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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-3
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
HALLWOOD ENERGY CORPORATION
(Name of the Issuer)
THE HALLWOOD GROUP INCORPORATED
(Name of Person(s) Filing Statement)
$0.50 PAR VALUE COMMON STOCK
(Title of Class of Securities)
40636M208
(CUSIP Number of Class of Securities)
MELVIN J. MELLE
THE HALLWOOD GROUP INCORPORATED
3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219
(214) 528-5588
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of the Bidder)
COPY TO:
W. ALAN KAILER, ESQ.
JENKENS & GILCHRIST
A PROFESSIONAL CORPORATION
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202-2799
(214) 855-4500
------------------------------
This statement is filed in connection with (check the appropriate box):
[ ] (a) The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under
the Securities Exchange Act of 1934.
[ ] (b) The filing of a registration statement under the Securities Act of
1933.
[x] (c) A tender offer.
[ ] (d) None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies. [ ]
Calculation of Filing Fee:
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Transaction Valuation* Amount of Filing Fee**
$2,792,576 $559
--------------------------------------------------------
* For purposes of calculating the fee only. The filing fee was
calculated pursuant to Section 13(e)(3) of the Securities Exchange Act
of 1934, as amended, and Rule 0-11 thereunder, on the basis of 143,209
shares of Common Stock (the number of shares of Common Stock
outstanding on the date hereof, excluding 633,917 shares of Common
Stock held by the Bidder) multiplied by the proposed acquisition price
of $19.50 per share.
** 1/50th of one percent of the value of the securities to be acquired.
[x] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $559
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Form or Registration No.: Schedule 14D-1
------------------------------------
Filing Party: The Hallwood Group Incorporated
------------------------------------------------
Date Filed: October 15, 1996
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CROSS-REFERENCE SHEET
Item in Location of item(s) in
Schedule 13E-3 Schedule 14D-1
- -------------- -----------------------
1(a) 1(a)
1(b) 1(b)
1(c) 1(c)
(d)-(f) *
2(a)-(g) 2(a)-(g)
3(a)(1) 3 (a)
3(a)(2) 3 (b)
3(b) *
4(a) *
4(b) **
5(a)-(g) 5
6(a) 4(a)
6(b) *
6(c) 4(b)
6(d) **
7(a) 5
7(b)-(d) *
8(a)-(e) *
(8)(f) **
9 *
10(a)-(b) 6(a)-(b)
11 7
12 *
13(a) *
13(b)-(c) *
14(a) *
14(b) **
15(a) **
15(b) 8
16 10(f)
17(a) **
(b) *
(c) *
(d) 11(a)
(e) *
(f) **
* The Item is not required by Schedule 14D-1 of the Exchange Act.
** The Item is not applicable or the answer thereto is in the negative.
3
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This Rule 13E-3 Transaction Statement (the "Schedule 13E-3") is being
filed by The Hallwood Group Incorporated, a Delaware corporation (the
"Purchaser"), pursuant to Section 13(e) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act"), and Rule 13e-3 thereunder in connection
with the tender offer by the Purchaser for all of the outstanding shares of
Common Stock, par value $0.50 per share (the "Shares"), of Hallwood Energy
Corporation, a Texas corporation (the "Company"), not currently directly or
indirectly owned by the Purchaser, for $19.50 per Share, 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 in the related Letter of Transmittal (the "Letter of
Transmittal," together with the Offer to Purchase, the "Offer"). This Schedule
13E-3 is intended to satisfy the reporting requirements of Section 13(e) of the
Exchange Act. Copies of the Offer to Purchase and the Letter of Transmittal are
attached as exhibits to, and incorporated by reference in, the Tender Offer
Statement on Schedule 14D-1 and Schedule 13D/A (Amendment No.12) under the
Exchange Act (the "Schedule 14D-1"). The Schedule 14D-1 was filed by the
Purchaser with the Securities and Exchange Commission contemporaneously with
this Schedule 13E-3 on October 15, 1996. The preceding cross-reference sheet,
prepared pursuant to General Instruction F to Schedule 13E-3 of the Exchange
Act shows the location in the Schedule 14D-1 of the information required to be
included in response to the items of Schedule 13E-3 of the Exchange Act. The
information contained in the Schedule 14D-1, including all exhibits thereto, is
expressly and hereby incorporated herein by reference and the responses to each
item are qualified in their entirety by reference to the information contained
in the Schedule 14D-I and the exhibits thereto. All cross references in this
Schedule 13E-3, other than cross references to the Schedule 14D-1, are to the
Offer to Purchase.
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The answer to item 1(a) of the Schedule 14D-1 is incorporated
herein by reference.
(b) The information set forth in the "INTRODUCTION" of the Offer
to Purchase is incorporated herein by reference.
(c) The answer to item 1(c) of the Schedule 14D-1 is incorporated
herein by reference.
(d) The information set forth in "THE OFFER - 6. Price Range of
Shares; Dividends" and in "THE OFFER - 14. Dividends and Distributions" of the
Offer to Purchase is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in "THE OFFER - 9. Certain
Information Concerning the Purchaser" of the Offer to Purchase is incorporated
herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(g) The answers to item 2 of the Schedule 14D-1 are incorporated
herein by reference.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)-(b) The information set forth in the "INTRODUCTION," in "SPECIAL
FACTORS - 5. Background of the Offer and the Merger," in "THE OFFER - 9.
Certain Information Concerning the Purchaser," in "THE OFFER - 10. Contacts
with the Company; Contracts and Arrangements" and in "THE OFFER - 11. The
Merger Agreement; Appraisal Rights" of the Offer to Purchase is incorporated
herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in "THE INTRODUCTION," in "THE OFFER
- - 1. Terms of the Offer and the Merger," in "THE OFFER - 2. Acceptance for
Payment and Payment for Shares," in "THE OFFER - 11. The Merger Agreement;
Appraisal Rights" and in "THE OFFER - 13. Certain Conditions of the Offer" of
the Offer to Purchase is incorporated herein by reference.
(b) Not applicable.
4
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ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(f) The answers to item 5 of the Schedule 14D-1 are incorporated
hereby by reference.
(g) The information set forth in "THE OFFER - 7. Effect of the
Offer on Market for the Shares; Stock Exchange Listing; and Exchange Act
Registration" of the Offer to Purchase is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The answer to item 4(a) of the Schedule 14D-1 is incorporated
herein by reference.
(b) The information set forth in "THE OFFER - 12. Source and
Amount of Funds" and in "THE OFFER - 16. Fees and Expenses" of the Offer to
Purchase is incorporated herein by reference.
(c) Not applicable.
(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The answer to item 5 of the Schedule 14D-1 is incorporated
herein by reference.
(b) The information set forth in "SPECIAL FACTORS - 5. Background
of the Offer and the Merger" of the Offer to Purchase is incorporated herein by
reference.
(c) The information set forth in "SPECIAL FACTORS - 2. Reasons for
the Offer and the Merger" of the Offer to Purchase is incorporated herein by
reference.
(d) The information set forth in the "INTRODUCTION," in "SPECIAL
FACTORS - 2. Reasons for the Offer and the Merger," in "SPECIAL FACTORS - 5.
Background of the Offer and the Merger," in "THE OFFER - 5. Certain United
States Tax Considerations of the Offer and the Merger," in "THE OFFER 10.
Contacts with the Company; Contracts and Arrangements" and in "THE OFFER - 11.
The Merger Agreement; Appraisal Rights" of the Offer to Purchase is
incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a)-(b) The information set forth in "INTRODUCTION," "SPECIAL FACTORS
- - 2. Reasons for the Offer and the Merger," "SPECIAL FACTORS - 3. Fairness of
the Offer and the Merger," in "SPECIAL FACTORS - 5. Background of the Offer and
the Merger" and "SPECIAL FACTORS - 6. Recommendation of the Company's Board of
Directors and the Special Committee" of the Offer to Purchase is incorporated
herein by reference.
(c)-(e) The information set forth in "INTRODUCTION," "SPECIAL FACTORS
- - 2. Reasons for the Offer and the Merger," "SPECIAL FACTORS - 3. Fairness of
the Offer and the Merger," in "SPECIAL FACTORS - 5. Background of the Offer and
the Merger," "SPECIAL FACTORS - 6. Recommendation of the Company's Board of
Directors and the Special Committee," in "THE OFFER - 1. Terms of the Offer"
and in "THE OFFER - 13. Certain Conditions of the Offer" of the Offer to
Purchase is incorporated herein by reference.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a)-(b) The information set forth in "INTRODUCTION," "SPECIAL FACTORS
- - 2. Reasons for the Offer and the Merger," in "SPECIAL FACTORS - 3. Fairness
of the Offer and the Merger," in "SPECIAL FACTORS - 5. Background of the Offer
and the Merger," in "THE OFFER - 11. The Merger Agreement; Appraisal Rights"
and in "THE OFFER - 16. Fees and Expenses" of the Offer to Purchase is
incorporated herein by reference.
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(c) The information set forth in "INTRODUCTION," "SPECIAL FACTORS
- - 2. Reasons for the Offer and the Merger" and in "SPECIAL FACTORS - 5.
Background of the Offer and the Merger" of the Offer to Purchase is
incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a)-(b) The answer to item 6 of the Schedule 14D-1 is incorporated
herein by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The answer to item 7 of the Schedule 14D-1 is incorporated herein by
reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) The information set forth in "THE OFFER - 9. Certain
Information Concerning the Purchaser" and in "THE OFFER - 11. The Merger
Agreement; Appraisal Rights" of the Offer to Purchase is incorporated herein by
reference.
(b) The information set forth in "SPECIAL FACTORS" - 3. Fairness
of the Offer and the Merger," "SPECIAL FACTORS - 5. Background of the Offer and
the Merger" and "SPECIAL FACTORS - 6. Recommendation of the Company's Board of
Directors and the Special Committee" of the Offer to Purchase is incorporated
herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in "THE OFFER - 11. The Merger
Agreement; Appraisal Rights" in the Offer to Purchase and in "SII - Appraisal
Rights of Dissenting Stockholders under Texas Law" of the Offer to Purchase is
incorporated herein by reference.
(b)-(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) The information set forth in "THE OFFER - 8. Certain
Information Concerning the Company" of the Offer to Purchase and the
information set forth in Appendix A to the Offer to Purchase is incorporated
herein by reference.
(b) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) Not applicable.
(b) The answer to item 8 of the Schedule 14D-1 is incorporated
herein by reference.
ITEM 16. ADDITIONAL INFORMATION.
The answer to item 10(f) of the Schedule 14D-1 is incorporated herein
by reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a) Not applicable.
(b) Not applicable.
(c)(1) Agreement and Plan of Merger, dated as of October 9, 1996,
between the Purchaser and the Company.
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(c)(2) Financial Consulting Agreement between The Hallwood Group
Incorporated and Hallwood Petroleum, Inc. dated June 30, 1994.
(c)(3) Compensation Agreement between Hallwood Petroleum, Inc. and
Anthony J. Gumbiner dated August 1, 1994.
(c)(4) Domestic Incentive Plan between Hallwood Energy Partners, L.P.
and Hallwood Petroleum, Inc. dated January 14, 1993.
(d)(1) Offer to Purchase.
(d)(2) Letter of Transmittal.
(d)(3) Letter dated October 15, 1996, to brokers, dealers, commercial
banks, trust companies and nominees.
(d)(4) Letter to be used by brokers, dealers, commercial banks, trust
companies and nominees to their clients.
(d)(5) Press Release issued by the Company and the Purchaser, dated
September 9, 1996
(d)(6) Press Release issued by the Company and the Purchaser, dated
October 10, 1996.
(d)(7) Form of newspaper advertisement, dated October 15, 1996.
(d)(8) Letter to Stockholders of the Company, dated October 15, 1996.
(e)(1) Appraisal Rights of Dissenting Stockholders Under Texas Law.
7
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: October 15, 1996 THE HALLWOOD GROUP INCORPORATED
By: /s/ Melvin J. Melle
-----------------------------------
Name: Melvin J. Melle
Title: Vice President
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page Number
- ------- ----------- -----------
<S> <C> <C>
(a) Not applicable.
(b) Not applicable.
(c)(1) Agreement and Plan of Merger, dated as of October 9, 1996,
between the Purchaser and the Company.
(c)(2)* Financial Consulting Agreement between The Hallwood Group
Incorporated and Hallwood Petroleum, Inc. dated June 30, 1994.
(c)(3)* Compensation Agreement between Hallwood Petroleum, Inc. and
Anthony J. Gumbiner dated August 1, 1994.
(c)(4)* Domestic Incentive Plan between Hallwood Energy Partners, L.P.
and Hallwood Petroleum, Inc. dated January 14, 1993.
(d)(1) Offer to Purchase.
(d)(2) Letter of Transmittal.
(d)(3) Letter dated October 15, 1996, to brokers, dealers, commercial banks,
trust companies and nominees.
(d)(4) Letter to be used by brokers, dealers, commercial banks, trust companies
and nominees to their clients.
(d)(5) Press Release issued by the Company and the Purchaser, dated September 9, 1996
(d)(6) Press Release issued by the Company and the Purchaser, dated October 10, 1996.
(d)(7) Form of newspaper advertisement, dated October 15, 1996.
(d)(8) Letter to Stockholders of the Company, dated October 15, 1996.
(e)(1) Appraisal Rights of Dissenting Stockholders Under Texas Law.
</TABLE>
*Incorporated by reference from the Company's Annual Report on Form 10-K for
the period ending December 31, 1995.
9
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Exhibit (c)(1)
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
<PAGE> 2
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 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.
<PAGE> 3
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 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.
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
3
<PAGE> 4
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 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
4
<PAGE> 5
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:
(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
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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, 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,
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(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 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.
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(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
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).
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(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.
(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
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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.
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
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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.
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
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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 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
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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
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.
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(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 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 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.
14
<PAGE> 15
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.
(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.
15
<PAGE> 16
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.
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.
16
<PAGE> 17
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 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.
17
<PAGE> 18
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
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,
18
<PAGE> 19
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.
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
19
<PAGE> 20
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.
20
<PAGE> 21
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
21
<PAGE> 22
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;
ANNEX A - PAGE 1
<PAGE> 23
(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.
ANNEX A - PAGE 2
<PAGE> 1
EXHIBIT (d)(1) 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) 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
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
<PAGE> 3
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."
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
<PAGE> 4
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."
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.
2
<PAGE> 5
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 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
3
<PAGE> 6
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.
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."
4
<PAGE> 7
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 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,
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:
5
<PAGE> 8
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
6
<PAGE> 9
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
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
7
<PAGE> 10
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.
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."
8
<PAGE> 11
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.
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
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<PAGE> 12
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 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
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
10
<PAGE> 13
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 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
11
<PAGE> 14
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.
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
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
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<PAGE> 15
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.
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."
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<PAGE> 16
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
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.
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
14
<PAGE> 17
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 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
15
<PAGE> 18
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.
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.
16
<PAGE> 19
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
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 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
17
<PAGE> 20
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 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
18
<PAGE> 21
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.
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.
19
<PAGE> 22
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:
HALLWOOD ENERGY CORPORATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDING HIGH LOW DIVIDENDS
------------------ ---- --- ---------
<S> <C> <C> <C>
December 31, 1994
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.
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
20
<PAGE> 23
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 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,
21
<PAGE> 24
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 $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.
22
<PAGE> 25
HALLWOOD ENERGY CORPORATION
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<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)
======= ======= ======= ======= =======
</TABLE>
(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.
23
<PAGE> 26
CONSOLIDATED BALANCE SHEETS
<TABLE>
<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 cost
method):
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 COMMON
SHARE EQUIVALENT $ 12.43 $ 11.72 $ 8.85 $ 12.03 $ 17.30
======== ======== ======== ======== ========
</TABLE>
24
<PAGE> 27
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.
25
<PAGE> 28
HALLWOOD ENERGY CORPORATION
MODIFIED CASH FLOW STATEMENTS (a)
AS OF APRIL 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended December 31, Projected Fiscal Years Ending December 31,
------------------------------- ----------------------------------------------------
REVENUE 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
<S> <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 Hallwoo 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
====== ====== ======= ====== ======= ======= ======= =======
</TABLE>
(a) See "Assumptions" on following pages.
(b) Includes acquisition fees paid to the
Company.
26
<PAGE> 29
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.
Operating Expenses - Operating Expenses are presented on an accrual
basis. However, such expenses exclude all depreciation, depletion and
amortization charges.
27
<PAGE> 30
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>
<S> <C> <C>
AMOUNT
NAME AND ADDRESS BENEFICIALLY PERCENT OF
OF BENEFICIAL OWNER OWNED COMMON STOCK
------------------- ----------- ------------
William L. Guzzetti, President 285 *
All directors and executive officers
as a group (nine individuals) 285 *
</TABLE>
* Represents less than 1% of the outstanding Shares.
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%,
28
<PAGE> 31
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 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
29
<PAGE> 32
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.
AMOUNT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED
------------------------ ------------------
William L. Guzzetti 285
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.
30
<PAGE> 33
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
------------------ ----------
<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 . . . . . . . . . . . . . . . 11.475
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 these positions until November 1980. He served as Senior Vice
President, Secretary and General Counsel from November
31
<PAGE> 34
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.
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
32
<PAGE> 35
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
</TABLE>
- -------------
(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.
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)
</TABLE>
- -------------
(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.
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."
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<PAGE> 36
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.
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
34
<PAGE> 37
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 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.
35
<PAGE> 38
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 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
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<PAGE> 39
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.
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.
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<PAGE> 40
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 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.
38
<PAGE> 41
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.
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."
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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.
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.
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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:
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
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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.
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
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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.
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
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<PAGE> 48
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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SCHEDULE III
[PRINCIPAL FINANCIAL SECURITIES, INC. LETTERHEAD]
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 "BEC") 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.
<PAGE> 50
Hallwood Energy Corporation
October 9, 1996
Page 2
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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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.
<TABLE>
<S> <C> <C>
By Mail: By Facsimile Transmission By Hand or
(for Eligible Institutions only): Overnight Delivery:
P. O. Box 37811 303 850-6507 4582 South Ulster Street Parkway
Denver, Colorado 80237 Confirm by telephone: Suite 1700
800-882-9225 Denver, Colorado 80237
</TABLE>
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
<PAGE> 52
Appendix A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
MARK ONE
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-9579
HALLWOOD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-1319083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 SOUTH ULSTER STREET PARKWAY
SUITE 1700
DENVER, COLORADO 80237
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
Shares of Common Stock outstanding at August 9, 1996 777,126 shares
<PAGE> 53
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 440 $ 10
Accounts receivable:
Affiliates 461 372
Trade 63 26
Current assets of affiliate 2,816 2,236
------- -------
Total 3,780 2,644
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method):
Proved mineral interests 112,832 113,159
Unproved mineral interests - domestic 127 82
Other property and equipment 3,774 3,758
------- -------
Total 116,733 116,999
Less accumulated depreciation, depletion,
amortization and property impairment (107,976) (107,160)
------- -------
Net Property, Plant and Equipment 8,757 9,839
------- -------
OTHER ASSETS
Investment in common stock of parent
(carried at market) 3,681 2,075
Deferred tax asset 342 500
Noncurrent assets of affiliate 1,549 1,407
------- -------
Total 5,572 3,982
------- -------
TOTAL ASSETS $ 18,109 $ 16,465
======= =======
</TABLE>
<PAGE> 54
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
June 30, December 31,
1996 1995
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 150 $ 106
Current portion of long-term debt 300 300
Current liabilities of affiliate 2,013 2,857
------- -------
Total 2,463 3,263
------- -------
NONCURRENT LIABILITIES
Long-term debt 675 825
Long-term liabilities of affiliate 5,312 5,366
------- -------
Total 5,987 6,191
------- -------
Total Liabilities 8,450 9,454
------- -------
STOCKHOLDERS' EQUITY
Series D convertible cumulative, redeemable
preferred stock, $.01 par value; 65,000 shares
authorized; 18,864 shares issued with a
liquidation preference of $1,154 (canceled
during 1995)
Series E convertible preferred stock; $.01 par
value; 450,000 shares authorized; 356,000
shares issued with a liquidation preference of
$.01 per share (converted to common stock
during 1995)
Common stock, $.50 par value; 80,000,000
shares authorized; 1,198,121 shares issued 599 599
Capital in excess of par value 53,789 53,789
Accumulated deficit (40,384) (41,584)
Unrealized gain (loss) on investment in common
stock of parent 604 (1,002)
Less cost of treasury stock of 420,995 and
405,995 common shares at 1996 and 1995,
respectively (4,949) (4,791)
------- -------
Stockholders' Equity - net 9,659 7,011
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,109 $ 16,465
======= =======
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months
Ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 673 $ 519
Gas revenue 1,057 710
------- -------
1,730 1,229
------- -------
EXPENSES:
Production operating expense 350 303
General and administrative 187 248
Depreciation, depletion and amortization 367 443
Interest 113 133
------- -------
1,017 1,127
------- -------
OTHER INCOME (EXPENSE): 36 (55)
------- -------
INCOME BEFORE INCOME TAXES 749 47
PROVISION FOR INCOME TAXES:
Current 28 92
Deferred 95
------- -------
123 92
------- -------
NET INCOME (LOSS) $ 626 $ (45)
======= =======
NET INCOME (LOSS) PER COMMON SHARE $ .80 $ (.09)
======= =======
WEIGHTED AVERAGE COMMON SHARES 785 494
======= =======
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Six Months
Ended June 30,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 1,345 $ 1,037
Gas revenue 2,239 1,490
------- -------
3,584 2,527
------- -------
EXPENSES:
Production operating expense 732 642
General and administrative 434 500
Depreciation, depletion and amortization 816 841
Impairment of oil and gas properties 464
Interest 254 204
------- -------
2,236 2,651
------- -------
OTHER INCOME 64 10
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,412 (114)
PROVISION FOR INCOME TAXES:
Current 54 92
Deferred 158
------- -------
212 92
------- -------
NET INCOME (LOSS) 1,200 (206)
PREFERRED STOCK DIVIDENDS 356
------- -------
NET INCOME (LOSS) FOR COMMON STOCKHOLDERS $ 1,200 $ (562)
======= =======
NET INCOME (LOSS) PER COMMON SHARE $ 1.52 $ (1.14)
======= =======
WEIGHTED AVERAGE COMMON SHARES 789 494
======= =======
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
Ended June 30,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,200 $ (206)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation, depletion, amortization and
property impairment 816 1,305
Equity in earnings of affiliate (2,397) (1,325)
Amortization of bond discount (24)
Deferred income tax expense 158
------- -------
Cash used in operations before working
capital changes (223) (250)
Changes in operating assets and liabilities
provided(used) cash net of noncash activity:
Receivables from affiliates (145)
Receivables - trade (37)
Accounts payable and accrued liabilities 44 (52)
------- -------
Net cash used in operating activities (361) (302)
------- -------
INVESTING ACTIVITIES:
Additions to property (16) (19)
Property development costs (85)
Distributions received from affiliate 1,355 1,554
Refinance of Spraberry investment (155)
Sale of bonds 1,376
Purchase of common stock of parent (314)
------- -------
Net cash provided by investing activities 1,099 2,597
------- -------
FINANCING ACTIVITIES:
Payments on long-term debt (150)
Proceeds from long-term debt 950
Dividends paid (849)
Repurchase of shares (158) (1,042)
------- -------
Net cash used in financing activities (308) (941)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 430 1,354
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 10 668
------- -------
END OF PERIOD $ 440 $ 2,022
======= =======
(F1)
The accompanying notes are an integral part
of the financial statements.
</TABLE>
<PAGE> 58
HALLWOOD ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Corporation ("HEC" or the "Company") is a Texas corporation
engaged in the development, production and sale of oil and gas. HEC is the
general partner of Hallwood Energy Partners, L. P. ("HEP"), a publicly traded
Delaware limited partnership. HEC now conducts substantially all of its
operations through HEP. HEP's properties are primarily located in the Rocky
Mountain, Mid-Continent, Texas and Gulf Coast regions of the United States. The
activities of HEP are conducted by HEP Operating Partners, L. P. ("HEPO") and
EDP Operating, Ltd. ("EDPO").
HEC's wholly-owned subsidiary, Hallwood G. P., Inc., is the general partner of
EDPO. Unless otherwise indicated, all references to HEC in connection with the
ownership, exploration, development or production of oil and gas properties
refer to HEC and its proportionate ownership of HEP. As of June 30, 1996, HEC's
parent company, The Hallwood Group Incorporated ("Hallwood Group"), owns
approximately 82% of the outstanding common shares of HEC.
The interim financial data are unaudited; however, in the opinion of management,
the interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. These financial statements should be read in conjunction with the
financial statements and accompanying footnotes included in HEC's December 31,
1995 Annual Report on Form 10-K.
ACCOUNTING POLICIES
INVESTMENT IN HEP
HEC'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 HEC holds
approximately 6.5% of HEP's limited partner Units. HEC accounts for its
ownership of HEP using the proportionate consolidation method of accounting
whereby HEC records its proportionate 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 its affiliate,
Hallwood Consolidated Resources Corporation ("HCRC"), which HEP accounts for
under the equity method.
INVESTMENT IN PARENT
Hallwood Group, a public company traded on the New York Stock Exchange, owns
approximately 82% of the outstanding common shares of HEC. Hallwood Group is a
diversified holding company with interests in oil and gas, specialty
restaurants, real estate, textile products and hotels.
From 1990 through 1995, HEC acquired 267,709 shares (adjusted for Hallwood
Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares of
Hallwood Group, on the open market. Because HEC has the ability and the intent
to hold the stock of Hallwood Group indefinitely, HEC has recorded it as a long-
term investment and has classified it as an available-for-sale security.
During 1991 and 1992, HEC acquired $2,439,000 principal amount of Hallwood
Group'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, Hallwood Group 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 carrying
value.
<PAGE> 59
NOTE 2 - DEBT
During the second quarter of 1995, the Company entered into a credit agreement
with a bank that has committed to loan the Company up to $1,500,000. As of June
30, 1996, the Company has $975,000 outstanding against the credit line.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (10.25% at June 30, 1996). Interest is payable monthly, and principal
payments of $75,000 are due quarterly. The credit line is secured by the Class
A HEP Units owned by the Company. The credit agreement limits aggregate
dividends paid by the Company to $3.50 per share each fiscal year.
NOTE 3 - REPURCHASE OF COMMON STOCK
In May 1996, HEC purchased 15,000 shares of its common stock from an individual
in a privately negotiated transaction for $10.50 per share.
NOTE 4 - LEGAL PROCEEDINGS
In June 1996, HEP and the other parties to the lawsuits styled Lamson Petroleum
Corporation v. Hallwood Petroleum, Inc. et al. settled the lawsuits. The
plaintiffs in the lawsuits claimed they had valid leases covering streets and
roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul
Castille #1 well, Evangeline Shrine Club #1 well and Duhon #1 well, which
represented approximately .4% to 2.3% of HEP s interest in these properties, and
they were entitled to a portion of the production from the wells dating from
February 1990. In the settlement, HEP and the plaintiffs agreed to cross-convey
interests in certain leases to one another, and HEP agreed to pay the plaintiffs
$728,000. HEP has not recognized revenue attributable to the contested leases
since January 1993. These revenues plus accrued interest, totaling $506,000,
had been placed in escrow pending the resolution of the lawsuits. HEC s pro
rata share of the excess of the cash paid over the escrowed amounts, is included
in other income (expense) in the accompanying financial statements. The cross-
conveyance of the interests in the leases will result in a decrease in HEP s
reserves of $374,000 in future net revenues, discounted at 10%.
NOTE 5 - SUBSEQUENT EVENT
On July 1, 1996, HEP and HCRC completed a transaction involving the sale by Fuel
Resources Development Co., a wholly owned subsidiary of Public Service Company
of Colorado, and other interest owners of their interests in 38 coal bed methane
wells located in La Plata County, Colorado and Rio Arriba County, New Mexico.
Thirty-four of the wells, estimated to have reserves of 53 BCF, were assigned to
44 Canyon LLC ( 44 Canyon ), a special purpose entity owned by a large east
coast financial institution. The wells qualify for tax credits under Section 29
of the Internal Revenue Code. Hallwood Petroleum, Inc. ( HPI ) will manage and
operate the properties on behalf of 44 Canyon. The $27.8 million purchase price
<PAGE> 60
was funded by 44 Canyon through the sale of a volumetric production payment to
an affiliate of Enron Capital & Trade Resources Corp., a subsidiary of Enron
Corp., the sale of a subordinated production payment and certain other property
interests for $3.45 million to an affiliate of HEP and HCRC, La Plata
Associates, LLC ( LPA ) and additional cash contributed by the owners of 44
Canyon. LPA is owned equally by HEP and HCRC. As a result of the transaction,
HEP expects to add 9.8 BCF of gas to its reserve base, which represents
approximately 52% of its estimated 1996 production.
HEC will receive a 4% economic interest in HEP s interest in LPA in satisfaction
of the acquisition fee payable to HEC. The assignment of this interest will
result in the addition of approximately 400,000 mcf of gas to HEC s direct
reserve base.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
FINANCING
During the second quarter of 1995, the Company entered into a credit agreement
with a bank that has committed to loan the Company up to $1,500,000. As of June
30, 1996, the Company has $975,000 outstanding against the credit line.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (10.25% at June 30, 1996). Interest is payable monthly, and principal
payments of $75,000 are due quarterly. The credit line is secured by the HEP
Class A Units owned by the Company. The credit agreement limits aggregate
dividends paid by the Company to $3.50 per share each fiscal year.
Included in the accompanying balance sheet at June 30, 1996 are long-term
obligations of affiliate of $5,312,000 which represents HEC's pro rata share of
the long-term obligations of HEP. The long-term obligations of HEP consist
primarily of $30,700,000 borrowed under a line of credit and $8,571,000 borrowed
under a note purchase agreement. HEP's borrowings are secured by a first lien
on approximately 80% in value of HEP's oil and gas properties.
DEVELOPMENT PROJECTS AND ACQUISITIONS
In the first six months of 1996, HEC through its interest in the Saxon Drilling
Venture, participated in drilling nine wells in Winkler County, Texas. Total
net cost to HEC is approximately $62,000. Effective April 1, 1996, HEC repaid
its share of the loan provided to Hallwood Spraberry Drilling Company, L.L.C.
( HSD ) by an outside third party. The net cost to HEC was approximately
$176,000, and HEC now has direct ownership of an interest of approximately 2% in
the Rocker "b" Ranch properties.
In the second quarter of 1996, HEC repurchased 15,000 shares of its common stock
from an individual in a privately negotiated transaction for $10.50 per share.
<PAGE> 61
HEC had no other material property acquisitions, sales, exploration or
development activity during the first six months of 1996. A summary of HEP's
significant property transactions follows.
Through June 30, 1996, HEP incurred approximately $4,758,000 for exploration,
development and acquisition costs and approximately $441,000 for the purchase of
shares of Hallwood Consolidated Resources Corporation ( HCRC ) toward the 1996
capital budget of $11,500,000. The expenditures were comprised of approximately
$4,142,000 for domestic exploration and development expenditures and
approximately $616,000 for property acquisitions. A description of significant
exploration and development projects to date in 1996 follows.
HEP continues to devote capital resources to the West Texas Kermit area in 1996.
HEP drilled or participated in the drilling of nine wells, eight of which were
successful, and participated in one unsuccessful recompletion in the first six
months of 1996, for a total cost of approximately $760,000. The new wells in
this area are capable of producing approximately 750 gross equivalent barrels of
oil per day but are currently limited to approximately 500 gross equivalent
barrels of oil per day due to limitations on production imposed by state laws
and regulations. HEP's interest in these wells averages 23%. HEP is committed
to drilling at least three more wells in this area in the third quarter and has
plans to drill or recomplete up to ten additional wells by year end.
During the second quarter of 1996, HEP purchased 12,965 shares of HCRC for $34
per share. The shares were originally purchased by HCRC in connection with an
odd lot repurchase offer and then were resold to HEP at the price paid by HCRC
for such shares.
HEP acquired three dimensional (3-D) seismic data covering 106 square miles on
the Cowden Ranch in Crane County, Texas. The prospect will be operated by a
major oil company, and HEP has a 12.5% working interest. HEP s share of costs
to date is $425,000. Seismic interpretation is in process, and two exploratory
wells are expected to be drilled in 1996.
HEP acquired 3-D seismic data and related acreage in the Merkel prospect area
which covers 87 square miles in Jones, Taylor and Nolan Counties, Texas.
Expenditures in the first six months of 1996 totaled $200,000. Thus far, HEP
has participated in drilling five wells on developed prospects for a total cost
of $135,000, including one well drilled in late 1995. Two of the wells are
awaiting completion, two are on production with average initial rates of 60
barrels of oil per day, and one well was unsuccessful. HEP s interest in the
wells is 10%. Fourteen more prospects have been identified on 13 square miles
of data, and seismic interpretation has begun on the remaining 74 square miles
of data.
HEP also participated in the drilling of two nonoperated wells in Williams
County, North Dakota in the latter part of 1995 and the first quarter of 1996,
one of which was dry and the other only marginally successful, for a total cost
of approximately $200,000. HEP also drilled an exploratory dry hole in Richland
County, Montana, at a cost of $120,000. HEP is currently completing an
Interlake Formation development well, drilled in the second quarter at a cost of
approximately $425,000
<PAGE> 62
HEP incurred approximately $189,000 in the first quarter, net to HEP's interest,
for four recompletions and one drilled well in the Rocker "b" Ranch in Reagan
County, Texas. This activity has increased HEP's share of production by 90
equivalent barrels of oil per day. During the first quarter, HEP also acquired
interests in five additional producing leases on the Rocker "b" Ranch for a
total of $93,000. Effective April 1, 1996, HEP repaid its share of the debt of
Hallwood Spraberry Drilling Company, L.L.C. ( HSD ) through additional
borrowings under its bank credit agreement and assumed direct ownership of its
share of HSD s properties. In the second quarter of 1996, HEP recompleted
three wells, two of which were successful, and began drilling another well in
July. HEP has plans to recomplete at least five more wells before year end and
will consider other work, if the capital is available.
Under a farmout agreement completed in 1995, HEP participates in several
multiple lateral, horizontal wells in the Giddings Austin Chalk play in Lee
County, Texas. Two successful wells and one unsuccessful well have been drilled
thus far. HEP's interests in the area range from 3% to 4%. Gross average
initial production rates were 750 barrels of oil per day on the first two wells.
HEP's cost for all three wells was approximately $25,000.
In the San Juan Basin area, HEP, through an affiliate, acquired interests in 34
coal bed methane wells located in La Plata County, Colorado for $1,300,000.
HEP s interest in the wells is expected to add 9.8 BCF of gas to its reserve
base, which represents approximately 52% of its estimated 1996 production. The
acquisition was completed on July 1, 1996. In the same transaction, HEP also
directly acquired interests in four non-producing wells in Rio Arriba County,
New Mexico.
In the first quarter of 1996, HEP successfully recompleted a well in New Mexico
for approximately $90,000. Production on this well averaged 1,600 mcf of gas
per day which exceeds the initial production rates experienced when the well was
drilled in 1990. Rates prior to this workover were approximately 400 mcf of gas
per day. HEP owns approximately 55% of this well. HEP began drilling another
Fruitland Coal development well in late July and anticipates completion of the
well in August.
HEP is also actively evaluating acquisitions in strategic areas. Such
acquisitions would be financed using the capital budget, supplemented by
external financing when appropriate.
PROPERTY SALES
During the first quarter of 1996, HEP received approximately $1,300,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HEP also
received another $88,000 in early April for the sale of various nonstrategic
properties at auction. In June 1996, HEP completed the sale of its interests in
the Bethany Longstreet area of Louisiana (approximately 575,000 equivalent
barrels of oil, measured using December 31, 1995 pricing) for approximately
$3,800,000.
<PAGE> 63
HEP DISTRIBUTIONS
HEP declared a limited partner distribution of $.13 per Class A Unit and $.25
per Class C Unit and a general partner distribution of $548,000 for the second
quarter of 1996, payable on August 15, 1996. The total of the distributions
receivable by HEC is $626,000, which has been accrued in receivables from
affiliates at June 30, 1996.
RESULTS OF OPERATIONS
The following table is presented to contrast HEC's average oil and gas prices
and production. Significant fluctuations are discussed in the accompanying
narrative.
<TABLE>
<CAPTION>
OIL AND GAS PRICES AND PRODUCTION
(In thousands except for price)
For the Three Months
Ended June 30,
1996 1995
Oil Gas Oil Gas
(bbl) (mcf) (bbl) (mcf)
<S> <C> <C> <C> <C>
Average
price $20.27 $ 2.28 $16.22 $ 1.62
Production 33 463 32 437
</TABLE>
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1996 1995
Oil Gas Oil Gas
(bbl) (mcf) (bbl) (mcf)
<S> <C> <C> <C> <C>
Average
price $18.94 $ 2.41 $16.73 $ 1.69
Production 71 928 62 880
</TABLE>
<PAGE> 64
QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JUNE 30, 1995
OIL REVENUE
Oil revenue increased $154,000 during the second quarter of 1996 as compared
with the second quarter of 1995. This increase is comprised of an increase in
oil production from 32,000 barrels in 1995 to 33,000 barrels in 1996 combined
with an increase in oil prices from $16.22 per barrel in 1995 to $20.27 per
barrel in 1996. The increase in oil production is due to increased production
from developmental and exploratory drilling projects in Montana, Wyoming and
West Texas partially offset by normal production declines.
GAS REVENUE
Gas revenue increased $347,000 during the second quarter of 1996 as compared
with the second quarter of 1995 primarily as a result of an increase in average
gas prices from $1.62 per mcf in 1995 to $2.28 in 1996 combined with an increase
in production from 437,000 mcf in 1995 to 463,000 mcf in 1996. The increase in
gas production is primarily due to increased production from developmental and
exploratory drilling projects in Montana, Wyoming and West Texas partially
offset by normal production declines.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $47,000 during the second quarter of 1996
as compared with the second quarter of 1995. The increase is primarily due to
increased production taxes and operating expenses during the second quarter of
1996 due to the production increase described above.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal and audit fees, as well as allocated
internal overhead incurred by Hallwood Petroleum, Inc. ("HPI"), an affiliate of
HEC, which manages and operates certain oil and gas properties on behalf of HEC,
HEP and their affiliates. These costs decreased $61,000 during the second
quarter of 1996 as compared to the second quarter of 1995, primarily due to a
decrease in allocated internal overhead.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization expense decreased $76,000 during the
second quarter of 1996 as compared with the second quarter of 1995. The
decrease is primarily due to lower capitalized costs in 1996.
INTEREST EXPENSE
Interest expense decreased $20,000 during the second quarter of 1996 as compared
with the second quarter of 1995 as a result of lower interest rates in 1996.
OTHER INCOME
Other income consists primarily of HEC's direct interest income, as well as
<PAGE> 65
HEC's share of HEP's interest income, facilities income from two gathering
systems in New Mexico, pipeline revenue, equity in income (loss) of affiliate
and miscellaneous income or expense. The increase of $91,000 during the second
quarter of 1996 as compared with the second quarter of 1995 is primarily due to
an increase in HEP s equity in earnings of affiliate due to higher oil and gas
revenues. The remaining increase is comprised of numerous other items, none of
which are individually significant.
FIRST SIX MONTHS OF 1996 COMPARED TO FIRST SIX MONTHS OF 1995
The comparisons for the first six months of 1996 and the first six months of
1995 are consistent with those discussed in the second quarter of 1996 compared
to the second quarter of 1995 except for the following:
OIL REVENUE
Oil revenue increased $308,000 during the first six months of 1996 as compared
with the first six months of 1995 due to an increase in oil prices from $16.73
per barrel in 1995 to $18.94 per barrel in 1996 combined with an increase in oil
production from 62,000 barrels in 1995 to 71,000 barrels in 1996. The
production increase is due to increased production from developmental and
exploratory drilling projects in Montana, Wyoming and West Texas partially
offset by normal production declines.
GAS REVENUE
Gas revenue increased $749,000 during the first six months of 1996 as compared
with the same period in 1995 due to an increase in gas prices from $1.69 per mcf
in 1995 to $2.41 in 1996 combined with an increase in production from 880,000
mcf in 1995 to 928,000 mcf in 1996. The increase in production is due to
increased production from developmental and exploratory drilling projects in
Montana, Wyoming and West Texas partially offset by normal production declines.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties for the six months ended June 30, 1995,
represents HEC s pro rata share of the write-off of HEP s Indonesian operations.
INTEREST EXPENSE
Interest expense increased $50,000 during the first six months of 1996 as
compared with the first six months of 1995 as HEC had outstanding borrowings for
six months in 1996 and for two months in 1995.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 12 of Form 10-K for the year
ended December 31, 1995, and Item 1 - Note 4 of this Form 10-Q.
<PAGE> 66
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 1996, HCRC held its Annual Meeting of Shareholders at
which Anthony J. Gumbiner, William L. Guzzetti, Brian M. Troup,
Hans-Peter Holinger, Rex A. Sebastian and Nathan C. Collins were
elected directors. Following is the number of votes cast for and
withheld for each of the directors.
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
<S> <C> <C>
Anthony J. Gumbiner 757,845 8,066
William L. Guzzetti 757,845 8,066
Brian M. Troup 758,035 7,876
Hans-Peter Holinger 758,035 7,876
Rex A. Sebastian 758,071 7,840
Nathan C. Collins 758,071 7,840
<F1>
There were no abstentions or broker non-votes.
</TABLE>
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
None.
<PAGE> 67
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLWOOD ENERGY CORPORATION
Date: August 9, 1996 By: /s/Robert S. Pfeiffer
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)
<PAGE> 68
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
MARK ONE
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
Commission File Number 0-9579
HALLWOOD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of 75-1319083
incorporation or organization) (I.R.S. Employer
Identification Number)
4582 SOUTH ULSTER STREET PARKWAY
SUITE 1700
DENVER, COLORADO 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.50 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 27, 1996 was approximately $1,737,153.
Shares of Common Stock outstanding at February 27, 1996: 792,126 Shares.
<PAGE> 69
PART I
ITEM 1 - BUSINESS
Hallwood Energy Corporation ("HEC") 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. HEC is the general partner of Hallwood Energy Partners,
L.P. ("HEP"), a publicly traded oil and gas limited partnership. HEC is also
the general partner of HEP Operating Partners, L.P. ("HEPO"), one of the
operating partnerships for HEP. HEC's wholly owned subsidiary, Hallwood
G.P., Inc. is the general partner of EDP Operating, Ltd. ("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 partner interests ("Units").
HEC'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 HEC holds
approximately 6.5% of HEP's limited partner Units. HEC accounts for its
ownership of HEP using the proportionate consolidation method of accounting
whereby HEC 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 40% 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 HEC is the sole general partner of HEPO. Hallwood, G.P.,
Inc., a wholly-owned subsidiary of HEC, 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.
HEC does not engage in any other line of business nor does it have any
employees. Hallwood Petroleum, Inc. ("HPI"), an affiliate of HEP, operates
the properties and administers the day to day activities of HEC. On February
27, 1996, HPI had 133 employees.
The Hallwood Group Incorporated ("Hallwood Group"), a public company traded
on the New York Stock Exchange, owns 80% of the outstanding common shares of
HEC. Hallwood Group is a diversified holding company with interests in oil
and gas, specialty restaurants, real estate, textile products and hotels.
From 1990 through 1995, HEC acquired 267,709 shares (adjusted for Hallwood
Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares
of Hallwood Group on the open market. HEC is holding the stock of Hallwood
Group, as a long-term investment and has classified it as an available-for-
sale security. As of June 30, 1994, it was determined that Hallwood Group
stock had experienced an other than temporary decline in fair value.
Therefore, HEC's investment in Hallwood Group was written down from its
original cost to a new cost basis based on its market value at June 30, 1994
of $11.50 per share. The resultant loss of $3,249,000 was recorded as an
impairment of investment in parent in the accompanying financial statements
for 1994.
During 1991 and 1992 HEC acquired $2,439,000 principal amount of Hallwood
Group'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, Hallwood Group 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.
<PAGE> 70
MARKETING
The oil and gas produced from the properties owned by HEC has typically been
marketed through normal channels for such products. Oil is generally sold to
purchasers at field prices posted by the principal purchasers of crude oil in
the areas where producing properties are located. In response to the
volatility in the oil markets, HEP entered into financial contracts for
hedging transactions of between 3% and 22% of its estimated oil production
for 1996 through 1999.
The majority of HEC's gas production is sold on the spot market and is
transported in intrastate and interstate pipelines. HEP has entered into
financial contracts for hedging transactions of between 17% and 47% of its
estimated gas production for 1996 through 2000.
The purpose of the hedges is to provide protection against price drops and to
provide a measure of stability in the volatile environment of oil and natural
gas spot pricing. The amounts received or paid upon settlement of these
contracts are recognized as oil or gas revenue at the time the hedged volumes
are sold.
Both oil and natural gas are purchased by refineries, major oil companies,
public utilities, industrial customers and other users and processors of
petroleum products. HEC is not confined to, nor dependent upon, any one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser, or a few purchasers would not materially affect HEC's business
because there are numerous purchasers in the areas in which HEC sells its
production. Sales to Conoco Inc. and Marathon Petroleum Company accounted
for 30% and 14%, respectively, of HEC's oil and gas sales for the year ended
December 31, 1995 and 23% and 12%, respectively, of HEC's oil and gas sales
for the year ended December 31, 1994. Sales to Conoco Inc., Koch Oil Company
and Marathon Petroleum Company accounted for 21%, 11% and 10%, respectively,
of HEC's oil and gas sales for the year ended December 31, 1993.
Factors, if they were to occur, which might adversely affect HEC include
decreases in oil and gas prices, the reduced availability of a market for
production, rising operational costs of producing oil and gas, compliance
with and changes in environmental control statutes and increasing costs of
transportation.
COMPETITION
In the course of its development activities, HEC must compete with other
entities for the acquisition of undeveloped acreage and desirable leaseholds.
As described above under "Marketing," production is sold on the spot market,
thereby reducing sales competition; however, oil and gas must compete with
coal, atomic energy, hydro-electric power and other forms of energy.
REGULATION
The production and sale of oil and gas is subject to federal and state
governmental regulations in a variety of ways including environmental
regulations, labor laws, regulation of interstate sales, excise taxes and
federal and Indian lands royalty payments. Failure to comply with these
regulations may result in fines, cancellation of licenses to do business and
cancellation of federal, state or Indian leases.
The production of oil and gas is subject to regulation by the state
regulatory agencies in the states in which HEC does business. These agencies
make and enforce regulations to prevent waste of oil and gas and to protect
the rights of owners to produce oil and gas from a common reservoir. The
regulatory agencies regulate the amount of oil and gas produced by assigning
allowable production rates to wells capable of producing oil and gas.
ENVIRONMENTAL CONSIDERATIONS
The exploration for, and development of, oil and gas involves the extraction,
production and transportation of materials which, under certain conditions,
can be hazardous or can cause environmental pollution problems. In light of
the current interest in environmental matters, HEC cannot predict the effect
of possible future public or private action on its business. HEC is taking
actions necessary in its operations to conform with applicable federal, state
and local environmental regulations and does not presently anticipate that
the compliance with federal, state and local environmental regulations will
have a material adverse effect upon capital expenditures, earnings or the
competitive position of HEC in the oil and gas industry.
<PAGE> 71
INSURANCE COVERAGE
HEC is subject to all the risks inherent in the exploration for, and
development of, oil and gas, including blowouts, fires and other casualties.
HEC maintains insurance coverage as is customary for entities of a similar
size engaged in operations similar to that of HEC, but losses can occur from
uninsurable risks or in amounts in excess of existing insurance coverage.
The occurrence of an event which is not insured or not fully insured could
have an adverse impact upon HEC's earnings and financial position.
ITEM 2 - PROPERTIES
OIL AND GAS PROPERTIES
HEC's oil and gas properties consist primarily of its indirect interest in
properties owned through its investment in HEP. Quantities and values
related to HEP's properties are shown net to HEC's interest in HEP. The
following reserve information for HEC represents estimated quantities of
proved oil and gas reserves which are located in the United States. The
determination of oil and gas reserves is based on estimates which are highly
complex and interpretive. The estimates are subject to continuing change as
additional information becomes available. The following table presents the
December 31, 1995 SEC case reserve data by significant areas and fields.
<TABLE>
<CAPTION>
Total Proved
Reserve Quantities Discounted Value
Mcf of Bbls of Proved Proved
Gas Oil Undeveloped Developed Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Scott/West Ridge 5,089 114 $ 9,169 $ 9,169
West Texas 1,862 568 $ 226 3,916 4,142
Kansas 89 56 35 219 254
San Juan Basin 1,484 18 566 584
South Texas Misc. 579 24 165 665 830
Southeastern New
Mexico 847 23 850 850
East Riceville 202 243 243
Other 1,485 209 191 2,737 2,928
------ ----- ----- ------ ------
11,637 994 $ 635 $18,365 $19,000
======= ==== ===== ======== =======
</TABLE>
The following table presents the oil and gas production for significant areas
and fields.
<TABLE>
<CAPTION>
Production for the Years Ended December 31,
1995 1994
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
(In thousands)
<S> <C> <C> <C> <C>
Scott/West Ridge 907 24 804 28
West Texas 138 48 98 31
Kansas 16 7 15 7
San Juan Basin 354 258
Southeastern New Mexico 195 6 230 2
East Riceville 32 33
South Texas 76 5
Other 90 40 494 60
------ ----- ----- ----
1,808 130 1,932 128
====== ===== ====== ====
</TABLE>
<PAGE> 72
SCOTT/WEST RIDGE
The Scott/West Ridge area consists of 12 gas wells located in Lafayette
Parish, Louisiana. The wells produce principally from the Bol Mex formations
at 13,500 to 14,500 feet and are operated by HPI, an affiliate of HEP. The
four most significant wells in the area, all of which were drilled by HPI
since 1989, are the A. L. Boudreaux #1, the G. S. Boudreaux Estate #1, the
Lessin Fontenot #1 and the Evangeline Shrine Club #1. During 1995, HEP
performed three workovers in this area, two of which were successful.
Surface facilities were upgraded on several wells to improve product
handling.
WEST TEXAS
The West Texas area is comprised of two significant groups of properties each
containing significant projects. The West Texas Spraberry area consists of
367 producing wells in Borden, Upton, Reagan, Glasscock and Martin counties
of Texas. HPI and its affiliates operate 357 of these wells. Most of the
current production from these wells is from the Upper Spraberry, Jo Mill,
Dean and Upper Wolfcamp formations which are at depths that range from
approximately 5,000 to 9,000 feet. HEP discovered a new field during 1995,
adding the SRH (Clearfork) as a producing horizon to 70 wells in eastern
Reagan County. HEP drilled 44 successful wells and one dry hole, and
recompleted 30 wells on acreage in the Rocker "b" Ranch. Most of the work
was performed under a line of credit of $4,650,000 net to HEP's interest,
provided by a third party lender. The line of credit is secured only by
leases in the project area and is otherwise nonrecourse to HEP. HEP plans to
purchase additional producing wells and to perform recompletions in this area
in 1996.
The West Texas Kermit area consists of 39 wells in Gaines and Winkler
Counties, Texas, 36 of which are operated by HPI and its affiliates. The
primary focus of this area is the development of the Holt and San Andres
formation at a depth of 5,100 feet on several leases in Winkler County.
During 1995, HEP drilled seven wells; one of which was a dry hole, and
performed ten recompletions; two of which were unsuccessful. HEP also
purchased eleven wells in the area in 1995. Up to ten new wells may be
drilled in 1996, and a secondary recovery project is being planned for the
area beyond 1996.
KANSAS
The Kansas area consists of 310 producing wells, of which 294 are operated by
HPI and 16 are operated by unaffiliated entities, located in 15 counties in
Kansas. These wells produce principally from the Arbuckle and numerous
Lansing-Kansas City formation zones from 3,000 feet to 6,500 feet. During
1995, HEP drilled two development wells, one of which was successful, and
performed 15 successful recompletions. The Kansas area is a mature operation
where recompletions and limited development drilling represent the most
prudent plans for future asset base protection. HEP plans to sell three
properties in this area in 1996 and will continue to evaluate and divest
nonstrategic properties.
SAN JUAN BASIN
The San Juan Basin region consists of 52 wells located in San Juan County,
New Mexico. The wells produce from the Fruitland Coal, Pictured Cliffs, Mesa
Verde and Dakota formations at depths of 1,900 to 7,000 feet. Twenty-four
wells are coal bed methane wells qualifying for the Section 29 alternative
fuels tax credit. During 1994, HEP, HCRC and an unaffiliated entity formed a
partnership to utilize effectively the Section 29 tax credits. During 1995,
HEP successfully drilled two additional coal bed methane wells. For 1996,
HEP plans to drill one additional well.
<PAGE> 73
SOUTHEASTERN NEW MEXICO
The Southeastern New Mexico area consists of 63 producing wells, 43 of which
are operated by HPI, which produce primarily gas and are located on the
northwestern edge of the Delaware Basin in Lea, Eddy and Chavez Counties, New
Mexico. These wells produce at depths ranging from approximately 2,500 feet
to 14,000 feet from the Delaware, Atoka, Bone Springs and Morrow formations.
During 1995, HEP performed nine successful recompletions and participated as
a nonoperator in six successful development wells. During 1996, HEP plans to
perform additional recompletions and exploit development drilling
opportunities.
EAST RICEVILLE
The East Riceville area consists of three gas wells and one oil well located
in Vermilion Parish, Louisiana. The wells produce principally from the
Barton Sand formation at a depth of approximately 14,800 feet, and the wells
are operated by HPI. No significant development plans for this area are
expected for 1996.
SOUTH TEXAS
The South Texas basin consists of approximately fifteen wells which are
operated by unaffiliated entities, producing primarily from the Wilcox at
depths of 10,000 to 12,000 feet. The majority of the reserves in this area
are located in the Mercy Field in San Jacinto County in the Houston Embayment
Basin. In 1995, four miles of existing pipeline were purchased and joined
with two miles of newly-constructed pipeline. Several shallower wells of
approximate depths of 800 feet were also purchased for deepening potential
and to alleviate high salt water disposal expense. Over 500 acres of leases
were also acquired to drill a step-out test in 1996. There have also been
several successful workovers in 1995 that have potential future benefits.
PROPERTY SALES
During 1994, HEP received $394,000 in connection with the sale of properties.
The proceeds are comprised of numerous sales of various nonstrategic
properties, none of which are individually significant.
PRODUCTIVE OIL AND GAS WELLS
The following table summarizes the productive oil and gas wells as of
December 31, 1995 attributable to HEC's and HEP's direct interests.
Productive wells are producing wells and wells capable of production. Gross
wells are the total number of wells in which HEC and HEP have an interest.
Net wells are the sum of HEC's and HEP's fractional interests owned in the
gross wells.
<TABLE>
<CAPTION>
HEC Direct HEP Direct
Productive Wells Gross Net Gross Net
<S> <C> <C> <C> <C>
Oil 35 1 892 378
Gas 0 0 351 114
---- ------ ----- -----
Total 35 1 1,243 492
===== ====== ===== =====
</TABLE>
<PAGE> 74
OIL AND GAS ACREAGE
The following table sets forth the developed and undeveloped leasehold
acreage held directly by HEC and HEP as of December 31, 1995. Developed
acres are acres which are spaced or assignable to productive wells.
Undeveloped acres are acres on which wells have not been drilled or completed
to a point that would permit the production of commercial quantities of oil
and gas regardless of whether or not such acreage contains proved reserves.
Gross acres are the total number of acres in which HEC and HEP have a working
interest. Net acres are the sum of HEC's and HEP's fractional interests
owned in the gross acres.
<TABLE>
<CAPTION>
HEC HEP
Gross Net Gross Net
<S> <C> <C> <C> <C>
Developed acreage 9,464 3,585 135,500 76,800
Undeveloped acreage 189,350 39,337
------ ----- ------- ------
Total 9,464 3,585 324,850 116,137
====== ====== ======= =======
</TABLE>
DRILLING ACTIVITY
The following table sets forth the number of wells attributable to HEC's
direct interests drilled during 1995. HEC had no drilling activity
attributable to its direct interests during the years ended December 31, 1994
and 1993.
<TABLE>
<CAPTION>
Gross Net
Development
Wells:
<S> <C> <C>
Productive 29 .98
Dry 1 .04
---- -----
Total 30 1.02
==== ====
</TABLE>
The following table sets forth the number of wells attributable to HEP's
direct interests drilled in the most recent three years.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
Gross Net Gross Net Gross Net
DEVELOPMENT
WELLS:
<S> <C> <C> <C> <C> <C> <C>
Productive 66 28.0 30 14.6 12 6.2
Dry 2 .5 4 .7 4 1.2
--- ---- --- ---- ---- ----
Total 68 28.5 34 15.3 16 7.4
=== ==== ==== ==== === ====
EXPLORATORY
WELLS:
Productive 5 .6 2 .1 6 1.1
Dry 1 .9 6 1.2 10 3.9
--- ---- --- ---- --- ----
Total 6 1.5 8 1.3 16 5.0
=== ==== === ==== === ====
</TABLE>
<PAGE> 75
AVERAGE SALES PRICES AND PRODUCTION COSTS
The following table presents the average oil and gas sales price and average
production costs per equivalent barrel computed at the ratio of six mcf of
gas to one barrel of oil.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Oil and condensate (includes the
effects of hedging) (per bbl) $17.14 $15.98 $17.73
Natural gas (includes the
effects of hedging) (per mcf) 1.81 1.98 1.98
Production costs (per equivalent
bbl of oil) 3.35 3.46 3.14
</TABLE>
OFFICE SPACE
HPI, an affiliate of HEC, leases office space in Denver, Colorado containing
approximately 41,000 square feet, for approximately $600,000 per year. These
lease payments are included in the allocation of general and administrative
expenses to HEC and other affiliated entities. HEP is guarantor of 60% of
the lease obligation, and HCRC is guarantor of the remaining 40% of the
obligation. HEC is the guarantor of a five year office lease of an affiliate
of Hallwood Group in Dallas, Texas covering approximately 17,000 square feet.
The affiliate of Hallwood Group has entered into an agreement to indemnify
HEC for any loss suffered by HEC because of the guaranty. The total lease
payments on this property are approximately $170,000 per year, of which
approximately $11,000 is billed to HEC.
ITEM 3 - LEGAL PROCEEDINGS
See Notes 11 and 12 to the financial statements in Item 8 - Financial
Statements and Supplementary Data.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Since January 17, 1995, HEC's common stock has been quoted in the OTC
Bulletin Board under the symbol "HWEC." Prior to January 17, 1995, HEC's
common stock was quoted in the National Association of Securities Dealers
National Market System. As of February 27, 1996, there were approximately
667 shareholders of HEC's common stock, including shareholders that hold in
street name. The following table sets forth, for the periods indicated, the
high and low closing bid quotations for the common stock as reported by the
National Quotation Bureau. See further discussion under Dividends in Item
7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Liquidity and Capital Resources.
<PAGE> 76
<TABLE>
<CAPTION>
HEC COMMON STOCK High Low Dividends
<S> <C> <C> <C>
First Quarter 1995 12 1/2 10 1/4 $1.00
Second Quarter 1995 18 1/2 10 1/4 1.50
Third Quarter 1995 21 13 1/2
Fourth Quarter 1995 16 10 .80
----
$ 3.30
=====
First Quarter 1994 15 13 $1.70
Second Quarter 1994 15 12
Third Quarter 1994 14 10 1.50
Fourth Quarter 1994 10 3/4 9
-----
$3.20
=====
</TABLE>
ITEM 6 - SELECTED FINANCIAL DATA - (In thousands except per share)
The following table sets forth selected financial data regarding HEC's
financial position and results of operations as of the dates indicated. In
connection with the change in HEC's reserve calculation methodology in 1994,
which is further described in Item 8 - Supplemental Oil and Gas Reserve
Information, all periods have been restated to reclassify HEC's share of
internal overhead charges attributable to wells operated by HPI from
production operating expense to general and administrative expense.
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
1995 1994 1993
Summary of Operations
<S> <C> <C> <C>
Oil and gas revenues $ 5,507 $ 5,878 $ 5,922
Total revenue 5,632 6,138 7,268
Production operating expense 1,443 1,555 1,394
Depreciation,depletion,
amortization and impairment 2,153 1,959 1,944
Impairment of investment in
parent 3,249
Net income (loss) 706 (2,512) 2,514
Net income (loss) per
common share (1.00) (3.32) 2.67
Dividends per common share 3.30 3.20
Balance Sheet
Working capital (deficit) $ (619) $ (72) $ 2,410
Net property, plant and
equipment 9,839 10,569 11,697
Total assets 16,465 18,266 25,298
Long-term debt 825
Long-term obligations of
affiliate 5,366 3,917 5,584
Stockholders' equity 7,011 11,316 16,284
(Continued below)
</TABLE>
<TABLE>
<CAPTION>
1992 1991
Summary of Operations
<S> <C> <C>
Oil and gas revenues $ 6,827 $ 6,690
Total revenue 6,835 6,702
Production operating expense 1,780 2,332
Depreciation,depletion,
amortization and impairment 2,308 2,328
Impairment of investment in
parent
Net income (loss) 1,006 498
Net income (loss) per
common share .80 .23
Dividends per common share
Balance Sheet
Working capital (deficit) $ 1,638 $ 1,937
Net property, plant and
equipment 12,909 17,470
Total assets 21,792 25,729
Long-term debt
Long-term obligations of
affiliate 5,183 7,010
Stockholders' equity 16,334 17,774
</TABLE>
<PAGE> 77
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY AND CAPITAL RESOURCES
HEC had a net working capital deficit of $619,000 at December 31, 1995,
including $10,000 of cash and cash equivalents. HEC has adopted a policy of
paying dividends in an amount to be determined by the board of directors
after consideration of the cash flow and working capital needs of HEC. For
1996, through February 27, 1996, no dividends have been declared by HEC.
PROPERTY PURCHASES, SALES AND CAPITAL BUDGET
During 1995, HEC participated in drilling seven wells in Winkler County and
twenty-three wells in Reagan and Irion Counties, Texas, through its interest
in the Saxon Drilling Venture (the "Drilling Venture"). The Company's share
of capital costs on these wells was $328,000 through December 31, 1995. The
Drilling Venture is a joint venture between the Company and HEP which was
originally established in 1985. Under the terms of the Drilling Venture, the
Company receives an 18.75% interest in revenues and costs relating to
production from certain wells drilled in West Texas, in return for payment of
7.5% of the drilling costs. The Reagan County wells were drilled utilizing
the third party financing described below. HEC has recorded its share of
debt on these wells ($172,000 at December 31, 1995), under the caption
"Current Liabilities of Affiliate" in the accompanying balance sheet because
the debt matures in August 1996.
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 provides the standards for accounting for the
impairment of various long-lived assets. The Company is required to adopt
SFAS 121 no later than 1996. HEC uses the full cost method of accounting for
its property, which requires an impairment to be recorded when total
capitalized costs exceed the present value, discounted at 10%, of estimated
future net revenues from proved oil and gas reserves. Therefore, the
adoption of SFAS 121 is not expected to have a material effect on the
financial position or results of operations of HEC.
DIVIDENDS
HEC paid a dividend of $1.00 per share of common stock and Series E Preferred
Stock on March 3, 1995. On August 15, 1995, HEC paid a dividend of $1.50 per
share of common stock and Series E Preferred Stock. On November 15, 1995,
HEC paid a dividend of $.80 per share of common stock and Series E Preferred
Stock.
The board of directors will determine future dividends, if any, after
consideration of the cash flow and working capital needs of HEC. HEC's
credit agreement limits aggregate dividends paid by the Company to $3.50 per
share each fiscal year.
HEP DISTRIBUTIONS
During 1995, HEP declared $.80 per Unit in distributions to its Unitholders
and $2,359,000 to its general partner, HEC. Oil and gas prices continue to
be low and the resulting negative effect on cash flow from operations will
impact the amount of distributions which HEP will be able to make.
On January 19, 1996, HEP paid a dividend of one new Class C Unit for every 15
HEP Class A Units held as of the record date of December 18, 1995. Pursuant
to the regulation of the American Stock Exchange, holders of Class A Units
who sold their Units between December 14, 1995 and January 19, 1996 also sold
their right to receive the associated Class C Unit dividend. Class C Units
are a newly created class of units that trade separately from HEP's currently
outstanding Units. The Class C Units have a distribution preference of $1.00
per year, payable quarterly, and distributions on the new units will commence
for the first quarter of 1996. Class C Units have been created to give HEP
greater flexibility in structuring future acquisitions by allowing HEP to
issue a security with a set distribution rate. Currently outstanding HEP
Units are referred to as Class A Units but will continue to be listed on the
American Stock Exchange using the symbol "HEP."
<PAGE> 78
If there are no further adverse changes in the factors which effect HEP cash
flow, including oil and gas prices, property and partnership expenses and
other relevant information, and there is no change in the limitation in HEP's
Credit facilities on the amount of distributions permitted, HEP believes that
it can distribute $.13 per Class A Unit and $.25 per Class C Unit for each of
the four quarters of 1996. The combined effect of the issuance of the new
Class C Units and the decrease in distributions on the Class A Units would
result in the $.80 annual distribution that has been paid since 1992 being
reduced to an annual rate of $.58 on a Class A and associated Class C Unit.
Future distributions will be determined after taking into account reduced
cash flow and the limitation in HEP's Credit Facilities on the amount of
distributions.
CASH FLOW
Cash used in operating activities was $495,000 in 1995. During 1995, HEC
received distributions of $2,886,000 from HEP and paid dividends of
$2,673,000. These items, together with investment transactions and
borrowings, resulted in a decrease in cash of $658,000 during 1995.
FINANCING
During the second quarter of 1995, the Company entered into a credit
agreement with a bank that has committed to loan the Company up to
$1,500,000. As of December 31, 1995, the Company has outstanding borrowings
of $1,125,000 against the credit line. Borrowings against the credit line
bear interest at the bank's prime rate plus 2% (10.5% at December 31, 1995).
Interest is payable monthly, and quarterly principal payments of $75,000
commenced December 1, 1995. The credit line is secured by the HEP Class A
Units owned by the Company. The credit agreement limits aggregate dividends
paid by the Company to $3.50 per share each fiscal year.
Included in the accompanying balance sheet at December 31, 1995 are long-term
obligations of affiliate of $5,366,000. This amount represents HEC's share
of HEP's outstanding long-term obligations which consist primarily of
$24,700,000 borrowed under a line of credit and $12,857,000 borrowed under a
note purchase agreement. HEP's borrowings are secured by a first lien on
approximately 80% in value of HEP's oil and gas properties. Included within
the caption "Current Liabilities of Affiliate" in the accompanying balance
sheet as of December 31, 1995 is $172,000 which represents HEC's pro rata
share of borrowings from a third party lender used to finance the drilling in
which HEC participated through the Saxon Drilling Venture. HEC is not
directly a party to the loan; however, HEC will reimburse HEP for HEC's
$172,000 share of the borrowings when HEP repays the loan in the first
quarter of 1996.
INFLATION AND CHANGING PRICES
Prices obtained for oil and gas production depend upon numerous factors that
are beyond the control of HEC, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas have fluctuated significantly in 1995. The
following table presents the average prices received each year by HEC and the
effects of its share of HEP's hedging transactions:
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding (including (excluding (including
effects of effects of effects of effects of
hedging hedging hedging hedging
transactions) transactions) transactions) transactions)
(per bbl) (per bbl) (per mcf) (per mcf)
<S> <C> <C> <C> <C>
1995 $ 16.88 $ 17.14 $ 1.66 $ 1.81
1994 15.33 15.98 1.94 1.98
1993 17.05 17.73 2.10 1.98
</TABLE>
<PAGE> 79
During the first quarter through February 14, 1996, the oil price (for
barrels not hedged) averaged between $17.00 and $18.50 per barrel. The
weighted average price of natural gas (for mcf not hedged) was between $1.35
and $4.00 per mcf.
Inflation did not have a material impact on HEC in 1995 and is not
anticipated to have a material impact in 1996.
RESULTS OF OPERATIONS
The following table is presented to contrast HEC's revenues, expenses and
earnings for discussion purposes. Significant fluctuations are discussed in
the accompanying narrative. The "HEC" column represents HEC's direct royalty
and working interests in oil and gas properties. The "HEP" column represents
HEC's combined limited partner and general partner ownership of HEP, which
was 7.3% of the limited partner share for the first three quarters of 1995
and 6.5% for the last quarter of 1995, 7.3% of the limited partner share for
1994 and 1993, and 100% of the general partner share for 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Table OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
(In thousands)
For the Year Ended December 31, 1995
HEC HEP Total
REVENUE
<S> <C> <C> <C>
Oil revenue $ 135 $ 2,093 $ 2,228
Gas revenue 35 3,244 3,279
Acquisition fee 11 11
Interest 86 28 114
--- ---- ----
267 5,365 5,632
--- ------ -----
EXPENSE
Production operating 44 1,399 1,443
General and administrative 628 530 1,158
Depreciation, depletion,
amortization and
impairment 127 2,026 2,153
Interest 106 387 493
Litigation settlement of
affiliate 46 46
---- ----- -----
905 4,388 5,293
---- ------ ------
Other Income (Expense):
Miscellaneous income
(expense) 30 (69) (39)
---- ----- -----
30 (69) (39)
------ ---- -----
Provision (Benefit) for
income taxes -
Current 94 94
Deferred (500) (500)
----- ----- -----
(406) (406)
----- ----- -----
Net Income (loss) $ (202) $ 908 $ 706
======== ======= =======
</TABLE>
<PAGE> 80
Table OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
(In thousands)
For the Years Ended December 31, 1994
<TABLE>
<CAPTION>
HEC HEP Total
REVENUE
<S> <C> <C> <C>
Oil revenue $ 30 $ 2,016 $ 2,046
Gas revenue 10 3,822 3,832
Acquisition fee 23 23
Interest 184 53 237
----- ----- -----
247 5,891 6,138
----- ------ ------
EXPENSE
Production operating 17 1,538 1,555
General and
administrative 570 528 1,098
Depreciation,
depletion,
amortization and
impairment 127 1,832 1,959
Interest 363 363
Litigation settlement
of affiliate 308 308
------ ------ ------
714 4,569 5,283
------ ------ ------
Other Income (Expense):
Impairment of
investment in parent (3,249) (3,249)
Miscellaneous income
(expense) 65 (50) 15
------- ------ ------
(3,184) (50) (3,234)
------- ------- -------
Provision (Benefit) for
income taxes -
Current 133 133
Deferred
----- ------ -----
133 133
----- ------ ------
Net Income (loss) $(3,784) $ 1,272 $(2,512)
======== ======= ========
</TABLE>
<PAGE> 81
Table OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
(In thousands)
For the Years Ended December 31, 1993
<TABLE>
<CAPTION>
HEC HEP Total
REVENUE
<S> <C> <C> <C>
Oil revenue $ 34 $ 1,916 $ 1,950
Gas revenue 7 3,965 3,972
Litigation settlement
of affiliate 1,050 1,050
Acquisition fee 111 111
Interest 143 42 185
----- ----- -----
295 6,931 7,268
----- ------ -----
EXPENSE
Production operating 18 1,376 1,394
General and
administrative 612 636 1,248
Depreciation,depletion,
amortization and
impairment 189 1,755 1,944
Interest 442 442
----- ------ ------
819 4,209 5,028
------ ------ -------
Other Income (Expense):
Impairment of investment
in parent
Miscellaneous income
(expense) 135 229 364
----- ----- -----
135 229 364
----- ----- -----
Provision (Benefit) for
income taxes -
Current 90 90
Deferred
----- ------ -----
90 90
----- ------ ------
Net Income (loss) $ (479) $ 2,993 $ 2,514
======= ======== =======
</TABLE>
<PAGE> 82
1995 COMPARED TO 1994
OIL REVENUE
Oil revenue increased $182,000, or 9%, during 1995. This increase is
primarily due to a 2% increase in production from 128,000 barrels in 1994 to
130,000 barrels in 1995, combined with an increase in the average oil price
from $15.98 per barrel in 1994 to $17.14 per barrel in 1995. This increase
in production is due primarily to HEP's drilling in 1994 and 1995, partially
offset by normal production declines.
The effect of HEP's hedging transactions described under "Inflation and
Changing Prices" during 1995 was to increase HEC's oil price from $16.88 per
barrel to $17.14 per barrel, representing $34,000 in additional revenue from
hedging transactions.
GAS REVENUE
Gas revenue decreased $553,000 during 1995, primarily due to a 6% decrease in
production from 1,932,000 mcf in 1994 to 1,808,000 mcf in 1995. The gas
price also declined 9% from $1.98 per mcf in 1994 to $1.81 per mcf in 1995.
The decrease in production is due primarily to normal production declines,
partially offset by HEP drilling in 1994 and 1995.
The effect of HEP's hedging transactions described under "Inflation and
Changing Prices" during 1995 was to increase HEC's gas price from $1.66 per
mcf to $1.81 per mcf, representing $271,000 in additional revenue from
hedging transactions.
ACQUISITION FEE REVENUE
The acquisition fee earned in 1995 and 1994 relates to property acquisitions
made by HEP. The fee decreased during 1995 as compared to 1994, as a result
of a decline in property acquisitions made by HEP during 1995.
INTEREST
Interest income decreased from 1994 to 1995 primarily as a result of lower
invested balances.
PRODUCTION OPERATING EXPENSE
Production operating expense decreased $112,000 in 1995 as compared to 1994
primarily as a result of general cost reductions in West Texas.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal and audit fees, as well as allocated
internal overhead incurred by HPI, an affiliate of HEC, which manages and
operates certain oil and gas properties on behalf of HEC and HEP and their
affiliates. These costs increased $60,000 during 1995 as compared with 1994
as a result of increased allocated internal overhead from HPI, as well as
increased insurance costs during 1995.
DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT EXPENSE
Depreciation, depletion, amortization and impairment expense increased
$194,000 in 1995 as compared to 1994. The increase is primarily the result
of HEC's share of HEP's impairment of its investment in Indonesia, which has
been abandoned.
INTEREST EXPENSE
Interest expense increased $130,000 in 1995 as compared to 1994, primarily as
a result of HEC's borrowings under its line of credit.
LITIGATION SETTLEMENT OF AFFILIATE
Litigation settlement of affiliate, which represents HEC's share of various
lawsuit settlements made by HEP, declined during 1995 compared to 1994
because HEP settled a significant lawsuit in 1994, as described in Item 8 -
Note 11.
<PAGE> 83
IMPAIRMENT OF INVESTMENT IN PARENT
Impairment of investment in parent of $3,249,000 during the year ended
December 31, 1994 represents an other than temporary decline in the fair
value of the Hallwood Group stock held by HEC. The impairment, which was
recorded at June 30, 1994, reflects the difference between the market value
of the stock at June 30, 1994 of $11.50 per share (adjusted for Hallwood
Group's 1 for 4 reverse split) and HEC's original cost basis.
MISCELLANEOUS INCOME
Miscellaneous income consists primarily of HEC's share of HEP's facilities
income from two gathering systems in New Mexico, pipeline revenue, equity
investment earnings, and miscellaneous income or expense. The decrease in
miscellaneous income of $54,000 is primarily due to a decrease in HEC's share
of HEP's equity investment earnings.
1994 COMPARED TO 1993
OIL REVENUE
Oil revenue increased $96,000, or 5%, during 1994. This increase is
primarily due to a 16% increase in production from 110,000 barrels in 1993 to
128,000 barrels in 1994, offset by a decrease in the average oil price from
$17.73 per barrel in 1993 to $15.98 to barrel in 1994. This increase in
production is due primarily to HEP property acquisitions which occurred late
in 1993, partially offset by normal production declines.
The effect of HEP's hedging transactions described under "Inflation and
Changing Prices" during 1994 was to increase HEC's oil price from $15.33 per
barrel to $15.98 per barrel, representing $83,000 in additional revenue from
hedging transactions.
GAS REVENUE
Gas revenue decreased $140,000 during 1994, primarily due to a 4% decrease in
production from 2,005,000 mcf in 1993 to 1,932,000 mcf in 1994. The gas
price remained consistent at $1.98 per mcf in both 1994 and 1993. The
decrease in production is due primarily to decreased production in the
Scott/West Ridge area, due to allowable production limits and normal
production declines, partially offset by HEP property acquisitions which
occurred late in 1993.
The effect of HEP's hedging transactions described under "Inflation and
Changing Prices" during 1994 was to increase HEC's gas price from $1.94 per
mcf to $1.98 per mcf, representing $77,000 in additional revenue from hedging
transactions.
LITIGATION SETTLEMENT OF AFFILIATE
Litigation settlement of affiliate in 1993 represents HEC's share of a
lawsuit settlement received by HEP which is further described in Item 8 -
Note 11.
ACQUISITION FEE REVENUE
The acquisition fee earned in 1994 and 1993 relates to property acquisitions
made by HEP. The fee decreased during 1994 as compared to 1993, as a result
of a decline in property acquisitions made by HEP during 1994.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $161,000 in 1994 as compared to 1993
primarily as a result of an increase in operating expenses due to property
acquisitions and drilling projects completed by HEP late in 1993 combined
with increased ad valorem taxes and salt water disposal costs in the
Scott/West Ridge area.
<PAGE> 84
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal and audit fees, as well as allocated
internal overhead incurred by HPI, an affiliate of HEC, which manages and
operates certain oil and gas properties on behalf of HEC and HEP and their
affiliates. These costs decreased $150,000 during 1994 as compared with 1993
as a result of reductions in internal allocated overhead from HPI, as well as
decreased legal expenses during 1994.
DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT EXPENSE
Depreciation, depletion, amortization and impairment expense increased
$15,000 in 1994 as compared to 1993. The increase is primarily the result of
HEC's share of HEP's impairment of foreign drilling projects which have been
abandoned.
INTEREST EXPENSE
Interest expense decreased $79,000 in 1994 as compared to 1993, primarily as
a result of HEP's lower average debt balance in 1994 as compared to 1993,
which was partially offset by higher interest rates.
LITIGATION SETTLEMENT OF AFFILIATE
Litigation settlement of affiliate during 1994 represents HEC's share of
various lawsuit settlements made by HEP which are further described in Item 8
- Note 11.
IMPAIRMENT OF INVESTMENT IN PARENT
Impairment of investment in parent of $3,249,000 during the year ended
December 31, 1994 represents an other than temporary decline in the fair
value of the Hallwood Group stock held by HEC. The impairment, which was
recorded at June 30, 1994, reflects the difference between the market value
of the stock at June 30, 1994 of $11.50 per share and HEC's original cost
basis.
MISCELLANEOUS INCOME
Miscellaneous income consists primarily of HEC's share of HEP's facilities
income from two gathering systems in New Mexico, pipeline revenue, gas
marketing activity and miscellaneous income or expense. The decrease in
miscellaneous income of $349,000 is primarily due to a $150,000 decrease in
HEC's share of HEP's equity investment and a $50,000 decrease in HEC's share
of HEP's revenue from gas marketing activities which were discontinued in
March 1993. The remaining decrease is comprised of numerous individually
insignificant items.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS: Page
Independent Auditors' Report 20
Consolidated Balance Sheets at December 31, 1995 and 1994 21-22
Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993 23
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 24
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 25
Notes to Consolidated Financial Statements 26-37
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION - (UNAUDITED) 38-41
INDEPENDENT AUDITORS' REPORT
<PAGE> 85
TO THE STOCKHOLDERS OF HALLWOOD ENERGY CORPORATION:
We have audited the consolidated financial statements of Hallwood Energy
Corporation as of December 31, 1995 and 1994 and for each of the three years
in the period ended December 31, 1995, listed in the index at Item 8. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hallwood Energy Corporation at
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 27, 1996
<PAGE> 86
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10 $ 668
Accounts receivable:
Affiliates 372 526
Trade 26 7
Current assets of affiliate 2,236 1,760
------- ------
Total 2,644 2,961
------- -------
PROPERTY, PLANT AND EQUIPMENT, at
cost
Oil and gas properties (full cost
method):
Proved mineral interests 113,159 111,951
Unproved mineral interests -
domestic 82 46
Unproved mineral interests -
foreign 288
Other property and equipment 3,758 3,745
------- -------
Total 116,999 116,030
Less accumulated depreciation,
depletion, amortization and
property impairment (107,160) (105,461)
--------- ----------
Net Property, Plant and Equipment 9,839 10,569
--------- ---------
OTHER ASSETS
Investment in common stock of
parent (carried at market) 2,075 1,680
-------- --------
Investment in bonds of parent
(at cost adjusted for
amortization of discount) 1,352
Deferred tax asset 500
Noncurrent assets of affiliate 1,407 1,704
------ -------
Total 3,982 4,736
------ -------
TOTAL ASSETS $ 16,465 $ 18,266
======== ========
</TABLE>
(continued on following page)
<PAGE> 87
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except Shares)
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 106 $ 154
Current portion of long-term debt 300
Current liabilities of affiliate 2,857 2,879
------- ------
Total 3,263 3,033
------- -------
NONCURRENT LIABILITIES
Long-term debt 825
Long-term obligations of affiliate 5,366 3,917
------- -------
Total 6,191 3,917
------- ------
Total Liabilities 9,454 6,950
------ -------
STOCKHOLDERS' EQUITY
Series D convertible cumulative,
redeemable preferred stock, $.01 par
value; 65,000 shares authorized; 18,864
shares issued as of 1994 with a
liquidation preference of $1,154
(cancelled during 1995) 1
Series E convertible preferred stock; $.01
stated value; 450,000 shares authorized;
356,000 shares issued as of 1994 with a
liquidation preference of $.01 per share 4
Common stock, $.50 par value; 80,000,000
shares authorized; 1,198,121 and 842,121
shares issued at 1995 and 1994,
respectively 599 421
Capital in excess of par value 53,789 58,248
Accumulated deficit (41,584) (42,290)
Unrealized loss on investment in common
stock of parent (1,002) (896)
Less cost of treasury stock of 405,995 and
347,995 common shares at 1995 and 1994,
respectively, and 7,500 Series D preferred
shares at 1994 (4,791) (4,172)
------- -------
Stockholders' Equity - net 7,011 11,316
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,465 $ 18,266
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 88
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per Share)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
REVENUES:
Oil revenue $ 2,228 $ 2,046 $ 1,950
Gas revenue 3,279 3,832 3,972
Litigation settlement of
affiliate 1,050
Acquisition fee 11 23 111
Interest 114 237 185
------ ----- ------
5,632 6,138 7,268
------ ------ ------
EXPENSES:
Production operating 1,443 1,555 1,394
General and administrative 1,158 1,098 1,248
Depreciation, depletion,
amortization and impairment 2,153 1,959 1,944
Interest 493 363 442
Litigation settlement of
affiliate 46 308
------ ------ ------
5,293 5,283 5,028
------ ------ ------
OTHER INCOME (EXPENSE):
Impairment of investment in
parent (3,249)
Miscellaneous income (expense) (39) 15 364
----- ----- -----
(39) (3,234) 364
----- ------- -----
INCOME (LOSS) BEFORE INCOME TAXES 300 (2,379) 2,604
----- ------- -------
PROVISION (BENEFIT) FOR INCOME
TAXES
Current 94 133 90
Deferred (500)
----- ------ -----
(406) 133 90
----- ----- -----
NET INCOME (LOSS) 706 (2,512) 2,514
PREFERRED STOCK DIVIDENDS 1,175 73 88
------- ------ -----
NET INCOME (LOSS) FOR COMMON
STOCKHOLDERS $ (469) $(2,585) $ 2,426
======= ======== ========
NET INCOME (LOSS) PER COMMON
SHARE $ (1.00) $ (3.32) $ 2.67
====== ====== ======
NET INCOME (LOSS) PER COMMON
SHARE (assuming full dilution) $ (1.00) $ (3.32) $ 2.42
====== ====== ======
WEIGHTED AVERAGE COMMON SHARES 469 779 907
====== ===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 89
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 706 $(2,512) $ 2,514
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation, depletion, amortization
and impairment 2,153 1,959 1,944
Impairment of investment in parent 3,249
Undistributed earnings of affiliate (2,917) (3,106) (4,748)
Deferred tax benefit (500)
Amortization of bond discount (24) (97) (41)
----- ------ -----
Cash used in operations before
working capital changes (582) (507) (331)
Changes in operating assets and
liabilities provided (used) cash:
Accounts receivable - affiliates 154 232 (106)
Accounts receivable - trade (19) (2) 5
Prepaids and other assets 11
Accounts payable and accrued
liabilities (48) (189) 215
----- ----- -----
Net cash used in operating activities (495) (466) (206)
------ ------ ------
INVESTING ACTIVITIES:
Proceeds from property sales 4 7
Additions to property (144) (100) (187)
Distributions received from affiliate 2,886 2,904 2,539
Purchase of common stock of parent (501)
Proceeds from sale of bonds of parent 1,376 380
Other investing activities (9) (20)
------ ----- -----
Net cash provided by investing
activities 3,617 2,799 2,719
------ ------ -------
FINANCING ACTIVITIES;
Proceeds from long-term debt 1,200
Payments of long-term debt (75)
Dividends paid (2,673) (2,793) (118)
Repurchase of common and preferred
stock (2,232) (1,692)
------- --------- -------
Net cash used in financing activities (3,780) (2,793) (1,810)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (658) (460) 703
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 668 1,128 425
------ ------- ------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 10 $ 668 $ 1,128
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 90
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series D Series E
Preferred Preferred Common Excess of
Stock Stock Stock Par Value
<S> <C> <C> <C> <C>
BALANCE,
December 31, 1992 $ 1 $ 599 $60,955
Net income
Preferred stock
dividends (88)
Purchase of treasury
stock
Unrealized loss on
investment in common
stock of parent
BALANCE,
December 31, 1993 1 599 60,867
Net loss
Exchange of Series E
preferred stock for
common stock $ 4 (178) 174
Dividends (2,793)
Unrealized loss on
investment in common
stock of parent
BALANCE,
December 31, 1994 1 4 421 58,248
Net income
Repurchase and
cancellation of Series
D Preferred stock (1) (1,612)
Repurchase of Common
Stock
Conversion of Series E
Preferred Stock into
Common Stock (4) 178 (174)
Dividends (2,673)
Unrealized loss on
investment in common
stock of parent
BALANCE,
December 31, 1995 $ $ $ 599 $53,789
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 91
<TABLE>
<CAPTION>
Accumulated Unrealized Treasury
Deficit Loss Stock Total
<S> <C> <C> <C> <C>
BALANCE,
December 31, 1992 $(42,292) $ (449) $ (2,480) $16,334
Net income 2,514 2,514
Preferred stock
dividends (88)
Purchase of treasury
stock (1,692) (1,692)
Unrealized loss on
investment in common
stock of parent (784) (784)
BALANCE,
December 31, 1993 (39,778) (1,233) (4,172) 16,284
Net loss (2,512) (2,512)
Exchange of Series E
preferred stock for
common stock
Dividends (2,793)
Unrealized loss on
investment in common
stock of parent 337 337
BALANCE,
December 31, 1994 (42,290) (896) (4,172) 11,316
Net income 706 706
Repurchase and
cancellation of Series
D Preferred stock 570 (1,043)
Repurchase of Common
Stock (1,189) (1,189)
Conversion of Series E
Preferred Stock into
Common Stock
Dividends (2,673)
Unrealized loss on
investment in common
stock of parent (106) (106)
BALANCE,
December 31, 1995 $(41,584) $(1,002) $(4,791) $ 7,011
</TABLE>
<F1>
The accompanying notes are an integral part of the financial statements.
<PAGE> 92
HALLWOOD ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Hallwood Energy Corporation ("HEC" or the "Company") is a Texas corporation
engaged in the development, production and sale of oil and gas. HEC is the
general partner of Hallwood Energy Partners, L.P. ("HEP"), a publicly traded
Delaware limited partnership. HEP commenced operations in August 1985 after
completing an exchange offer in which HEP acquired oil and gas properties and
operations from HEC, 24 oil and gas limited partnerships of which HEC was the
general partner, and certain working interests from owners that had
participated in wells with HEC and the limited partnerships. HEC now
conducts substantially all of its operations through HEP. HEP's properties
are primarily located in the Rocky Mountain, Mid-Continent, Texas and Gulf
Coast regions of the United States. The activities of HEP are conducted by
HEP Operating Partners, L.P. ("HEPO") and EDP Operating, Ltd. ("EDPO").
HEC's wholly-owned subsidiary, Hallwood G.P., Inc., is the general partner of
EDPO. Unless otherwise indicated, all references to HEC in connection with
the ownership, exploration, development or production of oil and gas
properties refer to HEC and its proportionate ownership of HEP. HEC's parent
company, The Hallwood Group Incorporated ("Hallwood Group"), owns 80% of the
common shares of HEC. (See Note 3).
ACCOUNTING POLICIES:
INVESTMENT IN HEP
HEC'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 HEC holds
approximately 6.5% of HEP's limited partner Units. HEC accounts for its
ownership of HEP using the proportionate consolidation method of accounting
whereby HEC 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 40% of its affiliate,
Hallwood Consolidated Resources Corporation ("HCRC"), which HEP accounts for
under the equity method.
DERIVATIVES
HEP entered into financial contracts for hedging transactions of
approximately 56%, 44% and 37% of its actual crude oil production during the
years 1993, 1994 and 1995, respectively. The oil price received by HEP was
$18.53, $17.93 and $17.31 per barrel in 1993, 1994 and 1995, respectively,
for the barrels hedged. HEP also entered into hedging contracts of between
3% and 22% of its forecasted oil production during each of the years 1996
through 1999. The oil price for the volumes hedged is expected to range from
$14.83 to $15.38 per barrel.
HEP also hedged approximately 53%, 56% and 56% of its gas production during
1993, 1994 and 1995, respectively. The gas price received for the volumes
hedged was $1.69, $1.88 and $2.04 per mcf during 1993, 1994 and 1995,
respectively. Additionally, HEP has entered into hedging contracts of
between 17% and 47% of its forecasted gas production for each of the years
1996 through 1999. The price for the hedged gas production is expected to
range from $2.01 to $2.10 per mcf.
The purpose of the hedges is to provide protection against price drops and to
provide a measure of stability in the volatile environment of oil and natural
gas spot pricing. The amounts received or paid in settling these contracts
is recognized as oil or gas revenue at the time the hedged volumes are sold.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
<PAGE> 93
PROPERTY, PLANT AND EQUIPMENT
HEC follows the full cost method of accounting, whereby all costs related to
the acquisition of oil and gas properties are capitalized in a single cost
center ("full cost pool") and are amortized over the productive life of the
underlying proved reserves using the units of production method. Proceeds
from property sales are generally credited to the full cost pool.
Capitalized costs of oil and gas properties may not exceed an amount equal to
the present value, discounted at 10%, of estimated future net revenues from
proved oil and gas reserves plus the cost, or estimated fair market value, if
lower, of unproved properties. Should capitalized costs exceed this ceiling,
an impairment is recognized. The present value of estimated future net
revenues is computed by applying year end prices of oil and gas to estimated
future production of proved oil and gas reserves as of year end, less
estimated future expenditures to be incurred in developing and producing the
proved reserves and assuming continuation of existing economic conditions.
HEC does not accrue costs for future site restoration, dismantlement and
abandonment costs related to proved oil and gas properties because the
Company estimates that such costs will be offset by the salvage value of the
equipment sold upon abandonment of such properties. The Company's estimates
are based upon its historical experience and upon review of current
properties and restoration obligations.
Unproved properties are withheld from the amortization base until such time
as they are either developed or abandoned. These properties are evaluated
periodically.
GAS BALANCING
HEC uses the sales method to account for gas balancing. Under this method,
it recognizes revenue on all of its sales of production, and any over
production or under production is recovered at a future date.
As of December 31, 1995, the imbalance net to HEC's interest is not material.
Current imbalances can be made up with production from existing wells or from
wells which will be drilled as offsets to current producing wells and the
imbalance will not have a material effect on the Company's results of
operations, liquidity and capital resources.
SIGNIFICANT CUSTOMERS
For the years ended December 31, 1995, 1994 and 1993 purchases by each of the
following companies exceeded 10% of the total oil and gas revenues
attributable to HEC's direct interests and its share of HEP. Although the
Company sells the majority of its oil and gas production to a few purchasers,
there are numerous other purchasers in the area, therefore, the loss of its
significant customers would not adversely affect the Company's operations.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Conoco Inc. 30% 23% 21%
Koch Oil Company 11%
Marathon Petroleum Company 14% 12% 10%
</TABLE>
ENVIRONMENTAL CONCERNS
HEC is taking actions necessary in its operations to conform with applicable
federal, state and local environmental regulations. As of December 31, 1995,
HEC has not been fined or cited for any environmental violations which would
have a material adverse effect upon capital expenditures, earnings or the
competitive position of HEC in the oil and gas industry.
DIVIDENDS
HEC paid a dividend of $1.00 per share of common stock and Series E Preferred
Stock on March 3, 1995. On August 15, 1995, HEC paid a dividend of $1.50 per
share of common stock and Series E Preferred Stock. On November 15, 1995,
HEC paid a dividend of $.80 per share of common stock and Series E Preferred
Stock.
HEC paid a dividend of $1.70 per share of common stock on March 4, 1994. HEC
paid a dividend of $1.50 per share of common stock on August 15, 1994.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform
to the classifications used in the current year.
<PAGE> 94
USE OF ESTIMATES
The preparation of the financial statements for the Company in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
CASH FLOW STATEMENT
Cash paid for interest was $106,000 in 1995. There was no cash paid for
interest in 1994 or 1993.
NOTE 2 - OIL AND GAS PROPERTIES
The following table summarizes certain cost information related to HEC's
direct interests and its share of HEP's oil and gas activities:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Property acquisition costs - $ 191 $ 637 $1,103
proved
Property acquisition costs - 56 257 176
unproved
Development costs 979 599 585
Exploration costs 166 273 169
---- ----- ----
Total $1,392 $1,766 $2,033
==== ===== ====
</TABLE>
Depreciation, depletion, amortization and impairment per equivalent barrel of
production for 1995, 1994 and 1993 was $5.00, $4.35 and $4.38, respectively.
At December 31, unproved domestic properties consist of the following:
<TABLE>
<CAPTION>
1995 1994
(In thousands)
<S> <C> <C>
South Louisiana $ 10 $ 40
Texas 27
Other 45 6
--- ---
$ 82 $ 46
=== ===
</TABLE>
At December 31, 1994, unproved foreign properties of $288,000 consisted of
HEC's share of HEP's investment in Indonesia which was abandoned during the
first quarter of 1995.
During 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 provides the standards for accounting for the
impairment of various long-lived assets. The Company is required to adopted
SFAS 121 no later than 1996. HEC uses the full cost method of accounting for
its oil and gas properties, which requires an impairment to be recorded when
total capitalized costs exceed the present value, discounted at 10%, of
estimated future net revenues from proved oil and gas reserves. Therefore,
the adoption of SFAS 121 is not expected to have a material effect on the
financial position or results of operations of HEC.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Hallwood Group Incorporated ("Hallwood Group"), a public company traded
on the New York Stock Exchange, owns 80% of the outstanding common shares of
HEC. Hallwood Group is a diversified holding company with interests in oil
and gas, specialty restaurants, real estate, textile products and hotels.
From 1990 through 1995, HEC acquired 267,709 shares (adjusted for Hallwood
Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares
of Hallwood Group, on the open market. Because HEC has the ability and the
intent to hold the stock of Hallwood Group indefinitely, HEC has recorded it
as a long-term investment and has classified it as an available-for-sale
security. As of June 30, 1994, it was determined that Hallwood Group stock
had experienced an other than temporary decline in fair value. Therefore,
HEC's investment in Hallwood Group was written down from its original cost to
a new cost basis based on its market value at June 30, 1994 of $11.50 per
share. The resultant loss of $3,249,000 was recorded as an impairment of
investment in parent in the accompanying financial statements for 1994.
During 1991 and 1992 HEC acquired $2,439,000 principal amount of Hallwood
Group'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, Hallwood Group 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 carrying value.
NOTE 4 - DEBT
During the second quarter of 1995, the Company entered into a credit
agreement with a bank that has committed to loan the Company up to
$1,500,000. As of December 31, 1995, the Company has outstanding borrowings
of $1,125,000 against the credit line. Borrowings against the credit line
bear interest at the bank's prime rate plus 2% (10.5% at December 31, 1995).
Interest is payable monthly, and quarterly principal payments of $75,000
commenced December 1, 1995. The credit line is secured by the HEP units
owned by the Company. The credit agreement limits aggregate dividends paid
by the Company to $3.50 per share each fiscal year.
<PAGE> 95
At December 31, 1995, HEC's five year debt maturity schedule is as follows:
1996 $ 300,000
1997 300,000
1998 300,000
1999 225,000
---------
1,125,000
Less current maturities
of long-term debt (300,000)
---------
Long-term debt at
December 31, 1995 $ 825,000
During 1995, HEP amended its Amended and Restated Credit Agreement ("Credit
Agreement") and an Amended and Restated Note Purchase Agreement ("Note
Purchase Agreement") (collectively referred to as the "Credit Facilities").
HEP has a borrowing base of $42,000,000 under the Credit Facilities, and
amounts outstanding at December 31, 1995 of $24,700,000 under the Credit
Agreement and $12,857,000 under the Note Purchase Agreement. HEP's borrowing
base is also reduced by an outstanding contract settlement debt of $2,771,000
and capital lease obligations of $87,000; therefore, its unused borrowing
base totalled $1,585,000 at February 27, 1996.
The Credit Facilities are secured by a first lien on approximately 80% in
value of HEP's oil and gas properties. Additionally, aggregate distributions
paid by HEP in any 12 month period are limited to 50% of cash flow from
operations before working capital changes plus distributions received from
affiliates.
HEP's five year debt maturities are as follows: $87,000 in 1996, $9,721,000
in 1997, $11,532,000 in 1998, $7,246,000 in 1999, and $7,246,000 in 2000 and
$1,812,000 thereafter.
NOTE 5 - PRINCIPAL ACQUISITIONS AND SALES
HEC had no significant direct acquisitions or sales other than the Hallwood
Group stock and Subordinated Debenture transactions described in Note 3.
HEP's significant activities are as follows:
1995
During 1995, HEP had no individually significant property acquisitions or
sales.
1994
During the second quarter of 1994, HEP and HCRC formed a limited partnership
with a third party for the purpose of producing natural gas qualified for the
Section 29 tax credit under the Internal Revenue Code. A limited liability
company owned by HEP and HCRC is the general partner of the partnership.
HEP and HCRC sold a term working interest in certain wells in San Juan
County, New Mexico to the limited partnership, in return for which HEP and
HCRC received a cash payment totaling $3,400,000 when the sale was closed.
HEP and HCRC will receive 97% of the cash flow from production from the wells
sold through the year 2002, and 80% of the cash flow thereafter. HEP and
HCRC will also receive quarterly cash incentive payments equal to 34% of the
Section 29 tax credit generated from the production from the wells. HEP and
HCRC will share in all proceeds 55% and 45%, respectively. HEP recorded its
$1,870,000 share of the cash payment received as a credit to oil and gas
properties in its 1995 financial statements.
1993
During September and October 1993, HEP completed the following transactions
which resulted in the acquisition of interests in the following properties
(the purchase amounts are net to HEP): 130 wells in twelve counties in
central Kansas for $1,200,000, of which $367,000 was paid in cash and
$833,000 was paid in the form of 96,607 HEP Class A Units; six wells in
Comanche County, Kansas for $750,000; nine wells in Russell County, Kansas
for $600,000; three wells in San Juan County, New Mexico for $425,000; and
nine wells in Toole County, Montana for $350,000. Additionally, HEP acquired
50% of the stock of Sunburst Exploration, Inc. ("Sunburst") for $1,700,000 by
issuing 197,103 HEP Class A Units. Sunburst owns interests in 130 wells in
Toole County, Montana, 45 of which are operated by Sunburst.
These acquisitions were effective as of various dates from August 1 through
October 29, 1993 and added an estimated 464,000 barrels of oil and 5 billion
cubic feet of gas to HEP's reserves at December 31, 1993.
Effective March 31, 1993, HEP sold its interest in Nycotex and its West
Virginia properties which included natural gas reserves estimated at
approximately 3.4 billion cubic feet of gas. HEP's share of these proceeds
after adjustments was approximately $1,600,000.
<PAGE> 96
NOTE 6 - INVESTMENT IN AFFILIATE
HEC accounts for its combined general and limited partner interest in HEP
(approximately 12%) using the proportionate consolidation method of
accounting. The following presents summarized financial information for HEP
at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Current assets $ 16,715 $ 14,670 $ 33,535
Noncurrent assets 106,649 121,611 138,089
Current liabilities 20,914 24,834 26,515
Noncurrent 41,836 29,721 43,187
liabilities
Minority interest 3,042 2,923 3,346
Gross oil and gas 41,010 41,496 42,893
revenue
Net income (loss) (9,031) (10,093) 13,064
</TABLE>
NOTE 7 - CAPITAL STOCK AND NET INCOME PER SHARE
SERIES E PREFERRED STOCK
On October 19, 1994, HEC exchanged 356,000 shares of newly authorized Series
E preferred stock for 356,000 shares of its outstanding common stock held by
Hallwood Group. On December 31, 1995, the Series E preferred stock was
converted into common stock. The Series E preferred stock was not entitled
to vote for the election of directors, except as required by law, but it was
entitled to vote with the common stock on all other matters. The Series E
preferred stock was entitled to one vote per share. In addition, the Series
E preferred stock was entitled to dividends, when and as declared, at the
same rate as the common stock, and it had a liquidation preference of $.01
per share. The Series E preferred stock received $1,175,000 in dividends
during 1995.
The purpose of the initial exchange was to reduce Hallwood Group's ownership
of the Company's common stock below 50% to permit HEC to vote its 14%
interest in Hallwood Group, which it was unable to do under Delaware law when
Hallwood Group owned greater than 50% of the Company's common stock.
Hallwood Group exercised its right to convert the Series E preferred shares
to common stock on December 31, 1995 to enable it to consolidate HEC into its
federal income tax returns beginning in 1996. The conversion increased
Hallwood Group's ownership of common stock to 80%. As a result of the
increased ownership, HEC will once again be prohibited, under Delaware law
from voting its 14% interest in Hallwood Group.
Per share information is based on the weighted average number of common
shares and common share equivalents outstanding in each period. Series D
preferred stock dividends of $73,000 and $88,000 were declared in 1994 and
1993, respectively, reducing net income per common share in those years. The
Series E preferred stock dividends reduced net income per common share in
1995. The weighted average number of common shares outstanding was 469,000,
779,000 and 907,000 in 1995, 1994 and 1993, respectively.
Net income per common share (assuming full dilution) for 1995, 1994 and 1993
was determined assuming that the Series D preferred stock was converted into
common stock on January 1, 1993 and the Series E on January 1, 1994. Net
income was adjusted for the preferred stock dividends declared during the
year. The effect of the conversion of the Series E and D preferred stock
into common shares was antidilutive during the years ended December 31, 1995
and 1994. For the year ended December 31, 1993, the Series D preferred stock
was dilutive. The weighted average number of common shares outstanding
(assuming full dilution) was 1,037,481 in 1993.
<PAGE> 97
TREASURY STOCK
During the first quarter of 1995, HEC repurchased 1,500 shares of its Series
D Preferred Stock for $90.88 per share. During April 1995, in two separate
transactions, HEC repurchased the remaining 9,864 shares of its Series D
Preferred Stock at $91.80 per share. These shares were retired during 1995.
In July 1995, HEC purchased 58,000 shares of its common stock from an
individual in a privately negotiated transaction for a total cost of
$1,189,000.
NOTE 8 - EMPLOYEE INCENTIVE PLANS
INCENTIVE CASH BONUS PLAN
HEC's 1980 Incentive Cash Bonus Plan provides for the payment of cash bonuses
to selected employees. The amounts of such bonuses will be prescribed by the
Board of Directors of HEC at its sole discretion. No payments under this
plan were made in 1995, 1994 or 1993.
UNIT OPTION PLAN
On January 31, 1995, the Board of Directors of HEC approved the adoption of a
Unit option plan to be used for the motivation and retention of directors and
employees performing services for HEP. The plan authorized the issuance of
425,000 options to purchase HEP Class A Units. Grants of the total options
authorized were made on January 31, 1995, vesting one-third at that time,
one-third on January 31, 1996 and one-third on January 31, 1997. In
addition, the plan provides that vesting of the options may be accelerated
under certain conditions. The exercise price of the options is $5.75, which
was the closing price of the Class A Units on January 30, 1995.
During 1995 the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
requires entities to use the fair value method to either account for, or
disclose, stock based compensation in their financial statements. The
Company is required to adopt SFAS 123 no later than 1996. Because the
Company intends to elect only the disclosure provisions of SFAS 123, the
adoption of SFAS 123 is not expected to have a material effect on the
financial position or results of operations of HEC.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
HPI, an affiliate of HEC, leases office space in Denver, Colorado containing
approximately 41,000 square feet, for approximately $600,000 per year. These
lease payments are included in the allocation of general and administrative
expenses to HEC and other affiliated entities. HEC is the guarantor of an
office lease of an affiliate of Hallwood Group, in Dallas, Texas covering
approximately 17,000 square feet. The lease payments on this property total
approximately $170,000 per year from June 1, 1994 through May 31, 1999, of
which approximately $11,000 per year is allocated to HEC. The affiliate of
Hallwood Group has entered into an agreement to indemnify HEC for any loss
suffered by HEC because of the guaranty.
NOTE 10 - INCOME TAXES
At December 31, 1995, HEC has a statutory depletion carryforward of
approximately $5,900,000, which may be used to offset future taxable income
without expiration limitation. At December 31, 1995, HEC has available an
investment tax credit carryforward of approximately $800,000, which will
expire between 1996 and 2000 and is reduced annually, as mandated by tax law,
and $2,700,000 of capital loss carryforward expiring in 1996. At December
31, 1995, HEC has net operating loss ("NOL") carryforwards of approximately
$108,000,000, which expire between 1996 and 2006. A subsidiary of HEC also
has approximately $1,000,000 of NOL carryforwards expiring in 2005.
<PAGE> 98
The following is a summary of the income tax provision (benefit):
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994 1993
(In thousands
<S> <C> <C> <C>
State $ 88 $ 100 $ 72
Federal - current 6 33 18
Deferred tax benefit (500)
--- ----- ---
$ (406) $ 133 $ 90
=== === ===
</TABLE>
Reconciliations of the expected tax at the statutory tax rate to the
effective tax are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
Description 1995 1994 1993
(In thousands)
<S> <C> <C> <C>
Expected tax (benefit)
at the statutory rate $ 102 $ (808) $ 885
Increase (decrease) in
deferred tax asset
valuation allowance net
of NOL carryforward (572) 875 (843)
State taxes net of
federal benefit 58 66 48
Effect of use of AMT 6
------ ----- -----
Effective tax $ (406) $ 133 $ 90
======== ======= ========
</TABLE>
The following is a schedule of the types and amounts of existing temporary
differences and NOL carryforwards, at the statutory tax rate of 34%, tax
credits and the valuation allowance at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995
Deferred Income Tax
Assets Liabilities
(In thousands)
<S> <C> <C>
NOL carryforward $ 36,739 $
Statutory depletion carryforward
1,991
Investment tax credit
carryforward 800
AMT credit carryforward 227
Capital loss carryforward 945
Basis difference - investment in
partnership and property 1,744
-------
Deferred tax assets 42,446
Less: Deferred tax liabilities
Valuation allowance (a) (41,946)
--------- ----------
Deferred tax asset $ 500 $ -
========== ==========
</TABLE>
(Continued below)
<PAGE> 99
<TABLE>
<CAPTION>
1994
Deferred Income Tax
Assets Liabilities
(In thousands)
<S> <C> <C>
NOL carryforward $ 37,047 $
Statutory depletion carryforward 1,991
Investment tax credit
carryforward 800
AMT credit carryforward 221
Capital loss carryforward 909
Basis difference - investment in
partnership and property 1,550
-------
Deferred tax assets 42,518
Less: Deferred tax liabilities
Valuation allowance (a) (42,518)
---------- ----------
Deferred tax asset $ - $ -
========== ===========
<F1>
(a) The net change in the valuation allowance during 1995 was $572,000,
$875,000 and $843,000 during 1995, 1994 and 1993, respectively.
</TABLE>
NOTE 11 - LITIGATION SETTLEMENTS OF AFFILIATE
In 1994, the Minerals Management Services ("MMS") of the Bureau of Land
Management notified HEP that the MMS had preliminarily determined that the
MMS was owed royalty payments on take-or-pay settlements involving federal
oil and gas leases. In the fourth quarter of 1995, HEP and the MMS reached
an agreement in principle that HEP would pay $321,000 in settlement of all
claims. HEP anticipates that the settlement amount will be paid in the first
quarter of 1996. HEC's share of HEP's settlement was recorded as litigation
settlements of affiliate in the 1995 financial statements.
In September 1995, the court order approving the settlement in the class
action lawsuit styled In re. Hallwood Energy Partners, L.P. Securities
Litigation became final. As part of the settlement, on September 28, 1995,
HEP paid $2,870,000 in cash (which was recorded as an expense in the December
31, 1994 financial statements as the estimated cost associated with the
litigation) and issued 1,158,696 HEP Class A Units with a market value of
$5,330,000 to a nominee of the class. HCRC subsequently exercised an option
to purchase these Units from the nominee for $5,330,000 in cash. Other
defendants contributed an additional $900,000 in cash to the settlement. The
net proceeds of the settlement will be distributed to a class consisting of
former owners of limited partner interests in Energy Development Partner,
Ltd. ("EDP") who exchanged their units in that entity for Units of HEP
pursuant to the merger of EDP and HEP on May 9, 1990 (the "Transaction").
Upon issuance, these Class A Units were treated, for financial statement
purposes only, as additional Class A Units issued in connection with the
Transaction, which was accounted for as a reorganization of entities under
common control, in a manner similar to a pooling of interest, and have been
reflected as outstanding Class A Units since May 9, 1990, the date of the
Transaction. As a result, the number of HEP's Units outstanding and the net
income (loss) per Class A Unit and Class B Unit have been retroactively
restated for all periods subsequent to the Transaction.
On June 24, 1993, HEP settled two lawsuits and all related claims with
Louisiana Intrastate Gas Corporation ("LIG"). The lawsuits against LIG
involved the prices paid for natural gas production under a long-term gas
contract. The settlement terminates the contract with LIG and resolves all
issues and claims relating to the gas purchase contract for the Northeast
Montegut Field located in Terrebonne Parish, Louisiana. The proceeds from
the settlement after payment of royalties and related legal costs are
reflected in HEP's earnings during the year ended December 31, 1993 and were
used to pay down debt and for working capital purposes.
<PAGE> 100
In January 1994, Hallwood Oil paid $525,000 to the former shareholders of the
general partner of a predecessor entity to settle a claim for payment of
Hallwood Oil's $800,000 guaranty of the promissory note of a former
affiliate. The promissory note was made in 1985 when EDP was formed. This
payment was accrued as litigation settlement expense as of December 31, 1993.
In February 1994, HEP and the other parties to the lawsuit styled SAS
Exploration, Inc. v. Hall Financial Group, Inc. et al. settled the lawsuit.
The plaintiffs alleged that certain leases in the A.L. Boudreaux #1 and A.M.
Duhon #1 wells expired and terminated at the end of their primary lease terms
as a result of production being from Bol Mex 4 Sand rather than the A.B.
Sand. In the settlement, the plaintiffs and the defendants cross-conveyed
interests in certain leases to one another and HEP paid the defendants
$388,000. The cash paid by HEP was paid from the revenues attributable to
the disputed leases that were escrowed beginning in February 1990. The cash
paid by HEP was included in litigation settlement expense in the December 31,
1993 financial statements. The interest conveyance resulted in a decrease in
HEP's consolidated reserves as of December 31, 1993 totalling 698,000 mcf of
gas, 15,000 bbls of oil and $1,317,000 in discounted future net revenues.
This reduction has been included in the revisions line in the Supplemental
Oil and Gas Reserve Information for the year ended December 31, 1993.
NOTE 12 - LEGAL PROCEEDINGS
In June 1993, 14 lawsuits were filed against HEP in the 15th Judicial
District Court, Lafayette Parish, Louisiana, Docket Nos. 93-2332-F through
93-2345-F, styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et
al. The plaintiffs in the lawsuits claim that they have valid leases
covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S.
Boudreaux #1 well, Paul Castille #1 well, Mary Guilbeau #1 well, Evangeline
Shrine Club #1 well and Duhon #1 well and are entitled to a portion of the
production for the wells dating from February 1990. The plaintiffs are
claiming between .4% and 2.3% of HEP's interest in the wells. HEP has not
recognized revenue attributable to the contested leases since January 1993.
These revenues, totaling $303,000 at December 31, 1995, have been placed in
escrow pending resolution of the lawsuits. At this time, HEP believes that
the difference between the escrowed amount and the amount of any liability
that may result upon resolution of this matter will not be material.
In June 1995, an additional lawsuit was filed against HEP in the 15th
Judicial District Court, Lafayette Parish, Louisiana, Docket No. 95-2601 3B,
styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al. The
plaintiffs in the lawsuit claim that they have additional valid leases
covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S.
Boudreaux #1 well, Paul Castille #1 well, Mary Guilbeau #1 well and Duhon #1
well and are entitled to a portion of the production from the wells. HEP has
not yet determined the amount of its interest in the properties which is at
issue. At this time, HEP believes that the difference between the amount
already in escrow as a result of the litigation described in the preceding
paragraph and the amount of any liability that may result upon resolution of
this matter and the matter described in the preceding paragraph will not be
material.
The Company is involved in other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. The Company believes that its liability, if any, as a result of
such proceedings and claims will not materially affect its financial
condition or operations.
NOTE 13 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments." The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. However, considerable judgment is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<PAGE> 101
<TABLE>
<CAPTION>
December 31, 1995
Carrying Estimated
Amount Fair
Value
(in thousands)
Assets:
<S> <C> <C>
Investment in common
stock of parent $ 2,075 $ 2,075
Liabilities:
Current portion of 300 300
long-term debt
Long-term debt 825 825
</TABLE>
The long-term debt is carried in the accompanying balance sheet at an amount
which is a reasonable estimate of its fair value as it is revolving debt at
floating rate.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1995. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair
value may differ significantly from the amounts presented herein.
<PAGE> 102
HALLWOOD ENERGY CORPORATION
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1995
(Unaudited)
The following reserve quantities and future net cash flow information for HEC
represents proved reserves which are located in the United States. The
reserve estimates presented have been prepared by in-house petroleum
engineers and the majority of these reserves have been reviewed by
independent petroleum engineers. The determination of oil and gas reserves
is based on estimates which are highly complex and interpretive. The
estimates are subject to continuing change as additional information becomes
available.
The standardized measure of discounted future net cash flows provides a
comparison of HEC's proved oil and gas reserves from year to year. No
consideration has been given to future income taxes since HEC's tax basis and
net operating loss carryforwards exceed future net cash flows. Under the
guidelines set forth by the Securities and Exchange Commission, the
calculation is performed using year end prices. At December 31, 1995, oil
and gas prices averaged $18.00 per bbl of oil and $2.10 per mcf of gas for
HEC, including its interest in HEP. Future production costs are based on
year-end costs and include severance taxes. This standardized measure is not
necessarily representative of the market value of HEC's properties.
As of December 31, 1994, HEC no longer includes its share of internal
overhead charges attributable to wells operated by Hallwood Petroleum, Inc.
in lease operating expense for reserve calculation purposes. These overhead
costs are now included in general and administrative expenses in HEC's
financial statements. This change resulted in an upward revision of HEC's
reserves during 1994 of 65,000 barrels of oil, 796,000 mcf of gas and
$895,000 of discounted future net cash flows. This change was implemented to
conform HEC's reserve calculation methodology to what management believes is
a more accurate representation of reserves and is the most common practice of
HEC's industry peers.
HEC's standardized measure of discounted future net cash flows has been
decreased by $39,000 at December 31, 1995 for its share of the effect of
HEP's hedge contracts. This amount represents the difference between year
end oil and gas prices and the hedge contract prices multiplied by the
quantities subject to contract, discounted at 10%.
<PAGE> 103
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
RESERVE QUANTITIES
(In thousands)
(Unaudited)
Gas Oil
Mcf Bbls
PROVED RESERVES:
<S> <C> <C>
Balance, December 31, 1992 17,373 938
Extensions and discoveries 774 66
Revisions of previous estimates (a)(1,993) (205)
Sales of reserves in place (460) (37)
Purchases of reserves in place 737 70
Production (2,005) (110)
-------- -----
Balance, December 31, 1993 14,426 722
Extensions and discoveries 636 104
Revisions of previous estimates (412) 105
Sales of reserves in place (96) (9)
Purchases of reserves in place 74 14
Production (1,932) (128)
--------- -----
Balance, December 31, 1994 12,696 808
Extensions and discoveries 728 267
Revisions of previous estimates (6) 52
Sales of reserves in place (13) (6)
Purchases of reserves in place 40 3
Production (1,808) (130)
------- -----
Balance, December 31, 1995 11,637 994
======= =====
PROVED DEVELOPED RESERVES:
Balance, December 31, 1993 12,779 666
====== =====
Balance, December 31, 1994 12,061 752
====== =====
Balance, December 31, 1995 11,009 914
====== =====
<F1>
(a) The majority of these revisions relate to the G. S. Boudreaux
Estate #1 well which, throughout 1993, produced an increasing
amount of water, resulting in higher operating costs and less
consistent production rates.
</TABLE>
<PAGE> 104
HALLWOOD ENERGY CORPORATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
Future cash flows $ 43,000 $ 37,000 $ 44,000
Future production and
development costs (15,000) (13,000) (13,000)
Future net cash flows
before discount 28,000 24,000 31,000
10% discount to present
value (9,000) (7,000) (10,000)
--------- ------- --------
Standardized measure of
discounted future net cash
flows $ 19,000 $ 17,000 $ 21,000
======== ======== ========
</TABLE>
<PAGE> 105
HALLWOOD ENERGY CORPORATION
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Standardized measure of
discounted future net cash
flows at beginning of year $ 17,000 $ 21,000 $25,000
Sales of oil and gas
produced, net of production
costs (4,064) (4,323) (4,528)
Net changes in prices and
production costs 2,424 (3,757) 1,150
Extensions, discoveries and
other additions, net of
future production costs 2,550 1,239 1,361
Changes in estimated future
development costs (1,037) (575) (643)
Development costs incurred 979 599 585
Revisions of previous
quantity estimates (a) 335 214 (3,750)
Purchases of reserves in
place 63 155 1,346
Sale of reserves in place (54) (148) (793)
Accretion of discount 1,700 2,100 2,500
Changes in production rates
and other (896) 496 (1,228)
------- ----- -------
Standardized measure of
discounted future net cash
flows at end of year $19,000 $17,000 $21,000
======= ======== ========
</TABLE>
(a) The majority of these revisions in 1993 relate to the G. S.
Boudreaux Estate #1 well which, throughout 1993, produced an
increasing amount of water, resulting in higher operating costs
and less consistent production rates.
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
<PAGE> 106
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in the definitive
proxy statement of HEC relating to HEC's 1996 Annual Meeting of
Shareholders, to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be included in the definitive
proxy statement of HEC relating to HEC's 1996 Annual Meeting of
Shareholders, to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the definitive
proxy statement of HEC relating to HEC's 1996 Annual Meeting of
Shareholders, to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the definitive
proxy statement of HEC relating to HEC's 1996 Annual Meeting of
Shareholders, to be filed with the SEC pursuant to Regulation 14A, which
information is incorporated herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
See Index at Item 8.
(b) Reports on Form 8-K.
HEC filed no current reports on Form 8-K during the last quarter of the
period covered by this report.
(c) Exhibits.
(1) 3.1 - Articles of Incorporation of HEC, as amended through October
26, 1990. (Exhibit 3.1)
(3) 3.2 - Bylaws of the Company.
(2) 4.2 - Statement of Resolution establishing and designating Series D
Preferred Stock of the Company. (Exhibit 10.2)
(4) 4.3 - Statement of Resolution establishing and designating Series E
preferred stock of the Company.
(5) 10.20 - Loan Agreement with NBD Bank dated May 19, 1995.
*10.21 - Financial Consulting Agreement between the Hallwood Group
Incorporated and Hallwood Petroleum, Inc. dated June 30, 1994.
*10.22 - Compensation Agreement between Hallwood Petroleum, Inc. and
Anthony J. Gumbiner dated August 1, 1994
*10.23 - Domestic Incentive Plan between the Partnership and Hallwood
Petroleum, Inc. dated January 14, 1993
*10.24 - 1995 Unit Option Plan of the Partnership
*10.25 - Unit Option Plan Loan Program of the Partnership
21 - Subsidiaries of Registrant.
(1) Portions incorporated by reference to the exhibit shown in parentheses
filed with Saxon Oil Company's Current Report on Form 8-K, dated
December 27, 1984, and portions filed with the Annual Report on Form
10-K for the fiscal year ended December 31, 1990.
(2) Incorporated by reference to the exhibit shown in parentheses filed
with Saxon Oil Company's Current Report on Form 8-K, dated January 28,
1987.
(3) Filed with Annual Report on Form 10-K for fiscal year ended December
31, 1992 and incorporated herein by this reference.
(4) Filed with Annual Report on Form 10-K for fiscal year ended December
31, 1994 and incorporated herein by this reference.
(5) Filed with Quarterly Report on Form 10-Q for quarterly year ended June
30, 1995 and incorporated herein by this reference.
* Designates management contracts or compensating plans or arrangements.
<PAGE> 107
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HALLWOOD ENERGY CORPORATION
Date: February 29, 1996 By: /s/ William L. Guzzetti
-------------------------
William L. Guzzetti
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/Anthony J. Gumbiner Chairman of the February 29, 1996
----------------------- Board and Director
Anthony J. Gumbiner (Chief Executive
Officer)
/s/Brian M. Troup Director February 29, 1996
-----------------------
Brian M. Troup
/s/Hans-Peter Holinger Director February 29, 1996
-----------------------
Hans-Peter Holinger
/s/Rex A. Sebastian Director February 29, 1996
-----------------------
Rex A. Sebastian
/s/Robert S. Pfeiffer Principal Accounting February 29, 1996
-----------------------
Robert S. Pfeiffer Officer
<PAGE> 108
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
HALLWOOD ENERGY CORPORATION
(Name of Registrant as Specified In Its Charter)
HALLWOOD ENERGY CORPORATION
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(j)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(j)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11,
(1) Title of each class of securities to which transaction applies:
........................................................................
(2) Aggregate number of securities to which transaction applies:
........................................................................
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
........................................................................
(4) Proposed maximum aggregate value of transaction:
........................................................................
(5) Total Fee Paid:
........................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
...................................................
2) Form, Schedule or Registration Statement No.:
...................................................
3) Filing Party:
...................................................
4) Date Filed:
...................................................
<PAGE> 109
HALLWOOD ENERGY CORPORATION
3710 Rawlins Street, Suite 1500
Dallas, Texas 75219
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
to Be Held May 14, 1996
To the Shareholders of HALLWOOD ENERGY CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Hallwood Energy Corporation (the "Company") will be held at 3710 Rawlins
Street, Suite 1500, Dallas, Texas on May 14, 1996 at 10:00 a.m. (Dallas time)
for the following purposes:
1. To elect 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. To transact any and all other business that may properly come
before the meeting or any adjournments thereof.
The Board of Directors has fixed the close of business on March 31, 1996
as the Record Date for the determination of shareholders entitled to notice
of and to vote at the meeting or any adjournments thereof. Only shareholders
of record at the close of business on the Record Date are entitled to notice
of and to vote at the meeting.
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING; HOWEVER, WHETHER OR NOT
YOU EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED PROMPTLY TO MARK,
SIGN, DATE AND MAIL THE ENCLOSED FORM OF PROXY IN THE ACCOMPANYING POSTAGE-
PAID ENVELOPE SO THAT YOUR SHARES OF STOCK MAY BE REPRESENTED AND VOTED IN
ACCORDANCE WITH YOUR WISHES AND IN ORDER THAT THE PRESENCE OF A QUORUM MAY BE
ASSURED AT THE MEETING. YOU HAVE THE RIGHT TO REVOKE YOUR PROXY AT ANY TIME
PRIOR TO VOTING, EITHER IN PERSON AT THE ANNUAL MEETING OR BY GIVING WRITTEN
NOTICE TO THE COMPANY IN THE MANNER PROVIDED ON THE INITIAL PAGE OF THE
ENCLOSED PROXY STATEMENT. PROMPT RETURN OF THE PROXY BY OUR SHAREHOLDERS
WILL REDUCE THE TIME AND EXPENSE OF PROXY SOLICITATION.
By Order of the Board of Directors,
Cathleen M. Osborn
Secretary
March 31, 1996
Dallas, Texas
<PAGE> 110
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.
<PAGE> 111
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 *
</TABLE>
* Represents less than 1% of the outstanding Common Stock.
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.
<PAGE> 112
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.
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.
<PAGE> 113
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.
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.
<PAGE> 114
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.
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.
<PAGE> 115
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).
<TABLE>
SUMMARY COMPENSATION Table
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
<S> <C> <C> <C> <C> <C>
LTIP All Other
Name & Principal Position Year Salary Bonus Payouts Compensation (1)
------------------------- ----- ---------- -------- ------------ ----------------
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
</TABLE>
(1) Employer contribution to 401(k) account.
(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.
<PAGE> 116
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.
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)
_______________________
</TABLE>
(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.
(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.
<PAGE> 117
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.
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.
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.
<PAGE> 118
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.
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
<PAGE> 119
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.
<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
<PAGE> 1
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
<PAGE> 2
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
<PAGE> 3
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.
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.
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.
<PAGE> 4
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.)
<PAGE> 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.
<PAGE> 6
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.
<PAGE> 7
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
<PAGE> 8
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.
<PAGE> 9
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.
<PAGE> 1
Hallwood Energy Corporation
To: Brokers, Banks and Other Nominees
Ladies and Gentlemen:
Enclosed is a copy of materials relating to an Offer being made by The
Hallwood Group Incorporated to Shareholders of Hallwood Energy Corporation (the
"Company"). Hallwood Group has commenced 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. We refer you to the enclosed materials for the terms and conditions of
the Offer. You may obtain additional copies of all materials by contacting
Hallwood Petroleum, Inc., the Depositary for the Offer, at: P.O. Box 378111,
4582 South Ulster Street Parkway, Suite 1700, Denver, Colorado 80237, phone
(800) 882-9225.
Since you are the holder of record, in order to participate in the
Offer on behalf of your clients, you should complete, execute and mail the
Letter of Transmittal (containing the Certificate of Broker, Bank or other
Nominee) that is enclosed with this letter to Hallwood Petroleum, Inc. at the
address above, together with the Share certificate(s) tendered. You should mail
the certificate(s) as soon as practicable after you receive authorization from
your clients, together with a Broker Letter of Transmittal for the Offer. All
documents must be received on or before November 22, 1996, which is the
expiration date for the Offer, unless it is extended.
The CUSIP Number is:
40636M 208
The Depositary agrees to reimburse you for the customary reasonable
expenses of solicitation of your clients. Your reimbursement request should be
submitted through Hallwood Petroleum, Inc., attn:
Monica Dozier. We appreciate your cooperation in this matter.
Very truly yours,
HALLWOOD PETROLEUM, INC.
Depositary for Hallwood Energy Corporation
Enclosures:
Letter to the Shareholders with Questions and Answers Section
Client Letter to Beneficial Owners
Broker Letter of Transmittal for the Offer
Offer to Purchase
14D-9
Hallwood Energy Corporation 1995 10-K, June 30, 1996 10-Q and Proxy
Statement dated March 31, 1996
<PAGE> 1
OFFER TO PURCHASE SHARES FOR
SHAREHOLDERS OF HALLWOOD ENERGY CORPORATION
THIS OFFER WILL EXPIRE ON NOVEMBER 22, 1996
UNLESS EXTENDED.
To Our Clients Who Hold Shares of:
Hallwood Energy Corporation
Enclosed for your consideration are materials relating to an Offer
being made by The Hallwood Group Incorporated to Shareholders of Hallwood Energy
Corporation. 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.
This material is being forwarded to you as the beneficial owner of
Shares carried by us in your account but not registered in your name on the
records of Hallwood Energy Corporation. A tender of the Shares may only be made
on your behalf by us, as the holder of record, pursuant to your instructions.
Accordingly, if you wish for us to tender your Shares on your behalf pursuant to
the Offer, you must notify us in writing. PLEASE READ ALL OF THE ENCLOSED
MATERIAL CAREFULLY.
Important:
1. The Offer will expire on November 22, 1996, unless extended by Hallwood
Energy Corporation. Accordingly, your instructions should be forwarded to us as
soon as possible so as to permit sufficient time to tender your Shares for the
Offer.
2. The Depositary will send a check for the shares after the Offer expires and
Hallwood Group accepts the tender of the shares.
3. The price paid per Share will be $19.50. We will forward the certificate(s)
relating to your Shares to the Depositary as soon as practicable after we
receive your authorization.
<PAGE> 1
Exhibit (d)(5)
NEWS RELEASE
THE HALLWOOD GROUP INCORPORATED HALLWOOD ENERGY CORPORATION
3710 Rawlins, Suite 1500 4582 South Ulster St. Parkway
Dallas, TX 75219 Post Office Box 80237
Denver, CO 80237
Contact:
Mary Doyle Mary Brook
Investor Relations (303) 850-7373
(214) 528-5588
For Immediate Release
Dallas, Texas, September 9, 1996. 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.
- END -
<PAGE> 1
Exhibit (d)(6)
PRESS RELEASE, DALLAS, TEXAS, OCTOBER 10, 1996
Hallwood Energy Corporation (OTC:HWEC) and The Hallwood Group Incorporated
(NYSE:HWG) 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.
<PAGE> 1
Exhibit (d)(7)
This announcement is neither an offer to purchase nor a solicitation of an
offer to sell the Shares (as defined below). The Offer ( as defined below) is
made solely by the Offer to Purchase dated October 15, 1996 ("Offer to
Purchase") and the related Letter of Transmittal and is being made to all
holders of Shares. The Offer is not being made to (nor will tenders be
accepted from or on behalf of) the holders of Shares in any jurisdiction in
which the making of the Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. In any jurisdiction 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 (as defined below) by one or more registered brokers or dealers.
Notice of Offer to Purchase for Cash
All Outstanding Shares of Common Stock of
Hallwood Energy Corporation
at
$19.50 Net Per Share
by
The Hallwood Group Incorporated
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 beneficially 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 the Offer to Purchase and in
the related Letter of Transmittal (together with the Offer to Purchase, the
"Offer"). The Purchaser currently beneficially owns approximately 81.6% of the
outstanding Shares. Following the Offer, the Purchaser intends to effect the
Merger (as defined below).
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW
YORK CITY TIME, ON 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 NOT HELD BY THE PURCHASER, WHICH, TOGETHER WITH ANY SHARES CURRENTLY
BENEFICIALLY OWNED DIRECTLY OR INDIRECTLY BY THE PURCHASER, WILL 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"). THE
OFFER IS ALSO SUBJECT TO OTHER TERMS AND CONDITIONS CONTAINED IN THE OFFER TO
PURCHASE. SEE THE INTRODUCTION AND SECTIONS 1 AND 13 OF THE OFFER IN THE OFFER
TO PURCHASE.
THE BOARD OF DIRECTORS OF THE COMPANY AND THE SPECIAL COMMITTEE (AS
DEFINED IN THE OFFER TO PURCHASE) 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.
The Offer is being made pursuant to an Agreement and Plan of Merger,
dated as of October 9, 1996 ("Merger Agreement"), by and 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 or any subsidiary of the Purchaser (other than Shares held by
stockholders of the Company who have properly exercised their appraisal rights
in accordance with Art. 5 of the Texas Business Corporation Act) will be
converted into the right to receive an amount in cash equal to the per Share
price paid pursuant to the Offer.
<PAGE> 2
For purposes of the Offer, the Purchaser will be deemed to have
accepted for payment, and thereby purchased, Shares validly tendered and not
withdrawn if and when the Purchaser gives oral or written notice to Hallwood
Petroleum, Inc., as depositary ("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 accepted for payment. UNDER NO CIRCUMSTANCES WILL INTEREST ON
THE PURCHASE PRICE BE PAID, 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) a
properly completed and duly executed Letter of Transmittal (or a facsimile
thereof), with any required signature guarantees and (iii) any other documents
required by the Letter of Transmittal.
The Purchaser expressly reserves the right, in its sole discretion, at
any time and from time to time to extend for any reason (including the
occurrence of any condition specified in the Offer to Purchase) the period of
time during which the Offer is open by giving oral or written notice of such
extension to the Depositary. Any such extension will also be publicly
announced by a press release issued no later than 9:00 a.m. New York City time,
on the next business day after the previously scheduled expiration date of the
Offer. During any such extension, all Shares previously tendered and not
withdrawn will remain subject to the Offer, subject to the rights of tendering
stockholders to withdraw their Shares.
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 (as defined in the Offer to Purchase) and, unless
theretofore accepted for payment, 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 the Offer to
Purchase. Any such notice of withdrawal must specify the name of the person
who tendered the Shares to be withdrawn, the number of Shares to be withdrawn
and the name of the registered holder if different from the name 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 be submitted to the Depositary and,
unless such Shares have been tendered for the account of any Eligible
Institution (as defined in the Offer to Purchase), the signature on the notice
of withdrawal must be guaranteed by an Eligible Institution. Withdrawals of
tenders may not be rescinded, and any Share properly withdrawn will thereafter
be deemed not validly tendered for the purpose of the Offer. However,
withdrawn Shares may be retendered by again following the procedure described
in the Offer to Purchase at any time on or prior to the Expiration Date.
All questions as to the form and validity (including time of receipt)
of a notice of withdrawal will be determined by the Purchaser, in its sole
discretion, and its determination shall be final and binding on all parties.
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 a failure to give such notification.
The information required to be disclosed by Paragraph (e)(1)(vii) of
Rule 14d-6 of the General Rules and Regulations under the Securities Exchange
Act, as amended, is contained in the Offer to Purchase and is incorporated
herein by reference.
The Company has provided to the Purchaser's agent its stockholder list
and security position lists for the purpose of disseminating the Offer to
holders of Shares. The Offer to Purchase, the related Letter of Transmittal
and other related materials are being mailed to record holders of Shares whose
names appear on the Company's stockholder list and will be mailed to brokers,
dealers, commercial brokers, commercial banks, trust companies and similar
persons whose names, or the names of whose nominees, appear on the Company's
stockholder lists 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
<PAGE> 3
THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION THAT SHOULD BE READ BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
Questions and requests for assistance may be directed to Hallwood
Petroleum, Inc. as set forth below. Requests for additional copies of the
Offer to Purchase, the Letter of Transmittal and the other tender offer
materials may be directed to Hallwood Petroleum, Inc. or to brokers, dealers,
commercial banks or trust companies, and copies will be furnished promptly at
the Purchaser's expense. No fees or commissions will be payable to brokers,
dealers or other persons (other than Hallwood Petroleum, Inc.) for soliciting
tenders of Shares pursuant to the Offer.
Depositary for the Offer is:
HALLWOOD PETROLEUM, INC.
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Toll Free) (800) 882-9225
3
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Exhibit (d)(8)
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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
Please see the reverse side of this letter for Questions and Answers about the
Offer.
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your shares in the offer.
Sincerely,
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.
Please see the reverse side of this letter for Questions and Answers about the
Offer.
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Exhibit (e)(1)
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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