of the Company, the Purchaser, Principal
and any other person assumes responsibility for their accuracy.
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The Company has retained Principal as the Special Committee's financial
advisor in connection with the Merger, the Offer and other matters arising in
connection therewith pursuant to an engagement letter dated July 17, 1996
("Engagement Letter") between the Company and Principal. The Engagement Letter
provides, among other things, that the Company will pay to Principal a fee equal
to $65,000. In addition, the Company has agreed to reimburse Principal for its
reasonable out-of-pocket expenses, including reasonable legal expenses, and to
indemnify Principal against certain liabilities.
The Special Committee selected Principal as its financial advisor because
Principal is a recognized investment banking firm with emphasis in the oil and
gas industry and regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions.
THE OFFER
1. TERMS OF THE OFFER.
Upon the terms and subject to the conditions set forth in the Offer
(including, if the Offer is extended or amended, the terms and conditions of
such extension or amendment), the Purchaser will accept for payment, and pay
for, all Shares validly tendered on or prior to the Expiration Date (as defined
herein) and not withdrawn as permitted by "THE OFFER -- 4. Rights of
Withdrawal." The term "Expiration Date" means 12:00 Midnight, New York City
time, on Friday, November 22, 1996, unless and until the Purchaser shall, in its
sole discretion, have extended the period for which the Offer is open, in which
event the term "Expiration Date" shall mean the latest time and date on which
the Offer, as so extended by the Purchaser, shall expire.
This Offer is subject to various terms and conditions described herein. See
"THE OFFER -- 13. Certain Conditions of the Offer."
Subject to the applicable rules and regulations of the Commission, the
Purchaser expressly reserves the right, in its sole discretion, at any time and
from time to time, and regardless of whether or not any of the events set forth
in "THE OFFER -- 13. Certain Conditions of the Offer" have occurred or have been
determined by the Purchaser to have occurred, to (i) extend the period of time
during which the Offer is open, and thereby delay acceptance for payment of,
regardless of whether such Shares were accepted for payment, and the payment
for, any Shares, by giving oral or written notice of such extension to the
Depositary and (ii) amend the Offer in any other respect by giving oral or
written notice of such amendment. The Purchaser shall not have any obligation to
pay interest on the purchase price for tendered Shares, whether or not the
Purchaser exercises its right to extend the Offer. The rights reserved by the
Purchaser in this paragraph are in addition to the Purchaser's right to
terminate the Offer pursuant to the provisions of "THE OFFER -- 13. Certain
Conditions of the Offer."
If by the Expiration Date, any or all conditions to the Offer have not been
satisfied or waived, the Purchaser reserves the right (but shall not be
obligated), in its sole discretion subject to the applicable rules and
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regulations of the Commission, to (i) terminate the Offer and not accept for
payment any Shares and return all tendered Shares, (ii) waive all the
unsatisfied conditions other than the Minimum Tender Condition and, with the
consent of the Special Committee, waive the Minimum Tender Condition and,
subject to the applicable rules and regulations of the Commission, accept for
payment and pay for all Shares validly tendered prior to the Expiration Date and
not withdrawn, (iii) extend the Offer and, subject to the right of stockholders
to withdraw Shares until the Expiration Date, retain the Shares that have been
tendered during the period or periods for which the Offer is extended, or (iv)
amend the Offer in any respect by giving oral and written notice of such
termination, waiver, extension, delay or amendment to the Depositary or by
making public announcement thereof.
There can be no assurance that the Purchaser will exercise its right to
extend the Offer. See "THE OFFER -- 13. Certain Conditions to the Offer." Any
extension, delay, amendment, waiver or termination will be followed as promptly
as practicable by public announcement. In the case of an extension, Rule
14e-l(d) under the Exchange Act requires that the announcement be made no later
than 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date in accordance with the public announcement
requirements of Rule 14d-4(c) under the Exchange Act. Subject to applicable law
(including Rules 14d-4(c) and 14d-6(d) under the Exchange Act, which require
that any material change in the information published, sent or given to
stockholders in connection with the Offer be promptly disseminated to
stockholders in a manner reasonably designed to inform stockholders of such
change), and without limiting the manner in which the Purchaser may choose to
make any public announcements, the Purchaser will not have any obligations to
publish, advertise or otherwise communicate any such public announcement other
than by issuing a press release to the Dow Jones News Service.
If the Purchaser extends the Offer or if the Purchaser (whether before or
after its acceptance for payment of the tendered Shares) is delayed in its
acceptance for payment of or payment for the Shares or if the Purchaser is
unable to accept for payment or pay for the Shares pursuant to the Offer for any
reason, then, without prejudice to the Purchaser's rights under the Offer, the
Depositary may retain tendered Shares on behalf of the Purchaser, and such
Shares may not be withdrawn except to the extent tendering stockholders are
entitled to withdrawal rights as described in "THE OFFER -- 4. Rights of
Withdrawal." However, the ability of the Purchaser to delay the payment for the
Shares that the Purchaser has accepted for payment is limited by Rule 14e-l(c)
under the Exchange Act, which requires that a bidder pay the consideration
offered or return the securities deposited by or on behalf of holders of
securities promptly after the termination or withdrawal of such bidder's offer.
Consummation of the Offer is conditioned upon satisfaction of the Minimum
Tender Condition and the other conditions set forth in "THE OFFER -- 13. Certain
Conditions of the Offer." The Purchaser reserves the right (but shall not be
obligated) to waive any or all such conditions other than the Minimum Tender
Condition, and, with the consent of the Special Committee, to waive the Minimum
Tender Condition and to accept for payment pursuant to the Offer less than the
minimum number of Shares necessary to satisfy the Minimum Tender Condition, to
the extent permitted under applicable law.
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If the Purchaser makes a material change in the terms of the Offer or the
information concerning the Offer or waives a material condition of the Offer
(including, with the consent of the Special Committee, a waiver or reduction of
the Minimum Tender Condition), the Purchaser will disseminate additional tender
offer materials and extend the Offer to the extent required by Rules 14d-4(c),
14d-6(d) and l4e-1 under the Exchange Act. The minimum period during which an
offer must remain open following material changes in the terms of the offer or
information concerning the offer, other than a change in price or a change in
the percentage of securities sought, will depend upon the facts and
circumstances then existing, including the relative materiality of the changed
terms or information. In the Commission's view, an offer should remain open for
a minimum of five business days from the date a material change is first
published, sent or given to security holders, and, if material changes are made
with respect to information that approaches the significance of price and share
levels, a minimum of ten business days may be required to allow for adequate
dissemination and investor response. With respect to a change in price or,
subject to certain limitations, a change in the percentage of securities sought
or a change in a dealer's solicitation fee, a minimum period of ten business
days from the date of such change is generally required under the applicable
rules and regulations of the Commission to allow for adequate dissemination to
stockholders and investor response. Accordingly, if prior to the Expiration
Date, the Purchaser should decrease the number of Shares being sought, or
increase or decrease the consideration offered pursuant to the Offer, or agree
to pay a dealer's solicitation fee, and if the Offer is scheduled to expire at
any time earlier than the period ending on the tenth business day from and
including the date that notice of such change is first published, sent or given
to holders of Shares, the Offer will be extended at least until the expiration
of such ten-business day period. As used herein, a "business day" means any day
other than a Saturday, Sunday or federal holiday and consists of the time period
from 12:01 a.m. through midnight, New York City time.
The Company has provided to the Purchaser's agent the Company's stockholder
list and security position lists for the purpose of disseminating the Offer to
holders of Shares. This Offer to Purchase, the Letter of Transmittal and other
relevant materials will be mailed to recordholders of the Shares whose names
appear on the Company's stockholder list and will be mailed to brokers, dealers,
banks, trust companies and similar persons whose names, or the names of whose
nominees, appear on such stockholder list or, if applicable, who are listed as
participants in a clearing agency's security position listing, for subsequent
transmittal to beneficial owners of Shares.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES.
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the Purchaser will purchase, by accepting for payment, and will
pay for, Shares validly tendered on or prior to the Expiration Date and not
properly withdrawn in accordance with "THE OFFER -- 4. Rights of Withdrawal" as
promptly as practicable after the later to occur of (i) the Expiration Date and
(ii) the satisfaction or waiver of the terms and conditions set forth in "THE
OFFER -- 13. Certain Conditions of the Offer." Any determination concerning the
satisfaction or waiver of the terms and conditions will be within the sole
discretion of the Purchaser, and such determination will be final and binding on
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all holders of Shares. See "THE OFFER -- 1. Terms of the Offer" and "THE
OFFER -- 13. Certain Conditions of the Offer." The Purchaser expressly reserves
the right, in its sole discretion, to delay acceptance for payment of or payment
for Shares in order to comply in whole or in part with any applicable law. Any
such delays will be effected in compliance with the Purchaser's obligation under
Rule 14e-l(c) under the Exchange Act to pay for or return tendered Shares
promptly after the termination or withdrawal of the Offer.
For purposes of the Offer, the Purchaser will be deemed to have accepted
for payment, and thereby purchased, Shares validly tendered to the Purchaser and
not withdrawn if and when the Purchaser gives oral or written notice to the
Depositary of the Purchaser's acceptance of such Shares for payment. Upon the
terms and subject to the conditions of the Offer, payment for Shares accepted
for payment pursuant to the Offer will be made by deposit of the purchase price
therefor with the Depositary, which shall act as agent for tendering
stockholders for the purpose of receiving payment from the Purchaser and
transmitting payment to the tendering stockholders whose shares have been
received for payment. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY THE
PURCHASER ON THE PURCHASE PRICE OF THE SHARES TENDERED PURSUANT TO THE OFFER,
REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN ACCEPTING FOR PAYMENT
OR MAKING SUCH PAYMENT.
In all cases, payment for Shares accepted for payment pursuant to the Offer
will be made only after timely receipt by the Depositary of (i) certificates for
such Shares, (ii) the Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, with any required signature guarantees and (iii)
any other documents required by such Letter of Transmittal.
If the Purchaser is delayed in its acceptance for payment of, or payment
for, Shares or is unable to accept for payment or pay for Shares pursuant to the
Offer for any reason, then, without prejudice to the Purchaser's rights under
the Offer (but subject to the Purchaser's obligations under Rule 14e-l(c) under
the Exchange Act to pay for or return the Shares promptly after the termination
or withdrawal of the Offer), the Depositary may, nevertheless, on behalf of the
Purchaser, retain tendered Shares, and such Shares may not be withdrawn except
to the extent tendering stockholders are entitled to exercise, and duly
exercise, withdrawal rights as described in "THE OFFER -- 4. Rights of
Withdrawal."
If any tendered Shares are not purchased pursuant to the Offer because of
an invalid tender or otherwise, certificates for any such Shares will be
returned, without expense, to the tendering stockholder as promptly as
practicable after the expiration, termination or withdrawal of the Offer.
The Purchaser reserves the right to transfer or assign in whole or in part
from time to time to one or more direct or indirect subsidiaries of the
Purchaser the right to purchase all or any portion of the Shares tendered
pursuant to the Offer, but any such transfer or assignment will not relieve the
Purchaser of its obligations under the Offer and will in no way prejudice the
rights of tendering stockholders to receive payment for Shares validly tendered
and accepted for payment pursuant to the Offer.
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By accepting the benefits of the Offer through the tender of Shares and the
receipt of payment for Shares, a tendering stockholder is (under the Purchaser's
view of applicable law) barred from thereafter attacking in any legal proceeding
the fairness of the consideration received by stockholders in the Offer. For
this reason, the Letter of Transmittal to be executed by tendering stockholders
includes a release of any such claims, which will be effective upon receipt of
payment for tendered shares.
3. PROCEDURE FOR TENDERING SHARES.
Valid Tender. To tender Shares pursuant to the Offer, a properly completed
and duly executed Letter of Transmittal (or facsimile thereof) and any other
documents required by the Letter of Transmittal, must be received by the
Depositary at its address set forth on the back cover of this Offer to Purchase
and certificates for the Shares to be tendered must be received by the
Depositary at such address by the Expiration Date.
Signature Guarantee. Except as otherwise provided below, all signatures on
a Letter of Transmittal must be guaranteed by a financial institution (including
most banks, savings and loan associations and brokerage houses) which is a
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or the Stock Exchanges Medallion
Program (an "Eligible Institution"). Signatures on a Letter of Transmittal need
not be guaranteed (a) if the Letter of Transmittal is signed by the registered
holder of the Shares tendered therewith and such holder has not completed the
box entitled "Special Payment Instructions" on the Letter of Transmittal or (b)
if such Shares are tendered for the account of an Eligible Institution. See
Instructions 1 and 5 of the Letter of Transmittal. If the certificates are
registered in the name of a person other than the signer of the Letter of
Transmittal or if payment is to be made or certificates for Shares not accepted
for payment or not tendered are to be returned to a person other than the
registered holder, then the tendered certificates must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the registered owner or owners appears on the certificates,
with the signatures on the certificates or stock power guaranteed as described
above. See Instructions 1 and 5 to the Letter of Transmittal.
THE METHOD OF DELIVERY OF SHARES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
OPTION AND RISK OF THE TENDERING STOCKHOLDER AND THE DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF CERTIFICATES FOR SHARES
ARE SENT BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY.
Other Requirements. Notwithstanding any other provision hereof, in all
cases, payment for Shares tendered and accepted for payment pursuant to the
Offer will be made only after timely receipt by the Depositary of certificates
for such Shares, properly completed and duly executed Letter(s) of Transmittal
(or facsimile(s) thereof) for such Shares together with any required signature
guarantees, and any other required documents. Accordingly, tendering
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stockholders may be paid at different times depending upon when certificates for
Shares and such other documents are actually received by the Depositary. Under
no circumstances will interest be paid by the Purchaser on the purchase price of
the Shares to any tendering stockholders, regardless of any extension of the
Offer or any delay in accepting for payment or making such payment.
Tender Constitutes an Agreement. The tender of Shares pursuant to any of
the procedures described above will constitute a binding agreement between the
tendering stockholder and the Purchaser upon the terms and subject to the
conditions of the Offer.
Appointment of Proxy After Acceptance for Payment. By executing a Letter of
Transmittal as set forth above, the tendering stockholder irrevocably appoints
the designees of the Purchaser, and each of them, the attorneys-in-fact and
proxies of such stockholder, each with full power of substitution, to the full
extent of such stockholder's rights with respect to the Shares tendered by such
stockholder and accepted for payment by the Purchaser and with respect to any
and all cash dividends, distributions, rights, other Shares and other securities
issued or issuable in respect of such Shares on or after the date of this Offer
to Purchase ("Distributions"). Such appointment is effective when, and only to
the extent that, the Purchaser deposits the payment for such Shares with the
Depositary. All such proxies and powers of attorney shall be irrevocable and
coupled with an interest in the tendered Shares. Upon the effectiveness of such
appointment, without further action, all prior proxies with respect to the
Shares (and any associated Distributions) given by such stockholder will be
revoked, and no subsequent proxies may be given nor subsequent written consents
executed (and, if given or executed, will not be deemed to be effective) with
respect thereto by the stockholder. The Purchaser's designees will, with respect
to the Shares (and any associated Distributions) for which the appointment is
effective, be empowered to exercise all voting and other rights of such
stockholder as they, in their sole discretion, may deem proper at any annual,
special or adjourned meeting of the stockholders of the Company, by written
consent in lieu of any such meeting or otherwise. The Purchaser reserves the
right to require that, in order for Shares to be deemed validly tendered,
immediately upon the Purchaser's payment for such Shares, the Purchaser must be
able to exercise full voting rights with respect to such Shares (and any
associated Distributions) (including voting at any meeting then scheduled or
actions by written consent). See "THE OFFER -- 6. Price Range of Shares;
Dividends."
Release of Claims. By accepting the Offer through the tender of Shares
pursuant to the Offer, the tendering stockholder agrees to release, and
releases, all claims with respect to or in respect of the Shares other than the
right to receive payment for the tendered Shares expressly provided herein and
that, upon payment for the Shares, to waive any right to attack (and agrees to
be barred from thereafter attacking) in any legal proceeding the fairness of the
consideration paid in the Offer.
Determination of Validity; Rejection of Shares; Waiver of Defects; No
Obligation to Give Notice of Defects. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any tender
of Shares will be determined by the Purchaser, in its sole discretion, which
determination shall be final and binding. The Purchaser reserves the absolute
right to reject any and all tenders determined by it not to be in proper form or
the acceptance for payment of which may, in the opinion of its counsel, be
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<PAGE>
unlawful. The Purchaser also reserves the absolute right to waive any of the
conditions of the Offer or any defect or irregularity in the tender of any
Shares. No tender of Shares will be deemed to have been validly made until all
defects and irregularities have been cured or waived. Neither the Purchaser, the
Depositary, nor any other person will be under any duty to give notification of
any defects or irregularities in tenders or will incur any liability for failure
to give any such notification. The Purchaser's interpretation of the terms and
conditions of the Offer (including the Letter of Transmittal and Instructions
thereto) will be final and binding.
Backup Withholding. In order to avoid backup withholding of federal income
tax on payments of cash pursuant to the Offer, a stockholder surrendering Shares
in the Offer must verify such stockholder's correct taxpayer identification
number ("TIN") and certify under penalties of perjury that such TIN is correct
and that such stockholder is not subject to backup withholding. Certain
stockholders (including, among others, all corporations and certain foreign
individuals and entities) are not subject to backup withholding. If a
stockholder fails to provide the certifications described above, under federal
income tax laws, the Depositary will be required to withhold 31% of the amount
of any payment made to certain stockholders pursuant to the Offer. All
stockholders tendering Shares pursuant to the Offer should complete and sign the
Letter of Transmittal to provide the information and certification necessary to
avoid backup withholding (unless an applicable exemption exists and is provided
in a manner satisfactory to the Purchaser and the Depositary). Non-corporate
foreign stockholders should complete and sign the main signature form and a Form
W-8, Certificate of Foreign Status, a copy of which may be obtained from the
Depositary, in order to avoid backup withholding. See Instruction 2 to the
Letter of Transmittal.
4. RIGHTS OF WITHDRAWAL.
Except as otherwise provided in this Section 4, tenders of Shares made
pursuant to the Offer are irrevocable except that Shares tendered pursuant to
the Offer may be withdrawn at any time prior to the Expiration Date and, unless
theretofore accepted for payment by the Purchaser pursuant to the Offer, may
also be withdrawn at any time after December 13, 1996. For a withdrawal to be
effective, a written, telegraphic, telex or facsimile transmission notice of
withdrawal must be timely received by the Depositary at its address set forth on
the back cover of this Offer to Purchase. Any such notice of withdrawal must
specify the name of the person having tendered the Shares to be withdrawn, the
number of Shares to be withdrawn and the name of the registered holder, if
different from that of the person who tendered such Shares. If certificates for
Shares to be withdrawn have been delivered or otherwise identified to the
Depositary, then prior to the physical release of such certificates, the name of
the registered holder and the serial numbers shown on such certificates must
also be submitted to the Depositary and, unless such Shares have been tendered
for the account of any Eligible Institution, the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution. Withdrawals of tenders
of Shares may not be rescinded, and any Shares properly withdrawn will
thereafter be deemed not validly tendered for the purposes of the Offer.
However, withdrawn Shares may be retendered by again following the procedures
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described above in "THE OFFER -- 3. Procedure for Tendering Shares" at any time
on or prior to the Expiration Date.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal will be determined by the Purchaser, in its sole
discretion, which determination shall be final and binding. None of the
Purchaser, the Depositary, or any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give such notification.
If the Purchaser extends the Offer, is delayed in its acceptance for
payment of Shares, or is unable to accept for payment Shares pursuant to the
Offer, for any reason, then, without prejudice to the Purchaser's rights under
this Offer, the Depositary may, nevertheless, on behalf of the Purchaser, retain
tendered Shares, and such Shares may not be withdrawn except to the extent that
tendering stockholders are entitled to withdrawal rights as set forth in this
Section 4. Under no circumstances will interest be paid by the Purchaser on the
purchase price of the Shares tendered pursuant to the Offer, regardless of any
extension of the Offer or any delay in making payment.
5. CERTAIN UNITED STATES TAX CONSIDERATIONS OF THE OFFER AND THE
MERGER.
The following is a summary of certain United States federal income tax
considerations with respect to a sale of Shares pursuant to the Offer or the
receipt of cash in exchange for Shares pursuant to the Merger. This summary does
not address the potential federal income tax considerations to holders of Shares
that continue to hold and do not sell all or a portion of their Shares pursuant
to the Offer. The summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations thereunder, Internal
Revenue Service ("IRS") rulings and pronouncements, reports of congressional
committees, judicial decisions and current administrative rulings and practice,
all as in effect on the date hereof, all of which are subject to change at any
time, and any such change may be applied retroactively in a manner that could
adversely affect a holder of Shares. The discussion below does not address all
of the federal income tax consequences that may be relevant to stockholders
entitled to special treatment under the Code (for example, life insurance
companies, foreign corporations, and individuals who are not citizens or
residents of the United States) or to holders who acquired their Shares through
the exercise of employee stock options or otherwise as compensation. Moreover,
the discussion below does not address the applicable state, local or foreign tax
laws. This summary also assumes that the Shares are held as a "capital asset"
within the meaning of section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the position of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the Offer or the Merger or that any such position would not be
sustained.
51
<PAGE>
A sale of Shares pursuant to the Offer or the receipt of cash in exchange
for Shares pursuant to the Merger will be a taxable transaction for federal
income tax purposes under the Code. In general, for federal income tax purposes,
a tendering stockholder will recognize gain or loss equal to the difference
between the cash received by the stockholder pursuant to the Offer or the cash
received by the stockholder pursuant to the Merger and the stockholder's
adjusted tax basis in the Shares tendered by the stockholder pursuant to the
Offer. Such gain or loss will be capital gain or loss. Such gain or loss will be
long-term gain or loss if, on the date that the Purchaser accepts the Shares for
payment pursuant to the Offer, the Shares were held for more than one year.
Capital losses are deductible only to the extent of capital gains, except that
non-corporate taxpayers may deduct annually up to $3,000 of capital losses in
excess of the amount of their capital gains against ordinary income. Excess
capital losses generally can be carried forward to succeeding years (a
corporation's carry forward period is five years and a non-corporate taxpayer
can carry forward such losses indefinitely); in addition, corporations are
allowed to carry back excess capital losses to the three preceding taxable
years.
Payments to stockholders in connection with either the Offer or the Merger
may be subject to "backup withholding" at a 31% rate. Backup withholding
generally applies if the stockholder fails to furnish such stockholder's social
security or other TIN, or furnishes an incorrect TIN. Backup withholding is not
an additional tax but merely an advance payment, which may be refunded to the
extent it results in an overpayment of tax. Certain persons generally are exempt
from backup withholding, including corporations and financial institutions.
Certain penalties apply for failure to furnish correct information and for
failure to include the reportable payments in income. Stockholders should
consult with their own tax advisors as to the qualification for exemption from
withholding and the procedure for obtaining such exemption.
HOLDERS OF SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO THE
APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED ABOVE TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
52
<PAGE>
6. PRICE RANGE OF SHARES; DIVIDENDS.
The Shares are quoted on the OTC Bulletin Board under the symbol "HWEC."
The following table sets forth, for the calendar quarters indicated, the high
and low sales prices for the Shares as reported by the National Quotation Bureau
and the amount of cash dividends paid per Share, based upon public sources:
<TABLE>
HALLWOOD ENERGY CORPORATION
<CAPTION>
Fiscal Year Ending High Low Dividends
- ------------------ ---- --- ---------
December 31, 1994
<S> <C> <C> <C>
First Quarter...................... $15 $13 $1.70
Second Quarter..................... 15 12 na
Third Quarter...................... 14 10 1.50
Fourth Quarter..................... 10 3/4 9 na
December 31, 1995
First Quarter...................... $12 1/2 $10 1/4 $1.00
Second Quarter..................... 18 1/2 10 1/4 1.50
Third Quarter...................... 21 13 1/2 na
Fourth Quarter..................... 16 10 .80
December 31, 1996
First Quarter...................... $11 $ 8 na
Second Quarter..................... 12 1/2 8 na
Third Quarter...................... 14 10 3/4 na
</TABLE>
As of September 8, 1996, the last full trading day prior to the public
announcement of the Purchaser's and the Company's agreement in principal to a
combination of the two in a transaction in which holders of Shares would receive
$19.50 in cash per share, the price at which Shares had most recently traded as
reported by the National Quotation Bureau was $10.75 per Share on August 12,
1996. As of October 8, 1996, the last full trading day prior to the public
announcement of execution of the Merger Agreement and the Purchaser's agreement
to commence the Offer, the price at which Shares had most recently traded as
reported by the National Quotation Bureau was $15.75 per Share on October 10,
1996. Stockholders are urged to obtain a current market quotation for the
Shares.
53
<PAGE>
The Company has adopted a policy of paying dividends in an amount
determined by the Board after consideration of the cash flow and working capital
needs of the Company. Declarations of dividends are within the discretion of the
Board of Directors of the Company, and the Company has informed the Purchaser
that the Board will not declare any dividends prior to completing the Merger,
unless the Merger is abandoned by the Purchaser and the Company. The payment of
dividends is restricted by a credit agreement with a bank to an aggregate of
$3.50 per Share in each fiscal year.
7. EFFECT OF THE OFFER ON MARKET FOR THE SHARES; STOCK EXCHANGE
LISTING; AND EXCHANGE ACT REGISTRATION.
The purchase of Shares by the Purchaser pursuant to the Offer will reduce
the number of Shares that might otherwise trade publicly and will reduce the
number of holders of Shares, which could further reduce the liquidity and market
value of the remaining Shares held by the public. The Shares are currently
quoted on the OTC Bulletin Board. If Shares are purchased by the Purchaser
pursuant to the Offer, the market for the Shares could be adversely affected.
The Shares are currently registered under the Exchange Act. Such
registration may be terminated by the Company upon application to the Commission
if the outstanding Shares are not listed on a national securities exchange and
if there are fewer than 300 holders of record of Shares. Termination of
registration of the Shares under the Exchange Act would reduce the information
required to be furnished by the Company to its stockholders and to the
Commission and would make certain provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b) of the Exchange Act, the
requirement of furnishing a proxy statement in connection with stockholders'
meetings pursuant to Section 14(a) of the Exchange Act, the related requirement
of furnishing annual and transition reports to stockholders pursuant to Section
15(d) of the Exchange Act and the requirements of Rule 13e-3 under the Exchange
Act with respect to "going private" transactions, no longer applicable with
respect to the Shares. Furthermore, the ability of "affiliates" of the Company
and persons holding "restricted securities" of the Company to dispose of such
securities pursuant to Rule 144 under the Securities Act of 1933, as amended,
may be impaired or eliminated. If registration of the Shares under the Exchange
Act were terminated, the Shares would no longer be eligible for quotation on the
OTC Bulletin Board. The Purchaser intends to terminate registration of the
Shares as soon as possible after consummation of the Offer and the Merger if,
and as soon as, the requirements for delisting of registration are met.
8. CERTAIN INFORMATION CONCERNING THE COMPANY.
General.
The Company is a Texas corporation with its principal executive offices
located at 3710 Rawlins, Suite 1500, Dallas, Texas 75219 and its principal
operating offices located at 4582 South Ulster Street Parkway, Suite 1700,
Denver, Colorado 80237. The following description of the Company's business has
54
<PAGE>
been taken from the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, at page 2:
The Company is a publicly traded Texas corporation engaged in the
development, production and sale of oil and gas through its ownership of oil and
gas properties and its investments in entities with oil and gas activities. The
Company is the general partner of HEP, a publicly traded oil and gas limited
partnership. The Company is also the general partner of HEPO, one of the
operating partnerships for HEP. The Company's wholly-owned subsidiary, Hallwood
G.P., Inc. is the general partner of EDPO, the other operating partnership for
HEP.
HEP is engaged in the development, production, sale and transportation of
oil and gas and in the acquisition, exploration, development and operation of
oil and gas properties. The principal objectives of HEP are to maintain or
expand its reserve base and to provide cash distributions to the holders of its
units of limited partnership interest ("Units").
The Company's general partner interest in HEP entitles it to a share of net
revenues derived from HEP's properties ranging from 2% to 25%, and the Company
holds approximately 6.5% of HEP's limited partner Units. The Company accounts
for its ownership of HEP using the proportionate consolidation method of
accounting whereby the Company records its proportional share of each of HEP's
revenues and expenses, current assets, current liabilities, noncurrent assets,
long-term obligations and fixed assets. HEP owns approximately 46% of the common
stock of its affiliate, Hallwood Consolidated Resources Corporation ("HCRC"),
which HEP accounts for under the equity method.
The activities of HEP are conducted by HEPO and EDPO. HEP is the sole
limited partner and the Company is the sole general partner of HEPO. Hallwood
G.P., Inc., a wholly-owned subsidiary of the Company, is the sole general
partner and HEP is the sole limited partner of EDPO. Solely for purposes of
simplicity herein, unless otherwise indicated, all references to HEP in
connection with the ownership, exploration, development or production of oil and
gas properties include HEPO and EDPO.
The Company does not engage in any other line of business nor does it have
any employees. HPI, an affiliate of HEP, operates the properties and administers
the day to day activities of the Company. On February 27, 1996, HPI had 133
employees.
From 1990 through 1995, the Company acquired 267,709 shares (adjusted for
the Purchaser's 1-for-4 reverse split) or approximately 17% of the outstanding
shares of the Purchaser on the open market. The Company is holding the stock of
the Purchaser as a long-term investment and has classified it as an
available-for-sale security. As of June 30, 1994, it was determined that the
Purchaser's stock had experienced an other than temporary decline in fair value.
Therefore, the Company's investment in the Purchaser was written down from its
original cost to a new cost basis based on its market value at June 30, 1994 of
55
<PAGE>
$11.50 per share. The resultant loss of $3,249,000 was recorded as an impairment
of investment in parent in the Company's financial statements for 1994.
During 1991 and 1992 the Company acquired $2,439,000 principal amount of
the Purchaser's 13.5% Subordinated Debentures due July 31, 2009, which it
subsequently exchanged for 7% Collateralized Subordinated Debentures due July
31, 2000. On March 29, 1995, the Purchaser repurchased the 7% Collateralized
Subordinated Debentures for $1,376,000 plus accrued interest through the
purchase date. The debentures were repurchased for an amount approximately equal
to their book value.
Financial Information.
Set forth below is certain summary consolidated financial information for
the Company's last three fiscal years as contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, and for the six
months ended June 30, 1996 and June 30, 1995, as contained in the Company's
Quarterly Reports on Form 10-Q for the quarters ended June 30, 1996 and June 30,
1995. More comprehensive financial information is included in such reports
(including management's discussion and analysis of financial condition and
results of operations, liquidity and capital resources) and other documents
filed by the Company with the Commission, and the following summary is qualified
in its entirety by reference to such reports and other documents and all of the
financial information and notes contained therein. Copies of such reports and
other documents may be examined at or obtained from the Commission in the manner
set forth below. Copies of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, and the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, are included with this Offer to
Purchase as Appendix A and incorporated herein by reference.
56
<PAGE>
<TABLE>
HALLWOOD ENERGY CORPORATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
(UNAUDITED)
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
1996 1995 1995 1994 1993
------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil revenue $ 1,345 $ 1,037 $2,228 $2,046 $1,950
Gas revenue 2,239 1,490 3,279 3,832 3,972
Litigation settlement of affiliate 1,050
Acquisition fee 11 23 111
Interest 114 237 185
------- --------- -------- ------- -------
3,584 2,527 5,632 6,138 7,268
--------- --------- ------- ------- -------
EXPENSES:
Production operating expense 732 642 1,443 1,555 1,394
General and administrative 434 500 1,158 1,098 1,248
Depreciation, depletion, amortization
and impairment 816 1,305 2,153 1,959 1,944
Interest 254 204 493 363 442
Litigation settlement of affiliate 46 308
----------- ------------ ------- -------- -------
2,236 2,651 5,293 5,283 5,028
-------- ---------- ------ ------- -------
OTHER INCOME (EXPENSE):
Impairment of investment in parent (3,249)
Miscellaneous income (expense) 64 10 (39) 15 364
---------- ----------- --------- --------- --------
64 10 (39) (3,234) 364
---------- ----------- --------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,412 (114) 300 (2,379) 2,604
-------- ---------- -------- ------- -------
PROVISION (BENEFIT) FOR INCOME TAXES
Current 54 92 94 133 90
Deferred 158 (500)
-------- ----------- ------- -------- -------
212 92 (406) 133 90
-------- ---------- ------- -------- -------
NET INCOME (LOSS) 1,200 (206) 706 (2,512) 2,514
PREFERRED STOCK DIVIDENDS 0 356 1,175 73 88
--------- --------- ------- -------- -------
NET INCOME (LOSS) FOR COMMON
STOCKHOLDERS $ 1,200 $ (562) $ (469) $(2,585) $2,426
======= ========= ========= ======== ======
NET INCOME (LOSS) PER
COMMON SHARE $ 1.52 $ (1.14) $ (1.00) $( 3.32) $ 2.67
======== ========= ========= ======== =======
NET INCOME (LOSS) PER COMMON SHARE
(assuming full dilution) $ 1.52 $ (1.14) $ (1.00) $ (3.32) $ 2.42
======== ========= ========= ======== =======
WEIGHTED AVERAGE COMMON SHARES 789 494 469 779 907
=========== ========== ========= ======== =========
EARNINGS TO FIXED CHARGES (a) 22:1 112:1 22:1 na(b) na(b)
===== ====== ========= ======== =========
<FN>
(a) Earnings are computed as net income before income taxes less equity in
earnings of affiliate and depreciation, depletion, amortization and
impairment pertaining to investment in affiliate plus distributions
received from affiliate, plus fixed charges. Fixed charges are comprised
of the Company's direct interest expense.
(b) Not applicable as there were no fixed charges during the period.
</FN>
</TABLE>
57
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
1996 1995 1995 1994 1993
--------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $440 $2,022 $ 10 $ 668 $1,128
Accounts receivable:
Affiliates 461 528 372 526 683
Trade 63 7 26 7 5
Current assets of affiliate 2,816 1,859 2,236 1,760 4,024
----- ----- ------- ------- -------
3,780 4,416 2,644 2,961 5,840
----- ----- ------- ------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas
properties (full costethod):
Proved mineral interests 112,832 112,373 113,159 111,951 111,125
Unproved mineral interests - domestic 127 40 82 46 240
Unproved mineral interests - foreign 288 214
Other property and equipment 3,774 3,745 3,758 3,745 3,743
-------- -------- -------- -------- --------
116,733 116,158 116,999 116,030 115,322
Less accumulated depreciation, depletion,
amortization and property impairment (107,976) (106,302) (107,160) (105,461) (103,625)
--------- --------- --------- --------- ---------
Net Property, Plant and Equipment 8,757 9,856 9,839 10,569 11,697
---------- --------- -------- --------- ---------
OTHER ASSETS
Investment in common stock of parent
(carried at market) 3,681 2,744 2,075 1,680 4,592
Investment in bonds of parent
(at cost adjusted for amortization of discount) 1,352 1,255
Deferred tax asset 342 500
Noncurrent assets of affiliate 1,549 1,415 1,407 1,704 1,914
------ ------ ------- ------- -------
5,572 4,159 3,982 4,736 7,761
------ ------ ------- ------- -------
TOTAL ASSETS $18,109 $18,431 $16,465 $18,266 $25,298
======= ======= ======= ======= =======
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 150 $ 102 $ 106 $ 154 $ 341
Current portion of long-term debt 300 225 300
Current liabilities of affiliate 2,013 2,357 2,857 2,879 3,089
------- ------- ------- ------- -------
2,463 2,684 3,263 3,033 3,430
------- ------- ------- ------- --------
NONCURRENT LIABILITIES
Long-term debt 675 725 825
Long-term obligations of affiliate 5,312 5,056 5,366 3,917 5,584
------- ------ ------ ------ ------
5,987 5,781 6,191 3,917 5,584
------- ------ ------ ------- ------
Total Liabilities 8,450 8,465 9,454 6,950 9,014
------- ------ ------ ------- ------
STOCKHOLDERS' EQUITY
Series D preferred stock, $.01 par value; 65,000
shares authorized; cancelled in 1995 1 1
Series E preferred stock; $.01 par value; 450,000
shares authorized; converted to common stock
in 1995 4 4
Common stock, $.50 par value; 80,000,000 shares
authorized; 599 421 599 421 599
Capital in excess of par value 53,789 57,397 53,789 58,248 60,867
Accumulated deficit (40,384) (42,496) (41,584) (42,290) (39,778)
Unrealized gain (loss) on investment in common
stock of parent 604 (146) (1,002) (896) (1,233)
Less cost of treasury stock common shares and
Series D preferred shares (4,949) (5,214) (4,791) (4,172) (4,172)
-------- ------- -------- -------- -------
Stockholder's Equity - net 9,659 9,966 7,011 11,316 16,284
------- ------- ------- ------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,109 $18,431 $16,465 $18,266 $25,298
======= ======= ======= ======= =======
BOOK VALUE PER COMMON SHARE AND $ 12.43 $ 11.72 $ 8.85 $ 12.03 $ 17.30
COMMON SHARE EQUIVALENT ======== ======== ========= ======= ========
</TABLE>
58
<PAGE>
Except as otherwise set forth herein, the information concerning the
Company contained in this Offer to Purchase has been taken from or based upon
publicly available documents and records on file with the Commission and other
public sources and is qualified in its entirety by reference thereto. Although
the Purchaser does not have any knowledge that would indicate that any
statements contained herein based on such documents and records are untrue, the
Purchaser cannot take responsibility for the accuracy or completeness of the
information contained in such documents and records, or for any failure by the
Company to disclose events which may have occurred or may affect the
significance or accuracy of any such information but which are unknown to the
Purchaser.
The Company is subject to the information and reporting requirements of the
Exchange Act and in accordance therewith is obligated to file reports and other
information with the Commission relating to its business, financial condition
and other matters. Information, as of particular dates, concerning the Company's
directors and officers, their remuneration, the principal holders of the
Company's securities, any material interests of such persons in transactions
with the Company and other matters is required to be disclosed in proxy
statements distributed to the Company's stockholders and filed with the
Commission. Such reports, proxy statements and other information should be
available for inspection at the public reference facilities of the Commission
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located in the Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and in
Seven World Trade Center, Suite 1300, New York, New York. Copies may be
obtained, by mail, upon payment of the Commission's customary charges, by
writing to its principal office at Room 1024, Judiciary Plaza, Washington, D.C.
20549.
Certain Projections.
The Purchaser and its representatives from time to time receive projections
of financial results prepared by the management of the Company in the ordinary
course of business as a part of the Company's or the Purchaser's financial
planning process. Although the Company does not as a matter of course publicly
disclose projections as to future revenues or earnings, because they were
received by the Purchaser, the Purchaser is making these projections available
to all stockholders.
THE SUMMARY PROJECTIONS BELOW WERE PREPARED IN APRIL 1996 IN CONNECTION
WITH A CONTEMPLATED BUT ABANDONED SALE OF SECURITIES BY THE PURCHASER AND THE
INFORMATION WITH RESPECT TO 1996 WAS UPDATED IN SEPTEMBER 1996 TO TAKE INTO
ACCOUNT THE RESULTS OF OPERATIONS OF THE FIRST TWO QUARTERS OF 1996 AND AN
ACQUISITION BY HEP IN JULY 1996. NONE OF THE PROJECTIONS SET FORTH BELOW ARE TO
BE REGARDED AS FACT AND SUCH PROJECTIONS SHOULD NOT BE RELIED UPON AS ACCURATE
REPRESENTATIONS OF FUTURE RESULTS. IN ADDITION, BECAUSE THE ESTIMATES AND
ASSUMPTIONS UNDERLYING THE SUMMARY PROJECTIONS, AS TO FUTURE RESULTS, ARE BASED
UPON EVENTS AND CIRCUMSTANCES THAT HAVE NOT TAKEN PLACE AND ARE INHERENTLY
SUBJECT TO SIGNIFICANT FINANCIAL, MARKET, ECONOMIC AND COMPETITIVE UNCERTAINTIES
AND CONTINGENCIES WHICH ARE DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND
ARE BEYOND THE PURCHASER'S AND THE COMPANY'S CONTROL, THEY ARE INHERENTLY
IMPRECISE AND THERE CAN BE NO ASSURANCE THAT THE PROJECTED RESULTS CAN BE
REALIZED. THEREFORE, IT IS EXPECTED THAT THERE WILL BE DIFFERENCES BETWEEN THE
ACTUAL AND PROJECTED RESULTS AND THAT THE ACTUAL RESULTS MAY BE MATERIALLY
HIGHER OR LOWER THAN THOSE PROJECTED.
THE INCLUSION OF THE SUMMARY PROJECTIONS SHOULD NOT BE REGARDED AS A
REPRESENTATION BY THE PURCHASER, OR THE COMPANY, OR ANY OF THEIR RESPECTIVE
AFFILIATES OR REPRESENTATIVES, THAT THE PROJECTED RESULTS WILL BE ACHIEVED. THE
SUMMARY PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARDS PUBLIC DISCLOSURE OR
COMPLYING WITH PUBLISHED GUIDELINES OF THE COMMISSION OR GUIDELINES ESTABLISHED
BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. NONE OF THE
PURCHASER, THE COMPANY, OR ANY OF THEIR RESPECTIVE AFFILIATES, REPRESENTATIVES,
FINANCIAL ADVISORS, INDEPENDENT AUDITORS OR DIRECTORS OR OFFICERS, ASSUMES ANY
RESPONSIBILITY FOR THE ACCURACY OF THE SUMMARY PROJECTIONS. THE SUMMARY
PROJECTIONS HAVE NOT BEEN EXAMINED, REVIEWED OR COMPILED BY THE COMPANY'S
INDEPENDENT AUDITORS, AND ACCORDINGLY THEY HAVE NOT EXPRESSED AN OPINION OR ANY
OTHER ASSURANCE ON THEM.
59
<PAGE>
<TABLE>
HALLWOOD ENERGY CORPORATION
MODIFIED CASH FLOW STATEMENTS (a)
AS OF APRIL 1996
(IN THOUSANDS)
<CAPTION>
Fiscal Years Ended Projected Fiscal Years
December 31, Ending December 31,
------------------------------ -----------------------------------------------------
Revenue 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Distributions from HEP-GP $2,013 $2,378 $2,360 $2,438 $2,262 $2,526 $2,731 $2,752
Distributions from HEP-LP 526 526 526 267 298 298 298 298
------ ------ ------- ------- ------ ------ ------ ------
Total 2,539 2,904 2,886 2,705 2,560 2,824 3,029 3,050
Direct Property Cash Flow
(Net of LOE) (b) 134 46 137 614 414 320 259 211
Interest Income 143 184 86 0 0 0 0 0
------ ------ ------- -------- -------- -------- --------- --------
Total Revenue 2,816 3,134 3,109 3,319 2,974 3,144 3,288 3,261
Operating Expense
General & Administrative Expenses (612) (570) (628) (654) (600) (600) (600) (600)
Working Capital Changes 64 (62) 80 0 0 0 0 0
Income Taxes (90) (133) (94) (50) (50) (50) (50) (50)
-------- ------- ------- -------- -------- -------- -------- --------
Operating Cash Flow 2,178 2,369 2,467 2,615 2,324 2,494 2,638 2,611
Capital Expenditures (187) (100) (144) (280) 0 0 0 0
Debt Service
Cash Interest Expense 0 0 (106) (65) (68) (38) (11) 0
Principal Payments 0 0 (75) (300) (300) (300) (225) 0
-------- ------- ------- ------ ------ ------ ------ -------
Total 0 0 (181) (365) (368) (338) (236) 0
Dividends
Dividends to Affiliate 0 (1,909) (1,989) (1,450) (1,565) (1,725) (1,922) (2,089)
Dividends to Third Parties 0 (766) (684) (362) (391) (431) (480) (522)
Dividends to Preferred Stockholders (118) (118) 0 0 0 0 0 0
------ -------- ------- -------- -------- -------- ------- ----------
Total (118) (2,793) (2,673) (1,812) (1,956) (2,156) (2,402) (2,611)
Non-Recurring Items
Proceeds from Property Sales 7 4 0 0 0 0 0 0
Miscellaneous, Non-recurring Income 135 60 30 0 0 0 0 0
Hallwood Debentures Sold to Hallwood 380 0 1,376 0 0 0 0 0
HEC Stock Purchase (Common and
Preferred) (1,692) 0 (2,232) 158 0 0 0 0
Hallwood Stock Purchase 0 0 (501) 0 0 0 0 0
Debt Borrowings 0 0 1,200 0 0 0 0 0
-------- ------- ------- ------ ------ -------- -------- --------
Total (1,170) 64 (127) 0 0 0 0 0
Net Cash Flow $703 ($460) ($658) $0 $0 $0 $0 $0
====== ====== ====== ======= ======= ======= ======= =======
<FN>
(a) See "Assumptions" on following pages.
(b) Includes acquisition fees paid to the Company.
</FN>
</TABLE>
60
<PAGE>
Assumptions. The Modified Cash Flow Statements ("Statements") above present
in summary form the revenues and expenses of the Company, and adjust them for
other sources and uses of cash to illustrate the free cash flows generated by
the Company. These statements were prepared on a modified cash basis by the
management of the Company and are not in accordance with Generally Accepted
Accounting Principles ("GAAP"). Therefore, any comparison between these
Statements and the audited financial statements presented in the Company's
public filings would lack consistency and would be inappropriate.
The following is a listing of the major definitional conventions and
assumptions made in the presentation of the Statements. Their correct
interpretation is critical to the understanding of the cash flows illustrated in
the Statements. Any similarities between the nomenclature utilized in the
Statements and that used in conventional GAAP basis financial statements are
purely coincidental. Consequently, the terms contained in the Statements should
be interpreted strictly on the bases defined below.
Revenue - Revenue figures are presented on an accrual basis. Revenue
includes sales, lease income, management fees, partnership distributions,
and intercompany advances.
Total Revenue - The Company's total revenue consists primarily of limited
partner and general partner distributions from HEP, which are paid
according to the terms of the HEP partnership agreement. The Company also
receives cash directly from certain properties in which it has a working
interest ("Direct Property Cash Flows"). Such Direct Property Cash Flows
include the receipt of fees for the successful completion of acquisitions
by HEP. Direct Property Cash Flows were $137,000 in fiscal 1995 and are
projected to increase to $588,000 in fiscal 1996 due to: (i) the
completion of one acquisition by HEP during 1996; and (ii) the Company's
participation in 1996 in the refinancing of a property owned by a special
purpose subsidiary of HEP. The Company's participation in such refinancing
will entitle it to receive Direct Property Cash Flows from that property.
For the purposes of the Statements, management has not assumed the
completion of additional transactions after 1996 which would result in
additional Direct Property Cash Flows. Consequently, Direct Property Cash
Flows are expected to decline after 1996 as the properties in which the
Company has a working interest are depleted.
Distributions paid by HEP depend primarily on HEP's revenues. HEP's
revenues represent gross revenue less lease operating expenses and taxes.
HEP's net revenue was estimated on three bases:
- Existing Properties - For each existing property, management utilized
comprehensive historical production reports prepared by its engineers
and audited by independent engineering firms to project oil and gas
production volumes for each property. Such reserve production
forecasts were then multiplied by assumed prices for each property to
calculate projected gross revenue. Gross revenue was then reduced by
the expected taxes, operating costs, and capital investment required
to sustain such production to calculate net revenue.
- Net Revenue From Drilling - In order to project the results of HEP's
capital spending, management projected net revenue resulting from
each year's capital spending to yield a 20% internal rate of return
on such capital spending over a fifteen year period.
- May Partnerships Distributions - Distributions from the 60% owned May
Partnerships were determined by utilizing the anticipated oil and gas
production volumes in the reserve production forecasts and the
overall average price assumptions.
In the preparation of such projections, management assumed overall average
prices of $18.50 per barrel of oil and $2.00 per thousand cubic feet of
gas, with no price or cost escalation over the projection period. During
the six years from 1990 through 1995, average oil and gas selling prices
achieved by HEP, the Company's primary operating affiliate, have been
approximately $19.37 and $1.73, respectively, including the results of
HEP's programs to hedge its oil and gas prices. For the six months ended
June 30, 1996, average oil and gas selling prices achieved by HEP were
approximately $18.99 and $2.21, respectively, including the results of
HEP's programs to hedge its oil and gas prices.
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<PAGE>
Operating Expenses - Operating Expenses are presented on an accrual basis.
However, such expenses exclude all depreciation, depletion and
amortization charges.
General and Administrative Expenses - The Company's general and
administrative expenses are projected to remain constant at $600,000 for
the period of the projections, based on historical performance.
Working Capital Changes - Changes in the working capital needs of the
Company are minimal, and have been assumed to be zero for the projection
period.
Income Taxes - The Company filed federal income tax returns on a
stand-alone basis until December 1995. Beginning January 1996, the Company
will be consolidated with the Purchaser for federal income tax purposes.
The Company pays state income taxes on a stand-alone basis. For the period
of the projections, management has assumed the Company will pay $50,000 in
state taxes per annum.
Operating Cash Flow - Operating Cash Flow represents the net cash
generated after the payment of: (i) Operating Expenses; (ii) cash
disbursements related to the normal course of business; and (iii) changes
in working capital.
Capital Expenditures - The Company's capital expenditures are projected to
be $280,000 in 1996. This figure represents the Company's share of the
refinancing of the property in which it will receive a working interest.
Thereafter, the Company has not assumed the completion of additional
projects which would require cash outlays from the Company.
Non-Recurring Items - Non-Recurring Items represent cash receipts or
disbursements which are not related to the ongoing business of the entity,
such as litigation payments, loan proceeds or costs, non-recurring income,
and purchases of stock of affiliated entities.
Net Cash Flow - Net Cash Flow represents the total change in cash of an
entity after all expenses and cash disbursements.
Dividends - The Company projects to pay as dividends its entire Net Cash
Flow Before Non-Recurring Items.
Because management of the Company periodically updates the projections, they may
vary, and in fact have varied, depending on the time such projections are made.
Share Ownership Information.
The following table sets forth the information provided to the Purchaser by
the Company concerning the number of Shares owned beneficially as of October 8,
1996 by (i) each director and executive officer of the Company who owns Shares
and (ii) the directors and executive officers of the Company as a group. Mr.
Guzzetti has sole voting and investment power with respect to the Shares
reported. To the Purchaser's knowledge, each of the following listed persons
currently intends to tender his Shares in the Offer.
<TABLE>
<CAPTION>
Amount
Name and Address Beneficially Percent of
of Beneficial Owner Owned Common Stock
<S> <C> <C>
William L. Guzzetti, President 285 *
All directors and executive officers as
a group (nine individuals) 285 *
<FN>
* Represents less than 1% of the outstanding Shares.
</FN>
</TABLE>
62
<PAGE>
The table above does not include the 633,917 Shares held by the Purchaser (81.6%
of all outstanding Shares) of which Mr. Gumbiner is Chairman and Chief Executive
Officer and Mr. Troup is President and a director. Messrs. Gumbiner and Troup
are directors of the Company and Mr. Gumbiner is the Chief Executive Officer of
the Company.
The Company is general partner of HEP. Mr. Guzzetti owns 100 Class A Units
of limited partner interest and six Class C Units (less than .01% of each class)
and currently exercisable options to acquire 42,500 Units (less than 1%,
assuming exercise of the options) of HEP. Mr. Sebastian owns 400 Class A Units
and 26 Class C Units (less than .01% of each class) of HEP. Mr. Troup owns
currently exercisable options to acquire 56,666 Class A Units (less than 1%,
assuming exercise of the options) of HEP, and Mr. Gumbiner owns currently
exercisable options to acquire 85,000 Class A Units (less than 1%, assuming
exercise of the options) of HEP. No other director of the Company owns Units of
HEP. Executive officers of the Company, including Messrs. Gumbiner and Guzzetti,
own 403 Class A Units and 26 Class C Units and currently exercisable options to
purchase 201,166 Class A Units (2%, assuming exercise of the options) of HEP.
9. CERTAIN INFORMATION CONCERNING THE PURCHASER.
General.
Upon its formation in 1981, the Purchaser, a Delaware corporation, became
engaged in the ownership, operation and management of the real estate portfolios
of its corporate predecessors and in the merchant banking business, specializing
in assisting troubled companies to implement plans of financial restructuring.
After 1981, the Purchaser disposed of a substantial portion of its initial real
estate portfolio and significantly expanded the range of its merchant banking
activities. The Purchaser acquired substantial investment positions in a number
of previously unaffiliated enterprises and thereby became a diversified holding
company engaged in three principal activities: asset management, operating
subsidiaries and investments in associated companies. The Purchaser, its
operating subsidiaries and associated companies are currently engaged in the
commercial and industrial real estate, energy, textile products, hotel and
restaurant businesses. For financial reporting purposes, the Purchaser considers
itself to operate in five business segments: real estate, energy, textile
products, hotels and restaurants. The Purchaser is no longer engaged in the
merchant banking business, other than in connection with the businesses in which
its operating subsidiaries or associated companies are engaged. The Purchaser's
principal executive offices are located at 3710 Rawlins, Suite 1500, Dallas,
Texas 75219.
The name, citizenship, business address, present principal occupation, and
material positions held during the past five years of each of the directors and
executive officers of the Purchaser are set forth in "Schedule I -- Directors
and Executive Officers of the Purchaser" to this Offer to Purchase which is
incorporated herein by reference.
The Purchaser is subject to the information and reporting requirements of
the Exchange Act and in accordance therewith is obligated to file reports and
other information with the Commission relating to its business, financial
condition and other matters. Information, as of particular dates, concerning the
Purchaser's directors and officers, their remuneration, stock options granted to
them, the principal holders of the Purchaser's securities, any material
interests of such persons in transactions with the Purchaser and other matters
is required to be disclosed in proxy statements distributed to the Purchaser's
stockholders and filed with the Commission. Such reports, proxy statements and
other information should be available for inspection at the public reference
facilities of the Commission located at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located in the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and in Seven World Trade Center, Suite 1300, New York,
New York. Copies may be obtained, by mail, upon payment of the Commission's
customary charges, by writing to its principal office at Room 1024, Judiciary
Plaza, Washington, D.C. 20549. Such information may also be obtained from the
New York Stock Exchange, 20 Broad Street, New York, New York.
On July 22, 1996, the Purchaser agreed to a settlement of a claim by the
Commission arising from the Purchaser's sale of a small portion of its holdings
in the stock of ShowBiz Pizza Time, Inc. ("ShowBiz") during a four- day period
in June 1993. These and other similar sales were made by the Purchaser pursuant
to a pre-planned, long-term selling program begun in December 1992. The
Commission asserted that some, but not all, of the Purchaser's June 1993 sales
were improper because, before the sales program was completed, the Purchaser is
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<PAGE>
alleged to have received nonpublic information about ShowBiz. In connection with
the settlement, the Purchaser agreed to contribute approximately $953,000,
representing the loss that the Commission alleged the Purchaser avoided by
selling during the four-day period, plus interest of $240,000. The Purchaser
also agreed to be subject to an injunction against any future violations of
certain federal securities laws. In addition, the Commission alleged that
Anthony J. Gumbiner failed to take appropriate action to discontinue the
Purchaser's sales of the ShowBiz shares during the four days in question. Mr.
Gumbiner did not directly conduct the sales, nor did he sell any shares for his
own account or for the account of any trust for which he has the power to
designate the trustee. Although the sales were made solely by the Purchaser, the
Commission assessed a civil penalty of $477,000 against Mr. Gumbiner, as a
"control person" for the Purchaser. Mr. Gumbiner, however, is not subject to any
separate injunction concerning his future personal activities. As provided in
the settlement, neither the Purchaser nor Mr. Gumbiner admits or denies the
allegations made by the Commission, and both entered into the settlement to
avoid the extraordinary time and expense that would be involved in protracted
litigation with the government.
Share Ownership Information.
The Purchaser currently owns 633,917 Shares, or approximately 81.6% of the
issued and outstanding Shares. In addition, the following table sets forth the
number of Shares beneficially owned as of October 8, 1996 by the persons listed
in "Schedule I -- Directors and Executive Officers of the Purchaser" to this
Offer to Purchase and any other associate or majority-owned subsidiary of the
Purchaser or any of the persons so listed. Mr. Guzzetti has indicated that he
intends to tender such Shares into the Offer.
<TABLE>
<CAPTION>
Amount
Name of Beneficial Owner Beneficially Owned
<S> <C>
William L. Guzzetti 285
</TABLE>
Except as elsewhere set forth in this Offer to Purchase: (i) neither the
Purchaser nor, to the knowledge of the Purchaser, any of the persons listed in
"Schedule I -- Directors and Executive Officers of the Purchaser" hereto nor any
associate or majority-owned subsidiary of any of the foregoing, beneficially
owns or has a right to acquire any equity securities of the Company; (ii)
neither the Purchaser nor, to the best knowledge of the Purchaser, any of the
persons or entities referred to above, nor any director, executive officer or
subsidiary of any of the foregoing, has effected any transaction in such equity
securities during the past 60 days; (iii) neither the Purchaser nor, to the
knowledge of the Purchaser, any of the persons listed in "Schedule I --
Directors and Executive Officers of the Purchaser" hereto, has any contract,
arrangement, understanding or relationship with any other person with respect to
any securities of the Company, including, but not limited to, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any such securities, joint ventures, loan or option arrangements, puts or
calls, guaranties of loans, guaranties against loss or the giving or withholding
of proxies, consents or authorizations; (iv) there have been no contacts,
negotiations or transactions since January 1, 1993 between the Purchaser, or, to
the knowledge of the Purchaser, any of the persons listed in "Schedule I --
Directors and Executive Officers of the Purchaser" hereto, on the one hand, and
the Company or its affiliates, on the other hand, concerning a merger,
consolidation or acquisition, a tender offer or other acquisition of securities,
an election of directors, or a sale or other transfer of a material amount of
assets of the Company; and (v) neither the Purchaser, nor, to the best knowledge
of the Purchaser, any of the persons listed in "Schedule I -- Directors and
Executive Officers of the Purchaser" hereto, has since January 1, 1993 had any
transaction with the Company or any of its executive officers, directors or
affiliates that would require disclosure under the rules and regulations of the
Commission applicable to the Offer. References herein to the subsidiaries or
affiliates of the Purchaser do not include the Company and its subsidiaries.
64
<PAGE>
Share Repurchases.
During the period from January 1, 1994 to the date of this Offer to
Purchase, the Purchaser purchased an aggregate of 37,312 Shares for a total
consideration of $615,621, with per Share prices ranging from $15.00 to $16.50
and the Company has purchased an aggregate of 163,912 Shares for a total
consideration of $2,388,335, with per share prices ranging from $11.36 to $21.50
(assuming that certain purchases of shares of the Company's Series D preferred
stock are treated on an as-converted basis). The average purchase price paid
during each quarterly period since January 1, 1994 is as follows:
<TABLE>
<CAPTION>
Average Purchase
Fiscal Year Ending Price Paid
December 31, 1994
<S> <C>
First Quarter.............................. $ na
Second Quarter............................. na
Third Quarter.............................. na
Fourth Quarter............................. na
December 31, 1995
First Quarter.............................. $ 11.36
Second Quarter............................. 11.475
Third Quarter.............................. 21.50
Fourth Quarter............................. 16.50
December 31, 1996
First Quarter.............................. $ na
Second Quarter............................. 10.50
Third Quarter.............................. na
</TABLE>
In addition, in October 1994, the Purchaser exchanged 356,000 Shares for
the same number of shares of Series E preferred stock ("Series E Stock") of the
Company that had rights identical to the Shares except that the Series E Stock
had no rights to vote in the election of directors. In December 1995, the
Purchaser converted all of its Series E Stock into the same number of Shares, as
permitted by the terms of the Series E Stock.
10. CONTACTS WITH THE COMPANY; CONTRACTS AND ARRANGEMENTS.
Directors of the Company.
The Board of Directors of the Company currently consists of six members,
three of whom are officers or directors of the Purchaser or the Company. The
Purchaser currently has, and following the Offer will continue to have, the
ability to elect the entire Board of Directors of the Company.
The members of the Company's Board of Directors are as follows:
Anthony J. Gumbiner, 51, has served as a director and as Chairman of the
Board and Chief Executive Officer of the Company since May 1984 and February
1987, respectively. He has also served as Chairman of the Board of Directors of
the Purchaser since 1981 and as Chief Operating Officer of the Purchaser since
April 1984. Mr. Gumbiner has also served as Chairman of the Board of Directors
and as a director of Hallwood Holdings S.A., a Luxembourg real estate investment
company, since March 1984 and as a director of ShowBiz Pizza Time, Inc., a
company primarily engaged in the restaurant business, since September 1988. He
has been a director of Hallwood Consolidated Resources Corporation ("HCRC")
since June 1992 and a director of Hallwood Realty Corporation ("Hallwood
Realty"), which is the general partner of Hallwood Realty Partners, L.P., since
November 1990. He is a Solicitor of the Supreme Court of Judicature of England.
William L. Guzzetti, 52, has been President, Chief Operating Officer and a
director of the Company since February 1985. Mr. Guzzetti joined the Company in
February 1976 as Vice President, Secretary and General Counsel and served in
65
<PAGE>
these positions until November 1980. He served as Senior Vice President,
Secretary and General Counsel from November 1980 until February 1985, when he
assumed his current office. Mr. Guzzetti is also an Executive Vice President of
the Purchaser. He is a director and President of Hallwood Realty. He is a
director and President of HCRC.
Brian M. Troup, 49, has served as a director of the Company since May 1984.
He has been President and Chief Operating Officer of the Purchaser since April
1986, and he is a director. He is a director of Hallwood Holdings S.A. and a
director of ShowBiz Pizza Time, Inc. He is also a director of HCRC and Hallwood
Realty. He is an associate of the Institute of Bankers in Scotland and a member
of the Society of Investment Analysts in the United Kingdom.
Hans-Peter Holinger, 53, is a citizen of Switzerland. He served as Managing
Director of Interallianz Bank Zurich A.G. from 1977 to February 1993. Since
February 1993, he has been the majority owner of Holinger Asset Management AG,
Zurich.
Rex A. Sebastian, 66, has served as a director of the Company since January
1993. Mr. Sebastian is a member of the Board of Directors of Ferro Corporation.
Mr. Sebastian served as Senior Vice President--Operations of Dresser Industries,
Inc. from January 1975 until his retirement in July 1985. He joined Dresser in
1966. Mr. Sebastian is now a private investor.
Nathan C. Collins, 61, was appointed a director of the Company in March
1995. From March 1, 1995 to March 1, 1996, he was President, Chief Executive
Officer and a director of Flemington National Bank & Trust Co. in Flemington,
New Jersey. From November 1987 until December 1994, he was Chairman of the Board
of Directors, President and Chief Executive Officer of BancTexas Group Inc. He
began his banking career in August 1964 with the Valley National Bank in
Phoenix, Arizona and held various positions there, finally becoming Executive
Vice President, Senior Credit Officer and Manager of the Asset/Liability Group
of the bank. Mr. Collins is now a private investor.
Contracts and Agreements.
The Company, the Purchaser and their affiliates have a number of financial,
operating and other arrangements and have engaged in certain intercompany
transactions believed to be mutually beneficial. These arrangements include
those set forth below. Copies of the Agreements referred to below required to be
filed as exhibits to the Schedule 13E-3 and the Schedule 14D-1 are so filed and
are available in the same manner as that described in "SPECIAL FACTORS-5.
Background of the Offer and the Merger," and the following summaries are
qualified in their entirety by reference to the copies of such agreements.
Hallwood Petroleum, Inc., a subsidiary of HEP, has a financial consulting
agreement with the Purchaser pursuant to which the Purchaser furnishes
consulting and advisory services to the Company and HEP and their affiliates.
Under the terms of the financial consulting agreement, HPI is obligated to pay
the Purchaser annual payments of $300,000 beginning June 30, 1993, and the
Purchaser is obligated to furnish consulting and advisory services to HPI, HEP
and their affiliates through June 30, 1997. Since 1994, the consulting services
have been provided by HSC Financial Corporation, through the services of Mr.
Gumbiner and Mr. Troup, and the Purchaser paid the annual fee it received to HSC
Financial. Of the $300,000 fee paid in 1994, approximately $7,000 was paid by
the Company, $166,000 was paid by HEP and the remainder was paid by other
affiliates of the Company. Of the $300,000 fee paid in 1995, approximately
$9,160 was paid by the Company, $156,000 was paid by HEP and the remainder was
paid by other affiliates of the Company. The fee paid in 1996 has not yet been
allocated, but management of the Company believes that the allocation for 1996
will be similar to that for 1994 and 1995.
The Company and HEP reimburse the Purchaser for expenses incurred on behalf
of the Company and HEP. In 1993, the Company reimbursed the Purchaser
approximately $13,000, and HEP reimbursed the Purchaser approximately $303,000.
In 1994, the Company reimbursed the Purchaser approximately $14,000, and HEP
reimbursed the Purchaser approximately $330,000. In 1995, the Company reimbursed
the Purchaser approximately $19,000, and HEP reimbursed the Purchaser
approximately $369,000. No reimbursements have been made for 1996, but
management of the Company believes that reimbursements for 1996 will be similar
to those for 1993, 1994 and 1995.
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<PAGE>
Anthony J. Gumbiner, Chairman of the Board of the Company, is also Chairman
of the Board of the Purchaser and William L. Guzzetti, President of the Company,
is also Executive Vice President of the Purchaser. In their capacities with the
Company, Messrs. Gumbiner and Guzzetti receive compensation from the Company.
The following table sets forth cash compensation paid to Messrs. Gumbiner and
Guzzetti during 1995, 1994 and 1993. Total compensation for 1996 has not yet
been determined.
<TABLE>
<CAPTION>
LTIP 401(k)
Year Salary Bonus Payouts Contributions
---- ----------- ------ ------- --------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner 1995 $250,000(a) $ 0 $ 0 $ 0
1994 125,000 0 0 0
1993 -0- 0 0 0
William L. Guzzetti 1995 $204,412 $75,000 $ 0 $6,004
1994 200,240 72,800 9,449 6,004
1993 200,240 65,000 5,227 6,004
- ---------
<FN>
(a) Effective August 1, 1994, Mr. Gumbiner has a Compensation Agreement
with HPI pursuant to which HPI pays Mr. Gumbiner $250,000 per year. The
Compensation Agreement continues in effect until terminated by either
party on not less than six months' notice.
</FN>
</TABLE>
During 1995, 1994 and 1993, Messrs. Gumbiner and Guzzetti also received
awards of performance units under a Domestic Incentive Plan and an International
Incentive Plan for the Company and its affiliated entities. The value of awards
under each plan depends primarily on success in drilling, completing and
achieving production from new wells each year and from certain recompletions and
enhancements of existing wells. The amounts shown below are aggregate awards
under the plans for the Company, HEP and their affiliates.
<TABLE>
<CAPTION>
Number Estimated Future
Year Of Units Payouts
---- -------- ----------------
<S> <C> <C> <C>
Anthony J. Gumbiner 1995 .30 $ 0(b)
1994 0 0
1993 0 0
William L. Guzzetti 1995 .15 $ 41,939(a)
.10 0(b)
1994 .15 11,364(a)
.22 0(b)
1993 .1425 16,084(a)
- -------------
<FN>
(a) This amount represents an award under the Domestic Incentive Plan.
There are no minimum, maximum or target amounts payable under the
Domestic Incentive Plan. Payments under the awards will be equal to
the indicated percentage of plan net cash flow from certain wells
for the first five years after an award and, in the sixth year, the
indicated percentage of 80% (40% for 1993 awards) of the remaining net
present value of estimated future production from the wells. The
amounts shown above are estimates based on estimated reserve
quantities and future prices. Because of the uncertainties inherent in
estimating quantities of reserves and prices, it is not possible to
predict cash flow or remaining net present value of estimated future
production with any degree of certainty.
(b) This amount represents an award under the International Incentive Plan.
There are no minimum, maximum or target amounts payable under the
International Incentive Plan. Payments under the awards will be equal
to the indicated percentage of gross revenues, net of costs of
transportation and marketing, from international projects. No proved
reserves attributable to international projects have been recorded, so
the current estimated future payout for the 1995 awards is $0.
</FN>
</TABLE>
67
<PAGE>
In addition, HEP and HCRC awarded options to certain persons who serve as
directors or officers of the Company and HCRC, including Messrs. Gumbiner and
Guzzetti. See "THE OFFER -- 8. Certain Information Concerning the Company."
11. THE MERGER AGREEMENT; APPRAISAL RIGHTS.
The Merger.
The Merger Agreement provides that, promptly after the purchase of Shares
pursuant to the Offer and the receipt of any required approval of the Merger
Agreement by the Company's stockholders and the satisfaction or waiver of
certain other conditions, the Company will be merged into the Purchaser. Because
the Purchaser currently owns a majority of the outstanding Shares, the Purchaser
will have the vote necessary under Texas law to approve the Merger. Under
Delaware and Texas law, if the Purchaser owns at least 90% of the outstanding
Shares, which would be the case if the Minimum Tender Condition is satisfied,
the Merger may be effected without the vote of the Company's or the Purchaser's
stockholders. Following consummation of the Merger, the Purchaser will continue
as the surviving corporation in the Merger ("Surviving Corporation") and the
directors of the Company who are not also directors of the Purchaser will remain
as advisory directors to the board of the Purchaser.
At the Effective Time, each Share outstanding immediately prior to the
Effective Time (other than Shares owned by the Purchaser, the Company or any
direct or indirect subsidiary of the Purchaser or the Company or Shares
("Dissenting Shares") held by stockholders of the Company who have properly
exercised their appraisal rights in accordance with Art. 5 of the TBCA) will be
converted into the right to receive, without interest, an amount in cash
("Merger Consideration") equal to the Offer Price.
The Merger Agreement provides that the Dissenting Shares will not be
converted into or represent the right to receive the Merger Consideration.
Holders of such Shares will be entitled to receive payment of the "fair value"
of such Shares held by them in accordance with the provisions of Art. 5 of the
TBCA, except that all Dissenting Shares held by stockholders who fail to perfect
or who effectively withdraw or lose their rights to dissent will thereupon be
deemed to have been converted into, as of the Effective Time, the right to
receive, without any interest thereon, the Merger Consideration, upon surrender
of the certificate or certificates that formerly evidenced such Shares.
The Merger Agreement provides that the Purchaser shall make available or
cause to be made available to the paying agent appointed by the Purchaser with
the Company's prior approval ("Paying Agent") amounts sufficient in the
aggregate to provide all funds necessary for the Paying Agent to make payments
described above to holders of Shares issued and outstanding immediately prior to
the Effective Time. Promptly after the Effective Time, the Paying Agent shall,
pursuant to irrevocable instructions, make the payments provided for in the
preceding sentence out of the funds deposited with the Paying Agent for such
purpose. One hundred and twenty days following the Effective Time, the Surviving
Corporation shall be entitled to cause the Paying Agent to deliver to it any
funds (including any interest received with respect thereto) made available to
the Paying Agent which have not been disbursed to holders of certificates
formerly representing Shares outstanding at the Effective Time, and thereafter
such holders shall be entitled to look to the Surviving Corporation only as
general creditors thereof with respect to the cash payable under due surrender
of their certificates. The Surviving Corporation shall pay all charges and
expenses, including those of the Paying Agent, in connection with the exchange
of cash for Shares.
Conditions to Certain Obligations. The obligations of the Company and the
Purchaser to effect the Merger are subject to the satisfaction of certain
conditions set forth in the Merger Agreement, including (i) the purchase by the
Purchaser (or one or more affiliates of the Purchaser) of Shares pursuant to the
Offer, (ii) to the extent required by applicable law, the receipt of stockholder
approval of the Merger and the Merger Agreement, (iii) there being no statute,
rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) enacted, issued, promulgated, enforced or
entered by any governmental, regulatory or administrative authority, agency,
tribunate, commission or other entity, domestic, international or foreign (a
"Governmental Entity"), or any court which is in effect and prohibits
consummation of the Merger, and (iv) the Minimum Tender Condition shall have
been satisfied and none of the events described in "THE OFFER -- 13. Certain
Conditions of the Offer" shall have occurred.
68
<PAGE>
Termination. According to its terms, the Merger Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, whether
before or after any approval by the stockholders of the Company, by the mutual
consent of the Purchaser and the Company, by action of their respective Boards
of Directors. In addition, the Merger Agreement may be terminated by action of
the Board of Directors of either the Purchaser or the Company if (i) the
Purchaser shall have terminated the Offer without purchasing any Shares pursuant
thereto; provided, in the case of termination of the Merger Agreement by the
Purchaser, such termination of the Offer is not in violation of the terms of the
Offer or (ii) without fault of the terminating party, the Merger shall not have
been consummated by December 31, 1996, whether or not such date is before or
after any approval by the stockholders of the Company of the Merger and the
Merger Agreement. The Merger Agreement may be terminated by the Purchaser at any
time prior to the Effective Time, whether before or after any approval by the
stockholders of the Company, by the action of the board of directors of the
Purchaser, if (i) the Company shall have failed to comply in any material
respect with any of the covenants and agreements contained in the Merger
Agreement to be complied with or performed by the Company at or prior to such
date of termination or (ii) the Board of Directors of the Company or those
directors of the Company who are not officers of the Purchaser or the Company or
any affiliate of either of them ("Independent Directors") shall have withdrawn
or modified in a manner adverse to the Purchaser its approval or recommendation
of the Offer, the Merger Agreement or the Merger or the Board of Directors of
the Company or the Independent Directors, upon request by the Purchaser, shall
fail to reaffirm such approval or recommendation, or shall have resolved to do
any of the foregoing. The Merger Agreement may be terminated at any time prior
to the Effective Time, before or after any approval by the stockholders of the
Company, by action of the Board of Directors of the Company, if the Purchaser
shall (i) have failed to comply in any material respect with any of the
covenants or agreements contained in the Merger Agreement to be complied with or
performed by the Purchaser at or prior to such date of termination or (ii) shall
have failed to commence the Offer within the time required by the Merger
Agreement.
Subject to the applicable provisions of the DGCL and the TBCA, the Merger
Agreement may be amended by action taken by the Company and the Purchaser at any
time prior to the Effective Time.
Certain Covenants of the Parties. The Purchaser has agreed in the Merger
Agreement that it will not, without the prior written consent of the Company,
decrease the price per Share or change the form of consideration payable in the
Offer, decrease the number of Shares sought or change the conditions to the
Offer. Also, the Purchaser shall not terminate or withdraw the Offer or extend
the Expiration Date unless at the Expiration Date the conditions set forth in
"THE OFFER -- 13. Certain Conditions of the Offer" have not been satisfied or
waived.
The Merger Agreement provides that the Purchaser shall maintain the
Purchaser's existing officers and directors' liability insurance or equivalent
liability insurance ("D&O Insurance"), which provides coverage for the Company's
officers and directors, for a period of six years after the Effective Time so
long as the annual premium therefore is not in excess of 125% of the last annual
premium paid prior to the date hereof ("Current Premium"); provided, however,
(a) if the Purchaser determines that it is unable to maintain the existing or
equivalent D&O Insurance that includes coverage for those persons who are
directors and officers of the Company as of the Effective Time, for a premium
not in excess of 125% of the Current Premium, but maintains D&O Insurance for
persons who are directors and officers of the Purchaser, then, for the six-year
period after the Effective Time, the Purchaser will provide D&O Insurance for
those persons who are currently directors and officers of the Company on the
same basis as the Purchaser maintains D&O Insurance for persons who are then
directors and officers of the Purchaser, and (b) if the existing D&O Insurance
expires, is terminated or is canceled during such six year period, the Purchaser
will use its reasonable best efforts to obtain D&O Insurance providing for such
period at least $2,000,000 of coverage for those persons who are directors or
officers of the Company at the Effective Time. In lieu of the insurance
arrangement referred to above, the Purchaser may, on or before the expiration of
the Offer, enter into alternative insurance arrangements, provided that such
arrangements are approved by each of the individuals who are Independent
Directors at any time from the date of the Merger Agreement through the
Effective Time. The Merger Agreement also provides that, from and after the
Effective Time, the Surviving Corporation will indemnify and hold harmless each
present and former director and/or officer of the Company, determined as of the
Effective Time ("Indemnified Parties") who is made a party or threatened to be
made a party to any threatened, pending or completed, action, suit, proceeding
or claim, whether civil, criminal, administrative or investigative, by reason of
the fact that he or she was a director or officer of the Company or any
subsidiary of the Company prior to the Effective Time and arising out of actions
or omissions of the Indemnified Party in any such capacity occurring at or prior
to the Effective Time ("Claim") against any costs or expenses (including
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reasonable attorneys' fees), judgments, fines, amounts paid in settlement
pursuant to the provisions of the Merger Agreement described in the next
succeeding paragraph, losses, claims, damages or liabilities (collectively,
"Costs") reasonably incurred in connection with any Claim, whether asserted or
claimed prior to, at or after the Effective Time, to the fullest extent that the
Company would have been permitted under Texas law. The Merger Agreement further
provides that the Surviving Corporation and the Purchaser shall also advance
expenses (including attorneys' fees), as incurred by the Indemnified Party to
the fullest extent permitted under applicable law provided such Indemnified
Party provides an undertaking to repay such advances if it is ultimately
determined that such Indemnified Party is not entitled to indemnification.
Pursuant to the Merger Agreement, upon learning of any Claim described in
the preceding paragraph, such Indemnified Party shall promptly notify the
Surviving Corporation thereof. In the event of any such Claim (whether arising
before or after the Effective Time), (i) the Surviving Corporation shall have
the right to assume the defense thereof and the Surviving Corporation shall not
be liable to such Indemnified Parties for any legal expenses of other counsel or
any other expenses subsequently incurred by such Indemnified Parties in
connection with the defense thereof, except that if the Surviving Corporation
elects not to assume such defense or counsel for the Indemnified Parties advises
that there are issues which raise conflicts of interest between the Surviving
Corporation and the Indemnified Parties, the Indemnified Parties may retain
counsel satisfactory to them, and the Surviving Corporation shall pay all
reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, however, that the
Surviving Corporation shall be obligated pursuant to the Merger Agreement to pay
for only one firm of counsel for all Indemnified Parties in any jurisdiction
unless the use of one counsel for such Indemnified Parties would present such
counsel with a conflict of interest, (ii) the Indemnified Parties will cooperate
in the defense of any such matter and (iii) the Surviving Corporation shall not
be liable for any settlement effected without its prior written consent, which
consent will not have been unreasonably withheld; and provided further that the
Surviving Corporation shall not have any obligation under the Merger Agreement
to any Indemnified Party when and if a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final and
non-appealable, that the indemnification of such Indemnified Party in the manner
contemplated by the Merger Agreement is prohibited by applicable law. If such
indemnity is not available with respect to any Indemnified Party, then the
Surviving Corporation and the Indemnified Party shall contribute to the amount
payable in such proportion as is appropriate to reflect relative faults and
benefits, with any aspect of "fault" otherwise allocable to the Company being
allocable to the Surviving Corporation.
The Merger Agreement further provides that if a claim for indemnification
or advancement under the Merger Agreement is not paid in full by the Surviving
Corporation within thirty days after a written claim therefor has been received
by the Surviving Corporation, the Indemnified Party may any time thereafter
bring suit against the Surviving Corporation or the Purchaser to recover the
unpaid amount of the claim and, if successful in whole or in part, the
Indemnified Party shall be entitled to be paid also the expense of prosecuting
such claims. Under the terms of the Merger Agreement, neither the failure of the
Surviving Corporation or the Purchaser (including their Boards of Directors,
independent legal counsel or stockholders) to have made a determination prior to
the commencement of such suit that indemnification of the Indemnified Party is
proper in the circumstances because he or she has met the applicable standard of
conduct, nor an actual determination by the Surviving Corporation or the
Purchaser (including their boards of directors, independent legal counsel, or
stockholders) that the Indemnified Party has not met such applicable standard of
conduct, shall be a defense to the suit or create a presumption that the
Indemnified Party has not met the applicable standard of conduct.
The Merger Agreement also provides that no amendment to the Certificate of
Incorporation or By-laws of the Surviving Corporation shall reduce in any way
adversely affect any then existing right of any director or officer (or former
director or officer) to be indemnified with respect to acts, omissions or events
occurring prior to the Effective Time.
In the Merger Agreement, the Company has agreed that its Board of Directors
and a majority of the Independent Directors will recommend acceptance of the
Offer to the Company's stockholders and will file with the Commission
contemporaneously with the commencement of the Offer, and mail to its
stockholders, a Solicitation/Recommendation Statement on Schedule 14D-9
containing the unanimous recommendation of the Company's Board of Directors and
the Independent Directors that the Company's stockholders accept the Offer. The
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Merger Agreement also provides that if the Company's Board of Directors
determines that its fiduciary duties require it to amend or withdraw its
recommendation, such amendment or withdrawal shall not constitute a breach of
the Merger Agreement.
The Merger Agreement also contains certain other restrictions as to the
conduct of business by the Company pending the Merger, as well as
representations and warranties of each of the parties customary in transactions
of this kind.
The foregoing description of the Merger Agreement is qualified in its
entirety by reference to the text of the Merger Agreement, a copy of which has
been filed as an exhibit to the Schedule 14D-1 and to the Schedule 13E-3 and may
be obtained in the manner described in "THE OFFER -- 8. Certain Information
Concerning the Company." The foregoing description of the Merger Agreement is
qualified in its entirety by reference to that document.
If the Minimum Tender Condition is satisfied, the Purchaser will hold 90%
or more of the outstanding Shares, and the Purchaser intends to effect the
Merger without a vote of the Company's stockholders pursuant to the "short-
form" merger provisions of the TBCA. As the Purchaser already owns 633,917 of
the 777,126 total outstanding Shares, assuming no additional Shares are issued
after October 8, 1996, the Purchaser will need to purchase pursuant to its Offer
a minimum of 71,605 of the Shares in order to satisfy the Minimum Tender
Condition. However, if the Purchaser, with the consent of the Special Committee,
were to waive the Minimum Tender Condition, and the Purchaser were to hold less
than 90% of the outstanding Shares, then the Merger would have to be approved by
the Company's Board of Directors and by the Company's stockholders. Under the
TBCA and the Company's Articles of Incorporation, the vote of the holders of a
majority of the outstanding Shares would be required to approve the Merger under
such circumstances. Since the Purchaser currently owns more than a majority of
the outstanding Shares, the Purchaser will have sufficient voting power to
approve the Merger without the affirmative vote of any other stockholders of the
Company, and the Purchaser intends to do so.
Appraisal Rights.
Holders of Shares do not have appraisal rights as a result of the Offer.
After the Offer is consummated, the Purchaser anticipates that the Shares will
cease to be quoted on the OTC Bulletin Board. In connection with the Merger,
even if the Merger is consummated pursuant to the short-form merger provisions
discussed above, holders of the Shares will have certain rights under the TBCA
to dissent and demand appraisal of, and payment in cash for the fair value of,
their Shares. Such rights, if the statutory procedures are complied with, could
lead to a judicial determination of the fair value (excluding any element of
value arising from accomplishment or expectation of the Merger) required to be
paid in cash, plus a payment in cash of a fair rate of interest from the date of
consummation of the Merger, to such dissenting holders for their Shares. Any
such judicial determination of the fair value of Shares would take into account
all relevant factors and could, accordingly, be based upon considerations other
than or in addition to the price paid in the Offer and the Merger and the market
value of the Shares, asset values, earning capacity and the investment value of
the Shares. The value so determined could be more or less than the purchase
price per Share pursuant to the Offer or the consideration per Share to be paid
in the Merger. The costs of appraisal litigation (including fees of counsel and
experts retained by the parties) will be taxed upon the parties, or either of
them, in such manner as appears equitable to the court. See "Schedule II --
Appraisal Rights of Dissenting Stockholders under Texas Law" attached hereto for
a summary of appraisal rights under the TBCA.
The Purchaser does not intend to object, assuming the proper procedures are
followed, to the exercise by any other stockholder of such stockholder's
appraisal rights, even if the Shares are not quoted on the OTC Bulletin Board
prior to the consummation of the Merger. However, the Purchaser intends to argue
in any appraisal proceeding that, for the purposes of such a proceeding, the
fair value of the Shares is less than the price paid in the Offer and the
Merger.
THE FOREGOING SUMMARY OF THE RIGHTS OF DISSENTING STOCKHOLDERS DOES NOT
PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY
STOCKHOLDERS DESIRING TO EXERCISE ANY AVAILABLE DISSENTERS' RIGHTS. THE
PRESERVATION AND EXERCISE OF APPRAISAL RIGHTS ARE CONDITIONED ON STRICT
ADHERENCE TO THE APPLICABLE PROVISIONS OF TEXAS LAW.
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Plans for the Company.
Except as otherwise set forth in this Offer to Purchase, it is expected
that, initially following the Merger, the business and operations of the Company
will be continued substantially as they are currently being conducted.
12. SOURCE AND AMOUNT OF FUNDS.
The Purchaser estimates that the total amount of funds required to purchase
100% of the outstanding Shares pursuant to the Offer and the Merger and to pay
related fees and expenses will be approximately $3,000,000. See "THE OFFER --
16. Fees and Expenses" for additional information as to the fees and expenses
payable by the Purchaser. The Purchaser will obtain these funds from existing
working capital and from the existing working capital of the Company subsequent
to the Merger.
13. CERTAIN CONDITIONS OF THE OFFER.
Notwithstanding any other provision of the Offer, the Purchaser shall not
be obligated to accept for payment any Shares or, subject to any applicable
rules and regulations of the Commission, including Rule 14e-l(c) (relating to
the Purchaser's obligation to pay for or return tendered Shares promptly after
termination or withdrawal of the Offer), pay for, and may delay the acceptance
for payment of or payment for, any tendered Shares (i) unless the Minimum Tender
Condition shall have been satisfied or, with the consent of the Special
Committee, waived, or (ii) if on or after October 9, 1996, and at or before the
time of payment for any of such Shares (whether or not any Shares have
theretofore been accepted for payment or paid for pursuant to the Offer), any of
the following events shall occur:
(a) there shall be any statute, rule, regulation, judgment, injunction or
other order, enacted, promulgated, entered, enforced or deemed applicable to the
Offer or the Merger or any other action shall have been taken by any
Governmental Entity, or any other person, domestic, supranational or foreign (i)
challenging the legality of the acquisition by the Purchaser of the Shares; (ii)
restraining, delaying or prohibiting the making or consummation of the Offer or
the Merger or obtaining from the Company or the Purchaser any damages in
connection therewith; (iii) relating to assets of, or prohibiting or limiting
the ownership or operation by the Purchaser of all or any portion of the
business or assets of, the Company or the Purchaser (including the business or
assets of their respective affiliates and subsidiaries) or imposing any
limitation on the ability of the Purchaser to conduct such business or own such
assets; (iv) imposing limitations on the ability of the Purchaser (or any
affiliate of the Purchaser) to acquire or hold or to exercise full rights of
ownership of the Shares, including, without limitation, the right to vote the
Shares purchased by them on all matters properly presented to the stockholders
of the Company or (v) having a substantial likelihood of any of the foregoing;
(b) there shall have occurred (i) any general suspension of, or limitation
on times or prices for, trading in securities on any national securities
exchange or in the over-the-counter market in the United States or (ii) a
declaration of a banking moratorium or any suspension of payments in respect of
banks in the United States (whether or not mandatory);
(c) the Company shall have breached or failed to perform in any material
respect any of its covenants, obligations or agreements under the Merger
Agreement or any representation or warranty of the Company set forth in the
Merger Agreement shall have been inaccurate or incomplete in any material
respect when made or thereafter shall become inaccurate or incomplete in any
material respect;
(d) any change, including, without limitation, any change arising out of or
related to any natural disaster shall have occurred or been threatened or become
known (or any condition, event or development shall have occurred or been
threatened or become known involving a prospective change) in the business,
properties, assets, liabilities, condition (financial or otherwise), or results
of operations of the Company or any of its subsidiaries that could reasonably be
expected to be materially adverse to the Company and its subsidiaries taken as a
whole;
(e) all consents, registrations, approvals, permits, authorizations,
notices, reports or other filings required to be made or obtained by the
Company, the Purchaser or any stockholder of the Purchaser with or from any
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Governmental Entity or any bank or lender to the Company in connection with the
Offer and the Merger shall not have been made or obtained except where the
failure to make or to obtain, as the case may be, such consents, registrations,
approvals, permits, authorizations, notices, reports or other filings could not
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), properties, assets, liabilities, business or results
of operations of the Company and its subsidiaries taken as a whole;
(f) the Special Committee shall have adversely amended or modified or shall
have withdrawn its recommendation of the Offer or the Merger, or shall have
failed to publicly reconfirm such recommendation upon request by the Purchaser,
or shall have resolved to do any of the foregoing; or
(g) the Merger Agreement shall have been terminated in accordance with its
terms or the Purchaser shall have reached an agreement or understanding with the
Special Committee providing for termination of the Offer which, in the
reasonable judgment of the Purchaser with respect to each and every matter
referred to above, and regardless of the circumstances (including any action or
inaction by the Purchaser or any affiliate of the Purchaser) giving rise to any
such condition, makes it inadvisable to proceed with the Offer or with such
acceptance for payment or payment.
The foregoing conditions are for the sole benefit of the Purchaser and may
be asserted by the Purchaser regardless of the circumstances (including any
action or inaction by the Purchaser or any affiliate of the Purchaser ) giving
rise to any such conditions or may be waived by the Purchaser in whole or in
part at any time and from time to time in its sole discretion. The failure by
the Purchaser at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right and each such right shall be deemed an ongoing
right which may be asserted at any time and from time to time. Any determination
by the Purchaser concerning the events described above will be final and binding
on all holders of the Shares.
14. DIVIDENDS AND DISTRIBUTIONS.
If, on or after the date hereof, the Company should (a) split, combine or
otherwise change the Shares or its capitalization, (b) acquire Shares or
otherwise cause a reduction in the number of outstanding Shares, (c) issue or
sell additional Shares, shares of any other class of capital stock, other voting
securities or any securities convertible into or exchangeable for, or rights,
warrants or options, conditional or otherwise, to acquire, any of the foregoing
or (d) disclose that it has taken any such action, then without prejudice to the
Purchaser's rights under the provisions of "THE OFFER -- 13. Certain Conditions
of the Offer," the Purchaser, in its sole discretion, may make such adjustments
as it deems appropriate in the Offer and Merger consideration and other terms of
the Offer and Merger, including, without limitation, the number or type of
securities offered to be purchased.
If, on or after the date hereof, the Company should declare or pay any cash
dividend on the Shares or make any other distribution on the Shares, or issue
with respect to the Shares any additional Shares, shares of any other class of
capital stock, other voting securities or any securities convertible into, or
rights, warrants or options, conditional or otherwise, to acquire, any of the
foregoing, payable or distributable to stockholders of record on a date prior to
the transfer of the Shares purchased pursuant to the Offer to the name of the
Purchaser or its nominees or transferees on the Company's stock transfer
records, then, subject to the provisions of "THE OFFER -- 13. Certain Conditions
of the Offer" above, (a) the price payable by the Purchaser pursuant to the
Offer and Merger may, in the sole discretion of the Purchaser, be reduced by the
amount of any such cash dividend or distribution or (b) the whole of any such
non-cash dividend, distribution or issuance to be received by the tendering
stockholders will (i) be received and held by the tendering stockholders for the
account of the Purchaser and will be required to be promptly remitted and
transferred by each tendering stockholder to the Depositary for the account of
the Purchaser, accompanied by appropriate documentation of transfer, or (ii) at
the direction of the Purchaser, be exercised for the benefit of the Purchaser,
in which case the proceeds of such exercise will promptly be remitted to the
Purchaser. Pending such remittance and subject to applicable law, the Purchaser
will be entitled to all rights and privileges as owner of any such non-cash
dividend, distribution, issuance proceeds or rights and may withhold the entire
purchase price or deduct from the purchase price the amount or value thereof, as
determined by the Purchaser in its sole discretion.
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15. CERTAIN LEGAL MATTERS.
General.
Except for the approval of any bank or lender to the Company or as
otherwise disclosed herein, the Purchaser is not aware of any licenses or other
regulatory permits which appear to be material to the business of the Company
and which might be adversely affected by the acquisition of Shares by the
Purchaser pursuant to the Offer or by the Merger or of any approval or other
action by any governmental, administrative or regulatory agency or authority
which would be required for the acquisition or ownership of Shares by the
Purchaser pursuant to the Offer or by the Merger. Should any such approval or
other action be required, it is currently contemplated that such approval or
action would be sought or taken. There can be no assurance that any such
approval or action, if needed, would be obtained or, if obtained, that it would
be obtained without substantial conditions or that adverse consequences might
not result to the Company's or the Purchaser's business or that certain parts of
the Company's or the Purchaser's business might not have to be disposed of in
the event that such approvals were not obtained or such other actions were not
taken, any of which could cause the Purchaser to elect to terminate the Offer
without the purchase of the Shares thereunder. The Purchaser's obligation under
the Offer to accept for payment and pay for Shares is subject to certain
conditions. See "THE OFFER -- 13. Certain Conditions of the Offer."
State Takeover Laws.
A number of states have adopted laws and regulations applicable to offers
to acquire securities of corporations which are incorporated in such states
and/or which have substantial assets, stockholders, principal executive offices
or principal places of business therein. In Edgar v. MITE Corporation, the
Supreme Court of the United States held that the Illinois Business Takeover
Statute, which made the takeover of certain corporations more difficult, imposed
a substantial burden on interstate commerce and was therefore unconstitutional.
In CTS Corporation v. Dynamics Corporation of America, the Supreme Court held
that as a matter of corporate law, and in particular, those laws concerning
corporate governance, a state may constitutionally disqualify an acquiror of
"Control Shares" (shares representing ownership in excess of certain voting
power thresholds, e.g. 20%, 33 1/3% or 50%) of a corporation incorporated in its
state and meeting certain other jurisdictional requirements from exercising
voting power with respect to those shares without the approval of a majority of
the disinterested stockholders.
The Purchaser has not currently complied with any state takeover laws. The
Purchaser reserves the right to challenge the applicability or validity of any
state law purportedly applicable to the Offer or the Merger and nothing in this
Offer to Purchase or any action taken in connection with the Offer or the Merger
is intended as a waiver of such right. If it is asserted that one or more state
takeover laws applies to the Offer or the Merger and it is not determined by an
appropriate court that such act or acts do not apply or are invalid as applied
to the Offer or the Merger, the Purchaser might be required to file certain
information with, or receive approvals from, the relevant state authorities. In
addition, if enjoined, the Purchaser might be unable to accept for payment any
Shares tendered pursuant to the Offer, or be delayed in consummating the Offer
or the Merger. In such case, the Purchaser might not be obligated to accept for
payment any Shares tendered.
16. FEES AND EXPENSES.
The Purchaser will pay the Depositary reasonable and customary compensation
for its services in connection with the Offer and the Merger pursuant to an
agreement between the Purchaser and the Depositary, plus reimbursement for
out-of-pocket expenses, and will indemnify the Depositary against certain
liabilities and expenses in connection therewith, including liabilities under
the federal securities laws. Brokers, dealers, commercial banks and trust
companies will be reimbursed by the Purchaser for customary mailing and handling
expenses incurred by them in forwarding material to their customers.
In addition to the fees set forth above, the Purchaser has paid, or will be
responsible for paying, the following approximate fees and expenses: filing fees
$559; legal fees and expenses $75,000 and printing and miscellaneous $27,100.
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17. MISCELLANEOUS.
The Offer is made solely by the Offer to Purchase and the Letter of
Transmittal and any amendments or supplements thereto. The Purchaser is not
aware of any state where the making of the Offer is prohibited by administrative
or judicial action pursuant to any valid state statute. If the Purchaser becomes
aware of any valid state statute prohibiting the making of the Offer or the
acceptance of the Shares pursuant thereto, the Purchaser will make a good faith
effort to comply with such statute. If, after such good faith effort, the
Purchaser cannot comply with such statute, the Offer will not be made to (nor
will tenders be accepted from or on behalf of) the holders of Shares in such
state.
To the extent the Purchaser becomes aware of any law that would limit the
class of offerees in the Offer, the Purchaser will amend the Offer and,
depending on the timing of such amendment, if any, will extend the Offer to
provide adequate dissemination of such information to holders of Shares prior to
the expiration of the Offer.
In those jurisdictions where the securities, blue sky or other laws require
the Offer to be made by a licensed broker or dealer, the Offer shall be deemed
to be made on behalf of the Purchaser by one or more registered brokers or
dealers licensed under the laws of such jurisdiction.
No person has been authorized to give any information or make any
representation on behalf of the Purchaser not contained in this Offer to
Purchase or in the Letter of Transmittal and, if given or made, such information
or representation must not be relied upon as having been authorized.
The Purchaser has filed with the Commission a Schedule 14D-1, together with
exhibits, pursuant to Rule 14d-3 under the Exchange Act, and a Schedule 13E-3,
together with exhibits, pursuant to Rule 13e-3 under the Exchange Act,
furnishing certain additional information with respect to the Offer. Such
Schedules and any amendments thereto, including exhibits, may be inspected and
copies may be obtained from the Commission in the manner set forth in "THE OFFER
- -- 8. Certain Information Concerning the Company" (except that they will not be
available at the regional offices of the Commission).
THE HALLWOOD GROUP INCORPORATED
October 15, 1996.
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SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF THE PURCHASER
The following table sets forth the name and present principal occupation or
employment, and material occupations, positions, offices or employments for the
past five years of each director and executive officer of the Purchaser. Each
such person is a citizen of the United States, unless otherwise indicated.
Unless otherwise indicated, the address of each such person is 3710 Rawlins,
Suite 1500, Dallas, Texas 75219.
Brian M. Troup, age 49, has served as President and Chief Operating Officer
of the Purchaser since April 1986. He has also served as Finance Director of
Anglo Metropolitan Holdings, plc, a real estate holding company located in the
United Kingdom, since 1979; as a director of Hallwood Holdings S.A. ("HHSA")
(formerly Stanwick International Corporation S.A.), a corporation engaged in the
real estate business, since March 1984; as a director of the Company, which
serves as the general partner of Hallwood Energy Partners, L.P. ("HEP") since
May 1994; as a director of ShowBiz Pizza Time, Inc., a corporation engaged in
the restaurant business and an affiliate of the Purchaser ("ShowBiz"), since
September 1988; as a director of Hallwood Realty Corporation ("Hallwood
Realty"), which is a wholly-owned subsidiary of the Purchaser and serves as the
general partner of Hallwood Realty Partners, L.P. ("HRP"), since 1990; and as a
director of Hallwood Consolidated Resources Corporation ("HCRC") since 1992. He
is an associate of the Institute of Bankers in Scotland and a member of the
Society of Investment Analysts in the United Kingdom. Mr. Troup also served as a
director of Alliance Bancorporation, a bank holding company ("Alliance"), from
February 1988 until its liquidation in February 1994. Mr. Troup is a citizen of
the United Kingdom.
Anthony J. Gumbiner, age 51, has served as Chairman of the Board of
Directors of the Purchaser since 1981 and Chief Executive Officer of the
Purchaser since 1984. He has also served as Chairman of the Board of Directors
and Chief Executive Officer of the Company since May 1984 and February 1987,
respectively; as a director of HHSA, since March 1984; as a director of ShowBiz
since September 1988; as a director of Hallwood Realty since November 1990 and
as a director of HCRC since 1992. Mr. Gumbiner is also a solicitor of the
Supreme Court of Judicature of England. Mr. Gumbiner is a citizen of the United
Kingdom.
Robert L. Lynch, age 78, has served as Vice Chairman of the Purchaser since
May 1984. He is Chairman of the Board and Chief Executive Officer of Perpetual
Storage, Inc., a corporation engaged in underground storage and maintenance of
business and personal records and in micrographic services. Mr. Lynch has served
as a director of Perpetual Storage, Inc. since 1969 and as a director of ShowBiz
since September 1988.
Charles A. Crocco, Jr., age 57, a shareholder in Crocco & DeMaio, P.C.,
attorneys at law, is Chairman of the Purchaser's Compensation Committee. He has
also served as a director of First Banks America, Inc. (formerly BancTEXAS
Group, Inc.), a bank holding company, since April 1988; and as a director of
ShowBiz since September 1988.
J. Thomas Talbot, age 59, is currently Chairman of the Purchaser's Audit
Committee. He has been a partner of Shaw & Talbot, a commercial real estate
investment and development company, since 1975, and of Pacific Management Group,
an asset management firm, since 1986, and is the owner of The Talbot Company.
Mr. Talbot served as Chairman of the Board and Chief Executive Officer of HAL,
Inc., an airline holding company; and as Chairman of the Board and Chief
Executive Officer of both Hawaiian Airlines, Inc., a commercial airline, and
West Maui Airport between 1989 and July 1991. He was founder and served as
Chairman of the Board of Jet America Airlines between 1980 and 1986. He has
served as a director of Fidelity National Financial, Inc. since December 1990;
and as a director of ShowBiz since September 1988. He has also served as a
director of Hemetter Enterprises, Inc. since May 1993; as a director of The
Baldwin Company since June 1993; and as a director of Koll Real Estate Group
(formerly Bolsa Chica Company) since August 1993. In addition, Mr. Talbot served
as a director of Alliance, from April 1988 until its liquidation, and as
Chairman and Chief Executive Officer of Alliance from August 1992 until its
liquidation.
In addition to certain directors of the Purchaser who serve as executive
officers, the following individuals also serve as executive officers of the
Purchaser:
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William L. Guzzetti, age 52, has served as Executive Vice President of the
Purchaser since October 1989. Mr. Guzzetti has served as President, Chief
Operating Officer and a Director of the Company since February 1985 and as
President, Chief Operating Officer and a Director of HCRC since May 1991. Prior
to that, Mr. Guzzetti served as Senior Vice President, Secretary and General
Counsel of the Company from November 1980 until February 1985. Since November
1990 and May 1991, Mr. Guzzetti has served as the President, Chief Operating
Officer and a Director of Hallwood Realty.
Melvin J. Melle, age 53, has served as Vice President and Chief Financial
Officer of the Purchaser since December 1984 and as Secretary of the Purchaser
since October 1987. Mr. Melle served as Assistant Secretary of the Purchaser
from December 1984 to October 1987. Mr. Melle had served as Secretary and
Principal Financial and Accounting Officer of Alliance from April 1989 until its
liquidation in February 1994. From June 1980 though June 1986, Mr. Melle served
as Chief Financial Officer of The Twenty Seven Trust. Mr. Melle is a member of
the American Institute of Certified Public Accountants and of the Ohio Society
of Certified Public Accountants.
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SCHEDULE II
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
UNDER TEXAS LAW
In connection with the Merger, a stockholder may have the right to dissent
from the Merger and, in lieu of receiving $19.50 net in cash per Share, to seek
the "fair value" of all of such stockholder's Shares, as determined in
accordance with the applicable provisions of the Texas Business Corporation Act
("TBCA"). In order to perfect such appraisal rights, a stockholder is required
to follow the procedures set forth in Art. 5 of the TBCA, as summarized below.
The following discussion of the provisions of Art. 5 is not intended to be a
complete statement of its provisions and is qualified in its entirety by
reference to the full text of that article. A STOCKHOLDER DESIRING TO DISSENT
FROM THE MERGER MUST STRICTLY COMPLY WITH THE PROCEDURES SET FORTH IN ART. 5 OF
THE TBCA. FAILURE TO FOLLOW ANY SUCH PROCEDURES MAY RESULT IN A TERMINATION OR
WAIVER OF APPRAISAL RIGHTS UNDER ART. 5 OF THE TBCA.
Any stockholder of the Company may elect to dissent from the Merger with
respect to all of the Shares registered in such stockholder's name. If the
Merger is consummated pursuant to a stockholder vote, a stockholder who votes in
favor of the Merger, whether in person or by proxy, shall waive such
stockholder's appraisal rights. However, a stockholder is not required to vote
against the Merger in order to qualify to exercise appraisal rights.
If the Merger is to be consummated pursuant to a stockholder vote, the
Company, not less than 20 days prior to the meeting of stockholders, shall
notify each of its stockholders who was such on the record date for such meeting
of the date and purpose of such meeting. Any stockholder desiring to exercise
appraisal rights must deliver to the Company, before the taking of the vote on
the proposed Merger, a written notice objecting to the Merger and setting out
that the stockholder's right to dissent will be exercised if the action becomes
effective. Such notice must inform the Company of the identity and address of
the stockholder. Within ten (10) days after the effective date of such Merger,
the surviving or resulting corporation must notify each stockholder who has
complied with Art. 5.12 of the TBCA and has not voted in favor of or consented
to the Merger at the date that the Merger has become effective. Any stockholder
desiring to exercise their appraisal rights must make written demand of such on
the surviving or resulting corporation within ten (10) days from the delivery or
mailing of the Company's notice of the effectiveness of such Merger. The notice
shall state the fair value of the Shares as estimated by the stockholder.
FAILURE TO MAKE A WRITTEN DEMAND WILL CONSTITUTE A WAIVER OF THE
STOCKHOLDER'S APPRAISAL RIGHTS.
If the Merger is consummated pursuant to Art. 5.16 of the TBCA without a
stockholder vote, because the Purchaser then owns more than 90% of the
outstanding Shares, the surviving or resulting corporation, within ten (10) days
of the effective date of the Merger, must notify each stockholder of the Company
of the effective date of such Merger and mail to each stockholder a copy of the
articles of merger. The notice shall be sent by certified or registered mail,
return receipt requested, addressed to the stockholder, at such stockholder's
address as it appears on the records of the Company. Any stockholder entitled to
appraisal rights may, within twenty (20) days after the date of mailing of the
notice and copy of the articles of merger, demand in writing from the surviving
or resulting corporation the payment of the fair value of the stockholder's
Shares. The demand must inform the surviving or resulting corporation of the
identity of the stockholder, state the number and class of all Shares owned by
the stockholder, and the fair value of the Shares as estimated by the
stockholder. Upon receiving a demand for payment from any dissenting
stockholder, the surviving or resulting corporation must make an appropriate
notation thereof in its stockholder records. Within twenty (20) days after
demanding payment for Shares in accordance with Article 5.16 of the TBCA, each
stockholder so demanding payment and holding Shares in certificate form shall
submit the certificates to the surviving or resulting corporation for notation
thereon that such demand has been made. THE FAILURE OF HOLDERS OF CERTIFICATED
SHARES TO DO SO WILL, AT THE OPTION OF THE SURVIVING OR RESULTING CORPORATION,
TERMINATE THE SHAREHOLDERS' RIGHTS UNDER ARTICLE 5.16 OF THE TBCA UNLESS A COURT
OF COMPETENT JURISDICTION FOR GOOD AND SUFFICIENT CAUSE DIRECTS OTHERWISE.
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Within ten (10) days after receipt by the surviving or resulting
corporation of the demand for payment by the dissenting stockholder of the fair
value of the Shares, the surviving or resulting corporation must deliver or mail
to the dissenting stockholder written notice either accepting the amount claimed
in the demand and agreeing to pay such amount within ninety (90) days after the
date of the Merger and upon surrendering the Share certificates duly endorsed,
or shall contain an estimate by the surviving or resulting corporation of the
fair value of the Shares, together with an offer to pay the amount of that
estimate within ninety (90) days after the date on which the Merger was
effective, upon receipt of notice from the stockholder within sixty (60) days
after that date that the stockholder agrees to accept that amount. If within
sixty (60) days after the date on which the Merger was effective, the value of
the Shares is agreed upon between the dissenting stockholder and the surviving
or resulting corporation, payment for the Shares must be made within ninety (90)
days after the date on which the Merger was effective. Upon payment of the
agreed value, the dissenting stockholder shall cease to have any interest in
such Shares or the surviving or resulting corporation.
FAILURE TO MAKE SUCH WRITTEN DEMAND WILL CONSTITUTE A WAIVER OF THE
STOCKHOLDER'S APPRAISAL RIGHTS.
The written demand for appraisal must be made by or for the holder of
record of Shares registered in the holder's name. Accordingly, the demand should
be executed by or for the stockholder of record, fully and correctly, as the
stockholder's name appears on the stockholder's stock certificates. If the stock
is owned of record in a fiduciary capacity, such as by a trustee, guardian or
custodian, execution of the demand should be made in such capacity and if the
stock is owned of record by more than one person as in a joint tenancy or
tenancy in common, the demand should be executed by or for all joint owners. An
authorized agent, including one or two or more joint owners, may execute the
demand for appraisal for a stockholder of record. However, the agent must
identify the record owner or owners and expressly disclose the fact that in
executing the demand he is acting as agent for the record owner.
Within one hundred and twenty (120) days after the day of the effective
date of the Merger, any stockholder who has satisfied the foregoing conditions
and who is otherwise entitled to appraisal rights under Art. 5.16 of the TBCA,
may file a petition in a court of competent jurisdiction demanding a
determination of the value of the Shares held by all stockholders entitled to
appraisal rights. If no such petition is filed, appraisal rights will be lost
for all stockholders who had previously demanded appraisal of their Shares.
Stockholders seeking to exercise appraisal rights should not assume that the
surviving or resulting corporation will file a petition with respect to the
appraisal of the value of their Shares or that the surviving or resulting
corporation will initiate any negotiations with respect to the "fair value" of
such Shares. ACCORDINGLY, STOCKHOLDERS WHO WISH TO EXERCISE THEIR APPRAISAL
RIGHTS SHOULD REGARD IT AS THEIR OBLIGATION TO TAKE ALL STEPS NECESSARY TO
PERFECT THEIR APPRAISAL RIGHTS IN THE MANNER PRESCRIBED IN ART. 5.16 of the
TBCA.
If a stockholder files the petition for appraisal in a timely manner, the
surviving or resulting corporation must file, within ten (10) days of service of
the stockholders' petition, a verified list of the names and addresses of all
stockholders who have demanded appraisal for their Shares and with whom the
surviving or resulting corporation has not reached an agreement regarding value.
If the surviving or resulting corporation files a petition, it must be
accompanied by a similar list. If so ordered by the Court, the clerk of the
court is required to provide notice by registered or certified mail of the
hearing to stockholders shown on the list and to provide notice by publication.
If a petition for an appraisal is timely filed, at the hearing on the
petition, the court will determine the stockholders entitled to appraisal rights
and will appraise the value of the Shares owned by the stockholders, determining
its "fair value" exclusive of any element of value arising from the
accomplishment or expectation of the Merger. The Court will direct payment of
the fair value of the Shares together with a fair rate of interest, if any, on
the fair value to stockholders entitled thereto upon surrender to the surviving
or resulting corporation of Share certificates. Upon application of a
stockholder, the Court may, in its discretion, order that all or a portion of
the expenses incurred by any stockholder in connection with an appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all the
shares entitled to appraisal.
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Although the Purchaser believes that the price per Share set out in the
offer is fair, it cannot make any representation as to the outcome of the
appraisal of fair value as determined by the Court, and stockholders should
recognize that such an appraisal could result in a determination of a lower,
higher or equivalent value.
Any stockholder who has duly demanded an appraisal in compliance with Art.
5.16 of the TBCA will not, after the effective date of the Merger, be entitled
to vote the Shares for any purpose nor be entitled to the payment of any
dividends or other distributions on the Shares (other than those payable to
stockholders of record as of a date prior to the effective date of the Merger).
If no petition for an appraisal is filed within the time provided, or if a
stockholder delivers to the surviving or resulting corporation a written
withdrawal of the stockholder's demand for an appraisal and an acceptance of the
Merger, either within sixty (60) days after the effective date of the Merger or,
with the written approval of the surviving or resulting corporation, thereafter,
then the right of the stockholder to an appraisal will cease and such
stockholder shall be entitled to receive in cash, without interest, the amount
to which the stockholder would have been entitled had he not demanded appraisal
of such stockholder's Shares. No appraisal proceeding in Court will be dismissed
as to any stockholder without the approval of the Court, which approval may be
conditioned on such terms as the Court deems just.
Any notice, objection, demand or other written communication required to be
given to the surviving or resulting corporation by a dissenting stockholder
should be delivered to the Secretary of the surviving or resulting corporation
at its address set forth in the Offer to Purchase or should be delivered as
otherwise permitted by law. Although not specifically required, it is
recommended that such written communications be sent by registered or certified
mail, return receipt requested.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF TEXAS LAW, ANY STOCKHOLDER
WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS SHOULD CONSULT THE STOCKHOLDER'S
LEGAL ADVISOR.
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Facsimile copies of the Letter of Transmittal will be accepted. The Letter
of Transmittal, Certificates for the Shares and any other required documents
should be sent by each stockholder of the Company or such stockholder's broker
dealer, a commercial bank, trust company or other nominee to the Depositary as
follows:
The Depositary for the Offer is:
Hallwood Petroleum, Inc.
BY MAIL: BY FACSIMILE TRANSMISSION
(for Eligible Institutions only):
P. O. Box 37811 303 850-6507
Denver, Colorado 80237 Confirm by telephone:
800-882-9225
BY HAND OR
OVERNIGHT DELIVERY:
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
Questions or requests for assistance may be directed to Hallwood Petroleum,
Inc. or the Company at their telephone numbers and locations listed below.
Requests for additional copies of the Offer to Purchase, Letter of Transmittal
and the other Tender Offer materials may be directed to the Hallwood Petroleum,
Inc. or to brokers, dealers, commercial banks or trust companies or other
nominees, and copies will be furnished promptly at the Purchaser's expense.
Hallwood Petroleum, Inc.
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
CALL TOLL FREE 1-800-882-9225
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LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK OF
HALLWOOD ENERGY CORPORATION
DESCRIPTION OF SHARES TENDERED
Name, Address and Account Number of
Registered Shareholder
Please make any corrections to the above address and Tax Identification
Number or Social Security Number in ink.
Number of Shares
Held in this Account
Certificate(s)
(Attach additional list if necessary)
Certificate(s) Enclosed
X Certificate Number
Number of Shares
Total Shares
NOTE: IF NECESSARY, PLEASE COMPLETE THE SPECIAL PAYMENT INSTRUCTIONS ON THE
REVERSE SIDE OF THIS LETTER OF TRANSMITTAL IF THE NAME ON THE CERTIFICATE
PRESENTED FOR TENDER DIFFERS FROM THAT OF THE SIGNER OF THE LETTER OF
TRANSMITTAL.
Ladies and Gentlemen:
I desire to tender my shares of common stock (the "Shares") of Hallwood
Energy Corporation ("The Company") listed above pursuant to the Offer to
Purchase for Cash dated October 15, 1996 by The Hallwood Group Incorporated (the
"Purchaser"), receipt of which is acknowledged, and this Letter of Transmittal
(together with the Offer to Purchase, the "Offer"), and herewith tender to the
Purchaser the above-listed certificate(s) representing such Shares.
Upon the terms and subject to the conditions of the Offer (including if
the Offer is extended or amended, the terms or conditions of any such extension
or amendment), and effective upon acceptance for payment of the Shares tendered
herewith, the undersigned hereby sells, assigns and transfers to, or upon the
order of, the Purchaser, all right, title and interest in and to all of the
Shares tendered herewith, and any and all cash dividends, distributions, rights,
other Shares and other securities issued or issuable in respect thereof on or
after the date of the Offer to Purchase (collectively, "Distributions"), and
irrevocably appoints Hallwood Petroleum, Inc. (the "Depositary") the true and
lawful agent and attorney-in-fact of the undersigned with respect to such Shares
(and all such Distributions), with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest), (a)
to present such Shares (and all such Distributions) for transfer on the books of
the Company and (b) to receive all benefits and otherwise exercise all rights of
beneficial ownership of such Shares (and all such Distributions), all in
accordance with the terms and the conditions of the Offer.
The undersigned hereby irrevocably appoints the designees of the
Purchaser, and each of them, the attorneys-in-fact and proxies of the
undersigned, each with full power of substitution, to vote in such manner as
each such attorney and proxy or any substitute thereof shall deem proper in the
sole discretion of such attorney-in-fact and proxy or such substitute, and
otherwise act (including pursuant to written consent) with respect to all of the
Shares tendered hereby (and any associated Distributions) which have been
accepted for payment by the Purchaser, without further action, prior to the time
of such vote or action, which the undersigned is entitled to vote at any meeting
of stockholders of the Company (whether annual or special and whether or not an
adjourned meeting), by written consent or otherwise. Such appointment shall be
effective when, and only to the extent that, the Purchaser deposits the payment
for such Shares (and any associated Distributions) with the Depositary. This
proxy and power of attorney shall be irrevocable and coupled with an interest in
the Shares. Upon the effectiveness of such appointment, without further action,
all prior proxies with respect to the Shares (and any associated Distributions)
at any time given by the undersigned will be revoked, and no subsequent proxies
will be given nor subsequent written consents executed (or, if given or
executed, will not be deemed effective) by the undersigned. The undersigned
understands that in order for Shares to be deemed validly tendered, immediately
upon the Purchaser's acceptance of such Shares for payment, the Purchaser or its
designees must be able to exercise full voting rights with respect to such
Shares (and any associated Distributions).
By accepting the Offer through the tender of Shares pursuant to the
Offer, the undersigned hereby agrees to release, and hereby releases, all claims
with respect to and in respect of the Shares other than the right to receive
payment for such tendered Shares, and upon payment for the Shares, the
undersigned waives any right to attack, and will be barred from thereafter
attacking, in any legal proceeding the fairness of the consideration paid in the
Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Shares (and
any associated Distributions) tendered hereby and that when the same are
accepted for payment by the Purchaser, the Purchaser will acquire good,
marketable and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances, and the same will not be subject to any
adverse claim. The undersigned will, upon request, execute and deliver any
additional documents deemed by the Depositary or the Purchaser to be necessary
or desirable to complete the sale, assignment, and transfer of the Shares (and
any associated Distributions) tendered hereby. In addition, the undersigned
shall promptly remit and transfer to the Depositary for the account of the
Purchaser any and all Distributions in respect of the Shares tendered hereby,
accompanied by appropriate documentation of transfer; and, pending such
remittance or appropriate assurance thereof, the Purchaser shall be entitled to
all rights and privileges as owner of any such Distributions and may withhold
the entire purchase price or deduct from the purchase price the amout or value
thereof, as determined by the Purchaser in its sole discretion.
All authority herein conferred, or agreed to be conferred, shall not be
affected by, and shall survive, the death or incapacity of the undersigned, and
any obligation of the undersigned hereunder shall be binding upon the heirs,
personal representatives, successors and assigns of the undersigned. Subject to
the withdrawal rights set forth in the section of the Offer to Purchase entitled
"THE OFFER. 4. Rights of Withdrawal," the tender of Shares hereby made is
irrevocable.
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The undersigned understands that tenders of Shares pursuant to of the
procedure described in the section of the Offer to Purchase entitled "THE
OFFER-3. Procedure for Tendering Shares" and in the Instructions hereto will
constitute a binding agreement between the undersigned and the Purchaser upon
the terms and subject to the conditions of the Offer.
Unless otherwise indicated herein under "Special Payment Instructions,"
please issue the check for the purchase price and/or return any certificates for
Shares not tendered or not accepted for payment in the name(s) of the registered
holder(s) appearing under "Description of Shares Tendered." Similarly, unless
otherwise indicated under "Special Payment Instructions," please mail the check
for the purchase price and/or return any certificates for Shares not tendered or
not accepted for payment (and accompanying documents, as appropriate) to the
addresses of the registered holder(s) appearing under "Description of Shares
Tendered." In the event that the Special Payment Instructions are completed,
please issue the check for the purchase price and/or issue any certificates for
Shares not so tendered or accepted for payment in the name of, and deliver said
check and/or return such certificates to, the person or persons so indicated.
The undersigned recognizes that Purchaser has no obligation, pursuant to the
Special Payment Instructions, to transfer any Shares from the name of the
registered holder thereof if the Purchaser does not accept for payment any of
the Shares so tendered.
PLEASE NOTE THAT YOUR SIGNATURE CERTIFIES THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. IF YOU FAIL TO SIGN BELOW, YOUR DOCUMENTATION WILL BE RETURNED TO
YOU. IF YOUR DOCUMENTATION IS DEFICIENT AS OF THE EXPIRATION DATE OF THE OFFER,
YOUR TENDER WILL NOT BE ACCEPTED.
Please sign exactly as your name(s) appears under "Description of Shares
Tendered" above. Each joint owner must sign; if one or more owners are deceased,
the other(s) must sign and enclose the death certificate. If you are signing for
someone else, you must enclose documentation with the Letter of Transmittal
certifying your authorization to sign, i.e., Death Certificate, Power of
Attorney, Letters Testamentary, etc. If your account is held as an IRA or a
third party acts as the custodian on your account, the custodian must also sign
the Letter of Transmittal. If you have questions as to your authority to sign,
please call Hallwood Petroleum, Inc. toll-free nationwide at (800) 882-9225.
PLEASE FILL IN YOUR PHONE NUMBER HERE:
X (______) ____________________________________
Day or Work Telephone Number
CERTIFICATION
Under penalties of perjury, I certify that:
(1) The number shown above is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me); or (2) I am not subject to backup
withholding, either because I have not been notified by the Internal Revenue
Service (IRS) that I am subject to backup withholding as a result of a failure
to report all interest or dividends or the IRS has notified me that I am no
longer subject to backup withholding; and (3) I have read and understood the
terms of the Offer.
PLEASE DATE AND SIGN HERE:
Date:________________________________
X ________________________________________________________
X ________________________________________________________
(Co-owner (custodian) signature, if applicable)
X ________________________________________________________
(Signature Guarantee, only if Special Payment Instructions have been completed.
See Instruction 5.)
IMPORTANT INSTRUCTIONS FOR ACCEPTING THE OFFER:
(1) Do Not Sign Your Share Certificate(s).
(2) Complete each section above marked with a red X.
(3) Return this form along with your unsigned certificate(s) in the enclosed
blue return envelope to:
Hallwood Petroleum, Inc.
4582 South Ulster Street Parkway, Suite 1700
P.O. Box 378111
Denver, Colorado 80237
(Note) The method of delivery of your certificate(s) and the Letter of
Transmittal is at your option and risk, but if the mail is used, we
recommend registered and insured mail.
(4) If you need assistance, please call toll-free nationwide (800)882-9225.
(5) If you cannot locate your certificate(s), please sign and have the
affidavit notarized on the reverse side of this letter.
(6) THIS OFFER EXPIRES ON NOVEMBER 22, 1996, UNLESS EXTENDED. YOUR
DOCUMENTATION MUST BE COMPLETE, DULY EXECUTED AND RECEIVED BY THIS DATE
TO BE ACCEPTED. WHEN MAILING, PLEASE ALLOW SUFFICIENT TIME FOR THE POST
OFFICE TO DELIVER THE MAIL.
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SPECIAL PAYMENT INSTRUCTIONS
To be completed only if the registered name on any Share certificate presented
for tender differs from the name of the signer of the Letter of Transmittal. See
Instruction 4.
Issue and mail to name:
------------------------------------------------------
(Please Print)
Social Security or
Identification No.
(see Instruction 2):
--------------------------------------------------------
Address:
---------------------------------------------------------------------
Zip
------------------------------------------- ----------------------
- -------------------------------------------------------------------------------
THIS SECTION TO BE COMPLETED AND NOTARIZED
ONLY IF YOU CANNOT LOCATE YOUR CERTIFICATE(S)
- -------------------------------------------------------------------------------
AFFIDAVIT OF LOST OR DESTROYED SHARE CERTIFICATE(S)
(Shareholder Information)
STATE OF ________________________
COUNTY OF _____________________
NAME AND ADDRESS______________________________________
CITY/STATE/ZIP___________________________________________
CERTIFICATE NUMBER(S)*________________, for __________ Share(s) of Hallwood
Energy Corporation.
The undersigned person(s), being first duly sworn, deposes and says that:
I am the lawful owner of the above described certificate(s). The
certificate(s) has not been endorsed, cashed, negotiated, transferred, assigned
or otherwise disposed of. I have made a diligent search for the certificate(s)
and have been unable to find it, and make this affidavit for the purpose of
tendering the certificate(s) without surrender of the certificate(s), and hereby
agree to surrender the certificate(s) for cancellation should I, at any time,
find the certificate(s). I, in consideration of the proceeds of the tender of
the Shares represented by the certificate(s), agree to completely indemnify,
protect and save harmless The Hallwood Group Incorporated, Hallwood Energy
Corporation, Hallwood Petroleum, Inc., Registrar and Transfer Co. and Seaboard
Surety Company (the "Obligees"), from and against all loss, costs and damages,
including court costs and attorneys' fees, which they may be subject to or
liable for in respect of the cancellation and replacement of the certificate(s),
the tender and purchase of Shares represented thereby and distribution of the
proceeds of the certificate(s). The rights accruing to the Obligees under the
preceding sentences shall not be limited by the negligence, inadvertence,
accident, oversight or breach of any duty or obligation on the part of the
Obligees or their respective officers, employees and agents or their failure to
inquire into, contest or litigate any claim, whenever such negligence,
inadvertence, accident, oversight, breach or failure may occur or have occurred.
I agree that this affidavit is to be delivered to accompany a bond of indemnity
underwritten by Seaboard Surety Company to protect the foregoing parties.
Signed, sealed and delivered by Affiant this ________ day of _________ 1996
Signature of Affiant _______________________________
Signature of Co-Affiant____________________________
PLEASE ALSO SIGN THE FRONT OF THE LETTER OF TRANSMITTAL
On this _________ day of ______________________ 1996, before me personally
appeared ______________________ known to me to be the individual(s) who executed
the foregoing instrument, and, being duly sworn, did depose and say that the
statements contained therein are true.
(AFFIX NOTARY SEAL)
My commission expires ___________ Notary Public _______________________________
*If you do not have a record of your certificate number(s), leave line blank.
These numbers will be researched by the Depositary.
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INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Letter of Transmittal
1. Delivery of Letter of Transmittal and Certificate. This Letter of
Transmittal must be used by shareholders (or their transferees) in connection
with the tender of Certificate(s). In the case of shareholders of record as of
the effective time of the offer, the Certificate(s), a properly completed and
duly executed Letter of Transmittal and any other documents required by this
Letter of Transmittal must be received by Hallwood Petroleum, Inc. (the
"Depositary") at its address shown on page 2 of this Letter of Transmittal in
order to make an effective tender. If you are a transferee of a shareholder of
record, you must provide a Certificate(s) accompanied by appropriate instruments
of transfer (with the guaranteed signature(s) of the record owner(s)), a
properly completed and duly executed Letter of Transmittal, with the Special
Payment Instructions completed, and any other documents required hereunder to
the Depositary at its address shown on page 2 of this Letter of Transmittal in
order to make an effective tender.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE CERTIFICATE(S)
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE SHAREHOLDER
(OR HIS/HER TRANSFEREE) AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE DEPOSITARY . IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. PLEASE RESPOND PROMPTLY, SO
THAT THE POST OFFICE HAS SUFFICIENT TIME PRIOR TO THE EXPIRATION OF THE OFFER TO
DELIVER YOUR DOCUMENTATION TO THE DEPOSITARY.
No alternative, conditional or contingent tenders will be accepted and no
fractional Shares will be purchased. By execution of this Letter of Transmittal
(or facsimile thereof), a Shareholder waives any right to receive any notice of
the acceptance of the Shares for payment.
2. Verification of Information and TIN. Please verify the information in
the box on the front side of this Letter of Transmittal. Please mark corrections
if any are necessary. If the space provided for corrections is inadequate, the
information should be listed on a separate, signed schedule attached to this
Letter of Transmittal. Federal income tax law requires a shareholder to provide
his or her correct taxpayer identification number ("TIN") and to certify that
such TIN is correct under penalties of perjury. Failure to furnish the correct
TIN may subject the shareholder to a penalty imposed by the Internal Revenue
Service, and any payment to such shareholder may be subject to backup
withholding of 31%. The TIN is that of the registered holder of the
certificate(s) or the last transferee appearing on the transfers attached to or
endorsed on the certificate(s). The TIN for an individual is his or her social
security number. Exempt persons (including, among others, all corporations) are
not subject to backup withholding.
3. Lost Certificates. If the Certificate(s) which a registered holder (or
his/her transferee) is required to tender has been lost or destroyed, please
properly complete, and duly execute and have notarized the Affidavit of Loss and
deliver it to the Depositary.
4. Special Payment Instructions. The box on the third page of this Letter
of Transmittal should be completed (1) if payment is to be issued in the name of
a person other than the record holder of the Certificate(s) tendered with this
Letter of Transmittal or (2) if payment is to be sent to an address other than
that shown in the name and address block on the front page.
5. Guarantee of Signatures. Signature guarantees are unnecessary unless (a)
a Certificate is registered in a name other than the name of the person
tendering the Certificate, or (b) the registered holder of the certificate
completed the Special Payment Instructions section of this Letter of
Transmittal. When a signature guarantee is required, the signature on the Letter
of Transmittal must guaranteed by a financial institution that is a member of
the Stock Transfer Association's approved medallion program (such as STAMP,
SEMP, or MSP), unless tendered on behalf of such institution.
6. Signatures on Letter of Transmittal, Stock Powers and Endorsements. If
this Letter of Transmittal is signed by the registered holder(s) of the
Certificate(s) tendered herewith, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) without alterations,
enlargement or any change whatsoever.
If any of the Certificate(s) tendered with this Letter of Transmittal are
owned of record by two or more joint owners, all such owners must sign this
Letter of Transmittal.
If any Certificates are registered in different names, it will be necessary
to complete, sign and submit as many separate Letters of Transmittal as there
are different registrations of Certificates.
If this Letter of Transmittal or any Certificate(s) or stock powers are
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and proper evidence
satisfactory to the Depositary for such person's authority so to act must be
submitted.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Certificate(s) listed, the Special Payment
Instructions must be completed and the signature must be guaranteed. (See
Instruction 5.)
7. Inquiries. All inquiries with respect to this Letter of Transmittal and
requests for additional copies of this Letter of Transmittal should be made to
Hallwood Petroleum, Inc., 4582 S. Ulster St. Pkwy. Ste. 1700, Denver, Colorado,
80237 at (800) 882-9225.
8. Waiver of Conditions. Subject to the terms of the Offer, the Purchaser
reserves the right to waive any of the specified conditions to the Offer, in
whole or in part, in the case of any Shares tendered.
85
<PAGE>
HALLWOOD ENERGY CORPORATION
3710 RAWLINS STREET, SUITE 1500
DALLAS, TEXAS 75219
PROXY STATEMENT FOR
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 14, 1996
SOLICITATION AND REVOCABILITY OF PROXIES
The accompanying Proxy is solicited on behalf of the Board of Directors of
Hallwood Energy Corporation (the "Company") to be voted at the Annual Meeting
of Shareholders of the Company (the "Annual Meeting") to be held on May 14,
1996, at 10:00 a.m., at 3710 Rawlins Street, Suite 1500, Dallas, Texas, for
the purposes set forth in the accompanying Notice of Annual Meeting, and at
any adjournments thereof. This Proxy Statement and accompanying form of
Proxy are being first mailed or distributed on or about April 4, 1996.
The accompanying form of Proxy is designed to permit each shareholder to
vote for, or to withhold voting for, any or all of the nominees for election
as directors of the Company listed under Proposal 1 and to authorize the
proxies to vote in their discretion with respect to any other proposal
brought before the Annual Meeting. When a shareholder's executed and dated
proxy card specifies a choice with respect to a voting matter, the shares
will be voted accordingly. If no specification is made, the Proxy will be
voted at the Annual Meeting FOR the election of the nominees specified under
the caption "Election of Directors."
The Company encourages the personal attendance of shareholders at its
annual meetings, and giving a Proxy does not preclude the right to vote in
person should any shareholder giving the Proxy so desire. Any shareholder of
the Company giving a Proxy has the unconditional right to revoke his Proxy at
any time prior to the voting thereof, either in person at the Annual Meeting
or by giving written notice to the Company addressed to Ms. Cathleen M.
Osborn, Secretary, 4582 South Ulster Street Parkway, Suite 1700, Denver,
Colorado 80237. No notice of revocation will be effective, however, until it
has been received by the Company, and the notice of revocation must be
received at or before the Annual Meeting.
In addition to the solicitation of Proxies by use of the mail, officers
and regular employees of the Company may solicit the return of Proxies by
personal interview, mail, telephone and telegraph. The officers and
employees will not be additionally compensated but will be reimbursed for
out-of-pocket expenses. Brokerage houses and other custodians, nominees and
fiduciaries will be requested to forward solicitation materials to the
beneficial owners of stock. The cost of preparing, printing, assembling and
mailing the Notice of Annual Meeting, this Proxy Statement, the form of Proxy
and any additional material, the cost of forwarding solicitation material to
the beneficial owners of stock and other costs of solicitation will be borne
by the Company.
The Annual Report to Shareholders covering the Company's fiscal year ended
December 31, 1995, including audited financial statements, is enclosed with
this Proxy Statement. The Annual Report does not form any part of the
materials for the solicitation of Proxies.
PURPOSES OF THE MEETING
At the Annual Meeting, the shareholders will consider and vote upon the
following matters:
1. The election of six directors to hold office until the next annual
election of directors or until their respective successors have been duly
elected and have qualified.
2. Such other and further business as may properly come before the meeting
or any adjournments thereof.
86
<PAGE>
VOTING RIGHTS AND PRINCIPAL SHAREHOLDERS
GENERAL
The Board of Directors has fixed the record date for the determination of
shareholders entitled to notice of and to vote at the Annual Meeting as of
the close of business on March 31, 1996 (the "Record Date"). On the Record
Date, there were 792,126 shares of Common Stock issued and outstanding.
REQUIRED VOTE
The Company's Restated Articles of Incorporation prohibit cumulative
voting. Assuming the presence of a quorum, the affirmative vote of a
plurality of the votes cast by the holders of shares of Common Stock is
necessary for the election of directors. Votes will be counted by Boston
EquiServe (formerly known as The First National Bank of Boston) the Company's
transfer agent and registrar. With respect to abstentions, the shares are
considered present at the meeting for purposes of determining a quorum and
voting on a particular matter, but since they are not affirmative votes for
the matter, they will have the same effect as votes against the matter. With
respect to broker non-votes, the shares are considered present at the meeting
for purposes of determining a quorum but are not entitled to vote on the
particular matter as to which the broker does not have voting authority.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth information concerning the number of shares
of Common Stock owned beneficially as of the Record Date by the persons who,
to the knowledge of management, beneficially owned more than 5% of the
outstanding Common Stock. Unless otherwise indicated, each of the persons
named has sole voting and investment power with respect to the shares
reported.
<TABLE>
<CAPTION>
AMOUNT
NAME AND ADDRESS BENEFICIALLY PERCENT OF
OF BENEFICIAL OWNER OWNED COMMON STOCK
-------------------- ----------- --------------
<S> <C> <C>
The Hallwood Group Incorporated 633,917 80
3710 Rawlins Street, Suite 1500
Dallas, Texas 75219
</TABLE>
The following table sets forth information concerning the number of shares
of Common Stock of the Company owned beneficially as of the Record Date by
(i) each director and executive officer of the Company who owns Common Stock
and (ii) the directors and executive officers of the Company as a group. Mr.
Guzzetti has sole voting and investment power with respect to the shares
reported.
<TABLE>
<CAPTION>
AMOUNT
NAME OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED COMMON STOCK
---------------- ------------ --------------
<S> <C> <C>
William L. Guzzetti 285 *
All directors and
executive officers as a
group (nine individuals) 285 *
<FN>
* Represents less than 1% of the outstanding Common Stock.
</FN>
</TABLE>
The table above does not include the shares of Common Stock held by The
Hallwood Group Incorporated ("Hallwood Group") of which Mr. Gumbiner is
Chairman and Chief Executive Officer and Mr. Troup is President and a
director.
Alpha Trust beneficially owns 297,167 shares of common stock (22.3% of the
outstanding common stock) of Hallwood Group, the parent of the Company, and
Epsilon Trust beneficially owns 198,112 shares of common stock (14.9%) of
Hallwood Group. Mr. Gumbiner has the power to designate and replace the
trustees of Alpha Trust, and Mr. Troup has the power to designate and replace
the trustees of Epsilon Trust. No other director or executive officer of the
Company owns any equity securities of Hallwood Group. The Company owns
267,709 shares of Common Stock (16.8%) of Hallwood Group.
87
<PAGE>
The Company is general partner of Hallwood Energy Partners, L.P. (the
"Partnership") a limited partnership. Mr. Guzzetti owns 100 Class A Units of
limited partner interest and 6 Class C Units (less than .01% of each class)
and currently exercisable options to acquire 42,500 Units (less than 1%,
assuming exercise of the options) of the Partnership. Mr. Sebastian owns 400
Class A Units and 26 Class C Units (less than .01% of each class) of the
Partnership. Mr. Troup owns currently exercisable options to acquire 56,666
Class A Units (less than 1%, assuming exercise of the options) of the
Partnership, and Mr. Gumbiner owns currently exercisable options to acquire
85,000 Class A Units (less than 1%, assuming exercise of the options) of the
Partnership. No other director of the Company owns Units of the Partnership.
Executive officers of the Company, including Mr. Guzzetti, own 403 Class A
Units and 26 Class C Units and currently exercisable options to purchase
201,166 Class A Units (2%, assuming exercise of the options) of the
Partnership.
Section 16(a) of the Securities Exchange Act of 1934 requires the officers
and directors of the Company, and persons who own more than ten percent of
the Common Stock, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Officers, directors and greater than
ten-percent owners are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of
the copies of such forms received by it, or written representations from
certain reporting persons that no forms were required for those persons, the
Company believes that, during the year ended December 31, 1995, all officers
and directors of the Company and greater than ten-percent beneficial owners
complied with applicable filing requirements.
ELECTION OF DIRECTORS
NOMINEES
At the Annual Meeting, shareholders will elect directors to serve until
the 1997 Annual Meeting of Shareholders. The Bylaws of the Company provide
that the Company's Board of Directors must consist of not fewer than three,
nor more than eleven, directors and that the number of directors, within such
limits, will be determined by resolution of the Board of Directors. By
action of the Board of Directors, the number of directors has been set at
six. The six persons currently serving as directors of the Company have been
nominated by the Board of Directors to serve as directors of the Company
until the 1997 Annual Meeting of Shareholders or until their successors have
been duly elected and have qualified.
Unless otherwise directed on any duly executed and dated Proxy, it is the
intention of the persons named in such Proxy to nominate and to vote the
shares represented by such Proxy for the election of the nominees listed in
the table below for the office of director of the Company to hold office
until their respective successors have been duly elected and have qualified.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED
NAME POSITION DIRECTOR
-------- ---------- ----------
<S> <C> <C>
Anthony J. Gumbiner Chairman of the Board and Director 1984
William L. Guzzetti President and Director 1985
Brian M. Troup Director 1984
Hans-Peter Holinger Director 1984
Rex A. Sebastian Director 1993
Nathan C. Collins Director 1995
</TABLE>
The Board of Directors does not contemplate that any of the above-named
nominees for director will refuse or be unable to accept election or to serve
as a director of the Company. Should any of them become unavailable for
nomination or election or refuse to be nominated or to accept election as a
director of the Company, then the person or persons voting the Proxy will
vote the shares represented by such Proxy for the election of such other
person or persons as may be nominated or designated by the Board of
Directors. If elected as a director of the Company, each director will hold
office until his successor has been duly elected and has qualified.
88
<PAGE>
BUSINESS EXPERIENCE OF DIRECTORS
Anthony J. Gumbiner, 51, has served as a director and as Chairman of the
Board and Chief Executive Officer of the Company since May 1984 and February
1987, respectively. He has also served as Chairman of the Board of Directors
of Hallwood Group, a diversified holding company with real estate, textile
products, hotel, restaurant and energy operations, since 1981 and as Chief
Executive Officer of Hallwood Group since April 1984. Mr. Gumbiner has also
served as Chairman of the Board of Directors and as a director of Hallwood
Holdings S.A., a Luxembourg real estate investment company, since March 1984
and as a director of ShowBiz Pizza Time, Inc., a company primarily engaged in
the restaurant business, since September 1988. He has been a director of
Hallwood Consolidated Resources Corporation ("HCRC") since June 1992 and a
director of Hallwood Realty Corporation ("Hallwood Realty"), which is the
general partner of Hallwood Realty Partners, L.P., since November 1990. He
is a Solicitor of the Supreme Court of Judicature of England.
William L. Guzzetti, 52, has been President, Chief Operating Officer and a
director of the Company since February 1985. Mr. Guzzetti joined the Company
in February 1976 as Vice President, Secretary and General Counsel and served
in these positions until November 1980. He served as Senior Vice President,
Secretary and General Counsel from November 1980 until February 1985, when he
assumed his current office. Mr. Guzzetti is also an Executive Vice President
of Hallwood Group and in that capacity may devote a portion of his time to
the activities of Hallwood Group, including the management of real estate
investments, acquisitions and restructurings of entities controlled by
Hallwood Group. He is a director and President of Hallwood Realty and in
that capacity may devote a portion of his time to the activities of Hallwood
Realty. He is a director and President of HCRC.
Brian M. Troup, 49, has served as a director of the Company since May
1984. He has been President and Chief Operating Officer of Hallwood Group
since April 1986, and he is a director. He is a director of Hallwood
Holdings S.A. and a director of ShowBiz Pizza Time, Inc. He is also a
director of HCRC and Hallwood Realty. He is an associate of the Institute of
Bankers in Scotland and a member of the Society of Investment Analysts in the
United Kingdom.
Hans-Peter Holinger, 53, is a citizen of Switzerland. He served as
Managing Director of Interallianz Bank Zurich A.G. from 1977 to February
1993. Since February 1993, he has been the majority owner of Holinger Asset
Management AG, Zurich.
Rex A. Sebastian, 66, has served as a director of the Company since
January 1993. Mr. Sebastian is a member of the Boards of Directors of The
Phoenix Resource Companies, Inc. and Ferro Corporation. Mr. Sebastian served
as Senior Vice President--Operations of Dresser Industries, Inc. from January
1975 until his retirement in July 1985. He joined Dresser in 1966. Mr.
Sebastian is now a private investor.
Nathan C. Collins, 61, was appointed a director of the Company in March
1995. From March 1, 1995 to March 1, 1996, he was President, Chief Executive
Officer and a director of Flemington National Bank & Trust Co. in Flemington,
New Jersey. From November 1987 until December 1994, he was Chairman of the
Board of Directors, President and Chief Executive Officer of BancTexas Group
Inc. He began his banking career in August 1964 with the Valley National
Bank in Phoenix, Arizona and held various positions there, finally becoming
Executive Vice President, Senior Credit Officer and Manager of
Asset/Liability Group of the bank. Mr. Collins is now a private investor.
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS
Following are brief biographies of the executive officers of the Company,
other than Mr. Guzzetti.
89
<PAGE>
Russell P. Meduna, 41, became Executive Vice President of the Company in
June 1991. He was Vice President from May 1990 until June 1991. Mr. Meduna
has been Executive Vice President of Hallwood G.P., Inc. ("HGP") and Hallwood
Petroleum, Inc. ("HPI") which are affiliates of the Company, since October
1989. Mr. Meduna was Vice President of such entities from April 1989 to
October 1989 and Manager of Operations from January 1989 to April 1989. He
joined HPI in 1984 as Production Manager. Mr. Meduna is also Executive Vice
President of HCRC. He is a registered professional engineer in the States
of Colorado and Texas.
Cathleen M. Osborn, 43, became Vice President, Secretary and General
Counsel of the Company in June 1991. Ms. Osborn has been Vice President,
Secretary and General Counsel of HGP and HPI since October 1986 and of HCRC
since June 1992. She joined HGP and HPI in 1985 as senior staff attorney.
Ms. Osborn is a member of the Colorado Bar Association.
Robert S. Pfeiffer, 39, became Chief Financial Officer of the Company in
June 1994. He has been a Vice President of the Company since June 1991.
Mr. Pfeiffer has been Vice President of HGP and HPI since October 1986 and of
HCRC since June 1992. He joined HGP and HPI in 1984. From July 1979 to May
1984, he was employed by Price Waterhouse as a senior accountant. Mr.
Pfeiffer is a member of the Colorado Society of Certified Public Accountants.
COMMITTEES; MEETINGS OF THE BOARD
The Board's Audit Committee, composed in 1995 of Messrs. Holinger,
Sebastian and Collins, recommends to the Board the firm to be employed as the
Company's and the Partnership's independent auditors and consults with, and
reviews the report of, the Company's independent auditors and HPI's financial
staff. The Audit Committee held four meetings during 1995. The principal
function of the Compensation Committee is to review the compensation plans
for directors, officers and other personnel. The Compensation Committee held
one meeting in 1995 and a meeting in January 1996. At both meetings, the
entire Board of Directors acted as the Compensation Committee. See
"Executive Compensation - Board Compensation Committee Report on Executive
Compensation." The Board's Executive Committee, composed of Messrs.
Gumbiner, Troup and Guzzetti, is authorized to exercise all the authority of
the Board in the business and affairs of the Company, except as limited by
applicable law. The Board's Executive Committee held no meetings during
1995. The Board's Special Committee to act upon the Rights Plan for the
Partnership is composed of Messrs. Holinger and Sebastian, and it held one
meeting during 1995. The Company does not have a standing Nominating
Committee.
The Board of Directors held four regularly scheduled meetings and four
special meetings during 1995. No director attended fewer than 75% of the
total number of meetings of the Board of Directors and committees of which he
is a member.
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The Company has no employees. Management services are provided to the
Company by HPI, an affiliated entity. Employees of HPI perform all duties
related to the management of the Company and its affiliated entities,
including the operation of various properties in which the Company owns an
interest. The Company is charged for management services by HPI based on an
allocation procedure that takes into account the amount of time spent on
management, the number of properties owned by the Company and the Company's
performance relative to its affiliates. The allocation procedure is applied
consistently to all entities for which HPI performs services.
The following table sets forth the compensation paid by HPI for the years
ended December 31, 1995, 1994 and 1993 to the Chief Executive Officer and
each of the four other most highly compensated officers (determined for the
year ended December 31, 1995).
90
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
LTIP All Other
Name & Principal Position Year Salary Bonus Payouts Compensation (1)
------------------------- ----- ---------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner (2) 1995 $250,000 $ 0 $ 0 $ 0
Chief Executive Officer 1994 125,000 0 0 0
1993 0 0 0 0
William L. Guzzetti 1995 204,412 75,000 15,753 6,004
President and Chief 1994 200,240 72,800 9,449 6,004
Operating Officer 1993 200,240 65,000 5,227 6,004
Russell P. Meduna 1995 167,364 161,000 15,753 4,810
Executive Vice President 1994 164,024 24,200 9,449 4,409
1993 167,356 62,500 5,227 4,477
Robert S. Pfeiffer 1995 109,949 94,000 11,692 3,160
Vice President and 1994 107,755 25,700 6,963 3,160
Chief Financial Officer 1993 109,941 47,025 3,851 3,171
Cathleen M. Osborn 1995 109,069 95,000 11,692 3,160
Vice President and 1994 105,848 24,600 6,963 3,160
General Counsel 1993 104,353 50,000 3,851 3,027
______________________
<FN>
<F1>
(1) Employer contribution to 401(k) account.
<F2>
(2) Mr. Gumbiner has a Compensation Agreement with HPI pursuant to which HPI
pays Mr. Gumbiner $250,000 per year. The Compensation Agreement was
effective August 1, 1994 and continues in effect until terminated by
either party on not less than six months' notice. In addition to
compensation listed in the table, HPI has a consulting agreement with
Hallwood Group which expires June 30, 1997, pursuant to which Hallwood
Group receives an annual consulting fee of $300,000. In 1994 and 1995,
the consulting services were provided by HSC Financial Corporation ("HSC
Financial"), through the services of Mr. Gumbiner and Mr. Troup, and
Hallwood Group paid the annual fee it received to HSC Financial. See
"Compensation Committee Interlocks and Insider Participation" below.
</FN>
</TABLE>
In 1995, $21,034 of the compensation listed above was allocated by HPI to
the Company and $556,404 was allocated to the Partnership. In 1994, $18,594
was allocated to the Company and $426,099 was allocated to the Partnership.
In 1993, $18,684 was allocated to the Company and $471,309 was allocated to
the Partnership.
In addition to the foregoing, the Partnership and HCRC awarded options to
persons who serve as directors and officers of the Company and HCRC. Those
options are described in the separate reports filed with the Securities and
Exchange Commission by the Partnership and HCRC.
91
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS
The following table describes performance units awarded to the executive
officers of the Company for 1995 under the Domestic Incentive Plan and
International Incentive Plan for the Company and affiliated entities. The
value of awards under each plan depends primarily on success in drilling,
completing and achieving production from new wells each year and from certain
recompletions and enhancements of existing wells. The amounts shown below
are aggregate awards under the plans for the Company, the Partnership and
HCRC; the awards were allocated 2% to the Company, 45% to the Partnership and
53% to HCRC, based on the ownership of the wells included in the plans.
<TABLE>
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<CAPTION>
Number Performance or Estimated Future
of Other Period Payouts under Non-Stock
Name Units Until Payout Price-Based Plans
------ ------ -------------- -----------------------
<S> <C> <C> <C>
Anthony J. Gumbiner .30 2005 $ 0 (2)
William L. Guzzetti .15 2001 41,939 (1)
.10 2005 0 (2)
Russell P. Meduna .15 2001 41,939 (1)
.10 2005 0 (2)
Robert S. Pfeiffer .10 2001 27,959 (1)
.07 2005 0 (2)
Cathleen M. Osborn .10 2001 27,959 (1)
.07 2005 0 (2)
_______________________
<FN>
<F1>
(1) This amount represents an award under the Domestic Incentive Plan.
There are no minimum, maximum or target amounts payable under the
Domestic Incentive Plan. Payments under the awards will be equal to the
indicated percentage of plan net cash flow from certain wells for the
first five years after an award and, in the sixth year, the indicated
percentage of 80% of the remaining net present value of estimated future
production from the wells. The amounts shown above are estimates based
on estimated reserve quantities and future prices. Because of the
uncertainties inherent in estimating quantities of reserves and prices,
it is not possible to predict cash flow or remaining net present value
of estimated future production with any degree of certainty.
<F2>
(2) This amount represents an award under the International Incentive Plan.
There are no minimum, maximum or target amounts payable under the
International Incentive Plan. Payments under the awards will be equal
to the indicated percentage of gross revenues, net of costs of
transportation and marketing, from international projects. The
Partnership and HCRC have not recorded any proved reserves attributable
to international projects, so the current estimated future payout for
the 1995 awards is $0.
</FN>
</TABLE>
DIRECTOR COMPENSATION
Each director of the Company who is not an officer or employee of, or
consultant to, the Company is entitled to receive an annual fee of $20,000
which will be proportionately reduced if the director attends fewer than four
regularly scheduled meetings of the Board of Directors during any calendar
year. In addition, all directors are reimbursed for their expenses in
attending meetings of the Board of Directors and committees. In 1995, Mr.
Sebastian received $20,000, and Messrs. Collins and Holinger each received
$15,000.
92
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors served as the Compensation Committee of the
Company during fiscal year 1995. Mr. Gumbiner is also Chief Executive
Officer of the Company. He is a director and serves on the compensation
committee of Hallwood Group, of which Mr. Troup is President and Mr. Guzzetti
is Executive Vice President. Mr. Gumbiner is also Chief Executive Officer
and a director of HCRC, Mr. Troup is a director of HCRC, and Mr. Guzzetti is
a director and President of HCRC. The Board of HCRC made compensation
decisions for HCRC in 1995 and January 1996. Mr. Gumbiner is Chief Executive
Officer and a director, and Mr. Guzzetti is President and a director, of
Hallwood Realty. During 1994, Messrs. Gumbiner and Guzzetti served on the
compensation committee of Hallwood Realty.
HPI has a financial consulting agreement with Hallwood Group pursuant to
which Hallwood Group furnishes consulting and advisory services to the
Company and the Partnership and their affiliates. Under the terms of the
financial consulting agreement, HPI is obligated to pay Hallwood Group three
annual payments of $300,000 beginning June 30, 1994, and Hallwood Group is
obligated to furnish consulting and advisory services to HPI, the Partnership
and their affiliates through June 30, 1997. In 1995, the consulting services
were provided by HSC Financial Corporation, through the services of Mr.
Gumbiner and Mr. Troup, and Hallwood Group paid the annual fee it received to
HSC Financial. Of the $300,000 fee paid in 1995, approximately $9,160 was
paid by the Company, $156,000 was paid by the Partnership and the remainder
was paid by other affiliates.
The Company and the Partnership reimburse Hallwood Group for expenses
incurred on behalf of the Company and the Partnership. In 1995, the Company
reimbursed Hallwood Group approximately $19,000, and the Partnership
reimbursed Hallwood Group approximately $369,000.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
General. The Company's primary activity is to serve as general partner of
the Partnership, which in turn controls several other entities (collectively,
the "Energy Companies"). The Company has no employees; all management is
provided by employees of HPI which provides services to all of the Energy
Companies. Accordingly, the Company does not directly pay any compensation
but reimburses HPI for its costs and expenses. Individual compensation is
based on the individual's responsibilities and performance relating to all of
the Energy Companies. Salaries are allocated among the Energy Companies
based on a procedure that takes into account both the amount of time spent on
management and the number of properties owned by each entity. The cash bonus
pool is allocated among the Energy Companies based upon the entity's
performance relative to all of the Energy Companies. Awards under the long-
term incentive plans are allocated based upon these factors and the ownership
of the wells included in the plans. Because the compensation paid to HPI
employees is allocated to all of the Energy Companies, it is reviewed and
approved by the Compensation Committee of the Company on behalf of the
Company. The compensation of the Energy Companies' management employees,
except salaries of officers, is reviewed and approved at least annually.
During 1995, awards under the Domestic Incentive Plan and the
International Incentive Plan and determination of salaries for management
employees other than officers were made by the full Board of Directors acting
as the Compensation Committee. In January 1996, the full Board of Directors
again acted as the Compensation Committee in determining cash bonuses paid
with respect to 1995 and the salaries to be paid and other awards made in
1996. In determining 1995 compensation of key employees, the Energy
Companies' compensation levels were compared with those of comparable
companies, as reported by compensation consultants and other industry
surveys. The comparable companies consist of twelve independent oil and gas
companies selected by consultants to the Energy Companies and are not the
same as those used in preparing the performance graph appearing elsewhere in
this Proxy Statement. For 1995, the compensation of the Energy Companies'
management employees consisted of four primary components: salary and annual
bonus, cash bonus and long-term incentive plan awards. In addition,
directors and executive officers of the Company received options from the
Partnership and from HCRC. Those options are described in the separate
filings with the Securities and Exchange Commission by the Partnership and
HCRC.
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Salary. All non-hourly employees' salaries, except salaries of officers,
and annual bonuses are determined annually based on the individual employee's
level of responsibility and comparisons to similar positions in comparable
companies. Salaries of officers are determined every three years based on
the same criteria. Salaries of officers and other professional employees are
generally set at approximately 74% to 90% of the average base salaries paid
by those comparable companies. When an employee's position is not standard
and cannot be compared to similar positions in comparable companies,
compensation is determined in a discretionary process, taking into
consideration the components and overall responsibility of the employee's
position.
Cash Bonus. The Board has determined to award certain management
employees, including executive officers, cash bonuses based on an assessment
of a number of quantitative and qualitative factors. The primary
quantitative factors are performance in reserve finding, considering overall
reserves found and effectiveness of capital expenditures in comparison to the
historical performance of independent oil and gas companies as a group, the
production of existing reserves in comparison to budget and the prior year,
and general and administrative expenses and operating costs in comparison to
budget. Qualitative factors include judgments regarding the effectiveness of
management and administration. Depending on the Energy Companies' success in
these areas, total salaries and cash bonuses paid to management employees may
range from 74% of the average compensation paid to similarly situated
employees in comparable companies if the Energy Companies perform poorly to
as high as 500% of the average compensation paid by comparable companies if
the Energy Companies perform very well. Based on comparisons of the Energy
Companies' performance with the historical performance of other independent
oil and gas companies as a group as reported by generally published industry
statistics, the Compensation Committee determined that the Energy Companies
had an above-average year in overall reserves found, the effectiveness of
capital expenditures and the production of existing reserves. The Board also
concluded that the effectiveness of management and administration and control
of expenses deserved recognition. Therefore, the cash bonuses paid to
management employees as a group were set at levels that would result in their
total annual compensation being 120% of that paid by comparable companies.
The aggregate cash bonuses are allocated among the key and professional
employees based on the recommendation of senior management and a
determination of the employees' relative contributions to the Energy
Companies during the year.
The Long-Term Incentive Plans. During 1995, the Energy Companies' long-
term incentive plans consisted of a Domestic Incentive Plan for domestic
properties and an International Incentive Plan for international projects.
Both plans are intended to provide incentive and motivation to the Energy
Companies' key employees, including the Company's executive officers, to
increase the oil and gas reserves of the Energy Companies and to enhance the
Energy Companies' ability to attract, motivate and retain key employees upon
whom, in large measure, the success of the Energy Companies depends.
The Domestic Incentive Plan. Under the Domestic Incentive Plan, the Board
annually determines the portion of the Energy Companies' collective interests
in the cash flow from certain wells drilled, recompleted or enhanced during
that year (the "Plan Year") which will be allocated to participants in the
plan. The portion allocated to participants in the plan is referred to as
the Plan Cash Flow. The Board then determines which key employees may
participate in the plan for the Plan Year and allocates the Plan Cash Flow
among the participants. Awards under the plan do not represent any actual
ownership interest in the wells. Awards are made in the Board's discretion.
Each award under the plan represents the right to receive for five years a
specified share of the Plan Cash Flow attributable to certain wells drilled,
recompleted or enhanced during the Plan Year. In the sixth year after the
award, the participant is paid an amount equal to a specified percentage of
the remaining net present value of estimated future production from the wells
and the award is terminated. Accordingly, the value of awards under the plan
depends primarily on the Energy Companies' success in drilling, completing
and achieving production from new wells each year and from certain
recompletions and enhancements of existing wells. The percentage of the
Energy Companies' cash flow from wells completed in any Plan Year to be
allocated to Plan Cash Flow each Plan Year, the percentage of the remaining
net present value of estimated future production for which the participants
will receive payment in the sixth year of an award, and the amount to be
awarded to individual participants is determined by the Board each year,
after taking into consideration the recommendation of the Energy Companies'
executive officers.
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The awards for the 1995 Plan Year were made in January 1995. For the 1995
Plan Year, the Compensation Committee determined that the total Plan Cash
Flow would be equal to 1.4% of the cash flow of the wells completed during
the Plan Year. The Compensation Committee also determined that the
participants' interests for the 1995 Plan Year would be purchased in the
sixth year at 80% of the remaining net present value of the wells completed
in the Plan Year. The total award was allocated among employees based on the
recommendation of senior management.
The International Incentive Plan. The International Incentive Plan awards
were made in January 1995. Under the Plan, awards were made entitling the
participants to receive for ten years from the date of first production an
aggregate of 3% of the gross revenues, net of the costs of transportation and
marketing, from international projects active during the 1995 Plan Year. The
Board determines which key employees may participate in the Plan for the Plan
Year and allocates the awards among the participants. Awards under the Plan
do not represent any actual ownership interests in any international projects
and are made in the Board's discretion.
Chief Executive Officer. Effective August 1, 1994, Mr. Gumbiner has a
Compensation Agreement with HPI pursuant to which HPI pays Mr. Gumbiner for
providing consultation and assistance in maintaining relationships with
foreign governments and negotiating contracts outside the United States. The
Energy Companies also engaged in certain transactions with Hallwood Group, of
which Mr. Gumbiner is Chairman and Chief Executive Officer, during 1995. In
addition, the Energy Companies have a consulting agreement with Hallwood
Group effective June 30, 1993 and expiring June 30, 1997, pursuant to which
the Energy Companies pay Hallwood Group a $300,000 annual consulting fee.
In 1995, the consulting services were provided by HSC Financial Corporation,
through Mr. Gumbiner and Mr. Troup, and Hallwood Group paid the annual fee it
received to HSC Financial. Both agreements were approved by the Board of
Directors of the Company, Mr. Gumbiner abstaining. See "Compensation
Committee Interlocks and Insider Participation" above. Mr. Gumbiner also
participated in the domestic and international incentive plans discussed
above, which were allocated based on the recommendation of senior management.
Mr. Gumbiner abstained from the Board's determinations on these matters.
Members of the Board Who Participated in Compensation
Decisions in January 1995 and 1996:
Anthony J. Gumbiner
Brian M. Troup
Hans-Peter Holinger
Rex A. Sebastian
William L. Guzzetti
Member of the Board Who Participated in Compensation
Decisions in January 1996:
Nathan C. Collins
PERFORMANCE GRAPH
Below is a line graph comparing the yearly percentage change in the
cumulative total shareholder return on the Company's Common Stock with the
cumulative total return of the Standard & Poor's 500 Composite Stock Index
("S&P 500") and Kirkpatrick Energy Associates Small Cap E&P Index ("KEA Small
Cap E&P") for the period beginning December 31, 1990 through December 31,
1995. Dividend reinvestment has been assumed.
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<TABLE>
5 YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN VS.
VARIOUS INDICES
<CAPTION>
Hallwood Energy KEA Small
Year Corporation S&P 500 Cap E&P
------ --------------- -------- ---------
<S> <C> <C> <C>
1990 100 100 100
1991 107.1429 104.2204 74
1992 108.9286 108.8756 103
1993 185.7143 116.5517 140
1994 199.2857 114.7626 133
1995 246.5581 153.9055 148
</TABLE>
OTHER BUSINESS
The Board of Directors knows of no other business that may properly be, or
that is likely to be, brought before the Annual Meeting. If, however, any
other matters are properly presented, it is the intention of the persons
named in the accompanying form of Proxy to vote the shares covered thereby as
they deem advisable in their discretion.
INDEPENDENT AUDITORS
Deloitte & Touche LLP currently serves the Company as independent
auditors. Representatives of Deloitte & Touche LLP will be present at the
Annual Meeting with the opportunity to make a statement if they desire to do
so and will be available to respond to appropriate questions from
shareholders.
DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as
amended, shareholders may present proper proposals for inclusion in the
Company's proxy statement and for consideration at its Annual Meeting of
Shareholders by submitting their proposals to the Company in a timely manner.
In order to be included for the 1997 Annual Meeting, shareholder proposals
must be received by the Company by November 30, 1996, which is approximately
120 days in advance of the date the Company anticipates mailing the proxy
statement for the Company's 1997 Annual Meeting of Shareholders, and must
otherwise comply with the requirements of Rule 14a-8.
By Order of the Board of Directors
Cathleen M. Osborn
Secretary
March 31, 1996
Dallas, Texas
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as
of October 9, 1996, is between The Hallwood Group Incorporated, a Delaware
corporation (the "Purchaser"), and Hallwood Energy Corporation, a Texas
corporation (the "Company"), the Company and Purchaser sometimes being
hereinafter collectively referred to as the "Constituent Corporations."
RECITALS
WHEREAS, the Boards of Directors of Purchaser and the Company
each have determined that it is in the best interests of their respective
shareholders for Purchaser to acquire the shares of Common Stock, par value
$0.50 per share (the "Shares") that it does not currently directly or indirectly
own upon the terms and subject to the conditions set forth herein; and
WHEREAS, Purchaser and the Company desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
The Tender Offer
1.1 Tender Offer.
(a) Provided that this Agreement shall not have been
terminated in accordance with Article IX hereof and none of the events set forth
in Annex A hereto shall have occurred or be existing, within five business days
of the date hereof, Purchaser will commence a tender offer (the "Offer") for all
of the outstanding Shares that it currently does not directly or indirectly own
at a price of $19.50 per Share in cash, net to the seller, subject to the
conditions set forth in Annex A hereto. Subject to the terms and conditions of
the Offer, Purchaser will promptly pay for all Shares duly tendered that it is
obligated to purchase thereunder. The Company's Board of Directors and a
majority of the Company's Independent Directors (as defined in Section 4.2)
shall recommend acceptance of the Offer to its stockholders in a
Solicitation/Recommendation Statement on Schedule 14D-9 (as such statement may
be amended or supplemented from time to time, the "Schedule 14D- 9") to be filed
with the Securities and Exchange Commission (the "SEC") upon commencement of the
Offer; provided, however, that if the Company's Board of Directors or the
Special Committee (the "Special Committee") composed of the Company's
Independent Directors determines that its fiduciary duties require it to amend
or withdraw its recommendation, such amendment or withdrawal shall not
constitute a breach of this Agreement. Purchaser will not, without the prior
written consent of the Company and the Special Committee, decrease the price per
Share or change the form of consideration payable in the Offer, decrease the
number of Shares sought or change the conditions to the Offer. Purchaser shall
not terminate or withdraw the Offer or extend the expiration date of the Offer
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unless at the expiration date of the Offer the conditions to the Offer set forth
on Annex A hereto shall not have been satisfied or waived.
(b) Purchaser agrees, as to the Offer to Purchase and related
Letter of Transmittal (which together, as either of them may be amended or
supplemented from time to time, constitute the "Offer Documents"), and the
Company agrees, as to the Schedule 14D-9, that such documents shall, in all
material respects, comply with the requirements of the Securities and Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder and other applicable laws. The Company and its counsel,
as to the Offer Documents, and Purchaser and its counsel, as to the Schedule
14D-9, shall be given an opportunity to review such documents prior to their
being filed with the SEC.
(c) In connection with the Offer, the Company will cause its
Transfer Agent to furnish promptly to Purchaser a list, as of a recent date, of
the record holders of Shares and their addresses, as well as mailing labels
containing the names and addresses of all record holders of Shares and lists of
security positions of Shares held in stock depositories. The Company will
furnish Purchaser with such additional information (including, but not limited
to, updated lists of holders of Shares and their addresses, mailing labels and
lists of security positions) and such other assistance as Purchaser or its
agents may reasonably request in communicating the Offer to the record and
beneficial holders of Shares.
ARTICLE II
The Merger; Closing; Effective Time
2.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 2.3) the Company shall
be merged with and into Purchaser and the separate corporate existence of the
Company shall thereupon cease (the "Merger"). The Purchaser shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation") and shall continue to be governed by the laws of the
State of Delaware, and the separate corporate existence of Purchaser with all
its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger, except as set forth in Section 3.1. The Merger shall
have the effects specified in the Delaware General Corporation Law (the "DGCL")
and the Texas Business Corporation Act (the "TBCA").
2.2 Closing. The closing of the Merger (the "Closing") shall
take place (a) at the offices of Jenkens & Gilchrist, A Professional
Corporation, 1445 Ross Avenue, Suite 3200, Dallas, Texas at 10:00 A.M. on the
first business day on which the last to be fulfilled or waived of the conditions
set forth in Article VIII (other than those conditions that by their nature are
to be satisfied at the Closing, but subject to the fulfillment or waiver of
those conditions) shall be fulfilled or waived in accordance with this Agreement
or (b) at such other place and time and/or on such other date as the Company and
Purchaser may agree.
2.3 Effective Time. As soon as practicable following the
Closing, and provided that this Agreement has not been terminated or abandoned
pursuant to Article IX hereof, the Company and Purchaser will cause a (i)
Certificate of Merger (the "Delaware Certificate of Merger") to be executed and
filed with the Secretary of State of Delaware as provided in Section 251 of the
DGCL and (ii) Articles of Merger (the "Texas Articles of Merger") to be executed
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and filed with the Secretary of State of Texas as provided in Art. 5.04 of the
TBCA. The Merger shall become effective on the date on which the Delaware
Certificate of Merger has been duly filed with the Secretary of State of
Delaware and the Texas Articles of Merger have been duly filed with the
Secretary of State of the State of Texas, and such time is hereinafter referred
to as the "Effective Time."
2.4 Merger Without Meeting of Stockholders. Notwithstanding
Section 2.3 hereof, in the event that Purchaser, or any other subsidiary of
Purchaser shall acquire at least 90% of the outstanding Shares pursuant to the
Offer or otherwise, the parties hereto agree, at the request of Purchaser, to
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after the acceptance for payment and purchase
of Shares by Purchaser pursuant to the Offer without a meeting of stockholders
of the Company in accordance with Section 253 of the DGCL and Art. 5.16 of the
TBCA.
ARTICLE III
Certificate of Incorporation and By-Laws
of the Surviving Corporation
3.1 The Certificate of Incorporation. The Certificate of
Incorporation of Purchaser (the "Certificate") in effect at the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation, until
duly amended in accordance with the terms thereof and the DGCL.
3.2 The By-Laws. The By-Laws of Purchaser in effect at the
Effective Time shall be the By-Laws of the Surviving Corporation, until duly
amended in accordance with the terms thereof and the DGCL.
ARTICLE IV
Officers and Directors
of the Surviving Corporation
4.1 Officers and Directors. The directors and officers of
Purchaser at the Effective Time shall, from and after the Effective Time, be the
directors and officers, respectively, of the Surviving Corporation until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and By-Laws.
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4.2 Actions by Directors. For purposes of Section 1.1(a),
Article IX and Sections 10.3 and 10.4, no action taken by the Board of Directors
of the Company prior to the Merger shall be effective unless such action is
approved by the affirmative vote of at least a majority of the directors of the
Company who are not directors or officers of Purchaser or officers of the
Company or any affiliate of either of them (the "Independent Directors").
ARTICLE V
Conversion or Cancellation of Shares in the Merger
5.1 Conversion or Cancellation of Shares. The manner of
converting or canceling shares of the Company in the Merger shall be as follows:
(a) At the Effective Time, each Share of the Common Stock of
the Company issued and outstanding immediately prior to the Effective Time
(other than Shares owned by Purchaser or any other direct or indirect subsidiary
of Purchaser (collectively, the "Purchaser Companies") or Shares that are owned
by the Company or any direct or indirect subsidiary of the Company or Shares
("Dissenting Shares") which are held by stockholders ("Dissenting Stockholders")
properly exercising appraisal rights pursuant to Art. 5.11 and 5.12 of the TBCA,
if applicable (collectively, "Excluded Shares")) shall, by virtue of the Merger
and without any action on the part of the holder thereof, be converted into the
right to receive, without interest, an amount in cash (the "Merger
Consideration") equal to $19.50 or such greater amount which may be paid
pursuant to the Offer. At the Effective Time, all Shares, by virtue of the
Merger and without any action on the part of the holders thereof, shall no
longer be outstanding and shall be canceled and retired and shall cease to
exist, and each holder of a certificate representing any such Shares (other than
Excluded Shares) shall thereafter cease to have any rights with respect to such
Shares, except the right to receive the Merger Consideration for such Shares
upon the surrender of such certificate in accordance with Section 5.2 or the
right, if any, to receive payment from the Surviving Corporation of the "fair
value" of such Shares as determined in accordance with Art. 5.12 of the TBCA.
(b) At the Effective Time, each Share issued and outstanding
at the Effective Time and owned by any of the Purchaser Companies or held in the
Company's treasury or owned by the Company or any direct or indirect subsidiary
of the Company shall, by virtue of the merger and without any action on the part
of the holder thereof, cease to be outstanding, shall be canceled and retired
without payment of any consideration therefor and shall cease to exist.
5.2 Payment for Shares. Purchaser shall make available or
cause to be made available to the paying agent appointed by Purchaser with the
Company's prior approval (the "Paying Agent") amounts sufficient in the
aggregate to provide all funds necessary for the Paying Agent to make payments
pursuant to Section 5.1(a) hereof to holders of Shares issued and outstanding
immediately prior to the Effective Time. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed to each person who was, at the
Effective Time, a holder of record (other than holders of Excluded Shares) of
issued and outstanding Shares a form (mutually agreed to by Purchaser and the
Company) of a letter of transmittal and instructions for use in effecting the
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surrender of the certificates, which, immediately prior to the Effective Time,
represented any of such Shares in exchange for payment therefor. Upon surrender
to the Paying Agent of such certificates, together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, the Surviving Corporation shall promptly cause to be paid to the
persons entitled thereto a check in the amount to which such persons are
entitled, after giving effect to any required tax withholdings. No interest will
be paid or will accrue on the amount payable upon the surrender of any such
certificate. If payment is to be made to a person other than the registered
holder of the certificate surrendered, it shall be a condition of such payment
that the certificate so surrendered shall be properly endorsed or otherwise in
proper form for transfer and that the person requesting such payment shall pay
any transfer or other taxes required by reason of the payment to a person other
than the registered holder of the certificate surrendered or establish to the
satisfaction of the Surviving Corporation or the Paying Agent that such tax has
been paid or is not applicable. One hundred and twenty days following the
Effective Time, the Surviving Corporation shall be entitled to cause the Paying
Agent to deliver to it any funds (including any interest received with respect
thereto) made available to the Paying Agent which have not been disbursed to
holders of certificates formerly representing Shares outstanding on the
Effective Time, and thereafter such holders shall be entitled to look to the
Surviving Corporation only as general creditors thereof with respect to the cash
payable upon due surrender of their certificates. Notwithstanding the foregoing,
neither the Paying Agent nor any party hereto shall be liable to any holder of
certificates formerly representing Shares for any amount paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
The Surviving Corporation shall pay all charges and expenses, including those of
the Paying Agent, in connection with the exchange of cash for Shares.
5.3 Dissenters' Rights. If any Dissenting Stockholder shall be
entitled to be paid the "fair value" of such Dissenting Stockholder's Shares, as
provided in Art. 5.12 of the TBCA, the Company shall give Purchaser notice
thereof and Purchaser shall have the right to participate in all negotiations
and proceedings with respect to any such demands. Neither the Company nor the
Surviving Corporation shall, except with the prior written consent of Purchaser,
voluntarily make any payment with respect to, or settle or offer to settle, any
such demand for payment. If any person who otherwise would have been a
Dissenting Stockholder shall have failed to perfect or shall have effectively
withdrawn or lost the right to dissent, the Shares held by such person shall
thereupon be treated as though such Shares had been converted into the Merger
Consideration pursuant to Section 5.1.
5.4 Transfer of Shares After the Effective Time. No transfers
of Shares shall be made on the stock transfer books of the Surviving Corporation
at or after the Effective Time.
ARTICLE VI
Representations and Warranties
6.1 Representations and Warranties of the Company. The
Company hereby represents and warrants to Purchaser that:
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(a) Corporate Organization and Qualification. Each of the
Company and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
incorporation and is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the business
conducted, by it require such qualification except for where such failure to so
qualify or be in such good standing, which, when taken together with all other
such failures, could not reasonably be expected to have a Material Adverse
Effect (as defined below). Each of the Company and its subsidiaries has the
requisite corporate power and authority to carry on its respective businesses as
they are now being conducted except where the failure to have such power or
authority could not reasonably be expected to have a Material Adverse Effect. As
used in this Agreement, the term "Material Adverse Effect" means a material
adverse effect on the condition (financial or otherwise), properties, assets,
liabilities, business or results of operations of the Company and its
subsidiaries, taken as a whole.
(b) Authorized Capital. The authorized capital stock of the
Company consists of 80,000,000 Shares, of which 777,126 Shares are outstanding
on the date hereof, and 20,000,000 shares of preferred stock, $0.10 par value
per share, 10,000,000 shares of preferred stock, $0.01 par value per share, and
12,000 shares of preferred stock, $1.00 par value per share (collectively, the
"Preferred Shares"), of which no shares are outstanding. All of the outstanding
Shares have been duly authorized and are validly issued, fully paid and
nonassessable. The Company has no Shares or Preferred Shares reserved for
issuance. Each of the outstanding shares of capital stock of each of the
Company's subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned, either directly or indirectly, by the Company free and
clear of all liens, pledges, security interests, claims or other encumbrances.
Except as set forth above, there are no shares of capital stock of the Company
authorized, issued or outstanding and there are no preemptive rights nor any
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of the Company or any of its
subsidiaries. After the Effective Time, the Surviving Corporation will have no
obligation to issue, transfer or sell any Shares or shares of common stock of
the Surviving Corporation pursuant to any Company stock or option plans or any
other employee benefit plan of the Company.
(c) Corporate Authority. Subject only to approval of this
Agreement by the holders of a majority of the outstanding Shares, the Company
has the requisite corporate power and authority and has taken all corporate
action necessary in order to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. This Agreement is a valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors rights and to general equity principles.
(d) Governmental Filings; No Violations.
(i) Other than the filing of a certificate of merger under the
DGCL, the filing of the articles of merger under the TBCA and filings required
to be made pursuant to the Exchange Act (together, the "Regulatory Filings"), no
notices, reports or other filings are required to be made by the Company or any
of its subsidiaries with, nor are any consents, registrations, approvals,
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permits or authorizations required to be obtained by the Company or any of its
subsidiaries from, any governmental, regulatory or administrative authority,
agency, tribunal, commission or other entity, domestic, international or foreign
(collectively, "Governmental Entities" or each a "Governmental Entity"), in
connection with the execution and delivery of this Agreement by the Company and
the consummation by the Company of the transactions contemplated hereby, the
failure to make or obtain any or all of which could reasonably be expected to
have a Material Adverse Effect or could prevent or materially delay the
transactions contemplated by this Agreement,
(ii) The execution and delivery of this Agreement by the
Company do not, and the consummation by the Company of the transactions
contemplated by this Agreement will not, constitute or result in (A) a breach or
violation of, or a default under, the Articles of Incorporation or By-Laws of
the Company or the comparable governing instruments of any of its subsidiaries,
(B) except as disclosed in the Company Reports (as hereinafter defined) filed
with the SEC prior to the date hereof, a breach or violation of, a default under
or the triggering of any payment or other material obligations pursuant to, any
of the Company's existing employee benefit plans or any grant or award made
under any of the foregoing, (C) a breach or violation of, or a default under,
the acceleration of or the creation of a lien, pledge, security interest or
other encumbrance on assets (with or without the giving of notice or the lapse
of time) pursuant to, any provision of any agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation ("Contracts") of the
Company or any of its subsidiaries or any law, rule, ordinance or regulation or
judgment, decree, order, award or governmental or non-governmental permit or
license to which the Company or any of its subsidiaries is subject or (D) any
change in the rights or obligations of any party under any of the Contracts,
except, in the case of clause (C) or (D) above, for such breaches, violations,
defaults, accelerations or changes that, alone or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect or that could not
prevent, materially delay or materially burden the transactions contemplated by
this Agreement. Schedule 6.1(d) sets forth, to the best knowledge of the
officers of the Company, a list of any consents required under any Contracts to
be obtained prior to consummation of the transactions contemplated by this
Agreement (whether or not subject to the exception set forth with respect to
clause (C) above). The Company will use its best efforts to obtain the consents
referred to on such Schedule 6.1(d).
(e) Company Reports; Financial Statements. The Company has
made available to Purchaser each registration statement, schedule, report, proxy
statement or information statement prepared by it since December 31, 1995
("Audit Date"), including, without limitation, (i) the Company's Annual Report
on Form 10-K for the year ended December 31, 1995 and (ii) the Company's
Quarterly Reports on Form 10-Q for the periods ended March 31, 1996 and June 30,
1996, each in the form (including exhibits and any amendments thereto) filed
with the SEC (collectively, the "Company Reports"). To the best knowledge of the
Company, as of their respective dates, the Company Reports did not, and any
Company Reports filed with the SEC subsequent to the date hereof will not,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading. To the
best knowledge of the Company, each of the consolidated balance sheets included
in or incorporated by reference into the Company Reports (including the related
notes and schedules) fairly presents the consolidated financial position of the
Company and its subsidiaries as of its date and each of the consolidated
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statements of income and of changes in financial position included in or
incorporated by reference into the Company Reports (including any related notes
and schedules) fairly presents the results of operations, retained earnings and
changes in financial position, as the case may be, of the Company and its
subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which will not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein. Other than the Company Reports and the Company's
proxy statement filed in connection with its 1996 annual meeting of
stockholders, the Company has not filed any other definitive reports or
statements with the SEC since the Audit Date.
(f) Absence of Certain Changes. Except as disclosed in the
Company Reports filed with the SEC prior to the date hereof, since the Audit
Date, the Company and its subsidiaries have conducted their respective
businesses only in, and have not engaged in any material transaction other than
according to, the ordinary and usual course of such businesses and there has not
been: (i) any material adverse change (including, without limitation, any change
arising out of or related to any natural disaster) in the condition (financial
or otherwise), properties, assets, liabilities, business or results of
operations of the Company or any of its subsidiaries or any development or
combination of developments of which the Company or any of its subsidiaries has
knowledge which is reasonably likely to result in any such change; (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to the capital stock of the Company; or (iii) any change by the Company
in accounting principles, practices or methods.
(g) Brokers and Finders. Neither the Company nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders, fees in connection
with the transactions contemplated herein, except that Principal Financial
Securities, Inc. (the "Financial Advisor") has been employed as financial
advisor to the Independent Directors and the arrangements with the Financial
Advisor have been disclosed in writing to Purchaser prior to the date hereof.
(h) Takeover Statutes. No "fair price," "moratorium," "control
share acquisition" or other similar antitakeover statute or regulation (each a
"Takeover Statute") is, or at the Effective Time will be, applicable to the
Company, the Shares, the Offer, the Merger or the transactions contemplated by
the Offer or hereby.
(i) Permits. The Company and its subsidiaries have such
certificates, permits, licenses, franchises, consents, approvals, orders,
authorizations, registrations, qualifications and clearances from appropriate
Governmental Entities ("Permits") as are necessary to own, lease or operate
their properties and to conduct their businesses in the manner described in the
Company Reports and as currently owned or leased and conducted and all such
Permits are valid and in full force and effect except such licenses that the
failure to have or to be in full force and effect, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
Neither the Company nor any of its subsidiaries has received any written notice
that any violations are being or have been alleged in respect of any such Permit
and no proceeding is pending or, to the best of the Company's knowledge, after
due inquiry, threatened, to suspend, revoke or limit any such Permit. To the
best of the Company's knowledge, after due inquiry, the Company and its
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subsidiaries are in compliance in all material respects with their respective
obligations under such Permits, with such exceptions as individually or in the
aggregate could not reasonably be expected to have a Material Adverse Effect,
and no event has occurred that allows, or after notice or lapse of time would
allow, revocation, suspension, limitation or termination of such Permits, except
such events as could not reasonably be expected to have a Material Adverse
Effect.
(j) Fairness Opinion. The Board of Directors of the Company
has received an opinion of the Financial Advisor dated the date hereof, to the
effect that the Offer and the Merger are fair, from a financial point of view,
to the holders of Shares (other than Purchaser).
(k) Schedule 14D-9; Offer Documents. The Schedule 14D-9
distributed to the Company's stockholders in connection with the Merger will
not, at the date of filing with the SEC, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by the Company with respect to information supplied by
Purchaser for inclusion in the Schedule 14D-9. None of the information supplied
by the Company for inclusion in the Offer Documents or the Rule 13e-3
Transaction Statement on Schedule 13E-3 (together with any supplements or
amendments thereto, the "Schedule 13E-3"), at the respective times such Offer
Documents or the Schedule 13E-3 or any amendments or supplements thereto are
filed with the SEC, will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein, in light of the circumstances under which
they were made, not misleading. With respect to information contained in the
Company Reports that are supplied by the Company for inclusion or incorporation
in the Offer Documents or the Schedule 13E-3, the representations and warranties
made in the preceding two sentences shall be limited to the best of the
Company's knowledge. The Company agrees to correct promptly any information in
the Schedule 14D-9 or any information provided by it for use in the Offer
Documents or the Schedule 13E-3 if and to the extent that such information shall
have become false or misleading in any material respect; and the Company further
agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected
to be filed with the SEC and disseminated to the holders of Shares, in each case
as and to the extent required by applicable federal securities laws.
6.2 Representations and Warranties of Purchaser.
Purchaser represents and warrants to the Company that:
(a) Corporate Organization and Qualification. Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and is in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business conducted, by it require such qualification except for such
failure to so qualify or to be in such good standing, which, when taken together
with all other such failures, could not reasonably be expected to have a
material adverse effect on the condition (financial or otherwise), properties,
assets, liabilities, business or results of operations of Purchaser and its
subsidiaries, taken as a whole.
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(b) Corporate Authority. Purchaser has the requisite corporate
power and authority and has taken all corporate action necessary in order to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement is a valid and binding agreement of
Purchaser enforceable against Purchaser in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors rights
and to general equity principles.
(c) Governmental Filings; No Violations.
(i) Other than Regulatory Filings by Purchaser (the "Purchaser
Regulatory Filings"), no notices, reports or other filings are required to be
made by Purchaser with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by Purchaser from, any Governmental
Entity in connection with the execution and delivery of this Agreement by
Purchaser and the consummation of the transactions contemplated hereby by
Purchaser, the failure to make or obtain any or all of which could prevent or
materially delay the transactions contemplated by this Agreement.
(ii) The execution and delivery of this Agreement by Purchaser
do not, and the consummation of the transactions contemplated hereby by
Purchaser will not, constitute or result in a breach or violation of, or a
default under, the Certificate of Incorporation or By-Laws (or similar
organizational documents) of Purchaser.
(d) Funds. Purchaser has or will have at the time of
acceptance for payment of Shares pursuant to the Offer and at the Effective Time
the funds necessary to consummate the Offer and the Merger.
(e) Offer Documents; Schedule 14D-9. The Offer Documents will
not, at the date of filing with the SEC, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by Purchaser with respect to information supplied by the
Company for inclusion in the Offer Documents. None of the information supplied
by Purchaser for inclusion in the Schedule 14D-9 or related materials or the
Schedule 13E-3 at the respective times such Schedules or any amendments or
supplements thereto are filed with the SEC, will contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading. Purchaser agrees to correct promptly any information in
the Offer Documents or any information provided by it for use in the Schedule
14D-9 or related materials or the Schedule 13E-3 if and to the extent that it
shall have become false or misleading in any material respect and Purchaser
further agrees to take all steps necessary to cause the Offer Documents as so
corrected to be filed with the SEC and to be disseminated to holders of Shares,
in each case as and to the extent required by applicable federal securities
laws.
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ARTICLE VII
Covenants
7.1 Interim Operations of the Company. The Company covenants
and agrees that, prior to the Effective Time (unless Purchaser shall otherwise
agree in writing and except as otherwise expressly contemplated by this
Agreement), the business of the Company and its subsidiaries shall be conducted
only in the ordinary and usual course consistent with past practice and, to the
extent consistent therewith, each of the Company and its subsidiaries shall use
its best efforts to preserve its business organization intact (including
maintaining all of its Permits) and maintain its existing relations with
customers, suppliers, employees and business associates and it will take no
action that would adversely affect the ability of the parties to promptly
consummate the transactions contemplated by this Agreement.
7.2 Meetings of the Company's Stockholders. If required
following termination of the Offer, the Company will take all action necessary
to convene a meeting of holders of Shares as promptly as practicable to consider
and vote upon the approval of this Agreement and the Merger. Subject to
fiduciary requirements of applicable law, the Board of Directors of the Company
shall recommend such approval and the Company shall take all lawful action to
solicit such approval. At any such meeting of the Company all of the Shares then
owned by the Purchaser Companies (including all Shares currently owned by the
Purchaser Companies) will be voted in favor of this Agreement. The Company's
proxy or information statement with respect to such meeting of shareholders (the
"Proxy Statement"), at the date thereof and at the date of such meeting, will
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
provided, however, that the foregoing shall not apply to the extent that any
such untrue statement of a material fact or omission to state a material fact
was made by the Company in reliance upon and in conformity with written
information concerning the Purchaser Companies furnished to the Company by
Purchaser specifically for use in the Proxy Statement. Purchaser understands
that for purposes of this Section 7.2 that while the Company's projections and
forward-looking information furnished by the Company to Purchaser were prepared
in good faith and represent the Company's best estimate as to the subject matter
thereof, the Company makes no representation or warranty as to the truth,
completeness or accuracy of any projections or forward- looking information
furnished by the Company to Purchaser. The Proxy Statement shall not be filed,
and no amendment or supplement to the Proxy Statement will be made by the
Company, without consultation with Purchaser and its counsel.
7.3 Filings; Other Action. Subject to the terms and conditions
herein provided, the Company and Purchaser shall: (a) promptly make their
respective Regulatory Filings and Purchaser Regulatory Filings and thereafter
make any other required submissions with respect to the Offer and the Merger;
and (b) use their respective best efforts to take promptly, or cause to be taken
promptly, all other action and do, or cause to be done, all other things
necessary, proper or appropriate under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement as
soon as practicable.
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7.4 Access. Upon reasonable notice, the Company shall (and
shall cause each of its subsidiaries to) afford Purchaser's officers, employees,
counsel, accountants and other authorized representatives ("Representatives")
access, during normal business hours throughout the period prior to the
Effective Time, to its properties, books, Contracts and records and, during such
period, the Company shall (and shall cause each of its subsidiaries to) furnish
promptly to Purchaser all information concerning its business, properties and
personnel as Purchaser or its Representatives may reasonably request, provided
that no investigation pursuant to this Section 7.4 shall affect or be deemed to
modify any representation or warranty made by the Company.
7.5 Notification of Certain Matters. The Company shall give
prompt notice to Purchaser of: (a) any notice of, or other communication
relating to, any default or event that, with notice or lapse of time or both,
would become a default, received by the Company or any of its subsidiaries
subsequent to the date of this Agreement and prior to the Effective Time, under
any Contract to which the Company or any of its subsidiaries is a party or is
subject where such default could reasonably be expected to have a Material
Adverse Effect; and (b) any material adverse change (including, without
limitation, any change arising out of or related to any natural disaster) in the
condition (financial or otherwise), properties, assets, liabilities, business or
results of operations of the Company or any of its subsidiaries or any
development or combination of developments of which the Company or any of its
subsidiaries has knowledge which could reasonably be expected to result in any
such change. Each of the Company and Purchaser shall give prompt notice to the
other party of any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by this Agreement.
7.6 Publicity. The initial press release issued in connection
with the execution of this Agreement shall be a joint press release and
thereafter the Company and Purchaser shall consult with each other prior to
issuing any press releases or otherwise making public statements with respect to
the transactions contemplated hereby and prior to making any filings with any
Governmental Entity or with any national securities exchange with respect
thereto.
7.7 Indemnification; Directors' and Officers Insurance. (a)
From and after the Effective Time, the Surviving Corporation agrees that it will
indemnify and hold harmless each present and former director and/or officer of
the Company, determined as of the Effective Time (the "Indemnified Parties"),
that is made a party or threatened to be made a party to any threatened, pending
or completed, action, suit, proceeding or claim, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she was a
director or officer of the Company or any subsidiary of the Company prior to the
Effective Time and arising out of actions or omissions of the Indemnified Party
in any such capacity occurring at or prior to the Effective Time (a "Claim")
against any costs or expenses (including reasonable attorneys' fees), judgments,
fines, amounts paid in settlement pursuant to Section 7.7(b), losses, claims,
damages or liabilities (collectively, "Costs") reasonably incurred in connection
with any Claim, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that the Company would have been permitted under
Texas law. The Surviving Corporation shall also advance expenses (including
attorneys' fees), as incurred by the Indemnified Party to the fullest extent
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permitted under applicable law provided such Indemnified Party provides an
undertaking to repay such advances if it is ultimately determined that such
Indemnified Party is not entitled to indemnification.
(b) Any Indemnified Party wishing to claim indemnification
under paragraph (a) of this Section 7.7, upon learning of any such Claim, shall
promptly notify the Surviving Corporation thereof, but the failure to so notify
shall not relieve the Surviving Corporation of any liability it may have to such
Indemnified Party if such failure does not materially prejudice the indemnifying
party. In the event of any such claim, action, suit, proceeding or investigation
(whether arising before or after the Effective Time), (i) the Surviving
Corporation shall have the right to assume the defense thereof and the Surviving
Corporation shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if the
Surviving Corporation elects not to assume such defense or counsel or the
Indemnified Parties advise that there are issues which raise conflicts of
interest between the Surviving Corporation and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and the Surviving
Corporation shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received; provided,
however, that the Surviving Corporation shall be obligated pursuant to this
paragraph (b) to pay for only one firm or counsel for all Indemnified Parties in
any jurisdiction unless the use of one counsel for such Indemnified Parties
would present such counsel with a conflict of interest, (ii) the Indemnified
Parties will cooperate in the defense of any such matter and (iii) the Surviving
Corporation shall not be liable for any settlement effected without its prior
written consent, which consent will not be unreasonably withheld; and provided,
further, however, that the Surviving Corporation shall not have any obligation
hereunder to any Indemnified Party when and if a court of competent jurisdiction
shall ultimately determine, and such determination shall have become final and
non-appealable, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law. If such indemnity is not
available with respect to any Indemnified Party, then the Surviving Corporation
and the Indemnified Party shall contribute to the amount payable in such
proportion as is appropriate to reflect relative faults and benefits, with any
aspect of "fault" otherwise allocable to the Company being allocated to the
Surviving Corporation.
(c) If a claim for indemnification or advancement under this
Section 7.7 is not paid in full by the Surviving Corporation within thirty days
after a written claim therefor has been received by the Surviving Corporation,
the Indemnified Party may any time thereafter bring suit against the Surviving
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the Indemnified Party shall be entitled to be paid also the
expense of prosecuting such claims.
(d) Neither the failure of the Surviving Corporation
(including its Board of Directors, independent legal counsel or shareholders) to
have made a determination prior to the commencement of such suit that
indemnification of the Indemnified Party is proper in the circumstances because
he or she has met the applicable standard of conduct, nor an actual
determination by the Surviving Corporation (including its Board of Directors,
independent legal counsel, or shareholders) that the Indemnified Party has not
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met such applicable standard of conduct, shall be a defense to the suit or
create a presumption that the Indemnified Party has not met the applicable
standard of conduct.
(e) For a period of six years after the Effective Time, the
Surviving Corporation shall maintain the Surviving Corporation's existing
directors and officers liability insurance or equivalent liability insurance
("D&O Insurance"), which will provide coverage for those persons who are
directors and officers of the Company as of the Effective Time, so long as the
annual premium therefor is not in excess of 125% of the last annual premium paid
by the Surviving Corporation prior to the date hereof (the "Current Premium").
If the Surviving Corporation determines that it is unable to maintain the
existing or equivalent D&O Insurance that includes coverage for those persons
who are directors and officers of the Company as of the Effective Time for a
premium not in excess of 125% of the Current Premium, but maintains D&O
Insurance for persons who are directors and officers of the Surviving
Corporation, then, for the six-year period after the Effective Time, the
Surviving Corporation will provide D&O Insurance for those persons who are
currently directors and officers of the Company on the same basis as the
Surviving Corporation maintains D&O Insurance for persons who are then directors
and officers of the Surviving Corporation. If the existing D&O Insurance
expires, is terminated or canceled during the six-year period after the
Effective Time and the Surviving Corporation does not then maintain D&O
Insurance for persons who are directors and officers of the Surviving
Corporation, the Surviving Corporation will use its reasonable best efforts to
obtain D&O Insurance for such period providing at least $2,000,000 of coverage
for those persons who are directors and officers of the Company at the Effective
Time.
(f) In lieu of the insurance arrangement referred to in clause
(e) of this Section 7.7, the Surviving Corporation may, on or before the
expiration of the Offer, enter into alternative insurance arrangements, provided
that such arrangements are approved by each of the individuals who are
Independent Directors at any time from the date of this Agreement through the
Effective Time.
7.8 Other Agreements.
(a) Takeover Statute. If any Takeover Statute shall become
applicable to the Merger, the Offer or the other transactions contemplated
hereby, the Company and the members of the Board of Directors of the Company
shall grant such approvals and take such actions as are necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to eliminate or minimize the
effects of such statute or regulation on the transactions contemplated hereby.
(b) Best Efforts and Cooperation. The Company and Purchaser
each shall use (and shall cause its subsidiaries to use) its best efforts to
cause the conditions set forth in Article VIII to be satisfied and to consummate
the Merger and the other transactions contemplated by this Agreement. Without
limiting the generality of the foregoing, the Company shall use (and shall cause
its subsidiaries to use) its best efforts (including providing information and
communication) to obtain each of the consents or waivers identified pursuant to
Section 6.1(d)(ii) and to obtain as promptly as practicable all necessary
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approvals authorizations and consents of Governmental Entities required to be
obtained in order to consummate the transactions contemplated hereby, and
each of the parties hereto shall cooperate with the others in obtaining all
such consents, waivers, approvals and authorizations.
(c) Purchaser Vote. Purchaser shall vote (or consent with
respect to) or cause to be voted (or a consent to be given with respect to) any
Shares (including all Shares currently owned) beneficially owned by it or any of
its subsidiaries or with respect to which it or any of its subsidiaries has the
power (by agreement, proxy or otherwise) to cause to be voted (or to provide a
consent), in favor of the adoption and approval of this Agreement at any meeting
of stockholders of the Company at which this Agreement shall be submitted for
adoption and approval and at all adjournments or postponements thereof (or, if
applicable, by any action of stockholders of the Company by consent in lieu of a
meeting).
7.9 Certain Amendments to the Certificate of Incorporation and
By-laws of the Surviving Corporation. No amendment to the Certificate of
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Incorporation or By-laws of the Surviving Corporation shall reduce in any way
the elimination of personal liability of the directors of the Company contained
therein or adversely affect any then existing right of any director or officer
(or former director or officer) to be indemnified with respect to acts,
omissions or events occurring prior to the Effective Time.
ARTICLE VIII
Conditions
8.1 Conditions to Obligations of Parties. The respective
obligations of the parties to consummate the Merger are subject to the
fulfillment of each of the following conditions:
(a) Stockholder Approval. In the event of a Company
stockholder meeting pursuant to Section 7.2, this Agreement shall have been duly
approved by the holders of a majority of the Shares, in accordance with
applicable law and the Articles of Incorporation and By-Laws of the Company;
(b) Purchase of Shares. Purchaser (or one of the
Purchaser Companies) shall have purchased Shares pursuant to the Offer;
(c) Litigation. No court or other Governmental Entity of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect and
prohibits consummation of the Merger;
(d) Consent. The Company shall have obtained the consent of
its principal lender to the Merger or the Purchaser shall have obtained a
refinancing of such obligation on terms satisfactory to the Purchaser in its
sole discretion.
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(e) Annex A. The Minimum Tender Condition shall have been
satisfied and none of the events listed in Annex A shall have occurred.
ARTICLE IX
Termination
9.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after the approval by holders of Shares, by the mutual consent
of Purchaser and the Company, by action of their respective Boards of Directors.
9.2 Termination by Either Purchaser or the Company. This
Agreement may be terminated and the Merger may be abandoned by action of the
Board of Directors of either Purchaser or the Company if: (a) Purchaser, or any
Purchaser Company, shall have terminated the Offer without purchasing any Shares
pursuant thereto; provided, however, that in the case of termination of this
Agreement by Purchaser, such termination of the Offer is not in violation of the
terms of the Offer; or (b) without fault of the terminating party, the Merger
shall not have been consummated by December 31, 1996, whether or not such date
is before or after the approval by holders of Shares.
9.3 Termination by Purchaser. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after the approval by holders of Shares, by action of the Board of Directors
of Purchaser, if: (a) the Company shall have failed to comply in any material
respect with any of the covenants or agreements contained in this Agreement to
be complied with or performed by the Company at or prior to such date of
termination; or (b) the Board of Directors of the Company or the Independent
Directors shall have withdrawn or modified in a manner adverse to Purchaser its
approval or recommendation of the Offer, this Agreement or the Merger or the
Board of Directors of the Company or the Independent Directors, upon request by
Purchaser, shall fail to reaffirm such approval or recommendation, or shall have
resolved to do any of the foregoing.
9.4 Termination by the Company. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after the approval by holders of Shares by action of the Board
of Directors of the Company, if Purchaser (a) shall have failed to comply in any
material respect with any of the covenants or agreements contained in this
Agreement to be complied with or performed by Purchaser at or prior to such date
of termination or (b) shall have failed to commence the Offer within the time
required in Section 1.1(a).
9.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article IX, no party hereto (or any of its directors or officers) shall have any
liability or further obligation to any other party to this Agreement, except as
provided in Section 10.2 below and except that nothing herein will relieve any
party from any liability or damages for any breach of this Agreement.
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ARTICLE X
Miscellaneous and General
10.1 Payment of Expenses. Whether or not the Merger shall be
consummated, each party hereto shall pay its own expenses incident to preparing
for, entering into and carrying out this Agreement and the consummation of the
Merger.
10.2 Survival. The agreements of the Company and Purchaser
contained in Sections 5.2 (but only to the extent that such Section expressly
relates to actions to be taken after the Effective Time), 5.3, 5.4, 7.7, 7.9,
and 10.1 shall survive the consummation of the Merger. The agreements of the
Company and Purchaser contained in Section 9.5 and this Article X shall survive
the termination of this Agreement. All other representations, warranties,
agreements and covenants in this Agreement shall not survive the consummation of
the Merger or the termination of this Agreement.
10.3 Modification or Amendment. Subject to the applicable
provisions of the DGCL or the TBCA, at any time prior to the Effective Time, the
parties hereto may modify or amend this Agreement, by written agreement executed
and delivered by duly authorized officers of the respective parties.
10.4 Waiver of Conditions. The conditions to each of the
parties obligations to consummate the Merger are for the sole benefit of such
party and may be waived by such party in whole or in part to the extent
permitted by applicable law.
10.5 Counterparts. For the convenience of the parties hereto,
this Agreement may be executed in any number of counterparts, each such
counterpart being deemed to be an original instrument, and all such counterparts
shall together constitute the same agreement.
10.6 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL
RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH
THE LAW OF THE STATE OF TEXAS WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES
THEREOF. The parties hereby irrevocably submit to the jurisdiction of the courts
of the State of Texas and the Federal courts of the United States of America
located in the State of Texas solely in respect of the interpretation and
enforcement of the provisions of this Agreement and of the documents referred to
in this Agreement, and in respect of the transactions contemplated hereby, and
hereby waive, and agree not to assert, as a defense in any action, suit or
proceeding for the interpretation or enforcement hereof or of any such document,
that it is not subject thereto or that such action, suit or proceeding may not
be brought or is not maintainable in said courts or that the venue thereof may
not be appropriate or that this Agreement or any such document may not be
enforced in or by such courts, and the parties hereto irrevocably agree that all
claims with respect to such action, suit or proceeding shall be heard and
determined in such a state or Federal court. The parties hereby consent to
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and grant any such court jurisdiction over the person of such parties and over
the subject matter of such dispute and agree that mailing of process or other
papers in connection with any such action or proceeding in the manner provided
in Section 10.7 or in such other manner as may be permitted by law, shall be
valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY
WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY
CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH
SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii)
EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION 10.6.
10.7 Notices. Any notice, request, instruction or other
document to be given hereunder by any party to the others shall be in writing
and delivered personally or sent by registered or certified mail, postage
prepaid:
if to Purchaser:
The Hallwood Group Incorporated
3710 Rawlins
Suite 1500
Dallas, Texas 75219
Attention: Melvin J. Melle
with a copy to:
W. Alan Kailer, Esq.
Jenkens & Gilchrist, A Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202-2799
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if to the Company:
Hallwood Energy Corporation
3710 Rawlins
Suite 1500
Dallas, Texas
Attention: William L. Guzzetti
with a copy to:
Cathleen M. Osborn, Esq.
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
and to:
Warren M. S. Ernst, Esq.
Donahoe, Jameson & Carroll, P.C.
1201 Elm Street, Suite 3400
Dallas, Texas 75270
or to such other persons or addresses as may be designated in writing by the
party to receive such notice.
10.8 Entire Agreement. This Agreement (including any annexes,
exhibits or Schedules hereto) constitutes the entire agreement, and supersedes
all other prior agreements, understandings, representations and warranties both
written and oral, among the parties, with respect to the subject matter hereof.
10.9 No Third Party Beneficiaries. Except as provided in
Sections 7.7 (Indemnification; Directors' and Officers' Insurance) and 7.9
(Certain Amendments to the Certificate of Incorporation and By-laws of the
Surviving Corporation), as to which directors and officers of the Company are
intended by the parties to be beneficiaries, this Agreement is not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder.
10.10 Obligations of Purchaser and of the Company. Whenever
this Agreement requires Purchaser or, after the Effective Time, the Surviving
Corporation, to take any action, such requirement shall be deemed to include an
undertaking on the part of Purchaser to cause the Surviving Corporation to take
such action, including providing the requisite funds to purchase Shares or make
any other payment obligation. Whenever this Agreement requires a subsidiary of
the Company to take any action, such requirement shall be deemed to include an
undertaking on the part of the Company to cause such subsidiary to take such
action and, after the Effective Time, on the part of the Surviving Corporation
to cause such subsidiary to take such action.
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10.11 Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any provision shall
not affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
10.12 Interpretation. The table of contents and headings
herein are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof. Where a reference in this Agreement is made to a Section or
Schedule, such reference shall be to a Section of or Annex or Schedule to this
Agreement unless otherwise indicated. Whenever the words "include," "includes"
or "including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation."
10.13 Assignment. This Agreement shall not be assignable by
operation of law or otherwise; provided, however, that Purchaser may designate,
by written notice to the Company, another wholly-owned direct or indirect
subsidiary to be a Constituent Corporation in lieu of Purchaser, in the event of
which, all references herein to Purchaser shall be deemed references to such
other subsidiary, where applicable, except that all representations and
warranties made herein with respect to Purchaser as of the date of this
Agreement shall be deemed representations and warranties made with respect to
such other subsidiary as of the date of such designation.
10.14 Definition of "Subsidiary" and "Person". When a
reference is made in this Agreement to a subsidiary of a party, the word
"subsidiary" means any corporation or other organization whether incorporated or
unincorporated of which at least a majority of the securities or interests
having by the terms thereof ordinary voting power to elect at least a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its subsidiaries, or by such
party and one or more of its subsidiaries. When a reference is made in this
Agreement to a person, the word "person" means and includes any natural person,
corporation, partnership, firm, joint venture, association, joint-stock company,
trust, unincorporated organization, governmental or political subdivision,
regulatory body or other entity.
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IN WITNESS WHEREOF, this Agreement has been duly executed and delivered
by the duly authorized officers of the parties hereto on the date first
hereinabove written.
The Hallwood Group Incorporated
By: /s/ Melvin J. Melle
Melvin J. Melle, Vice President
Hallwood Energy Corporation
By: /s/ William L. Guzzetti
William L. Guzzetti, President
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Annex A
Certain Conditions of the Offer. Notwithstanding any other provision of
the Offer, Purchaser shall not be obligated to accept for payment any Shares or,
subject to any applicable rules and regulations of the SEC, including Rule
14e-l(c) (relating to Purchaser's obligation to pay for or return tendered
Shares promptly after termination or withdrawal of the Offer) or pay for, and
may delay the acceptance for payment of or payment for, any tendered Shares
unless there have been validly tendered and not withdrawn prior to the
expiration date of the Offer a majority of the Shares not currently owned by
Purchaser which, together with any Shares currently beneficially owned directly
or indirectly by Purchaser, also will constitute at least 90% of the total
Shares outstanding and issuable as of the date the Shares are accepted for
payment pursuant to the offer (the "Minimum Tender Condition"), or if on or
after October 9, 1996, and at or before the time of payment for any of such
Shares (whether or not any Shares have theretofore been accepted for payment or
paid for pursuant to the Offer), any of the following events shall occur:
(a) there shall be any statute, rule, regulation, judgment, injunction
or other order, enacted, promulgated, entered, enforced or deemed applicable to
the Offer or the Merger or any other action shall have been taken by any
government, legislative body, court or governmental, regulatory or
administrative agency, authority, tribunal or commission, domestic,
supranational or foreign (each, a "Governmental Entity"), or any other person,
domestic, supranational or foreign (i) challenging the legality of the
acquisition by Purchaser of the Shares; (ii) restraining, delaying or
prohibiting the making or consummation of the Offer or the Merger or obtaining
from the Company or Purchaser any damages in connection therewith; (iii)
relating to assets of, or prohibiting or limiting the ownership or operation by
Purchaser of all or any portion of the business or assets of, the Company or
Purchaser (including the business or assets of their respective affiliates and
subsidiaries) or imposing any limitation on the ability of Purchaser to conduct
such business or own such assets; (iv) imposing limitations on the ability of
Purchaser or (or any affiliate of Purchaser) to acquire or hold or to exercise
full rights of ownership of the Shares, including, without limitation, the right
to vote the Shares purchased by them on all matters properly presented to the
stockholders of the Company; or (v) having a substantial likelihood of any of
the foregoing;
(b) there shall have occurred and be continuing (i) any general
suspension of, or limitation on times or prices for, trading in securities on
any national securities exchange or in the over-the-counter market in the United
States or (ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States (whether or not mandatory);
(c) the Company shall have breached or failed to perform in any
material respect any of its covenants, obligations or agreements under the
Agreement, which breach or failure shall not have been cured within the earlier
of 30 days or the time for any payment causing such breach or failure, if
curable, or any representation or warranty of the Company set forth in the
Agreement shall have been inaccurate or incomplete in any material respect when
made or thereafter shall become inaccurate or incomplete in any material
respect;
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(d) any change, including, without limitation, any change arising out
of or related to any natural disaster, shall have occurred or been threatened or
become known (or any condition, event or development shall have occurred or been
threatened or become known involving a prospective change) in the business,
properties, assets, liabilities, condition (financial or otherwise), or results
of operations of the Company or any of its subsidiaries that could reasonably be
expected to be materially adverse to the Company and its subsidiaries taken as a
whole;
(e) all consents, registrations, approvals, permits, authorizations,
notices, reports or other filings required to be made or obtained by the
Company, Purchaser or any stockholder of Purchaser with or from any Governmental
Entity in connection with the Offer and the Merger shall not have been made or
obtained except where the failure to make or to obtain, as the case may be, such
consents, registrations, approvals, permits, authorizations, notices, reports or
other filings could not reasonably be expected to have a Material Adverse
Effect;
(f) the Special Committee of the Board of Directors shall have
adversely amended or modified or shall have withdrawn its recommendation of the
Offer or the Merger, or shall have failed to publicly reconfirm such
recommendation upon request by Purchaser, or shall have resolved to do any of
the foregoing; or
(g) the Agreement shall have been terminated in accordance with its
terms or Purchaser shall have reached an agreement or understanding with the
Special Committee providing for termination of the Offer which, in the
reasonable judgment of Purchaser with respect to each and every matter referred
to above, and regardless of the circumstances (including any action or inaction
by Purchaser or any affiliate of Purchaser) giving rise to any such condition,
makes it inadvisable to proceed with the Offer or with such acceptance for
payment or payment.
The foregoing conditions are for the sole benefit of Purchaser and may
be asserted by Purchaser regardless of the circumstances (including any action
or inaction by Purchaser or any affiliate of Purchaser) giving rise to any such
conditions or may be waived by Purchaser in whole or in part at any time and
from time to time in its sole discretion, other than the Minimum Tender
Condition, which the Purchaser may waive only with the consent of the Special
Committee. The failure by Purchaser at any time to exercise any of the foregoing
rights shall not be deemed a waiver of any such right and each such right shall
be deemed an ongoing right which may be asserted at any time and from time to
time. Any determination by Purchaser concerning the events described above will
be final and binding on all holders of the Shares.
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------------------------------------------------------------------------------
Hallwood Energy Corporation
4582 S. Ulster Street Parkway, Stanford Place III, Suite 1700
Post Office Box 378111
Denver, Colorado 80237 (303) 850-7373
------------------------------------------------------------------------------
October 15, 1996
Dear Stockholders:
I am pleased to inform you that on October 9, 1996, Hallwood Energy
Corporation (the "Company") entered into an Agreement and Plan of Merger (the
"Merger Agreement") providing for the acquisition of all publicly held shares of
common stock of the Company by The Hallwood Group Incorporated ("Hallwood
Group"). Hallwood Group currently beneficially owns approximately 82% of the
outstanding shares of the Company.
Pursuant to the Merger Agreement, Hallwood Group commenced today a
tender offer to purchase any and all outstanding shares of the Company's common
stock at a price of $19.50 per share in cash. If at least a majority of the
shares not now owned by Hallwood Group are tendered, which would mean that
Hallwood Group would own at least 90% of the outstanding shares after the tender
offer, and after satisfaction of certain other conditions, the Company will be
merged with and into Hallwood Group. Each share of the Company's common stock
then outstanding (other than shares of stockholders properly exercising
appraisal rights under Texas law and shares owned by Hallwood Group) will be
converted into the right to receive $19.50 per share in cash. Following
consummation of the merger, the Company will no longer exist.
A Special Committee of the Company's Board of Directors consisting of
three directors unaffiliated with Hallwood Group carefully considered Hallwood
Group's proposal and determined that the Hallwood Group offer and the merger are
fair to, and in the best interests of, the Company's public stockholders. The
Company's Board of Directors, based upon the recommendation of the Special
Committee, unanimously approved and adopted the Merger Agreement and the
transactions contemplated thereby, and recommends that stockholders accept the
offer and tender their shares.
In arriving at its determinations, the Special Committee and the
Company's Board gave careful consideration to a number of factors, including the
opinion of the Special Committee's financial advisor that the consideration to
be received by the Company's public stockholders in the offer and merger is fair
to such stockholders from a financial point of view as of the date thereof.
Detailed information about the deliberations of the Special Committee and the
Board of Directors and their determinations and recommendations is contained in
the enclosed offering materials.
Accompanying this letter is Hallwood Group's Offer to Purchase, dated
October 15, 1996, together with related materials, including a Letter of
Transmittal to be used for tendering your shares. These documents set forth the
terms and conditions of the offer and provide instructions as to how to tender
your shares. On the reverse side of this letter, you will find commonly asked
Questions with Answers. I urge you to read the enclosed material carefully
before making your decision with respect to tendering your shares in the offer.
Sincerely,
/s/William L. Guzzetti
William L. Guzzetti
President
Please see the reverse side of this letter for Questions and Answers about
the Offer.
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QUESTIONS AND ANSWERS ABOUT THE OFFER
1. How much will I receive if I tender my Shares?
You will receive $19.50 per Share.
2. When do I receive my money?
The Depositary will mail you a check after the Offer expires and the
Purchaser accepts the tender of the Shares. In estimating when you will
receive a check, please allow time for the post office to deliver the mail.
3. Why is the Purchaser making the Offer?
The Offer is the first step in the Purchaser's plan to acquire all of the
Shares in the Company. If at least a majority of the Shares not now owned
by the Purchaser are tendered, which would mean the Purchaser would own at
least 90% of the outstanding Shares after the Offer, the Purchaser intends
to merge the Company into the Purchaser.
4. What should I do if my Share certificate(s) has been lost or destroyed?
On page 3 of the Letter of Transmittal, you will find an Affidavit of Lost
or Destroyed Share Certificate(s). You should fill in, sign and date the
affidavit where indicated and have your signature notarized. The Company
has made special arrangements so that you do not have to pay any fee for
the replacement and sale of your lost or destroyed certificate(s).
5. At what price are the Shares currently selling?
The Shares are listed on the OTC Bulletin Board.
The ticker symbol is HWEC. On October 9, 1996, the closing price was
$15.75. The 52-week high and low prices were $15.75 and $8.00,
respectively.
6. Why can't I find the stock price listed on any of the exchanges?
Due to the low trading volume, the stock trades only on the Over The
Counter Bulletin Board, which can only be accessed by brokerage firms.
7. How did you arrive at the price of $19.50?
The Special Committee and its financial and legal advisors, all of whom are
unaffiliated with the Purchaser, negotiated the price with the Purchaser.
8. Should I sell? What options do I have if I don't want to tender my shares?
The Board of Directors of the Company and the Special Committee have
unanimously determined that the Offer and the Merger are fair to and in the
best interests of the Company and its shareholders, have approved the Offer
and the Merger and recommend that the Company's Shareholders accept the
Offer and tender their shares.
If at least a majority of the Shares not now owned by the Purchaser are
tendered, which would mean the Purchaser would own at least 90% of the total
Shares outstanding, the Company will be merged into the Purchaser without a vote
of the Company's shareholders. Shareholders who do not tender their Shares will
receive $19.50 per Share after the Merger is completed. By tendering in the
Offer, you will receive your payment sooner. In connection with the Merger,
holders of Shares have certain rights under Texas law to dissent and to demand
appraisal of the fair value of their Shares. The value of the Shares, as
determined in appraisal litigation, could be more or less than $19.50 per Share.
9. What should I do if my Shares are held by my broker?
If you wish to tender and your Shares are held in a brokerage account, you
must contact your broker.
10. What are the tax consequences if I participate in the Offer?
We do not make any representations as to tax consequences of the
transaction. You should consult your own tax and financial advisers to
assess the desirability of participating in the Offer.
11. Why do I have to certify that I am not subject to backup withholding?
Internal Revenue Service regulations require you to certify that you are
not subject to such withholding and have provided your Social Security
Number or Employer Identification Number. Otherwise, the Internal Revenue
Service requires us to withhold 31% from your proceeds.
12. How much time do I have to decide?
The Offer will expire on November 22, 1996.
Your Share certificate(s) and Letter of Transmittal must be in good order
and received no later than that date. When mailing your documents, please allow
sufficient time for the post office to deliver the mail. If your Shares are
received after the expiration of the Offer, your documents and Shares will be
returned to you promptly.
13. How do I know how many Shares I own?
The number of Shares that you own is set forth under "Number of Shares Held
in this Account" on the front of the blue Letter of Transmittal, above and
to the right of your name and address.
If you need further information, please call Hallwood Petroleum, Inc., toll-free
nationwide, at (800) 882-9225.
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News Release
FOR IMMEDIATE RELEASE
The Hallwood Group Incorporated Hallwood Energy Corporation
3710 Rawlins 4582 South Ulster St. Parkway
Ste. 1500 Post Office Box 378111
Dallas, TX 75219 Denver, CO 80237
Contact: Mary Doyle (214) 528-5588 Contact: Mary Brook (303) 850-7373
Dallas, Texas, October 10, 1996, - The Hallwood Group Incorporated
(NYSE-HWG) and Hallwood Energy Corporation (OTC:HWEC) announced today that they
have entered into a definitive Merger Agreement providing for the merger of
Hallwood Energy Corporation ("Hallwood Energy") into The Hallwood Group
Incorporated ("Hallwood Group"). Prior to the merger, Hallwood Group has agreed
to commence a tender offer for all the outstanding shares of common stock of
Hallwood Energy at a price of $19.50 per share, net to the seller in cash,
subject to the terms and conditions of the tender offer documents.
The Board of Directors, and Special Committee of the Board of Directors, of
Hallwood Energy have unanimously approved the tender offer and the merger and
determined the terms of the tender offer and the merger are fair to, and in the
best interest of, stockholders of Hallwood Energy. The Board of Directors of
Hallwood Energy recommends that all stockholders of Hallwood Energy accept the
tender offer and tender their shares. Principal Financial Securities, Inc. acted
as financial advisor to the Special Committee of the Board of Directors of
Hallwood Energy and advised the Special Committee that the consideration to be
received by the stockholders of Hallwood Energy is fair to the stockholders
(other than Hallwood Group) from a financial point of view as of the date of the
Merger Agreement.
Hallwood Group currently owns approximately 81.6% of the issued and
outstanding shares of the common stock of Hallwood Energy. The completion of the
transaction will be conditioned upon, among other things, the valid tender of a
majority of the shares of Hallwood Energy not currently held by Hallwood Group
which, together with the shares currently held by Hallwood Group, will
constitute at least 90% of the issued and outstanding shares of the common stock
of Hallwood Energy.
- END -
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October 9, 1996
The Special Committee of the
Board of Directors
HALLWOOD ENERGY CORPORATION
4582 South Ulster Street Parkway, Suite 1700
Denver, CO 80237
Gentlemen:
Principal Financial Securities, Inc. ("PFS") understands that pursuant to
an Agreement and Plan of Merger between Hallwood Energy Corporation (the
"Company" or "HEC") and The Hallwood Group Incorporated ("HGI"), dated October
9, 1996 (the "Agreement") and as reflected in an offer letter from HGI dated
August 13, 1996, HGI will acquire each outstanding share of HEC's common stock
not already held by HGI in a going-private transaction. The financial terms were
based on negotiations between you and HGI and we did not participate nor did we
advise and were not asked to advise in the negotiations. You have asked us to
advise you as to the fairness of the terms of the Agreement, from a financial
point of view, to the current stockholders of the Company (other than HGI).
In arriving at our opinion we have, among other things:
1. Reviewed the Agreement;
2. Reviewed HEC's financial statements for the latest twelve
months ended June 30, 1996 and certain other publicly available
financial statements and reports regarding the Company;
3. Reviewed certain reserve information provided by the Company
relating to the producing properties of the Company and its
affiliates;
4. Reviewed certain financial and stock market data of the Company
and compared that data with similar data for other publicly-held
companies that have operations similar in some respect to the
operations of the Company;
5. Reviewed the financial terms, to the extent publicly available,
of certain comparable transactions;
6. Discussed with management of the Company the operations of and
business prospects for the Company and the anticipated financial
consequences of the proposed transaction to the Company; and
7. Performed other analyses as are customary in our industry.
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As part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in the valuation of companies and their
securities in connection with business reorganizations, private placements,
negotiated underwritings, mergers and acquisitions and valuations for estate,
corporate and other purposes. In the ordinary course of business, Principal
Financial Securities, Inc. and its affiliates at any time may hold long or short
positions, and may trade or otherwise effect transactions as principal or for
the accounts of customers, in debt or equity securities or options on securities
of the Company.
In our review and analysis in rendering our opinion, we have assumed and
relied upon the accuracy and completeness of all the financial and other
information provided to us by the management of the Company, or publicly
available, and have not assumed any responsibility for the independent
verification of such information. In addition, we have not made an independent
evaluation or appraisal of the assets of the Company, nor have we been furnished
with any such independent evaluations or appraisals.
Our opinion is based solely upon the information set forth herein as
reviewed by us and circumstances existing as of the date hereof. Events
occurring after the date hereof could materially affect the assumptions used
both in preparing this opinion and in the documents reviewed by us. We have not
undertaken to reaffirm or revise this opinion or otherwise comment upon any
events occurring after the date hereof.
We are not opining, and were not requested by you to opine, as to the
fairness of any aspect of the transaction other than the financial terms of the
Agreement. We have assumed that the Agreement and all other aspects of the
proposed transaction will be, in all respects, in compliance with all laws and
regulations that are applicable to HEC, HGI or the proposed transaction (and we
have relied as to all legal matters relating thereto on counsel to HEC).
We have acted as financial advisor to the Special Committee of the Board of
Directors in connection with this transaction and will receive a fee for our
services. It is understood that this letter is for the information of the
Special Committee of the Board of Directors only and, without our prior written
consent, other than as required by law or judicial process, is not to be quoted
or referred to, in whole or in part, in any registration statement, prospectus
or proxy statement, or in any other written document used in connection with the
offering or sale of securities, nor shall this letter be used for any other
purposes, except that this letter may be filed with the Securities and Exchange
Commission as an exhibit to an offer to purchase or a proxy statement to be
prepared in connection with the proposed transaction.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that on the date hereof the
terms of the Agreement are fair, from a financial point of view, to the current
stockholders of the Company (other than HGI).
Very truly yours,
PRINCIPAL FINANCIAL SECURITIES, INC.
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July 16, 1996
Special Committee of the Board of Directors
Hallwood Energy Corporation
3710 Rawlins Street
Dallas, TX 75219
Attn.: Mr. Hans-Peter Holinger
Dear Special Committee Members:
On behalf of the Special Committee of the Board of Directors ("the
"Committee") of Hallwood Energy Corporation. (the "Company"), you have requested
that Principal Financial Securities, Inc. ("PFS") act as an independent
investment banker to review strategic options available to the Company and its
shareholders and, if the Committee requests an opinion in connection with a
particular transaction, for the purpose of rendering an opinion (the "Opinion")
to the Committee as to the fairness from a financial point of view of the
transaction to the Company's shareholders (called a "Transaction"). Any Opinion
will address matters that are standard and appropriate for the particular
transaction.
The Company agrees to cooperate fully in providing PFS with information
requested by PFS from the Company, its auditors, and legal counsel prior to our
submitting our findings and any potential Opinion and allow us to perform our
due diligence accordingly. The Company represents that the information provided
by it to PFS (the "Information") will be true, complete, and correct in all
material respects and will not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein not misleading in the light of the circumstances under which such
statements are made. PFS will make no independent investigation or verification
of, and will assume and rely on the accuracy and completeness of the
Information.
PFS acknowledges that the Information includes proprietary or otherwise
confidential information ("Confidential Information") and agrees to maintain
such confidentiality for a period of two years and not reveal such Confidential
Information to any third party or to any person within PFS, including its
advisors and consultants, except on a need to know basis to fulfill this
engagement and then only with the acknowledgment by such person of the
sensitivity of the Confidential Information. Confidential Information, for the
purposes of this engagement, shall not include:
a. Information that was already in PFS's possession prior to the date
hereof and which was not acquired or obtained from the Company or its agents,
employees or affiliates.
b. Information that is obtained or was previously obtained by PFS from a
third party who, insofar as is known to PFS after reasonable inquiry, is not
prohibited from transmitting the information to PFS by a contractual, legal or
fiduciary obligation to the Company, to its agents or its affiliates.
c. Information that is or becomes generally available to the public other
than as a result of a disclosure by PFS.
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The terms and conditions by which PFS proposes to provide the services requested
are as follows:
1. PFS' compensation for undertaking and delivering an analysis of
Strategic Options open to the Company shall be $40,000.00 of which $30,000.00
shall be paid by the Company upon the execution of this letter and $10,000.00
upon the date PFS is prepared to deliver the Analysis. Should PFS issue the
Opinion the fee shall include an additional $25,000.00. The Company shall
reimburse PFS for all travel and out-of-pocket expenses incurred in connection
with the engagement of PFS hereunder, including fees and expenses of its legal
counsel, which amount shall not exceed $5,000.00 without written authorization
from the Company to do so.
2. Any Opinion provided by PFS shall contain customary and appropriate
recitals and assumptions and shall address only the matters described in the
first paragraph of this letter.
3. Any Opinion and any advice, written or oral, provided by PFS
pursuant to this letter will be solely for the confidential use of the Committee
in connection with their consideration of Strategic Options and are not to be
used, circulated, quoted, or otherwise referred to for any other purpose, nor is
any Opinion or any such advice to be filed with, included in or referred to in
whole or in part in any prospectus, information or proxy statement, filing,
other document, or any communication with the Company's shareholders except that
the Company may provide a copy of any Opinion to its shareholders for their
information as an exhibit to a proxy statement or tender offer documentation
disseminated in connection with any potential Transaction provided that before
any document is filed with the Securities and Exchange Commission or mailed to
the stockholders of the Company, the Company shall furnish to PFS a draft
thereof, including all disclosures of and references to any Opinion, and shall
make no such filing or mailing as to which PFS shall reasonably object. PFS
agrees to cooperate with the Company, as regards to the form and content of any
Opinion, in trying to accommodate SEC comments, if any.
4. Any Opinion shall be delivered in a timely manner and shall be
effective as of the date of delivery and shall not address developments or
circumstances subsequent to such date.
5. The Company agrees that PFS shall not have any liability (including
liability for losses, claims, damages, or liabilities resulting from any
negligent act by PFS) to the Company or any person (including the shareholders
of the Company) claiming through the Company or otherwise, for or in connection
with the services or matters that are the subject of this letter, except to the
extent that a court having jurisdiction shall have determined by a final
judgment that such liability resulted primarily and directly from PFS' gross
negligence or willful misconduct. "Person", for purposes of this letter, shall
include any individual, corporation, partnership or other entity.
6. Recognizing that transactions of the type contemplated by this
engagement sometimes result in litigation and that the role of PFS is limited to
acting as the Company's financial advisor, the Company will indemnify PFS and
its directors, officers, agents, employees, and affiliates (collectively
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referred to as "Indemnified Party") to the full extent permitted by Texas law
against any and all losses and expenses incurred in suits, claims,
investigations, or proceedings arising out of PFS' engagement hereunder or any
Transaction (collectively, "Claims"). The Company shall not be obliged to
indemnify PFS, however, to the extent that any Claim is found by the final and
non-appealable judgment of a court or other competent authority to have
proximately resulted from willful bad faith or gross negligence of PFS in the
performance of the services which are the subject of this agreement. The Company
also agrees to immediately reimburse PFS for its costs of investigating,
defending, and resolving any Claims, including the reasonable fees and expenses
of PFS' attorneys, expert witnesses, consultants, and agents. The Company may
not withhold reimbursement of PFS' costs pending final determination of the
Company's indemnification obligation, but may recover those funds if it is
determined that indemnification is unavailable hereunder. The Company's
indemnification and reimbursement obligations extend to the settlement by PFS of
any Claims; provided however that the Company will not be liable for any
settlement entered into without the Company's consent which consent shall not be
unreasonably withheld.
Upon the receipt by an Indemnified Party of actual notice of a Claim
against such Indemnified Party with respect to which indemnity may be sought
under this agreement, the Indemnified Party shall promptly notify the Company in
writing: provided that failure to so notify the Company shall relieve the
Company only to the extent the Company may be materially prejudiced by the
failure. The Company shall, if requested by PFS, assume the defense of any Claim
including the employment of counsel reasonably satisfactory to PFS. Any
Indemnified Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of the Indemnified Party, unless: (i) the
Company has failed promptly to assume the defense and employ counsel or (ii) the
named parties to any such claim (including any impleaded parties) include such
Indemnified Party and the Company, and such Indemnified Party shall have been
advised in writing by counsel that there may be one or more legal defenses
available to it which are different from or in addition to those available to
the Company; provided that the Company shall not in such event be responsible
hereunder for the fees and expenses of more than one firm of separate counsel in
connection with any Claim in the same jurisdiction.
7. To the extent PFS has any liability for its gross negligence or
willful misconduct, or is otherwise found to be liable or obligated to provide
contribution, in connection with the services or matters that are subject of
this letter, the Company agrees that PFS' liability shall be limited to the
amount of the fees paid to it hereunder and that PFS shall have no liability for
any punitive or consequential damages.
8. If the Company or the Company's Board of Directors is a party to or
a subject of any judicial or administrative proceeding or investigation in
connection with PFS's engagement hereunder or any Transaction, PFS will, at the
request of the Company or its board, testify or otherwise present evidence or
make submissions in appropriate form as to PFS' performance of its obligations
hereunder. The Company shall pay $200.00 per person per hour for time expended
pursuant to this paragraph 8, and a minimum of $1,000.00 per day per person for
any day the person provides court testimony or presents evidence, plus out of
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pocket expenses and shall reimburse PFS for all reasonable fees and expenses of
any counsel engaged by PFS in connection therewith.
9. The parties agree that the sole capacity in which PFS will be acting
is in connection with reviewing strategic options and providing a fairness
opinion to the Company and that PFS is not acting as an agent for the Company or
its shareholders, notwithstanding that PFS' fees hereunder are to be paid by the
Company.
10. This letter shall be interpreted and enforceable under Texas law,
without giving effect to the principles of choice of law of such state, and the
parties agree that any suit filed in connection with this letter or the services
or matters that are the subject of this letter shall be filed in the appropriate
state or federal court in Dallas County, Texas.
11. The benefits of this letter shall inure to the respective
successors and assigns of the parties hereto and of the indemnified parties
hereunder and their respective successors, assigns, heirs and representatives.
The obligations and liabilities of the parties contained in this letter shall be
binding upon their respective successors and assigns.
Please confirm that the foregoing is in accordance with your
understanding by signing and returning the duplicate of this letter with a check
in the amount of $30,000.00 to PFS, whereupon this letter shall constitute a
binding agreement between the Company and PFS.
Sincerely yours,
PRINCIPAL FINANCIAL SECURITIES, INC.
By: /s/John W. Bishop
-----------------------
John W. Bishop,
Sr. Vice President
ACCEPTED AND AGREED THIS
17th day of July, 1996.
HALLWOOD ENERGY CORPORATION
By: /s/William L. Guzzetti
-----------------------
William L. Guzzetti,
President
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