UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Amended February 27, 1996
MARK ONE
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 75-1319083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 SOUTH ULSTER STREET PARKWAY
SUITE 1700
DENVER, COLORADO 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
Shares of Common Stock outstanding at August 11, 1995 436,126
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except Shares)
June 30, December 31,
1995 1994
-------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,022 $ 668
Accounts receivable:
Affiliates 528 526
Trade 7 7
Current assets of affiliate 1,859 1,760
------- -------
Total 4,416 2,961
------- -------<PAGE>
PROPERTY, PLANT AND EQUIPMENT, at
cost
Oil and gas properties (full cost
method):
Proved mineral interests 112,373 111,951
Unproved mineral interests -
domestic 40 46
Unproved mineral intersts -
foreign 288
Other property and equipment 3,745 3,745
------- -------
Total 116,158 116,030
Less accumulated depreciation,
depletion, amortization and
property impairment (106,302) (105,461)
------- -------
Net Property, Plant and Equipment 9,856 10,569
------- -------
OTHER ASSETS
Investment in common stock of parent
(at fair value) 2,744 1,680
Investment in bonds of parent (at
cost adjusted for amortization of
discount) 1,352
Noncurrent assets of affiliate 1,415 1,704
------- -------
Total 4,159 4,736
------- -------
TOTAL ASSETS $ 18,431 $ 18,266
======= =======
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In thousands except Shares)
(Continued)
June 30, December 31,
1995 1994
-------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 102 $ 154
Current portion of long-term debt 225
Current liabilities of affiliate 2,357 2,879
------- --------
2,684 3,033
------- -------
NONCURRENT LIABILITIES
Long-term debt 725
Long-term obligations of affiliate 5,056 3,917
------- -------
5,781 3,917
------- -------
Total Liabilities 8,465 6,950
------- -------<PAGE>
STOCKHOLDERS' EQUITY
Series D convertible, cumulative,
redeemable preferred stock, $.01
par value; 65,000 shares
authorized;
18,864 shares issued with a
liquidation
preference of $1,154 1
Series E convertible preferred
stock; $.01 stated
value; 450,000 shares authorized;
356,000 shares
issued with a liquidation
preference of $.01 per share 4 4
Common stock, $.50 par value,
80,000,000 shares
authorized; 842,121 shares issued 421 421
Capital in excess of par value 57,397 58,248
Accumulated deficit (42,496) (42,290)
Unrealized loss on investment in
common stock of parent (146) (896)
Less cost of treasury stock of
347,995 common shares
and 18,864 and 7,500 Series D
preferred shares
as of 1995 and 1994, respectively (5,214) (4,172)
------- -------
Total Stockholders' Equity 9,966 11,316
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 18,431 $ 18,266
======= =======
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months
Ended June 30,
--------------------
1995 1994
------ ------
<S> <C> <C>
REVENUES:
Oil revenue $ 519 $ 507
Gas revenue 710 928
------ ------
1,229 1,435
------ ------
EXPENSES:
Production operating 303 449
General and administrative 248 209
Depreciation, depletion and
amortization 443 460
Interest 133 94
------ ------
1,127 1,212
------ ------<PAGE>
OTHER INCOME (EXPENSE):
Impairment of investment in parent (3,249)
Miscellaneous (147) 123
------ ------
(147) (3,126)
------ ------
NET LOSS (45) (2,903)
PREFERRED STOCK DIVIDENDS 18
------ ------
NET LOSS FOR COMMON STOCKHOLDERS $ (45) $(2,921)
NET LOSS PER COMMON SHARE $ (.09) $ (3.44)
====== =======
WEIGHTED AVERAGE COMMON SHARES 494 850
====== ======
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Six Months
Ended June 30,
--------------------
1995 1994
------ ------
<S> <C> <C>
REVENUES:
Oil revenue $ 1,037 $ 961
Gas revenue 1,490 2,101
------ ------
2,527 3,062
------ ------
EXPENSES:
Production operating 642 793
General and administrative 500 441
Depreciation, depletion and
amortization 841 940
Impairment of oil and gas properties 464
Interest 204 192
------ ------
2,651 2,366
------ ------
OTHER INCOME (EXPENSE):
Impairment of investment in parent (3,249)
Miscellaneous (82) 170
------ ------
(82) (3,079)
------ ------
NET LOSS (206) (2,383)
PREFERRED STOCK DIVIDENDS 356 36
------ ------
NET LOSS FOR COMMON STOCKHOLDERS $ (562) $(2,419)
NET LOSS PER COMMON SHARE $ (1.14) $ (2.85)
======= =======
WEIGHTED AVERAGE COMMON SHARES 494 850
======= =======
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months
Ended June 30,
------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (206) $(2,383)
Adjustments to reconcile net loss to
net
cash used in operating activities:
Depreciation, depletion,
amortization
and property impairment 1,305 940
Impairment of investment in
parent 3,249
Undistributed earnings of
affiliate (1,325) (1,864)
Amortization of bond discount (24) (49)
------ ------
Cash used in operations
before working capital changes (250) (107)
Changes in operating assets and
liabilities
used cash net of noncash activity:
Receivables from affiliates (43)
Receivables - trade (2)
Accounts payable and accrued
liabilities (52) (193)
------ ------
Net cash used in operating
activities (302) (345)
------ ------
INVESTING ACTIVITIES:
Additions to property (19) (83)
Proceeds from property sales 4
Distributions received from
affiliate 1,554 1,566
Proceeds from sale of investment in
bonds of parent 1,376
Purchase of common stock of parent (314)
Other investing activities 15
------ ------
Net cash provided by investing
activities 2,597 1,502
------ ------
FINANCING ACTIVITIES:
Dividends paid (849) (1,481)
Repurchase of Series D preferred
shares (1,042)
Proceeds from long-term debt 950
------ ------
Net cash used in financing
activities (941) (1,481)
------ ------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,354 (324)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 668 1,128
------ ------
END OF PERIOD $ 2,022 $ 804
====== ======
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Corporation ("HEC") 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 interest owners that had participated in wells with HEC and
the limited partnerships. HEC now conducts substantially all of its operations
through HEP. The activities of HEP are conducted by HEP Operating Partners, L.
P. ("HEPO") and EDP Operating, Ltd. ("EDPO").
HEC's wholly-owned subsidiaries include Hallwood Operating Company ("HOC"),
former operator for HEC's properties, and Hallwood G. P., Inc., 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 70% of
the outstanding shares of HEC on a fully diluted basis.
The interim financial data are unaudited; however, in the opinion of management,
the interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. These financial statements should be read in conjunction with the
financial statements and accompanying footnotes included in HEC's December 31,
1994 Annual Report on Form 10-K.
ACCOUNTING POLICIES
INVESTMENT IN HEP
HEC's general partner interest in HEP entitles it to a share of net revenues
derived from HEP's properties ranging from 2% to 25%, and HEC holds
approximately 7.3% 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.
INVESTMENT IN PARENT
Hallwood Group, a public company traded on the New York Stock Exchange, is a
diversified holding company with interests in oil and gas, specialty
restaurants, real estate, textile products and hotels. During 1991, HEC
purchased $2,149,000 aggregate principal amount of Hallwood Group's 13.5%
Subordinated Debentures due July 31, 2009 ("Subordinated Debentures"). The
purchase price was $1,429,000 including $99,000 of accrued interest. During
1992, HEC received an additional $290,000 face value of bonds as payment in lieu
of interest. HEC exchanged the original issue Subordinated Debentures for 7%
Collateralized Subordinated Debentures (the "New Collateralized Debentures") on
March 2, 1993. Interest on the New Collateralized Debentures accrued from the
date of the exchange at the rate of 7% per annum, payable quarterly in cash.
Additionally, during the first quarter of 1993, Hallwood Group purchased for
$380,000 the Subordinated Debentures that had been issued to HEC in 1991 and
1992 as payment in lieu of interest. On March 29, 1995, Hallwood Group
repurchased the New Collateralized Debentures for $1,376,000 plus accrued
interest through the purchase date.
From 1990 through the second quarter of 1995, HEC acquired 249,434 shares of
Hallwood Group's Common Stock (adjusted for the one-for-four reverse stock
split), or approximately 16% of the outstanding shares of Hallwood Group, on the
open market at an average cost of $12.33 per share. HEC is holding the stock of
Hallwood Group as a long-term investment and has classified it as an available-
for-sale security. During the period from July 1, 1995 through August 11, 1995,
HEC purchased an additional 9,875 shares at an average cost of $10.46 per share.
The Company does not have a current intention to purchase additional shares of
Hallwood Group during 1995 but may consider doing so thereafter.
NOTE 2 - DIVIDENDS
HEC paid a dividend of $1.00 per share of common stock and $1.00 per share of
Series E Preferred Stock on March 3, 1995 to all shareholders of record on
February 28, 1995. On July 18, 1995, HEC declared a dividend of $1.50 per share
of common stock to all shareholders of record on July 31, 1995, payable on or
about August 15, 1995.
The Board of Directors will determine future dividends, if any, after
consideration of the cash flow and working capital needs of HEC.
NOTE 3 - REPURCHASES OF SERIES D PREFERRED STOCK AND COMMON 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.
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. Neither
the Company nor its affiliated entities have any current intention to purchase a
significant number of additional shares of the Company's common stock during
1995, but may consider doing so thereafter.
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 June
30, 1995 the Company has borrowed $950,000 against the credit line. Subsequent
to the end of the second quarter, HEC borrowed an additional $250,000.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (11% at June 30, 1995). Interest is payable monthly and quarterly principal
payments of $75,000, as adjusted for the borrowings subsequent to June 30, 1995,
commence 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.
NOTE 5 - LEGAL PROCEEDINGS
On August 15, 1995, the United States District Court for the Southern District
of New York issued a Final Order approving the settlement of In Re: Hallwood
Energy Partners, L. P. Securities Litigation, 90 Civ. 1555. The settlement
class is composed of all persons and entities who beneficially owned or held
units of Energy Development Partners, Ltd. ("EDP") on May 9, 1990 and who
exchanged, or were eligible to exchange, their EDP units for HEP Units pursuant
to the merger of EDP into HEP (the "Transaction").
As part of the settlement, HEP will make a cash payment of approximately
$2,870,000, which was recorded as an expense in HEP's 1994 financial statements
as the estimated cost associated with the litigation. In addition, in
connection with plaintiffs' allegation that they did not receive adequate
compensation for their EDP Units at the time of the Transaction, HEP will issue
Units having a market value of $5,330,000. When issued, these Units, which are
presently estimated to total approximately 1,185,000, will be treated, for
financial statement purposes only, as additional 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 interests, and will be
reflected as outstanding Units since May 9, 1990, the date of the Transaction.
As a result, after the Units are issued, the number of Units outstanding and the
net income (loss) per Unit will be retroactively restated for all periods
subsequent to the Transaction. The Board of Directors of HCRC has approved the
exercise by HCRC of an option to purchase all of the Units for $5,330,000,
provided that the effective price paid by HCRC for the Units is no more than
$6.00 and no less than $3.875. If the completion of the settlement is
substantially delayed, or if there is a material change in circumstances, HCRC
will reassess its current intention to purchase the settlement Units. HEP Units
will be issued and the settlement proceeds will be distributed to the class
after all time periods for an appeal of the final settlement order have expired.
Unless there is an appeal of the court's order, HEP expects to issue the Units
and pay the cash portion to the class nominee in late September or October 1995.
Trial in the lawsuit styled Stutes v. Hallwood Petroleum, Inc. et al. has been
set for February 1996. The plaintiff in the lawsuit, a driver for Koch
Services, alleges that as a result of exposure to benzene in the petroleum he
was hauling from various wells owned and operated by Hallwood Petroleum, Inc.
("HPI") and the approximately 80 other named defendants, he contracted
myelogenous leukemia. Discovery is ongoing. HPI plans to vigorously defend
this case, but cannot predict the outcome of this matter or any possible effect
an uninsured or unindemnified adverse outcome might have.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
FINANCING
During the second quarter of 1995, the Company entered into a credit agreement
with a bank that has committed to loan the Company up to $1,500,000. As of June
30, 1995 the Company has borrowed $950,000 against the credit line. Subsequent
to the end of the second quarter, HEC borrowed an additional $250,000.
Borrowings against the credit line bear interest at the bank's prime rate plus
2% (11% at June 30, 1995). Interest is payable monthly and quarterly principal
payments of $75,000, as adjusted for the borrowings subsequent to June 30, 1995,
commence 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.
Included in the accompanying balance sheet at June 30, 1995 are long-term
obligations of affiliate of $5,056,000. This amount represents HEC's share of
HEP's outstanding long-term obligations which consist primarily of $21,700,000
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.
PROPERTY SALES AND CAPITAL BUDGET
During the second quarter of 1995 and through August 11, 1995, HEC purchased
35,309 shares of Hallwood Group at an average cost of $11.83 per share. HEC
intends to spend up to an additional $80,000 to purchase common stock of
Hallwood Group.
During the first quarter of 1995, HEC repurchased 1,500 shares of its Series D
Preferred Stock for $90.88 per share. During the second quarter 1995, in two
separate transactions, HEC repurchased the remaining 9,864 shares of its Series
D Preferred Stock at $91.80 per share.
On July 17, 1995, HEC purchased 58,000 shares of its common stock from an
individual in a privately negotiated transaction for a total price of
$1,189,000.
HEC had no material property acquisitions, sales, exploration or development
activity during the second quarter of 1995. A summary of HEP's significant
property transactions follows.
CAPITAL PROJECTS
For 1995, HEP has a capital budget of $15,800,000 which includes $11,600,000 for
direct expenditures and $4,200,000 for indirect expenditures through its
investment in Hallwood Spraberry Drilling Company, L.L.C. ("HSD"). Through June
30, 1995, HEP incurred approximately $9,299,000 in capital expenditures which
includes $6,456,000 directly and $2,843,000 indirectly through HSD. A
description of significant exploration and development projects to date in 1995
follows.
HSD has incurred approximately $2,843,000, net to HEP's interest, through June
30, 1995 for 20 drilled wells, 12 recompletions and acquisition of drilling
leases on the Rocker "b" Ranch in Reagan County and Irion County, Texas. HSD
has its own line of credit of $4,000,000, net to HEP's interest, provided by a
third party lender. The line of credit is secured only by certain leases on the
Rocker "b" Ranch and is otherwise nonrecourse to HEP. Based on the initial
success of the drilling and recompletions, HEP spent approximately $780,000 on
additional acreage in the Rocker "b" Ranch during the second quarter, and HSD
plans to expand its project area to include this acreage. HSD has three
drilling rigs under contract in the area currently, and now plans to drill 54
wells by the end of 1995. It is HEP's intention to arrange third party
financing for the drilling. The wells drilled and recompleted through June 30,
1995 added a total of 1 million equivalent barrels of proven developed and
undeveloped reserves, including 640,000 equivalent barrels which were booked as
proven undeveloped reserves at December 31, 1994. From June 30 to August 11,
1995, HSD drilled an additional seven wells. The 39 wells drilled or
recompleted since January 1, 1995, have increased HEP's share of production on
the Rocker "b" properties by 590 barrels of oil equivalent per day.
HEP's $11,600,000 direct capital budget is being expended on a variety of
projects described below. The reserve additions generated by the following
expenditures resulted in replacement of 72% of production during the first half
of 1995 net of downward revisions caused primarily by price declines.
HEP spent approximately $825,000 on six successful drilling wells and eight
successful recompletions in the West Texas Kermit area where HEP has working
interests ranging from 25% to 80%. Gross production on these properties has
increased by 690 barrels of oil per day and 1,275 mcf per day. Future projects
in the area include secondary recovery in the San Andres and Holt Formations.
It is anticipated that six more wells will be recompleted and seven more wells
will be drilled by year end.
A workover on the G.S. Boudreaux in Lafayette Parish increased gross production
rates from 17,500 mcf per day and 370 barrels of condensate per day to 22,000
mcf per day and 450 barrels of condensate per day during the second quarter of
1995. The increased production rate on the G.S. Boudreaux is anticipated to
increase the state administered production allowable for the A.L. Boudreaux in
the same area from its current 20,000 mcf per day to 28,000 mcf per day. HEP
has an 26% interest in the A.L. Boudreaux.
In Richland County, Montana, the Lewis #1 was recompleted to the Interlake
Formation in the first quarter of 1995, and the well is currently flowing 325
barrels of oil per day and 165 mcf per day. Two development wells to further
exploit this field's reserves are planned for 1995. HEP has a 22% working
interest in the area.
In the first six months of 1995, HEP spent approximately $290,000 on a program
started in late 1994 in New Mexico. This amount includes eight successful non-
operated development wells in Lea County, New Mexico, and two successful
operated recompletions in Eddy County, New Mexico, having gross combined initial
flowing potentials of 2,750 barrels of oil per day and 3,525 mcf per day. HEP
has a 5% working interest in the Lea County field and 25% to 50% interests in
the Eddy County wells. An additional five nonoperated wells are expected to be
drilled by the end of 1996.
In May 1995, HEP completed an exploratory well in Hot Springs County, Wyoming.
The well is flowing 550 barrels of oil per day, and a delineation well is
presently being drilled. HEP has a 17% working interest in this field.
Depending upon the results of the delineation well, additional field development
is possible.
In the first six months of 1995, HEP drilled two additional coal bed methane
development wells and acquired working interests in the San Juan Basin of New
Mexico, for a total of approximately $194,000. The two new wells have increased
gross production in this area by 325 mcf per day, and gross production is
expected to increase further as the Fruitland Coal dewaters. HEP has working
interests in these new wells of 18% and 25%.
During the first six months of 1995, HEP also acquired additional acreage in
Martin County, Reagan County and Irion County, Texas for approximately $497,000.
Nine wells are planned to be drilled on the Irion County acreage in 1995. HEP
has also spent approximately $555,000 on two development wells in Reagan County,
Texas in which it has a 90% working interest. Significant additional acreage
acquisition in 1995 is anticipated to support 1996 drilling plans in Reagan
County. Numerous other projects, which are individually less significant, are
also underway in Montana, Colorado, North Dakota, Texas and Utah. Additionally,
six wildcat exploration wells are planned for the second half of 1995.
During the first quarter of 1995, Hallwood Petroleum Indonesia, Inc. ("Hallwood
Indonesia") completed and evaluated its first well, PTH-01, in the Telaga Said
Field in North Sumatra, Indonesia. A 39 barrel per day oil test was obtained,
but insufficient reserves were indicated to justify field development costs.
Consequently, Hallwood Indonesia has decided to relinquish its interest in the
contract area and is in the process of closing down its operations there. HEP
recorded $4,051,000 of impairment expense in the first quarter of 1995, which
represents the write-off of its entire investment in Hallwood Indonesia.
DIVIDENDS
HEC paid a dividend of $1.00 per share of common stock and $1.00 per share of
Series E Preferred Stock on March 3, 1995, to all shareholders of record on
February 28, 1995. On July 18, 1995, HEC declared a dividend of $1.50 per share
of common stock to all shareholders of record on July 31, 1995, payable on or
about August 15, 1995.
The Board of Directors will determine future dividends, if any, after
consideration of the cash flow and the working capital needs of HEC.
HEP DISTRIBUTIONS
HEP declared a limited partner distribution of $.20 per Unit and a general
partner distribution of $634,000 for the second quarter of 1995, payable on
August 15, 1995. The total of the distributions receivable by HEC is $765,000,
which has been accrued in receivables from affiliates at June 30, 1995.
RESULTS OF OPERATIONS
The following table is presented to contrast HEC's average oil and gas prices
and production. Significant fluctuations are discussed in the accompanying
narrative.
<TABLE>
<CAPTION>
OIL AND GAS PRICES AND PRODUCTION
(In thousands except for price)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
1995 1994 1995 1994
------ ------ ------ ------
Oil Gas Oil Gas Oil Gas Oil Gas
---- ---- ---- ---- ---- ---- ---- ----
(bbl) (mcf) (bbl) (mcf) (bbl) (mcf) (bbl) (mcf)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average
price $16.22 $1.62 $16.90 $1.96 $16.73 $1.69 $15.75 $2.28
Production 32 437 30 474 62 880 61 922
</TABLE>
QUARTER ENDED JUNE 30, 1995 COMPARED TO QUARTER ENDED JUNE 30, 1994
OIL REVENUE
Oil revenue increased $12,000 during the second quarter of 1995 as compared with
the second quarter of 1994. This increase is comprised of an increase in oil
production from 30,000 barrels in 1994 to 32,000 barrels in 1995 partially
offset by a decrease in oil prices from $16.90 per barrel in 1994 to $16.22 per
barrel in 1995. The increase in oil production is due to increased production
from developmental drilling projects in West Texas partially offset by normal
production declines.
GAS REVENUE
Gas revenue decreased $218,000 during the second quarter of 1995 as compared
with the corresponding period in 1994 primarily as a result of a decrease in
average gas prices from $1.96 per mcf in 1994 to $1.62 in 1995 combined with a
decrease in production from 474,000 mcf in 1994 to 437,000 mcf in 1995. The
decrease in gas production is primarily due to normal production declines,
allowable production limits and gas balancing during the second quarter of 1995.
PRODUCTION OPERATING EXPENSE
Production operating expense decreased $146,000 during the second quarter of
1995 as compared with the second quarter of 1994. The decrease is comprised of
lower production taxes resulting from the 14% decrease in revenue discussed
above combined with general operating 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 Hallwood Petroleum, Inc. ("HPI"), an affiliate of
HEC, which manages and operates certain oil and gas properties on behalf of HEC,
HEP and their affiliates. These costs increased $39,000 during the second
quarter of 1995 as compared to the second quarter of 1994, primarily due to an
increase in allocated internal overhead.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization expense decreased $17,000 during the
second quarter of 1995 as compared with the second quarter of 1994. The
decrease is primarily due to lower net capitalized costs in 1995 as compared
with 1994.
INTEREST EXPENSE
Interest expense increased $39,000 during the second quarter of 1995 as compared
with the second quarter of 1994 as a result of HEC's borrowings under its line
of credit during the second quarter of 1995.
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 $2.875 per share and HEC's original cost basis of $6.50 per share.
MISCELLANEOUS INCOME (EXPENSE)
Miscellaneous income (expense) consists primarily of HEC's direct interest
income, as well as HEC's share of HEP's interest income, facilities income from
two gathering systems in New Mexico, pipeline revenue, equity in loss of
affiliate and miscellaneous income or expense. The decrease of $270,000 during
the second quarter of 1995 as compared with the second quarter of 1994 is
primarily due to an increase in HEP's equity in loss of affiliate due to an
impairment of oil and gas properties recorded by HEP's affiliate. The remaining
decrease is comprised of numerous other items, none of which are individually
significant.
INCOME TAX BENEFIT
There was no income tax benefit recorded in either 1995 or 1994 due to the
existence of net operating loss carryforwards.
FIRST SIX MONTHS 1995 COMPARED TO FIRST SIX MONTHS 1994
The comparisons for the first six months of 1995 and the first six months of
1994 are consistent with those discussed in the second quarter of 1995 compared
to the second quarter of 1994 except for the following:
OIL REVENUE
Oil revenue increased $76,000 during the first six months of 1995 as compared
with the first six months of 1994 due to an increase in oil prices from $15.75
per barrel in 1994 to $16.73 per barrel in 1995 combined with a slight increase
in oil production from 61,000 barrels in 1994 to 62,000 barrels in 1995. The
production increase is due to increased production from developmental drilling
projects in West Texas partially offset by normal production declines.
GAS REVENUE
Gas revenue decreased $611,000 during the first six months of 1995 as compared
with the same period in 1994 due to a decrease in gas prices from $2.28 per mcf
in 1994 to $1.69 per mcf in 1995 combined with a decrease in production from
922,000 mcf in 1994 to 880,000 mcf in 1995. The decrease in production is due
to normal production declines and allowable production limits.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties represents HEC's pro rata share of the
write-off of HEP's Indonesian operations.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 11 of Form 10-K for the year ended
December 31, 1994, Item 1 - Note 4 of Form 10-Q for the quarter ended
March 31, 1995 and Item 1 - Note 5 of Form 10-Q for the quarter ended
June 30, 1995.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made to Part II, Item 4 of Form 10-Q for the quarter ended
March 31, 1995.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
10.20 Loan Agreement with NBD Bank dated May 19, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLWOOD ENERGY CORPORATION<PAGE>
Date: August 11, 1995 By: Robert S. Pfeiffer
------------------------- ---------------------------
Robert S. Pfeiffer, Vice
President
(Chief Financial Officer)<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1995 for Hallwood Energy Partners, L.P. and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000319019
<NAME> HALLWOOD ENERGY CORPORATION
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 2,022
<SECURITIES> 0
<RECEIVABLES> 535
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,416
<PP&E> 116,158
<DEPRECIATION> (106,302)
<TOTAL-ASSETS> 18,431
<CURRENT-LIABILITIES> 2,684
<BONDS> 0
<COMMON> 421
0
4
<OTHER-SE> 9,541
<TOTAL-LIABILITY-AND-EQUITY> 18,431
<SALES> 2,527
<TOTAL-REVENUES> 2,527
<CGS> 0
<TOTAL-COSTS> 2,447
<OTHER-EXPENSES> 82
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204
<INCOME-PRETAX> (206)
<INCOME-TAX> 0
<INCOME-CONTINUING> (206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (206)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226
May 19, 1995
Hallwood Energy Corporation
4582 South Ulster Street Parkway
Suite 1700, Stanford Place III
Denver, Colorado 80237
Re: $1,500,000 Credit Authorization to Make Loans expiring November
19, 1995
Ladies and Gentlemen:
The terms and conditions under which NBD Bank (the "Bank") may, in its
sole and uncontrolled discretion, make loans to Hallwood Energy Corporation, a
Texas corporation (the "Company"), are as follows:
1. Definitions. As used herein the following terms shall have the
following respective meanings:
"Acceleration Event" means the written demand by the Bank that all
amounts owed under this agreement are to be repaid in accordance with paragraph
5(e), which demand may be made by the Bank at any time in its sole discretion.
"Authorization Amount" means $1,500,000 from the date hereof until the
Initial Maturity Date, which amount shall thereafter be reduced on the first
Business Day of each March, June, September, and December thereafter, beginning
with the first such date thereafter by the amounts required to be paid under
paragraph 5(a), and shall be further reduced by any payments received by the
Bank under paragraph 5(d).
"Business Day" means a day other than a Saturday, Sunday or other day
on which the Bank is not open to the public for carrying on substantially all of
its banking functions.
"Collateral Value" means, as of any date, an amount equal to the
Current Market Value of the Eligible Securities.
"Current Market Value" of the Eligible Securities as of any day means
the closing sale price of the units or other securities on the preceding
Business Day, as appearing on any regularly published reporting or quotation
service, multiplied by the number of units or securities included as Eligible
Securities.
"Dollars" and "$" means the lawful money of the United States of
America.
"Eligible Securities" means, as of any date, those Units owned
beneficially and of record by the Company which constitute Margin Stock and in
which the Company has granted and pledged a first-priority security interest to
the Bank pursuant to the Pledge Agreement, plus such other Margin Stock as has
been pledged to the Bank as security for the Loans pursuant to documentation
acceptable to the Bank in its sole discretion.
"Event of Default" means any of the events or conditions described in
paragraph 12.
"Floating Rate" means the per annum rate equal to the sum of (a) two
percent (2%) per annum plus (b) the Prime Rate in effect from time to time;
which Floating Rate shall change simultaneously with any change in such Prime
Rate.
"generally accepted accounting principles" means generally accepted
accounting principles applied on a basis consistent with that reflected in the
most recent audited financial statements of the Company submitted to the Bank
prior to the date hereof.
"HCRC" means Hallwood Consolidated Resources Corporation, a Delaware
corporation.
"HCRC Credit Agreement" means the Amended and Restated Credit
Agreement dated as of March 31, 1995, among HCRC, Hallwood Consolidated Partners
L.P., the banks listed therein, First Union National Bank of North Carolina, as
Collateral Agent, and Morgan Guaranty Trust Company of New York, as Agent, as it
may be modified or amended from time to time.
"HEP" means Hallwood Energy Partners, L.P., a publicly-traded Delaware
limited partnership, the general partner of which is the Company.
"HEP Credit Agreement" means the Second Amended and Restated Credit
Agreement dated as of March 31, 1995, among HEP, HEP Operating Partners L.P.,
EDP Operating, Ltd., EM Nominee Partnership Company, Concise Oil and Gas
Partnership, May Energy Partners Operating Partnership Ltd., the banks listed
therein, First Union National Bank of North Carolina, as Collateral Agent, and
Morgan Guaranty Trust Company of New York, as Agent, as it may be modified or
amended from time to time.
"Hallwood Companies" means, collectively, the Company, HEP, and HCRC.
"Initial Maturity Date" means the date which is six months after the
date of this agreement.
"Interest Payment Date" means the first Business Day of each month
occurring after the date hereof, commencing on July 1, 1995.
"Lien" means any pledge, assignment, hypothecation, mortgage, security
interest, deposit arrangement, option, conditional sale or title retaining
contract, sale and leaseback transaction, financing statement filing, lessor's
or lessee's interest under any lease, subordination of any claim or right, or
any other type of lien, charge, encumbrance, preferential arrangement or other
claim or right.
"Loan" means any borrowing pursuant to paragraph 2.
"Margin Stock" has the same meaning as set forth in Regulation U,
provided, however, that for the purpose hereof, options, puts, calls, and any
combination thereof shall not qualify as Eligible Securities or be ascribed any
value in the Collateral Value.
"Maturity Date" means the date which is six months after the date of
this agreement, initially the date on which the authorization to make the Loans
expires, as such date may be extended from time to time under paragraph 6.
"Maximum Loan Value" means the maximum loan value assigned to Margin
Stock from time to time by the Board of Governors of the Federal Reserve System
under 12 C.F.R. Part 221.8 or any successor thereto. As of the date of this
agreement, the maximum loan value of Margin Stock is fifty percent (50%) of its
current market value.
"Note" means the promissory note of the Company evidencing the Loans,
in substantially the form annexed hereto as Exhibit A, as amended or modified
from time to time and together with any promissory note or notes issued in
exchange or replacement therefor.
"Overdue Rate" means a rate per annum that is equal to the sum of
three percent (3%) per annum plus the Floating Rate.
"Permitted Liens" means (i) Liens for taxes not delinquent or for
taxes being contested in good faith by appropriate proceedings and as to which
adequate financial reserves have been established on its books and records; (ii)
Liens created and maintained in the ordinary course of business which are not
material in the aggregate, and which would not have a material adverse effect on
the business or operations of the Company and which constitute (A) pledges or
deposits under workers' compensation laws, unemployment insurance laws or
similar legislation, (B) good faith deposits in connection with bids, tender,
contracts or leases to which the Company is a party for a purpose other than
borrowing money or obtaining credit, including rent security deposits and liens
arising under operating agreements affecting the Company's oil and gas
properties, (C) liens imposed by law, such as those of carrier, warehousemen and
mechanics, if payment of the obligation secured thereby is not yet due, (D)
Liens securing tax, assessments or other governmental charges or levies not yet
subject to penalties for nonpayment, and (E) pledges or deposits to secure
public or statutory obligations of the Company; and (iii) other Liens listed on
Schedule I hereto, but no extensions or renewals thereof.
"Person" or "person" shall include an individual, a corporation, an
association, a partnership, a trust or estate, a joint stock company, an unin-
corporated organization, a joint venture, a trade or business (whether or not
incorporated), a government (foreign or domestic) and any agency or political
subdivision thereof, or any other entity.
"Pledge Agreement" means the Continuing Pledge Agreement entered into
by the Company for the benefit of the Bank pursuant to this agreement,
substantially in the form of Exhibit B hereto, as amended or modified from time
to time.
"Prime Rate" means the per annum rate announced by the Bank from time
to time as its "prime rate" (it being acknowledged that such announced rate may
not necessarily be the lowest rate charged by the Bank to any of its customers),
which Prime Rate shall change simultaneously with any change in such announced
rate.
"Principal Payment Date" means the first Business Day of each March,
June, September, and December.
"Regulation U" means Regulation U promulgated by the Board of
Governors of the Federal Reserve System (12 C.F.R. Part 221 et seq.), as such
regulation is now in effect and as it may hereafter be amended.
"SEC" means the United States Securities and Exchange Commission and
any successor agency.
"SEC 10 Value" means the standardized measure of discounted future net
cash flows from oil and gas reserves under the guidelines set forth by the SEC.
"Security Documents" means, collectively, the Pledge Agreement and all
other related agreements and documents, including financing statements and
similar documents, delivered pursuant to this agreement or otherwise entered
into by any person to secure the Loans.
"Tangible Net Worth" of any person means, as of any date, (a) the
amount of any capital stock, paid-in capital, and similar equity accounts plus
(or minus, in the case of a deficit) the capital surplus and retained earnings
of the person and the amount of any foreign currency translation adjustment
account shown as a capital account of the person, less (b) the net book value of
all items of the following character which are included in the assets of such
person: (i) goodwill, including without limitation the excess of cost over book
value of any asset, (ii) organization or experimental expenses, (iii)
unamortized debt discount and expense, (iv) patents, trademarks, trade names,
and copyrights, (v) treasury stock, (vi) deferred taxes and deferred charges,
(vii) franchises, licenses, and permits, and (viii) other assets which are
deemed intangible assets under generally accepted accounting principles.
"Units" means units of limited partner interests in HEP.
2. Loans. The Bank may issue a Loan to the Company only if, at the
time a Loan is to be made, the aggregate outstanding principal amount of Loans
made by the Bank to the Company hereunder (including the requested Loan) does
not exceed the least of (a) the Authorization Amount and (b) 50% of the
Collateral Value and (c) the Maximum Loan Value of the Current Market Value of
the Eligible Securities. All Loans made prior to the Initial Maturity Date
shall be used only to fund the Company's repurchase of common and preferred
stock issued by the Company, or to reimburse the Company for amounts expended
prior to the date of this agreement for the purpose of repurchasing the
Company's stock; all Loans made on or after the Initial Maturity Date will be
used for working capital purposes. The Loans shall be evidenced by the Note,
payable no later than the Maturity Date, with interest payable prior to maturity
(whether on acceleration or otherwise) no later than each Interest Payment Date
and at maturity (whether on acceleration or otherwise) at the Floating Rate, and
after an Event of Default has occurred on demand at the Overdue Rate. All Loans
shall be in the minimum amount of $50,000 and in integral multiples thereof.
3. Request for Loans. The Company shall give the Bank a written
request, or a verbal request followed immediately by a written request, for each
requested Loan not later than 1:00 p.m. Detroit time one (1) Business Day prior
to the date the Loan is requested to be made, (a) identifying the purpose for
which the Loan proceeds are to be used, and (b) certifying that there has been
no change in the value of the Eligible Securities from that shown on the most
recent report delivered under paragraph 9(b), which change would cause,
immediately following the requested Loan being made, the aggregate outstanding
principal amount of Loans to exceed the limitation stated in paragraph 2. Each
request for a Loan, and each acceptance by the Company of Loan proceeds, shall
be deemed to constitute a representation and warranty by the Company that the
representations and warranties contained in paragraph 10 are true and correct on
and as of the date of such request or acceptance as if such representations and
warranties were made on and as of such date, and that the Company is in
compliance with the covenants contained in paragraph 10 on and as of such date.
4. Increased Costs; Limitations on Requests. The Company agrees
that in the event that any applicable law, treaty, rule or regulation (whether
domestic or foreign) now or hereafter in effect (including without limitation
the Federal Deposit Insurance Act) and whether or not presently applicable to
the Bank, or any interpretation or administration thereof by any governmental
authority or compliance by the Bank with any guideline, request or directive of
any such authority (whether or not having the force of law), shall (i) impose,
modify or deem applicable any insurance assessment or reserve, special deposit
or similar requirement against assets of, deposits with or for the account of,
or credit extended by the Bank, or (ii) affect the amount of capital required or
expected to be maintained by the Bank or its parent bank holding company, and
such action results in increasing the Bank's costs allocable to the Loans or
reduces any sums receivable by the Bank thereunder, the Company shall pay to the
Bank, from time to time upon request of the Bank, additional amounts sufficient
to compensate the Bank for such increased costs or reduced sum receivable
related thereto. A detailed statement as to the amount of such increased cost
or reduced sum receivable, prepared in good faith and submitted by the Bank to
the Company, shall be conclusive and binding for all purposes absent manifest
error in computation.
5. Mandatory Payments. In addition to any payments required to be
made under paragraph 2:
(a) Scheduled Principal Payments. On the Principal Payment
Dates, beginning with the first such day after the Initial Maturity Date, the
Company shall pay the Bank an amount equal to the amount sufficient to amortize
the principal amount of the Loans outstanding on the Initial Maturity Date with
quarterly payments made over a four-year period.
(b) Violation of Authorization Amount. If at any time the
principal amount of the Loans exceeds the Authorization Amount, the Company
shall immediately pay to the Bank an amount not less than the amount of such
excess.
(c) Violation of Margin Amount. If at any time the principal
amount of the Loans exceeds 66 2/3% of the Collateral Value, the Company shall
immediately (i) pay to the Bank an amount sufficient to reduce the principal
amount of the outstanding Loans to an amount not greater than 50% of the
Collateral Value, or (ii) provide additional Margin Stock collateral to the Bank
sufficient to increase the Collateral Value to an amount such that 50% of the
Collateral Value is not less than the principal amount of the Loans, or (iii)
perform some combination of making Loan payments and providing additional Margin
Stock collateral such that the principal amount of the Loan is not greater than
50% of the Collateral Value.
(d) Partnership Distributions. If the Company receives any
dividends or other distributions in its capacity as a holder of Units which
exceed twenty cents ($.20) during any calendar quarter, (i) the Company shall
pay such excess to the Bank, to be applied against the outstanding principal of
the Loans, and (ii) the Authorization Amount shall be reduced by the amount of
such excess.
(e) Acceleration Event Payments. In the event the Bank declares
an Acceleration Event, all principal amounts then outstanding shall be due and
payable in two equal amounts plus interest on the next two successive Principal
Payment Dates, and all other amounts due or to be due hereunder shall be due and
payable on the last of such successive Principal Payment Dates.
6. Extension of Maturity Date. The Bank consents to extend the
Maturity Date as of the Initial Maturity Date for one year. Thereafter, the
Company may request, by written notice to the Bank given not less than 60 days
before the date of the Maturity Date then in effect, to extend the Maturity Date
then in effect for an additional one year. If the Bank, in its sole discretion,
consents to such request, the Maturity Date then in effect shall be so extended.
The Bank shall respond to the Company's request not later than 30 days before
the Maturity Date then in effect; the failure of the Bank to respond by such
date shall not be deemed a consent to the extension request. The Company shall
pay the Bank an extension fee of twenty-five one-hundredths of one percent
(.25%) of the Authorization Amount initially available during the extended term
on or before the first Business Day of each extension, including the extension
effective as of the Initial Maturity Date. Failure to extend the Maturity Date
under this paragraph shall be deemed to be an Acceleration Event, and all
amounts due hereunder shall be repaid in accordance with paragraph 5(e).
7. Security. All indebtedness of the Company to the Bank shall be
secured by first priority security interests in all Units now owned by the
Company, which security interests shall be granted pursuant to the Pledge
Agreement.
8. Conditions of Loans. Prior to or simultaneously with its initial
Loan hereunder, the Company shall furnish to the Bank the following documents
and payments, each in form and substance satisfactory to the Bank:
(a) Certified copies of such corporate documents of the Company,
including those evidencing necessary corporate action with respect to this
agreement, the Note, the Security Documents and the Loans hereunder, as the Bank
shall request.
(b) The Note, duly executed by an authorized officer of the
Company.
(c) Each Security Document, duly executed by an authorized
officer of the Company, including without limitation all assignments separate
from certificate, financing statements, and other documents requested by the
Bank to perfect its security interest in the collateral therein described.
(d) An opinion of counsel to the Company, in form and substance
satisfactory to the Bank, with respect to the matters set forth in subparagraphs
(a) through (e) of paragraph 10, and such other matters as the Bank may request.
(e) A Federal Reserve System Form U-1 dated as of the date of
the initial Loan, with appropriate insertions duly executed by the Company, in
form and substance acceptable to the Bank.
(f) An arrangement fee of $15,000.
(g) Such other documents and agreements requested by the Bank.
9. Reporting Requirements. The Company will, so long as this
agreement is in effect, furnish or cause to be furnished to the Bank the
following financial statements, information and certificates, each in form and
substance satisfactory to the Bank, at the times indicated:
(a) Promptly and in any event within three calendar days after
becoming aware of any Event of Default or any event or condition which, with
notice or lapse of time, or both, would constitute an Event of Default, a
statement of the Company describing the Event of Default, event, or condition,
and the action which the Company has taken and proposes to take with respect
thereto.
(b) On each Monday, a certificate of the Company's chief
financial officer or authorized individual (i) describing in detail the amount
and Current Market Value of all Eligible Securities as of the preceding Business
Day, (ii) identifying each tangible asset sold after all sales of tangible
assets after the date of this agreement have exceed $100,000 in the aggregate;
and (iii) identifying all Liens granted by the Company on or after the date of
this agreement.
(c) As soon as available, and in any event within 50 days after
the end of each of the first three fiscal quarters of the Company, the Company's
Quarterly Report on Form 10-Q as filed with the SEC, together with a certificate
of the Company's chief financial officer stating that no Event of Default has
occurred and is continuing or, if an Event of Default has occurred and is
continuing, a statement setting forth the details thereof and the action which
the Company has taken and proposes to take with respect thereto.
(d) As soon as available and in any event within 120 days after
the end of each fiscal year of the Company, the Company's Annual Report on Form
10-K as filed with the SEC, together with a certificate of the Company's chief
financial officer stating that no Event of Default has occurred and is
continuing or, if an Event of Default has occurred and is continuing, a
statement setting forth the details thereof and the action which the Company has
taken and proposes to take with respect thereto.
(e) As soon as available and in any event within 50 days after
the end of each of the first three fiscal quarters of HEP, HEP's Quarterly
Report on Form 10-Q as filed with the SEC, together with a certificate of HEP's
chief financial officer stating that no event of default has occurred and is
continuing under the HEP Credit Agreement or, if such an event of default has
occurred and is continuing, a statement setting forth the details thereof and
the action which HEP has taken and proposes to take with respect thereto.
(f) As soon as available and in any event within 120 days after
the end of each fiscal year of HEP, HEP's Annual Report on Form 10-K as filed
with the SEC, together with a certificate of HEP's chief financial officer
stating that no event of default has occurred and is continuing under the HEP
Credit Agreement or, if such an event of default has occurred and is continuing,
a statement setting forth the details thereof and the action which HEP has taken
and proposes to take with respect thereto.
(g) As soon as available and in any event within 50 days after
the end of each of the first three fiscal quarters of HCRC, HCRC's Quarterly
Report on Form 10-Q as filed with the SEC.
(h) As soon as available and in any event within 120 days after
the end of each fiscal year of HCRC, HCRC's Annual Report on Form 10-K as filed
with the SEC.
(i) Within 120 days after the end of each fiscal year of the
Company, an annual reserve report of the Hallwood Companies, and, if requested
by the Bank, a summary update of such report not less than six months
thereafter.
(j) Promptly but in no event more than 3 Business Days after the
Company sells or otherwise disposes of any shares of the equity securities of
The Hallwood Group Incorporated, a certificate of the Company reporting such
disposition.
(k) Promptly but in no event more than 3 Business Days after the
occurrence of any Event of Default under the HEP Credit Agreement or HCRC Credit
Agreement, written notice from the Company reporting such event and the action
which HEP or HCRC, as the case may be, has taken and proposes to take with
respect thereto.
(l) Promptly, such other information as the Bank may reasonably
request.
10. Representations and Warranties. The Company represents and
warrants to, and covenants with, the Bank as follows:
(a) The Company is a corporation duly organized, existing and in
good standing under the laws of the State of Texas, and HEP is a limited
partnership duly organized, existing and in good standing under the laws of
Delaware, and each of the above is duly qualified to do business and is in good
standing in each additional jurisdiction where such qualification is necessary
except where the failure to so qualify would not have a material adverse effect
on the Company's business.
(b) The execution, delivery and performance of this agreement
and each Security Document to which it is a party by the Company and the
issuance of the Note by the Company, are within its corporate powers, have been
duly authorized, and are not in contravention of law or of the terms of its
Articles of Incorporation or By-laws, or of any undertaking to which the Company
is a party or by which it may be bound.
(c) This agreement and the Security Documents are, and the Note
when issued will be, valid, binding and enforceable in accordance with the terms
thereof, except as the enforceability thereof may be limited by bankruptcy,
insolvency, or similar laws affecting creditor's rights generally and rights of
acceleration, and as the availability of equitable remedies may be limited by
equitable principles of general applicability. The Security Documents grant to
the Bank a perfected and enforceable lien and security interest in all of the
collateral described therein, which is not void or voidable, subject to no other
Liens except security interests and liens granted to the Bank. The Company has
no other indebtedness and is not a party to any loan agreement or financial
lease except this agreement and the agreements and leases set forth on Schedule
I. The Company has no Liens on its assets except security interests and liens
granted to the Bank under the Security Documents, and Permitted Liens.
(d) No consent, approval or authorization of or declaration or
filing with any governmental authority on the part of the Company is required in
connection with the execution, delivery and performance of this agreement, the
Note or the Security Documents.
(e) Except as disclosed in the Company's or HEP's audited
financial statements for the fiscal year ending December 31, 1994, copies of
which have been provided to the Bank and Schedule I, no litigation or
governmental proceeding is pending or, to the knowledge of the officers of the
Company, threatened against the Company or HEP which involves any judgment or
liability which could have a material adverse effect on the Company's or HEP's
financial condition or business.
(f) All financial statements furnished by the Company to the
Bank are complete and accurate in all material respects and present fairly the
financial condition of the Company as of the dates of such statements and the
results of their operations for the periods covered thereby, in accordance with
generally accepted accounting principles, and there has been no material adverse
change in the condition of the Company, financial or otherwise, since the date
of the latest of such statements.
(g) The Company is in compliance with all laws, rules,
regulations, orders or similar requirements of any federal, state or local
governmental authority, including without limitation those relating to any
environmental matters, which noncompliance (in the event it was asserted through
appropriate action) would have a material adverse effect on the business or
financial condition of the Company.
(h) The Company has complied and will comply with all applicable
state and federal laws in repurchasing shares of its common and preferred stock
with the proceeds of the Loans.
(i) The Company will not make, pay, declare, or authorize any
dividend, payment, or other distribution in respect of its capital stock except
for (i) payment of dividends on its common stock not exceeding $3.50 per share
each fiscal year in accordance with the Company's historic practice and (ii) the
repurchases of stock prior to the Initial Maturity Date with the proceeds of the
Loans, provided, however, that the Company will not make, pay, declare, or
authorize any such dividend, payment, or other distribution upon the occurrence
of any Event of Default set forth in paragraph 12(a) which is not cured within 7
days after its occurrence, and any other Event of Default which is not cured
within 30 days after its occurrence.
(j) The Company will not request or accept any Loan in violation
of Regulation U, will not use the proceeds of any Loan in a manner which would
cause the Loans then outstanding to be in violation of Regulation U, and will
not seek to withdraw or substitute collateral if such withdrawal or substitution
would cause the Loan to be in excess of the Maximum Loan Value of the remaining
collateral.
(k) The Company will not permit or suffer the consolidated SEC
10 Value of the Company and its subsidiaries to be less than $10,000,000 at any
time during the period from the date of this agreement until the Loans are paid
in full.
(l) The Company will not permit or suffer the consolidated
Tangible Net Worth of the Company and its subsidiaries to be less than
$5,000,000 at any time during the period from the date of this agreement until
the Loans are paid in full.
11. Fees. The Company shall pay all filing fees and other expenses
incurred by the Bank in connection with this agreement, including without
limitation the reasonable fees and expenses of Dickinson, Wright, Moon,
Van Dusen & Freeman, counsel for the Bank, in connection with preparation of
this agreement and the documents required hereunder.
12. Events of Default. Each of the following shall be deemed an
Event of Default under this agreement, and upon the occurrence of any of the
following, the Note and all accrued interest thereon and all other indebtedness,
obligations and liabilities of the Company to the Bank shall be immediately due
and payable, without notice or demand:
(a) Failure to make any payment when due (whether on
acceleration or otherwise) of principal or interest on the Note, or any other
amount due under this agreement, or failure to satisfy the requirements of
paragraph 5(c), or failure to satisfy the requirements of paragraph 9(b) within
three Business Days after written notification to the Company; or
(b) any other default in the performance or observance of any
term, covenant or agreement of the Company contained in this agreement or the
Note, which default is not cured within 10 days after written notification to
the Company; or
(c) any default, beyond applicable grace and cure periods, under
the terms of any Security Document, or any Security Document shall for any
reason become unavailable to or unenforceable by the Bank; or
(d) any representation or warranty made by the Company herein,
or in any Security Document, or any statement or certificate furnished by the
Company or HEP hereunder, proves to have been untrue in any material respect
when made or deemed made; or
(e) the Company or HEP becomes insolvent or bankrupt, or makes
an assignment for the benefit of creditors or consents to the appointment of a
trustee or receiver for itself or for the greater part of its properties; or a
trustee or receiver is appointed for the Company or HEP without its consent; or
bankruptcy, reorganization or liquidation proceedings are instituted by or
against the Company or HEP; or
(f) any material adverse change occurs in the business or
financial condition of the Company or HEP.
13. Discretionary Loans; Acceleration Events. Notwithstanding any
provisions of this agreement, it is understood and agreed that the Bank shall at
no time be obligated to make any Loan hereunder, despite compliance with any
express conditions precedent thereto. The Bank shall be privileged at any time
to declare an Acceleration Event, following which the Note and all other
indebtedness, obligations and liabilities of the Company to the Bank hereunder
shall be payable pursuant to paragraph 5(e), despite the fact that there may not
then exist an Event of Default.
14. Interest Limitation. Notwithstanding any provisions of this
agreement, the Note or any Security Document, in no event shall the amount of
interest paid or agreed to be paid by the Company exceed an amount computed at
the highest rate of interest permissible under applicable law. If, from any
circumstances whatsoever, fulfillment of any provision of this agreement, the
Note or any Security Document, at the time performance of such provision shall
be due, shall involve exceeding the interest rate limitation validly prescribed
by law which a court of competent jurisdiction may deem applicable hereto, then,
ipso facto, the obligations to be fulfilled shall be reduced to an amount
computed at the highest rate of interest permissible under applicable law, and
if for any reason whatsoever the Bank receives as interest an amount which would
be deemed unlawful under such applicable law, such interest shall be
automatically applied to the payment of principal of the loans outstanding here-
under (whether or not then due and payable) and not for the payment of interest,
or shall be refunded to the Company if such principal and all other obligations
of the Company to the Bank have been irrevocably paid in full.
15. Notices. All notices, demands, request and consents hereunder
shall be in writing and shall be effective when received, except that any notice
or demand which by any provision of this agreement is required or provided to be
given or served to or upon the Company shall be deemed to have been given or
served for all purposes by being sent by recognized overnight courier service,
addressed as follows: c/o Robert S. Pfeiffer, Vice President-Finance, Hallwood
Petroleum, Inc., 4582 S. Ulster Street Parkway, Suite 1700, Denver, Colorado
80237, or, if any other address shall at any time be designated by the Company
in writing to the Bank, to such other address.
16. Miscellaneous. This agreement embodies the entire agreement and
understanding between the Company and the Bank and supersedes all prior agree-
ments and understandings relating to the subject matter hereof, and all existing
credit facilities of any kind of the Company with the Bank, including without
limitation any facility to make loans or issue letters of credit, all of which
are hereby terminated. No amendment, modification or waiver of any provision of
this agreement nor any consent to a departure therefrom shall be effective
unless the same shall be in writing and signed by the Bank. No failure of the
Bank or of the holder of the Note in exercising any right, power or privilege
hereunder shall affect such right, power or privilege, nor shall any single or
partial exercise thereof preclude any further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies of the Bank and
those of the holder of the Note under this agreement are cumulative and not
exclusive of any rights or remedies which either of them may otherwise have.
All payments to be made by the Company hereunder shall be made in immediately
available funds to the Bank at its main banking office in Detroit, Michigan not
later than 1:00 p.m. Detroit time on the date on which such payment shall become
due, and all payments received after 1:00 p.m. shall be deemed received on the
following Business Day. All financial terms used but not defined herein shall
be interpreted in accordance with generally accepted accounting principles. All
amounts due hereunder which are not paid when due (other than interest) shall
bear interest at the Overdue Rate. The Company indemnifies and holds the Bank
harmless against any loss, claim, damage or liability arising out of the
Company's repurchase of its securities with the proceeds of the Loan, and will
reimburse the Bank for any reasonable legal fees or other expenses incurred by
the Bank hereunder.
17. Waiver of Jury Trial. The Bank and the Company, after consulting
or having had the opportunity to consult with counsel, knowingly, voluntarily
and intentionally waive any right either of them may have to a trial by jury in
any litigation based upon or arising out of this agreement or any related
instrument or agreement or any of the transactions contemplated by this agree-
ment or any course of conduct, dealing, statements (whether oral or written) or
actions of either of them. Neither the Bank nor the Company shall seek to
consolidate, by counterclaim or otherwise, any such action in which a jury trial
has been waived with any other action in which a jury trial cannot be or has not
been waived. These provisions shall not be deemed to have been modified in any
respect or relinquished by either the Bank or the Company except by a written
instrument executed by both of them.
18. Governing Law. This agreement shall be governed by and construed
in accordance with the laws of the State of Michigan applicable to contracts
made and to be performed entirely within that state, without regard to the
choice of law principles thereof.
19. Binding Effect. All representations, warranties, covenants and
agreements herein contained shall be binding upon and inure to the benefit of
the respective successors and assigns of the parties hereto whether or not so
expressed.
Should the foregoing be agreeable to you, as it is to us, please indi-
cate your agreement and acceptance by executing and returning the enclosed copy
of this letter, whereupon this agreement shall be effective as of the date of
this letter.
Very truly yours,
NBD BANK<PAGE>
By: /s/ W. Scott Bennett
_________________________________
Its: W. Scott Bennett
Vice President
Agreed and accepted:
HALLWOOD ENERGY CORPORATION
By: /s/ Robert S. Pfeiffer
_____________________________
Its: Vice President
Dated: May 19, 1995
EXHIBIT A
SECURED AUTHORIZATION CREDIT NOTE
---------------------------------
$1,500,000 May 19, 1995
Detroit, Michigan
FOR VALUE RECEIVED, Hallwood Energy Corporation, a Texas corporation
(the "Company"), hereby promises to pay to the order of NBD BANK, a Michigan
banking corporation (the "Bank"), at its principal banking office in lawful
money of the United States of America and in immediately available funds, the
principal sum of One Million, Five Hundred Thousand and 00/100 Dollars
($1,500,000.00), or such lesser amount as is recorded on the schedule attached
hereto, or in the books and records of the Bank, on the Maturity Date, as
defined in the Loan Agreement referred to below; and to pay interest on the
unpaid principal balance hereof from time to time outstanding, in like money and
funds, for the period from the date hereof until the Loans evidenced hereby
shall be paid in full, at the rates per annum and on the dates provided in the
Loan Agreement referred to below.
The Bank is hereby authorized by the Company to record on its books
and records the date and amount of each Loan, the amount of each payment of
principal thereon and the other information required by the Bank, which books
and records shall constitute prima facie evidence of the information so
recorded, provided, however, that any failure by the Bank to record any such
information shall not relieve the Company of its obligation to repay the
outstanding principal amount of the Loans, all accrued interest thereon, and any
amount payable with respect thereto in accordance with the terms of this Note
and the Loan Agreement.
The Company and each endorser or guarantor hereof waive demand,
presentment, protest, diligence, notice of dishonor and any other formality in
connection with this Note. Should the indebtedness evidenced by this Note or
any part thereof be collected in any proceeding or be placed in the hands of
attorneys for collection, the Company agrees to pay, in addition to the
principal, interest and other sums due and payable hereon, all costs of
collecting this Note, including attorneys' fees and expenses.
This Note evidences one or more Loans made under a Letter Loan
Agreement of even date herewith (as amended, the "Loan Agreement"), among the
Company and the Bank, to which reference is hereby made for a statement of the
circumstances under which this Note is subject to prepayment and under which its
due date may be accelerated and for a description of the collateral and security
securing this Note. Capitalized terms used but not defined in this Note shall
have the respective meanings assigned to them in the Loan Agreement.
This Note is made under, and shall be governed by and construed in
accordance with, the laws of the State of Michigan applicable to contracts made
and to be performed entirely within such State and without giving effect to
choice of law principles of such State.
HALLWOOD ENERGY CORPORATION
By: /s/ Robert S. Pfeiffer
Its: Vice President
EXHIBIT B
CONTINUING PLEDGE AGREEMENT
PLEDGE: To induce NBD Bank (the "Bank"), of 611 Woodward Avenue, Detroit,
Michigan 48226, at its option, to make loans, extend or continue credit or some
other benefit, including guaranties, letters of credit and foreign exchange
contracts, present or future, direct or indirect, and whether several, joint or
joint and several (referred to collectively as "Liabilities"), to the
undersigned and its successors (the Pledgor"), and
(check if applicable)
___ to __________________________________________________________ and its
successors (Name of Borrower if other than Pledgor)
(the "Borrower"), and because the Pledgor has determined that executing this
Pledge is in its interest and to its financial benefit, the Pledgor pledges and
transfers to the Bank, and grants the Bank a continuing security interest in the
property listed below under the heading "Schedule of Collateral.: If the
Collateral consists of securities, the grant includes any stock rights, stock
dividends, liquidating dividends, new securities and other property to which the
pledgor may become entitled because it owns the Collateral. The Pledgor has
transferred the securities to the Bank. In the event the transfer is not
complete, the Pledgor will complete it within 10 days. This security interest
shall secure all Liabilities and includes principal, interest, expenses,
reasonable attorneys' fees, and all other costs of collection. The Pledgor
agrees to hold the Bank harmless from any liability caused by its reliance on
this Pledge.
SCHEDULE OF COLLATERAL:
Five Hundred Thirteen Thousand Four Hundred Eighty Seven (513,487) Units of
Hallwood Energy Partners, L.P.
including substitutions, replacements, additions and proceeds. Any securities
or other property of the Pledgor at any time in the custody, possession or
control of the Bank's commercial loan department, unless the receipt states
otherwise, shall be governed by this Pledge.
WARRANTIES AND COVENANTS: The Pledgor warrants it owns the Collateral free and
clear of any liens. The Pledgor will not attempt to sell or assign the
Collateral or create any lien or claim against it. The Pledgor agrees to
reimburse the Bank, on demand, for any amounts paid or advanced by the Bank for
the purpose of preserving all or any part of the Collateral. The Bank shall
exercise reasonable care in the custody an preservation of the Collateral to the
extent required by applicable statute. The Bank shall use its best efforts to
take any action the Pledgor may reasonably request in writing, but the failure
to do so shall not be deemed a failure to exercise reasonable care.
REGISTRATION RIGHTS: If any of the Collateral consists of securities not
registered under the Securities Act of 1933, and the issuer proposes to register
any of its securities, the Pledgor will give the Bank notice of that fact. In
addition, and at no cost to the Bank, the Pledgor will use its best efforts to
induce the issuer to register the pledged securities so that they may be
disposed of by public sale or other public disposition. Upon the completion of
registration, the Pledgor will deliver certificates without any restrictive
legend in exchange for the unregistered securities. The Pledgor indemnifies and
holds the Bank harmless against any loss, claim, damage or liability arising out
of the registration process, and will reimburse the Bank for any legal or other
expenses incurred by the Bank as a result.
INSTRUCTIONS REGARDING THE COLLATERAL: The Bank may act upon any instructions
given by the Pledgor whether in writing or not, with regard to additions or
substitutions or sale or other disposition of Collateral and its proceeds. The
Pledgor agrees that any additions to, substitutions for or proceeds of the
Collateral that it or the Borrower receives will be held for the Bank's benefit
and turned over to the Bank. The Pledgor also gives the Bank permission to have
the Collateral or any part of it transferred to or registered in the Bank's name
or in the name of any other person, firm or corporation, with or without
designation of the capacity of such nominee, and will hold the Bank harmless
from any liability or responsibility that might result. In furtherance of the
Bank's rights under this Pledge, the Pledgor irrevocably appoints the Bank as
its attorney-in-fact, with full power of substitution.
CONTINUED RELIANCE: The Bank may continue to make loans or extend credit to the
Borrower based on this Pledge until it receives written notice of termination
from the Pledgor. That notice shall be effective at the opening of the Bank for
business on the day after receipt of the notice. The termination will not
affect any of the rights given to the Bank in this Pledge with respect to any of
the Liabilities that were created, assumed or committed to prior to the Bank's
receipt of the notice, and all subsequent renewals, extensions, modifications
and amendments of the Liabilities. Upon receipt of the notice, the Bank does
not have to take any action against the Borrower or the Collateral in order to
maintain its rights. If the Pledgor is the Borrower, this Pledge is not
terminable.
WAIVERS: The Pledgor waives any right it may have to receive notice of any of
the following matters before the Bank enforces any of its rights: (a) the
Bank's acceptance of this Pledge, (b) any credit that the Bank extends to the
Borrower, (c) the Borrower's default, (d) any demand, or (e) any action that the
Bank takes regarding the Borrower, anyone else, any collateral, or any
Liability, which it might be entitled to take by law or under any other
agreement. No modification or waiver of this Pledge shall be effective unless
it is in writing and signed by the party against whom it is being enforced. The
Bank may waive or delay enforcing any of its rights without losing them. Any
waiver shall affect only the specific terms and time period stated in the
waiver. The Bank shall not be obligated to take any action in connection with
any conversion, call, redemption, retirement or any other event relating to any
of the Collateral.
REPRESENTATIONS BY PLEDGOR: If the Pledgor is a corporation, it represents that
it is a corporation duly organized, existing and in good standing under the laws
of its state of incorporation, and that the execution and delivery of this
Pledge and the performance of the obligations it imposes are within its
corporate powers, have been duly authorized by all necessary action of its board
of directors, and do not contravene the terms of its articles of incorporation
or by-laws. If the Pledgor is a general or limited partnership, it represents
that it is duly organized and existing and that the execution and delivery of
this Pledge and the performance of the obligations it imposes do not conflict
with any provision of its partnership agreement and have been authorized by all
necessary action of its partners. Each Pledgor represents that the execution
and delivery of this Pledge and the performance of the obligations it imposes,
do not violate any law and do not conflict with any agreement by which it is
bound, and that no consent or approval of any governmental authority or any
third party is required in connection with the execution or delivery of this
Pledge and the performance of the obligations it imposes, and that this Pledge
is a valid and binding agreement, enforceable according to its terms. Each
Pledgor further represents that all balance sheets, profit and loss statements,
and other information, if any, furnished to the Bank are accurate and fairly
reflect the financial condition of the organizations and persons to which they
apply on their effective dates, including contingent liabilities of every type,
which financial condition has not changed materially and adversely since those
dates.
NOTICES: Notice from one party to another relating to this Pledge shall be
deemed effective if made in writing (including telecommunications) and delivered
to the recipient's address, telex number or telecopier number set forth under
its name by any of the following means: (a) hand delivery, (b) registered or
certified mail, postage prepaid, (c) Federal Express, Purolator Courier or like
overnight courier service or (d) telecopy, telex or other wire transmission with
request for assurance of receipt in a manner typical with respect to
communications of that type. Notice made in accordance with this section shall
be deemed delivered on receipt if delivered by hand or wire transmission, on the
third business day after mailing if mailed by first class, registered or
certified mail, or on the next business day after mailing or deposit with an
overnight courier service if delivered by express mail or overnight courier.
MISCELLANEOUS: The Pledgor consents to (a) any extension, postponement,
renewal, modification and amendment of any Liability, (b) the release or
discharge of all or any part of any security for the Liabilities and (c) the
release or discharge or suspension of any rights and remedies against any person
who may be liable for the Liabilities. The Bank does not have to look to any
other right, any other collateral, or any other person for payment before it
exercises its rights under the Pledge. The Pledgor's obligations to the Bank
under this Pledge are not subject to any condition, precedent or subsequent, and
shall not be released or affected by any change in the composition or structure
of the Borrower or Pledgor, including a merger or consolidation with any other
person or entity. If this Pledge is signed by more than one person, all shall
be jointly and severally bound. This Pledge is binding on the Pledgor and its
heirs, successors and assigns, and is for the benefit of the Bank and its
successors and assigns. This Agreement is governed by Michigan law. The use of
section headings shall not limit the provisions of this Pledge.
WAIVER OF JURY TRIAL: The Bank and the Pledgor, after consulting or having had
the opportunity to consult with counsel, knowingly, voluntarily and
intentionally waive any right either of them may have to a trial by jury in any
litigation based upon or arising out of this Pledge or any related instrument or
agreement, or any of the transactions contemplated by this Pledge, or any course
conduct, dealing, statement (whether oral or written), or actions of either of
them. Neither the Bank not the Pledgor shall seek to consolidate, by
counterclaim of otherwise, any such action in which a jury trial has been waived
with any other action in which a jury trial cannot be or has not been waived.
These provisions shall not be deemed to have been modified in any respect or
relinquished by either the Bank or the Pledgor except by a written instrument
executed by both of them.
Dated: May 19, 1995 PLEDGOR: Hallwood Energy Corporation
Address: /s/ Robert S. Pfeiffer
4582 S. Ulster Street Parkway
Denver, Colorado 80237 By: Robert S. Pfeiffer, Vice President
SCHEDULE I
Liens
- -----
None
Leases
- ------
The Company is the guarantor of an office lease
of Hallwood Realty Corporation, an affiliate of The Hallwood Group Incorporated,
in Dallas, Texas, with a lease payment of approximately $170,000 per year
through May 31, 1999.
Litigation
- ----------
Edward E. Bailey, Sally Bailey, Brian J. Adolph
and Marc G. Charland vs. Hallwood Petroleum, Inc., Hallwood Petroleum Indonesia,
Inc., Hallwood Energy Corporation and Hallwood Energy Companies, filed in
District Court, City and County of Denver, Colorado on April 7, 1995
