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 (Zip Code)
offices)
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.
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.
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.
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.
Total Proved
Reserve Quantities Discounted Value
Mcf of Bbls of Proved Proved
Gas Oil Undeveloped Developed Total
(In thousands)
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
======= ==== ===== ======== =======
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>
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.
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>
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>
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>
Oil and condensate (includes the <C> <C> <C>
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.
<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>
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."
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)
<C> <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>
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>
<TABLE>
<CAPTION>
TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
(In thousands)
For the Years Ended December 31, 1994
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>
<TABLE>
<CAPTION>
TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION
(In thousands)
For the Years Ended December 31, 1993
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>
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.
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.
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
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
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
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 the following page)
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except Shares)
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
======== ========
<F1>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per Share)
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
====== ===== =====
<FN>1
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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
======= ======= =======
<F1>
The accompanying notes are an integral part of the financial statements.
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Series D Series E
Convertible Convertible Capital in
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
<F1>
(Continued below)
</TABLE>
<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
<F1>
The accompanying notes are an integral part of the financial statements.
</TABLE>
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.
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.
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.
At December 31, 1995, HEC's five year debt maturity schedule is as follows:
<TABLE>
<C> <C>
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
</TABLE>
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.
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.
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.
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)
<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.
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.
<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.
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%.
<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>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)<PAGE>
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>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
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
======= ======== ========
<F1>
(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.
</TABLE>
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None.
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.
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<PAGE>
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
Anthony J. Gumbiner Board and Director
(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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1995 for Hallwood Energy Corporation and is
qualified in its entirety by reference to such Form 10-K.
</LEGEND>
<CIK> 0000319019
<NAME> HALLWOOD ENERGY CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 398
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,644
<PP&E> 116,999
<DEPRECIATION> 107,160
<TOTAL-ASSETS> 16,465
<CURRENT-LIABILITIES> 3,263
<BONDS> 825
0
0
<COMMON> 599
<OTHER-SE> 6,412
<TOTAL-LIABILITY-AND-EQUITY> 14,465
<SALES> 5,507
<TOTAL-REVENUES> 5,632
<CGS> 0
<TOTAL-COSTS> 1,443
<OTHER-EXPENSES> 3,396
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 493
<INCOME-PRETAX> 300
<INCOME-TAX> (406)
<INCOME-CONTINUING> 706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 706
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Hallwood G.P., Inc., a Delaware corporation
THE HALLWOOD GROUP INCORPORATED
FINANCIAL CONSULTING AGREEMENT
THIS FINANCIAL CONSULTING AGREEMENT (the "Agreement"), made and entered
into as of the 30th day of June, 1994, by and between THE HALLWOOD GROUP
INCORPORATED, a Delaware corporation (the "Consultant") and HALLWOOD PETROLEUM,
INC., a Delaware corporation ("HPI").
W I T N E S S E T H:
WHEREAS, HPI, on behalf of its affiliates, is engaged in numerous
international activities and shall from time to time require the financial
knowledge and expertise of the Consultant or its agents in regard to various
transactions between HALLWOOD ENERGY CORPORATION, a Texas corporation ("HEC"),
HALLWOOD ENERGY PARTNERS, L.P., a Delaware limited partnership (the
"Partnership"), HALLWOOD CONSOLIDATED RESOURCES CORPORATION, a Delaware
corporation ("HCRC"), or their affiliates, and any third parties (HPI, HEC, HEP
and HCRC and their affiliated entities are sometimes referred to in this
Agreement as the "Energy Companies");
WHEREAS, the Energy Companies desire to draw upon and benefit from the
financial knowledge and expertise of Consultant or its agents and Consultant
desires to consult with the Energy Companies and be available therefor.
NOW, THEREFORE, for and in consideration of the mutual undertakings and
agreements contained in this Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
Section 1. Appointment. HPI hereby appoints and employs the Consultant to
act as its financial advisor and consultant upon and subject to the terms and
conditions hereinafter set forth, and Consultant hereby accepts such appointment
and undertakes to advise and consult with HPI during the term of this Agreement
upon and subject to the terms and conditions hereinafter set forth.
Section 2. Term. The services of the Consultant under this Agreement
shall be for a term commencing on the date of execution of this Agreement and
expiring June 30, 1997 (the "Expiration Date") unless earlier terminated by the
Consultant for any reason upon thirty (30) days' written notice to HPI.
Section 3. Duties of the Consultant. The Consultant shall furnish and
perform international consulting and advisory services to the Energy Companies
to enable such entities to: (i) render assistance in the implementation of
plans of financial restructuring of unrelated companies; (ii) effect
acquisitions by the Energy Companies of oil or gas interests or mergers of the
Energy Companies with other entities; and (iii) assist and consult with the
Energy Companies in structuring and obtaining financing for their activities,
and shall perform such services in or from Monaco, Antigua, or such other
jurisdictions as Consultant or its agents may, in their sole discretion, deem
appropriate, and neither Consultant nor any agent of Consultant shall provide
any such services, or otherwise engage in any business of any nature whatsoever,
in the United States or the United Kingdom. In particular, the Consultant's
duties and obligations hereunder shall include: (a) performing such duties at
such times and in such manner as shall be mutually agreeable to HPI and the
Consultant, although at all times the Consultant will retain control over how
such services are performed and who the Consultant will hire to perform such
services; (b) reporting to HPI and any other entity designated by HPI, as
needed, to fulfill its obligations regarding the rendition of international
financial and consulting advice; and (c) observing and complying with all
resolutions, regulations and directions from time to time made or given by HPI
as long as such resolutions, regulations and directions do not interfere with
the manner in which Consultant performs its duties.
Section 4. Compensation.
A. As compensation for the Consultant's services, HPI agrees to pay to
the Consultant a total of Nine Hundred Thousand Dollars ($900,000), due and
payable in Three Hundred Thousand Dollar ($300,000) installments on June 30 of
each of 1994, 1995 and 1996.
B. The amounts paid pursuant to paragraph A of this section shall be a
nonrefundable advance against any fees, commissions or other payments payable to
Consultant in the future for services rendered by Consultant in connection with
any transactions between the Energy Companies and any third party.
C. HPI and the Consultant hereby acknowledge and agree that all amounts
payable pursuant to paragraph A of this section are to be paid as a retainer to
secure, for the benefit of the Energy Companies, the availability of the
Consultant to perform the services referred to in Section 3 of this Agreement.
Consequently, all amounts so payable shall be so payable, without offset,
withholding or any deduction of any nature whatsoever, whether or not any
services are performed at any time, except as provided in paragraph B of this
section.
D. HPI shall reimburse Consultant for all reasonable and ordinary out-of-
pocket business expenses Consultant reasonably incurs in the performance of its
duties under this Agreement.
Section 5. Relationship of the Parties. In performing its services under
this Agreement, the Consultant shall be an independent contractor and, as
between HPI and the Consultant, neither HPI nor any other of the Energy
Companies shall be responsible for withholding, collection or payment of income
taxes or for other taxes of any nature on behalf of the Consultant or any agent
of Consultant. Nothing contained in this Agreement shall make the Consultant
the agent, employee, joint venturer or partner of the Energy Companies or
provide the Consultant with the power or authority to bind the Energy Companies
to any contract, agreement or arrangement with any individual or entity except
with the prior written approval of such entities.
Section 6. Confidentiality. The Consultant recognizes and acknowledges
that confidential information of various kinds may exist, from time to time,
with respect to the business of the Energy Companies. Accordingly, the
Consultant covenants on behalf of itself and its agents, if any, that, (a)
except with the prior written consent of HEC, they shall at all times keep
confidential and not divulge, furnish or make accessible to anyone (except HEC's
or the Partnership's authorized representatives), any confidential information
to which the Consultant or its agents have been or shall become privy relating
to the business of HEC, the Partnership or any of their affiliates and, (b)
except with the prior written consent of HCRC, they shall at all times keep
confidential and not divulge, furnish or make accessible to anyone (except
HCRC's authorized representatives), any confidential information to which the
Consultant or its agents have been or shall become privy relating to the
business of HCRC or any of its affiliates. The provisions of this Section 6
shall not apply to any information to the extent (i) it is or shall become
generally known to the public or the trade (without the commission of a tortious
act), (ii) it is or shall become available in trade or other publications, or
(iii) Consultant or its agents are required by law to disclose such information
to any person.
Section 7. Certain Payments. The Consultant acknowledges that it is
aware of the provision of United States law relating to prohibitions of any
person representing a United States company from, directly or indirectly, giving
anything of value to any foreign official to influence the foreign official in
directing or agreeing to do business with the United States firm. In addition,
the Consultant acknowledges that it has read the Statement of Company Policy of
the Hallwood Entities regarding payment of gifts to foreign officials that has
previously been supplied to the Consultant. The Consultant hereby undertakes to
abide by such laws and policy and will not use any part of the amounts paid
under this Agreement or any payments that are prohibited under such laws or
policy.
Section 8. Assignment. Neither party hereto may assign, without the other
party's prior written consent, this Agreement, or any right or obligation
hereunder, and any and all assignments without such prior written consent shall
be null and void, except that with the consent of HPI the Consultant may
designate agents to perform its obligations under this Agreement.
Section 9. Miscellaneous.
A. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas, other than the conflicts of
laws provisions of such laws.
B. Headings. The descriptive headings for the several sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
C. Severability. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained in this Agreement.
D. Entire Contract. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto and contains
all of the covenants and agreements between the parties. In particular, this
Agreement supersedes the Financial Consulting Agreement between the parties
dated June 30, 1993, which Agreement is no longer in effect.
E. Amendments. This Agreement may not be modified, altered, amended,
waived or terminated orally, unless in writing signed by the parties hereto.
F. Notices. All communications to be given or made pursuant to this
Agreement shall be in writing and shall be deemed to have been duly given or
made if mailed by registered or certified mail, postage prepaid, addressed to
the address set forth opposite each party's name below, or in such other
reasonable manner as HPI or the Consultant, as the case may be, shall have
previously designated in writing to the other.
G. Execution in Counterparts. This Agreement may be executed in
counterparts, each to constitute an original, but both in the aggregate to
constitute one agreement as executed.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
CONSULTANT:
Address: THE HALLWOOD GROUP INCORPORATED
3710 Rawlins
Suite 1500
Dallas, Texas 75219 By: /s/William L. Guzzetti
--------------------------
Name: William L. Guzzetti
Title: Executive Vice President
HPI:
Address: HALLWOOD PETROLEUM, INC.
4582 S. Ulster Street Parkway<PAGE>
Suite 1700
Denver, Colorado 80237 By: /s/Russell P. Meduna
---------------------------
Name: Russell P. Meduna
Title: Executive Vice President<PAGE>
COMPENSATION AGREEMENT
FOR
ANTHONY J. GUMBINER
WITH HALLWOOD PETROLEUM, INC.
This Compensation Agreement ("Agreement"), is made and entered into as of
August 1, 1994 by and between Hallwood Petroleum, Inc. ("HPI"), and Anthony J.
Gumbiner ("Gumbiner").
RECITALS
HPI, through its affiliates, is actively engaged in oil and gas activities
in the countries of Indonesia, Azerbaijan and Peru and may become actively
involved in similar activities in other countries.
Gumbiner is the Chairman of the Board of HPI and the parties have agreed
that his duties in such office shall be those described in this Agreement and
shall be performed outside the United States and the United Kingdom.
HPI and Gumbiner wish to promote their mutual best interests by
establishing rights and obligations with respect to Gumbiner's employment
relationship with HPI and they desire to set forth in writing their mutual
understanding and agreement with respect to the conditions, covenants and
agreements regarding the employment of Gumbiner by HPI.
HPI and Gumbiner previously entered into an agreement dated as of April 1,
1992, which incorrectly reflected the terms of their relationship.
AGREEMENT
In consideration of the mutual benefits to be derived from this Agreement
and the covenants and agreements set forth herein, the receipt and sufficiency
of which are acknowledged by the execution and delivery hereof, the parties
agree as follows:
1. Engagement. HPI agrees to compensate Gumbiner for his activities
outside of the United States and Gumbiner agrees to perform these activities
outside of the United States upon the terms and conditions set forth in this
Agreement.
2. Duties of Gumbiner. Gumbiner's duties and obligations hereunder shall
include: (a) consulting with and assisting HPI in maintaining its relationships
with officials in Indonesia, Azerbaijan and Peru and other countries outside the
United States and the United Kingdom in which HPI or its affiliates may in the
future enter into agreements with respect to oil and gas activities; (b)
assisting HPI in negotiating such agreements with the governments or state oil
companies of these countries as may be necessary or appropriate to implement the
initial agreement HPI or its affiliates entered into in those countries; (c)
assist and consult with HPI in structuring and obtaining financing for the
activities of its affiliates; (d) reporting to the Boards of Directors of HPI
and its affiliates (the "Boards") and any other person designated by the Boards;
and (d) observing and complying with all resolutions, regulations and directions
from time to time made or given by the Boards.
3. Nondisclosure and Confidentiality. Gumbiner understands that he has
developed and been exposed to, or may develop or be exposed to highly
confidential information and trade secrets of HPI and its parent, subsidiaries
or associated companies ("Confidential Information"), and that maintenance by
HPI of its proprietary Confidential Information to the fullest extent possible
is extremely important. Except as required during the performance of his duties
for HPI or otherwise permitted by HPI, Gumbiner agrees never to disclose or use
any Confidential Information either during or after the term of this Agreement
and to take all reasonable precautions to prevent inadvertent disclosure, use or
transfer of any Confidential Information.
4. Term. This Agreement shall be effective from August 1, 1994 (the
"Commencement Date") and shall continue in effect until terminated by either
party giving to the other not less than six calendar month's notice in writing.
5. Compensation. As compensation for services rendered by Gumbiner
hereunder, HPI shall pay to Gumbiner annual compensation of Two Hundred Fifty
Thousand Dollars ($250,000) payable in installments quarterly in advance on the
first day of each of February, May, August and November each year beginning
August 1, 1994.
6. Expenses. HPI shall within a reasonable time after the occurrence of
same, reimburse Gumbiner for reasonable, ordinary business expenses reasonably
incurred by him in the performance of his duties for HPI, provided that Gumbiner
shall maintain an accurate record of such expenses and shall provide HPI with
evidence thereof.
7. Termination. HPI may terminate this Agreement at any time upon the
following events: (i) any act of dishonesty on the part of Gumbiner resulting
or intended to result directly or indirectly in personal gain or benefit at the
expense of HPI or material damage of or to property of HPI; (ii) any act of
fraud, misappropriation, embezzlement or willful misconduct by Gumbiner or (iii)
the willful breach or repeated, habitual neglect by Gumbiner of his duties under
this Agreement to HPI. Upon such termination HPI shall pay to Gumbiner the pro-
rata portion of the annual compensation to the date of termination, and he shall
be entitled to no other compensation or benefits hereunder, including, without
limitation, any other compensation, bonuses or commissions.
8. Disability or Death. If as a result of illness, injury or other
disability, Gumbiner shall be unable to perform his duties hereunder on a
substantially full-time basis for any period of 30 days or more, HPI may at its
option terminate Gumbiner's employment hereunder and shall pay to Gumbiner the
pro-rata portion of annual compensation to the date of termination. If Gumbiner
shall die during the term of his employment by HPI, HPI shall pay to Gumbiner's
estate the pro-rata portion of annual compensation to the date of Gumbiner's
death.
9. Certain Payments. Gumbiner acknowledges that he is aware of the
provision of United States law relating to prohibitions of any person
representing a United States company from, directly or indirectly, giving
anything of value to any foreign official to influence the foreign official in
directing or agreeing to do business with the United States firm. In addition,
Gumbiner acknowledges that he has read the Statement of Company Policy of the
Hallwood Entities regarding payment of gifts to foreign officials that has
previously been supplied to him. Gumbiner hereby undertakes to abide by such
laws and policy and will not use any part of the amounts paid under this
Agreement or any payments that are prohibited under such laws or policy.
10. Relationship of the Parties. In performing his services under this
Agreement, Gumbiner shall be an independent contractor and, as between HPI and
Gumbiner, neither HPI nor any of its affiliates shall be responsible for
withholding, collection or payment of income taxes or for other taxes of any
nature on behalf of Gumbiner.
11. Miscellaneous.
(a) Notices. Any notice to be given hereunder is to be given in writing
by either party to the other and delivered or sent by prepaid airmail post or
facsimile transmission addressed to the address shown next to each party's
signature to this agreement or such other address as may be notified by one
party to the other for such purposes and shall be deemed to be served in the
case of airmail post three days after posting and in the case of facsimile
transmission immediately upon successfully transmission.
(b) Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
(c) Governing Law; Venue. This Agreement shall be governed by and
construed in accordance with the laws of Monaco and the parties agree to submit
themselves to the jurisdiction of Monaco.
(d) Counterparts. This Agreement may be executed in multiple
counterparts, all of which shall be deemed originals, but which counterparts
shall constitute one and the same instrument.
(e) Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter hereof. No
variations, modifications or changes herein or hereof shall be binded upon any
party unless set forth in a document duly executed by or on behalf of such
party.
(f) Supersedes Prior Agreement. This Agreement replaces and supersedes in
its entirety the Compensation Agreement for Anthony J. Gumbiner with Hallwood
Petroleum, Inc. dated as of April 1, 1992.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and date above first written.
HPI:
4582 South Ulster Street Parkway HALLWOOD PETROLEUM, INC.
Suite 1700
Denver, Colorado 80237 By: /s/William L. Guzzetti
------------------------
William L. Guzzetti
President
24, Avenue Princesse Grace GUMBINER:
Monte-Carlo MC98000
Principality of Monaco /s/Anthony J. Gumbiner
----------------------------
ANTHONY J. GUMBINER
DOMESTIC INCENTIVE PLAN
OF
HALLWOOD PETROLEUM, INC.
Hallwood Petroleum, Inc., a Delaware corporation (the "Company"), hereby
establishes the following Domestic Incentive Plan, which is intended to provide
greater incentive and motivation to the Company's key personnel to increase the
domestic oil and gas reserves of the affiliates of the Company for which the
Company provides management and operational services and to enhance the
Company's ability to attract, motivate and retain key employees upon whom, in
large measure, the success of the Company and its Affiliates depends.
ARTICLE I
DEFINITIONS
The following words and phrases shall have the meaning set forth below
unless the context clearly indicates otherwise:
"Affiliates" means the affiliates of the Company for which the Company
provides management and operational services, including, but not limited to,
Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation,
Hallwood Energy Corporation and Hallwood San Juan #1, L.L.C.
"Beneficiary" means a Beneficiary designated pursuant to Section 6.6.
"Board" means the Board of Directors of the Company or any committee of the
Board of Directors to which the Board may delegate its authority to act in
connection with this Plan from time to time. The Board shall, with regard to
other than procedural matters related to this Plan, act after consultation and
recommendation from the boards of directors of the Affiliates of the Company.
"Buy-Out Value" shall mean that percentage of the net present value of the
then remaining proven reserves of an Eligible Well, as determined by the Board
at the time any award is made under the Plan. The net present value of the then
remaining proven reserves of an Eligible Well shall be determined based on the
Reserve Report.If the net present value of the proven reserves of an Eligible
Well is less than zero, the Buy-Out Value shall be zero.
"Cash Flow" from an Eligible Well means, with regard to the period in
question, (i) all revenues received by the Company or its Affiliates from the
sale of production from the Eligible Well plus (ii) all proceeds received from
the sale of an interest in the Eligible Well to other than an Affiliate, less in
each case (A) all operating expenses paid by the Company or its Affiliates and
normally attributable to a working interest in the Eligible Well; (B) all
amounts paid by the Company or its Affiliates to improve, recomplete or maintain
the production from an Eligible Well (other than amounts spent in connection
with the initial spudding, drilling and first Completion of the Eligible Well or
recompletion of a Marginal Well); and (C) all severance, production or other
production related taxes paid by the Company and its Affiliates and applicable
to the Eligible Well.
"Company" means Hallwood Petroleum, Inc. and any successor thereto.
"Completion" of an Eligible Well or a "Completed" Eligible Well means (i)
with regard to an initial drilling, the date such well is spud; (ii) with regard
to the recompletion of a Marginal Well, the date when a completion, workover or
drilling rig is moved in and rigged up in preparation of imminent work
initiation or (iii) with regard to secondary or tertiary recovery operations,
the date of first injection of any fluids used for secondary or tertiary
recovery.
"Effective Date" means January 1, 1992.
"Eligible Well" means any domestic well Completed within the Plan Year, any
recompleted Marginal Well (in which case the value to be assigned to such
recompleted Marginal Well shall be the incremental value attributable to the
recompletion), or any secondary or tertiary recovery operation (in which case
the value to be assigned to such secondary or tertiary recovery wells not
already included in a Plan, shall be calculated by holding constant the proven
developed producing reserve rate at the time of first injection, and only
considering the production above that rate as added value).
"Key Employee" means an employee or consultant of the Company who the
Board, in its sole discretion, determines has or may substantially benefit the
Company.
"Marginal Well" means any well having a net present value, on the Reserve
Report, of less than or equal to $25,000.
"Participant" means a Key Employee who is selected by the Board to
participate in the Plan for any Plan Year.
"Participation Point" means one percent of the Plan Cash Flow for any Plan
Year; 100 Participation Points shall be awarded to Participants in any Plan Year
during which any awards are made.
"Plan" means this Domestic Incentive Plan of Hallwood Petroleum, Inc.
"Plan Cash Flow" means the aggregate percentage of the Affiliates'
collective interest in the Cash Flow of the Eligible Wells that the Board
determines for any Plan Year to allocate to the Plan, and which is to be divided
among the Participants based on Participation Points.
"Plan Distributions" attributable to any Participant's Participation Points
means (i) the Plan Cash Flow attributable to the Participation Points and (ii)
the Buy-Out Value of the Participation Points upon buy-out pursuant to Section
3.4.
"Plan Year" means the twelve-month calendar year.
"Reserve Report" means the most recent regularly prepared reserve report
which applies the rules and regulations of the Securities and Exchange
Commission, except that average, twelve month prices, rather than year-end
prices, shall be used.
"Termination for Cause" means termination which is initiated by the Company
for either misconduct or poor performance.
ARTICLE II
PARTICIPATION IN THE PLAN
2.1 Eligibility. Any Key Employee of the Company shall be eligible to
be selected as a Participant in the Plan. A Key Employee shall become a
Participant upon receiving an award of Participation Points by the Board, which
shall act upon the recommendation of the boards of directors of its Affiliates,
which in turn may take into consideration, among other factors, the
recommendation of the Company's and the Affiliates' executive officers, the Key
Employee's position, salary, and individual contribution to the performance of
the Company's Affiliates. Only Key Employees who are employed by or engaged as
consultants to the Company on the date of the award by the Board shall be
eligible to be awarded Participation Points.
2.2 Enrollment Procedure. Each Participant shall complete, sign, and
return to the Company's Human Resources department an enrollment form supplied
by the Company. The enrollment form shall state, among other information, the
Participant's address and date of birth and a designation of the names and
addresses of the Participant's beneficiaries. The Participant will not be
entitled to receive any payments with respect to the Plan until the Participant
has properly returned the enrollment form.
ARTICLE III
ALLOCATION AND DISTRIBUTION OF NET INCOME
3.1 Determination of Participants and Awards. The Board may, based upon
the recommendation of the boards of directors of its Affiliates, determine
annually the Key Employees who are to be Participants in the Plan with respect
to the Plan Year, the percentage of the total Plan Cash Flow to be allocated to
awards for the Plan Year, the Plan Buy-Out Value, and the Participation Points
to be awarded to each Participant. The Board may make these determinations in
its sole discretion, is not required to allocate any Plan Cash Flow for a Plan
Year and may award all Participation Points for a Plan Year to one Participant.
It is anticipated that determinations of the Plan Cash Flow allocated for a Plan
Year, the Participants, the Plan Buy-Out Value and the Participation Points for
a Plan Year will be made concurrently with the first regular meeting of the
Board held each year. The first such determinations shall be made in 1993 with
respect to the 1992 Plan Year, and shall be effective from January 1, 1992. All
allocations shall be made on a well-by-well basis or in such other manner as the
Board may determine.
3.2 Effect of Award. Subject to Section 3.5, a Participant who is
awarded Participation Points shall receive the Plan Cash Flow attributable to
those Participation Points for a total of five calendar years, beginning with
the Plan Year for which the Participation Points were awarded, as provided in
Section 3.3, and in the sixth calendar year shall receive the Buy-Out Value, as
provided in Section 3.4.
3.3 Distribution of Plan Cash Flow. On all outstanding awards, the
Company shall distribute to each Participant the portion of the Plan Cash Flow
attributable to the Participation Points then held by the Participant for each
Plan Year. The distributions shall be made quarterly to each Participant or his
Beneficiary in the amount of such person's allocable share of the Plan Cash Flow
for the preceding quarter, less any applicable withholding of income taxes or
other amounts. Distributions shall be made within thirty days of the end of a
quarter.
3.4 Buy-out of Plan's Interest. As of January 1 of the sixth year that
Cash Flow from an Eligible Well has been allocated under the Plan, the Buy-Out
Value, if any, of an Eligible Well shall be paid to the Participants with
respect to that Eligible Well and thereafter no further Cash Flow from such
Eligible Well shall be paid to the Participants. All payments under this section
shall be made on or before the end of the first quarter of the sixth year.
3.5 Vesting.
(a) If a Participant's employment with the Company is terminated by
the Participant or by the Company as a Termination for Cause, the Participant
shall cease to be a Participant in this Plan and all Participation Points of the
Participant under this Plan shall be canceled without payment of any
compensation and the former Participant shall not thereafter receive any Plan
Distributions. Any Participation Points cancelled hereunder and the related Plan
Cash Flow shall revert to the Affiliates, and shall not be available to any
other Participant.
(b) If a Participant's employment with the Company is terminated by
the Company as other than a Termination for Cause, the Participant shall, at the
option of the Company, (a) continue to receive Plan Distributions in the same
manner as though such Participant were still employed by the Company, or (b)
receive a cash lump sum payment equal to the present value of such Participant's
interest in the estimated remaining Plan Distributions, including the Buy-Out
Value, based on the most recent Reserve Report, each of (a) and (b) being based
on the Participation Points held by the Participant at the date of termination
of employment.
(c) If a Participant dies or is permanently and totally disabled, the
Participant (or the Participant's Beneficiary) shall, at the option of the
Company, (a) continue to receive Plan Distributions in the same manner as though
such Participant were still employed by the Company, or (b) receive a cash lump
sum payment equal to the present value of such Participant's interest in the
estimated remaining Plan Distributions, including the Buy-Out Value, based on
the most recent Reserve Report, each of (a) and (b) being based on the
Participation Points held by the Participant at the date of death or
disablement.
(d) If the Company determines under subsection (b) or (c) to exercise
the option of making a cash lump sum payment, then it shall notify the
terminated or disabled Participant, or a deceased Participant's Beneficiary, of
such option within 45 days of the termination of such Participant's employment
or consultancy with the Company. Payment for any interest so purchased shall be
made by the Company, by check, within 60 days after such termination.
ARTICLE IV
ALLOCATION OF ADMINISTRATIVE RESPONSIBILITIES
4.1 The Company. The Company shall be responsible for keeping accurate
books and accounts with respect to all Eligible Wells, Plan Cash Flow and Plan
Distributions and making the payments to Plan Participants provided by the Plan.
4.2 The Board. The Board shall administer the Plan and shall have all
powers necessary for that purpose, including, but not limited to, the power to
interpret the Plan, to determine the eligibility, status and rights of all
persons under the Plan, to make all determinations required to be made under the
Plan.
4.3 Others. The Board of the Company may designate one or more persons
who may, but need not be, employees of the Company or Participants, to assist it
in the ministerial tasks required in administering the Plan. The Company hereby
indemnifies each person so designated by the Board against any and all claims,
loss, damages, expense and liability arising from any action or failure to act
with respect to the Plan, except when the same is judicially determined to be
due to the fraud, gross negligence or willful misconduct of such person.
ARTICLE V
TERMINATION AND AMENDMENT
5.1 Termination of Plan and Discontinuance of Contributions. The
Company presently intends to continue the Plan indefinitely, but the continuance
of the Plan is not assumed as a contractual obligation and the Company may
terminate the Plan at any time by delivering written notice of termination to
each Participant and Beneficiary then entitled to receive distributions pursuant
to the Plan. In addition, the sale or exchange of all or substantially all of
the assets of an Affiliate of the Company (to other than an Affiliate of the
Company), the merger of the Company or an Affiliate (if the Company or an
Affiliate is not the surviving entity) or any material change in the direct or
indirect ownership or control of the Company or an Affiliate (if the new owner
is not an Affiliate) or the liquidation of the Company or an Affiliate, shall
automatically terminate the Company's obligations under the Plan (as such
obligations relate to such Affiliates' Eligible Wells, other than the
obligations under Section 5.2).
5.2 Procedure Upon Termination. Upon termination of the Plan, the
Company shall, at its option, (i) distribute to each Participant or Beneficiary
then participating in the Plan, in one lump sum or in three equal annual
installments with interest at the base rate required in order to avoid the
imputation of interest under section 483 of the Internal Revenue Code, or any
successor provision, an amount equal to the present value of such Participant's
or Beneficiary's interest in the estimated remaining Plan Distributions,
including the Buy-Out Value, based on the most recent Reserve Report, or (ii)
continue to make Plan Distributions in accordance with the provisions of the
Plan existing at the time of termination, or (iii) transfer and assign to each
Participant and Beneficiary who then holds Participation Points, in proportion
to each such person's Participation Points, actual working interests in the
Eligible Wells used to determine Plan Distributions, all as the Board in its
sole discretion may determine.
5.3 Amendment by the Company. The Company may at any time amend the
Plan in any respect by action of its Board, but no amendment shall be made that
would have the effect of materially and adversely affecting the economic
interest of any person under the Plan with respect to previously awarded
Participation Points.
ARTICLE VI
MISCELLANEOUS
6.1 Right to Dismiss Employees and Consultants. The Company may
terminate the employment of any employee or consultant at any time as freely as
if this Plan were not in existence.
6.2 Source of Benefits. The obligations hereunder are undertaken by the
Company and the Affiliates, and all benefits payable under the Plan shall be
paid solely from the general assets of the Company and or its Affiliates, and no
allocation of interests or income on the books of the Company or the Affiliates
shall be deemed to create a separate fund or any ownership interest on the part
of any Participant in any Eligible Wells being used to measure Plan
Distributions or in any production from properties.
6.3 No Ownership of Properties; Other Rights. Nothing contained in this
Plan shall in any way restrict the right of the Company or the Affiliates in
their discretion to operate, abandon, sell, transfer, mortgage, encumber or
otherwise deal with the Eligible Wells giving rise to the revenues used to
measure Plan Distributions. Any rights accruing to a Participant or other
person under the Plan are solely those of an unsecured general creditor of the
Company. Nothing contained in the Plan and no action taken pursuant to the
provisions of the Plan will create or be construed to create a trust of any
kind, or a pledge, or an economic interest in the Eligible Wells, or a fiduciary
relationship between the Company, an Affiliate, and a Participant or any other
person. Nothing in the Plan will be construed to require that any fund be
maintained or any amount be segregated for a Participant's benefit.
6.4 Sale of Eligible Wells. If an Eligible Well is sold or in any way
transferred to other than an Affiliate during the time that the Eligible Well is
subject to the Plan, the value of the consideration received in connection with
the transfer will be considered to be Cash Flow from such Eligible Well and will
be distributed as Plan Cash Flow at the time and in the manner required by
Section 3.3.
6.5 Deductibility under Internal Revenue Code. If the Company believes
in good faith that a Participant may receive total compensation from the Company
in one calendar year in excess of the amount which may be deducted by the
Company under Internal Revenue Code section 162 (m), then the Company may defer
such excess payments until the first year when they would be deductible.
6.6 Beneficiaries. Each Participant shall file with the Company a
designation of the Beneficiaries and contingent Beneficiaries to whom income
attributable to the Participant's interest under the Plan shall be paid in the
event of the Participant's death. Such designation may be changed by the
Participant at any time and without the consent of any previously designated
Beneficiary. In the absence of an effective Beneficiary designation as to any
portion of a Participant's interest under the Plan, Plan Distributions
attributable to such interest shall be paid to the Participant's personal
representative, but if the Company believes that none had been appointed within
six months after the Participant's death, the Company may elect not to pay such
income until a personal representative has been appointed or may pay such income
to the Participant's surviving spouse, or if none, to his surviving children and
issue of deceased children by right of representation, or if there be none, to
his surviving parents.
6.7 Non-Transferability of Benefits. No Participant or other person
shall have any right to assign, alienate, transfer, hypothecate, encumber or
anticipate any interest in any benefits under this Plan, nor shall such benefits
be subject to any legal process to levy upon or attach the same for payment of
any claim against any such Participant or other person through any process
whatsoever, and any attempt to cause such rights to be so subjected will not be
recognized except to such extent as may be required by law.
6.8 Payment Due Minor or Incapacitated Persons. If any person entitled
to a payment under the Plan is a minor, or if the Company determines that any
such person is incapacitated by reason of physical or mental disability, whether
or not legally adjudicated as such, the Company shall have the power to cause
the payments becoming due to such person to be made to his personal
representative or to another for his benefit, without responsibility of the
Company to see to the application of such payments. The Company shall have no
responsibility to investigate the physical or mental condition of a Participant
and any determination of disability made by the Company shall be binding on the
Participant and all other persons. Payments made pursuant to such power shall
operate as a complete discharge of the Plan and the Company.
6.9 Disposition of Unclaimed Payments. Each Participant must file with
the Company from time to time in writing his address and the address of each of
his Beneficiaries and each change of address. Any communication, statement or
notice addressed to a Participant or Beneficiary at his last post office address
filed with the Company, or if no address is filed with the Company then at his
last post office address as shown on the Company's records, will be binding on
the Participant and his Beneficiaries for all purposes of the Plan. The Company
shall not be required to search for or locate a Participant or Beneficiary. If
the Company notifies a Participant or Beneficiary that he is entitled to a
distribution and also notifies him of the provisions of this section, and the
Participant or Beneficiary fails to make his address known to the Company within
three calendar years after the notification, the Participation Points of the
Participant Beneficiary will be forfeited and canceled as of the end of the Plan
Year following the expiration of such three year period.
6.10 Governing Law. The construction and interpretation of this Plan
shall be governed by the laws of the State of Colorado.
6.11 Pronouns; Gender and Number. Unless the context clearly indicates
otherwise, words in any gender shall include the other genders and the singular
shall include the plural and vice versa.
As of January 14, 1993.
HALLWOOD PETROLEUM INC., as agent for Hallwood
Energy Partners, L.P., Hallwood Consolidated
Resources Corporation, Hallwood Energy Corporation
and Hallwood San Juan #1
L.L.C.
/s/William L. Guzzetti
----------------------------------
William L. Guzzetti
President<PAGE>
1995 UNIT OPTION PLAN
FOR
HALLWOOD ENERGY PARTNERS, L.P.
SECTION 1. PURPOSE. The purpose of this 1995 Unit Option Plan for
Hallwood Energy Partners, L.P. is to advance the interests of Hallwood Energy
Partners, L.P., a Delaware limited partnership (the "PARTNERSHIP"), by providing
an additional incentive to attract and retain qualified and competent directors,
employees and consultants for the Partnership, its general partner and the
subsidiaries of the general partner and the Partnership, upon whose efforts and
judgment the success of the Partnership is largely dependent, through the
encouragement of ownership in the Partnership by such persons.
SECTION 2. DEFINITIONS. As used herein, the following terms shall have
the meaning indicated:
(a) "ACT" shall mean the Securities Exchange Act of 1934, as amended.
(b) "BOARD" shall mean the Board of Directors of the General Partner.
(c) "BUSINESS DAY" shall mean (i) if the Units trade on a national
securities exchange, any day that the national securities exchange on which
the Units trade is open or (ii) if the Units do not trade on a national
securities exchange, any day that commercial banks in the City of New York
are open.
(d) "COMMITTEE" shall mean the Compensation Committee of the Board or
other committee, if any, appointed by the Board pursuant to SECTION 13
hereof.
(e) "CONTINUING DIRECTOR" shall mean (i) any member of the Board on
the effective date of this Plan and (ii) any person who subsequently
becomes a member of the Board if such person's nomination for election or
election to the Board is recommended or approved by a majority of the
Continuing Directors.
(f) "DATE OF GRANT" shall mean the date on which the Committee takes
formal action to grant an Option to an Eligible Person, provided it is
followed, as soon as reasonably possible, by written notice to the Eligible
Person of the grant.
(g) "DIRECTOR" shall mean a member of the Board.
(h) "ELIGIBLE PERSON(S)" shall mean those persons who are Directors
or are employees of, or consultants to, the Partnership, the General
Partner or any Subsidiary.
(i) "FAIR MARKET VALUE" of a Unit on any date of reference shall
mean the Closing Price on the business day immediately preceding such date,
unless the Committee in its sole discretion shall determine otherwise in a
fair and uniform manner. For this purpose, the Closing Price of the Units
on any business day shall be: (i) if the Units are listed or admitted for
trading on any United States national securities exchange or included in
the National Market System of the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the last reported sale price
of Units on such exchange or system, as reported in any newspaper of
general circulation; (ii) if Units are quoted on NASDAQ, or any similar
system of automated dissemination of quotations of securities prices in
common use, the mean between the closing high bid and low asked quotations
for such day of Units on such system; (iii) if neither clause (i) nor (ii)
is applicable, the mean between the high bid and low asked quotations for
Units as reported by the National Quotation Bureau, Incorporated if at
least two securities dealers have inserted both bid and asked quotations
for Units on at least five of the ten preceding days; or, (iv) in lieu of
the above, if actual transactions in the Units are reported on a
consolidated transaction reporting system, the last sale price of the Units
for such day and on such system.
(j) "GENERAL PARTNER"shall mean Hallwood Energy Corporation, a
Delaware corporation, or any successor thereof.
(k) "NONQUALIFIED UNIT OPTION" shall mean an option that is not an
incentive stock option as defined in Section 422 of the Internal Revenue
Code.
(l) "OPTION" (when capitalized) shall mean any option granted under
this Plan.
(m) "OPTIONEE" shall mean a person to whom an Option is granted or
any successor to the rights of such Option under this Plan.
(n) "PARTNERSHIP" shall mean Hallwood Energy Partners, L.P., a
Delaware limited partnership.
(o) "PERSON shall mean any individual, corporation, limited liability
company, partnership, joint venture or other legal entity.
(p) "PLAN" shall mean this 1995 Unit Option Plan for Hallwood Energy
Partners, L.P.
(q) "SAR" shall mean a stock appreciation right as defined in Section
9 hereof.
(r) "UNIT(S)" shall mean units representing limited partner interests
in the Partnership.
(s) "SUBSIDIARY" shall mean (i) any corporation of which a majority
of the outstanding stock having by the terms thereof ordinary voting power
to elect a majority of the directors of such corporation, irrespective of
whether at the time stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency, is at the time, directly or indirectly, owned or controlled by
the Partnership, General Partner or by one or more Subsidiaries, or by the
Partnership, the General Partner and one or more Subsidiaries or (ii) any
partnership, joint venture or limited liability company of which at least a
majority of the equity ownership, whether in the form of membership,
general, special or limited partnership interests or otherwise, is directly
or indirectly owned or controlled by the Partnership, the General Partner
or by one or more Subsidiaries or by the Partnership, the General Partner
and one or more Subsidiaries.
SECTION 3. UNITS AND OPTIONS. The Partnership may grant to Eligible
Persons from time to time Options to purchase an aggregate of up to Four Hundred
Twenty-Five Thousand (425,000) Units. If any Option granted under the Plan
shall terminate, expire, or be cancelled or surrendered as to any Units, new
Options may thereafter be granted covering such Units. An Option granted
hereunder shall be a Nonqualified Unit Option.
SECTION 4. CONDITIONS FOR GRANT OF OPTIONS.
(a) Each Option shall be evidenced by an option agreement that may contain
any term deemed necessary or desirable by the Committee, provided such terms are
not inconsistent with this Plan or any applicable law. Optionees shall be those
persons selected by the Committee from Eligible Persons. Any Person who files
with the Committee, in a form satisfactory to the Committee, a written waiver of
eligibility to receive any Option under this Plan shall not be eligible to
receive any Option under this Plan for the duration of such waiver.
(b) In granting Options, the Committee shall take into consideration the
contribution the Person has made or may make to the success of the Partnership
or its Subsidiaries and such other factors as the Committee shall determine.
The Committee shall also have the authority to consult with and receive
recommendations from officers and other personnel of the General Partner, the
Partnership and a Subsidiary with regard to these matters. The Committee may
from time to time in granting Options under the Plan prescribe such other terms
and conditions concerning such Options as it deems appropriate, including,
without limitation, relating an Option to achievement of specific goals
established by the Committee or the continued employment of the Optionee for a
specified period of time, provided that such terms and conditions are not more
favorable to an Optionee than those expressly permitted herein.
(c) The Committee in its sole discretion shall determine in each case
whether periods of military or government service shall constitute a
continuation of employment for the purposes of this Plan or any Option.
SECTION 5. EXERCISE PRICE. The exercise price per Unit of any Option
shall be any price determined by the Committee.
SECTION 6. EXERCISE OF OPTIONS. An Option shall be deemed exercised
when (i) the Partnership has received written notice of such exercise in
accordance with the terms of the Option, (ii) full payment of the aggregate
exercise price of the Units as to which the Option is exercised has been made,
and (iii) arrangements that are satisfactory to the Committee in its sole
discretion have been made for the Optionee's payment to the Partnership of the
amount, if any, that the Committee determines to be necessary for the employer
of the Optionee to withhold in accordance with applicable federal or state
income tax withholding requirements. Unless further limited by the Committee in
any Option, the option price of any Units purchased shall be paid in cash, by
certified or cashier's check, by money order, with Units (provided that at the
time of exercise the Committee in its sole discretion does not prohibit the
exercise of Options through the delivery of already-owned Units) or by a
combination of the above; provided, however, that the Committee in its sole
discretion may accept a personal check in full or partial payment of any Units.
If the exercise price is paid in whole or in part with Units, the value of the
Units surrendered shall be their Fair Market Value. The Partnership in its sole
discretion, and on such terms as it may determine, may lend money to an
Optionee, guarantee a loan to an Optionee, or otherwise assist an Optionee to
obtain the cash necessary to exercise all or a portion of an Option granted
hereunder or to pay any tax liability of the Optionee attributable to such
exercise.
SECTION 7. EXERCISABILITY OF OPTIONS.
(a) Any Option shall become exercisable in such amounts and at such
intervals as the Committee shall provide in any Option, except as otherwise
provided in this SECTION 7; provided in each case that the Option has not
expired on the date of exercise.
(b) The expiration date of an Option shall be determined by the Committee
at the Date of Grant, but in no event shall an Option be exercisable after the
expiration of ten (10) years from the Date of Grant.
(c) The Committee may in its sole discretion accelerate the date on which
any Option may be exercised.
(d) Unless otherwise provided in any Option, each outstanding Option shall
become fully exercisable immediately upon any of the following dates unless, in
each case, the applicable transaction is approved in advance by Continuing
Directors:
(i) ten (10) days prior to the date of any transaction (which
shall include a series of transactions occurring within 60 days or
occurring pursuant to a plan), which has the result that unitholders
of the Partnership immediately before such transaction would cease to
own at least 66 % of the voting ownership interests of the Partnership
or of any entity that results from the participation of the
Partnership in a reorganization, consolidation, merger, liquidation,
dissolution or any other comparable form of transaction;
(ii) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of a plan of reorganization,
consolidation, merger, liquidation, dissolution or other comparable
form of transaction in which the Partnership does not survive or as a
result of which the unitholders of the Partnership immediately before
such transaction would cease to own at least 66 % of the voting
ownership interests of the Partnership;
(iii) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of a plan for the sale, lease,
exchange or other disposition of 50% or more of the property and
assets of the Partnership;
(iv) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of the removal of the General
Partner as general partner of the Partnership;
(v) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of the amendment of the
Partnership's or any operating partnership's agreement of limited
partnership; or
(vi) the date any tender offer or exchange offer is made by any
person, which, if successfully completed, would result in such person
beneficially owning (within the meaning of Rule 13d-3 promulgated
under the Act) either 33 % or more of the Partnership's outstanding
Units or interests in the Partnership having 33 % or more of the
combined voting power of the Partnership's then outstanding voting
interests.
(e) Notwithstanding any provisions hereof to the contrary, if any Option
is accelerated under SUBSECTION 7(C) or (D), the portion of such Option that may
be exercised to acquire Units that the Optionee would not be entitled to acquire
but for such acceleration (the "ACCELERATION UNITS"), is limited to that number
of Acceleration Units that can be acquired without causing the Optionee to have
an "excess parachute payment" under Section 280G of the Internal Revenue Code,
determined by taking into account all of the Optionee's "parachute payments"
determined under Section 280G of the Code. If as a result of this SUBSECTION
7(E), the Optionee may not acquire all of the Acceleration Units, then the
Acceleration Units that the Optionee may acquire shall be the last Units that
the Optionee would have been entitled to acquire had this Option not been
accelerated.
SECTION 8. TERMINATION OF OPTION PERIOD.
(a) Unless otherwise provided in any Option, the unexercised portion of an
Option shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(i) the date on which the Optionee's employment by the General
Partner or a Subsidiary is terminated for any reason other than by
reason of: (A) retirement (which, for purposes of this Plan, shall
mean any termination of employment after an Optionee has reached the
age of sixty-five (65)); (B) a mental or physical disability as
determined by a medical doctor satisfactory to the Committee; (C)
death; or (D) termination resulting from any transaction described in
SECTION 7(D) hereof;
(ii) three (3) months after the date on which the Optionee's
employment by the General Partner or a Subsidiary is terminated by
reason of retirement;
(iii) twelve (12) months after the date on which the Optionee's
employment by the General Partner or a Subsidiary is terminated by
reason of a mental or physical disability as determined by a medical
doctor satisfactory to the Committee;
(iv) ten (10) years after the date of grant of such Option;
(v) (A) twelve (12) months after the date of termination of the
Optionee's employment by the General Partner or a Subsidiary by reason
of death of the Optionee; (B) three (3) months after the date on which
the Optionee shall die if such death shall occur during the three-
month period specified in SECTION 8(A)(II) hereof or the twelve-month
period specified in SECTION 8(A)(III) hereof; or (C) three (3) years
after the termination of the employee's employment by the General
Partner or a Subsidiary by reason of a transaction specified in
SECTION 7(D) hereof.
(b) If provided in an Option, the Committee in its sole discretion
shall have the power to cancel, effective upon the date determined by the
Committee in its sole discretion, all or any portion of any Option that is
then exercisable (whether or not accelerated by the Committee) upon payment
to the Optionee of cash in an amount that, in the absolute discretion of
the Committee, is determined to be equal to the excess of (i) the aggregate
Fair Market Value of the Units subject to such Option on the effective date
of the cancellation over (ii) the aggregate exercise price of such Option.
9. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS.
(a) The Board shall have authority to grant an SAR or a Limited SAR with
respect to all or some of the Units covered by any Option ("RELATED OPTION").
An SAR or Limited SAR may be granted on or after the Date of Grant of such
Related Option.
(b) For the purposes of this SECTION 9, the following definitions shall
apply:
(i) The term "OFFER" shall mean any tender offer or exchange offer
for twenty-five percent (25%) or more of the outstanding Units of the
Partnership, other than one made by the Partnership; provided that the
corporation, person or other entity making the Offer acquires Units
pursuant to such Offer.
(ii) The term "OFFER PRICE PER UNIT" shall mean the highest price per
Unit paid in any Offer that is in effect at any time during the period
beginning on the 60th day prior to the date that a Limited SAR is exercised
and ending on the date that the Limited SAR is exercised. Any securities
or properties that are a part or all of the consideration paid or to be
paid for Units in the Offer shall be valued in determining the Offer Price
Per Unit at the higher of (1) the valuation placed on such securities or
properties by the person making such Offer, or (2) the valuation placed on
such securities or properties by the Board.
(iii) The term "LIMITED SAR" shall mean a right granted under this Plan
that shall entitle the Holder to an amount in cash equal to the Offer
Spread in the event an Offer is made.
(iv) The term "OFFER SPREAD" shall mean, with respect to each Limited
SAR, an amount equal to the product obtained by multiplying (1) the excess
of (A) the Offer Price Per Unit immediately preceding the date of exercise
over (B) the Option Price per Unit of the Related Option multiplied by (2)
the number of Units with respect to which such Limited SAR is being
exercised.
(v) The term "SAR" shall mean a right granted under this Plan that
shall entitle the Holder thereof to an amount in cash equal to the SAR
Spread.
(vi) The term "SAR SPREAD" shall mean with respect to each SAR an
amount equal to the product of (1) the excess of (A) the Fair Market Value
per Unit on the date of exercise over (B) the Option Price per Unit of the
Related Option multiplied by (2) the number of Units with respect to which
such SAR is being exercised.
(c) To exercise the SAR or Limited SAR, the Holder shall:
(i) Give written notice thereof to the Partnership, specifying the
SAR or Limited SAR being exercised and the number or Units with respect to
which such SAR or Limited SAR is being exercised, and
(ii) If requested by the Partnership, deliver within a reasonable time
the agreement evidencing the SAR or Limited SAR being exercised, and the
Related Option agreement to the Secretary of the General Partner who shall
endorse or cause to be endorsed thereon a notation of such exercise and
return all agreements to the Holder.
(d) As soon as practicable after the exercise of an SAR or Limited SAR,
the Partnership shall pay to the Holder (i) cash, (ii) at the request of the
Holder and the approval of the Board, or in accordance with the terms of the
Related Option, Units, or (iii) a combination of cash and Units, having a Fair
Market Value equal to either the SAR Spread, or to the Offer Spread, as the case
may be; provided, however, that the Partnership may, in its sole discretion,
withhold from such payment any amount necessary to satisfy the Partnership's or
a Subsidiary's obligation for federal and state withholding taxes with respect
to such exercise.
(e) An SAR or Limited SAR may be exercised only if and to the extent that
the Related Option is eligible to be exercised; provided, however, a Limited SAR
may be exercised only during the period beginning on the first day following the
date of expiration of the Offer and ending on the 30th day following such date.
(f) Upon the exercise of an SAR or Limited SAR, the Units under the
Related Option to that such exercised SAR or Limited SAR relate shall be
released, but such released Units shall never again be Units available for
grant.
(g) Upon the exercise or termination of a Related Option, the SAR or
Limited SAR with respect to such Related Option likewise shall terminate.
(h) An SAR or Limited SAR shall be transferable only to the extent, if
any, that the Related Option is transferable, and under the same conditions.
(i) Each SAR or Limited SAR shall be on such terms and conditions not
inconsistent with this Plan as the Board may determine and shall be evidenced by
a written agreement.
(j) The Holder shall have no rights as a unitholder with respect to the
related Units as a result of the grant of an SAR or Limited SAR.
SECTION 10. ADJUSTMENT OF UNITS.
(a) If at any time while the Plan is in effect or unexercised Options are
outstanding, there shall be any increase or decrease in the number of issued and
outstanding Units through the declaration of a unit dividend or through any
recapitalization resulting in a unit split-up, combination or exchange of Units,
then and in such event.
(i) appropriate adjustment shall be made in the maximum number
of Units then subject to being optioned under the Plan, so that the same
proportion of the Partnership's issued and outstanding Units shall continue
to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Units
and the exercise price per Unit thereof then subject to outstanding
Options, so that the same proportion of the Partnership's issued and
outstanding Units shall remain subject to purchase at the same aggregate
exercise price.
(b) The Committee may change the terms of Options outstanding under this
Plan, with respect to the exercise price or the number of Units subject to the
Options, or both, when, in the Committee's sole discretion, such adjustments
become appropriate by reason of any transaction.
(c) Except as otherwise expressly provided herein, the issuance by the
Partnership of any class, or securities convertible into ownership interests of
any class, either in connection with direct sale or upon the exercise of rights
or warrants to subscribe therefor, or upon conversion of shares or obligations
of the Partnership convertible into such ownership interests or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to the number of Units reserved for issuance under the Plan or the
number of or exercise price of Units then subject to outstanding Options granted
under the Plan.
(d) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under the Plan shall not affect in any manner the
right or power of the Partnership to make, authorize or consummate (1) any or
all adjustments, recapitalizations, reorganizations or other changes in the
Partnership's capital structure or its business; (2) any merger or consolidation
of the Partnership; (3) any issue by the Partnership of debt securities, or
partnership interests that would rank above the Units subject to outstanding
Options; (4) the dissolution or liquidation of the Partnership; (5) any sale,
transfer or assignment of all or any part of the assets or business of the
Partnership; or (6) any other partnership act or proceeding, whether of a
similar character or otherwise.
SECTION 11. TRANSFERABILITY OF OPTIONS. Each Option may provide that
such Option may be transferrable by the Optionee in the Optionee's discretion.
SECTION 12. ISSUANCE OF UNITS. No person shall be, or have any of the
rights or privileges of, a unitholder of the Partnership with respect to any of
the Units subject to an Option unless and until certificates representing such
Units shall have been issued and delivered to such person. As a condition of
any transfer of the certificate for Units, the Committee may obtain such
agreements or undertakings, if any, as it may deem necessary or advisable to
assure compliance with any provision of the Plan, the agreement evidencing the
Option or any law or regulation including, but not limited to, the following:
(i) A representation, warranty or agreement by the Optionee to
the Partnership at the time any Option is exercised that he or she is
acquiring the Units to be issued to him or her for investment and not with
a view to, or for sale in connection with, the distribution of any such
Units; and
(ii) A representation, warranty or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or appropriate
to comply with the provisions of any securities laws deemed by the
Committee to be applicable to the issuance of the Units and that are
endorsed upon the Unit certificates.
SECTION 13. ADMINISTRATION OF THE PLAN.
(a) The Plan may be administered by the Compensation Committee of the
Board or other committee thereof as appointed by the Board (herein called the
"COMMITTEE"); or, if the Board so determines, by the Board and in such case all
references to the Committee shall be deemed to be references to the Board.
Except for the powers set forth in SECTION 16, the Committee shall have all of
the powers of the Board with respect to the Plan. Any member of the Committee
may be removed at any time, with or without cause, by resolution of the Board
and any vacancy occurring in the membership of the Committee may be filled by
appointment by the Board.
(b) The Committee, from time to time, may adopt rules and regulations for
carrying out the purposes of the Plan. The determinations and the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive.
(c) Any and all decisions or determinations of the Committee shall be made
either (i) by a majority vote of the members of the Committee at a meeting or
(ii) without a meeting by the written approval of a majority of the members of
the Committee.
(d) Subject to the express provisions of this Plan, the Committee shall
have the authority, in its sole and absolute discretion (i) to adopt, amend, and
rescind administrative and interpretive rules and regulations relating to this
Plan or any Option; (ii) to construe the terms of this Plan or any Option; (iii)
as provided in SUBSECTION 10(A), upon certain events to make appropriate
adjustments to the exercise price and number of Units subject to this Plan and
Option; and (iv) to make all other determinations and perform all other acts
necessary or advisable for administering this Plan, including the delegation of
such ministerial acts and responsibilities as the Committee deems appropriate.
The Committee may correct any defect or supply any omission or reconcile any
inconsistency in this Plan or any Option in the manner and to the extent it
shall deem expedient to carry it into effect, and it shall be the sole and final
judge of such expediency. The Committee shall have full discretion to make all
determinations on the matters referred to in this SUBSECTION 13(D), and such
determinations shall be final, binding and conclusive.
SECTION 14. GOVERNMENT REGULATIONS.
This Plan, Options and the obligations of the Partnership to sell and
deliver Units under any Options, shall be subject to all applicable laws, rules
and regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
SECTION 15. MISCELLANEOUS.
(a) The grant of an Option shall be in addition to any other compensation
paid to the Optionee or other employee benefit plans of the General Partner or a
Subsidiary or other benefits with respect to Optionee's position with the
General Partner or a Subsidiary. The grant of an Option shall not confer upon
the Optionee the right to continue in the Optionee's employment position, or
interfere in any way with the rights of the Optionee's employer to terminate his
or her status as an employee.
(b) Neither the members of the Board nor any member of the Committee shall
be liable for any act, omission, or determination taken or made in good faith
with respect to this Plan or any Option, and members of the Board and the
Committee shall, in addition to all other rights of indemnification and
reimbursement, be entitled to indemnification and reimbursement by the
Partnership in respect of any claim, loss, damage, or expense (including
attorneys' fees, the costs of settling any suit, provided such settlement is
approved by independent legal counsel selected by the Partnership, and amounts
paid in satisfaction of a judgment, except a judgment based on a finding of bad
faith) arising from such claim, loss, damage, or expense to the full extent
permitted by law and under any directors' and officers' liability or similar
insurance coverage that may from time to time be in effect.
(c) Any issuance or transfer of Units to an Optionee, or to his legal
representative, heir, legatee, distributee or assignee, in accordance with the
provisions of this Plan or the applicable Option, shall, to the extent thereof,
be in full satisfaction of all claims of such persons under the Plan. The
Committee may require any Optionee, legal representative, heir, legatee,
distributee or assignee as a condition precedent to such payment or issuance or
transfer of Units, to execute a release and receipt for such payment or issuance
or transfer of Units in such form as it shall determine.
(d) Neither the Committee nor the Partnership guarantees Units from loss
or depreciation.
(e) All expenses incident to the administration, termination, or
protection of this Plan or any Option, including, but not limited to, legal and
accounting fees, shall be paid by the Partnership; provided, however, the
Partnership may recover any and all damages, fees, expenses and costs arising
out of any actions taken by the Partnership to enforce its rights under this
Plan or any Option.
(f) Records of the Partnership shall be conclusive for all purposes under
this Plan or any Option, unless determined by the Committee to be incorrect.
(g) The Partnership shall, upon request or as may be specifically required
under this Plan or any Option, furnish or cause to be furnished all of the
information or documentation that is necessary or required by the Committee to
perform its duties and functions under this Plan or any Option.
(h) The Partnership assumes no liability to any Optionee or his legal
representatives, heirs, legatees or distributees for any act of, or failure to
act on the part of, the Committee.
(i) If any provision of this Plan or any Option is held to be illegal or
invalid for any reason, the illegality or invalidity shall not affect the
remaining provisions of this Plan or any Option, but such provision shall be
fully severable, and the Plan or Option, as applicable, shall be construed and
enforced as if the illegal or invalid provision had never been included in the
Plan or Option, as applicable.
(j) Whenever any notice is required or permitted under this Plan, such
notice must be in writing and personally delivered or sent by mail or delivery
by a nationally recognized courier service. Any notice required or permitted to
be delivered under this Plan shall be deemed to be delivered on the date on
which it is personally delivered, or, if mailed, whether actually received or
not, on the third Business Day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address that such person has previously specified by written
notice delivered in accordance with this SUBSECTION 15(J) or, if by courier,
seventy-two (72) hours after it is sent, addressed as described in this
SUBSECTION 15(J). The Partnership or the Optionee may change, at any time and
from time to time, by written notice to the other, the address that it or he had
previously specified for receiving notices. Until changed in accordance with
this Plan, the address of the Partnership is 4582 South Ulster Street Parkway,
Suite 1700, Denver, Colorado 80237 and the address of the Optionee is the
Optionee's address in the records of the Optionee's employer.
(k) Any person entitled to notice under this Plan may waive such notice.
(l) Each Option shall be binding upon the Optionee, his legal
representatives, heirs, legatees and distributees and upon the Partnership, its
successors, and assigns, and upon the Board, the Committee and its successors.
(m) The titles and headings of Sections are included for convenience of
reference only and are not to be considered in construction of this Plan's
provisions.
(n) Words used in the masculine shall apply to the feminine where
applicable, and wherever the context of this Plan dictates, the plural shall be
read as the singular and the singular as the plural.
SECTION 16. AMENDMENT AND DISCONTINUATION OF THE PLAN. The Committee
may from time to time amend the Plan or any Option; provided, however, that,
except to the extent provided in SECTION 8, no amendment or suspension of the
Plan or any Option issued hereunder shall, except as specifically permitted in
any Option, substantially impair any Option previously granted to any Optionee
without the consent of such Optionee.
SECTION 17. EFFECTIVE DATE AND TERMINATION DATE. The effective date of
the Plan is January 31, 1995, which is the date the Board adopted this Plan.
The Plan shall terminate on the tenth anniversary of the effective date.
Executed to evidence the 1995 Unit Option Plan of Hallwood Energy Partners,
L.P. adopted by the Board on January 31, 1995.
HALLWOOD ENERGY PARTNERS, L.P.
By: Hallwood Energy Corporation,
its general partner
By: /s/William L. Guzzetti
--------------------------
Name: William L. Guzzetti
Title: President
1995 UNIT OPTION PLAN LOAN PROGRAM FOR
HALLWOOD ENERGY PARTNERS, L.P.
SECTION 1. PURPOSE. This 1995 Unit Option Plan Loan Program for
Hallwood Energy Partners, L.P. (this "Loan Program") has been established in
connection with the adoption of the 1995 Unit Option Plan for Hallwood Energy
Partners, L.P. (the "Option Plan"). This Loan Program provides for the making
of loans by Hallwood Energy Partners, L.P. (the "Partnership"), upon the terms
and conditions hereinafter set forth, to the recipients of options to purchase
units representing limited partnership interests in the Partnership granted
pursuant to the Option Plan. The purpose of this Loan Program is to provide
such optionees with funds to pay the exercise price of such options and any
additional amounts to be paid to the Partnership in order to comply with
applicable federal or state income tax withholding requirements.
SECTION 2. DEFINITIONS. As used herein, the following terms shall have
the meanings indicated:
(A) "ACCELERATED OPTION" shall mean any Option the exercisability of
which has been accelerated pursuant to Section 7 of the Option Plan.
(B) "FAIR MARKET VALUE" shall mean:
(i) with respect to any Traded Securities on any date of
reference, the Closing Price on the business day immediately preceding
such date, unless the Committee in its sole discretion shall determine
otherwise in a fair and uniform manner. For this purpose, the closing
price of the Traded Securities on any business day shall be: (A) if
the Traded Securities are listed or admitted for trading on any United
States national or international securities exchange or included in
the National Market System of the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the last reported sale
price of the Traded Securities on such exchange or system, as reported
in any newspaper of general circulation; (B) if the Traded Securities
are quoted on NASDAQ, or any similar system of automated dissemination
of quotations of securities prices in common use, the mean between the
closing high bid and low asked quotations for such day of the Traded
Securities on such system; (C) if neither clause (A) nor (B) is
applicable, the mean between the high bid and low asked quotations for
the Traded Securities as reported by the National Quotation Bureau,
Incorporated if at least two securities dealers have inserted both bid
and asked quotations for the Traded Securities on at least five of the
ten preceding days; or, (D) in lieu of the above, if actual
transactions in the Traded Securities are reported on a consolidated
transaction reporting system, the last sale price of the Traded
Securities for such day and on such system;
(ii) with respect to any U.S. Government Obligations on any date
of reference, the mean between the bid and asked quotations for such
U.S. Government Obligations for the business day immediately preceding
such date as set forth in any newspaper of general circulation; and
(iii) with respect to any foreign or domestic real or personal
property other than Traded Securities or U.S. Government Obligations,
the fair market value of such property as determined by an appraiser
of recognized standing duly qualified in the jurisdiction in which
such appraiser practices.
(C) "FULLY SECURED" shall mean that the Optionee shall have created
in favor of the Partnership a perfected security interest in (i) the Units
acquired upon exercise of the Related Option as security for such portion
of the Loan equal to the Margin Loan Amount and (ii) Other Collateral that
has a Fair Market Value equal to the amount of the remaining portion of the
Loan (including any portion attributable to Tax Payments).
(D) "LOAN" shall mean any loan extended to an Optionee pursuant to
this Loan Program.
(E) "LOAN DATE" shall mean, with respect to any Loan, the date on
which such Loan is made by the Partnership.
(F) "MARGIN LOAN AMOUNT" shall mean, with respect to any Loan, an
amount equal to fifty percent (50%) of the Fair Market Value as of the Loan
Date of the Units acquired upon exercise of the Related Option.
(G) "OTHER COLLATERAL" shall mean any property of an Optionee other
than Units acquired upon exercise of a Related Option that is pledged to
secure any portion of a Loan.
(H) "PARTNERSHIP INTEREST RATE" shall mean the rate of interest
payable by the Partnership with respect to its revolving line of credit
with its primary lender.
(I) "RELATED OPTION" shall mean the Option with respect to which the
proceeds of a particular Loan shall be used for payment of the exercise
price thereunder.
(J) "REQUIRED LOAN DOCUMENTS" shall mean (i) the Optionee Loan
Application Form, in substantially the form of EXHIBIT A attached hereto,
(ii) the Promissory Note, in substantially the form of EXHIBIT B attached
hereto, (iii) in the case of a Loan pursuant to Section 3(a) hereof, the
Pledge Agreement, in substantially the form of EXHIBIT C attached hereto,
covering the Units acquired upon the exercise of a Related Option and any
Traded Securities or U.S. Government Obligations included as Other
Collateral, (iv) in the case of a Loan pursuant to Section 3(a) hereof,
Federal Reserve Form FR G-3, (v) in the case of a Loan pursuant to Section
3(a) that is secured by Other Collateral consisting of real or personal
property located in a foreign jurisdiction, the Standard Form All-Monies
Legal Charge, in substantially the form of EXHIBIT D attached hereto, and
(vi) in the case of a Loan pursuant to Section 3(a) that is secured by
Other Collateral consisting of real or personal property located within the
United States, any other documentation required by the Committee, in its
sole discretion, to create in favor of the Partnership a perfected security
interest in such property.
(K) "TAX PAYMENTS" shall mean payments to the Partnership in
compliance with applicable federal or state income tax withholding
requirements.
(L) "TRADED SECURITIES" shall mean any securities that are listed or
admitted for trading on any United States national or international
securities exchange or included in the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") or any similar system of automated dissemination of quotations
of securities prices in common use.
(M) "U.S. GOVERNMENT OBLIGATIONS" shall mean securities that are (i)
direct obligations of the United States of America for the payment of which
its full faith and credit is pledged or (ii) the obligations of an entity
controlled or supervised by and acting as an agency or instrumentality of
the United States of America the timely payment of which is unconditionally
guaranteed as a full faith and creditobligation of the United States of
America.
All capitalized terms not otherwise defined herein shall have the meanings
assigned to them in the Option Plan.
SECTION 3. LOANS.
(A) The Partnership, upon the receipt of each of the Required Loan
Documents, properly completed and signed by an Optionee, shall extend to such
Optionee a Loan in the amount indicated on such form (subject to the terms of
this Section 3). The Required Loan Documents must be provided to the
Partnership prior to or concurrently with such Optionee's written notice of
exercise of the Related Option. Subject to Section 3(b) below, the Loan shall
be made on the following terms and conditions:
(i) the amount of the Loan may not exceed the aggregate exercise
price for the Related Option plus the amount of any Tax
Payments;
(ii) the amount of the Loan must be Fully Secured;
(iii) the principal balance of the Loan shall become due and
payable on the fifth anniversary of the Loan Date;
(iv) the principal balance of the Loan shall accrue interest at a
rate equal to the Partnership Interest Rate in effect as of
the Loan Date; and
(v) accrued interest shall be payable on the last day of each of
the Partnership's fiscal quarters during which the Loan
remains outstanding.
(B) In the event that (i) any portion of the Related Option is an
Accelerated Option and (ii) the Optionee was not a member of the Board at the
time the Related Option was granted, then the Loan may be made, at the
discretion of the Optionee, on the following terms and conditions:
(i) the amount of the Loan may not exceed the aggregate exercise
price for the Related Option plus the amount of any Tax
Payments;
(ii) the Loan may be unsecured;
(iii) the principal balance of the Loan shall become due and
payable on the first anniversary of the Loan Date;
(iv) the principal balance of the Loan shall accrue interest at a
rate equal to the Partnership Interest Rate in effect as of
the Loan Date plus two percent (2%); and
(v) accrued interest shall be payable on the last day of each of
the Partnership's fiscal quarters during which the Loan
remains outstanding.
(C) The proceeds of the Loan may be used by the Optionee solely for (i)
the payment, whether full or partial, of the aggregate exercise price of the
Related Option and (ii) the payment of any funds by the Optionee to the
Partnership in order to comply with applicable federal or state income tax
withholding requirements.
(D) The principal balance of the Loan may be repaid by the Optionee either
in cash or by the surrender of Units having a Fair Market Value as of the date
of such repayment equal to such principal balance.
(E) The Partnership shall not be obligated to make any Loan if the amount
of such Loan is less than $25,000.
(F) In no event shall the Partnership be required to make a Loan if, as
reflected on the Partnership's latest regularly prepared books and records, the
Partnership does not have available sufficient cash or the availability of
additional borrowings under its revolving line of credit in a sufficient amount
to make the Loan after taking into account all of the Partnership's commitments
for cash expenditures and budgeted receipts for at least a one year period after
the Loan Date.
SECTION 4. COMPLIANCE WITH APPLICABLE LAWS. It is the intent of the
Partnership that this Loan Program and the Loans made hereunder comply with all
applicable laws, including without limitation Regulation G issued by the Board
of Governors of the Federal Reserve System. Accordingly, the Partnership shall
register on Federal Reserve Form FR G-1 within 30 days after the end of any
calendar quarter during which (i) the aggregate amount of the Loans extended
during such quarter equals $200,000 or more or (ii) the aggregate amount of the
Loans outstanding at any time during that calendar quarter equals $500,000 or
more. Furthermore, if the Partnership has registered on Form FR G-1, then the
Partnership shall, within 30 days following June 30 of every year, file Federal
Reserve Form FR G-4.
SECTION 5. ADMINISTRATION OF LOAN PROGRAM; AMENDMENTS.
(A) This Loan Program may be administered by the Compensation Committee of
the Board or other committee thereof as appointed by the Board (the
"Committee"); or, if the Board so determines, by the Board and in such case all
references to the Committee shall be deemed to be references to the Board. The
Committee may from time to time amend this Loan Program; provided, however, that
no such amendment shall apply to any Loans outstanding prior to the adoption of
such amendment.
(B) The Committee, from time to time, may adopt rules and regulations for
carrying out the purposes of this Loan Program. The determinations and the
interpretation and construction of any provision of this Loan Program by the
Committee shall be final and conclusive.
(C) Any and all decisions or determinations of the Committee shall be made
either (i) by a majority vote of the members of the Committee at a meeting or
(ii) without a meeting by the written approval of a majority of the members of
the Committee.
SECTION 6. MISCELLANEOUS.
(a) The provision of a Loan shall be in addition to any other compensation
paid to the Optionee or other employee benefit plans of the Partnership or other
benefits with respect to Optionee's position with the Partnership or its
Subsidiaries. The provision of a Loan shall not confer upon the Optionee the
right to continue as an Employee, or interfere in any way with the rights of the
Partnership to terminate his or her status as an Employee.
(b) Neither the members of the Board nor any member of the Committee shall
be liable for any act, omission, or determination taken or made in good faith
with respect to this Loan Program or any Loan, and members of the Board and the
Committee shall, in addition to all other rights of indemnification and
reimbursement, be entitled to indemnification and reimbursement by the
Partnership in respect of any claim, loss, damage, or expense (including
attorneys' fees, the costs of settling any suit, provided such settlement is
approved by independent legal counsel selected by the Partnership, and amounts
paid in satisfaction of a judgment, except a judgment based on a finding of bad
faith) arising from such claim, loss, damage, or expense to the full extent
permitted by law and under any directors' and officers' liability or similar
insurance coverage that may from time to time be in effect.
(c) The provision of a Loan to an Optionee in accordance with the
provisions of this Loan Program shall, to the extent thereof, be in full
satisfaction of all claims of such Optionee under this Loan Program. The
Committee may require any Optionee, legal representative, heir, legatee,
distributee or assignee as a condition precedent to the provision of such Loan,
to execute a release and receipt for such Loan in such form as it shall
determine.
(d) All expenses incident to the administration, termination, or
protection of this Loan Program, including, but not limited to, legal and
accounting fees, shall be paid by the Partnership; provided, however, the
Partnership may recover any and all damages, fees, expenses and costs arising
out of any actions taken by the Partnership to enforce its rights under this
Loan Program or any Required Loan Document.
(e) Records of the Partnership shall be conclusive for all purposes under
this Loan Program or any Loan, unless determined by the Committee to be
incorrect.
(f) The Partnership shall, upon request or as may be specifically required
under this Loan Program or any Required Loan Document, furnish or cause to be
furnished all of the information or documentation that is necessary or required
by the Committee to perform its duties and functions under this Loan Program or
any Required Loan Document.
(g) The Partnership assumes no liability to any Optionee or his legal
representatives, heirs, legatees or distributees for any act of, or failure to
act on the part of, the Committee.
(h) If any provision of this Loan Program or any Required Loan Document is
held to be illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining provisions of this Loan Program or such Required Loan
Document, but such provision shall be fully severable, and the Loan Program or
Required Loan Document, as applicable, shall be construed and enforced as if the
illegal or invalid provision had never been included in the Loan Program or
Required Loan Document, as applicable.
(i) Whenever any notice is required or permitted under this Loan Program,
such notice must be in writing and personally delivered or sent by mail or
delivery by a nationally recognized courier service. Any notice required or
permitted to be delivered under any Required Loan Document shall be deemed to be
delivered on the date on which it is personally delivered, or, if mailed,
whether actually received or not, on the third Business Day after it is
deposited in the United States mail, certified or registered, postage prepaid,
addressed to the person who is to receive it at the address that such person has
previously specified by written notice delivered in accordance with this SECTION
6(I) or, if by courier, seventy-two (72) hours after it is sent, addressed as
described in this SECTION 6(I). The Partnership or the Optionee may change, at
any time and from time to time, by written notice to the other, the address that
it or he had previously specified for receiving notices. Until changed in
accordance with this Loan Program, the Partnership and the Optionee shall
specify as its and his address for receiving notices the address set forth in
this Loan Program or any Required Loan Document to which such notice relates.
(j) Any person entitled to notice under this Loan Program or any Required
Loan Document may waive such notice.
(k) This Loan Program shall be binding upon the Optionee, his legal
representatives, heirs, legatees and distributees upon the Partnership, its
successors, and assigns, and upon the Board, the Committee and its successors.
(l) The titles and headings of Sections are included for convenience of
reference only and are not to be considered in construction of this Loan
Program's provisions.
EFFECTIVE DATE: JANUARY 31, 1995
EXHIBIT A
OPTIONEE LOAN APPLICATION FORM
1. Name of Optionee: .
2. Number of Units Subject to Option: .
3. Number of Units being acquired
pursuant to exercise of such Option: .
4. Exercise price per Unit for such Option:
5. Amount of Loan requested: .
6. Is the above-referenced Option an
Accelerated Option? Yes No
7. If the above-referenced Option is
an Accelerated Option, then the Loan
shall be made pursuant to which section
of the Loan Program (designate one): Section 3(a)
Section 3(b)
OPTIONEE:
Date:
Print Name:
EXHIBIT B
PROMISSORY NOTE
$_________ _____________, 199__
____________________________________ ("Maker"), for value received,
promises and agrees to pay, as herein provided, to the order of Hallwood Energy
Partners, L.P., a Delaware limited partnership ("Payee"), at such address or to
such bank account as Payee may direct, in lawful money of the United States of
America, the principal sum of _______________________________________ Dollars
($_________). This note ("Note") is issued under the terms of that certain 1995
Unit Option Plan Loan Program for Hallwood Energy Partners, L.P. as in effect on
the date hereof (the "Loan Program").
1. PAYMENT OF PRINCIPAL AND INTEREST. (a) The principal balance of this
Note and all accrued and unpaid interest thereon shall be due and payable on
______________, _____ (the "Maturity Date"); provided, however, that if such day
is not a day on which banks are open for business in the State of ___________ (a
"Business Day"), then such payment shall be due on the Business Day next
succeeding the Principal Payment Date. The principal balance of this Note may
be repaid either in cash or by the surrender of certificates representing units
of limited partnership interests in Payee having a fair market value equal to
such principal balance (as determined in accordance with the Loan Program).
(b) The principal balance outstanding from time to time under this Note
(after giving effect to all adjustments thereto made pursuant to the terms of
this Note) shall bear interest at a rate of __________ percent (____%) per
annum. In no event shall the interest rate payable hereunder exceed the maximum
rate of nonusurious interest allowed from time to time by applicable law (the
"Highest Lawful Rate"). Maker shall pay to Payee, commencing on
_________________ and on the last day of each succeeding three-month period
until the Maturity Date, all accrued and unpaid interest on the outstanding
principal balance as of such date, unless such day is not a Business Day in
which case such payment shall be due on the Business Day next succeeding such
day.
2. MAXIMUM INTEREST RATE. (a) It is the intention of Maker and Payee to
conform strictly to applicable usury laws. Accordingly, if the interest payable
on this Note would be usurious under applicable law, in that event,
notwithstanding anything to the contrary herein, it is agreed as follows:
(i) the aggregate of all consideration which constitutes interest under
applicable law that is taken, reserved, contracted for, charged or received
under this Note shall under no circumstances exceed the maximum amount of
interest allowed by applicable law, and any excess shall be canceled
automatically and, if theretofore paid, shall be credited on this Note by the
holder hereof (or, to the extent that this Note shall have been or would thereby
be paid in full, refunded to Maker); and (ii) in the event that maturity of this
Note is accelerated for any reason, or in the event of any required or permitted
prepayment, then such consideration that constitutes interest may never include
more than the maximum amount allowed by applicable law, and excess interest, if
any, provided for in this Note or otherwise shall be canceled automatically as
of the date of such acceleration or prepayment and, if theretofore paid, shall
be credited on this Note (or, to the extent that this Note shall have been or
would thereby be paid in full, refunded to Maker). All sums paid or agreed to
be paid to the holder hereof for the use, forbearance or detention of sums
included in the amounts owing to such holder by Maker shall, to the extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of this Note until payment in full so that the rate or
amount of interest on account of indebtedness does not exceed the applicable
usury ceiling, if any. As used in this Note, the term "applicable law" shall
mean the law of the State of __________.
(b) If at maturity or final payment of this Note the total amount of
interest paid or accrued under the foregoing provisions is less than the total
amount of interest which would have accrued if an interest rate per annum equal
to the Interest Rate had at all times been in effect, then Maker agrees to pay
to Payee, to the extent allowed by applicable law, an amount equal to the
difference between (a) the lesser of (i) the amount of interest which would have
accrued on this Note if the Highest Lawful Rate had at all times been in effect
or (ii) the amount of interest which would have accrued if an interest rate per
annum equal to the Interest Rate had at all times been in effect, and (b) the
amount of interest accrued in accordance with the other provisions of this Note.
3. WAIVER. Maker expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor, notice of
intent to accelerate the maturity hereof, notice of the acceleration of the
maturity hereof, bringing of suit and diligence in taking any action to collect
amounts called for hereunder and in the handling of securities at any time
existing in connection herewith.
4. AMENDMENTS. Any term or provision of this Note and any obligation of
Maker hereunder or with respect hereto, may be changed or modified, partially or
completely, or noncompliance may be consented to or authorized, by written
agreement between Maker and Payee.
5. EVENTS OF DEFAULT. The occurrence and continuance of any of the
following events shall be considered an "Event of Default" for purposes of this
Note: (a) if Maker uses the proceeds of this Note for any purpose other than in
accordance with the terms of the Loan Program; (b) default is made (and not
cured within 10 calendar days) in the payment of principal or interest hereon,
(c) any involuntary case or other proceeding shall be commenced against Maker
that seeks liquidation, reorganization or other relief with respect to it or its
debts or other liabilities under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator or custodian unless dismissed or stayed within 90 days after the
institution thereof (provided that upon ineffectiveness of any stays, an Event
of Default shall exist); and (d) Maker shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts or other liabilities under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official with respect
to the Maker, or shall consent to any such relief or to the appointment of, or
taking possession by, any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors or shall fail generally or shall admit in writing its
inability to pay its debts generally as they become due or shall take any
corporate action to authorize or effect any of the foregoing.
6. REMEDY. Upon the occurrence of any Event of Default, the entire
principal amount of the Note then outstanding together with interest accrued
thereon shall become immediately due and payable, all without written notice and
without presentment, demand, protest, notice of protest or dishonor or any other
notice of default of any kind, all of which are hereby expressly waived by the
Maker.
7. COSTS AND ATTORNEYS' FEES. If default is made in the payment of this
Note at maturity (regardless of how its maturity may be brought about) and the
same is placed in the hands of an attorney for collection, or suit is filed
hereon, or proceedings are had in bankruptcy, probate, receivership,
reorganization, arrangement, or other judicial proceedings for the establishment
or collection of any amount called for hereunder, or any amount payable or to be
payable hereunder is collected through any such proceedings, Maker agrees to pay
to the owner and holder of this Note reasonable attorneys' fees and costs,
including the fees and costs incurred in any appeals, and any collection fees
incurred in collection of this Note.
8. SECURITY. The payment and performance of this Note is secured by the
security interest described by that certain Unit Pledge Agreement by and between
Maker and Payee.
9. GOVERNING LAW. THIS NOTE AND THE RIGHTS AND OBLIGATIONS HEREUNDER
SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF ___________.
(Name of Maker)
EXHIBIT C
PLEDGE AGREEMENT
This PLEDGE AGREEMENT (this "Agreement"), dated as of _______________,
19___, is entered into by and between ______________________________ ("Pledgor")
and Hallwood Energy Partners, L.P., a Delaware limited partnership (the
"Partnership"), in order to secure the payment of the indebtedness hereinafter
referred to of Pledgor to the Partnership.
R E C I T A L S
As a condition to the Partnership providing a loan to Pledgor in the amount
of $_________, which loan is evidenced by a Promissory Note dated of even date
herewith, Pledgor has agreed to pledge to the Partnership all of the securities
that are described on EXHIBIT A hereto (the "Pledged Securities").
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS. Capitalized terms used herein shall have the
meaning specified herein.
SECTION 2. PLEDGE. Pledgor hereby pledges, assigns, transfers and
delivers to the Partnership, and hereby grants a security interest (the
"Security Interest") in, the following (the "Collateral"): the Pledged
Securities, the certificates representing such Pledged Securities and all
dividends, cash, securities, instruments and other property from time to time
paid, payable or otherwise distributed in respect of or in exchange for any or
all of such Pledged Securities.
SECTION 3. SECURED OBLIGATIONS. The Security Interest shall secure, under
the circumstances set forth herein, the Secured Obligations. For purposes of
this Agreement, the term "Secured Obligations" shall mean the following (i) the
due and punctual payment and performance of the Promissory Note, dated as of
_______________, made by Pledgor and payable to the order of the Partnership in
the principal amount of $_______________ (the "Note") and (ii) the reimbursement
of all costs incurred by the Partnership to obtain, preserve and enforce this
Agreement, collect the Secured Obligations and maintain and preserve the
Collateral, including without limitation the Partnership's reasonable attorneys'
fees, disbursements and legal expenses.
SECTION 4. DELIVERY OF COLLATERAL. Upon the execution hereof, Pledgor
shall deliver to the Partnership the certificates representing or evidencing the
Collateral, in suitable form for transfer by delivery, or accompanied by duly
executed instruments of transfer or assignment in blank, all in form and
substance reasonably satisfactory to the Partnership. Upon the occurrence and
during the continuance of an Event of Default, the Partnership shall have the
right, at any time in its discretion and without notice to Pledgor, to transfer
to or to register in the name of the Partnership any or all of the Collateral.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
Pledgor represents and warrants as follows:
(i) The Security Interest constitutes a valid and, upon delivery
of the certificates evidencing the Pledged Securities, first perfected
security interest in all of the Collateral for payment and performance of
the Secured Obligations.
(ii) The Collateral is owned by Pledgor free and clear of any
lien, claim or encumbrance except for the Security Interest.
All representations and warranties of Pledgor contained herein shall survive the
execution, delivery and performance of this Agreement until termination of this
Agreement under SECTION 16.
SECTION 6. FURTHER ASSURANCES. Pledgor agrees that at any time and from
time to time, at Pledgor's expense, Pledgor will promptly execute and deliver
all further instruments and documents, and take all further action that the
Partnership may reasonably request, in order to perfect and protect the Security
Interest granted or purported to be granted hereby or to enable the Partnership
to exercise and enforce the rights and remedies hereunder with respect to any
Collateral.
SECTION 7. RELEASES OF COLLATERAL. Pledgor shall not sell or otherwise
dispose of the Collateral, or any part thereof or any interest therein. If the
Collateral, or any part thereof, is sold or otherwise disposed of in violation
of these provisions, the Security Interest of the Partnership shall continue in
such Collateral or any part thereof notwithstanding such sale or other
disposition, and Pledgor will deliver any proceeds thereof to the Partnership to
be held as Collateral hereunder.
SECTION 8. PARTNERSHIP APPOINTED ATTORNEY-IN-FACT. Pledgor hereby
irrevocably appoints the Partnership as Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor and in its name or otherwise, from
time to time in the Partnership's discretion, to take any action and to execute
any instrument that the Partnership may deem reasonably necessary or advisable
to accomplish the purposes of this Agreement, including, without limitation, to
receive, endorse and collect all instruments made payable to Pledgor
representing any dividend, interest payment or other distribution in respect of
the Collateral or any part thereof and to give full discharge for the same, when
and to the extent permitted by this Agreement.
SECTION 9. PARTNERSHIP MAY PERFORM. Upon the occurrence and during the
continuance of an Event of Default (including an Event of Default resulting from
a failure to perform any agreement contained herein), if Pledgor fails to
perform any agreement contained herein, the Partnership may itself perform, or
cause performance of, such agreement, and the expenses of the Partnership
incurred in connection therewith shall be payable by Pledgor under SECTION 12.
SECTION 10. REASONABLE CARE. The Partnership shall have an obligation to
exercise reasonable care with respect to Collateral in its possession; provided,
however, that the Partnership shall be deemed to have exercised reasonable care
if the Collateral is accorded treatment substantially comparable to that which
the Partnership accords its own property or treatment substantially in
accordance with actions requested by Pledgor in writing (although the
Partnership shall not be obligated to comply with any such requests and no
failure to do so shall be deemed to be a failure to exercise reasonable care).
SECTION 11. EVENTS OF DEFAULT: REMEDIES UPON DEFAULT. An "Event of
Default" hereunder occurs if Pledgor fails to pay any amount when due under the
Note and the Partnership accelerates the payment of the principal and interest
thereunder such that such Secured Obligations shall become immediately due and
payable (herein called an "Event of Default").
If upon or after the occurrence of any Event of Default, the Partnership
elects to exercise remedies under this Agreement (the occurrence of any such
event shall be referred to as an "Acceleration"), then upon thirty (30) days'
advance notice to the Pledgor:
(a) The Partnership may exercise (in compliance with all applicable
securities laws) in respect of the Collateral, in addition to other rights and
remedies provided for herein or otherwise available to it, all the rights and
remedies of a secured party after default under the Uniform Commercial Code in
effect in the State of ____________ at that time, and the Partnership may also,
without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any exchange, over
the counter or at the Partnership's offices or elsewhere, for cash, on credit or
for future delivery, and at such price or prices and upon such other terms as
the Partnership may deem commercially reasonable or otherwise in such manner as
necessary to comply with applicable federal and state securities laws. Upon
consummation of any such sale, the Partnership shall have the right to assign,
transfer and deliver to the purchaser or purchasers at any such sale and such
purchasers shall hold the property sold absolutely, free from any claim or right
on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by
law) all rights of redemption, stay or appraisal that it now has or may at any
time in the future have under any rule of law or statute now existing or
hereafter enacted.
Pledgor agrees that the Partnership shall not be required to register or
qualify any of the Collateral under applicable state or federal securities laws
in connection with any such sale if the sale is effected in a manner that
complies with all applicable federal and state securities laws or exemptions
therefrom. The Partnership shall be authorized at any such sale (if it deems it
advisable to do so) to restrict the prospective bidders or purchasers to persons
who will represent and agree that they are purchasing the Collateral for their
own account for investment and not with a view to the distribution or sale
thereof. In the event that any such Collateral is sold at private sale, Pledgor
agrees that if such Collateral is sold for a price that the Partnership in good
faith believes to be reasonable under the circumstances then existing, then
(a) the sale shall be deemed to be commercially reasonable in all respects, (b)
Pledgor shall not be entitled to a credit against the Secured Obligations in an
amount in excess of the purchase price, and (c) the Partnership shall not incur
any liability or responsibility to Pledgor in connection therewith,
notwithstanding the possibility that a substantially higher price might have
been realized at a public sale. Pledgor hereby waives any claims against the
Partnership arising by reason of the fact that the price at that the Collateral
may have been sold at such private sale was less than the price which might have
been obtained at a public sale or was less than the Secured Obligations, even if
the Partnership accepts the first offer received and does not offer the
Collateral to more than one offeree (other than the Partnership or an affiliate
of the Partnership), unless such sale was not commercially reasonable under the
circumstances.
To the extent notice of sale shall be required by law, the Partnership
shall give Pledgor at least ten (10) days' (or such longer period as shall be
specified by applicable laws) notice of the time and place of any public sale or
the time after which any private sale is to be made, which Pledgor agrees shall
constitute commercially reasonable notification. At any such sale, the
Partnership, to the extent permitted by law, may bid (which bid may be, in
whole or in part, in the form of cancellation of Secured Obligations) for and
purchase for the account of the Partnership the whole or any part of the
Collateral. The Partnership shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Partnership may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned. If sale of all or any part of
the Collateral is made on credit or for future delivery, the Collateral so sold
may be retained by the Partnership until the sale price is paid by the purchaser
or purchasers thereof, but the Partnership shall not incur any liability in case
any such purchaser or purchasers shall fail to take up and pay for the
Collateral so sold and, in case of any such failure, such Collateral may be sold
again upon like notice. Pledgor agrees that any sale of the Collateral
conducted by the Partnership in accordance with the foregoing provisions of this
SECTION 11(A) shall be deemed to be a commercially reasonable sale under the
Uniform Commercial Code as in effect in the State of ____________ from time to
time.
As an alternative to exercising the power of sale herein conferred upon it,
the Partnership may proceed by a suit or suits at law or in equity to foreclose
the security interest granted under this Agreement and to sell the Collateral,
or any portion thereof, pursuant to a judgment or decree of a court or courts of
competent jurisdiction.
(b) Any cash held by the Partnership as Collateral and all cash
proceeds received by the Partnership in respect of any sale of, collection from,
or other realization upon all or any part of the Collateral (i) prior to the
occurrence of an Acceleration shall be held by the Partnership as collateral for
the Note, and (ii) following the occurrence of an Acceleration may be held by
the Partnership as Collateral and/or then or at any time thereafter applied as
follows: (x) first, to the payment to the Partnership of the costs and expenses
of retaking, holding and preparing for sale of the Collateral and any other
fees, expenses, claims, demands, losses, judgments, damages and liabilities
arising out of or related to any loan document which are payable to the
Partnership pursuant to SECTION 12, and (y) second, to the Partnership for
application against or on account of all or any part of the Notes.
(c) Any surplus of such cash or cash proceeds held by the Partnership
and remaining after payment in full of all the Notes shall be reassigned and
redelivered as provided in SECTION 16 hereof.
SECTION 12. EXPENSES. The Partnership shall be entitled to receive from
any proceeds of the Collateral, the amount of any and all reasonable expenses,
including the fees and expenses of its counsel and of any experts and agents
which the Partnership may incur in connection with (i) the administration of
this Agreement, (ii) the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral, (iii) the exercise or
enforcement of any of the rights of the Partnership hereunder, or (iv) the
failure by Pledgor to perform or observe any of the provisions hereof.
SECTION 13. SECURITY INTEREST ABSOLUTE. All rights of the Partnership
hereunder, the interest, and all obligations of Pledgor hereunder, shall be
absolute and unconditional irrespective of:
(i) any lack of validity or enforceability of the Note or the
Secured Obligations or any other agreement or instrument relating to the
Note or the Secured Obligations;
(ii) any change in the time, manner or place of payment of, or in
any other term of, the Note or the Secured Obligations, or any renewal or
extension of the Note or the Secured Obligations or any other amendment or
waiver of or any consent to any departure from this Agreement or any other
agreement or instrument;
(iii) any sale, exchange, release or nonperfection of any other
collateral, or any release of any guarantor or any person liable in any
manner for the collection of the Note or the Secured Obligations, or any
amendment or waiver of or consent to or departure from any guaranty, for
the Note or the Secured Obligations; or
(iv) any other circumstance that might otherwise constitute a
defense available to, or a discharge of, Pledgor in respect of the Note or
the Secured Obligations or in respect of this Agreement.
SECTION 14. AMENDMENTS AND WAIVERS. No amendment or waiver of any
provision of this Agreement nor consent to any departure by Pledgor herefrom
shall in any event be effective unless the same shall be in writing and signed
by the Partnership and Pledgor, and then such waiver or consent shall be
effective only for the specific purpose for which given.
SECTION 15. TIME IS OF THE ESSENCE; NO WAIVER: CUMULATIVE REMEDIES. Time
and exactitude of each of the terms, obligations, covenants and conditions of
this Agreement are hereby declared to be of the essence. No failure on the part
of the Partnership to exercise, and no delay in exercising, any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy by the Partnership preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy. All remedies hereunder are cumulative and are not exclusive of any
other remedies provided by law.
SECTION 16. TERMINATION. This Agreement shall terminate upon the payment
in full of the Secured Obligations. Upon such termination, the Partnership
shall reassign and redeliver (or cause to be reassigned and redelivered) to
Pledgor, or to such person or persons as Pledgor shall designate or to whomever
may be lawfully entitled to receive such surplus, against receipt, such of the
Collateral (if any) as shall not have been sold or otherwise applied by the
Partnership pursuant to the terms hereof and shall still be held by it
hereunder, together with appropriate instruments of reassignment and release.
Any such reassignment shall be without recourse upon or warranty by the
Partnership and at the expense of Pledgor.
SECTION 17. ADDRESSES FOR NOTICES. Any notice or communication to be
given or made hereunder shall be in writing (including facsimile communication)
and may be given or made personally or by first class letter, telecopy, courier
telex or tested telex, telegram or cable (confirmed, in the case of a telecopy,
telex, telegram or cable, by a letter delivered personally within, or dispatched
by first class mall within, twenty-four hours of the dispatch of such telecopy,
telex, telegram or cable) and shall be effective when actually received. For
the purposes hereof, the address of the Pledgor shall be address maintained in
the records of the Partnership (until notice of a change thereof is given as
provided in this SECTION 17), and the address of the Partnership (until notice
of a change thereof is given as provided in this SECTION 17) shall be as
follows:
SECTION 18. CONTINUING SECURITY INTEREST; ASSIGNMENTS. This Agreement
shall create a continuing security interest in the Collateral and shall (i)
remain in full force and effect until termination as provided in SECTION 16,
(ii) be binding upon Pledgor, the Partnership and their respective successors
and assigns, and (iii) inure, together with the rights, powers and remedies of
Pledgor and the Partnership hereunder, to the benefit of Pledgor, the
Partnership and their respective successors, transferees and assigns, as the
case may be.
SECTION 19. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF __________.
SECTION 20. SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective. If any
provisions of this Agreement or any lien, security interest or other right of
the Partnership hereunder shall be held to be invalid, illegal or unenforceable
under applicable law, such invalidity, illegality or unenforceability shall not
affect any other provision herein or any lien, security interest or other right
granted hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the date first above written.
PARTNERSHIP:
HALLWOOD ENERGY PARTNERS, L.P.
By: Hallwood Energy Corporation
By:
Name:
Title:
PLEDGOR:
Print Name:
EXHIBIT A
PLEDGED SECURITIES
Record Owner Number of
Title of Securities and Address Shares or Units Certificate No.
EXHIBIT D
This form is applicable to FREEHOLDS and LEASEHOLDS whether the title is
registered or unregistered and whether given by one or more than one Mortgagor.
This Legal Charge
made the day of 19
Between (1) (Insert full name(s) and address(es) of the Mortgagor(s))
(hereinafter called "the Mortgagor") and (2)
(hereinafter called "the
Bank")
Witnesses and it is agreed and declared as follows:--
1. The Mortgagor hereby covenants with the Bank that the Mortgagor will on
demand in writing made to the Mortgagor pay or discharge to the Bank all moneys
and liabilities which shall for the time being (and whether on or at any time
after such demand) be due owing or incurred to the Bank by the Mortgagor whether
actually or contingently and whether solely or jointly with any other person and
whether as principal or surety including interest discount commission or other
lawful charges and expenses which the Bank may in the course of its business
charge in respect of any of the matters aforesaid or for keeping the Mortgagor's
account and so that interest shall be computed and compounded according to the
usual mode of the Bank as well after as before any demand made or judgment
obtained hereunder and will on such demand also retire all bills or notes which
may for the time being be under discount with the Bank and to which the
Mortgagor is a party whether as drawer acceptor maker or indorser without any
deduction whatsoever.
2. The Mortgagor as Beneficial Owner hereby charges by way of legal mortgage
ALL THAT the property referred to in the schedule hereto (hereinafter called
"the Mortgaged Property") with the payment or discharge of all moneys and
liabilities hereby covenanted to be paid or discharged by the Mortgagor.
3. A demand for payment or any other demand or notice under this security may
be made or given by any manager or officer of the Bank or of any branch thereof
by letter addressed to the Mortgagor and sent by post to or left at the last
known place of business or abode of the Mortgagor or at the option of the Bank
if the Mortgagor is a company its registered office and if sent by post shall be
deemed to have been made or given at noon on the day following the day the
letter was posted.
4. During the continuance of this security no statutory or other power of
granting or agreeing to grant or of accepting or agreeing to accept surrenders
of leases or tenancies of the Mortgaged Property or any part thereof shall be
capable of being exercised by the Mortgagor without the previous consent in
writing of the Bank nor shall section 93 of the Law of Property Act 1925 dealing
with the consolidation of mortgages apply to this security.
5. Section 103 of the said Act shall not apply to this security but the
statutory power of sale shall as between the Bank and a purchaser from the Bank
arise on and be exercisable at any time after the execution of this security
provided that the Bank shall not exercise the said power of sale until payment
of the moneys hereby secured has been demanded but this proviso shall not affect
a purchaser or put him upon inquiry whether such demand has been made.
6. (a) At any time after the Bank shall have demanded payment of any moneys
hereby secured or if requested by the Mortgagor the Bank may appoint by
writing any person or persons (whether an officer of the Bank or not)
to be receiver and manager or receivers and managers (hereinafter
called the "Receiver" which expression shall where the context so
admits include the plural and any substituted receiver and manager or
receivers and managers) of all or any part of the Mortgaged Property.
(b) The Bank may from time to time determine the remuneration of the
Receiver and may remove the Receiver and appoint another in his place.
(c) The Receiver shall (so far as the law permits) be the agent of the
Mortgagor (who shall alone be personally liable for his acts defaults
and remuneration) and shall have and be entitled to exercise all powers
conferred by the Law of Property Act 1925 in the same way as if the
Receiver had been duly appointed thereunder and in particular by way of
addition to but without hereby limiting any general powers hereinbefore
referred to (and without prejudice to any of the Bank's powers) the
Receiver shall have power in the name of the Mortgagor or otherwise to
do the following things namely:--
(i) to take possession of collect and get in all or any part
of
the Mortgaged Property and for that purpose to take any
proceedings as he shall think fit;
(ii) to commence and/or complete any building operations on the
Mortgaged Property or any part thereof and to apply for
and obtain any planning permissions building regulation
approvals and any other permissions consents or licences
in each case as he may in his absolute discretion think
fit;
(iii) to raise money from the Bank or others on the security of
the Mortgaged Property or otherwise;
(iv) to provide such facilities and services for tenants and
generally to manage the Mortgaged Property in such manner
as he shall think fit;
(v) if the Mortgaged Property is leasehold to vary the terms
of or surrender any lease and/or to take a new lease
thereof or of any part thereof on such terms as he shall
think fit and so that any such new lease shall ipso facto
become charged to the Bank on the terms hereof so far
as applicable and to execute a formal legal charge over
any such new lease in favour of the Bank in such form as
it may require;
(vi) to sell let or lease or concur in selling letting or
leasing and to vary the terms of terminate or accept
surrenders of leases or tenancies of the Mortgaged
Property or any part thereof in such manner and for such
term with or without a premium with such rights relating
to other parts thereof and containing such covenants on
the part of the Mortgagor and generally on such terms and
conditions (including the payment of money to a lessee or
tenant on a surrender) as in his absolute discretion he
shall think fit;
(vii) to make any arrangement or compromise which the Bank or he
shall think fit;
(viii) to make and effect all repairs improvements and
insurances;
(ix) to appoint managers officers contractors and agents for
the aforesaid purposes upon such terms as to remuneration
or otherwise as he may determine;
(x) to do all such other acts and things as may be considered
to be incidental or conducive to any of the matters or
powers aforesaid and which he lawfully may or can do;
PROVIDE NEVERTHELESS THAT the Receiver shall not be authorised to exercise any
of the aforesaid powers if and insofar and so long as the bank shall in writing
exclude the same whether in or at the time of his appointment or subsequently.
(d) The statutory powers of sale leasing and accepting surrenders
exercisable by the Bank hereunder are hereby extended so as to
authorise the Bank whether in its own name or in that of the Mortgagor
to grant a lease or leases of the whole or any part or parts of the
Mortgaged Property with such rights relating to other parts thereof and
containing such covenants on the part of the Mortgagor and generally on
such terms and conditions (including the payment of money to a lessee
or tenant on a surrender) and whether or not at a premium as the Bank
in its absolute discretion shall think fit.
(e) In no circumstances shall the Bank be liable to account to the
Mortgagor as a mortgagee in possession or otherwise for any moneys not
actually received by the Bank.
(f) The Mortgagor hereby irrevocably appoints the Bank and the Receiver
jointly and also severally the Attorney and Attorneys of the Mortgagor
for the Mortgagor and in his name and on his behalf and as his act and
deed or otherwise to sign seal deliver and otherwise perfect any deed
assurance agreement instrument or act which may be required or may be
deemed proper for any of the purposes aforesaid.
(g) All powers of the Receiver hereunder may be exercised by the Bank
whether as attorney of the Mortgagor or otherwise.
7. The Mortgagor hereby covenants with the Bank that the Mortgagor during the
continuance of this security will keep all buildings now or for the time being
subject to this security insured against loss or damage by fire and such other
risks as the Bank may from time to time require to the full replacement value
thereof with an insurance office or underwriters approved by the Bank in writing
from time to time and if so required by the Bank in the joint names of the
Mortgagor and the Bank and will duly pay all premiums and other moneys necessary
for effecting and keeping up such insurance within one week of the same becoming
due and will on demand produce to the Bank the policies of such insurance and
the receipts for such payments And will keep all buildings now or for the time
being subject to this security in good repair And will duly and with reasonable
expedition complete any building operations commenced at any time by the
Mortgagor on the Mortgaged Property And at any time after payment of the moneys
hereby secured has been demanded or if default shall be made by the mortgagor in
performing any of the above obligations the Bank may as the case may be insure
and keep insured the said buildings in any sum which the Bank may think
expedient or may repair and keep in repair the said buildings or may complete
any such building operations (with power to enter upon the Mortgaged Property
for any of those purposes without thereby becoming a mortgagee in possession)
And all moneys expended by the Bank under this provision shall be deemed to be
properly paid by the Bank.
8. All moneys received on any insurance whatsoever in respect of loss or
damage by fire or otherwise to the said buildings or any part of thereof
(whether effected or maintained by the Mortgagor in pursuance of his obligation
under the covenant in that behalf contained in clause 7 hereof or independently
of or otherwise than in pursuance of such obligation) shall as the Bank requires
either be applied in making good the loss or damage in respect of which the
moneys are received or be paid to the Bank in or towards payment of the moneys
for the time being hereby secured.
9. All costs charges and expenses incurred hereunder by the Bank and all other
moneys paid by the Bank or the Receiver in perfecting or otherwise in connection
with this security or in respect of the Mortgaged Property including (without
prejudice to the generality of the foregoing) all moneys expended by the Bank
under clause 7 hereof and all costs of the Bank or the Receiver of all
proceedings for enforcement of the security hereby constituted or for obtaining
payment of the moneys hereby secured or arising out of or in connection with the
acts authorised by clause 6 hereof (and so that any taxation of the Banks costs
charges and expenses shall be on the basis of solicitor and own client) shall be
recoverable from the Mortgagor as a debt and may be debited to any account of
the Mortgagor and shall bear interest accordingly and shall be charged on the
Mortgaged Property and the charge hereby conferred shall be in addition and
without prejudice to any and every other remedy lien or security which the Bank
may have or but for the said charge would have for the moneys hereby secured or
any part thereof.
10. The Bank shall be at liberty from time to time to give time for payment of
any bills of exchange promissory notes or other securities which may have been
discounted for or received on account from the Mortgagor by the Bank or on which
the Mortgagor shall or may be liable as drawer acceptor maker indorser or
otherwise to any parties liable thereon or thereto as the Bank in its absolute
discretion shall think fit without releasing the Mortgagor or affecting the
Mortgagor's liability under these presents or the security thereby created.
11. This security shall be a continuing security to the Bank notwithstanding
any settlement of account or other matter or thing whatsoever and shall not
prejudice or affect any security which may have been created by any deposit of
title deeds or other documents which may have been made with the Bank prior to
the execution hereof relating to the Mortgaged Property or to any other property
or any other security which the Bank may now or at any time hereafter hold in
respect of the moneys hereby secured or any of them or any part thereof
respectively.
12. The Bank shall on receiving notice that the Mortgagor has incumbered or
disposed of the Mortgaged Property or any part thereof be entitled to close the
Mortgagor's then current account or accounts and to open a new account or
accounts with the Mortgagor and (without prejudice to any right of the Bank to
combine accounts) no money paid in or carried to the Mortgagor's credit in any
such new account shall be appropriated towards or have the effect of discharging
any part of the amount due to the Bank on any such closed account. If the Bank
does not open a new account or accounts immediately on receipt of such notice it
shall nevertheless be treated as if it had done so at the time when it received
such notice and as from that time all payments made by the Mortgagor to the Bank
shall be credited or be treated as having been credited to such new account or
accounts and shall not operate to reduce the amount due from the Mortgagor to
the Bank at the time when it received such notice.
13. At any time after payment of the moneys hereby secured has been demanded
and any part thereof remains unpaid the Bank may as agent of the Mortgagor
remove and sell any chattels on the Mortgaged Property and the new proceeds of
sale thereof shall be paid to the Mortgagor on demand and the Bank shall not
have the right to retain or set off such proceeds of sale against any
indebtedness of the Mortgagor.
14. The Mortgagor hereby covenants with the Bank to pay any sums which may
become payable by the Mortgagor under the Agricultural Holdings Act 1986 for
compensation costs or otherwise to a tenant of the Mortgaged Property or any
part thereof failing which the Bank may pay the said sum or discharge and charge
created in pursuance of the said Act for securing the same and any moneys paid
by the Bank under this clause shall be deemed to be expenses properly incurred
by the Bank hereunder.
15. The Mortgagor hereby covenants with the Bank that:
(a) if and so long as the title to the Mortgaged Property or any part
thereof is not registered under the Land Registration Acts 1925 to 1971
no person shall during the continuance of this security be registered
under the said Acts as proprietor of the Mortgaged Property or any part
thereof without the consent in writing of the Bank.
(b) upon any such registration the Mortgagor will forthwith deliver to the
Bank all Land Certificates relating to the Mortgaged Property unless
such certificates are deposited with the Land Registry.
16. Any party hereto which is a company certifies that this charge does not
contravene any of the provisions of its Memorandum and Articles of Association.
17. In these presents where the context so admits the expression "the
Mortgagor" shall include persons deriving title under the Mortgagor or entitled
to redeem this security and the expression "the Bank" shall include persons
deriving title under the Bank and any reference herein to any statute or section
of any statute shall be deemed to include reference to any statutory
modification or re-enactment thereof for the time being in force.
18. If there are two or more parties hereto of the first part the expression
"the Mortgagor" shall throughout mean and include such two or more parties and
each of them or (as the case may require) such two or more parties or any of
them and shall so far as the context admits be construed as well in the plural
as in the singular and all covenants charges agreements and undertakings herein
expressed or implied on the part of the Mortgagor shall be deemed to be joint
and several covenants charges agreements and undertakings by such parties And in
particular this security and the covenant in clause 1 hereof and the remaining
covenants charges agreements and undertakings herein contained shall extend and
apply to any moneys owing or liabilities incurred by any of such parties to the
Bank whether solely or jointly with each other or with any other person and
references to the Mortgagor in relation to the retirement of bills and in
clauses 3, 9, 10 and 12 shall mean and include any one or more of such parties
as well as such parties jointly.
In Witness whereof the Mortgagor has executed these presents as a deed the day
and year first above written.
The Schedule above referred to
The property known as or being
comprised in the document(s) particulars of which are set out below:--
Description (Conveyance, Lease, Assignment,
Date Mortgage, Assent, Etc.)
Parties
Last Certificate(s) Title No.(s)
County/London Borough
Signed sealed and delivered by the above named
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in the presence of
SIGNATURE OF WITNESS---------------------------------------------------
NAME OF WITNESS----------------------------------------------------------SEAL
ADDRESS-------------------------------------------------------------------------
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OCCUPATION--------------------------------------------------------------------
Signed sealed and delivered by the above named
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in the presence of
SIGNATURE OF WITNESS---------------------------------------------------
NAME OF WITNESS----------------------------------------------------------SEAL
ADDRESS-------------------------------------------------------------------------
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OCCUPATION--------------------------------------------------------------------
EXECUTED AND DELIVERED AS A DEED BY
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DIRECTOR
- -----------------------------------------------------------------------SECRETARY
Company's registered number---------------------------------------------------
The address of the Bank for service (if title is
registered) is:
