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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HALLWOOD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 1311 84-1489099
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
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3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219
(214) 528-5588
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CATHLEEN OSBORN, ESQ.
HALLWOOD ENERGY PARTNERS, L.P.
4582 S. ULSTER STREET PARKWAY
DENVER, COLORADO 80237
(303) 850-7373
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
W. ALAN KAILER
JENKENS & GILCHRIST,
A PROFESSIONAL CORPORATION
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202
(214) 855-4500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and the
satisfaction or waiver of all other conditions to the mergers described in the
enclosed Joint Proxy Statement/Prospectus.
If the securities being registered on this Form S-4 are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE(3)
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Common Stock, $.01 par value..... 10,000,000 shares $7.074 $70,740,000 $19,665.72
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Preferred Stock, $0.01 par
value.......................... 2,290,370 shares $9.337 $21,386,000 $5,945.31
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(1) Based upon the estimated number of shares that may be issued in the
transaction described herein.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended
(the "Securities Act"), based upon the book value as of September 30, 1998
of all shares of Hallwood Energy Corporation common stock and preferred
stock to be issued in the transaction described herein.
(3) Fee paid previously with preliminary proxy materials ($3,678.54 under file
000-19931, and offset payment of $14,746.67 under file 001-08921).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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HALLWOOD
HALLWOOD ENERGY ENERGY HALLWOOD CONSOLIDATED RESOURCES
PARTNERS, L.P. CORPORATION CORPORATION
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CONSOLIDATION PROPOSED
YOUR VOTE IS VERY IMPORTANT
We are asking you to approve a consolidation of Hallwood Energy Partners,
L.P., Hallwood Consolidated Resources Corporation and the energy interests of
The Hallwood Group Incorporated into the newly formed Hallwood Energy
Corporation.
As a result of the consolidation, public holders of Class A units of Energy
Partners will receive 0.7417 of a share of common stock of Energy Corporation
for each Class A unit they now hold and public holders of Class C units of
Energy Partners will receive one share of redeemable preferred stock of Energy
Corporation for each Class C unit they now hold. Public stockholders of
Consolidated Resources will receive 1.5918 shares of common stock of Energy
Corporation for each share of stock of Consolidated Resources they now hold.
Hallwood Group will receive 0.7417 of a share of common stock of Energy
Corporation for each Class A and Class B unit of Energy Partners that it now
holds. Hallwood Group will also contribute its energy interests to Energy
Corporation and in consideration will receive additional shares of common stock
of Energy Corporation. The consolidation should be, in almost all cases,
tax-free to stockholders of Consolidated Resources and unitholders of Energy
Partners.
After the consolidation, current public holders of Class A units of Energy
Partners will own 56% of the Energy Corporation common stock, current public
stockholders of Consolidated Resources will own 26% of the Energy Corporation
common stock and Hallwood Group will own 18% of the Energy Corporation common
stock.
After the consolidation is complete, shares of Energy Corporation common
stock will trade on NASDAQ under the symbol "HECO" and shares of Energy
Corporation preferred stock will trade on NASDAQ under the symbol "HECOP."
However, because this is the first public offering of Energy Corporation stock,
there is no established trading market for either the common stock or the
preferred stock.
The consolidation cannot be completed unless you approve it. We are asking
you to approve the consolidation at special meetings of unitholders and
stockholders. By voting for the consolidation you will also be voting for the
classified board of directors, the stockholder rights plan and the incentive
plan of Energy Corporation, which are described in detail in this document. In
addition, unitholders of Energy Partners are being asked to approve an amendment
to Energy Partners' partnership agreement to allow for the consolidation.
The boards of directors and the special committees of Consolidated
Resources and of the general partner of Energy Partners have unanimously
approved and recommend the approval of the consolidation. We believe the
consolidation will create a more efficient and profitable energy company and
will enhance the value of your investment.
WHETHER OR NOT YOU PLAN TO ATTEND YOUR MEETING, PLEASE COMPLETE, SIGN AND
MAIL THE ENCLOSED PROXY CARD. IF YOU FAIL TO RETURN YOUR PROXY CARD OR TO VOTE
IN PERSON AT A MEETING, THE EFFECT WILL BE A VOTE AGAINST THE CONSOLIDATION.
This document is first being mailed on May 4, 1999. It provides additional
information about the proposed consolidation. Please read this entire document
carefully.
Hallwood Energy Partners, L.P.
Hallwood Consolidated Resources Corporation
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED IF THIS DOCUMENT IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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SUMMARY..................................................... 1
The Parties............................................... 1
The Consolidation......................................... 2
Structure................................................. 3
Recommendation of the Special Committee of the Board of
Directors of Hallwood G.P. ............................ 4
Recommendation of the Special Committee of the Board of
Directors of Consolidated Resources.................... 4
Opinions of Financial Advisors............................ 4
The Meetings.............................................. 4
Conditions to the Consolidation; Waiver; Termination of
the Consolidation Agreement............................ 5
Conflicts of Interest..................................... 5
Differences in Rights of Unitholders and Stockholders..... 6
Summary Historical and Pro Forma Financial and Oil and Gas
Data................................................... 7
Summary Historical and Pro Forma Operating and Financial
Data As of and For the Year Ended December 31, 1998.... 8
Selected Comparative Per Unit/Share Data.................. 9
Comparative Per Unit/Share Information.................... 9
Comparative Market Data................................... 10
RISK FACTORS................................................ 11
There are a number of risks associated with the
consolidation.......................................... 11
There are a number of risks inherent in the oil and gas
business............................................... 13
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE............. 16
GENERAL INFORMATION......................................... 17
Voting Rights of Energy Partners Unitholders and
Consolidated Resources Stockholders.................... 17
Proxies; Solicitation and Revocation of Proxies........... 17
Abstentions; Broker Non-Votes............................. 18
THE CONSOLIDATION........................................... 19
Background of the Consolidation........................... 19
Recommendation of the Hallwood G.P. Special Committee and
the Hallwood G.P. Board................................ 22
Opinion of Energy Partners' Financial Advisor............. 24
Recommendation of the Consolidated Resources Special
Committee and the Consolidated Resources Board......... 29
Opinion of Consolidated Resources' Financial Advisor...... 31
Terms of the Consolidation; Conversion of Units or
Shares................................................. 37
Effective Time............................................ 38
The Consolidation Agreement............................... 39
Exchange of Certificates.................................. 41
Fractional Shares......................................... 41
Accounting Treatment...................................... 41
Consequences Under Federal Securities Laws; Resale of
Energy Corporation Stock............................... 41
Absence of Appraisal Rights............................... 42
Interests of Certain Persons in the Mergers and the
Consolidation.......................................... 42
Conflicts of Interest..................................... 42
Management and Board of Directors After the
Consolidation.......................................... 43
Amendment to the Energy Partners Partnership Agreement.... 43
Stock Options; Incentive Plan; Warrants................... 44
Expenses of the Consolidation............................. 49
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.................... 50
The Energy Partners Merger................................ 50
The Consolidated Resources Merger......................... 51
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Effect of Asset Contribution on Energy Corporation........ 51
Treatment of Energy Corporation........................... 52
Treatment of Energy Corporation Stockholders.............. 52
Reporting Obligations..................................... 52
SELECTED HISTORICAL FINANCIAL DATA.......................... 54
ENERGY PARTNERS SELECTED FINANCIAL DATA..................... 55
CONSOLIDATED RESOURCES SELECTED FINANCIAL DATA.............. 56
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...... 57
BUSINESS AND PROPERTIES..................................... 66
Overview.................................................. 66
Properties................................................ 66
Oil and Gas Reserves...................................... 68
Volumes, Sales Prices and Oil and Gas Production
Expense................................................ 70
Development, Exploration and Acquisition Capital
Expenditures........................................... 71
Productive Oil and Gas Wells.............................. 71
Oil and Gas Acreage....................................... 71
Drilling Activity......................................... 72
MANAGEMENT.................................................. 73
Directors and Officers.................................... 73
Director Compensation..................................... 75
EXECUTIVE COMPENSATION...................................... 76
Compensation of Executive Officers........................ 76
Option Grants and Exercises in Last Fiscal Year........... 77
Long-Term Incentive Plan.................................. 80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 82
DESCRIPTION OF ENERGY CORPORATION'S CAPITAL STOCK........... 85
Description of Common Stock............................... 85
Description of Preferred Stock............................ 85
Limitation of Liability and Indemnification............... 87
COMPARISON OF UNITHOLDER AND STOCKHOLDER RIGHTS............. 88
Management................................................ 88
Amendments................................................ 89
Liquidation Rights........................................ 90
Limitations of Liability of Management.................... 90
Indemnification........................................... 91
Derivative Actions........................................ 91
Inspection of Books and Records........................... 91
Distributions and Dividends............................... 92
Changes of Control........................................ 92
Transferability........................................... 93
Appraisal Rights.......................................... 93
Fiduciary Duties.......................................... 93
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ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OF THE
ORGANIZATIONAL DOCUMENTS OF ENERGY CORPORATION............ 95
Classified Board of Directors............................. 95
Number of Directors; Removal; Filling Vacancies........... 95
Advance Notice Provisions for Director Nominations and
Stockholder Proposals.................................. 96
Preferred Shares.......................................... 96
Amendment of the Energy Corporation Certificate of
Incorporation.......................................... 96
Business Combinations Under Delaware Law.................. 97
Stockholders' Rights Plan................................. 97
WHERE YOU CAN GET INFORMATION............................... 99
STOCKHOLDER PROPOSALS....................................... 99
OTHER MATTERS............................................... 100
LEGAL MATTERS............................................... 100
EXPERTS..................................................... 100
GLOSSARY OF OIL AND GAS TERMS............................... 101
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APPENDIX A MERGER AND ASSET CONTRIBUTION AGREEMENT
APPENDIX B OPINION OF KIRKPATRICK ENERGY ASSOCIATES
APPENDIX C OPINION OF DAIN RAUSCHER WESSELS
APPENDIX D REPORT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
APPENDIX E THIRD AMENDMENT TO THE THIRD AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF HALLWOOD ENERGY PARTNERS, L.P.
APPENDIX F 1999 LONG TERM INCENTIVE PLAN FOR HALLWOOD ENERGY CORPORATION
APPENDIX G HALLWOOD ENERGY PARTNERS, L.P., FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
APPENDIX H HALLWOOD CONSOLIDATED RESOURCES CORPORATION, FORM 10-K FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998
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QUESTIONS AND ANSWERS ABOUT THE CONSOLIDATION
1. Q: WHY IS THE CONSOLIDATION BEING PROPOSED?
A: The boards of directors and the special committees of Consolidated
Resources and of the general partner of Energy Partners have each determined
that the consolidation is likely to benefit the security holders of Consolidated
Resources and Energy Partners in several ways. The combined entity will be
larger, with a greater number of stockholders and greater equity capitalization
than either Energy Partners or Consolidated Resources. Furthermore, Hallwood
Group and the general partner of Energy Partners have agreed to relinquish their
indirect interests in acquisitions and drilling conducted by, and fees paid by,
Energy Partners. This will simplify the structure of the entities and reduce
ongoing expenses. The consolidation will also eliminate the cross-ownership
between Energy Partners and Consolidated Resources.
For these reasons, we believe that investors, especially institutional
investors, are more likely to invest in the combined entity. This should result
in greater liquidity for existing investors. For the same reasons, we believe
that the combined entity will be better able than either Energy Partners or
Consolidated Resources to attract new investors and, therefore, to obtain
financing to pursue additional drilling and acquisition projects. Finally, the
combined entity will eliminate duplicative record keeping and reporting.
We also believe that the consolidation will provide investors increased
opportunity for growth of their investment because, unlike Energy Partners,
which pays quarterly distributions on its Class A and Class C units, Energy
Corporation does not intend to pay dividends on its common shares, and will,
therefore, have greater cash available for drilling and acquisitions than the
total cash available to Energy Partners and Consolidated Resources.
2. Q: WHAT WILL I RECEIVE IN THE CONSOLIDATION?
A: Class A units in Energy Partners will be converted into 0.7417 of a share
of Energy Corporation common stock. For example, if you own 100 Class A units,
you will receive 74 shares of Energy Corporation common stock.
Class C units in Energy Partners will be converted into one share of Energy
Corporation redeemable preferred stock. For example, if you own 100 Class C
units, you will receive 100 shares of preferred stock. Stock in Consolidated
Resources will be converted into 1.5918 shares of Energy Corporation common
stock. For example, if you own 100 shares of stock in Consolidated Resources,
you will receive 159 shares of Energy Corporation common stock.
After the consolidation, current public holders of Class A units of Energy
Partners will own 56% of the Energy Corporation common stock, current public
stockholders of Consolidated Resources will own 26% of the Energy Corporation
common stock and Hallwood Group will own 18% of the Energy Corporation common
stock.
Energy Corporation will not issue fractional shares of common or preferred
stock. Instead, the number of shares you receive will be rounded up or down to
the nearest whole share. Half shares will be rounded up to the next whole share.
3. Q: WHAT VOTE IS REQUIRED TO APPROVE MY MERGER?
A: In order to approve your merger, the holders of the majority of each
class of units of Energy Partners or shares of Consolidated Resources common
stock must vote in favor of your merger.
Individuals that are officers or directors of Energy Partners and/or Energy
Corporation hold 100 Class A units and 106 Class C units of Energy Partners and
369 shares of Consolidated Resources common stock. These individuals have
indicated that they intend to vote their units and shares in favor of the
consolidation.
4. Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope as
soon as possible so that your units of Energy Partners or shares of Consolidated
Resources stock may be represented at the appropriate meeting. Both of the
meetings will be held on Tuesday, May 25, 1999.
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5. Q: IF MY UNITS OR SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY UNITS
OR SHARES FOR ME?
A: Your broker may vote your units or shares on the consolidation only if
you instruct your broker how to vote. You should follow the directions provided
by your broker regarding how to instruct your broker to vote your units or
shares. If you do not tell your broker how to vote, your units or shares will
not be voted on the consolidation. Your failure to vote will have the same
effect as a vote against the consolidation. If you hold your shares or units in
a brokerage account, you cannot vote in person at your meeting.
6. Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before your proxy is voted at
your meeting. You may do this by sending a written notice stating that you would
like to revoke your proxy or by completing and submitting a new proxy card. You
may also attend your meeting and vote in person. Simply attending the meeting,
however, will not revoke your proxy. If you hold your shares or units in a
brokerage account and you have instructed your broker to vote, you must follow
your broker's instructions regarding how to change your vote.
7. Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: No. After the consolidation is completed, you will receive written
instructions for exchanging units of Energy Partners and shares in Consolidated
Resources for Energy Corporation stock.
8. Q: I'VE LOST MY CERTIFICATE. WHAT SHOULD I DO?
A: After the close of the consolidation, you will receive a letter of
transmittal with complete instructions.
9. Q: I'M STILL HOLDING A CERTIFICATE FOR A PREDECESSOR ENTITY OF CONSOLIDATED
RESOURCES OR ENERGY PARTNERS. CAN I SEND IN MY OLD CERTIFICATE?
A: Yes. All adjustments for exchanges or
splits will be made prior to the issuance of your Energy Corporation share
certificate. You will also receive any unpaid Energy Partners distributions,
without interest, at that time.
10. Q: WHAT WILL HAPPEN IF I DO NOT EXCHANGE MY ENERGY PARTNERS UNIT
CERTIFICATES OR CONSOLIDATED RESOURCES SHARE CERTIFICATES FOR AN ENERGY
CORPORATION SHARE CERTIFICATE?
A: Once the consolidation is complete, Energy Partners and Consolidated
Resources will no longer trade in any market, and your units or shares will be
converted into the right to receive shares of Energy Corporation. If you do not
return your old certificate(s) in exchange for an Energy Corporation
certificate, your shares of Energy Corporation will eventually be abandoned
after a period of 5-7 years in compliance with the regulations of your state of
residence which provide that ownership of your shares will become the property
of your state.
11. Q: WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION?
A: If you own units in Energy Partners, the exchange of your units for stock
of Energy Corporation should be treated as a transfer of your interest to Energy
Corporation and should, in almost all cases, be tax-free to you. In those
infrequent cases where your share of Energy Partners' liabilities exceeds your
basis in your units, you will recognize gain to the extent of that excess. This
gain should be treated, for the most part, as capital gain. Additional
information will be included in the final Schedule K-1, which we anticipate
mailing before March 2000. After the consolidation, you will be a stockholder
rather than a limited partner, so you will no longer receive the pass-through
tax treatment accorded to partners and you will no longer receive a Schedule
K-1.
If you own shares of stock of Consolidated Resources you should not
recognize any gain or loss as a result of the consolidation.
12. Q: HOW DO I DETERMINE A COST BASIS FOR MY SHARES OR UNITS?
A: Consolidated Resources: If you received your shares of Consolidated
Resources in the 1992 conversion of Hallwood Consolidated Partners, L.P., you
will need to obtain a copy of your 1992 Substitute Schedule K-1. This form was
probably filed in 1993 with your 1992 federal income tax return. For most
individuals, your adjusted tax basis is equal to the amount reported in column
(d) of Line J, Analysis of Partner's
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Capital Account, less the 1992 cash distributions reported on Line 20 of the
Schedule K-1. If you need another copy of your K-1, please call the investor
relations department at (303) 850-7373. If you acquired your shares by gift or
inheritance, you are not "at risk," or you are not an individual taxpayer,
please consult your personal tax advisor.
If you purchased your shares on the open market after June 1992, your cost
basis will be the original purchase price paid for your shares.
Energy Partners: Your basis is calculated by adjusting your beginning basis
by the cumulative change for all years which you held your investment. If you
purchased units on the open market, your beginning basis is the total purchase
price including commissions. If you obtained your units in a tax-free exchange,
your beginning basis is equal to the adjusted basis in the prior partnership
property at the time of exchange. The cumulative change is calculated by adding
all income, gains and excess depletion amounts and subtracting all deductions,
losses and cash distributions. If you acquired your units by gift or
inheritance, you are not "at risk," or you are not an individual taxpayer,
please consult your personal tax advisor. Additional information will be
included in the final Schedule K-1, which we anticipate mailing before March
2000.
13. Q: WHEN DO YOU EXPECT THE CONSOLIDATION TO OCCUR?
A: If the consolidation is approved by the unitholders of Energy Partners
and the stockholders of Consolidated Resources, the consolidation will occur as
soon as possible after approval. We expect this to occur by May 25, 1999.
14. Q: HOW DOES ENERGY PARTNERS INTEND TO VOTE ITS SHARES OF CONSOLIDATED
RESOURCES COMMON STOCK? HOW DOES CONSOLIDATED RESOURCES INTEND TO VOTE
ITS UNITS OF ENERGY PARTNERS? HOW DOES HALLWOOD GROUP INTEND TO VOTE ITS
UNITS OF ENERGY PARTNERS?
A: Energy Partners has indicated that it will vote its shares, other than
those that are restricted by contracts, in favor of the Consolidated Resources
merger. Consolidated Resources has indicated that it will vote its Class A and
Class C units of Energy Partners in favor of the Energy Partners merger.
Hallwood Group has indicated that it will vote its Class A, Class B and Class C
units of Energy Partners in favor of the Energy Partners merger.
15. Q: WHAT HAPPENS IF YOU DO NOT RECEIVE A MAJORITY VOTE BY SEPTEMBER 30, 1999?
A: Neither Energy Partners nor Consolidated Resources has decided yet. They
will consider their alternatives at that time.
16. Q: WILL I HAVE APPRAISAL RIGHTS IN THE CONSOLIDATION?
A: No. You will have no right to dissent from your merger and receive an
appraised value for your units of Energy Partners or shares of Consolidated
Resources common stock. If you do not wish to own Energy Corporation stock after
the consolidation, you must sell either your units of Energy Partners or your
shares of Consolidated Resources common stock before your merger is completed or
sell your shares of Energy Corporation common stock or preferred stock after the
consolidation is completed.
17. Q: WHEN WILL SHARES OF ENERGY CORPORATION BEGIN TRADING?
A: We anticipate that the Energy Corporation shares will begin trading on
NASDAQ on the day after the consolidation is completed.
18. Q: WHAT IS THE DIVIDEND POLICY OF ENERGY CORPORATION GOING TO BE?
A: Energy Corporation has no current plans to pay cash dividends on its
common stock. The preferred stock is entitled to an annual cumulative dividend
of $1.00 per share.
19. Q: WHAT ARE THE TERMS OF THE PREFERRED STOCK TO BE ISSUED BY ENERGY
CORPORATION TO THE CURRENT HOLDERS OF ENERGY PARTNERS CLASS C UNITS? WILL
THERE BE A DIVIDEND?
A: The preferred stock of Energy Corporation is entitled to a cumulative
annual dividend of $1.00 per share. Dividends will be paid on the preferred
stock when, as and if declared by the board of directors of Energy Corporation.
The shares will have no liquidation preference beyond accumulated and unpaid
dividends, and may be redeemed at the price of $10.00 per share, plus accrued
but unpaid dividends, at the option of Energy Corporation, at any time after
December 31, 2003. The holders of the preferred stock
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will vote with the holders of the common stock in the election of directors and
will vote as a separate class on all other matters on which stockholders vote.
The preferred stock is not convertible.
20. Q: HOW CAN I TELL HOW MANY ENERGY PARTNERS UNITS OR SHARES OF CONSOLIDATED
RESOURCES I OWN?
A: The number of units or shares that you own is given on your proxy card.
21. Q: WHAT IS THE DIFFERENCE BETWEEN THE CLASS A AND CLASS C UNITS OF ENERGY
PARTNERS?
A: The Class C units were issued as a unit dividend by Energy Partners in
January 1996 and trade separately from the original Energy Partners units. The
original units were redesignated as Class A units to distinguish them from the
Class C units. In the past, the Class A units have received an annual
distribution of $.52 per unit, and the Class C units have received an annual
preferred cumulative distribution of $1.00 per unit.
22. Q: DOES ENERGY CORPORATION PLAN TO REDEEM THE PREFERRED STOCK?
A: In connection with the consolidation, Energy Corporation has represented
that it has no present plan or intention to redeem the preferred stock.
23. Q: CAN I PURCHASE ADDITIONAL SHARES OF ENERGY CORPORATION STOCK THROUGH THE
COMPANY TO ROUND UP MY POSITION?
A: Energy Corporation does not have a plan for direct purchases. You will
need to contact your broker to purchase additional shares.
24. Q: HOW DO I SELL MY SHARES OF ENERGY CORPORATION?
A: If you hold your own certificate, you are a registered stockholder or
unitholder and you will receive a letter of transmittal after the close of the
consolidation. You will need to complete the letter of transmittal and return
your old Consolidated Resources or Energy Partners certificates for exchange.
Once you receive your new certificate for shares of Energy Corporation, you can
sell your shares of Energy Corporation through any brokerage firm.
If your shares or units are held in a brokerage account, you will need to
contact your broker to sell your Energy Corporation shares.
25. Q: AFTER THE CONSOLIDATION, I'LL HAVE A VERY SMALL NUMBER OF SHARES OF
ENERGY CORPORATION. WILL ENERGY CORPORATION BE MAKING AN ODD LOT TENDER
OFFER TO BUY BACK MY SHARES?
A: At this time Energy Corporation has no plan to offer an odd lot buy back
plan.
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. Accordingly, we
encourage you to read carefully this entire document and the other documents to
which we have referred you. For ease of reference, a glossary of oil and gas
terms used in this document is included under "Glossary of Oil and Gas Terms."
THE PARTIES
Energy Corporation is a Delaware corporation formed to complete the
consolidation and to carry on the businesses of the
combined entity after the consolidation. Until the
consolidation is completed, Energy Corporation will
have no substantial assets or operations and will
not have engaged in any activities other than in
connection with the consolidation.
Consolidated Resources is a publicly traded Delaware corporation engaged
in the exploration for and development,
acquisition, production and sale of oil and gas in
the continental United States.
Energy Partners is a publicly traded Delaware limited partnership
engaged in the exploration for and development,
acquisition, production and sale of oil and gas in
the continental United States.
HEPGP is a limited partnership of which Hallwood Group is
the limited partner and Hallwood G.P., a wholly
owned subsidiary of Hallwood Group, is the general
partner. HEPGP is the general partner of Energy
Partners. HEPGP indirectly participates in oil and
gas exploration, development, acquisition and
production in its capacity as general partner of
Energy Partners. HEPGP also holds interests in a
number of oil and gas properties directly.
Hallwood G.P. is a wholly owned subsidiary of Hallwood Group and
is the general partner of HEPGP.
Hallwood Group is a publicly traded Delaware holding corporation
with interests in energy, real estate, textile
products and hotel operations and which owns all of
the equity of Hallwood G.P. Hallwood Group owns
5.1% of the Class A units, all of the Class B units
and 1.8% of the Class C units of Energy Partners.
Energy Partners holds 45.7% of Consolidated Resources' common stock and
Consolidated Resources holds 19.5% of Energy Partners' Class A units and 5.3% of
Energy Partners' Class C units. In addition, Energy Partners owns interests in
all of the same properties owned by Consolidated Resources. Approximately 6.5%
of the estimated reserve value of Energy Partners is in properties in which
Consolidated Resources does not have an interest. Energy Partners has an
interest in all of the properties owned by HEPGP.
The principal operating offices of each of Energy Corporation, Energy
Partners, Consolidated Resources and HEPGP are located at 4582 S. Ulster Street
Parkway, Suite 1700, Denver, Colorado 80237. The telephone number is (303)
850-7373. The principal office of Hallwood Group is 3710 Rawlins, Suite 1500,
Dallas, Texas 75219. The telephone number is (214) 528-5588.
For more information on the consolidation, you may call our solicitation
agent, The Herman Group, toll-free at (877) 731-5210.
1
<PAGE> 11
THE CONSOLIDATION (See Page 19)
General.
If the unitholders of Energy Partners and stockholders of Consolidated
Resources approve the consolidation, Energy Partners and Consolidated Resources
will be merged with wholly owned subsidiaries of Energy Corporation. Energy
Corporation will be the parent entity in the consolidation.
Stock Options and Warrants.
In the consolidation, currently outstanding options held by directors,
officers and employees of Energy Partners and Consolidated Resources will be
canceled and the holder of each option will receive an amount in cash equal to
the difference between the exercise price of the option and the average market
value of the units or stock into which the option is exercisable for the 30
calendar days prior to the closing of the consolidation. In addition, the
Prudential Insurance Company of America holds a warrant to purchase 98,599
shares of Consolidated Resources common stock. Upon completion of the
consolidation, Prudential has the right to receive a new warrant, which will
allow Prudential to receive shares of Energy Corporation common stock or cash
equal to the value of the shares covered by the new warrant.
2
<PAGE> 12
STRUCTURE
The diagrams below show the structure of Hallwood Group, Energy Partners
and Consolidated Resources before the consolidation and the structure of Energy
Corporation after the consolidation.
STRUCTURE BEFORE THE CONSOLIDATION
- -------------------------------------
[CHART]
3
<PAGE> 13
RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF HALLWOOD
G.P. (See Page 22)
The special committee of the board of directors of Hallwood G.P.,
consisting solely of outside directors, has unanimously recommended that the
board of directors approve the Energy Partners merger. Following this
recommendation, the board of directors has determined that the terms of the
proposed consolidation are fair to and in the best interests of Energy Partners'
unitholders and unanimously recommends that its unitholders vote "for" the
consolidation. For a complete discussion of the reasons the special committee
and the board of directors determined to recommend the Energy Partners merger,
see "The Consolidation -- Recommendation of the Hallwood G.P. Special Committee
and the Hallwood G.P. Board."
RECOMMENDATION OF THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF
CONSOLIDATED RESOURCES (See Page 29)
The special committee of the board of directors of Consolidated Resources,
consisting solely of outside directors, has unanimously recommended that the
board of directors approve the Consolidated Resources merger. Following this
recommendation, the board of directors has determined that the terms of the
proposed consolidation are fair to and in the best interests of Consolidated
Resources' stockholders and unanimously recommends that its stockholders vote
"for" the consolidation. For a complete discussion of the reasons the special
committee and the board of directors determined to recommend the Consolidated
Resources merger, see "The Consolidation -- Recommendation of the Consolidated
Resources Special Committee and the Consolidated Resources Board."
OPINIONS OF FINANCIAL ADVISORS (See Pages 24 and 31)
Kirkpatrick Energy Associates has given its opinion to the special
committee of the board of directors of Hallwood G.P. that, based upon the
assumptions and analyses contained in its letter dated December 15, 1998, and as
of that date, the consideration to be received by Class A and Class C
unitholders of Energy Partners, other than Consolidated Resources and Hallwood
Group, is fair to its unitholders from a financial point of view.
At the December 15, 1998 meeting of the Consolidated Resources special
committee, Dain Rauscher Wessels delivered its oral opinion, which it
subsequently confirmed in writing by letter dated December 15, 1998, that, after
allowing for the factors and assumptions stated in its opinion and as of that
date, the merger consideration to be received by the public stockholders of
Consolidated Resources in the consolidation is fair to its stockholders from a
financial point of view.
These opinions are attached as Appendices B and C. We encourage you to read
these opinions.
THE MEETINGS
Date, Time and Place Both of the meetings will be held on Tuesday, May
25, 1999 at the offices of Hallwood Group, 3710
Rawlins, Suite 1500, Dallas, Texas 75219. The Energy
Partners meeting will be held at 10:00 a.m. and the
Consolidated Resources meeting will be held at 11:00
a.m.
Matters to be Considered At your meeting, you will be asked to consider and
vote upon proposals to approve the consolidation.
Approval of the consolidation will also constitute
approval of Energy Corporation's stockholder rights
plan, its staggered board of directors and its newly
adopted incentive plan described in this document.
In addition, unitholders of Energy Partners will be
asked to approve an amendment to the Energy
Partners' partnership agreement to allow for the
consolidation.
Record Date April 14, 1999.
4
<PAGE> 14
Vote Required for Energy
Partners and Consolidated
Resources The vote of the holders of a majority of each class
of the outstanding units of Energy Partners and
each class of capital stock of Consolidated
Resources entitled to vote at each meeting is
required to approve the consolidation. Significant
cross-ownership exists between Hallwood Group,
Energy Partners and Consolidated Resources. All of
these parties will vote their shares and units in
favor of the consolidation, other than those bound
by contractual restrictions.
The vote of the holders of a majority of each class
of outstanding units of Energy Partners entitled to
vote at its meeting is required to approve the
amendment to the Energy Partners' partnership
agreement. See "General Information -- Voting
Rights of Energy Partners unitholders and
Consolidated Resources stockholders."
CONDITIONS TO THE CONSOLIDATION; WAIVER; TERMINATION OF THE CONSOLIDATION
AGREEMENT (See Page 40)
Completion of the consolidation is dependent upon the fulfillment of a
number of conditions, including the following material conditions:
- the approval of the consolidation by the required holders of the Class A
and Class C units of Energy Partners and of the stock of Consolidated
Resources;
- the approval by NASDAQ of the listing of the Energy Corporation common
stock and preferred stock to be issued in the consolidation; and
- the completion of both mergers and the contribution of assets by HEPGP at
the same time.
The consolidation agreement permits the parties to waive any of these
conditions to the consolidation that are in favor of that party. If the parties
elect to waive any of these material conditions to one of the mergers, they will
amend or supplement this document as appropriate and recirculate it to the
affected unitholders or stockholders, if the waiver occurs prior to approval of
the applicable merger by the unitholders or stockholders. If any of these
material conditions to one of the mergers is waived after the parties receive
unitholder or stockholder approval, the unitholders or stockholders of a party
adversely affected by the waiver will be asked to reapprove that merger.
The consolidation agreement may be terminated by one or more parties at any
time prior to the effective time if specific events occur.
CONFLICTS OF INTEREST (See Page 42)
In considering your board's recommendation that you vote for the
consolidation, you should be aware that the determination of the boards of
Hallwood G.P. and Consolidated Resources to participate in the consolidation may
have been affected by conflicts of interest. In particular:
- Hallwood Group is the sole stockholder of Hallwood G.P., which is the
general partner of HEPGP, which in turn is the general partner of Energy
Partners;
- Hallwood Group holds 5.1% of the Class A units, 100% of the Class B units
and 1.8% of the Class C units;
- Hallwood Group will be contributing assets and some of its liabilities to
Energy Corporation through HEPGP;
- Energy Partners owns 45.7% of the stock of Consolidated Resources and
Consolidated Resources owns 19.5% of the Class A units and 5.3% of the
Class C units of Energy Partners; and
5
<PAGE> 15
- Messrs. Gumbiner, Troup and Guzzetti are directors of each of Hallwood
G.P. and Consolidated Resources and are also directors or officers of
Hallwood Group, which means that they have fiduciary duties to more than
one party to the consolidation and that these duties may conflict.
The special committees of the boards of Hallwood G.P. and of Consolidated
Resources were aware of these interests and considered them in approving the
consolidation.
DIFFERENCES IN RIGHTS OF UNITHOLDERS AND STOCKHOLDERS (See Page 88)
The rights of Energy Partners unitholders and Consolidated Resources
stockholders differ from the rights of Energy Corporation stockholders in a
number of ways. Energy Partners is a limited partnership formed under the laws
of Delaware, and both Consolidated Resources and Energy Corporation are
corporations formed under the laws of Delaware. Furthermore, Energy
Corporation's charter and bylaws contain provisions that are not included in the
organizational documents of either or both of Energy Partners and Consolidated
Resources. For a complete discussion of the material differences in rights and
limitations that will exist with respect to Energy Corporation stockholders, see
"Comparison of Unitholder and Stockholder Rights."
6
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL AND OIL AND GAS DATA
The following tables set forth summary historical operating and financial
data for Energy Partners, Consolidated Resources and the contributed assets and
assumed liabilities of HEPGP that are being exchanged for Energy Corporation
common stock in the consolidation. The historical financial data for the year
ended December 31, 1998 for Energy Partners and Consolidated Resources have been
derived from the audited financial statements and the notes relating to them
included in each entity's Annual Report on Form 10-K for the year ended December
31, 1998, which accompany this document and shall be considered to be a part of
this document. The historical financial data for Energy Partners and
Consolidated Resources are qualified in their entirety by, and should be read
together with, the Consolidated Financial Statements and notes of the entity
contained in each entity's Annual Report on Form 10-K for the year ended
December 31, 1998, which accompany this document. The summary historical
financial data for Energy Partners and Consolidated Resources should also be
read together with the selected financial data on page 54. The historical
financial data for the year ended December 31, 1998, for HEPGP have been derived
from the unaudited financial statements of HEPGP for this period. Some financial
data for HEPGP is not available.
The pro forma operating and financial data of Energy Corporation set forth
below is qualified in its entirety by, and should be read together with, the
unaudited pro forma financial statements of Energy Corporation on page 57. The
pro forma financial information does not necessarily indicate what the actual
financial position and results of operations of Energy Corporation would have
been as of and for the periods indicated, nor does it purport to represent the
future financial position and results of operations of Energy Corporation.
The summary historical reserve data have been estimated by Hallwood
Petroleum, Inc.'s in-house engineers. Approximately 80% of these reserves have
been reviewed by Williamson Petroleum Consultants, Inc., independent petroleum
engineers.
7
<PAGE> 17
SUMMARY HISTORICAL AND PRO FORMA OPERATING AND FINANCIAL DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER UNIT AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------------- PRO FORMA
CONTRIBUTED ASSETS -----------
AND LIABILITIES OF CONSOLIDATED ENERGY
HEPGP ENERGY PARTNERS RESOURCES CORPORATION
------------------ --------------- ------------ -----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas operations.................... $ 427 $ 39,107 $ 29,534 $ 62,229
Pipeline and other........................ 283 4,070 2,696 6,300
Interest.................................. -- 409 180 521
------ -------- -------- --------
710 43,586 32,410 69,050
------ -------- -------- --------
Expenses:
Oil and gas operations.................... 181 12,673 11,642 22,203
General and administrative................ 515 5,045 4,451 7,970
Depreciation, depletion and
amortization............................ 141 15,720 11,463 24,034
Impairment of oil and gas properties...... -- 14,000 19,600 33,600
Litigation................................ -- 1,382 1,087 2,209
------ -------- -------- --------
837 48,820 48,243 90,016
------ -------- -------- --------
Operating loss.......................... (127) (5,234) (15,833) (20,966)
------ -------- -------- --------
Interest and other expense................ -- 2,797 4,160 6,534
Equity in loss of HCRC,................... -- 4,888 -- --
Minority interest in net income of
affiliates.............................. -- 976 -- 976
------ -------- -------- --------
-- 8,661 4,160 7,510
------ -------- -------- --------
Income tax expense........................ -- -- 286 687
------ -------- -------- --------
Net loss.................................. $ (127) $(13,895) $(20,279) $(29,163)
====== ======== ======== ========
Net loss per share/Class A and Class B
Unit -- basic........................... N/A $ (1.86) $ (7.38) $ (3.16)
====== ======== ======== ========
Net loss per share/Class A and Class B
Unit -- diluted......................... N/A $ (1.86) $ (7.38) $ (3.16)
====== ======== ======== ========
CASH FLOW DATA:
Net cash provided by (used in) operating
activities................................ $ 26,277 $ 6,130
Net cash used in investing activities....... (38,919) (34,666)
Net cash provided by (used in) financing
activities................................ 17,894 24,595
OTHER FINANCIAL DATA:
Distributions per Class A Unit.............. $ .52
Distributions per Class C Unit.............. 1.00
Preferred stock dividends per share......... $ 1.00
Ratio of Earnings to Fixed Charges and Class
C Distributions/Preferred Stock
Dividends................................. (1) (2)
BALANCE SHEET DATA:
Total Assets................................ $139,091 $101,167 $204,675
Long-term debt.............................. 40,381 44,774 84,131
Stockholders' equity/Partners' capital...... 62,632 29,589 70,860
OIL AND GAS DATA:
Net Proved Reserves (Mmcfe)................. 2,040 121,861 111,205 213,143
Net Proved Developed Reserves (Mmcfe)....... 1,971 112,377 102,755 196,981
Standardized Measure of Discounted Cash
Flows (in thousands)(3)................... $1,300 $101,000 $ 84,000 $169,000
Production Volumes (Mmcfe).................. 253 18,759 14,851 30,562
</TABLE>
- ---------------
(1) Energy Partners had a loss during this period. Interest expense was
$2,782,000.
(2) Energy Corporation has a pro forma loss during this period. Pro forma
interest expense is $6,410,000.
(3) The discounted future net cash flows for Energy Partners are calculated with
no consideration given to future income taxes because Energy Partners is not
a tax paying entity.
8
<PAGE> 18
SELECTED COMPARATIVE PER UNIT/SHARE DATA
The following table sets forth selected historical per unit or per share
data for Energy Partners and Consolidated Resources and selected unaudited pro
forma per share data for Energy Corporation giving effect to the consolidation
using the purchase method of accounting.
The pro forma operating and financial data of Energy Corporation set forth
below is qualified in its entirety by, and should be read together with, the
unaudited pro forma financial information of Energy Corporation included
elsewhere in this document. The unaudited pro forma financial information does
not necessarily indicate what the actual financial position and results of
operations of Energy Corporation would have been as of and for the periods
indicated, nor does it purport to represent the future financial position and
results of operations of Energy Corporation. The book value per Class A and
Class B unit/common share is computed by dividing the Class A and Class B
partners' capital/common stock equity by the weighted average Class A and Class
B units/common shares outstanding during the period.
COMPARATIVE PER UNIT/SHARE INFORMATION
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1998
--------------------------------------------
HISTORICAL PRO FORMA
------------------------------ -----------
CONSOLIDATED ENERGY
ENERGY PARTNERS RESOURCES CORPORATION
--------------- ------------ -----------
<S> <C> <C> <C>
Basic net loss per Class A and Class B unit/common
share................................................ $(1.86) $(7.38) $(3.16)
Diluted net loss per Class A and Class B unit/common
share................................................ (1.86) (7.38) (3.16)
Cash distributions per Class A unit/common share....... .52 -- --
Book value per Class A and Class B unit/common share... 4.15 10.77 7.09
</TABLE>
9
<PAGE> 19
COMPARATIVE MARKET DATA
Class A units of Energy Partners are traded on the American Stock Exchange
under the symbol "HEP." The Class C units of Energy Partners are traded on the
American Stock Exchange under the symbol "HEPC." The Class B units of Energy
Partners are not publicly traded. Consolidated Resources' common stock is traded
on NASDAQ under the symbol "HCRC."
The following table sets forth the quarterly high and low reported sales
prices of Energy Partners' Class A units and Class C units and Consolidated
Resources' common stock, as well as the quarterly distributions declared per
unit with respect to the Class A units and the Class C units, for the periods
indicated below.
Consolidated Resources did not pay a dividend during the periods shown.
During the third quarter of 1997, the stockholders of Consolidated Resources
approved a three-for-one split of its common stock. The stock split was effected
by issuing, as a stock dividend, two additional shares of common stock for each
share outstanding. All information has been adjusted to give effect to the stock
dividend.
On December 14, 1998, the last full trading day prior to the public
announcement of the consolidation, the closing price of the Class A units was
$3 7/8, the closing price of the Class C units was $6 1/2 and the closing price
of the Consolidated Resources common stock was $10 5/8.
<TABLE>
<CAPTION>
CONSOLIDATED
ENERGY PARTNERS ENERGY PARTNERS RESOURCES
CLASS A UNITS CLASS C UNITS COMMON
-------------------------- -------------------------- STOCK
DISTRIBUTIONS DISTRIBUTIONS -------------
HIGH LOW PER UNIT HIGH LOW PER UNIT HIGH LOW
---- --- ------------- ---- --- ------------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
First Quarter.............. $10 3/4 $8 1/16 $.13 $10 $ 8 5/8 $.25 $30 1/16 $22 3/4
Second Quarter............. 9 7 1/8 .13 9 3/8 8 3/4 .25 25 15
Third Quarter.............. 8 15/16 6 15/16 .13 10 1/2 8 7/8 .25 30 1/2 20
Fourth Quarter............. 10 1/4 7 1/2 .13 14 7/8 10 .25 26 21 1/4
1998
First Quarter.............. 8 5/8 6 3/8 .13 11 9 1/8 .25 21 9/16 14 1/4
Second Quarter............. 7 6 .13 9 13/16 8 3/8 .25 16 15/16 14 3/8
Third Quarter.............. 7 4 11/16 .13 8 1/2 6 3/4 .25 17 3/8 12
Fourth Quarter............. 5 7/8 3 .13 7 15/16 5 7/8 .25 15 9 1/2
1999
First Quarter.............. 4 3/8 3 .13 8 1/2 6 3/16 .25 18 10
Second Quarter (through
April 28, 1999)......... 4 3 1/2 0 8 7 3/16 0 11 8 5/8
</TABLE>
10
<PAGE> 20
RISK FACTORS
In addition to the other information presented in this document, you should
carefully consider the following risk factors in deciding how to vote on your
merger.
THERE ARE A NUMBER OF RISKS ASSOCIATED WITH THE CONSOLIDATION
The anti-takeover provisions in Energy Corporation's organizational documents
may have the effect of discouraging a change in ownership or management.
Some of the provisions of Delaware law and of Energy Corporation's
certificate of incorporation may discourage a third party from making an
acquisition proposal for Energy Corporation, and may inhibit a change of control
of Energy Corporation under circumstances that could give you an opportunity to
realize a premium over then-prevailing market prices. Furthermore, your ability
to change the management of Energy Corporation could be substantially impeded by
these provisions. For a more complete discussion of these risks, see
"Anti-Takeover Provisions of Delaware Law and of the Organizational Documents of
Energy Corporation."
The uncertainty of reserve information and future net revenue estimates makes
it difficult to predict what Energy Corporation's reserves or future net
revenues will be.
The consideration to be issued in the consolidation was determined to a
large extent by reference to the estimates of proved reserves of each of the
entities. There are numerous uncertainties inherent in estimating oil and gas
reserves and their values. Reserve estimates are imprecise and are expected to
change as additional information becomes available. For a more complete
discussion of these uncertainties, see "Business and Properties -- Oil and Gas
Reserves."
The valuations used placed greater emphasis on discounted cash flows than on
the value of publicly traded securities and may not accurately reflect the value
of the contributions of each entity to Energy Corporation.
A primary element of valuation of each entity was an assessment by the
special committees of Consolidated Resources and the general partner of Energy
Partners of the value of the underlying assets of each entity. Greater weight
was given by the special committees to estimates of discounted future net cash
flows than to the value of the publicly traded securities of Energy Partners and
Consolidated Resources. If this were not the case, the exchange ratios
negotiated by the parties for each entity might have been different.
The interests of HEPGP have been valued on a different basis than the
interests of Energy Partners and Consolidated Resources and may not accurately
reflect HEPGP's contribution to Energy Corporation.
The assets contributed by HEPGP have been valued on a different basis than
the assets of Energy Partners and Consolidated Resources. If this were not the
case, Hallwood Group would have received fewer shares of Energy Corporation
common stock in the consolidation. HEPGP will receive 1,312,411 shares of common
stock of Energy Corporation based upon:
- the contribution of its oil and gas assets and its general partner
interest in Energy Partners;
- the value assigned to the contractual rights being given up by HEPGP to
receive a greater share of revenues from Energy Partners than the amount
of expenses allocated to HEPGP;
- the rights being relinquished by Hallwood Group to receive compensation
for some types of services and reimbursement of actual expenses from
Energy Partners and Consolidated Resources; and
- the right being relinquished by Hallwood Group to vote the Class B units
of Energy Partners as a separate class on all matters.
11
<PAGE> 21
Conflicts of interest may have affected the boards' approval of the terms of
the consolidation.
The determinations by the boards of directors of Hallwood G.P. and
Consolidated Resources to participate in the consolidation may have been
affected by potential conflicts of interest. If these conflicts did not exist it
is possible that the consolidation would not have been approved or would have
been approved on a basis that would be more favorable to the unitholders of
Energy Partners, the stockholders of Consolidated Resources or both.
There may be some tax risks to Energy Partners' unitholders.
Your receipt of stock in Energy Corporation as a result of the
consolidation should, in almost all cases, be nontaxable to you for federal
income tax purposes. A small percentage of unitholders of Energy Partners,
however, will recognize gain to the extent that their allocable share of Energy
Partners' liabilities, plus any liabilities to which their Energy Partners
interest is subject or that otherwise are assumed by Energy Corporation, exceeds
their adjusted basis in their Energy Partners interest. No rulings have been, or
will be, requested from the IRS with respect to the consolidation. We can give
no assurance that the IRS or the courts would agree with these conclusions.
Energy Partners presently is taxed as a limited partnership and, as such,
does not generally pay federal income tax at the partnership level. Rather, its
items of income, gain, loss and deduction flow through to its unitholders.
Unitholders will receive Energy Corporation common stock and preferred stock in
the consolidation. Because Energy Corporation is a corporation, its income will
be taxed at the corporate level and, to the extent distributions are made to its
stockholders, such distributions will be taxable to the stockholders to the
extent of Energy Corporation's accumulated and current earnings and profits. As
a result of the consolidation, the former unitholders who become Energy
Corporation stockholders will no longer receive the pass-through tax treatment
accorded to partners.
Redemption of the preferred stock may limit its future value.
Unlike the Class C units, the Energy Corporation preferred stock is
redeemable at Energy Corporation's option after December 31, 2003, at $10.00 per
share, plus accrued but unpaid dividends. Although the value of a share of
preferred stock might increase if the value of the assets of Energy Corporation
increases significantly in the future, the redemption option would place a
ceiling of $10.00 per share on the future value of the preferred stock.
Energy Corporation will be highly leveraged after the consolidation, which may
affect the future financial health of Energy Corporation.
After the consolidation, Energy Corporation will have approximately $100
million of debt, including the current portion of long-term debt of
approximately $15 million. This level of debt will have several important
effects on its future operations, including:
- a substantial portion of its cash flow from operations must be dedicated
to the payment of interest on its debt and will not be available for
other purposes;
- covenants contained in its credit facilities will require it to meet a
number of financial tests;
- other restrictions may limit its ability to borrow additional funds or to
dispose of assets and may affect its flexibility in planning for, and
reacting to, changes in its business, including possible acquisition
activities; and
- its ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired.
12
<PAGE> 22
THERE ARE A NUMBER OF RISKS INHERENT IN THE OIL AND GAS BUSINESS
Energy Corporation's success might be adversely affected by the volatility of
oil and gas prices.
Energy Corporation's revenues, profitability, future growth and ability to
borrow funds or obtain additional capital, as well as the carrying value of its
properties, will be substantially dependent upon prevailing prices of oil and
gas. Historically, the markets for oil and gas have been volatile, and they are
likely to continue to be volatile in the future. Prices for oil and gas may
fluctuate widely in response to relatively minor changes in the supply of and
demand for oil and gas, market uncertainty and a variety of additional factors
that are beyond Energy Corporation's control.
It is impossible to predict future oil and gas price movements with
certainty. Declines in oil and gas prices may materially adversely affect Energy
Corporation's financial condition, liquidity, ability to finance planned capital
expenditures and results of operations. Lower oil and gas prices also may reduce
the amount of oil and gas that Energy Corporation can produce economically.
Oil and gas price hedging and financial hedging arrangements may expose Energy
Corporation to financial loss in some circumstances.
In order to reduce their exposure to short-term fluctuations in the prices
of oil and gas, Energy Partners and Consolidated Resources periodically have
entered into hedging arrangements. The hedging arrangements apply to only a
portion of their production and provide only partial price protection against
declines in oil and gas prices. These hedging arrangements will remain in place
following the consolidation and may expose Energy Corporation to risk of
financial loss in some circumstances, including instances where production is
less than expected or where the other party to any hedging arrangement fails to
perform. In addition, the hedging arrangements may limit the benefit to Energy
Corporation of increases in the prices of oil or gas. No determinations have
been made regarding hedging arrangements to be entered into by Energy
Corporation. These determinations will be made after the consolidation by the
board of directors of Energy Corporation. Total quantities of oil and gas
covered by hedging arrangements was as follows:
<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES
---------------------------------- ----------------------------------
PERCENTAGE PERCENTAGE
OF OF
PERIOD OIL (BBL) GAS (MCF) PRODUCTION OIL (BBL) GAS (MCF) PRODUCTION
- ------ --------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1996..................... 300,000 5,479,000 39% 219,000 2,429,000 28%
Year ended December 31,
1997..................... 346,000 5,386,000 46% 262,000 2,413,000 33%
Year ended December 31,
1998..................... 175,000 7,101,000 43% 82,000 3,545,000 27%
</TABLE>
Similarly, in order to reduce their exposure to short-term fluctuations in
interest rates and to provide a measure of predictability for a portion of their
interest payments under their debt facilities, Energy Partners and Consolidated
Resources entered into contracts to hedge their interest payments on a portion
of their variable rate debt. As of December 31, 1998, Energy Partners had hedged
$15 million of its variable rate debt for 1998 and between $4 million and $30
million of its variable rate debt for 1999 through 2004. As of December 31,
1998, Consolidated Resources had hedged $10 million of its variable rate debt
for 1998 and between $2 million and $15 million of its variable rate debt for
1999 through 2004. These hedges provide only partial protection against
increases in interest rates. These hedging arrangements will remain in place
following the consolidation and may expose Energy Corporation to risk of
financial loss in some circumstances, including instances where the other party
to any hedging arrangement fails to perform. In addition, the hedging
arrangements may limit the benefit to Energy
13
<PAGE> 23
Corporation of declines in interest rates. Energy Corporation intends to
continue to enter into hedging arrangements with respect to a portion of its
debt obligations.
Significant capital needs may require that Energy Corporation obtain additional
financing which may not be available on attractive terms.
Due to their plans for active development, exploration and acquisition
programs, Energy Partners and Consolidated Resources have experienced, and
Energy Corporation expects to experience, substantial capital needs. As a
result, additional financing may be required in the future to fund Energy
Corporation's growth and developmental and exploratory drilling. We cannot
assure you as to the availability or terms of any such additional financing that
may be required or whether financing will continue to be available under
existing or new credit facilities. In the event sufficient capital resources are
not available to Energy Corporation, its drilling and other activities may be
curtailed.
Energy Corporation may find it difficult to continually replace and expand its
reserves in the future.
In general, the volume of production from oil and gas properties declines
as reserves are depleted, with the rate of decline depending on reservoir
characteristics. Except to the extent Energy Corporation acquires properties
containing proved reserves or conducts successful exploration and development
activities, or both, the proved reserves of Energy Corporation will decline as
reserves are produced. Energy Corporation's future oil and gas production is,
therefore, highly dependent upon its ability to economically find, develop or
acquire additional reserves in commercial quantities. The business of exploring
for, developing or acquiring reserves is capital-intensive. To the extent cash
flow from operations is reduced and external sources of capital become limited
or unavailable, Energy Corporation's ability to make the necessary capital
investments to maintain or expand its asset base of oil and gas reserves would
be impaired. In addition, we cannot assure you that Energy Corporation's future
exploration, development and acquisition activities will result in additional
proved reserves or that Energy Corporation will be able to drill productive
wells at acceptable costs. Furthermore, although Energy Corporation's revenues
could increase if prevailing prices for oil or gas increase significantly,
Energy Corporation's finding and development costs could also increase.
Energy Corporation's reserves are concentrated in a few wells.
We estimate that Energy Corporation will receive approximately 17% of its
total estimated 1999 production from Energy Partners' and Consolidated
Resources' interests in two wells located in the Scott/ West Ridge area of the
Gulf Coast region, the A. L. Boudreaux #1 and the G. S. Boudreaux Estate #1. Any
interruption in the production from these wells could materially adversely
affect the operations of Energy Corporation.
There are numerous risks relating to drilling activities.
Energy Corporation's success will be materially dependent upon the
continued success of its drilling program. Oil and gas drilling involves
numerous risks, including the risk that no commercially productive oil or gas
reservoirs will be encountered. The cost of drilling, completing and operating
wells is often uncertain, and drilling operations may be curtailed, delayed or
canceled as a result of a variety of factors, including, unexpected drilling
conditions, pressure or irregularities in formations, equipment failures or
accidents, adverse weather conditions, compliance with governmental
requirements, and shortages or delays in the availability of drilling rigs and
the delivery of equipment. Energy Corporation's future drilling activities may
not be successful and, if drilling activities are unsuccessful, such failure
will have an adverse effect on Energy Corporation's future results of operations
and financial condition. Although Energy Corporation has identified numerous
drilling prospects, we cannot assure you that those prospects will be drilled or
that oil or gas will be produced from any such identified prospects or any other
prospects.
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Risks relating to the acquisition of oil and gas properties may affect Energy
Corporation's future success.
The successful acquisition of producing properties requires an assessment
of recoverable reserves, future oil and gas prices, operating costs, potential
environmental and other liabilities and other factors. Such assessments are
necessarily inexact and their accuracy inherently uncertain. In connection with
such an assessment, Energy Corporation will perform a review of the subject
properties. This usually includes on-site inspections and the review of reports
filed with various regulatory entities. Such a review, however, will not reveal
all existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties to fully assess their deficiencies and
capabilities. Inspections may not always be performed on every well, and
structural and environmental problems are not necessarily observable even when
an inspection is undertaken. Even when problems are identified, the seller may
be unwilling or unable to provide effective contractual protection against all
or part of these problems. We cannot assure you that any acquisition of property
interests by Energy Corporation will be successful and, if an acquisition is
unsuccessful, that the failure will not have an adverse effect on Energy
Corporation's future results of operations and financial condition.
There are a number of hazards relating to well operations, and Energy
Corporation is not fully insured against all of them.
The oil and gas business involves numerous operating hazards, such as well
blowouts, craterings, explosions, uncontrollable flows of oil, gas or well
fluids, fires, formations with abnormal pressures, pollution, releases of toxic
gas, and other environmental hazards and risks. Any of these could result in
substantial losses to Energy Corporation. Energy Corporation does not maintain
business interruption insurance. In addition, Energy Corporation cannot predict
with certainty the circumstances under which an insurer might deny coverage or
under which the amount of coverage might be insufficient. If an event not fully
covered by insurance occurs, it could have a material adverse effect on Energy
Corporation's financial condition and results of operations.
Energy Corporation is subject to substantial environmental risks.
The development, production, handling, storage, transportation and disposal
of oil and gas, by-products and other substances and materials produced or used
in connection with oil and gas operations are regulated by federal, state and
local laws and regulations primarily relating to protection of human health and
the environment. The discharge of oil, gas or pollutants into the air, soil or
water may give rise to significant liabilities on the part of Energy Corporation
to the government and third parties and may result in the assessment of
administrative, civil and criminal penalties or require Energy Corporation to
incur substantial costs of remediation. In addition, Energy Corporation may be
liable for environmental damages caused by previous owners of property purchased
or leased by Energy Corporation. As a result, substantial liabilities to third
parties or governmental entities may be incurred, the payment of which could
reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of Energy Corporation's properties. Energy
Corporation believes that after the consolidation it will be in substantial
compliance with applicable regulations, although we cannot assure you that this
is or will remain the case. We cannot assure you that existing environmental
laws or regulations, as currently interpreted or reinterpreted in the future, or
future laws or regulations will not materially adversely affect Energy
Corporation's financial condition and results of operations.
Energy Corporation will encounter competition from larger, more established
oil and gas companies.
Energy Corporation will encounter competition from other oil and gas
companies in all areas of its operation, including the acquisition of
exploratory prospects and proven properties. Energy Corporation's competitors
will include major integrated oil and gas companies and numerous independent oil
and gas companies, individuals and drilling and income programs. Many of its
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than Energy Corporation's and, in
many instances, have been engaged in the oil and gas business for a much longer
time than Energy Corporation. Those companies may be able to pay more for
exploratory prospects and
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<PAGE> 25
productive oil and gas properties, and may be able to define, evaluate, bid for
and purchase a greater number of properties and prospects, than Energy
Corporation's financial or human resources permit. Energy Corporation's ability
to explore for oil and gas prospects and to acquire additional properties in the
future will depend upon its ability to conduct its operations, to evaluate and
select suitable properties and to complete transactions in highly competitive
environments.
The year 2000 problem poses risks.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, some normal business activities or operations.
This risk exists both as to the information technology systems such as
computers, programs and related systems and non-information technology systems
such as embedded technology on a silicon chip, as well as to the systems of
third parties. Such failures could materially and adversely affect Energy
Partners', Consolidated Resources' or Energy Corporation's results of
operations, cash flow and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third party suppliers, vendors and transporters, we are
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on results of operations, cash flow or financial
condition. Although it is currently not possible to determine the consequences
of Year 2000 failures, the current assessment is that Energy Partners',
Consolidated Resources' and Energy Corporation's areas of greatest potential
risk are in connection with the transporting and marketing of the oil and gas
production. Energy Partners and Consolidated Resources are contacting the
various purchasers and pipelines with which they regularly do business to
determine their state of readiness for the Year 2000. Although the purchasers
and pipelines will not guaranty their state of readiness, the responses received
to date have indicated no material problems. Energy Corporation believes that in
a worst case scenario, the failure of its purchasers and transporters to conduct
business in a normal fashion could have a material adverse effect on cash flow
for a period of six to nine months. The evaluation of third party readiness will
be followed by the development of contingency plans.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Some statements contained in this document regarding future financial
performance and results and other statements that are not historical facts are
"forward-looking statements." The words "expect," "project," "estimate,"
"predict," "anticipate," "believes" and similar expressions are also intended to
identify forward- looking statements. Such statements and Energy Corporation's
results may be affected by numerous risks, uncertainties and assumptions,
including but not limited to:
- changes in general economic conditions in the United States;
- changes in law and regulations to which Energy Corporation is subject;
- the cost and effects of legal and administrative claims and proceedings
against Energy Corporation or its subsidiaries or which may be brought
against Energy Corporation or its subsidiaries;
- conditions in the capital markets utilized by Energy Corporation to
access capital to finance operations;
- Energy Corporation's ability to develop expanded markets and product
offerings as well as maintain existing markets;
- energy prices;
- competition from other pipelines and alternate fuels;
- the ability of Energy Corporation to sustain its past practice of growth
through acquisitions;
- the general level of natural gas and petroleum product demand and weather
conditions, among other things; and
- the general uncertainty inherent in the Year 2000 problem resulting in
part from the Year 2000 readiness of third parties and the
interconnection of computer systems.
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GENERAL INFORMATION
VOTING RIGHTS OF ENERGY PARTNERS UNITHOLDERS AND CONSOLIDATED RESOURCES
STOCKHOLDERS
The board of directors of Hallwood G.P. and the board of directors of
Consolidated Resources have each fixed April 14, 1999 as the record date for the
determination of unitholders and stockholders entitled to notice of and to vote
at the meetings. Only unitholders and stockholders of record at the close of
business on the record date will be entitled to vote at the meetings.
At the close of business on the record date, there were outstanding
10,011,567 Class A units, 143,773 Class B units, and 2,464,044 Class C units of
Energy Partners, each of which is entitled to one vote on each matter properly
submitted to a vote at the Energy Partners meeting. At the close of business on
the record date, there were outstanding 3,007,852 shares of Consolidated
Resources common stock, each of which is entitled to one vote on each matter
properly submitted to a vote at the Consolidated Resources meeting. The presence
at the meetings, in person or by proxy, of holders of a majority of units or
shares of stock will constitute a quorum. A quorum is necessary for a meeting to
be valid.
In order to approve the consolidation agreement on behalf of Energy
Partners, a majority of each class of the outstanding units entitled to vote,
with the Class A, Class B and Class C units each voting as a separate class,
must approve it. The same vote is required to approve the amendment to the
Energy Partners' partnership agreement. In order to approve the consolidation
agreement on behalf of Consolidated Resources, a majority of the outstanding
Consolidated Resources common stock entitled to vote must approve it.
Hallwood Group owns approximately 5.1% of the outstanding Class A units,
100% of the outstanding Class B units and 1.8% of the outstanding Class C units
of Energy Partners. Consolidated Resources also owns 19.5% of the Class A units
and 5.3% of the Class C units of Energy Partners. Hallwood Group and
Consolidated Resources both will vote all of their units in favor of the
consolidation. As a result, an additional 2,544,109 Class A units, representing
25.4% of the outstanding Class A units, and an additional 1,058,330 Class C
units, representing 43.0% of the outstanding Class C units, must vote for the
consolidation in order for it to be approved for Energy Partners.
Energy Partners owns 45.7% of the stock of Consolidated Resources and will
vote 919,011 of its shares in favor of the consolidation. The remaining 455,454
shares of Consolidated Resources held by Energy Partners are restricted by a
contract that requires that they be voted in the same proportion that all other
outstanding shares, including the 919,011 shares held by Energy Partners, of
Consolidated Resources are voted or withheld from voting. As a result, the
holders of 387,138 shares of common stock of Consolidated Resources held by
public shareholders, representing 23.7% of the outstanding common stock held by
public shareholders, must vote in favor of the consolidation to approve the
consolidation for Consolidated Resources.
PROXIES; SOLICITATION AND REVOCATION OF PROXIES
Energy Partners units and Consolidated Resources common stock represented
by properly executed and unrevoked proxies will be voted at the appropriate
meeting according to the directions you give in your proxy.
YOU SHOULD NOT SEND ANY CERTIFICATES FOR YOUR STOCK OR UNITS WITH YOUR
PROXY CARDS.
If you return, but do not make any direction in, a properly executed and
unrevoked proxy, your Energy Partners units or Consolidated Resources common
stock represented by that proxy will be voted "FOR" the adoption of the
consolidation agreement.
The proxy card for Energy Partners will allow you to give directions for
the voting of both Class A and Class C units. If you own both classes of units
and give direction for voting only one class, your proxy will be voted in the
same manner for both classes. If you return, but do not make any direction in,
your proxy, your Energy Partners units will be voted "FOR" the adoption of the
Energy Partners merger.
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You may revoke a proxy at any time before its exercise. You may revoke your
proxy by filing with the Secretary of Hallwood G.P., with respect to Energy
Partners, or with the Secretary of Consolidated Resources, as the case may be, a
written revocation or a signed proxy bearing a later date. Any written notice
revoking a proxy for either the Energy Partners meeting or the Consolidated
Resources meeting should be sent to Energy Partners or Consolidated Resources at
4582 South Ulster Street Parkway, Suite 1700, Denver, Colorado, 80237,
Attention: Corporate Secretary. You may also hand deliver your proxy to the
Secretary at or before the taking of the vote at your meeting. You may attend
your meeting, and vote in person, whether or not you have previously given a
proxy. If you hold your shares or units in a brokerage account and have
instructed your broker how to vote, you must follow your broker's instructions
regarding how to change your vote. If you hold your shares or units in a
brokerage account, you cannot vote in person at your meeting.
Energy Partners and Consolidated Resources will each bear their own costs
of soliciting proxies from Energy Partners unitholders and Consolidated
Resources stockholders. In addition to soliciting proxies by mail, directors,
officers and employees of Energy Partners and Consolidated Resources may solicit
proxies by telephone, in person or otherwise, each without receiving additional
compensation for their solicitation efforts. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of Energy Partners units or
shares of Consolidated Resources common stock held of record by such persons,
and arrangements may be made for reimbursement of reasonable out-of-pocket
expenses incurred by them in connection with the solicitation. In addition,
Energy Partners and Consolidated Resources have retained The Herman Group, an
outside solicitation firm, which will receive a fee of approximately $10,000
plus variable amounts based upon the number of solicitation calls made.
ABSTENTIONS; BROKER NON-VOTES
Energy Partners units or shares of Consolidated Resources common stock
represented at the meetings but not voted for or against a proposal, such as
abstentions or "broker non-votes," will be counted in determining a quorum. A
"broker non-vote" refers to units or shares represented at the meetings in
person or by proxy by a broker or nominee where the broker or nominee does not
vote the shares because it (1) has not received voting instructions on a
particular matter from the beneficial owners or person entitled to vote and (2)
does not have discretionary voting power on the matter. If your Energy Partners
units or shares of Consolidated Resources common stock are held in your name and
you either fail to return your proxy card or to vote in person at a meeting, the
effect will be a vote against your merger. If your Energy Partners units or
shares of Consolidated Resources common stock are held in brokerage account and
you fail to instruct your broker how to vote your Energy Partners units or
shares of Consolidated Resources common stock, the effect will be a vote against
your merger.
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THE CONSOLIDATION
The following summary highlights some of the important aspects of the
consolidation and is not intended to be complete. The consolidation agreement is
attached to this document as Appendix A and is incorporated in this document by
reference. For more detailed information, we urge you to read the consolidation
agreement carefully.
BACKGROUND OF THE CONSOLIDATION
From time to time prior to 1998, members of management of Hallwood Group,
Energy Partners, Hallwood G.P. and Consolidated Resources had discussed a
combination of their energy businesses. However, until 1998, no formal action
was ever taken. During May and June 1998, the members of the board of directors
of Hallwood Group discussed their belief that the trading prices of the Energy
Partners units and the Consolidated Resources common stock did not fully reflect
the underlying asset values of Energy Partners and Consolidated Resources. The
board members of Hallwood Group believed that at least part of the reason for
this situation was the complicated structure of Energy Partners and Consolidated
Resources and their relatively small sizes. The board members of Hallwood Group
also discussed their views that an entity that combined the assets and
operations of Energy Partners, Consolidated Resources and the energy interests
of Hallwood Group could take better advantage of opportunities in the industry
and could operate more efficiently than the entities could separately. In May
and June, 1998, the board members of Hallwood Group had discussions with
Prudential Securities Incorporated to seek its assistance in developing a
proposal to consolidate Energy Partners, Consolidated Resources, and the energy
interests of Hallwood Group. The board of Hallwood Group officially retained
Prudential Securities as financial advisor to Hallwood Group on June 26, 1998.
Representatives of Prudential Securities met with management personnel of
Energy Partners and Consolidated Resources and with management of Hallwood Group
during the months of May and June 1998. On June 22, 1998, Hallwood Group
delivered to the Hallwood G.P. board and to the Consolidated Resources board a
letter proposing that a consolidation of Energy Partners, Consolidated
Resources, Hallwood G.P. and the energy interests of Hallwood Group would be in
the best interests of each of the entities and their security holders. The
letter requested that the members of the two boards of directors and their
advisors meet to discuss the specifics of such a consolidation. On June 25 and
June 26, 1998, the Hallwood G.P. board and the Consolidated Resources board met
and authorized the special committee of each of the boards of directors,
consisting solely of the directors that are not affiliated with Hallwood Group,
to consider and respond to Hallwood Group's proposal. The special committees did
not receive any other proposals and did not solicit any other parties to make
proposals or consider an alternative transaction due to Hallwood Group's
ultimate control of both Energy Partners and Consolidated Resources. Hallwood
Group owns 100% of the Class B units of Energy Partners, which have the right to
vote as a separate class on all matters. Therefore, Hallwood Group's ownership
of the Class B units enables Hallwood Group to prevent any merger transaction
involving Energy Partners of which Hallwood Group does not approve. In addition,
Energy Partners owns 45.7% of Consolidated Resources. This ownership effectively
prevents Consolidated Resources from participating in any transaction of which
Energy Partners, and ultimately Hallwood Group, does not approve.
On June 29, 1998, the Hallwood G.P. special committee met by telephone and,
among other matters, selected Rex Sebastian to serve as its chairman. In
addition, the special committee selected Donohoe, Jameson & Carroll, P.C., to
serve as its special counsel. Further, the special committee discussed the
relative merits of seven firms as potential financial advisors to the special
committee in evaluating a proposal. During the period from July 1 through July
10, members of the special committee and its special counsel interviewed several
of the firms that expressed interest in the engagement. On July 10, 1998, the
special committee met by telephone to discuss the results of the interviews and
other considerations in selection of a financial advisor. After further
discussions, the special committee unanimously selected Kirkpatrick Energy
Associates, Inc. as its financial advisor. The special committee did not
instruct Kirkpatrick Energy Associates to solicit alternative parties, or to
solicit any other type of transaction.
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Each of the special committees met and requested Hallwood Group to submit a
specific proposal for the consolidation. On July 14, 1998, Hallwood Group sent
to each of the special committees a written proposal that the consolidation be
effected in a manner that would result in the Class A unitholders of Energy
Partners, other than Consolidated Resources and Hallwood Group, receiving 55%,
the stockholders of Consolidated Resources, other than Energy Partners,
receiving 25% and Hallwood Group receiving 20% of the common shares of the
consolidated entity and that the Class C unitholders of Energy Partners, other
than Consolidated Resources, would receive a new class of redeemable preferred
shares of the consolidated entity.
On July 21, 1998, the Consolidated Resources special committee held a
telephonic meeting during which it unanimously selected Vinson & Elkins L.L.P.
to serve as its special counsel. In addition, the Consolidated Resources special
committee reviewed proposals from six financial advisors regarding
representation of Consolidated Resources in the transaction. On July 24, 1998,
the Consolidated Resources special committee held a telephonic meeting with
representatives of four financial advisors regarding representation of
Consolidated Resources in the transaction. After separately interviewing each of
the four candidates, the Consolidated Resources special committee unanimously
selected Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, to
serve as its financial advisor with respect to the transaction. The special
committee did not instruct Dain Rauscher Wessels to solicit alternative parties,
or to solicit another type of transaction.
On July 27, 1998, prior to the meeting of the special committees with the
working group, as described below, the Hallwood G.P. special committee met with
its financial advisor and special counsel to discuss the proposal and the
background information that had been received to date from Hallwood Petroleum,
Inc. and Prudential Securities. In addition, following the meeting of the entire
working group, the Hallwood G.P. special committee resumed its meeting with its
advisors. The members of the Hallwood G.P. special committee and their advisors
discussed the methodologies and analyses that would be necessary in order to
fully evaluate the proposal. The advisors explained the necessity for a complete
financial analysis of each of the three entities that are participating in the
consolidation. The advisors then summarized the three analyses that would be
conducted, as follows:
- a discounted net asset value analysis, in which Kirkpatrick Energy
Associates would assess the present value of cash flows and other assets
and liabilities of the three entities;
- a comparable acquisitions analysis, in which Kirkpatrick Energy
Associates would analyze the reserves and resulting valuation of the
three entities in comparison to reserves of other publicly-held companies
that have been valued by the market in recent acquisitions; and
- a comparable companies trading analysis, in which financial data of the
three entities is compared to financial data of other publicly-held
companies and the values that the stock of the other companies have in
the market in order to value the three entities.
On July 27, 1998, representatives of Hallwood Group, Hallwood Petroleum,
Inc., the members of each of the special committees and their financial and
legal advisors met to discuss further the reasons for the consolidation and the
bases upon which Hallwood Group proposed the specific terms of the
consolidation. Prudential Securities also provided an overview of the potential
benefits of the transaction to all parties.
On July 28, 1998, the Consolidated Resources special committee held a
telephonic meeting with its financial and legal advisors and Prudential
Securities and a representative of the independent petroleum engineers,
Williamson Petroleum Consultants, hired by Hallwood Group to review the
internally generated reserve reports of Hallwood Group, Energy Partners and
Consolidated Resources.
On August 13, 1998, the financial and legal advisors to the special
committees met with management of Energy Partners and Consolidated Resources to
discuss the current financial and operating conditions of each of Energy
Partners, Consolidated Resources and the energy interests of HEPGP.
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On August 25, 1998, the Consolidated Resources special committee held a
telephonic meeting with its financial and legal advisors during which its
financial advisor discussed the benefits of the transaction to the stockholders
of Consolidated Resources, including, but not limited to, those discussed by
Prudential Securities. After discussion, the members of the Consolidated
Resources special committee unanimously agreed that the transaction would
provide multiple benefits to the Consolidated Resources stockholders and should
be pursued. The financial advisor then discussed the due diligence completed to
date with the Consolidated Resources special committee followed by extensive
discussion by the Consolidated Resources special committee.
On August 26, 1998, the Hallwood G.P. special committee met with its
financial advisor and special counsel. At that meeting, Kirkpatrick Energy
Associates discussed the material it had reviewed and the procedures it was
using, and presented the results of its analysis to date. The advisors discussed
the components of the analysis, including assessment of the contractual
arrangements and cross-ownership among the three entities and the entities'
ongoing drilling programs. The special committee held extensive discussions
regarding the proposal and the analysis to date.
On September 21, 1998, the Consolidated Resources special committee held a
telephonic meeting with its financial and legal advisors during which the group
discussed the structure of the proposed transaction. The members of the special
committee then discussed a number of other aspects of the proposed transaction
with its legal advisors and Dain Rauscher Wessels.
On September 28, 1998, the Hallwood G.P. special committee met with its
financial advisor and special counsel prior to the meeting of the entire working
group discussed below. At that meeting, the Hallwood G.P. special committee
discussed issues regarding the valuation of Energy Partners and Consolidated
Resources, cross-ownership among the entities and appropriate methodologies for
conducting the analysis. Kirkpatrick Energy Associates discussed the procedures
it had conducted, and presented the results of its analysis to date. The
presentation included a discussion of the methodology for addressing
cross-ownership among the entities and valuation of the various assets and
liabilities of the entities.
On September 28, 1998, the Consolidated Resources special committee, the
Hallwood G.P. special committee and Hallwood Group held a meeting at which
representatives of Dain Rauscher Wessels discussed the methodologies that they
were using with respect to the valuation of the consolidated company that should
be attributed to Consolidated Resources stockholders. Representatives of the
Hallwood G.P. special committee indicated that they were not prepared at that
time to discuss the percentage of value of the consolidated company that should
be attributed to Energy Partners. It was agreed that the discussions should
continue.
Throughout October 1998, numerous meetings and discussions were held by and
among various representatives of Hallwood Group, the Hallwood G.P. special
committee, the Consolidated Resources special committee, their financial and
legal advisors and representatives of Hallwood Petroleum to discuss components
of the value and the analysis used by the advisors.
On November 3, 1998, the Consolidated Resources special committee held a
telephonic meeting with its financial and legal advisors during which its
financial advisor analyzed the proposed transaction as amended. The members of
the special committee then considered various alternatives available to
Consolidated Resources, and compared such alternatives to the proposed
transaction as amended. The legal advisors to the special committee then
presented an update to the committee with respect to the various pending
litigation matters that could affect the various energy interests of Hallwood
Group or Consolidated Resources and Energy Partners.
On November 3, 1998, the Hallwood G.P. special committee met with its
financial advisor and special counsel. At that meeting, the special committee
discussed issues regarding the complexities of the partnership arrangement of
Energy Partners and cross-ownership among the entities, treatment of the various
contractual arrangements among the entities and treatment of various balance
sheet items in the consolidation. Kirkpatrick Energy Associates discussed the
procedures it had conducted and presented the results of its analysis to date.
The Hallwood G.P. special committee then discussed the assumptions and
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methodologies being used and the appropriate approach to valuation of the
entities. The Hallwood G.P. special committee directed Kirkpatrick Energy
Associates to continue its discussions with the other advisors as to the
analyses conducted by the advisors and its analysis of the consolidation.
On December 15, 1998, the Consolidated Resources special committee held a
telephonic meeting with its financial and legal advisors during which Dain
Rauscher Wessels orally advised the special committee that it would be prepared
to render an opinion concerning the proposed allocation of stock of the combined
entity: 56% to Energy Partners, 26% to Consolidated Resources, and 18% to
Hallwood Group. After discussing various alternatives available to Consolidated
Resources, the Consolidated Resources special committee voted to recommend the
transaction at the proposed allocation of 56%, 26% and 18%, and to recommend
that the Energy Partners units held by Consolidated Resources be voted for the
Energy Partners merger and for the amendment to the Energy Partners partnership
agreement.
On December 15, 1998, the Hallwood G.P. special committee met by telephone,
with its financial advisor and special counsel, to discuss further the proposed
transaction. At that meeting, Kirkpatrick Energy Associates summarized the
assumptions and results of its analyses, as well as the data on which the
analyses were based. The financial advisor presented the threshold minimums that
each of the three methodologies would indicate and threshold minimum summary
value for the Class A units. Kirkpatrick Energy Associates advised the special
committee that it would be prepared to render its opinion that the proposed
transaction would be fair, from a financial point of view, to the unitholders of
Energy Partners, other than Consolidated Resources and Hallwood Group, if, as a
result of the transaction, the Class A unitholders received Energy Corporation
common stock representing at least 56% of the stock outstanding immediately
following the transaction and the Class C unitholders received one share of
Energy Corporation's redeemable preferred stock for each Class C unit. After
further discussion regarding the merits of the proposal and the potential
benefits for unitholders, the Hallwood G.P. special committee unanimously voted
to recommend approval of the transaction and to recommend that the Consolidated
Resources common stock held by Energy Partners be voted for the Consolidated
Resources merger.
On March 9, 1999, the consolidation agreement was amended to (1) change how
existing options of Energy Partners and Consolidated Resources would be treated
in the consolidation and (2) change the earliest date on which the Energy
Corporation preferred stock could be redeemed. The existing options of Energy
Partners and Consolidated Resources will be canceled and the holders of each
option will receive an amount in cash equal to the difference between the
exercise price of the option and the average market value of the units or stock
for which the option is exercisable for the 30 calendar days prior to the
closing of the consolidation. Prior to the amendment of the consolidation
agreement the existing options were to be replaced by new options of Energy
Corporation. The change was made to give Energy Corporation an unallocated
option pool large enough to provide for sufficient employee incentives going
forward. The earliest date on which the Energy Corporation preferred stock could
be redeemed was previously December 31, 2001. The change in the consolidation
agreement moved this date to December 31, 2003, to allow holders of the
preferred stock to retain their preferred position for a longer period of time,
if Energy Corporation makes a determination in the future to redeem the
preferred stock.
RECOMMENDATION OF THE HALLWOOD G.P. SPECIAL COMMITTEE AND THE HALLWOOD G.P.
BOARD
The Hallwood G.P. special committee and the Hallwood G.P. board believe
that the consolidation is in the best interests of Energy Partner's unitholders
and have unanimously approved the consolidation agreement and the transactions
contemplated by it, including the amendment to the Energy Partners partnership
agreement. THE HALLWOOD G.P. SPECIAL COMMITTEE AND THE HALLWOOD G.P. BOARD
UNANIMOUSLY RECOMMEND THAT UNITHOLDERS VOTE "FOR" ADOPTION AND APPROVAL OF THE
CONSOLIDATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY IT AND "FOR"
ADOPTION AND APPROVAL OF THE AMENDMENT TO THE ENERGY PARTNERS PARTNERSHIP
AGREEMENT.
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In arriving at the decision to approve and recommend the terms of the
consolidation agreement, the Hallwood G.P. special committee and the Hallwood
G.P. board considered a number of factors, including, but not limited to, the
following:
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
understanding of:
- the strategic options available to Energy Partners to maximize value for
the unitholders and the conclusion that the consolidation represents the
best strategic option available;
- the likelihood of future consolidation in the oil and gas exploration
and production industry and the conclusion that the consolidation
affords the holders of units the opportunity to own the equity of a
larger public company that would be better positioned in light of trends
in the industry; and
- the restrictions placed on Energy Partners' ability to take advantage of
a number of business opportunities due to its present size and level of
leverage that are a negative factor if the consolidation were not
approved.
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
consideration of Energy Partners' strengths and weaknesses as an
independent company and the conclusion that its ability to pursue its
strategic plan would be enhanced by the consolidation;
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
conclusion that the consolidation would create a company with a larger
equity capitalization and simplified ownership structure that would,
therefore, more easily attract the interest of institutional investors
and financial analysts, create more liquidity for the unitholders of
Energy Partners and have better access to the capital markets than the
entities would separately;
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
consideration of the business, operations, assets, financial positions
and prospects of Consolidated Resources, Energy Partners and the various
energy interests of HEPGP, including the shared ownership of oil and gas
properties, the shared management and the common operations of the
companies and potential synergies, a factor that supports a conclusion
that the consolidation would be in the best interests of the unitholders;
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
consideration of, and discussions with, senior executives of Hallwood
G.P. regarding the terms of the consolidation agreement and other factors
that management believed would assist the Hallwood G.P. special committee
and Hallwood G.P. board in arriving at a fair value for Energy Partners'
interests;
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
analysis of the complexities of the limited partnership structure of
Energy Partners, a negative factor if the consolidation were not
approved, and the relative liquidity and marketability of units of Energy
Partners compared to the expected liquidity and marketability of shares
of Energy Corporation's common stock and preferred stock;
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
analysis of the complexities to financial analysts and potential and
current unitholders of the cross ownership of the securities and energy
assets of Energy Partners and Consolidated Resources, which makes it more
difficult for securities analysts to analyze Energy Partners and for
investors to assess the opportunities and risks of an investment in
Energy Partners, compared to the simpler ownership structure of Energy
Corporation following the consolidation; and
- the Hallwood G.P. special committee's and the Hallwood G.P. board's
receipt of Kirkpatrick Energy Associates opinion that, as of December 15,
1998, the merger consideration was fair, from a financial point of view,
to the public unitholders.
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<PAGE> 33
The above discussion of the information and factors considered by the
Hallwood G.P. Board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the consolidation, the
Hallwood G.P. board did not find it practical to and did not attempt to rank or
assign relative weights to the above factors. The Hallwood G.P. board relied on
the experience and expertise of its financial advisor for quantitative analysis
of the financial terms of the merger. In addition, the Hallwood G.P. board did
not undertake as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather conducted a discussion of the factors described above, including
asking questions of Energy Partners' management and legal and financial
advisors, and reached a general consensus that the consolidation was in the best
interests of Energy Partners and its unitholders. In addition, individual
members of the Hallwood G.P. board may have given different weights to different
factors.
Some of the members of the Hallwood G.P. board have interests in the Energy
Partners merger that are different from, or in addition to, yours. In addition,
the executive officers and directors of Hallwood G.P. and Hallwood Petroleum,
Inc. will become executive officers and directors of Energy Corporation.
OPINION OF ENERGY PARTNERS' FINANCIAL ADVISOR
On July 15, 1998, the Hallwood G.P. special committee engaged Kirkpatrick
Energy Associates to act as financial advisor in connection with the
consolidation. The Hallwood G.P. special committee instructed Kirkpatrick Energy
Associates, in its role as financial advisor, to evaluate the fairness, from a
financial perspective, to Class A unitholders of Energy Partners of the
percentage of Energy Corporation common stock to be received by such unitholders
in the consolidation (the "exchange percentage"). The Hallwood G.P. special
committee also instructed Kirkpatrick Energy Associates, in its role as
financial advisor, to evaluate the fairness, from a financial perspective, to
Class C unitholders of Energy Partners, of the exchange rate of the Energy
Corporation preferred stock. In connection with these evaluations, the Hallwood
G.P. special committee authorized Kirkpatrick Energy Associates to conduct such
investigations as Kirkpatrick Energy Associates deemed appropriate.
On December 15, 1998 Kirkpatrick Energy Associates delivered its opinion to
the Hallwood G.P. special committee to the effect that, as of that date and
based upon matters stated in the opinion, from a financial point of view, the
exchange percentage to be received by Energy Partners' Class A unitholders,
other than Consolidated Resources and Hallwood Group, in the consolidation was
fair to the unitholders and that, from a financial point of view, the exchange
of one share of Energy Corporation preferred stock for one Class C unit of
Energy Partners was fair to such unitholders. A copy of Kirkpatrick Energy
Associate's opinion is attached as Appendix B to this document. The summary of
the opinion set forth below is qualified in its entirety by Appendix B, which is
incorporated in this document by reference. Unitholders are urged to read the
opinion in its entirety for a description of the assumptions made, matters
considered and procedures followed by Kirkpatrick Energy Associates.
No limitations were imposed by the Hallwood G.P. special committee upon
Kirkpatrick Energy Associates with respect to the investigations made or the
procedures followed by Kirkpatrick Energy Associates in rendering its opinion,
and Energy Partners and the members of its management cooperated with
Kirkpatrick Energy Associates in connection with its investigation. The
consideration to be received pursuant to the consolidation was determined by
negotiations on behalf of Energy Partners, Consolidated Resources and HEPGP and
was not determined by Kirkpatrick Energy Associates. In giving its opinion,
Kirkpatrick Energy Associates did not render any opinion as to the value of
Energy Partners, Consolidated Resources, HEPGP or Energy Corporation and its
opinion does not constitute a recommendation to any unitholders as to how the
unitholders should vote with respect to the consolidation.
Kirkpatrick Energy Associates was not requested to opine as to, and its
opinion does not address, Energy Partners' underlying business decision to
proceed with or effect the consolidation. Kirkpatrick Energy Associates also
expressed no opinion as to the prices at which shares of Energy Corporation
common stock will actually trade following consummation of the consolidation and
Kirkpatrick Energy Associate's opinion should not be viewed as providing any
assurance that the market value of the shares of
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<PAGE> 34
Energy Corporation common stock to be held by Class A unitholders after the
consolidation will be greater than market value of the Class A units owned by
such unitholders at any time prior to announcement of the consolidation.
Additionally, Kirkpatrick Energy Associates expressed no opinion as to the
prices at which shares of Energy Corporation preferred stock actually will trade
following the completion of the consolidation and Kirkpatrick Energy Associate's
opinion should not be viewed as providing any assurance that the market value of
the shares of Energy Corporation preferred stock to be held by Class C
unitholders after the consolidation will be in excess of the market value of the
Class C units owned by such unitholders at any time prior to announcement or
consummation of the consolidation.
In arriving at its opinion, Kirkpatrick Energy Associates, among other
things:
- reviewed publicly available business and financial information relating
to Energy Partners and Consolidated Resources and the related unaudited
financial information for Energy Partners, Consolidated Resources and
HEPGP;
- reviewed oil and gas reserve reports for Energy Partners, Consolidated
Resources and HEPGP as prepared by management of Energy Partners,
Consolidated Resources and HEPGP and reviewed by Williamson Petroleum
Consultants, Inc., independent petroleum engineers, as of July 1, 1998,
as well as, oil and gas reserve reports for the Arcadia acquisition, for
Energy Partners, Consolidated Resources, and HEPGP as prepared by
management of Energy Partners, Consolidated Resources, and HEPGP as of
September 17, 1998;
- reviewed internal financial information and other data provided to
Kirkpatrick Energy Associates by Energy Partners, Consolidated Resources
and HEPGP relating to the business and prospects of Energy Partners,
Consolidated Resources and HEPGP, including financial projections
prepared by the management of Energy Partners, Consolidated Resources and
HEPGP;
- conducted discussions with members of the senior management of Energy
Partners, Consolidated Resources and HEPGP;
- reviewed publicly available financial and securities market data
pertaining to publicly held companies in the oil and gas industry;
- reviewed the financial terms, to the extent publicly available, of
acquisition transactions involving other companies that Kirkpatrick
Energy Associates considered relevant;
- conducted discussions with representatives of the independent certified
public accountants for Energy Partners, Consolidated Resources and HEPGP;
- reviewed the reported prices and trading activity for the Class A and
Class C units of Energy Partners and shares of Consolidated Resources
common stock;
- reviewed the results of operations of Energy Partners, Consolidated
Resources and HEPGP and compared them with those of relevant companies;
- reviewed drafts of the consolidation agreement and a draft of the
Schedule 14A and related proxy statement dated December 11, 1998; and
- conducted such other financial studies, analyses and investigations, and
considered such other information as Kirkpatrick Energy Associates
considered necessary and appropriate.
In reaching its opinion and conducting its analysis, Kirkpatrick Energy
Associates did not assume any responsibility for independent verification of any
of the information discussed above and relied upon it being complete and
accurate in all material respects. Kirkpatrick Energy Associates was not
requested to, and did not make, an independent evaluation or appraisal of any
assets or liabilities, contingent or otherwise, of Energy Partners, Consolidated
Resources and HEPGP or any of their subsidiaries, nor was Kirkpatrick Energy
Associates furnished with any such evaluation or appraisal. Kirkpatrick Energy
Associates also assumed that all of the information, including the projections
provided to Kirkpatrick Energy Associates by management of Energy Partners,
Consolidated Resources and HEPGP was prepared
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<PAGE> 35
in good faith, based upon reasonable estimates and reflects the best judgment of
the management of Energy Partners, Consolidated Resources, and HEPGP as to the
future financial performance of Energy Partners, Consolidated Resources and
HEPGP based upon the historical performance and estimates and assumptions that
were reasonable at the time made. In addition, Kirkpatrick Energy Associates was
not asked to and did not express any opinion as to the after-tax consequences of
the consolidation to the Class A and Class C unitholders. Kirkpatrick Energy
Associate's opinion is based on economic, monetary and market conditions
existing on the date of the opinion.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative analysis
and the application of those methods to the particular circumstances, and
therefore such an opinion is not readily susceptible to summary description.
Class A Units
In arriving at its opinion with respect to the Class A units, Kirkpatrick
Energy Associates used three separate analyses for Energy Partners, Consolidated
Resources and HEPGP, consisting of:
- discounted net asset value analysis;
- comparable acquisitions analysis; and
- comparable companies trading analysis.
Net Asset Value Analysis. Kirkpatrick Energy Associates performed a net
asset value analysis to determine if, based on the orderly liquidation value of
Energy Partners, Consolidated Resources and the energy interests of Hallwood
Group, the consolidation was fair, from a financial point of view to Energy
Partners' public unitholders. Kirkpatrick Energy Associates performed the
analysis using the present value of the future cash flows of the proved reserves
as of July 1, 1998, as supplemented on September 17, 1998, based on reserve,
production, and production cost estimates, all as provided to Kirkpatrick Energy
Associates by Energy Partners, Consolidated Resources and HEPGP. In addition,
representatives of Kirkpatrick Energy Associates met with representatives of
management of Energy Partners, Consolidated Resources and HEPGP to discuss
current and projected operations for Energy Partners, Consolidated Resources and
HEPGP. In developing its net asset value analysis, Kirkpatrick Energy Associates
took the free cash flow, defined as net income plus non-cash expenses less
required capital expenditures, that Energy Partners, Consolidated Resources and
HEPGP were expected to generate throughout the life of the reserves, as
presented to Kirkpatrick Energy Associates in the reserve reports provided by
Energy Partners, Consolidated Resources and HEPGP, and discounted the cash flows
to a present value using a 10% discount rate, based on Kirkpatrick Energy
Associate's analysis of the weighted average costs of capital for comparable
companies and the accepted industry practice of using a 10% discount rate.
Kirkpatrick Energy Associates also discounted proved non-producing and proved
undeveloped reserves by 25% and 50%, respectively.
Kirkpatrick Energy Associates also analyzed an acquisition that occurred
after the July 1, 1998 reserve report and calculated a value based on
management's base case economics, presented to Kirkpatrick Energy Associates by
Energy Partners, Consolidated Resources and HEPGP. Kirkpatrick Energy Associates
then added net working capital, estimated book value of other assets, the value
of Energy Partners' stock investment in Consolidated Resources and the book
value of other noncurrent assets, and subtracted the long-term liabilities of
Energy Partners and the value of units owned by Consolidated Resources and
Hallwood Group. In addition, Kirkpatrick Energy Associates took into
consideration the fact that, by virtue of its general partner interest and sole
ownership of the Class B units, Hallwood Group is able to exercise a level of
control in excess of its economic interest. Based on this analysis, Kirkpatrick
Energy Associates calculated a threshold minimum of 56%. Based upon a proposed
allocation of 56% to Energy Partners, this analysis would support a finding of
fairness.
Comparable Acquisition Analysis. Kirkpatrick Energy Associates used a
comparable acquisition analysis to value Energy Partners and Consolidated
Resources and to derive a value for the energy
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<PAGE> 36
interests of Hallwood Group and then to determine if, based on these valuations,
the consolidation was fair, from a financial point of view, to Energy Partners'
public unitholders. In calculating the value of the oil and gas reserves of
Energy Partners, Consolidated Resources and HEPGP, Kirkpatrick Energy Associates
examined publicly available comparable oil and gas reserve acquisition
transactions that occurred during 1997 and through July of 1998 in the
mid-continent, Rocky Mountains, Gulf Coast, and West Texas regions of the United
States as reported in Energy Capital Quarterly. Energy Capital Quarterly, which
is compiled and published by Kirkpatrick Energy Associates, tracks merger and
acquisition activity for the oil and gas industry. Twenty two such transactions
occurred during the period with a mean purchase price of $4.58 per barrel of oil
equivalent reserves. Kirkpatrick Energy Associates applied this multiple per
equivalent barrel of oil to proved reserves of Energy Partners, Consolidated
Resources and HEPGP as provided to Kirkpatrick Energy Associates by Energy
Partners, Consolidated Resources and HEPGP. Kirkpatrick Energy Associates then
adjusted the equity value ranges to account for some types of assets and
liabilities of Energy Partners, Consolidated Resources and HEPGP that were
included as part of the analysis. In addition, Kirkpatrick Energy Associates
took into consideration the fact that, by virtue of its general partner interest
and sole ownership of the Class B units, Hallwood Group is able to exercise a
level of control in excess of its economic interest. Based on this analysis,
Kirkpatrick Energy Associates calculated a threshold minimum of 56%. Based upon
a proposed allocation of 56% to Energy Partners, this analysis would support a
finding of fairness.
No company used in the comparable acquisition analysis was identical to
Energy Partners, Consolidated Resources, and HEPGP. Accordingly, an analysis of
the results of the above is not purely mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the comparable companies and other factors, such as total
consideration paid in relation to a company's reserves, total oil and gas
reserves, reserve life index and location of reserves acquired, that could
affect the acquisition value of such companies.
Comparable Companies Trading Analysis. Kirkpatrick Energy Associates used a
comparable companies trading analysis to value Energy Partners and Consolidated
Resources and then to determine if, based on these valuations, the consolidation
was fair, from a financial point of view, to Energy Partners' public
unitholders. Under this method, Kirkpatrick Energy Associates examined five
companies Kirkpatrick Energy Associates believed to be comparable based on
various financial and operational parameters. The comparable companies included
were:
- Abraxas Petroleum Corporation;
- Costilla Energy, Inc.;
- Cross Timbers Oil Company;
- KCS Energy, Inc.; and
- Swift Energy Company.
With respect to the comparable companies, Kirkpatrick Energy Associates
analyzed, among other things, current market value multiples relative to proved
reserves, operating cash flows, and the present value of cash flows as
determined pursuant to the standards established by the SEC for discounting the
present value of proved reserves. Kirkpatrick Energy Associates then established
market valuations for Energy Partners, Consolidated Resources and HEPGP by
applying the corresponding multiples of the comparable companies to establish
hypothetical relative values. Kirkpatrick Energy Associates then averaged these
implied relative market values. In addition, Kirkpatrick Energy Associates took
into consideration the fact that by virtue of its general partner interest and
sole ownership of the Class B units, Hallwood Group is able to exercise a level
of control in excess of its economic interest. Based on this analysis,
Kirkpatrick Energy Associates calculated a threshold minimum of 59%. Based upon
a proposed allocation of 56% to Energy Partners, this analysis by itself would
not support a finding of fairness.
None of the comparable companies utilized in the comparable companies
trading analysis is identical to Energy Partners and Consolidated Resources.
Accordingly, an analysis of the results of the foregoing is
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<PAGE> 37
not purely mathematical. Rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the public trading
value of the comparable companies or company to which they are being compared.
Summary of Analyses. The analyses described above yielded the following
results:
<TABLE>
<CAPTION>
THRESHOLD PROPOSED
MINIMUM ALLOCATION
--------- ----------
<S> <C> <C>
Net Asset Value............................................. 56% 56%
Comparable Acquisition...................................... 56% 56%
Comparable Companies Trading................................ 59% 56%
</TABLE>
Based on its experience in business valuations and the results obtained
from the three valuation methodologies and other pertinent observations and
criteria, Kirkpatrick Energy Associates calculated a threshold minimum summary
reference value for the Class A units, as of December 15, 1998, of 56%.
Class C Units
In addition, Kirkpatrick Energy Associates analyzed the proposed exchange
ratio of one Class C unit for one share of Energy Corporation preferred stock.
In performing this analysis, Kirkpatrick Energy Associates considered the
similarities between the Class C units and Energy Corporation preferred stock,
including but not limited to:
- preferential distribution of $1.00 per year;
- distributions are paid prior to distributions paid to other classes of
units or shares;
- distributions are and will remain fully cumulative;
- upon any liquidation or dissolution, the Class C units and the Energy
Corporation preferred stock will be entitled to accrued and accumulated
and unpaid distributions before any distribution of assets are made to
other classes; and
- after all payments have been made in respect to unpaid and accumulated
distributions, the Class C units and Energy Corporation preferred stock
will rank, as to rights and distributions on liquidation or dissolution,
on a parity with other classes of units or Energy Corporation common
stock, respectively.
Differences considered between the Class C units and Energy Corporation
preferred stock included, but were not limited to:
- the Energy Corporation preferred stock will vote together with the Energy
Corporation common stock in the election of directors, while on all other
matters, it will vote as a separate class, whereas the Class C units vote
as a separate class on all matters; and
- the Hallwood Energy Corporation preferred stock will be redeemable after
December 31, 2003, at Energy Corporation's option, in whole or in part,
at any time or from time to time, at a redemption price per share of
$10.00 plus, in each case, an amount equal to all dividends, whether or
not earned or declared, accrued and accumulated and unpaid to the date
fixed for redemption, without interest, whereas, the Class C units are
not redeemable.
In conducting its fairness evaluation of the exchange of one Class C unit
for one share of Energy Corporation preferred stock, Kirkpatrick Energy
Associates considered the similarities and differences discussed above,
calculated the premium to be received from the average market price over the 180
days ending September 30, 1998 to the proposed redemption price at 19% and
conducted net asset value and internal rate of return calculations based on the
redemption price of $10.00 per share starting in the year 2004. In conducting
its analysis, Kirkpatrick Energy Associates concluded that the exchange of the
Class C units for Energy Corporation preferred stock on a one to one basis, was
fair from a financial point
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<PAGE> 38
of view as of December 15, 1998 for the unitholders of Energy Partners' Class C
units, other than Consolidated Resources and Hallwood Group.
The summary set forth above does not purport to be a complete description
of either Kirkpatrick Energy Associates' analyses or presentations to the
Hallwood G.P. special committee. Kirkpatrick Energy Associates believes that its
analyses must be considered as a whole and that selecting portions of its
analyses or the factors considered by it, without considering all factors and
analyses, could create an incomplete view of the processes underlying its
opinion. The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial analyses or summary description. In its
analyses, Kirkpatrick Energy Associates made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Energy Partners, Consolidated
Resources and HEPGP. These assumptions include, without limitations, the
valuation of contractual obligations; the appropriate discounts applied to
proved non-producing and proved undeveloped reserves; and applicable value to
undeveloped acreage. Any estimates contained in the opinion are not necessarily
indicative of actual values, which may be significantly more or less favorable
than as set forth in the opinion. Estimates of value of companies do not purport
to be appraisals or necessarily reflect the prices at which companies may
actually be sold. Because such estimates are inherently subject to uncertainty,
none of Energy Partners, Consolidated Resources, HEPGP, Kirkpatrick Energy
Associates, or any other person assume responsibility for their accuracy.
The Hallwood G.P. special committee selected Kirkpatrick Energy Associates
as its financial advisor because Kirkpatrick Energy Associates is a recognized
financial advising firm specializing in the oil and gas industry and regularly
engages in the valuation of oil and gas businesses and their securities in
connection with mergers and acquisitions. According to the terms of its
engagement on July 15, 1998, it was agreed that Kirkpatrick Energy Associates
would receive a fee of $120,000 for its services in connection with the
consolidation. This fee was increased by $60,000 on October 13, 1998 due to the
significant amount of work that was required by Kirkpatrick Energy Associates
beyond what the parties had anticipated upon the initial engagement of
Kirkpatrick Energy Associates. Energy Partners also agreed to reimburse
Kirkpatrick Energy Associates for its reasonable out-of-pocket expenses and to
indemnify Kirkpatrick Energy Associates and its controlling persons against
liabilities and expenses relating to or arising out of the consummation of the
consolidation, including liabilities under United States federal securities
laws. The indemnification for liabilities under United States federal securities
laws may not be enforceable as being against public policy.
The full text of Kirkpatrick Energy Associate's written opinion to the
Hallwood G.P. special committee, dated December 15, 1998, which sets forth the
assumptions made, matters considered, and limitations of the review by
Kirkpatrick Energy Associates is attached as Appendix B and is incorporated by
reference in this document. The above summary highlights aspects of Kirkpatrick
Energy Associates' opinion and is not intended to be complete. We urge you to
read the full text of the opinion carefully and in its entirety. Kirkpatrick
Energy Associates has consented to inclusion of its written opinion in this
document. In furnishing its opinion, Kirkpatrick Energy Associates does not
admit that it is an expert with respect to the registration statement of which
this document is a part within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder. Kirkpatrick Energy Associates does not admit that its opinion
constitutes a report or valuation within the meaning of Section 11 of the
Securities Act. Kirkpatrick Energy Associate's opinion is directed to the
Hallwood G.P. special committee, covers only the fairness of the consideration
to be received by the Class A and Class C unitholders, other than Consolidated
Resources and Hallwood Group, from a financial point of view as of the date of
the opinion and does not constitute a recommendation to any unitholders as to
how unitholders should vote at the Energy Partners meeting.
RECOMMENDATION OF THE CONSOLIDATED RESOURCES SPECIAL COMMITTEE AND THE
CONSOLIDATED RESOURCES BOARD
The Consolidated Resources special committee and the Consolidated Resources
board believe that the consolidation is in the best interests of Consolidated
Resources' stockholders and have unanimously
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<PAGE> 39
approved the consolidation agreement and the transactions contemplated by it.
THE CONSOLIDATED RESOURCES SPECIAL COMMITTEE AND THE CONSOLIDATED RESOURCES
BOARD UNANIMOUSLY RECOMMEND THAT THE STOCKHOLDERS OF CONSOLIDATED RESOURCES VOTE
"FOR' ADOPTION AND APPROVAL OF THE CONSOLIDATION AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY IT.
In arriving at the decision to approve and recommend the terms of the
consolidation agreement, the Consolidated Resources special committee and the
Consolidated Resources board considered a number of factors, including, but not
limited to, the following:
- the Consolidated Resources special committee's and the Consolidated
Resources board's understanding of:
- the conditions in the oil and gas exploration and production industry in
North America generally and the southwestern and midwestern United
States, Louisiana and the Rocky Mountain region of the United States in
particular;
- the strategic options available to Consolidated Resources;
- the likelihood of future consolidation in the oil and gas exploration
and production industry in North America generally and the southwestern
and midwestern United States, Louisiana and the Rocky Mountain region of
the United States in particular; and
- the limitations placed on Consolidated Resources' ability to take
advantage of a number of opportunities due to its present size, level of
leverage and limited borrowing capacity;
- the Consolidated Resources special committee's and the Consolidated
Resources board's consideration of Consolidated Resources' strategic plan
as an independent company and the belief that its ability to pursue its
plan would be enhanced by the consolidation;
- the Consolidated Resources special committee's and the Consolidated
Resources board's belief that the consolidation would create a company
with a larger equity capitalization that would, because of its increased
size, more easily attract the interest of institutional investors and
financial advisors, create more liquidity for the stockholders and have
better access to the capital markets than the constituent entities;
- the Consolidated Resources special committee's and the Consolidated
Resources board's consideration of the business, operations, assets,
financial position, prospects and personnel of Consolidated Resources,
Energy Partners and the various energy interests of HEPGP, including the
shared ownership of oil and gas properties, the shared management and the
common operations of the companies and potential synergies;
- the Consolidated Resources special committee's and the Consolidated
Resources board's consideration of current litigation involving
Consolidated Resources, Energy Partners, and HEPGP, and the proportionate
increase in exposure to litigation that Consolidated Resources'
stockholders would incur as a result of the consolidation;
- the Consolidated Resources special committee's and the Consolidated
Resources board's belief that the consolidation would be accomplished for
Consolidated Resources stockholders on a tax-free basis for federal
income tax purposes;
- the Consolidated Resources special committee's and the Consolidated
Resources board's consideration of presentations by, and discussions
with, senior executives of Hallwood G.P. and representatives of Jenkens &
Gilchrist, counsel to Hallwood Group, regarding the terms of the
consolidation agreement, and the results of the management's due
diligence presentation; and
- the Consolidated Resources special committee's receipt of oral opinions
from Dain Rauscher Wessels, which it subsequently confirmed in writing by
letter dated December 15, 1998, that, based upon the factors and
assumptions stated in its opinion and as of the date of the opinion, the
merger
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<PAGE> 40
consideration to be received by the public stockholders of Consolidated
Resources in the consolidation is fair to such stockholders from a financial
point of view.
The above discussion of the information and factors considered by the
Consolidated Resources board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the
consolidation, the Consolidated Resources board did not find it practical to and
did not attempt to rank or assign relative weights to the above factors. The
Consolidated Resources board relied on the experience and expertise of its
financial advisors for quantitative analysis of the financial terms of the
merger. See "-- Opinion of Hallwood Consolidated Resources' Financial Advisor."
In addition, the Consolidated Resources board did not undertake to make any
specific determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to its ultimate determination,
but rather conducted a discussion of the factors described above, including
asking questions of Consolidated Resources management and legal and financial
advisors, and reached a general consensus that the consolidation was in the best
interests of Consolidated Resources and its stockholders. In addition,
individual members of the Consolidated Resources board may have given different
weights to different factors. On balance, however, the discussions among the
members of the Consolidated Resources board evidenced the general view that,
except with respect to the increased exposure to litigation resulting from the
consolidation, the factors enumerated above were regarded favorably by the
Consolidated Resources board in making its determination to approve the
consolidation.
Some of the members of the Consolidated Resources board have interests in
the Consolidated Resources merger that are different from, or in addition to,
yours. In addition, the executive officers and directors of Consolidated
Resources will become executive officers and directors of Energy Corporation.
OPINION OF CONSOLIDATED RESOURCES' FINANCIAL ADVISOR
On December 15, 1998, Dain Rauscher Wessels delivered its written opinion
to the Consolidated Resources special committee that, as of the date of its
opinion, the consideration to be received by the public stockholders in the
consolidation is fair to such stockholders from a financial point of view. THE
FULL TEXT OF THE WRITTEN OPINION OF DAIN RAUSCHER WESSELS DATED DECEMBER 15,
1998, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED TO THIS
DOCUMENT AS APPENDIX C. STOCKHOLDERS OF CONSOLIDATED RESOURCES ARE URGED TO, AND
SHOULD, READ THE OPINION IN ITS ENTIRETY.
In connection with Dain Rauscher Wessels' review of the consolidation, and
in arriving at its opinion, Dain Rauscher Wessels has reviewed business and
financial information relating to Consolidated Resources, Energy Partners and
the energy interests of Hallwood Group. Dain Rauscher Wessels has, among other
things:
- reviewed a draft of the consolidation agreement;
- reviewed the Annual Reports on Form 10-K for the years ended December 31,
1995, 1996 and 1997 and the Quarterly Reports on Form 10-Q and related
unaudited financial information for a number of interim periods,
including the nine months ended September 30, 1998, of Consolidated
Resources and Energy Partners;
- reviewed proved oil and gas reserves and the standardized measure of
discounted future net cash flows relating to proved oil and gas reserves
as of June 30, 1998, reviewed by Williamson Petroleum Consultants, Inc.,
independent petroleum engineers, for Consolidated Resources, Energy
Partners, and the energy interests of Hallwood Group;
- reviewed management's projections of reserves for Consolidated Resources,
Energy Partners and the energy interests of Hallwood Group at January 1,
1999;
- met with members of senior management to discuss Consolidated Resources'
and Energy Partners' operations, historical financial statements and
future prospects and their views of the business, operational and
strategic benefits, potential synergies and other implications of the
consolidation;
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<PAGE> 41
- reviewed operating and financial information of Consolidated Resources
and Energy Partners, including projections and projected cost savings and
operating synergies, provided to Dain Rauscher Wessels by management
relating to Consolidated Resources' and Energy Partners' businesses and
prospects;
- reviewed historical market prices and trading volumes for the
Consolidated Resources common stock and the Class A and Class C units of
Energy Partners;
- reviewed publicly available financial data and stock market performance
data of publicly held companies that Dain Rauscher Wessels felt were
generally comparable to Consolidated Resources and Energy Partners; and
- reviewed the financial terms of numerous business combinations of
comparable exploration and production companies.
In addition, Dain Rauscher Wessels has considered such other information and has
conducted investigations as Dain Rauscher Wessels considered appropriate under
the circumstances.
Dain Rauscher Wessels relied upon the accuracy and completeness of all of
the financial and other information reviewed by it and has assumed such accuracy
for purposes of its opinion. Dain Rauscher Wessels has not made an independent
evaluation or appraisal of the assets and liabilities of Consolidated Resources
or Energy Partners or the energy interests of Hallwood Group, nor was Dain
Rauscher Wessels furnished with any such appraisals. With respect to reserve
information, Dain Rauscher Wessels has relied solely upon the reserve reports
and internal projections prepared by the independent petroleum engineers and the
management of Consolidated Resources and Energy Partners. Dain Rauscher Wessels
has assumed, with Consolidated Resources' consent, that such reserve information
and the financial forecasts provided to Dain Rauscher Wessels and discussed with
Dain Rauscher Wessels with respect to Consolidated Resources, Energy Partners
and the energy interests of Hallwood Group, after giving effect to the
consolidation, have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of management and that such
forecasts will be realized in the amounts and at the times contemplated. Dain
Rauscher Wessels did not attempt to verify any of the information furnished to
or reviewed by it. Dain Rauscher Wessels' opinion was based upon economic and
market conditions existing on the date of such opinion.
In order to give an opinion as to the fairness, from a financial point of
view, to the public holders of Consolidated Resources common stock of the
consideration to be received by such holders in the proposed consolidation, Dain
Rauscher Wessels calculated a valuation range for Consolidated Resources and
Energy Partners on a stand-alone basis based on the following approaches:
- market value analysis;
- net asset value analysis;
- comparable company analysis; and
- comparable merger and acquisition transaction analysis.
A value was then derived for the general partnership interest in Energy Partners
based on the same methodologies used to value Consolidated Resources and Energy
Partners. The other components that constitute the energy interests of Hallwood
Group were then added to the value of the general partnership interest in Energy
Partners as follows:
- $467,400 in fees, discounted at 10%;
- the projected 1999 pretax PV-10% Value ("1999 PV-10") of Hallwood Group's
direct owned reserves, which is the projected value of total proved
reserves at January 1, 1999 based on oil and gas prices at December 7,
1998 and applying a 10% discount rate; and
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<PAGE> 42
- a "control relinquishment payment," of between 0% and 10% of the value of
Energy Corporation for Hallwood Group's effective loss of control over
Consolidated Resources and Energy Partners.
As stated previously in this document, Energy Partners owns 45.7% of the
fully diluted outstanding shares of Consolidated Resources common stock.
Consolidated Resources, in turn, owns 19.5% of the Class A and 5.3% of the Class
C units of Energy Partners. In addition, Hallwood Group owns 5.1% of Energy
Partner's Class A units, 100% of the Class B units and 1.8% of the Class C units
and, through its general partnership interest in Energy Partners, owns 2% of
Energy Partner's 45.7% ownership of Consolidated Resources. Thus, to come to a
conclusion regarding the fairness of the percentage of the equity of Energy
Corporation allocated to the public stockholders of Consolidated Resources in
the consolidation, Dain Rauscher Wessels used an iterative approach, referred to
in this discussion as the "cross-ownership approach," to allocate the value to
public holders of Consolidated Resources common stock and Energy Partners units
and to Hallwood Group.
Set forth below is a summary of the material analyses performed by Dain
Rauscher Wessels in connection with the preparation of its opinion and included
in the presentation made by Dain Rauscher Wessels to the Consolidation Resources
special committee on December 15, 1998. The following table sets forth the
results of the analyses, which should be considered together with the more
detailed information set forth below.
<TABLE>
<CAPTION>
IMPLIED RANGE OF PERCENTAGE OF
VALUE CONTRIBUTED BY CONSOLIDATED
ANALYSIS RESOURCES PUBLIC STOCKHOLDERS
- -------- ---------------------------------
<S> <C>
Market Value Analysis....................................... 24.6% to 27.0%
Net Asset Value Analysis.................................... 24.7% to 27.1%
Comparable Company Analysis................................. 23.4% to 25.8%
Comparable Merger and Acquisition Transaction Analysis...... 24.1% to 26.5%
</TABLE>
Market Value Analysis. Dain Rauscher Wessels performed a market value
analysis to determine if, based on Consolidated Resources' and Energy Partners'
current market value and the derived value for the energy interests of Hallwood
Group, the consolidation was fair from a financial point of view to Consolidated
Resources' public stockholders. Dain Rauscher Wessels reviewed the daily
historical closing prices and volumes, for shares of Consolidated Resources
common stock and the Class A and C units of Energy Partners during the period
from January 2, 1998 to December 10, 1998. In addition, Dain Rauscher Wessels
determined the market value of Consolidated Resources and Energy Partners based
on the average closing price for the Consolidated Resources common stock and the
Class A and C units of Energy Partners for a thirty-day period ended December
10, 1998. Dain Rauscher Wessels then derived the value of the general
partnership interest in Energy Partners from the market value of Energy Partners
and added to such value the other components that constitute the energy
interests of Hallwood Group. This market value analysis, after applying the
cross-ownership approach, implies that the public stockholders of Consolidated
Resources, who are receiving 26.0% of the Energy Corporation common stock in the
consolidation, are contributing between 24.6% and 27.0% of the value of Energy
Corporation, depending on the control relinquishment payment. Because the
percentage of Energy Corporation that Consolidated Resources' public
stockholders are receiving was within this range, this analysis supported Dain
Rauscher Wessels' opinion.
Net Asset Value Analysis. Dain Rauscher Wessels performed a net asset value
analysis to determine if, based on the orderly liquidation value of Consolidated
Resources, Energy Partners, and the energy interests of Hallwood Group, the
consolidation was fair from a financial point of value to Consolidated Resources
public stockholders. Dain Rauscher Wessels calculated net asset values for
Consolidated
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<PAGE> 43
Resources, Energy Partners, and the energy interests of Hallwood Group based on
(1) the 1999 PV-10 and (2) unaudited balance sheet information as of September
30, 1998. The table below summarizes the 1999 PV-10 values for the three
entities.
<TABLE>
<CAPTION>
ENTITY PV-10 VALUE
- ------ -------------
<S> <C>
Hallwood Consolidated Resources............................. $53.6 million
Hallwood Energy Partners.................................... $73.1 million
Energy Interests of Hallwood Group.......................... $ 8.6 million
</TABLE>
By adding the discounted net cash flows of plants/facilities tax credits
and hedge income as well as other assets and working capital, excluding
short-term debt, to the 1999 PV-10 and subtracting long-term debt and other
liabilities, Dain Rauscher Wessels calculated the net asset values set forth in
the table below.
<TABLE>
<CAPTION>
ENTITY NET ASSET VALUE
- ------ ---------------
<S> <C>
Hallwood Consolidated Resources............................. $23.2 million
Hallwood Energy Partners.................................... $30.2 million
Energy Interests of Hallwood Group.......................... $13.2 million
</TABLE>
This net asset value analysis, after applying the cross-ownership approach,
implies that the public stockholders of Consolidated Resources, who are
receiving 26.0% of the Energy Corporation common stock in the consolidation, are
contributing between 24.7 % and 27.1 % of the value of Energy Corporation,
depending on the control relinquishment payment. Because the percentage of
Energy Corporation that Consolidated Resources' public stockholders are
receiving was within this range, this analysis supported Dain Rauscher Wessels'
opinion.
Comparable Company Analysis. Dain Rauscher Wessels used comparable company
trading multiples to value Consolidated Resources and Energy Partners and to
derive a value for the energy interests of Hallwood Group and then to determine
if, based on these valuations, the consolidation was fair from a financial point
of view to Consolidated Resources' public stockholders. Dain Rauscher Wessels
reviewed and compared a variety of financial operating and market information
relating to Consolidated Resources and Energy Partners to corresponding
financial information, ratios and public multiples for the following seven small
to medium capitalization, acquisition and exploitation focused exploration and
production companies:
- Abraxas Petroleum Corporation;
- Costilla Energy, Inc.;
- Cross Timbers Oil Company;
- Key Production, Inc.;
- Magnum Hunter Resources, Inc.;
- Southern Mineral Corporation; and
- Swift Energy Company.
These comparable companies were chosen because they are publicly traded
companies with operations that, for purposes of analysis, can be considered
similar to Consolidated Resources and Energy Partners. The multiples and ratios
for the companies were based on Dain Rauscher Wessels' and others' published
research estimates and latest public information.
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<PAGE> 44
Dain Rauscher Wessels considered publicly available information for the
comparable companies, including, but not limited to the following:
- market value of capitalization ("MVC"), which is the market value of
equity plus book value of total debt and liquidation value of preferred
stock, less excess cash and equivalents, as a ratio of 1997 pretax SEC
PV-10% Value (the "MVC/1997 PV-10 Ratio");
- MVC as a multiple of earnings before interest, taxes, depreciation,
depletion and amortization and exploration expenses ("EBITDX") as
estimated for the 1998 (the "1998E MVC/EBITDX Multiple") and 1999 (the
"1999E MVC/ERITDX Multiple") calendar years; and
- MVC as a ratio of 1997 proved reserves (the "MVC/1997 Proved Reserves
Ratio").
Dain Rauscher Wessels' analyses indicated the following:
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED
RANGE MEDIAN RESOURCES CORP. VALUE
---------------- ------ ---------------------
<S> <C> <C> <C>
MVC/1997 PV-10.......................... 84.6% to 190.2% 127.6% 84.9%
1998E MVC/EBITDX........................ 4.2x to 11.3x 8.6x 6.1x
1999E MVC/EBITDX........................ 3.0x to 9.9x 6.9x 4.2x
MVC/1997 Proved Reserves................ $0.81 to $1.98 $1.09 $0.73
</TABLE>
The median multiples were applied to the comparable financial statistics
for Consolidated Resources, Energy Partners and the general partnership interest
in Energy Partners. The value for the general partnership interest in Energy
Partners was then added to the other components that constitute the energy
interests of Hallwood Group.
After applying the cross-ownership approach, the comparable company
analysis implies that the public stockholders of Consolidated Resources, who are
receiving 26.0% of the Energy Corporation common stock in the consolidation, are
contributing between 23.4 % and 25.8 % of the value of Energy Corporation,
depending on the control relinquishment payment. Because the percentage of
Energy Corporation that Consolidated Resources' public stockholders are
receiving was slightly above this range, this analysis supported Dain Rauscher
Wessels' opinion.
No company used in the comparable company analysis is identical to
Consolidated Resources or Energy Partners. Accordingly, an analysis of the above
is not purely mathematical. Rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the comparable companies and other factors that could affect the public trading
value of the comparable companies or company to which they are being compared.
Comparable Merger and Acquisition Transaction Analysis. Dain Rauscher
Wessels used comparable transaction multiples to value Consolidated Resources
and Energy Partners and to derive a value for the energy interests of Hallwood
Group and then to determine if, based on these valuations, the consolidation was
fair from a financial point of view to Consolidated Resources' public
stockholders. Dain Rauscher Wessels considered a number of publicly announced
completed business combinations in the oil and gas sector for which terms were
publicly available, including the following 22 transactions announced between
March 1994 and November 1998:
- Pogo Petroleum, Inc.'s acquisition of Arch Petroleum, Inc.;
- Lomak Petroleum, Inc.'s acquisition of Domain Energy Corporation;
- Meridian Resource Corp.'s acquisition of Shell Oil Co.'s south Louisiana
properties;
- Ocean Energy, Inc.'s acquisition of United Meridian Corporation;
- Texoil, Inc.'s acquisition of Cliffwood Oil & Gas Corp.;
- Chesapeake Energy Corporation's acquisition of Hugoton Energy Corp.;
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<PAGE> 45
- Titan Exploration, Inc.'s acquisition of Carrollton Resources, LLC;
- Belco Oil & Gas Corp.'s acquisition of Coda Energy, Inc.;
- Chesapeake Energy Corporation's acquisition of DLB Oil & Gas, Inc.;
- Southern Mineral Corporation's acquisition of Amarac Energy Corporation;
- Titan Exploration, Inc.'s acquisition of Offshore Energy Development
Corporation;
- Meridian Resource Corp.'s acquisition of Cairn Energy USA, Inc.;
- Louis Dreyfus Natural Gas Corp.'s acquisition of American Exploration
Company;
- Forcenergy Inc.'s acquisition of Convest Energy Corporation;
- Forcenergy Inc.'s acquisition of Edisto Resources Corporation;
- Monterey Resources, Inc.'s acquisition of McFarland Energy, Inc.;
- Columbia Natural Resources, Inc.'s acquisition of Alamco, Inc.;
- Forcenergy Inc.'s acquisition of Great Western Resources, Inc.;
- Texas Pacific Group, Inc.'s acquisition of Belden & Blake Corporation;
- HS Resources, Inc.'s acquisition of Tide West Oil Company;
- Key Production Company, Inc.'s acquisition of Brock Exploration
Corporation; and
- Alexander Energy Corporation's acquisition of American Natural Energy
Corporation.
Dain Rauscher Wessels considered some of the publicly available information
for the comparable transactions, including, but not limited to, (1) transaction
value to target company total proved reserves ("Transaction Value/Proved
Reserves") and (2) transaction value to target company SEC PV-10% Value,
("Transaction Value/SEC PV-10"). Dain Rauscher Wessels calculated multiples
based on the consideration attributable to oil and gas reserves for each of the
comparable transactions to, among other things, such acquired companies'
respective proved reserves. Dain Rauscher Wessels' analyses is summarized in the
following table.
<TABLE>
<CAPTION>
RANGE FOR THE
COMPARABLE TRANSACTIONS MEAN
----------------------- ----
<S> <C> <C>
Transaction Value/Proved Reserves.................... $2.55 to $14.37 per BOE $7.02 per BOE
Transaction Value/SEC PV-10.......................... 0.6x to 2.2x 1.1x
</TABLE>
The mean multiples were applied to comparable financial statistics for
Consolidated Resources and Energy Partners. A value for the general partnership
interest in Energy Partners was derived from the value of Energy Partners and
added to the other components that constitute the energy interests of Hallwood
Group. After applying the cross-ownership approach, this comparable transaction
analysis implies that the public stockholders of Consolidated Resources, who are
receiving 26.0% of the Energy Corporation common stock in the consolidation, are
contributing between 24.1% and 26.5% of the value of Energy Corporation,
depending on the control relinquishment payment. Because the percentage of
Energy Corporation that Consolidated Resources' public stockholders are
receiving was within this range, this analysis supported Dain Rauscher Wessels'
opinion.
No transaction used in the comparable merger and acquisition transaction
analysis is identical to the consolidation. In evaluating the comparable
transactions, Dain Rauscher Wessels made judgments and assumptions with regard
to industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of
Consolidated Resources, such as the impact of competition on the business of
Consolidated Resources, Energy Partners and the industry in general, industry
growth and the absence of any material change in the financial condition and
prospects of
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<PAGE> 46
Consolidated Resources or Energy Partners or the industry or in the financial
markets in general. Mathematical analysis is not in itself a meaningful method
of using comparable transaction data.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Dain Rauscher Wessels' opinion. In arriving at its fairness opinion,
Dain Rauscher Wessels considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
Consolidated Resources or Energy Partners or the contemplated transaction. The
analyses were prepared solely for purposes of Dain Rauscher Wessels' providing
its opinion to the Consolidated Resources special committee as to the fairness
from a financial point of view of the consideration to the public stockholders
in the consolidation and do not purport to be appraisals or necessarily reflect
the prices at which businesses or securities may be sold. Analyses based upon
forecast of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such analyses are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Consolidated Resources, Energy Partners, Dain
Rauscher Wessels or any other person assumes responsibility if future results
are materially different from those forecast. As described above, Dain Rauscher
Wessels' opinion to the Consolidated Resources special committee was one of many
factors taken into consideration by the Consolidated Resources special committee
in connection with its consideration of the consolidation, and its opinion does
not constitute a recommendation as to how any stockholder should vote with
respect to the consolidation. The foregoing summary does not purport to be a
complete description of the analysis performed by Dain Rauscher Wessels and is
qualified by reference to the written opinion of Dain Rauscher Wessels set forth
in Appendix C to this document. Dain Rauscher Wessels has consented to inclusion
of its written opinion in this document.
Dain Rauscher Wessels, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes. Dain Rauscher
Wessels was selected to serve as the financial advisor to the Consolidated
Resources special committee in connection with the consolidation on the basis of
Dain Rauscher Wessels' experience with mergers and acquisitions in the energy
industry. Pursuant to an engagement letter agreement dated July 27, 1998,
Consolidated Resources paid Dain Rauscher Wessels a financial advisory fee of
$50,000 upon the execution of the engagement letter, an additional $125,000 at
the time Dain Rauscher Wessels delivered its fairness opinion and will pay Dain
Rauscher Wessels a fee of $100,000 at the time the consolidation is completed.
Consolidated Resources also agreed to reimburse Dain Rauscher Wessels for its
reasonable out-of-pocket expenses and to indemnify Dain Rauscher Wessels and its
controlling persons against specified liabilities and expenses relating to or
arising out of the completion of the consolidation, including liabilities under
federal securities laws. The indemnification for liabilities under United States
federal securities laws may not be enforceable as being against public policy.
Dain Rauscher Wessels in the normal course of its business may trade the
securities of Consolidated Resources and Energy Partners for its own account and
for the accounts of its customers and, accordingly, may hold a long or short
position in such securities at any time. Dain Rauscher Wessels has been engaged
to perform services for affiliates of Consolidated Resources, Energy Partners
and Hallwood Group in the past and has been paid customary fees for those
services.
TERMS OF THE CONSOLIDATION; CONVERSION OF UNITS OR SHARES
The consolidation will be accomplished by (1) merging subsidiaries of
Energy Corporation with and into each of Energy Partners and Consolidated
Resources, with Energy Partners and Consolidated Resources as the surviving
entities, and with the result that each of them will be wholly owned by Energy
Corporation, and by (2) the contribution of the energy assets of HEPGP to Energy
Corporation. If the consolidation is completed, each Energy Partners unit, other
than those owned by Consolidated Resources,
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<PAGE> 47
and each issued and outstanding share of Consolidated Resources common stock,
other than those owned by Energy Partners, outstanding immediately prior to the
effective time of the consolidation will be automatically converted into and
exchanged for the right to receive shares of Energy Corporation common stock or
Energy Corporation preferred stock based on a formula referred to as a
"conversion ratio" as described below. Each Class A and Class B unit of Energy
Partners will be converted into the right to receive 0.7417 of a share of Energy
Corporation common stock. Class C units of Energy Partners, other than those
held by Consolidated Resources, will be converted into the right to receive one
share of Energy Corporation preferred stock. Each share of Consolidated
Resources common stock, other than those held by Energy Partners, will be
converted into the right to receive 1.5918 shares of Energy Corporation common
stock. The Class A units and Class C units held by Consolidated Resources will
continue to represent limited partner interests in Energy Partners after the
consolidation. The Consolidated Resources common stock held by Energy Partners
will be canceled without consideration.
HEPGP will receive 1,312,411 shares of Energy Corporation common stock, as
a result of its:
- relinquishing its rights to participate in drilling and acquisitions by
Energy Partners;
- relinquishing its rights to receive a share of revenues from Energy
Partners greater than the amount of expenses allocated to it;
- its contribution of assets and the general partner interest in Energy
Partners to Energy Corporation;
- Hallwood Group's relinquishing its contractual rights to fees paid by
Energy Partners and Consolidated Resources; and
- Hallwood Group's relinquishing its right to vote the Class B units of
Energy Partners, which vote as a separate class on all matters brought to
a vote of unitholders.
Based upon the conversion ratios set out in the Consolidation Agreement,
holders of Energy Partners Class A units, other than Consolidated Resources and
Hallwood Group, prior to the effective time of the consolidation, in the
aggregate, will own 56% of the outstanding Energy Corporation common stock after
giving effect to the consolidation. Holders of Consolidated Resources common
stock, other than Energy Partners, prior to the effective time of the
consolidation, in the aggregate, will own 26% of the outstanding Energy
Corporation common stock after giving effect to the consolidation. Hallwood
Group will own 18% of the Energy Corporation common stock after giving effect to
the consolidation. In addition, holders of Class C units of Energy Partners,
including Hallwood Group, but not including Consolidated Resources, will hold
all of the Energy Corporation preferred stock.
EFFECTIVE TIME
Energy Partners, Consolidated Resources and HEPGP anticipate completing the
consolidation as promptly as possible after the approval of the consolidation
and when all of the conditions contained in the consolidation agreement are
satisfied or waived.
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<PAGE> 48
THE CONSOLIDATION AGREEMENT
The following is a discussion of the significant provisions of the
consolidation agreement. This discussion is not intended to be complete and is
qualified in its entirety by reference to the full text of the consolidation
agreement, which is attached as Appendix A. We encourage you to read the
consolidation agreement in its entirety. For purposes of convenience, references
to the "original entity" means Energy Partners, Consolidated Resources or HEPGP,
BEFORE giving effect to the consolidation. "Energy subsidiary" means the
subsidiary of Energy Corporation that is merging with and into Energy Partners
or Consolidated Resources. "Surviving entity" refers to Energy Partners or
Consolidated Resources, AFTER giving effect to the consolidation.
Representations and Warranties of each Original Entity. The consolidation
agreement contains representations and warranties of each original entity
relating to, among other things:
- the original entity's organization, qualification, standing and similar
corporate or partnership matters;
- the original entity's capital structure, such as the number of authorized
shares or units, number of shares or units outstanding, etc.;
- the authorization, performance and enforceability of the consolidation
agreement and that there are no violations of the original entity's
governing instruments or applicable laws and agreements, governmental
filings, authorizations and consents required to complete the
consolidation;
- the availability to Energy Corporation and the other parties of selected
reports and financial statements;
- the absence of any material adverse changes or events relating to the
business and properties of the original entity, its capital stock, or its
accounting principles, practices or methods;
- the absence of any brokers or broker fees to be paid in connection with
the consolidation, other than those being paid to Prudential Securities,
Dain Rauscher Wessels and Kirkpatrick Energy Associates;
- the absence of any takeover statutes applicable to the original entity or
the consolidation;
- the certificates, permits, licenses, franchises, consents, and other
documents necessary to conduct its business and that those documents have
been obtained and are in full force and effect; and
- the absence of any untrue statements of a material fact or any omission
of a material fact relating to such original entity, as represented by
that original entity, but not as to the other parties to the
consolidation agreement, that must be stated in this document.
Representations and Warranties of Energy Corporation and the Energy
Subsidiaries. Energy Corporation and each energy subsidiary made representations
and warranties relating to:
- their proper organization, qualification, standing and similar corporate
or partnership matters;
- the authorization, performance and enforceability of the consolidation
agreement;
- the absence of any violations of their governing instruments or
applicable laws and agreements, governmental filings, authorizations and
consents required to complete the consolidation; and
- the absence of any untrue statements of a material fact or any omission
of a material fact relating to Energy Corporation or the energy
subsidiary, as represented by such party, but not as to the other parties
to the consolidation agreement, that must be stated in this document.
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<PAGE> 49
Covenants. The parties to the consolidation agreement made a number of
covenants or promises. Each of the original entities covenanted to, among other
things:
- operate its business and that of its subsidiaries in the usual and
ordinary course consistent with past practices;
- use its best efforts to preserve its business organization;
- maintain its existing relations with customers, suppliers, employees and
business associates;
- not take any action that would adversely affect the ability of the
parties to complete the consolidation;
- take all actions necessary to convene the meetings to vote on the
approval of the consolidation agreement;
- give the representatives of the other parties reasonable access to
information concerning its business; and
- notify the other parties of any material adverse change in the condition
of its business, properties, assets, liabilities or results of
operations.
The surviving entity has agreed to indemnify and hold harmless each present and
former director and/or officer who is made a party or threatened to be made a
party to a lawsuit by reason of the fact that he or she was a director or
officer of the original entity or any subsidiary of the original entity and,
except as specified in the consolidation agreement, to maintain existing
directors' and officers' liability insurance or equivalent liability insurance
for six years following the effective time.
Other Agreements. Each original entity, Energy Corporation and each energy
subsidiary have also agreed that it shall use its commercially reasonable best
efforts to complete the consolidation.
Conditions to the Consolidation. A number of conditions must be met in
order to complete the consolidation, including:
- the approval of the consolidation agreement by the holders of a majority
of each class of Energy Partners units and the Consolidated Resources
common stock;
- no court or other governmental entity will have enacted a law that is in
effect and prohibits the consolidation;
- both of the mergers and the asset contribution are to be completed
concurrently; and
- the obtaining of any necessary consent of any lender or other third party
that is required to be obtained.
Termination. The consolidation agreement can be terminated by:
- the mutual consent of Energy Corporation and the original entities;
- the action of the board of directors of Energy Corporation or any
original entity if, without fault of the terminating party, the mergers
are not completed by September 30, 1999;
- the action of the Energy Corporation board, if one of the original
entities fails to comply in any material respect with any of the
covenants or agreements contained in the consolidation agreement that
were to have been performed by it at or prior to the date of termination;
- by either Energy Partners or Consolidated Resources if either of them
receive an offer from a third party for a merger, consolidation or
combination or a tender offer or exchange, and the applicable board of
directors determines, in its good faith reasonable judgment, that the
acceptance of the offer could reasonably be required by the fiduciary
obligations of those directors under applicable law;
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- the action of the board of directors of one of the original entities if
the board of directors of the original entity or the independent
directors withdraw or adversely modify their approval or recommendation
of the consolidation agreement or the applicable merger; or
- the action of the board of directors of one of the original entities if
Energy Corporation fails to comply in any material respect with any of
the covenants or agreements contained in the consolidation agreement.
Amendment. The parties may modify or amend the consolidation agreement, by
written agreement prior to the completion of the consolidation, according to the
applicable provisions of the Delaware Revised Uniform Limited Partnership Act,
as it applies to Energy Partners, or the Delaware General Corporation Law, as it
applies to Consolidated Resources.
EXCHANGE OF CERTIFICATES
At the completion of the consolidation, all Energy Partners units, other
than those held by Consolidated Resources, and all shares of Consolidated
Resources common stock will cease to be outstanding and will automatically be
canceled and retired. Each certificate formerly representing Energy Partners
units, other than those held by Consolidated Resources, and shares of
Consolidated Resources common stock, other than those held by Energy Partners,
will represent ownership of the right to receive the Energy Corporation common
stock or Energy Corporation preferred stock issuable in the mergers until those
certificates are surrendered to the exchange agent. The exchange agent for the
consolidation is Registrar and Transfer Company.
As soon as possible after the completion of the consolidation, the exchange
agent will mail you a form of letter of transmittal and instructions for your
use in exchanging your Energy Partners unit certificates or Consolidated
Resources common stock certificates for Energy Corporation common stock and
preferred stock certificates. When you surrender your certificates, together
with a signed letter of transmittal, you will receive in exchange certificate(s)
representing whole shares of Energy Corporation common stock or Energy
Corporation preferred stock to which you are entitled, based on the conversion
ratio that applies.
YOU SHOULD NOT SEND YOUR CERTIFICATES TO THE EXCHANGE AGENT UNTIL YOU
RECEIVE A LETTER OF TRANSMITTAL.
FRACTIONAL SHARES
You will not receive any fractional shares of Energy Corporation common
stock or Energy Corporation preferred stock as a result of the consolidation.
Instead of fractional shares, you will receive, upon surrender of your
certificate(s) to the exchange agent, along with the signed letter of
transmittal, a number of shares rounded up or down to the nearest whole share.
Half shares will be rounded up to the next whole share.
ACCOUNTING TREATMENT
For accounting purposes, the consolidation of Energy Partners, Consolidated
Resources and the direct energy interests of HEPGP into a newly created Energy
Corporation will be treated as a purchase by Energy Partners of the Consolidated
Resources common stock it does not currently own and the direct energy interests
of HEPGP. Accordingly, the assets and liabilities of Energy Partners, including
its share of the assets and liabilities of Consolidated Resources owned prior to
the consolidation, will be recorded at historical cost, and the remaining assets
and liabilities of Consolidated Resources and the direct energy interests of
HEPGP will be recorded at estimated fair values.
CONSEQUENCES UNDER FEDERAL SECURITIES LAWS; RESALE OF ENERGY CORPORATION STOCK
The Energy Corporation common stock and Energy Corporation preferred stock
issuable in connection with the consolidation have been registered under the
Securities Act. Accordingly, there will be no restrictions upon the resale or
transfer of such shares by unitholders or stockholders, except for those
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unitholders or stockholders who are considered "affiliates" of Energy Partners
or Consolidated Resources, as that term is defined in Rule 144 and Rule 145
adopted under the Securities Act.
Energy Corporation stock received by those unitholders and stockholders who
are considered to be "affiliates" of Energy Partners or Consolidated Resources
may be resold without registration only as provided for by Rule 145 or as
otherwise permitted under the Securities Act. Persons who may be considered to
be affiliates of Energy Partners or Consolidated Resources generally include
individuals or entities that control, are controlled by or are under common
control with, Energy Partners or Consolidated Resources and may include the
executive officers and directors of Energy Partners and Consolidated Resources,
as well as some of the principal unitholders or stockholders of Energy Partners
and Consolidated Resources.
ABSENCE OF APPRAISAL RIGHTS
According to applicable Delaware law, you will have no right to dissent
from the mergers and receive an appraised value for your units of Energy
Partners or shares of Consolidated Resources common stock. Consequently, you
will be bound by the vote of unitholders or stockholders owning a majority of
each class of the units of Energy Partners or shares of Consolidated Resources
common stock. If you do not wish to own Energy Corporation common stock or
Energy Corporation preferred stock, you must either sell your Energy Partners
units or shares of Consolidated Resources common stock before the consolidation
is completed, or sell your Energy Corporation common stock or Energy Corporation
preferred stock after the consolidation is completed.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS AND THE CONSOLIDATION
In considering the recommendation of the boards of Consolidated Resources
and Hallwood, G.P., with respect to the mergers, you should be aware that
Messrs. Gumbiner, Troup and Guzzetti are directors or executive officers of each
of Hallwood Group, Hallwood G.P. and Consolidated Resources and therefore they
have an interest in the completion of the mergers that are in addition to, or
different from, yours. The boards were aware of these interests, and considered
them, among other matters, in approving the consolidation agreement and the
transactions contemplated by it. The boards noted, however, that Messrs.
Gumbiner, Troup and Guzzetti's participation in approving the consolidation on
behalf of Energy Partners and Consolidated Resources was limited to acting upon
the recommendations of the special committees of the boards of Hallwood G.P. and
Consolidated Resources.
CONFLICTS OF INTEREST
The determinations by the boards of directors of Hallwood G.P. and
Consolidated Resources to participate in the consolidation may have been
affected by a number of conflicts of interest.
Hallwood Group is the sole stockholder of Hallwood G.P., which is the
general partner of HEPGP, the general partner of Energy Partners. As the sole
stockholder of Hallwood G.P., Hallwood Group has approved the contribution of
assets by HEPGP to Energy Corporation. Hallwood Group also owns approximately
5.1% of the outstanding Class A units, 100% of the outstanding Class B units and
1.8% of the outstanding Class C units of Energy Partners. The holders of each
class of units will be entitled to vote on the Energy Partners merger as
separate classes. Hallwood Group will vote all of its units in favor of the
Energy Partners merger.
The board of directors of Hallwood G.P., acting on behalf of HEPGP, has
approved the contribution of assets and liabilities by HEPGP to Energy
Corporation and, acting on behalf of Hallwood G.P. as the general partner of
HEPGP, which is the general partner of Energy Partners, has approved the merger
of Energy Partners into a separate subsidiary of Energy Corporation.
Furthermore, the board of directors of Hallwood G.P. consists of Messrs.
Gumbiner, Troup and Guzzetti, who are also officers or directors of Hallwood
Group, as well as three members who are not otherwise affiliated with Hallwood
Group. In taking its actions in connection with the consolidation, the board of
Hallwood G.P. has fiduciary duties to both the stockholders of Hallwood G.P. and
the unitholders of Energy Partners. To address the separate
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fiduciary duties of the board to the unitholders, the board authorized the
special committee of Hallwood G.P., consisting solely of the outside directors,
to consider and recommend whether Energy Partners should participate in the
consolidation. Pursuant to this authority, the Hallwood G.P. special committee
engaged legal and financial advisors to assist it in its consideration.
Energy Partners owns 45.7% of the stock of Consolidated Resources.
Furthermore, Messrs. Gumbiner, Troup and Guzzetti are members of the board of
directors of both Hallwood G.P. and Consolidated Resources. The board of
directors of Consolidated Resources also includes four members who are not
otherwise affiliated with Hallwood Group or Energy Partners. To address the
fiduciary duties of Consolidated Resources' board to the stockholders of
Consolidated Resources, other than Energy Partners, the board authorized the
special committee of Consolidated Resources, consisting solely of the four
outside directors, to consider and recommend whether Consolidated Resources
should participate in the consolidation. Acting under this authority, the
Consolidated Resources special committee engaged legal and financial advisors to
assist it in its consideration.
Although the boards of directors of both Hallwood G.P. and Consolidated
Resources have attempted to resolve all conflicts of interest in a manner that
would not adversely affect either the unitholders or the stockholders, if these
conflicts did not exist it is possible that the consolidation would not have
been approved or would have been approved on a basis that would be more
favorable to the unitholders, the stockholders or both.
MANAGEMENT AND BOARD OF DIRECTORS AFTER THE CONSOLIDATION
None of Energy Partners, Consolidated Resources or Hallwood G.P. has any
employees. Hallwood Petroleum, a subsidiary of Energy Partners, operates the
properties and administers the day-to-day activities of each of the entities and
performs duties related to the management and operation of various properties in
which the entities own an interest. Furthermore, the officers of each of
Consolidated Resources and Hallwood G.P. are the same. Upon completion of the
consolidation, Hallwood Petroleum will become a wholly-owned subsidiary of
Energy Corporation, all of the officers of Hallwood G.P., Consolidated Resources
and Hallwood Petroleum will become officers of Energy Corporation and all of the
directors of Hallwood G.P. and Consolidated Resources will become directors of
Energy Corporation. After the consolidation, the board of directors of Energy
Corporation will consist of the present members of the boards of both Hallwood
G.P. and Consolidated Resources.
AMENDMENT TO THE ENERGY PARTNERS PARTNERSHIP AGREEMENT
The partnership agreement does not presently provide for the merger of
Energy Partners with another entity. In order to complete the Energy Partners
merger, it is necessary to amend the partnership agreement. Approval of the
consolidation by unitholders will constitute approval of the amendment. The
stockholders of Consolidated Resources will not vote on the amendment.
The following summary highlights the primary features of the amendment. For
a complete description of its provisions, we urge you to read the amendment,
which is attached to this document as Appendix E.
The amendment adds a new Article XXI to the partnership agreement. The new
Article XXI does the following:
- Authorizes Energy Partners to merge or consolidate with one or more
limited partnerships organized under the laws of Delaware or another
state of the United States according to a written agreement;
- Outlines the procedure for entering into a merger or consolidation,
including requiring the written consent of the general partner to the
merger and the general partner's approval of the merger agreement;
- Requires that, upon approval of the proposed agreement by the general
partner, the merger agreement be submitted to a vote of the limited
partners;
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- Requires a majority of the limited partnership interests, each voting as
a separate class, to vote for the merger agreement; and
- Requires the filing of a certificate of merger with the Secretary of
State of Delaware.
Completion of the consolidation is conditioned upon approval of the
consolidation agreement and the amendment by the unitholders. If the
consolidation agreement is not approved or if for any reason the consolidation
is not completed, the amendment will not be implemented.
STOCK OPTIONS; INCENTIVE PLAN; WARRANTS
Some of the directors, officers and employees of each of Hallwood G.P.,
Hallwood Petroleum and Consolidated Resources currently hold options to purchase
units or stock of Consolidated Resources. In the consolidation, these options
will be canceled and the holder of each option will receive an amount in cash
equal to the difference between the exercise price of the option and the average
market value of the units or stock into which the option is exercisable for the
30 calendar days prior to the closing of the consolidation. In addition, the
Prudential Insurance Company of America holds a warrant to purchase 98,599
shares of Consolidated Resources common stock. Upon completion of the
consolidation, Prudential has the right to receive a new warrant instead of its
current warrant. The new warrant will entitle Prudential to purchase shares of
Energy Corporation common stock. The price per share at which the shares may be
purchased under the new warrant will be the lesser of (1) the exercise price
currently in effect, which is $28.76, multiplied by a fraction, the numerator of
which is the value of a share of Energy Corporation's common stock at the
completion of the consolidation and the denominator of which is the market price
per share of Consolidated Resources' stock at the completion of the
consolidation; or (2) the value of a share of Energy Corporation common stock at
the completion of the consolidation. The number of shares of Energy Corporation
that Prudential may purchase is determined by multiplying the 98,599 shares
subject to the current warrant by a fraction, the numerator of which is the
current exercise price of $28.76, and the denominator of which is the new
exercise price. At Prudential's election, it may exercise the warrant for Energy
Corporation common stock, and instead of receiving the shares of common stock,
receive cash equal to the value of the shares covered by the warrant.
The incentive plan provides for the issuance of options to purchase up to
1,200,000 shares of Energy Corporation common stock and 180,000 shares of Energy
Corporation preferred stock to directors, officers and employees of Energy
Corporation. Approval of the consolidation by the unitholders and the
stockholders will also constitute approval of the incentive plan.
The following discussion highlights the principal features of the incentive
plan. For a complete description of the incentive plan, we urge you to read the
full text of the incentive plan, which is attached as Appendix F to this
document.
Purpose of the Incentive Plan
The purpose of the incentive plan is to advance the best interests of
Energy Corporation, its subsidiaries and its stockholders in order to attract,
retain and motivate directors, officers, key employees and consultants by
providing them with incentives in the form of options, stock appreciation
rights, awards of restricted stock and awards based upon performance. Energy
Corporation believes that awards granted under the incentive plan will increase
the personal stake of such individuals in the continued success and growth of
Energy Corporation.
Eligibility
Persons eligible to participate in the incentive plan are directors,
officers, key employees, and consultants to Energy Corporation or its
subsidiaries. The Energy Corporation board or the incentive plan committee has
the discretion to designate the eligible persons and determine the type, amount
and time of grant of any award under the incentive plan.
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Administration of the Incentive Plan
The incentive plan is administered by Energy Corporation's board, or by a
committee designated by the board. The committee must consist of three "outside"
directors, as defined in Section 162(m) of the Internal Revenue Code. The
committee has the discretion and the authority to establish the terms and
conditions of awards granted under the incentive plan. The committee also has
the discretion to establish the performance objectives for determination of
awards that are performance-based compensation.
Shares Subject to the Incentive Plan
Energy Corporation may issue up to 1,200,000 shares of common stock and
180,000 shares of preferred stock under the incentive plan. The committee may
grant awards of incentive stock options or non-qualified stock options. The
maximum number of shares of common stock that may be granted to any individual
in any calendar year is 600,000 shares. The maximum number of shares of
preferred stock that may be granted to any one individual in a calendar year is
90,000 shares. These limits apply whether the awards are incentive stock options
or non-qualified stock options. The maximum amount payable in cash under a
performance-based award is $1,000,000. If any award under the incentive plan
expires or is terminated prior to its exercise, the shares subject to that award
will again be available for further grants under the incentive plan.
Exercisability; Exercise Price
Options granted under the incentive plan are exercisable at specific times
and subject to the terms and conditions as determined by the committee in
granting the option. However, outstanding options become immediately exercisable
upon a change of control and remain exercisable for three years after the
optionee's termination of employment for any reason other than termination for
cause. Options are issued at an exercise price as determined by the committee
except that the exercise price of an incentive stock option cannot be less than
100% of the fair market value of the stock. In the case of incentive stock
options granted to a person who owns stock of Energy Corporation that represents
more than 10% of the combined voting power of all classes of Energy
Corporation's stock, the exercise price may not be less than 110% of the fair
market value of the shares.
Options may be paid for in cash or with shares of Energy Corporation common
stock or preferred stock. For purposes of the incentive plan, the fair market
value is determined by the last reported sales price of the shares if the shares
are listed or admitted for trading on any national securities exchange. If the
shares are quoted on NASDAQ or any similar system of automated securities price
quotations in common use, the fair market value is the mean between the closing
high bid and low asked quotations for the shares on that day for that system.
Reload Options
At the time an option is granted, the committee has the authority to
specify if the recipient will be granted a "reload" option. A reload option
entitles the optionee to new options, if, upon exercise of a previously granted
option, the optionee pays the exercise price with shares of stock. The exercise
price of the reload option is the fair market value per share of stock on the
date the reload option is granted. The reload option is exercisable at any time
after grant, or on a date set by the committee, and the reload option expires on
the expiration date of the original option that it replaced.
Expiration of Options
The expiration date of an option is determined by the committee when the
option is granted, but in no event is an option exercisable after 10 years from
the date of grant. Options awarded to persons who own more than 10% of Energy
Corporation's stock expire five years from the date of grant. If an optionee
ceases to be employed due to death, retirement or disability, that optionee's
options expire after 12 months. If, however, an optionee ceases to be employed
by Energy Corporation for any reason other than death, retirement or disability,
that optionee's options expire 90 days after the optionee's termination.
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In the event of a change of control of Energy Corporation, an optionee will have
three years to exercise the option.
Stock Appreciation Rights
The committee may also make awards of stock appreciation rights. A stock
appreciation right entitles the holder to receive upon exercise of the right,
all or a portion of the excess of (1) the fair market value of a specified
number of shares of common stock at the time of exercise over (2) a specified
price that may not be less that 100% of the fair market value of the shares of
common stock at the time of grant. Stock appreciation rights may be granted in
connection with a previously or contemporaneously granted option, or independent
of any option. If issued in connection with an option, the committee may impose
a condition that exercise of a stock appreciation right cancels the option with
which it is connected. A stock appreciation right may not be exercised at any
time when the fair market value of the shares of common stock to which it
relates does not exceed the exercise price of the option associated with those
shares of common stock. A stock appreciation right issued in connection with an
option may be exercised at any time the option to which it relates is
exercisable, but only to the extent the option to which it relates is then
exercisable, and it is subject to the conditions that apply to the option. Stock
appreciation rights become immediately exercisable upon a change of control and
remain exercisable for three years after the optionee's termination of
employment for any reason other than termination for cause.
Restricted Stock Awards
The committee may, in its discretion, make awards of restricted stock. The
committee may specify the number of shares of restricted stock to be awarded,
the price, if any, to be paid by the individual receiving the restricted stock
award, and the date or dates on which the restricted stock will vest. The
vesting and number of shares of restricted stock may be conditioned upon the
completion of a specified period of service with Energy Corporation or its
subsidiaries or upon the employee's attaining any of the following specified
performance goals as fixed by the committee:
- net income before or after extraordinary items, operating income, income
before taxes, earnings before depreciation, interest and taxes, cash flow
or revenues of Energy Corporation or one or more subsidiaries;
- return on equity;
- return on capital employed;
- return on net assets;
- increases in the market price of the common stock or other securities of
Energy Corporation before or after dividends;
- the performance of the Energy Corporation's common stock or other
securities in comparison to other stocks, stock indices or groups of
stocks or other investments;
- increases in sales, margins or profit on a product or product line basis;
or
- any combination of the above.
The committee will determine whether the recipient of the award will have
the right to vote and/or receive dividends on the restricted stock before it has
vested. In the event of the recipient's termination of employment before all of
his or her restricted stock has vested, or if other conditions to the vesting of
restricted stock have not been satisfied, the shares of restricted stock that
have not vested will be forfeited and any purchase price paid by the employee
will be returned to the employee. The committee may, in its discretion at any
time, accelerate the vesting of restricted stock or otherwise waive or amend any
conditions of a grant of a restricted stock award.
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Performance Awards
The committee is also authorized to grant awards that are intended to be
"performance-based compensation." These "performance awards" are payable in
stock, cash or a combination of the two, at the discretion of the committee.
The committee will establish a performance period with respect to each
performance award over which the performance of the holder of the performance
award will be measured. The committee will establish a minimum level of
acceptable achievement for the participant at the time of the grant of each
performance award. Each performance award will be contingent upon future
performance and achievement of the "performance measures" fixed by the
committee. These performance measures will be based on the same factors
described above that are used by the committee to establish the performance
goals relating to the awards of restricted stock.
The committee has the authority to determine at the time of grant of the
performance award the maximum value of a performance award, the frequency of
performance awards and the date or dates when performance awards vest. Following
the end of each performance period, the holder of each performance award will be
entitled to receive payment of an amount, based on the achievement of the
performance measures for the performance period, as determined by the committee.
If at the end of the performance period the specified performance measures have
been attained, the holder will be considered to have fully earned the
performance award.
An individual that receives a performance award who, by reason of death,
disability or retirement, terminates employment before the end of the
performance period will be entitled to receive, to the extent earned, a portion
of the performance award that is proportional to the portion of the performance
period during which the holder was employed. An individual who receives a
performance award who terminates employment for any other reason will not be
entitled to any part of the performance award unless the committee determines
otherwise.
The committee may accelerate vesting of the performance award or otherwise
waive or amend any conditions, including but not limited to performance
objectives, of a performance award, and all performance awards will vest upon a
change of control.
Transferability; Adjustments of Options
Awards granted under the incentive plan are transferable only by will or by
the laws of descent and distribution. The number of shares covered by an award
will be adjusted if there is an increase or decrease in the number of
outstanding shares of Energy Corporation common stock or of Energy Corporation
preferred stock due to: a stock dividend; stock split; recapitalization;
combination; an exchange of shares; a liquidation; a split-up, split-off or
spin-off; or similar changes in capitalization.
Acceleration of awards upon a "change of control'
If there is a change of control of Energy Corporation, the vesting of
awards granted under the incentive plan accelerates. For purposes of the
incentive plan, a change of control occurs if:
- any person acquires beneficial ownerships of 25% or more of the combined
voting power of Energy Corporation's voting securities;
- the individuals who, as of the completion of the consolidation, are
members of the board, cease to constitute two-thirds of the board unless
any new director nominated by the stockholders is approved by a
two-thirds vote of the incumbent board;
- the stockholders of Energy Corporation approve a merger or consolidation
in which the stockholders of Energy Corporation do not continue to own
80% of Energy Corporation's combined power after the transaction;
- Energy Corporation liquidates, dissolves or sells all or substantially
all of its assets; or
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- the stockholders of Energy Corporation accept shares of stock in a share
exchange and, after the exchange, do not own 80% of Energy Corporation's
combined voting power.
Tax Consequences
The following discussion of tax considerations relates only to United
States federal income tax matters. The discussion assumes that optionees are
fully subject to United States federal income tax on the basis of United States
citizenship or residency. Moreover, the discussion is general in nature and does
not take into account a number of considerations that may apply in light of the
particular circumstances of an optionee.
Some of the options issued under the incentive plan are intended to
constitute "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code, while other options granted under the incentive plan are
non-qualified stock options. The Internal Revenue Code provides for tax
treatment of stock options qualifying as incentive stock options that may be
more favorable to employees than the tax treatment accorded non-qualified stock
options.
Generally, upon the exercise of an incentive stock option, the optionee
will recognize no income for United States federal income tax purposes. On the
sale of shares acquired by exercise of an incentive stock option, assuming that
the sale does not occur within two years of the date of grant of the option or
within one year from the date of exercise, any gain will be taxed to the
optionee as long-term capital gain. In contrast, upon the exercise of a
non-qualified option, the optionee recognizes taxable income, subject to
withholding, in an amount equal to the difference between the fair market value
of the shares on the date of exercise and the exercise price. Upon any sale of
such shares by the optionee, any difference between the sale price and the fair
market value of the shares on the date of exercise of the non-qualified option
will be treated generally as capital gain or loss.
Under rules that apply to United States corporations, no deduction is
available to the employer corporation upon the grant or exercise of an incentive
stock option. Upon exercise of a non-qualified stock option, however, the
employer corporation is entitled to a deduction in an amount equal to the income
recognized by the employee.
The current federal income tax consequences of other awards authorized
under the incentive plan generally follow some basic patterns:
- stock appreciation rights are taxed in substantially the same manner as
nonqualified stock options;
- nontransferable restricted stock subject to a substantial risk of
forfeiture results in income recognition equal to the excess of the fair
market value of the stock over the purchase price, if any, only at the
time the restrictions lapse, unless the recipient elects to accelerate
recognition as of the date of grant;
- performance awards are generally subject to tax at the time of payment;
and
- cash based performance awards generally are subject to tax at the time of
payment.
In each of the above cases, Energy Corporation will generally have, at the
time the participant recognizes income, a corresponding deduction.
Stock Option Loan Program
Under the 1999 Long-Term Incentive Plan Loan Program for Hallwood Energy
Corporation, Energy Corporation may lend to the holders of options granted under
the incentive plan an amount up to the total exercise price of their options.
The loan must be secured by the shares to be acquired upon exercise of the
option and other property having a fair market value equal to the principal
amount of the loan. The loan is payable in full on the fifth anniversary of the
loan and will bear interest at the same rate that Energy Corporation pays on its
revolving line of credit with its primary lender. The principal balance of the
loan may be paid by the holder either in cash or by the surrender of shares
having a fair market value as of the
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date of the repayment equal to the principal balance. Terms of the loan vary if
the option is accelerated due to a change in control of Energy Corporation.
Total Number of Awards; Amendment of the Incentive Plan
Since the number of options awarded to any participant is determined by the
committee in its discretion from time to time, it is not possible to indicate
the number of options that will be granted to any employee in the future. The
Energy Corporation board or the committee may amend the incentive plan or any
option as it deems advisable, but may not substantially impair any option
outstanding under the incentive plan.
EXPENSES OF THE CONSOLIDATION.
If the consolidation is completed, Energy Corporation will pay all expenses
of the consolidation for all parties, which are estimated to be approximately
$4,195,000. If the consolidation is not completed, each party will pay its own
expenses. These are estimated to be approximately $918,000 for Energy Partners,
$827,000 for Consolidated Resources and $2,450,000 for HEPGP.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is the opinion of PricewaterhouseCoopers and sets
forth the material United States federal income tax considerations of general
application to a unitholder and a stockholder of the mergers. The following
discussion is based upon information provided by the general partner of Energy
Partners and by Consolidated Resources, the Internal Revenue Code of 1986, as
amended and in effect on the date of this document, existing and proposed
regulations promulgated under the code, reports of congressional committees,
judicial decisions and current administrative rulings and practices. Any of
these authorities could be repealed, overruled or modified at any time after the
date of this document. Any such change could be retroactive and, accordingly,
could modify the tax consequences discussed in this document. No ruling from the
IRS with respect to the matters discussed in this document has been requested.
The IRS will not issue advance rulings on transactions such as the
consolidation, which involve the transfer of interests in widely-held oil and
gas properties. Furthermore, there can be no assurance that the IRS or the
courts would agree with the conclusions set forth in this discussion. This
discussion does not address all aspects of federal income taxation that may be
relevant to particular unitholders or stockholders in light of their individual
circumstances or to unitholders or stockholders that are dealers in securities,
insurance companies, financial institutions, insurance companies, foreign
corporations and persons who are not citizens or residents of the United States,
who may be accorded special treatment under the federal income tax laws. This
discussion also does not address the effect of any foreign, state or local tax
law, which effect may be significant.
ALL PERSONS AFFECTED BY THE PROPOSED CONSOLIDATION ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL INCOME AND OTHER TAX CONSEQUENCES
OF THE PROPOSED CONSOLIDATION.
THE ENERGY PARTNERS MERGER
The Energy Partners merger should be treated for federal income tax
purposes as if the unitholders transferred their interests in Energy Partners to
Energy Corporation in exchange for stock of Energy Corporation in a transaction
described in section 351(a) of the code. Energy Partners should not recognize
any gain or loss as a result of the Energy Partners merger.
A unitholder who receives only Energy Corporation stock generally should
not recognize gain or loss as a result of the Energy Partners merger. A
unitholder receiving Energy Corporation stock, however, will recognize gain to
the extent that his allocable share of Energy Partners' liabilities, plus any
liabilities to which his partnership interest is subject or that otherwise are
assumed by Energy Corporation, exceeds his adjusted basis in his partnership
interest. Gain, if any, recognized by a unitholder in the Energy Partners merger
will be treated as gain from the sale or exchange of an interest in Energy
Partners. Therefore, gain recognized by a unitholder generally will be capital
gain except to the extent of consideration, including the relief of liabilities,
received in exchange for Energy Partners' unrealized receivables. For this
purpose unrealized receivables include some types of recapture items with
respect to deductions previously taken by Energy Partners and inventory items.
A unitholder's basis in Energy Corporation stock received in the Energy
Partners merger will be equal to his aggregate basis in his partnership interest
transferred in the Energy Partners merger, reduced by the amount of any
liabilities to which the partnership interest is subject or that are assumed by
Energy Corporation in the Energy Partners merger, and increased by any gain
recognized by the unitholder in the Energy Partners merger. A unitholder who
receives only Energy Corporation common stock or only Energy Corporation
preferred stock will allocate his basis in such stock on a pro rata basis. A
unitholder who receives both Energy Corporation common stock and Energy
Corporation preferred stock will allocate his basis in proportion to the fair
market values of the Energy Corporation common stock and Energy Corporation
preferred stock. After such value is determined respectively for the Energy
Corporation common stock and the Energy Corporation preferred stock, the value
of the Energy Corporation preferred stock will be allocated on a pro rata basis
among such Energy Corporation preferred stock and the value determined for the
Energy Corporation common stock will be allocated on a pro rata basis among such
Energy Corporation common stock.
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The code provides special rules suspending a partner's ability to deduct
his allocable share of partnership losses when the partner lacks tax basis in
his partnership interest, the losses are generated by some types of "passive
activities" or activities with respect to which the partner is not "at risk."
Following the Energy Partners merger, any prior partnership loss allocated to a
unitholder that was suspended by the at risk rules or by a lack of basis will
continue to be suspended and effectively will be lost. Losses suspended by the
at risk rules, however, should be available to offset any taxable gain
recognized as a result of the Energy Partners merger. Any prior partnership loss
allocated to a unitholder that was suspended by the passive activity loss rules
should be available to offset any gain recognized as a result of the Energy
Partners merger, because that income should be passive income, but will not be
available to offset nonpassive income, including dividends received on Energy
Corporation stock, until such unitholder has sold all of his Energy Corporation
common stock to an unrelated party in a fully taxable transaction.
Notwithstanding the above, the receipt of Energy Corporation preferred
stock will be taxable if the stock is treated as "nonqualified preferred stock"
within the meaning of Section 351(g) of the code. Section 351(g)(3)(A) defines
"preferred stock" as stock which is limited and preferred as to dividends and
does not participate in corporate growth to any significant extent. The Energy
Corporation preferred stock is able to participate in the corporate growth of
Energy Corporation because, upon liquidation of the corporation, the Energy
Corporation preferred stock will participate on the same basis as the Energy
Corporation common stock. The Energy Corporation preferred stock may be redeemed
at any time on or after December 31, 2003. Because of this redemption feature,
there is a possibility the IRS could claim that the Energy Corporation preferred
stock does not have a real and meaningful probability of actually participating
in the liquidation of Energy Corporation. Energy Corporation, however, has
represented that it has no plan or intention to redeem the Energy Corporation
preferred stock. In addition, the Energy Corporation preferred stock has no
features that effectively would require or are intended to compel its
redemption. Thus, because (1) the Energy Corporation preferred stock
participates upon liquidation of the corporation, and (2) there are no factors
that indicate that the Energy Corporation preferred stock is likely to be
redeemed, the Energy Corporation preferred stock should not meet the definition
of "nonqualified preferred stock" contained in Section 351(g) of the Code.
THE CONSOLIDATED RESOURCES MERGER
The Consolidated Resources merger should be treated for federal income tax
purposes as if the stockholders transferred their Consolidated Resources common
stock to Energy Corporation in exchange for stock of Energy Corporation in a
transaction described in Section 351(a) of the code. There is a possibility that
the IRS could treat the Consolidation Resources merger as a reorganization under
Section 368(a) of the code. In either event, however, the federal income tax
consequences to a stockholder who transfers only Consolidation Resources common
stock solely in exchange for Energy Corporation common stock should be the same.
Such a stockholder should not recognize gain or loss as a result of the
Consolidated Resources merger. Furthermore, Consolidated Resources should not
recognize any gain or loss as a result of the Consolidated Resources merger.
A stockholder's basis in Energy Corporation stock received in the
Consolidated Resources merger will be equal to his basis in the exchanged shares
transferred in Consolidated Resources merger. Such basis will be allocated among
a stockholder's Energy Corporation common stock on a pro rata basis. A
stockholder's holding period for his Energy Corporation common stock will
include his holding period for the exchanged shares if such stock was a capital
asset in his hands.
EFFECT OF ASSET CONTRIBUTION ON ENERGY CORPORATION
Energy Corporation will not recognize gain or loss on the issue of its
stock in exchange for the assets contributed by HEPGP. Energy Corporation's
basis in such assets will be the same as HEPGP's basis in such assets, increased
by the amount of gain, if any, recognized by HEPGP on the transfer.
51
<PAGE> 61
TREATMENT OF ENERGY CORPORATION
Energy Corporation will not recognize gain on the issuance of its stock in
exchange for partnership interests transferred by unitholders or shares
transferred by stockholders in the mergers. Energy Corporation's basis in the
Energy Partners partnership interests or Consolidated Resources shares generally
will be equal to the basis of such property in the hands of its transferor
increased by the amount of gain, if any, recognized by such transferor. Because
Energy Corporation generally will inherit the basis that the property had in the
hands of the transferor, it may recognize more income and pay higher taxes in
the future than it would if the acquisitions were taxable and it received a cost
basis in the property. Energy Corporation's holding period for such property
generally will include the transferor's holding period for such property.
The Energy Partners merger will result in a constructive termination of
Energy Partners for federal income tax purposes under Section 708 of the Code.
The constructive termination of Energy Partners will require Energy Partners to
"restart" depreciation of its adjusted basis in its assets. Accordingly, the
constructive termination will result in the deferral of some types of
depreciation deductions.
TREATMENT OF ENERGY CORPORATION STOCKHOLDERS
Following the completion of the mergers, unitholders, the general partner
of Energy Partners, and the stockholders will be stockholders of Energy
Corporation. As such, they will not be taxed directly on the earnings of Energy
Corporation, in contrast to the treatment of a person who previously held a
partnership interest in Energy Partners. Rather, Energy Corporation will be a
taxpaying entity that will pay federal income tax with respect to its taxable
income. Thus, the unitholders and the general partner of Energy Partners will
lose the tax benefits of operating through a "pass-through" entity for federal
income tax purposes.
Stockholders of Energy Corporation generally will recognize taxable income
with respect to the Energy Corporation stock upon the receipt of dividends or
other distributions from Energy Corporation, or upon the sale or other
disposition of their Energy Corporation stock. Any dividends generally will be
included in the recipient's ordinary income to the extent that they are paid out
of Energy Corporation's current or accumulated earnings and profits; to the
extent they exceed such amount, they will first be treated as a nontaxable
return of basis to the extent thereof, and then as gain from the sale of the
Energy Corporation stock generally as capital gain. Upon a sale or other taxable
disposition of Energy Corporation stock, a stockholder generally will recognize
taxable gain or loss equal to the difference between the amount realized on the
disposition and his adjusted tax basis in the disposed stock. Provided that the
Energy Corporation stock disposed of was held as a capital asset, any such gain
or loss generally will be capital gain or loss.
Under the backup withholding rules of the code, holders of Energy
Corporation stock may be required to pay backup withholding tax at the rate of
31% with respect to dividends paid by Energy Corporation on its stock unless
such holder (1) is a corporation or comes within specific exempt categories and,
when required, demonstrates this fact or (2) provides a correct taxpayer
identification number and certifies under penalty of perjury that the taxpayer
identification number is correct and that the holder is not required to pay
backup withholding because of a failure to report all dividends and interest
income. Any amount withheld under these rules will be credited against the
holder's federal income tax liability. Energy Corporation may require holders of
its stock to establish an exemption from backup withholding or to make
arrangements satisfactory to Energy Corporation with respect to the payment of
backup withholding.
REPORTING OBLIGATIONS
Under United States Treasury regulations, each unitholder and each
stockholder who receives shares of Energy Corporation common stock or preferred
stock in the mergers must provide information concerning the exchange with their
federal income tax return for the year in which the mergers occurs. A unitholder
also will be required to attach to such income tax return a statement setting
forth information with respect to such unitholder's share of Energy Partners'
Section 751 assets and related matters. Energy
52
<PAGE> 62
Corporation intends to provide former unitholders with information in their
final Schedule K-1 that will assist them in meeting these requirements.
THE ABOVE DISCUSSION ADDRESSES ONLY THE FEDERAL INCOME TAX CONSEQUENCES OF
THE PROPOSED TRANSACTIONS TO A UNITHOLDER OR STOCKHOLDER GENERALLY. THE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS AND THE
OWNERSHIP AND DISPOSITION OF STOCK IN ENERGY CORPORATION ARE COMPLEX AND, IN
SOME CASES, UNCERTAIN. SUCH CONSEQUENCES ALSO MAY VARY BASED UPON THE INDIVIDUAL
CIRCUMSTANCES OF EACH UNITHOLDER AND STOCKHOLDER. ACCORDINGLY, UNITHOLDERS AND
STOCKHOLDERS ARE URGED TO CONSULT, AND MUST RELY UPON, THEIR OWN TAX ADVISORS AS
TO THE TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
STOCK IN ENERGY CORPORATION, INCLUDING THE APPLICABILITY OF ANY STATE, LOCAL OR
FOREIGN TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION.
53
<PAGE> 63
SELECTED HISTORICAL FINANCIAL DATA
The Selected Historical Financial Data of each of Energy Partners and
Consolidated Resources for the five years ended December 31, 1998 has been
derived from each entity's audited Consolidated Financial Statements and the
notes related to them contained in the entity's Annual Report on Form 10-K,
which accompany this document. The Selected Historical Financial Data is
qualified in its entirety and should be read together with each entity's
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and audited Consolidated Financial Statements and the related notes
included in each entity's Annual Report on Form 10-K for the year ended December
31, 1998, which accompany this document.
54
<PAGE> 64
ENERGY PARTNERS
SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding Energy
Partners' financial position and results of operations as of the dates
indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Oil and gas revenues and pipeline
operations........................... $ 43,177 $ 44,707 $ 50,644 $ 43,454 $ 43,899
Litigation settlement revenue
(expense)............................ (1,382) 240 (230) (386) (3,370)
Total revenue.......................... 43,586 45,103 51,066 43,780 44,482
Production operating expense........... 12,175 11,060 11,511 11,298 12,177
Depreciation, depletion and
amortization......................... 15,720 11,961 13,500 15,827 18,168
Impairment............................. 14,000 10,943 7,345
General and administrative expense..... 5,045 5,333 4,540 5,580 5,630
Net income (loss)...................... (13,895) 12,803 15,726 (9,031) (10,093)
Basic net income (loss) per Class A and
Class B Unit......................... (1.86) 1.09 1.35 (1.07) (1.20)
Diluted net income (loss) per Class A
and Class B Unit..................... (1.86) 1.07 1.35 (1.07) (1.20)
Distributions per Class A Unit......... .52 .52 .52 .80 .80
Distributions per Class C Unit......... 1.00 1.00 1.00 N/A N/A
Ratio of earnings to fixed charges
and Class C distributions......... (1) 4.45 4.08 (1) (1)
BALANCE SHEET
Working capital deficit................ $ (8,722) $ (973) $ (1,355) $ (4,363) $ (9,390)
Property, plant and equipment, net..... 105,005 94,331 88,549 94,926 107,414
Total assets........................... 139,091 131,603 122,792 125,152 136,281
Long-term debt......................... 40,381 34,986 29,461 37,557 25,898
Long-term contract settlement
obligation........................... 2,512 2,397 2,666
Deferred liability..................... 1,050 1,180 1,533 1,718 1,931
Minority interest in affiliates........ 2,788 3,258 3,336 3,042 2,923
Partners' capital...................... 62,632 69,064 64,215 57,572 78,803
</TABLE>
- ---------------
(1) Energy Partners had a loss in these years. Interest expense was $2,782,000
in 1998, $3,956,000 in 1995 and $3,445,000 in 1994.
55
<PAGE> 65
CONSOLIDATED RESOURCES
SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding
Consolidated Resources' financial position and results of operations as of the
dates indicated. All per share information has been restated to reflect the
three-for-one stock split, which was effective August 11, 1997.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Oil and gas revenues and pipeline
operations................................ $ 32,230 $32,258 $34,308 $25,349 $20,459
Total revenue............................... 32,410 32,411 34,445 25,484 20,644
Production operating expense................ 11,642 10,218 10,383 8,514 8,367
Depreciation, depletion and amortization.... 11,463 8,605 9,246 8,206 7,340
Impairment.................................. 19,600 -- -- 9,277 4,721
General and administrative expense.......... 4,451 4,884 4,011 4,630 3,842
Net income (loss)........................... (20,279) 5,585 8,210 (4,670) (2,974)
Net income (loss) per share -- basic........ (7.38) 2.05 3.00 (1.48) (.93)
Net income (loss) per share -- diluted...... (7.38) 1.97 2.91 (1.48) (.93)
Dividends per share......................... -- -- -- -- --
BALANCE SHEET
Working capital (deficit)................... $ (5,696) $ 4,867 $ (47) $(7,202) $ 430
Property, plant and equipment, net.......... 87,322 76,031 67,285 65,433 55,011
Total assets................................ 101,167 92,371 78,468 73,939 62,125
Long-term debt.............................. 44,774 25,000 16,250 12,000 5,250
Noncurrent liabilities...................... 53,316 32,678 24,558 21,790 11,890
Stockholders' equity........................ 29,589 48,686 43,061 36,635 43,589
</TABLE>
56
<PAGE> 66
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The accompanying Unaudited Pro Forma Consolidated Financial Statements of
Energy Corporation as of December 31, 1998 give effect to the issuance of shares
of Energy Corporation common stock and preferred stock in exchange for the Class
A, Class B and Class C units of Energy Partners, the Consolidated Resources
common stock, and the direct energy interests of HEPGP as described in this
document.
The historical financial data for Energy Partners and Consolidated
Resources for the year ended December 31, 1998 has been derived from the
Consolidated Audited Financial Statements and notes included in each entity's
Annual Report on Form 10-K for the year ended December 31, 1998, which accompany
this document.
The pro forma adjustments described in the accompanying notes are based
upon available information and assumptions that management believes are
reasonable. In the opinion of management, all adjustments necessary to present
the pro forma information have been made. The Unaudited Pro Forma Consolidated
Financial Statements are provided for informational purposes only and do not
necessarily indicate the financial results that would have occurred had the
consolidation actually occurred on the dates specified, nor do they indicate
Energy Corporation's future results. The unaudited pro forma consolidated
financial information should be read together with the consolidated Financial
Statements and notes of Energy Partners and Consolidated Resources contained in
their Annual Reports on Form 10-K for the year ended December 31, 1998, which
accompany this document.
57
<PAGE> 67
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ENERGY
------------------------ CORPORATION
ENERGY CONSOLIDATED PRO FORMA CONSOLIDATED
PARTNERS RESOURCES ADJUSTMENTS PRO FORMA
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................. $ 11,874 $ 551 $ (3,458)(G) $ 8,170
(797)(F)
Accounts receivable:
Oil and gas revenues..................... 5,911 3,053 54(B) 9,018
Trade.................................... 4,040 -- 4,040
Due from affiliates........................ 119 4,246 (71)(B) 4,294
Prepaid and other assets................... 1,338 285 1,623
Net working capital of affiliate........... 236 -- 236
Current assets of affiliates............... -- 4,431 (3,794)(E) 637
--------- --------- --------- ---------
Total current assets............. 23,518 12,566 (8,066) 28,018
--------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved oil and gas properties............ 664,799 336,713 1,302(B) 732,497
(13,736)(E)
(4,377)(H)
(252,204)(N)
Unproved mineral interests............... 2,694 2,813 119(B) 5,626
Furniture, fixtures and other.............. 3,411 -- -- 3,411
--------- --------- --------- ---------
Total............................ 670,904 339,526 (268,896) 741,534
Less -- accumulated depreciation,
depletion, amortization and impairment... (565,899) (252,204) 252,204(N) (565,899)
--------- --------- --------- ---------
Net property, plant and
equipment...................... 105,005 87,322 (16,692) 175,635
--------- --------- --------- ---------
OTHER ASSETS
Investment in common stock of Hallwood
Consolidated Resources................... 10,160 7,962(D)
797(F)
4,195(G)
(23,114)(H)
Deferred expenses and other assets......... 408 1,201 (737)(G) 872
Deferred tax asset......................... -- 539(H) 150
11,154(J)
(11,543)(K)
Noncurrent assets of affiliate............. -- 78 (78)(E) --
--------- --------- --------- ---------
Total other assets............... 10,568 1,279 (10,825) 1,022
--------- --------- --------- ---------
TOTAL ASSETS..................... $ 139,091 $ 101,167 $ (35,583) $ 204,675
========= ========= ========= =========
</TABLE>
58
<PAGE> 68
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ENERGY
----------------------- CORPORATION
ENERGY CONSOLIDATED PRO FORMA CONSOLIDATED
PARTNERS RESOURCES ADJUSTMENTS PRO FORMA
-------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities..... $ 22,921 $ 3,886 $ 749(B) $ 27,556
Current portion of long-term debt............ 9,319 4,781 14,100
Current liabilities of affiliates............ -- 9,595 (5,465)(E) 4,130
-------- -------- -------- --------
Total current liabilities.......... 32,240 18,262 (4,716) 45,786
-------- -------- -------- --------
NONCURRENT LIABILITIES
Long-term debt............................... 40,381 44,774 (1,024)(H) 84,131
Long-term obligations of affiliates.......... -- 8,482 (8,482)(E)
Deferred liability........................... 1,050 60 1,110
-------- -------- -------- --------
Total noncurrent liabilities....... 41,431 53,316 (9,506) 85,241
-------- -------- -------- --------
Total liabilities.................. 73,671 71,578 (14,222) 131,027
-------- -------- -------- --------
MINORITY INTEREST IN AFFILIATES.............. 2,788 2,788
-------- --------
PARTNERS' CAPITAL
Class A Units................................ 44,198 (44,198)(A)
Class B Subordinated Units................... 1,143 (1,143)(A)
Class C Units................................ 21,386 (21,386)(C)
General Partner.............................. 2,814 (2,814)(B)
Treasury Units............................... (6,909) 6,909(A)
-------- --------
Partners' Capital -- Net........... 62,632 (62,632)
-------- --------
STOCKHOLDERS' EQUITY
Common stock................................. 30 56(A) 100
18(B)
26(D)
(30)(H)
Preferred stock.............................. 21,386(C) 21,386
Additional paid-in-capital................... 81,283 38,376(A) 49,374
3,451(B)
7,936(D)
(81,283)(H)
11,154(J)
(11,543)(K)
Accumulated deficit.......................... (47,860) 51,521(H)
(3,661)(E)
Treasury stock............................... (3,864) 3,864(H)
-------- -------- --------
Stockholders' equity -- Net........ 29,589 41,271 70,860
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY/PARTNERS' CAPITAL......... $139,091 $101,167 $(35,583) $204,675
======== ======== ======== ========
</TABLE>
59
<PAGE> 69
ENERGY CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS EXCEPT PER UNIT/SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL ENERGY
----------------------- CORPORATION
ENERGY CONSOLIDATED PRO FORMA CONSOLIDATED
PARTNERS RESOURCES ADJUSTMENTS PRO FORMA
-------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Oil revenue..................................... $ 10,741 $ 9,392 $(1,919)(E) $ 18,477
263(B)
Gas revenue..................................... 28,366 20,142 (4,920)(E) 43,752
164(B)
Pipeline and other.............................. 4,070 2,696 (749)(E) 6,300
283(B)
Interest........................................ 409 180 (68)(E) 521
-------- -------- ------- --------
43,586 32,410 (6,946) 69,050
-------- -------- ------- --------
EXPENSES:
Production operating............................ 12,673 11,642 (2,293)(E) 22,203
181(B)
General and administrative...................... 5,045 4,451 (916)(E) 7,970
515(B)
(1,125)(L)
Depreciation, depletion and amortization........ 15,720 11,463 (2,515)(E) 24,034
141(B)
(775)(M)
Impairment of oil and gas properties............ 14,000 19,600 33,600
Interest........................................ 2,797 4,160 (526)(E) 6,534
103(O)
-------- -------- ------- --------
50,235 51,316 (7,210) 94,341
-------- -------- ------- --------
OTHER INCOME (EXPENSES):
Equity in loss of Hallwood Consolidated
Resources..................................... (4,888) 4,888(H)
Minority interest in net income of affiliates... (976) (976)
Litigation...................................... (1,382) (1,087) 260(E) (2,209)
-------- -------- ------- --------
(7,246) (1,087) 5,148 (3,185)
-------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES............... (13,895) (19,993) 5,412 (28,476)
PROVISION FOR INCOME TAXES...................... -- 286 401(J) 687
-------- -------- ------- --------
NET INCOME (LOSS)............................... (13,895) (20,279) 5,011 (29,163)
CLASS C UNIT DISTRIBUTIONS ($1.00 PER UNIT)..... (2,464) 2,464(I)
PREFERRED DIVIDENDS ($1.00 PER SHARE)........... -- (2,464)(I) (2,464)
-------- -------- ------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL
PARTNER, CLASS A AND CLASS B LIMITED
PARTNERS/COMMON STOCKHOLDERS.................. $(16,359) $(20,279) $ 5,011 $(31,627)
======== ======== ======= ========
ALLOCATION OF NET INCOME (LOSS):
General Partner................................. $ 886
========
Class A and Class B Limited Partners............ $(17,245)
========
Per Class A Unit and Class B
Unit/Share -- basic........................ $ (1.86) $ (7.38) $ (3.16)
======== ======== ========
Per Class A Unit and Class B Unit/Share --
diluted.................................... $ (1.86) $ (7.38) $ (3.16)
======== ======== ========
Number of Class A and Class B Units/Common
Shares used in the calculation of:
Basic net loss per Unit/Share.............. 9,258 2,747 10,000
======== ======== ========
Diluted net loss per Unit/Share............ 9,258 2,747 10,000
======== ======== ========
</TABLE>
60
<PAGE> 70
ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying Unaudited Pro Forma Consolidated Financial Statements of
Energy Corporation give effect to the issuance of shares of Energy Corporation
common stock and preferred stock in exchange for the Class A, Class B and Class
C units of Energy Partners, the common stock of Consolidated Resources, and the
direct energy interests of HEPGP as described in this document. For accounting
purposes, the consolidation has been treated as a purchase by Energy Partners of
the common stock of Consolidated Resources and the direct energy interests of
HEPGP. Accordingly, the assets and liabilities of Energy Partners, including its
share of the assets and liabilities of Consolidated Resources owned prior to the
consolidation, have been recorded at historical cost, and the remaining assets
and liabilities of Consolidated Resources and the direct energy interests of
HEPGP have been recorded at estimated fair values.
The pro forma consolidated balance sheet as of December 31, 1998 has been
prepared as if the consolidation was consummated on December 31, 1998. The pro
forma consolidated statement of operations for the year ended December 31, 1998
has been prepared as if the consolidation was consummated on January 1, 1998.
Because Energy Corporation is a newly formed entity with no established
trading history for its common stock, the estimated fair value of the common
shares issued in exchange for the common stock of Consolidated Resources and the
direct energy interests of HEPGP was determined based on the estimated fair
values of the assets acquired and liabilities assumed, net of transaction costs
and the amount paid to reacquire and cancel existing options to purchase
Consolidated Resources common stock.
These Unaudited Pro Forma Consolidated Financial Statements the financial
results that would have occurred had the consolidation actually occurred on the
dates specified, nor do they indicate Energy Corporation's future results.
NOTE 2 -- PRO FORMA ADJUSTMENTS
The following represents the pro forma adjustments necessary to reflect the
financial condition and the results of operations of Energy Corporation assuming
the consummation of the consolidation on the dates specified above.
(A) To record the issuance of 5,600,000 shares of Energy Corporation common
stock to Energy Partners Class A and Class B unitholders, other than
Consolidated Resources, based on Energy Partners' carrying value of the Class A
and Class B units.
(B) To record the issuance of 1,800,000 shares of Energy Corporation common
stock to HEPGP for its direct energy interests based on the estimated fair value
of the assets acquired and the liabilities assumed, and for the general partner
interest in Energy Partners based on Energy Partners' carrying value of the
general partner interest.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Accrued oil and gas revenues................................ $ 54
Unproved mineral interests.................................. 119
Proved oil and gas properties............................... 1,302
General partner interest.................................... 2,814
Accrued liabilities......................................... (749)
Due from affiliates......................................... (71)
</TABLE>
61
<PAGE> 71
ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(C) To record the issuance of shares of Energy Corporation preferred stock
in exchange for the outstanding Class C units of Energy Partners, other than
those held by Consolidated Resources, based on Energy Partners' carrying value
of the Class C units.
(D) To record the issuance of 2,600,000 shares of Energy Corporation common
stock to stockholders of Consolidated Resources, other than Energy Partners,
based on the estimated fair value of the assets acquired and the liabilities
assumed, as follows:
<TABLE>
<CAPTION>
PRO-RATA CARRYING ESTIMATED
SHARE VALUES OF FAIR VALUE
CARRYING OF ENERGY ACQUIRED OF ACQUIRED
VALUE PARTNERS INTERESTS INTERESTS
-------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets............................ $ 12,566 $ (3,794) $ 8,772 $ 8,772
Oil and gas properties -- net............. 87,322 (13,736) 73,586 68,752
Other assets.............................. 1,279 (78) 1,201 1,201
Current liabilities....................... (18,262) 5,466 (12,796) (12,796)
Long-term debt............................ (44,774) (44,774) (42,878)
Other noncurrent liabilities.............. (8,542) 8,482 (60) (60)
-------- -------- -------- --------
Net assets................................ $ 29,589 $ (3,660) 25,929 22,991
======== ========
Percentage acquired....................... 54% 54%
-------- --------
$ 14,001 12,415
========
Deferred taxes on basis differences....... 539
--------
Fair value of net assets acquired......... $ 12,954
========
Common stock issued....................... $ 7,962
Cash paid to Consolidated Resources option
holders................................. 797
Transaction costs......................... 4,195
--------
Total purchase price............ $ 12,954
========
</TABLE>
(E) To eliminate Consolidated Resources' 19.5% investment in the Class A
units of Energy Partners, which is accounted for in the historical financial
statements of Consolidated Resources using the pro rata consolidation method of
accounting.
(F) To recognize the estimated costs, paid upon cancellation, to the
holders of stock options of Consolidated Resources.
(G) To recognize estimated costs of the consolidation as direct costs of
the acquisition.
(H) To eliminate Energy Partners' investment in Consolidated Resources,
which consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Historical cost of Energy Partners' investment in 46% of
Consolidated Resources common stock....................... $10,160
Purchase price for acquisition of remaining 54% interest by
Energy Corporation........................................ 12,954
-------
Total............................................. $23,114
=======
</TABLE>
62
<PAGE> 72
ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the carrying value of the investment and the carrying
value of the underlying net assets as shown in the financial statements of
Consolidated Resources is allocated to oil and gas properties and long-term
debt.
(I) To eliminate Energy Partners' Class C unit distributions and to record
Energy Corporation preferred stock dividends.
(J) To record (a) estimated income taxes attributable to the operations of
Energy Partners and the direct oil and gas interests of HEPGP for the year ended
December 31, 1998 assuming a change in tax status of these operations to a
taxpaying entity; (b) the tax effects related to the other pro forma adjustments
reflected in the statements of operations; and (c) deferred income taxes related
to temporary differences between the financial reporting and income tax bases of
the assets and liabilities as of December 31, 1998.
For purposes of the accompanying pro forma financial statements, income
taxes have been computed based on the estimated effective federal and state
income tax rates that would have been incurred had the pro forma consolidated
operating results been reported for tax purposes on a consolidated basis.
(K) To reduce net deferred tax assets of Energy Corporation as of December
31, 1998 to an estimated amount that would more likely than not be realized.
(L) To adjust general and administrative expense to reflect the elimination
of a consulting agreement with the general partner of Energy Partners, and the
elimination of the payment of other administrative expenses, which are
conditions to the closing of the consolidation. General and administrative
expenses assume a continuation of current compensation expense for management.
The board of directors of Energy Corporation may review the existing
compensation structure after the consolidation.
(M) To adjust depletion, depreciation and amortization expense to give
effect to (a) adjustments to oil and gas reserves to reflect pro forma reserve
amounts, (b) the elimination of Consolidated Resources' pro rata share of Energy
Partners' oil and gas properties, and (c) adjustments to reflect the allocation
of the purchase price to oil and gas properties.
(N) To eliminate historical accumulated depreciation, depletion,
amortization and impairment recorded by Consolidated Resources against the
carrying value of the related assets to give effect to the acquisition of assets
by Energy Corporation.
(O) To record the amortization of the difference between the carrying value
and the fair value of the pro forma long-term debt of Energy Corporation.
63
<PAGE> 73
ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- PRO FORMA OIL AND GAS DISCLOSURES
The following tables present the pro forma combined oil and gas activities
assuming consummation of the consolidation. The pro forma information presented
for Energy Corporation includes the oil and gas activities of Energy Partners,
Consolidated Resources and the direct energy interests of HEPGP which are
presented in the Business and Properties section under the Oil and Gas Reserves
subheading. The Energy Corporation pro forma information is not equal to the sum
of the oil and gas information in the Energy Partners and Consolidated Resources
columns because an adjustment has been made to eliminate the cross ownership
between Energy Partners and Consolidated Resources and because the energy
interests of HEPGP are also included.
ENERGY CORPORATION
PRO FORMA RESERVE QUANTITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
---------------- ----------------------- ------------------
GAS OIL GAS OIL GAS OIL
(MCF) (BBLS) (MCF) (BBLS) (MCF) (BBLS)
------- ------ --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES:
Balance, December 31, 1997.............. 93,053 5,767 75,575 5,525 153,162 10,397
Extensions and discoveries............ 1,542 415 1,363 490 2,665 833
Revisions of previous estimates....... (9,369) (1,385) (8,515) (1,858) (16,651) (3,026)
Sales of reserves in place............ (244) (35) (297) (35) (496) (65)
Purchases of reserves in place........ 23,994 512 29,436 627 49,837 1,059
Production............................ (14,037) (787) (10,555) (716) (22,252) (1,385)
------- ------ ------- ------ ------- ------
Balance, December 31, 1998.............. 94,939 4,487 87,007 4,033 166,265 7,813
======= ====== ======= ====== ======= ======
PROVED DEVELOPED RESERVES............... 90,915 3,577 83,717 3,173 159,715 6,211
======= ====== ======= ====== ======= ======
</TABLE>
ENERGY CORPORATION
PRO FORMA STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------------
ENERGY CONSOLIDATED ENERGY
PARTNERS RESOURCES CORPORATION
--------- ------------ -----------
<S> <C> <C> <C>
Future sales................................................ $ 245,000 $215,000 $ 421,000
Future production and development costs..................... (102,000) (94,000) (179,000)
Provision for income tax*................................... -- -- --
--------- -------- ---------
Future cash flows........................................... 143,000 121,000 242,000
10% discount to present value............................... (42,000) (37,000) (73,000)
--------- -------- ---------
Standardized measure of discounted future net cash flow..... $ 101,000 $ 84,000 $ 169,000
========= ======== =========
</TABLE>
- ---------------
* No consideration has been given to future income taxes as of December 31, 1998
since the tax basis of Consolidated Resources' and Energy Corporation's oil
and gas properties and net operating loss carryforwards exceed future net cash
flows.
64
<PAGE> 74
ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
ENERGY CORPORATION
PRO FORMA CHANGES IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------
ENERGY CONSOLIDATED ENERGY
PARTNERS RESOURCES CORPORATION
-------- ------------ -----------
<S> <C> <C> <C>
Standardized measure of discounted future net cash flows at
beginning of year........................................ $129,000 $ 88,000 $179,000
Sales of oil and gas produced, net of production costs..... (26,932) (17,892) (40,026)
Net changes in prices and production costs................. (21,211) (10,359) (27,282)
Extensions and discoveries net of future production and
development costs........................................ 3,546 3,411 6,398
Changes in estimated future development costs.............. (9,738) (9,542) (18,122)
Development costs incurred................................. 8,087 6,904 14,153
Revisions of previous quantity estimates................... (15,547) (15,587) (29,063)
Purchases of reserves in place............................. 23,802 26,316 46,917
Sales of reserves in place................................. (399) (402) (740)
Accretion of discount...................................... 12,936 8,818 17,900
Net change in income taxes................................. 5,825 23,037
Changes in production rates and other...................... (2,544) (1,492) (3,172)
-------- -------- --------
Standardized measure of discounted future net cash flows at
end of year.............................................. $101,000 $ 84,000 $169,000
======== ======== ========
</TABLE>
65
<PAGE> 75
BUSINESS AND PROPERTIES
OVERVIEW
Energy Partners, Consolidated Resources and HEPGP explore for, develop,
acquire and produce oil and gas in the continental United States. Both Energy
Partners and Consolidated Resources own a diversified portfolio of core
producing properties located primarily in the Greater Permian region of Texas
and southeast New Mexico, the Gulf Coast region of Louisiana and Texas, and the
Rocky Mountain region. HEPGP indirectly participates in oil and gas exploration,
development, acquisition and production in its capacity as general partner of
Energy Partners. In addition, through a joint venture with Energy Partners,
HEPGP has direct working interests in some of the oil and gas properties owned
by Energy Partners. As a result of the consolidation, Energy Corporation will
assume the business and operations of Energy Partners and Consolidated Resources
and will assume ownership of the properties owned by HEPGP. In addition, Energy
Partners owns interests in all of the same properties owned by Consolidated
Resources. Approximately 6.5% of the estimated reserve value of Energy Partners
is in properties in which Consolidated Resources does not have an interest.
Energy Partners has an interest in all of the properties owned by HEPGP.
Management, technical and operational services for all of Energy Partners,
Consolidated Resources and HEPGP are provided by Hallwood Petroleum, a
subsidiary of Energy Partners. None of Energy Partners, Consolidated Resources
or HEPGP directly have any employees.
The following discussion summarizes the information regarding the business
and properties of Energy Partners, Consolidated Resources and HEPGP from a
historical perspective and for Energy Corporation on a pro forma basis after
giving effect to the consolidation. It is not intended to be a complete
discussion of their businesses or properties. More complete information is
provided in the Annual Report on Form 10-K for the year ended December 31, 1998
for each of Energy Partners and Consolidated Resources, which accompany this
document.
PROPERTIES
Energy Partners and Consolidated Resources conduct exploration, drilling
and development operations in primarily the same geographic regions and
participate with each other in substantially all new oil and gas projects
generally on a 50/50 basis, unless the project is inconsistent with either
entity's objectives or the entities already have differing interests in the
project. Since 1996, all projects were undertaken jointly by Energy Partners and
Consolidated Resources on that basis. Under the Energy Partners partnership
agreement, HEPGP participates in all drilling conducted by Energy Partners. A
description of the primary regions in which Energy Partners and Consolidated
Resources conduct operations follows.
Rocky Mountain Region
Energy Partners and Consolidated Resources have significant interests in
the Rocky Mountain region, which include producing properties in Colorado,
Montana, North Dakota and northwest New Mexico. At December 31, 1998 Energy
Partners and Consolidated Resources had interests in 207 producing oil and gas
wells, 168 of which were operated by Hallwood Petroleum, 27 shut-in wells, 25 of
which are operated by Hallwood Petroleum, and five salt water disposal wells.
The following is a description of the significant areas within the Rocky
Mountain region.
San Juan Basin. At December 31, 1998, Energy Partners' and Consolidated
Resources' interests in the San Juan Basin consisted of 85 producing gas wells
located in San Juan County, New Mexico and LaPlata County, Colorado. Hallwood
Petroleum operates 51 wells in New Mexico, 31 of which produce from the
Fruitland Coal formation at approximately 2,200 feet and 20 of which produce
from the Pictured Cliffs, Mesa Verde and Dakota formations at approximately
1,200 to 7,000 feet. During 1998, Energy Partners and Consolidated Resources
expanded their New Mexico gathering system to increase gas gathering, processing
and compression capacity for the associated properties.
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<PAGE> 76
In July 1996, Energy Partners and Consolidated Resources acquired interests
in 34 wells in LaPlata County, Colorado. The wells produce from the Fruitland
Coal formation at approximately 3,200 feet. An unaffiliated large East Coast
financial institution formed an entity to utilize tax credits generated from the
wells. The project was financed by an affiliate of Enron Corp. through a
volumetric production payment. During May 1998, a limited liability company,
owned equally by Energy Partners and Consolidated Resources purchased from the
affiliate of Enron Corp. the volumetric production payment. At the time of the
purchase, Energy Partners and Consolidated Resources entered into financial
contracts to hedge the volumes affected by the production payment at an average
price of $2.11 per Mmbtu. Under the terms of the original 1996 transaction,
Energy Partners and Consolidated Resources were already responsible for all
costs associated with the wells. Hallwood Petroleum has managed and operated the
wells since July 1996, and has increased the wells' production from 14 to
approximately 23.5 Mmcf per day through workovers and gas gathering facilities
improvement programs.
Toole County Area. Energy Partners' and Consolidated Resources' interests,
at December 31, 1998, in the Toole County Area of Montana consisted of 67
producing wells and 17 shut-in wells, 61 of which are operated by Hallwood
Petroleum. The oil wells produce from the Nisku formation at depths of
approximately 3,000 feet, and the gas wells produce from the Bow Island
formation at depths of approximately 900 to 1,200 feet. During 1998, Energy
Partners and Consolidated Resources drilled and completed two horizontal wells.
Greater Permian Region
Energy Partners and Consolidated Resources have significant interests in
the Greater Permian region, which includes West Texas and Southeast New Mexico.
In this region, at December 31, 1998, Energy Partners and Consolidated Resources
had interests in 537 productive oil and gas wells (423 operated). Energy
Partners and Consolidated Resources also had interests in 38 operated shut-in
oil and gas wells and 17 (15 operated) salt water disposal wells or injection
wells. During 1998, Energy Partners and Consolidated Resources drilled or
recompleted 42 wells, 79% of which are producing. The following is a description
of the significant areas within the Greater Permian region.
Carlsbad/Catclaw Area. Energy Partners' and Consolidated Resources'
interests in the Carlsbad/ Catclaw Area as of December 31, 1998 consisted of 93
producing wells that produce primarily natural gas and are located on the
northwestern edge of the Delaware Basin in Lea, Eddy and Chaves Counties, New
Mexico. Hallwood Petroleum operates 37 of these wells. The wells produce at
depths ranging from approximately 2,500 feet to 14,000 feet from the Delaware,
Ataxia, Bone Springs and Morrow formations. During 1998, Energy Partners and
Consolidated Resources recompleted or drilled nine producing development wells
and one unsuccessful exploration well in the area.
East Keystone Area. Energy Partners' and Consolidated Resources' interests
in the East Keystone Area at December 31, 1998 consisted of 55 producing wells
in Winkler County, Texas, 37 of which are operated by Hallwood Petroleum. The
primary focus of this area is the development of the Holt and San Andreas
formations at a depth of approximately 5,100 feet. During 1998, Energy Partners
and Consolidated Resources had eight development projects, seven of which are
producing.
Merkle Area. Energy Partners', Consolidated Resources' and HEPGP's
nonoperated interests in the Merkle Area include 10 square miles of proprietary
seismic data in Jones, Nolan and Taylor Counties, Texas, which data was acquired
in 1995. Based on the success of the nonoperated Merkle Area, Energy Partners,
Consolidated Resources and HEPGP acquired 74 additional miles of proprietary 3-D
seismic data adjacent to the nonoperated area. Energy Partners', Consolidated
Resources' and HEPGP's focus in this area is exploration of the Canyon, Strawn,
Flippen, Tannehill and Ellenberger formations at depths of approximately 2,500
to 6,500 feet. In 1998, Energy Partners, Consolidated Resources and HEPGP
participated in the drilling and recompletion of 11 exploration wells and one
development well, nine of which were completed.
Spraberry Area. At December 31, 1998, Energy Partners' and Consolidated
Resources' interests in the Spraberry Area consisted of 360 producing wells, 13
salt water disposal wells and 36 shut-in wells in
67
<PAGE> 77
Dawson, Upton, Reagan and Irion Counties, Texas. Hallwood Petroleum operates 380
of these wells. Most of the current production from the wells is from the Upper
and Lower Spraberry, Clearfork Canyon, Dean and Fusselman formations at depths
ranging from 5,000 feet to 9,000 feet.
Arcadia Acquisition. In October 1998, Energy Partners and Consolidated
Resources purchased for $16,400,000 oil and gas properties, including interests
in approximately 570 wells, located primarily in Texas, numerous proven and
unproven drilling locations, exploration acreage, and 3-D seismic data.
Approximately 85% in value of the proved properties are operated by Hallwood
Petroleum.
Gulf Coast Region
Energy Partners and Consolidated Resources have significant interests in
the Gulf Coast region in Louisiana and South and East Texas. Energy Partners'
and Consolidated Resources' most significant interests in the Gulf Coast region
consist of 23 producing gas wells and six salt water disposal wells located in
Lafayette Parish, Louisiana. The wells produce principally from the Bol Mex
formations at approximately 13,500 to 14,500 feet and 11 are operated by
Hallwood Petroleum. The two most significant wells in the area are the A.L.
Boudreaux #1 and the G.S. Boudreaux Estate #1, which, it is estimated, will
account on a combined basis for approximately 20% of Energy Corporation's
estimated 1999 production. In South and East Texas, Energy Partners and
Consolidated Resources have interests in 203 wells, 65 of which are operated by
Hallwood Petroleum. The wells produce primarily from the Austin Chalk, Paluxy,
Lower Frio and Cotton Valley formations at depths from 7,000 to 13,000 feet.
During 1998, Energy Partners and Consolidated Resources together drilled or
recompleted eight wells, five of which are producing. Energy Partners also
drilled five additional development wells, two of which are producing, on
acreage that it does not share with Consolidated Resources.
Other Properties
Energy Partners and Consolidated Resources own interests in wells located
in Kansas, Oklahoma, California and South Central Texas. Energy Partners' and
Consolidated Resources' most significant interests are in Kansas and consisted
at December 31, 1998 of 224 producing wells, of which 219 are operated by
Hallwood Petroleum and five are operated by unaffiliated entities. The wells are
located in 15 counties primarily in the Central Kansas Uplift and produce
principally from the Arbuckle and numerous Lansing-Kansas City formation zones
from approximately 3,000 feet to 6,500 feet.
OIL AND GAS RESERVES
The following historical reserve quantity and future net cash flow
information represents proved reserves that are located in the United States.
The historical reserves for each entity have been estimated by Hallwood
Petroleum's in-house engineers. Approximately 80% in value of these reserves
have been reviewed by Williamson Petroleum Consultants. The determination of oil
and gas reserves is based on estimates that are highly complex and interpretive.
The estimates change continually as additional information becomes available.
The calculations are performed using the prices for oil and gas at December
31, 1998 held constant (unless a contract provides otherwise) and are based on a
10% discount rate. The oil and gas prices used for each entity are shown in the
following table. Future production costs are based on year end costs and include
severance taxes. The discounted future net cash flows for Energy Partners are
calculated with no consideration given to future income taxes because Energy
Partners is not a tax paying entity. Future income taxes are considered in the
pro forma discounted future net cash flows for Energy Corporation.
There are numerous uncertainties inherent in estimating oil and gas
reserves and their estimated values, including many factors beyond the entities'
control. The reserve data in this document represents only estimates. Although
we believe the reserve estimates contained in this document are reasonable,
reserve estimates are imprecise and are expected to change as additional
information becomes available.
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<PAGE> 78
Reservoir engineering is a subjective process of estimating underground
accumulations of oil and gas that cannot be measured in an exact manner.
Estimates of economically recoverable oil and gas reserves and of future net
cash flows necessarily depend upon a number of variable factors and assumptions,
such as historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. For these
reasons, estimates of the economically recoverable quantities of oil and gas
attributable to any particular group of properties, classifications of such
reserves based on risk of recovery, and estimates of the future net cash flows
expected from them prepared by different engineers, or by the same engineers but
at different times, may vary substantially and such reserve estimates may be
adjusted downward or upward based upon such factors. Actual production, revenues
and expenditures with respect to the entities' reserves will likely vary from
estimates, and such variances may be material.
The standardized measure of discounted future net cash flows referred to in
this document should not be construed as the current market value of the
estimated oil and gas reserves attributable to Energy Corporation's properties.
In accordance with applicable requirements of the SEC, the estimated discounted
future net cash flows from proved reserves are generally based on prices and
costs as of the date of the estimate; however, actual future prices and costs
may be materially higher or lower. Actual future net cash flows also will be
affected by factors such as the amount and timing of actual production, supply
and demand for oil and gas, decreases or increases in consumption by oil and gas
purchasers, and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves will be affected by the timing
of both the production and the expenses incurred in connection with development
and production of oil and gas properties. In addition, the 10% discount factor,
which is required by the SEC to calculate discounted future net cash flows for
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
Energy Corporation or the oil and gas industry in general.
The following table summarizes the proved reserves, the estimated future
net revenues from those proved reserves and the standardized measure of
discounted net cash flows attributable to them at December 31, 1998 for each of
HEPGP, Energy Partners and Consolidated Resources and for Energy Corporation on
a pro forma basis after giving effect to the consolidation. The information
below on estimated future net cash flows and weighted average sales prices
includes the effects of hedging. The discounted future net cash flows for Energy
Partners are calculated with no consideration given to future income taxes
because Energy Partners is not a tax paying entity. The following pro forma
information is not equal to the sum of the oil and gas information shown in the
HEPGP, Energy Partners and
69
<PAGE> 79
Consolidated Resources columns because an adjustment has been made to eliminate
the cross ownership between Energy Partners and Consolidated Resources.
<TABLE>
<CAPTION>
ENERGY
ENERGY CONSOLIDATED CORPORATION
HEPGP PARTNERS RESOURCES (PRO FORMA)
------ -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR
WEIGHTED AVERAGE SALES PRICES)
<S> <C> <C> <C> <C>
Proved reserves:
Oil (Mbbl)...................................... 113 4,487 4,033 7,813
Natural gas (Mmcf).............................. 1,362 94,939 87,007 166,265
Total (Mmcfe)........................... 2,040 121,861 111,205 213,143
Estimated future net cash flows................. $1,900 $143,000 $121,000 $242,000
Standardized measure of discounted net cash
flows........................................ $1,300 $101,000 $ 84,000 $169,000
Proved developed reserves:
Oil (Mbbl)...................................... 107 3,577 3,173 6,211
Natural gas (Mmcf).............................. 1,329 90,915 83,717 159,715
Total (Mmcfe)........................... 1,971 112,377 102,755 196,981
Estimated future net cash flows................. $1,900 $142,000 $120,000 $239,000
Standardized measure of discounted net cash
flows........................................ $1,300 $100,000 $ 82,000 $166,000
Weighted average sales prices:
Oil (per Bbl)................................... $9.84 $ 10.03 $ 10.01 $ 10.02
Natural gas (per Mcf)........................... $1.77 $ 1.92 $ 1.86 $ 1.89
</TABLE>
VOLUMES, SALES PRICES AND OIL AND GAS PRODUCTION EXPENSE
The following table sets forth information regarding the production volumes
and weighted average sales prices received for, and average production cost
associated with, the sale of oil and gas for the year ended December 31, 1998
for each of HEPGP, Energy Partners, and Consolidated Resources and for Energy
Corporation on a pro forma basis after giving effect to the consolidation. The
information below includes the effects of hedging and includes production taxes.
<TABLE>
<CAPTION>
ENERGY
ENERGY CONSOLIDATED CORPORATION
HEPGP PARTNERS RESOURCES (PRO FORMA)
------ -------- ------------ -----------
<S> <C> <C> <C> <C>
Production:
Oil (Mbbl)....................................... 23 787 716 1,385
Natural gas (Mmcf)............................... 115 14,037 10,555 22,252
Total (Mmcfe).................................... 253 18,759 14,851 30,562
Weighted average sales price:
Oil (per BBL).................................... $11.43 $ 13.65 $ 13.12 $ 13.33
Natural gas (per Mcf)............................ $1.43 $ 2.02 $ 1.91 $ 1.96
Production operating expense (per Mcfe)............ $0.72 $ 0.65 $ 0.78 $ 0.73
</TABLE>
70
<PAGE> 80
DEVELOPMENT, EXPLORATION AND ACQUISITION CAPITAL EXPENDITURES
The following table sets forth information regarding the costs incurred in
the purchase of proved and unproved properties and in development and
exploration activities during the year ended December 31, 1998 for each of
HEPGP, Energy Partners and Consolidated Resources and for Energy Corporation on
a pro forma basis after giving effect to the consolidation (in thousands).
<TABLE>
<CAPTION>
ENERGY
ENERGY CONSOLIDATED CORPORATION
HEPGP PARTNERS RESOURCES (PRO FORMA)
----- -------- ------------ -----------
<S> <C> <C> <C> <C>
Acquisition costs:
Proved properties................................ $28,397 $31,609 $56,016
Unproved prospects............................... 379 563 942
Development costs.................................. $298 8,087 6,904 14,153
Exploration costs.................................. 6,043 6,552 11,746
---- ------- ------- -------
Total costs incurred..................... $298 $42,906 $45,628 $82,857
==== ======= ======= =======
</TABLE>
PRODUCTIVE OIL AND GAS WELLS
The following table summarizes the productive oil and gas wells as of
December 31, 1998 attributable to the interests held directly by each of HEPGP,
Energy Partners and Consolidated Resources and by Energy Corporation on a pro
forma basis after giving effect to the consolidation.
<TABLE>
<CAPTION>
ENERGY
ENERGY CONSOLIDATED CORPORATION
HEPGP PARTNERS RESOURCES (PRO FORMA)
----------- ----------- ------------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ------ ---- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Productive Wells
Oil................................... 379 1 1,263 164 1,209 104 1,263 269
Natural Gas........................... 84 5 352 69 319 65 352 139
--- -- ----- --- ----- --- ----- ---
Total......................... 463 6 1,615 233 1,528 169 1,615 408
=== == ===== === ===== === ===== ===
</TABLE>
OIL AND GAS ACREAGE
The following table sets forth the developed and undeveloped leasehold
acreage held directly as of December 31, 1998 by each of HEPGP, Energy Partners
and Consolidated Resources and by Energy Corporation on a pro forma basis after
giving effect to the consolidation. Developed acres are acres that 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 or gas, regardless of whether or not the acreage
contains proved reserves. Gross acres are the total number of acres in which the
entity has a working interest. Net acres are the sum of the entity's fractional
interests owned in the gross acres.
<TABLE>
<CAPTION>
ENERGY
ENERGY CONSOLIDATED CORPORATION
HEPGP PARTNERS RESOURCES (PRO FORMA)
------------ ----------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET GROSS NET
------ --- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Developed acreage........ 8,999 388 101,257 46,771 91,436 28,728 101,257 75,887
Undeveloped acreage...... 2,285 324 323,108 82,976 306,437 73,727 323,108 157,027
------ --- ------- ------- ------- ------- ------- -------
Total.......... 11,284 712 424,365 129,747 397,873 102,455 424,365 232,914
====== === ======= ======= ======= ======= ======= =======
</TABLE>
71
<PAGE> 81
DRILLING ACTIVITY
The following table sets forth the number of wells drilled during the year
ended December 31, 1998 attributable to the direct interests of each of HEPGP,
Energy Partners and Consolidated Resources and to Energy Corporation on a pro
forma basis after giving effect to the consolidation.
<TABLE>
<CAPTION>
ENERGY
ENERGY CONSOLIDATED CORPORATION
HEPGP PARTNERS RESOURCES (PRO FORMA)
----------- ----------- ------------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ------ ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development Wells:
Productive.............................. 1 .1 12 3.6 11 3.4 12 7.1
Dry..................................... 2 .1 5 1.5 5 1.5 5 3.1
-- --- -- --- -- --- -- ----
Total........................... 3 .2 17 5.1 16 4.9 17 10.2
== === == === == === == ====
Exploratory wells:
Productive.............................. 11 .7 17 4.3 17 4.9 17 9.9
Dry..................................... 8 .4 17 3.0 16 3.3 17 6.7
-- --- -- --- -- --- -- ----
Total........................... 19 1.1 34 7.3 33 8.2 34 16.6
== === == === == === == ====
</TABLE>
72
<PAGE> 82
MANAGEMENT
DIRECTORS AND OFFICERS
None of Energy Partners, Consolidated Resources or Hallwood G.P. has any
employees. Hallwood Petroleum operates the properties and administers the
day-to-day activities of each of the entities and performs duties related to the
management and operation of various properties in which the entities own an
interest. Furthermore, the officers of each of Consolidated Resources and
Hallwood G.P. are the same. Messrs. Gumbiner, Troup and Guzzetti are directors
of each of Hallwood G.P., the general partner of Energy Partners, and
Consolidated Resources. In addition, Hallwood G.P. has three outside directors
who are not otherwise affiliated with any of the entities and Consolidated
Resources has four outside directors who are not otherwise affiliated with any
of the entities. Upon completion of the consolidation, Hallwood Petroleum will
become a wholly-owned subsidiary of Energy Corporation, all of the officers of
Hallwood G.P. and Consolidated Resources will become officers of Energy
Corporation and all of the directors of Hallwood G.P. and Consolidated Resources
will become directors of Energy Corporation. The following are brief biographies
of the directors and officers of Hallwood G.P., Consolidated Resources and
Hallwood Petroleum.
Anthony J. Gumbiner, 54, has served as a director and Chief Executive
Officer of Hallwood G.P. since March 1997. He was Chairman of the Board of
Hallwood Energy Corporation, a predecessor entity to Hallwood Group and
unrelated to Energy Corporation, ("HEC") from May 1984 until HEC's merger into
Hallwood Group in November 1996. He was Chief Executive Officer of HEC from
February 1987 to November 1996. Mr. Gumbiner has been a director and Chief
Executive Officer of Consolidated Resources since February 1992. He has also
served as Chairman of the board of directors of Hallwood Group since 1981 and as
Chief Executive Officer of Hallwood Group since April 1984. Mr. Gumbiner has
also served as Chairman of the board of directors and as a director of Hallwood
Holdings S.A., a Luxembourg real estate investment company, since March 1984. He
has been a director of Hallwood Realty Corporation, which is the general partner
of Hallwood Realty Partners, L.P., since November 1990. He is a Solicitor of the
Supreme Court of Judicature of England.
William L. Guzzetti, 55, has been President of Hallwood G.P. and Hallwood
Petroleum since October 1989, and a director of Hallwood G.P. and Hallwood
Petroleum since August 1989. He was President, Chief Operating Officer and a
director of HEC from February 1985 until November 1996. Mr. Guzzetti joined HEC
in February 1976 as Vice President, Secretary and General Counsel and served in
these positions until November 1980. He served as Senior Vice President,
Secretary and General Counsel of HEC from November 1980 until February 1985,
when he became President of HEC. Mr. Guzzetti has been President, Chief
Operating Officer and a director of Consolidated Resources since May 1991. Mr.
Guzzetti is also an Executive Vice President of Hallwood Group and in that
capacity may devote a portion of his time to the activities of Hallwood Group,
including the management of real estate investments, acquisitions and
restructurings of entities controlled by Hallwood Group. He is a director and
President of Hallwood Realty Corporation and in that capacity may devote a
portion of his time to the activities of Hallwood Realty Corporation.
Russell P. Meduna, 44, has served as Executive Vice President of Hallwood
G.P. and Hallwood Petroleum since October 1989. He was Executive Vice President
of HEC from June 1991 until November 1996. He was Vice President of HEC from May
1990 until June 1991. Mr. Meduna became Executive Vice President of Consolidated
Resources in June 1992. Mr. Meduna was Vice President of Hallwood G.P. and
Hallwood Petroleum from April 1989 to October 1989 and Manager of Operations
from January 1989 to April 1989. He joined Hallwood Petroleum in 1984 as
Production Manager. Prior to joining Hallwood Petroleum, he was employed by both
major and independent oil companies. Mr. Meduna is a registered professional
engineer in the States of Colorado and Texas.
Cathleen M. Osborn, 46, has served as Vice President, Secretary and General
Counsel of Hallwood G.P. and Hallwood Petroleum since September 1986. She was
Vice President, Secretary and General Counsel of HEC from June 1991 until
November 1996. Ms. Osborn became Secretary and General
73
<PAGE> 83
Counsel of Consolidated Resources in May 1992 and Vice President in June 1992.
She joined Hallwood G.P. and Hallwood Petroleum in 1985 as senior staff
attorney. Ms. Osborn is a member of the Colorado Bar Association.
Tom J. Jung, 50, has served as Vice President and Chief Financial Officer
of Hallwood G.P., Consolidated Resources and Hallwood Petroleum since May 1998.
From January 1997 until April 1998, he was a Senior Financial Associate with
Trinity Petroleum Management, and during that period, he also provided
consulting services to other companies involved in the development, financing,
management and monetization of tax credits for alternative energy projects. From
1994 to 1996, he was Chief Executive Officer of FAR Gas Acquisitions Corp. From
1986 to 1994, he was Vice President and Chief Financial Officer of NICOR
Exploration & Production Company and Reliance Pipeline Company.
Betty J. Dieter, 51, has been Vice President of Hallwood Petroleum
responsible for domestic operations since January 1995. Her previous positions
with Hallwood Petroleum have included Operations Manager, Rocky Mountain and
Mid-Continent District Manager and Manager for Operations Accounting and
Administration. She joined Hallwood Petroleum in 1985, and has 25 years
experience in accounting and operations, 18 of which are in the oil and gas
industry. Ms. Dieter is a Certified Public Accountant.
George Brinkworth, 57, has been Vice President-Exploration and
International Division of Hallwood Petroleum since August 1994. He became
associated with Hallwood Petroleum in 1987 when he was President of a joint
venture program funded by Hallwood Petroleum and two other domestic oil
companies. Mr. Brinkworth has 33 years experience with various exploration and
production companies, including previous responsibility for operations in the
United Kingdom, Spain, Morocco, Egypt and Indonesia. He is a registered
geophysicist in the State of California.
William H. Marble, 48, has served as Vice President of Hallwood Petroleum
since December 1990. His previous positions with Hallwood Petroleum have
included Texas/Gulf Coast District Manager, Manager of Nonoperated Properties
and Chief Engineer. He joined a predecessor general partner of Energy Partners
in 1984. Mr. Marble is a registered engineer in the State of Colorado and has 23
years oil and gas engineering experience.
Nathan C. Collins, 64, has served as a director of Hallwood G.P. since
March 1997. He was a director of HEC from January 1993 until November 1996.
Since February 1999, he has been a consultant in banking products development
for Nordstrom, Inc. He is also a director of First State Bank of Flagstaff. From
March 1, 1995 to March 1, 1996, he was President, Chief Executive Officer and a
director of Flemington National Bank & Trust Co. in Flemington, New Jersey. From
November 1987 until December 1994, he was Chairman of the board of directors,
President and Chief Executive Officer of BancTexas Group Inc. He began his
banking career in August 1964 with the Valley National Bank in Phoenix, Arizona
and held various positions there, finally becoming Executive Vice President,
Senior Credit Officer and Manager of Asset/Liability Group of the bank.
Hans-Peter Holinger, 56, has served as a director of Hallwood G.P. since
March 1997. He was a director of HEC from May 1984 until November 1996. Mr.
Holinger served as Managing Director of Interallianz Bank Zurich A.G. from 1977
to February 1993. Since February 1993, he has been the majority owner of
Holinger Asset Management AG, Zurich. Mr. Holinger is a citizen of Switzerland.
Rex A. Sebastian, 69, has served as a director of Hallwood G.P. since March
1997. He was a director of HEC from January 1993 until November 1996. Mr.
Sebastian is a member of the board of directors of Ferro Corporation. He served
as Senior Vice President-Operations of Dresser Industries, Inc. from January
1975 until his retirement in July 1985. He joined Dresser in 1966. Mr. Sebastian
is now a private investor.
Brian M. Troup, 52, has served as a director of Hallwood G.P. since March
1997. Mr. Troup was a director of HEC from May 1984 until November 1996. He has
been President and Chief Operating Officer of Hallwood Group since April 1986,
and he is a director of Hallwood Group. He has been a director of Consolidated
Resources since February 1992. Mr. Troup is a director of Hallwood Holdings
74
<PAGE> 84
S.A. and of Hallwood Realty Corporation. He is an associate of the Institute of
Bankers in Scotland and a member of the Society of Investment Analysts in the
United Kingdom.
John R. Isaac, Jr., 54, has served as a director of Consolidated Resources
since June 1992. Since October 1997, Mr. Isaac has been Chief Executive Officer
and President of Ideas, Inc., a retail consulting company. From February 1996 to
October 1997, Mr. Isaac was President and Chief Executive Officer of Thorn
Americas, Inc., parent of Rent-A-Center USA. From March 1995 until February
1996, Mr. Isaac was President and Chief Operating Officer of Rent-A-Center USA.
From February 1991 to February 1995, Mr. Isaac was President and Chief Operating
Officer of Everything's A Dollar, a division of Value Merchants, Inc. He was
President and Chief Executive Officer of Hallwood Industries Incorporated from
August 1987 to October 1991. He was President of Tradevest, Inc., a mail order
catalog retailer, from 1986 to 1987, and a Vice President of Service Merchandise
Co., Inc., a catalog showroom retailer, from 1981 to 1986.
Jerry A. Lubliner, 44, has served as a director of Consolidated Resources
since June 1992. Dr. Lubliner is a medical doctor who has been in private
practice since 1986. From 1986 to 1988, he was Associate Chief-Sports Medicine
at the Hospital for Joint Diseases-Orthopedic Institute in New York. Dr.
Lubliner is a Fellow of the American Academy of Orthopedic Surgeons. He is also
a director of New York Orthopedics and Sports Medicine, P.C.
Hamilton P. Schrauff, 63, has served as a director of Consolidated
Resources since September 1996. From March 1997 until June 1998, he was Chief
Financial Officer of Burns Controls Company. From March 1996 to January 1997 he
was Vice President of Capital Alliance. From August 1995 to February 1996 he was
an independent financial consultant. From October 1991 to August 1995 he was
Vice President and Chief Financial Officer of Basic Capital Management, Inc.,
Syntek Asset Management, Inc., American Realty Trust Investors, Inc., Income
Opportunity Realty Trust and Transcontinental Realty Investors, Inc. From
October 1991 to February 1994 he was Executive Vice President and Chief
Financial Officer of National Income Realty Trust and Vinland Property Trust.
From December 1990 to October 1991 he was Vice President Finance-Partnership
Investments of Hallwood Group. From October 1980 to October 1990 he was Vice
President Finance and Treasurer, and from November 1976 to September 1980 he was
Vice President Finance of Texas Oil and Gas Corporation. From 1959 to 1976, Mr.
Schrauff was employed by Exxon Corporation and its predecessors in various
accounting and finance positions. Mr. Schrauff is a Certified Public Accountant
and a Certified Financial Planner. He is a member of the American Institute of
Certified Public Accountants, the Texas Society of Certified Public Accountants
and the Financial Executives Institute.
Bill M. Van Meter, 66, has served as a director of Consolidated Resources
since September 1996. From 1986 until May 1996, Mr. Van Meter was President of
the Energy Companies of ONEOK division of ONEOK Inc. From 1958 to 1996, Mr. Van
Meter was employed by both major and independent oil companies.
DIRECTOR COMPENSATION
Each director of Hallwood G.P. or Consolidated Resources who is not an
officer of any of the entities is paid an annual fee of $20,000 that is
proportionately reduced if the director attends fewer than four regularly
scheduled meetings of the board during the year. In addition, all directors are
reimbursed for their expenses in attending meetings of the board and committees.
We anticipate that Energy Corporation will adopt a similar policy for
compensation of its directors after the consolidation.
75
<PAGE> 85
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the total compensation to the Chief
Executive Officer of Hallwood Petroleum and each of the four other most highly
compensated officers of Hallwood Petroleum whose compensation exceeded $100,000,
determined for the year ended December 31, 1998, for services to Energy
Partners, Consolidated Resources and Hallwood G.P. for the years ended December
31, 1998, 1997 and 1996. The table reflects the compensation approved by the
boards of directors of the general partner of Energy Partners and Consolidated
Resources for the years shown. The compensation to be paid by Energy Corporation
will be determined following the consolidation and may be different from that
paid in the past.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING LTIP ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) PAYOUTS COMPENSATION(1)
- ------------------------- ---- -------- -------- --------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Gumbiner(2)....... 1998 $ 0 $ 0 (5) $ (6) $ 0
Chief Executive 1997 0 0 (3) (6) 0
Officer 1996 250,000 0 0 6 0
William L. Guzzetti.......... 1998 204,811 162,800 (5) 30,523 4,800
President and Chief 1997 204,294 143,870 (3) 42,854 4,750
Operating Officer 1996 204,294 131,500 0 33,170 5,699
Russell P. Meduna............ 1998 163,664 99,000 (5) 30,523 4,800
Executive Vice 1997 163,664 111,520 (3) 42,854 4,750
President 1996 163,664 101,900 0 33,170 4,500
Thomas J. Jung............... 1998 82,850 60,000 (4)(5) 0 1,922
Vice President and Chief
Financial Officer
Cathleen M. Osborn........... 1998 119,614 74,500 (5) 21,458 4,800
Vice President and 1997 105,685 100,000 (3) 30,124 4,750
General Counsel 1996 105,685 62,400 0 23,092 4,500
</TABLE>
- ---------------
(1) Employer contribution to 401(k) and a service award of $1,199 paid to Mr.
Guzzetti in 1996.
(2) For 1996, Mr. Gumbiner had a compensation agreement with Hallwood Petroleum.
$250,000 was paid under this agreement in 1996. The compensation agreement
terminated effective December 1996. In addition to compensation listed in
the table, Hallwood Petroleum had a consulting agreement with Hallwood Group
for 1996, pursuant to which Hallwood Group received an annual consulting fee
of $300,000 from affiliates of Hallwood Petroleum. During 1997 and 1998,
Hallwood Petroleum participated in a new financial consulting agreement with
Hallwood Group, pursuant to which Hallwood Group received a fee of $550,000
from Hallwood Petroleum and its affiliates. The consulting services were
provided by HSC Financial, through the services of Mr. Gumbiner and Mr.
Troup, and Hallwood Group paid the annual fee it received to HSC Financial.
(3) Consists of the following Consolidated Resources options granted in 1997,
which have been adjusted to give effect to the 3-for-1 split effective in
1997.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING
NAME OPTIONS/SARS(#)
- ---- ---------------------
<S> <C>
Anthony J. Gumbiner......................................... 47,700
William L. Guzzetti......................................... 23,850
Russell P. Meduna........................................... 22,260
Cathleen M. Osborn.......................................... 9,540
</TABLE>
76
<PAGE> 86
(4) Consists of the following Energy Partners Class A unit options and
Consolidated Resources common stock options granted in 1998.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING
NAME COMPANY OPTIONS/SARS(#)
- ---- ------- ---------------------
<S> <C> <C>
Thomas J. Jung.................................... Energy Partners 25,500
Consolidated 9,540
Resources
</TABLE>
(5) Consists of the following Energy Partners Class C unit options granted in
1998.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING
NAME OPTIONS/SARS(#)
- ---- ---------------------
<S> <C>
Anthony J. Gumbiner......................................... 34,588
William L. Guzzetti......................................... 16,588
Russell P. Meduna........................................... 14,118
Thomas J. Jung.............................................. 10,024
Cathleen M. Osborn.......................................... 10,024
</TABLE>
(6) Payments were made to HSC Financial, with which Mr. Gumbiner is associated,
in the amount of $67,977 for 1998, $54,750 for 1997 and $9,943 for 1996.
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth options to purchase Class C units of Energy
Partners granted to executive officers during 1998. The Options have a ten-year
term and vest cumulatively one-half on the grant date and one-half on the first
anniversary of the grant date. All options vest immediately in the event of
specific types of changes in control of Energy Partners. No options to purchase
Class C units were exercised in 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
% OF TOTAL RATES OF UNIT PRICE
NUMBER OF OPTIONS/ APPRECIATION FOR OPTION
SECURITIES SARS TERM(1)
UNDERLYING GRANTED EXERCISE -----------------------
OPTIONS/ EMPLOYEES OR 5% 10%
SARS IN FISCAL BASE PRICE EXPIRATION $16.29 $25.94
NAME GRANTED YEAR ($/UNIT) DATE UNIT PRICE UNIT PRICE
- ---- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Gumbiner......... 34,588 24 10.00 05/05/08 $217,522 $551,244
William L. Guzzetti......... 16,588 11 10.00 05/05/08 104,321 264,370
Russell P. Meduna........... 14,118 10 10.00 05/05/08 88,787 225,005
Cathleen M. Osborn.......... 10,024 7 10.00 05/05/08 63,040 159,757
Thomas J. Jung.............. 10,024 7 10.00 05/05/08 63,040 159,757
</TABLE>
- ---------------
(1) SEC rules require calculation of potential realizable value assuming that
the market price of the Class C units appreciates in value at 5% and 10%
annualized rates. At a 5% annualized rate of appreciation, the Class C unit
price would be $16.29 at the end of 10 years. At a 10% annualized rate of
appreciation, the Class C unit price would be $25.94 at the end of 10 years.
No gain to an executive officer is possible without an appreciation in Class
C unit value, which will benefit all holders of Class C units. The actual
value an executive officer may receive depends on market prices for the
Class C units, and there can be no assurance that the amounts reflected will
actually be realized.
77
<PAGE> 87
The following table sets forth the options to purchase Class A units of
Energy Partners granted to an executive officer during 1998. The Options have a
ten-year term and vest cumulatively over three years at the rate of 1/3 of the
grant date and the first two anniversaries of the grant date. All options vest
immediately in the event of specific types of changes in control of Energy
Partners. None of these options were exercised in 1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL RATES
-------------------------- OF UNIT PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR OPTION
SECURITIES OPTIONS/ TERM(1)
UNDERLYING SARS -------------------------
OPTIONS/ GRANTED EXERCISE OR 5% 10%
SARS EMPLOYEES IN BASE PRICE EXPIRATION $10.79 $17.18
NAME GRANTED FISCAL YEAR ($/SHARE) DATE UNIT PRICE UNIT PRICE
- ---- ---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Jung............ 25,500 18 $6.625 05/05/08 $106,244 $269,243
</TABLE>
- ---------------
(1) Securities and Exchange Commission Rules require calculation of potential
realizable value assuming that the market price of the Class A units
appreciates in value at 5% and 10% annualized rates. At a 5% annualized rate
of appreciation, the Class A unit price would be $10.79 at the end of ten
years. At a 10% annualized rate of appreciation, the Class A unit price
would be $17.18 at the end of ten years. No gain to an executive officer is
possible without an appreciation in Class A unit value, which will benefit
all holders of Class A units. The actual value an executive officer may
receive depends on market prices for the Class A units, and there can be no
assurance that the amounts reflected will actually be realized.
The following table sets forth the options to purchase common stock of
Consolidated Resources granted to an executive officer during 1998. The Options
have a ten-year term and vest cumulatively over two years at the rate of 1/3 on
the grant date and the 1/3 on first two anniversaries of the grant date. All
options vest immediately in the event of specific types of changes in control of
Consolidated Resources.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
INDIVIDUAL GRANTS OF UNIT PRICE
-------------------------- APPRECIATION FOR OPTION
NUMBER OF % OF TOTAL TERM(1)
SECURITIES OPTIONS/SARS -------------------------
UNDERLYING GRANTED EXERCISE OR 5% 10%
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION $25.66 $40.85
NAME GRANTED FISCAL YEAR ($/SHARE) DATE UNIT PRICE UNIT PRICE
- ---- ------------ ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Jung.......... 19,080 100 $15.75 05/05/08 $189,989 $478,936
</TABLE>
- ---------------
(1) Securities and Exchange Commission Rules require calculation of potential
realizable value assuming that the market price of the common stock
appreciates in value at 5% and 10% annualized rates. At a 5% annualized rate
of appreciation, the common stock price would be $25.66 at the end of ten
years. At a 10% annualized rate of appreciation, the common stock price
would be $40.85 at the end of ten years. No gain to an executive officer is
possible without an appreciation in common stock value, which will benefit
all holders of common stock. The actual value an executive officer may
receive depends on market prices for the common stock, and there can be no
assurance that the amounts reflected will actually be realized.
78
<PAGE> 88
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth exercises of options to purchase units and
shares of common stock in 1998 and the value of unexercised options held by the
executive officers at December 31, 1998. The Energy Partners Class A unit
options have a ten year term and vest cumulatively over three years at the rate
of one-third on each of the date of grant and the first two anniversaries of the
grant date. The Energy Partners Class C unit options have a ten year term and
vest one-half on the date of grant and one-half on the first anniversary of the
grant date. All options vest immediately in the event of specific types of
changes in control of Energy Partners. The Consolidated Resources options have a
ten-year term and vest cumulatively over three years at the rate of one-third on
each of the date of grant and the first two anniversaries of the grant date. All
options vest immediately in the event of specific types of changes in control of
Consolidated Resources. The number of options has been adjusted to reflect a
3-for-1 stock split effective in 1997. For purposes of this table, "HCRC" refers
to Consolidated Resources and "HEP" refers to Energy Partners.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
UNITS AT FY-END(#) AT FY-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME COMPANY EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)(2)
- ---- ------- ----------- ----------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner...... HEP 144,794 / 17,294 0 / 0
HCRC 4,000 33,820 75,500 / 15,900 189,221 / 0
William L. Guzzetti...... HEP 72,044 / 8,294 0 / 0
HCRC 39,750 / 7,950 103,271 / 0
Russell P. Meduna........ HEP 66,559 / 7,059 0 / 0
HCRC 2,500 21,700 34,600 / 7,420 85,561 / 0
Cathleen M. Osborn....... HEP 9,100 11,497 21,412 / 5,012 0 / 0
HCRC 5,000 42,900 10,900 / 3,180 19,658 / 0
Thomas J. Jung........... HEP 13,512 / 22,012 0 / 0
HCRC 6,360 / 12,720 0 / 0
</TABLE>
- ---------------
(1) The exercise price of the Energy partners Class A unit options granted in
1995 and in 1998 is $5.75 and $6.625 per Class A unit, respectively. The
exercise price of the Energy Partners Class C unit options granted in 1998
is $10.00 per Class C unit. The closing price of the Class A units was
$3.625 on December 31, 1998 and the closing price of the Class C units was
$6.625 on December 31, 1998.
(2) The exercise price of the Consolidated Resources options granted in 1995 is
$6.67 per share, and the exercise price of the Consolidated Resources
options granted in 1997 is $20.33 per share. The closing price of the common
stock was $11.00 on December 31, 1998. The number of options and the
exercise and closing price has been adjusted to reflect a 3-for-1 stock
split effective in 1997.
79
<PAGE> 89
LONG-TERM INCENTIVE PLAN
The following table describes performance units awarded to the executive
officers of Hallwood Petroleum for 1998 under the incentive plan described for
Energy Partners, Consolidated Resources and affiliated entities. The value of
awards under the incentive plan depends primarily on the entities' success in
drilling, completing and achieving production from new wells each year and from
recompletions and enhancements of existing wells.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE
NUMBER OF OTHER PERIOD PAYOUTS UNDER NON-STOCK
NAME UNITS UNTIL PAYOUT PRICE-BASED PLANS(1)
- ---- --------- -------------- -----------------------
<S> <C> <C> <C>
William L. Guzzetti............................. 0.0727 2003 $18,176
Russell P. Meduna............................... 0.0727 2003 18,176
Cathleen M. Osborn.............................. 0.0545 2003 13,625
</TABLE>
- ---------------
(1) This amount represents an award under the incentive plan. There are no
minimum, maximum or target amounts payable under the incentive plan.
Payments under the awards will be equal to the indicated percentage of
incentive plan net cash flow from specific wells for the first five years
after an award and, in the sixth year, the indicated percentage of 80% of
the remaining net present value of estimated future production from the
wells allocated to the incentive plan. The amounts shown above are estimates
based on estimated reserve quantities and future prices. Because of the
uncertainties inherent in estimating quantities of reserves and prices, it
is not possible to predict cash flow or remaining net present value of
estimated future production with any degree of certainty.
(2) In addition, an award of .3818 units, with an estimated future payout of
$95,453 was made to HSC Financial, with which Mr. Gumbiner is associated.
The payout period ends in 2003.
The incentive plan for Energy Partners and Consolidated Resources is
intended to provide incentive and motivation to Hallwood Petroleum's key
employees to increase the oil and gas reserves of the various affiliated
entities for which Hallwood Petroleum provides services and to enhance those
entities' ability to attract, motivate and retain key employees and consultants
upon whom, in large measure, those entities' success depends.
Under the incentive plan, the boards of directors of Hallwood G.P. and
Consolidated Resources annually determine the portion of the entities'
collective interests in the cash flow from some of their international projects
and from domestic wells drilled, recompleted or enhanced during that year,
called the "plan year," which will be allocated to participants in the plan and
the percentage of the remaining net present value of estimated future production
from domestic wells for which the participants will receive payment in the sixth
year of an award. The portion allocated to participants in the plan is referred
to as the "plan cash flow." The boards then determine which key employees and
consultants may participate in the plan for the plan year and allocate the plan
cash flow among the participants. Awards under the plan do not represent any
actual ownership interest in the wells. Awards are made at the boards'
discretion.
Each award under the incentive plan represents the right to receive for
five years a specified share of the plan cash flow attributable to some of the
domestic wells drilled, recompleted or enhanced during the plan year. In the
sixth year after the award, the participant is paid an amount equal to a
specified percentage of the remaining net present value of estimated future
production from the wells and the award is terminated. Cash flow from
international projects, if any, allocated to the incentive plan is paid to
participants for a 10-year period, with no buy-out for estimated future
production.
The awards for the 1998 plan year were made in January 1998. No other
awards were made in 1998. For the 1998 plan year, the boards determined that the
total plan cash flow would be equal to 2.75% of the cash flow of the domestic
wells completed, recompleted or enhanced during 1998. Accordingly, the value of
awards for each plan year depends primarily on the entities' success in
drilling, completing and
80
<PAGE> 90
achieving production from new wells each year and from recompletions and
enhancements of existing wells. The boards also determined that the
participants' interests in eligible domestic wells for the 1998 plan year would
be purchased in the sixth year at 80% of the remaining net present value of the
wells completed in the plan year. The boards also determined that the total
award would be allocated among key employees primarily on the basis of salary
and, to a lesser extent, on the basis of contribution to the entities' drilling
activity.
Energy Corporation intends to continue the incentive plan on substantially
the same basis following the consolidation.
81
<PAGE> 91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information, as of the record date, and after
giving effect to the consolidation, about any individual, partnership or
corporation that is known to Energy Partners or Consolidated Resources to be the
beneficial owner of more than 5% of each class of Energy Partners units or
Consolidated Resources common stock issued and outstanding and each executive
officer and director of Hallwood G.P. or Consolidated Resources and all
executive officers and directors of Energy Partners and Consolidated Resources
as a group.
<TABLE>
<CAPTION>
SUBSEQUENT TO
PRIOR TO CONSOLIDATION CONSOLIDATION
---------------------------------------------------------------------- ------------------------
SHARES OF
UNITS OF CONSOLIDATED SHARES OF
ENERGY PARTNERS RESOURCES ENERGY CORPORATION
---------------------------------------- --------------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
TITLE OF BENEFICIALLY OF BENEFICIALLY OF BENEFICIALLY OF
NAME CLASS OF UNITS OWNED CLASS OWNED CLASS OWNED CLASS(21)
- ---- -------------- ------------ ------- ------------ ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
The Hallwood Group
Incorporated(1)............. Class A 657,260(6) 6.5 -- -- 1,800,000 18.0
Class B 143,773 100.0 -- -- --
Class C 43,816 1.8 -- -- 43,816 1.9
Hallwood Energy Partners,
L.P.(2)..................... -- -- 1,374,465(12) 45.7 -- --
Hallwood Consolidated
Resources Corporation(2).... Class A 1,948,189 19.5 -- -- -- --
Class C 129,877 5.3 -- -- -- --
Heartland Advisors, Inc.(3)... Class A 803,760(7) 8.0 476,500(15) 15.8 1,354,641 13.5
Estate of William Baxter Lee,
III(4)...................... Class A 715,000(8) 7.1 293,800(16) 9.8 997,986 10.0
Class C 40,033(9) 1.6 40,033 1.7
FMR Corp.(5).................. -- -- 241,550(10) 8.0 384,499 3.8
Anthony J. Gumbiner........... Class A 127,500(18) 1.3 1,449,965(11)(12) 47.0 -- --
Class C 17,294(19) * -- --
William L. Guzzetti........... Class A 63,850(18) * 1,414,215(11)(12) 46.4 75 *
Class C 8,300(19) * 6 *
Russell P. Meduna............. Class A 59,500(18) * 34,879(12) 1.2 445 *
Class C 7,059(19) -- --
Cathleen M. Osborn............ Class A 16,400(18) * 10,990(12) * 143 *
Class C 5,112(19) 100 *
Thomas J. Jung................ Class A 8,500(18) * 6,360(12) * -- --
Class C 5,012(19) * -- --
Brian M. Troup................ Class A 85,000(18) * 53,000(12) 1.7 -- --
Class C 11,294(19) -- --
Hans-Peter Holinger........... Class A -- -- -- -- -- --
Class C -- -- -- -- -- --
Rex A. Sebastian.............. Class A 400 * -- -- 297 *
Class C 26 * -- -- 26 *
Nathan C. Collins............. Class A -- -- -- -- -- --
Class C -- -- -- -- -- --
John R. Isaac, Jr. ........... Class A -- -- -- -- -- --
Class C -- -- -- -- -- --
Jerry A. Lubliner............. Class A -- -- -- -- -- --
Class C -- -- -- -- -- --
Hamilton P. Schrauff.......... Class A -- -- -- -- -- --
Class C -- -- -- -- --
Bill M. Van Meter............. Class A -- -- -- -- -- --
Class C -- -- -- -- -- --
All directors and executive
officers of Hallwood G.P. as
a group (9 persons)......... Class A 361,150(13) 3.7
Class C 54,097(17) *
All directors and executive
officers of HCRC as a group
(10 persons)................ 1,594,944(20) 49.4
All directors and executive
officers of Energy
Corporation as a group (13
persons).................... Class A 960 *
Class C 132 *
</TABLE>
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<PAGE> 92
- ---------------
* Less than 1%.
(1) The address of Hallwood Group is 3710 Rawlins Street, Suite 1500, Dallas,
Texas 75219.
(2) The address of Energy Partners and Consolidated Resources is 4582 S. Ulster
Street Parkway, Suite 1700, Denver, Colorado 80237.
(3) The address of Heartland Advisors, Inc. is 790 North Milwaukee Street,
Milwaukee, WI 53202.
(4) The address of the Estate of William Baxter Lee, III, is c/o Glankler
Brown, PLLC, 1700 One Commerce Sq., Memphis, TN 38103
(5) The address of FMR Corp. is 82 Devonshire St., Boston, MA 02109.
(6) Includes 143,773 Class B units (100% of the Class B units) that are
convertible into Class A units one-for-one.
(7) According to Amendment No. 4 to Schedule 13G filed January 26, 1999 by
Heartland Advisors, Inc., the units to which the schedule relates are held
in investment advisory accounts of Heartland Advisors, Inc. As a result,
various persons have the right to receive or the power to direct the
receipt of dividends from, or the proceeds from the sale of, the
securities. No such account is known to have an interest relating to more
than 5% of the class.
(8) According to Schedule 13G filed February 23, 1999.
(9) According to Schedule 13G filed February 23, 1999.
(10) According to Schedule 13G filed February 12, 1999, Fidelity Management &
Research Company is the beneficial owner of the shares and acts as
investment adviser to Fidelity Low-Priced Stock Fund, which has an interest
in the shares. Edward C. Johnson III, FMR Corp. and Fidelity Low Price
Stock Fund each has sole power to dispose of the shares. The power to vote
the shares resides with the Board of Trustees of Fidelity Low Price Stock
Fund.
(11) Includes 1,374,465 shares beneficially owned by Energy Partners. Mr.
Gumbiner is Chief Executive Officer and Mr. Guzzetti is President and a
director of the general partner of the general partner of Energy Partners.
(12) The following numbers of shares issuable upon the exercise of currently
exercisable options are included in the amounts shown: Mr. Troup, 53,000
shares; Mr. Gumbiner, 75,500 shares; Mr. Guzzetti, 39,750 shares; Mr.
Meduna, 34,600 shares; Ms. Osborn, 10,900; and Mr. Jung, 6,360 shares.
(13) Consists of 500 Class A units and currently exercisable options to purchase
360,650 Class A units.
(14) Includes 40,323 shares held by Hallwood Oil and Gas, Inc., a subsidiary of
Energy Partners. Energy Partners has sole voting and investment power with
respect to the shares reported. The general partner of Energy Partners is
HEPGP Ltd., a limited partnership, the general partner of which is Hallwood
G.P. The executive officers of Hallwood G.P. and Consolidated Resources are
the same individuals: Anthony J. Gumbiner, William L. Guzzetti, Russell R.
Meduna, Cathleen M. Osborn and Thomas J. Jung.
(15) Information is from Amendment No. 6 to the Schedule 13G of Heartland
Advisors dated January 26, 1999. The Schedule 13G states that the shares
are held in investment advisory accounts of Heartland Advisors, Inc. and
that the interests of one such account, Heartland Value Fund, a series of
Heartland Group, Inc., a registered investment company, relates to more
than 5% of the Common Stock.
(16) Information is from Amendment No. 6 to Schedule 13D filed October 16, 1998.
(17) Consists of 132 Class C units and currently exercisable options to purchase
53,965 Class C units.
(18) The following numbers of Class A units issuable upon the exercise of
currently exercisable options are included in the amounts shown: Mr.
Gumbiner, 127,500; Mr. Troup, 85,000; Mr. Guzzetti, 63,750; Mr. Meduna,
59,500; Ms. Osborn, 16,400; Mr. Jung, 8,500.
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<PAGE> 93
(19) The following numbers of Class C units issuable upon the exercise of
currently exercisable options are included in the amounts shown: Mr.
Gumbiner, 17,294; Mr. Troup, 11,294; Mr. Guzzetti, 8,294; Mr. Meduna;
7,059; Ms. Osborn, 5,012; Mr. Jung, 5,012.
(20) Consists of 1,374,465 shares beneficially owned by Energy Partners,
currently exercisable options to purchase 220,110 shares and 369 shares
owned by directors and executive officers.
(21) For purposes of this column, amounts shown as Class A units represent
Energy Corporation common stock and amounts shown as Class C units
represent Energy Corporation preferred stock.
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<PAGE> 94
DESCRIPTION OF ENERGY CORPORATION'S CAPITAL STOCK
The description of Energy Corporation's capital stock set forth below is
only a summary and is not intended to be complete. For a complete description of
Energy Corporation's capital stock, we urge you to read Energy Corporation's
certificate of incorporation and bylaws and the certificate of designation of
the Series A cumulative preferred stock, which are filed as exhibits to the
registration statement of which this document forms a part.
DESCRIPTION OF COMMON STOCK
Under its charter, Energy Corporation has the authority to issue up to 25
million shares of Energy Corporation common stock, par value $0.01 per share.
Energy Corporation is expected to issue approximately 10,000,000 shares of its
common stock in the consolidation, which will be all of the shares of Energy
Corporation common stock then outstanding.
Voting Rights
Holders of Energy Corporation common stock will be entitled to one vote per
share on all matters voted on by stockholders, including in the election of
directors. The Energy Corporation certificate of incorporation does not provide
for cumulative voting in the election of directors of Energy Corporation. As
discussed below, Energy Corporation will have a staggered board of directors.
Dividends
After giving effect to any preferential rights of any series of preferred
stock outstanding, including the Energy Corporation preferred stock to be issued
in the consolidation, the holders of Energy Corporation common stock are
entitled to participate in dividends, if any, as may be declared from time to
time by the Energy Corporation board from funds legally available to pay
dividends and, upon liquidation, are entitled to receive a pro-rata share of all
the assets of Energy Corporation that are available for distribution to such
holders. All of the Energy Corporation common stock will, when issued in
connection with the consolidation, be fully paid and nonassessable. Holders of
Energy Corporation common stock will have no preemptive rights with respect to
future issuances of Energy Corporation common stock.
DESCRIPTION OF PREFERRED STOCK
Under the Energy Corporation certificate of incorporation, the board of
directors of Energy Corporation is authorized to issue up to 5,000,000 shares of
preferred stock from time to time, in one or more series, without stockholder
approval and to fix the designation, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of any series that may be established by the
Energy Corporation board. As a result, without stockholder approval, the Energy
Corporation board could authorize the issuance of preferred stock with voting,
conversion and other rights that could dilute the voting power and other rights
of the holders of Energy Corporation common stock. In addition, shares issued
after the effective time may have the effect, under some circumstances, alone or
in combination with other provisions of the Energy Corporation certificate of
incorporation of rendering more difficult or discouraging an acquisition of
Energy Corporation considered undesirable by the Energy Corporation board.
The Energy Corporation board has authorized the issuance of 2,334,186
shares of Series A cumulative preferred stock in connection with the
consolidation. The following highlights some of the features of the Energy
Corporation preferred stock.
Voting Rights
Each share of Energy Corporation preferred stock is entitled to one vote on
all matters on which stockholders may vote. The Energy Corporation preferred
stock will vote together with the Energy
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<PAGE> 95
Corporation common stock in the election of directors, and will vote as a
separate class on all other matters upon which stockholders may vote.
Dividends
Holders of shares of the Energy Corporation preferred stock are entitled to
receive, if declared by the board of directors out of funds legally available
for payment of dividends, cumulative cash dividends at the rate of $1.00 per
share per year. Dividends are paid quarterly in arrears, commencing on June 30,
1999. Payments will be paid to those holders of Energy Corporation preferred
stock who hold their shares of record at the close of business on each of March
31, June 30, September 30 and December 31 of each year.
The dividends are fully cumulative and accumulate, whether or not earned or
declared and whether or not Energy Corporation has funds legally available to
pay them, without interest on a daily basis. The first dividend will accrue,
without interest, commencing June 30, 1999. Dividends that are accumulated for a
dividend period that is shorter or longer than a full quarter will be prorated
on the basis of a 360 day year. Energy Corporation may not declare or pay
dividends to holders of the Energy Corporation common stock or any other series
of stock on a parity with or junior to the Energy Corporation preferred stock
unless full cumulative dividends have been paid on the Energy Corporation
preferred stock for the most recently completed quarterly dividend period.
Liquidation
Upon the liquidation or dissolution of Energy Corporation, Energy
Corporation may not distribute any assets to the holders of the Energy
Corporation common stock or holders of any class or series that is junior to the
Energy Corporation preferred stock unless it has first paid the dividends
accrued on the Energy Corporation preferred stock. If there is a class or series
of stock on a parity with the Energy Corporation preferred stock, any amounts
available for payment of dividends will be shared ratably by the Energy
Corporation preferred stock and the parity stock.
Once the accrued dividends are paid as described above, the Energy
Corporation preferred stock is then entitled to participate on a parity with the
Energy Corporation common stock in the distribution of the remaining assets of
Energy Corporation in a liquidation or dissolution. If the proceeds from a
liquidation or dissolution of Energy Corporation are insufficient to fully pay
the amounts to which the Energy Corporation preferred stock and any stock
ranking on a parity with it are entitled, the assets or the proceeds from them
will be distributed ratably among the holders of the Energy Corporation
preferred stock and the holders of the parity stock.
Redemption
The Energy Corporation preferred stock is redeemable at the option of
Energy Corporation after December 31, 2003. After that date, Energy Corporation
may redeem shares of the Energy Corporation preferred stock in whole or in part
at any time or from time to time, upon meeting specified notice requirements, at
a redemption price of $10.00 per share, plus an amount equal to all dividends
accrued and unpaid on that date, without interest.
The Energy Corporation preferred stock may not be redeemed in part if full
cumulative dividends have not been paid or set apart for payment with respect to
all prior dividend periods. Energy Corporation may not purchase or acquire any
shares of the Energy Corporation preferred stock other than in a purchase or
exchange offer made on the same terms to all holders of the Energy Corporation
preferred stock. If fewer than all the outstanding shares of Energy Corporation
preferred stock are to be redeemed, the board of directors will determine the
number of shares to be redeemed and they will be selected to be redeemed by lot,
pro rata or any other equitable means determined by the board of directors. In
connection with the consolidation, Energy Corporation has represented that it
has no plan or intention to redeem the Energy Corporation preferred stock.
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<PAGE> 96
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 102(b)(7) of the Delaware General Corporation Law authorizes
corporations to limit or eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. Although Section 102(b)(7) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Energy Corporation
certificate of incorporation limits the liability of directors to Energy
Corporation or its stockholders to the full extent permitted by Section
102(b)(7). Specifically, directors of Energy Corporation are not personally
liable for monetary damages to Energy Corporation or its stockholders for breach
of the director's fiduciary duty as a director, except for liability for:
- any breach of the director's duty of loyalty to Energy Corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- any transaction from which the director derived an improper personal
benefit.
To the maximum extent permitted by law, the Energy Corporation certificate
of incorporation provides for mandatory indemnification of directors and permits
indemnification of officers of Energy Corporation against any expense, liability
and loss to which they may become subject, or which they may incur as a result
of being or having been a director or officer of Energy Corporation. In
addition, Energy Corporation must advance or reimburse directors and officers
for expenses incurred by them in connection with indemnifiable claims.
Energy Corporation will maintain directors' and officers' liability
insurance.
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COMPARISON OF UNITHOLDER AND STOCKHOLDER RIGHTS
The rights of unitholders are currently governed by the Energy Partners
partnership agreement and Delaware Revised Uniform Limited Partnership Act. The
rights of stockholders are currently governed by the Consolidated Resources'
certificate of incorporation, the bylaws of Consolidated Resources and the
Delaware General Corporation Law. After the completion of the consolidation, the
rights of unitholders and stockholders who become stockholders of Energy
Corporation will be governed by the Energy Corporation certificate of
incorporation, the Energy Corporation bylaws and the Delaware General
Corporation Law.
The following summary highlights similarities and differences between the
rights of unitholders and stockholders. Because it is a summary, it is not
intended to be complete and is qualified in its entirety by reference to
Delaware partnership and corporation laws, the Energy Partners partnership
agreement, the Consolidated Resources certificate of incorporation, the
Consolidated Resources bylaws, the Energy Corporation certificate of
incorporation and the Energy Corporation bylaws.
<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
UNITS COMMON STOCK COMMON STOCK
--------------- ---------------------- ------------------
<S> <C> <C>
MANAGEMENT
The Energy Partners Under Delaware law, the The Energy Corporation
partnership agreement provides business and affairs of a certificate of incorporation
that, with limited excep- Delaware corporation are provides for a classified, or
tions, Energy Partners' managed by or under the "staggered" board of up to
general partner has full and direction of its board of fifteen directors. The board
exclusive discretion to man- directors, whose members are consists of three classes of
age and control the business generally elected by a directors, as nearly equal in
and affairs of Energy plurality vote of stockholders number as possible at any time
Partners. The general partner at which a quorum is pre- that the Energy Corporation
may be removed only upon the sent. Any vacancy in an board consists of three or
affirmative vote of owners of existing board position may be more directors. Any vacancy in
at least two-thirds of the filled by the affirmative vote a board position may be filled
total number of all of a majority of the remaining by the vote of a majority of
outstanding units, with the directors, though less than a the remaining directors in
Class A, Class B and Class C quorum. Newly created favor of the proposed
units each voting as a directorships resulting from director, though less than a
separate class, provided there an increase in the authorized quorum, or by a sole remaining
is the selection of a number of directors may be director. Newly created
successor general partner and filled by the Consolidated directorships resulting from
the receipt of a legal opinion Resources board under Del- an increase in the authorized
that the removal and selection aware law. Any director or the number of directors may be
of a successor would not cause entire Consolidated Resources filled by the Energy
Energy Partners to be treated board may be removed, with or Corporation board under Dela-
as a corporation for tax without cause, by the holders ware law. Any director or the
purposes. of a majority of the shares entire Energy Corporation
then entitled to vote. board may be removed, only for
Under the partnership cause, by the holders of a
agreement, unitholders have Each share of Consolidated majority of the shares then
only limited voting rights on Resources common stock entitled to vote. Holders of
matters affecting Energy entitles its holder to cast Energy Corporation preferred
Partners' business. one vote on matters as to stock vote with the Energy
Unitholders have no right to which voting is permitted or Corporation common stock in
elect the general partner on required by Delaware law, the election of directors, and
an annual or other ongoing including the election of as a separate class on other
basis. Unitholders have voting directors, amendments to the matters.
rights with respect to (1) the Consolidated Resources cer-
removal and replacement of the tificate of incorporation and With the exception of the
general partner; (2) the sale mergers and other provisions for a staggered
or exchange of substantially extraordinary transactions. board and the class voting of
all of Energy Partners' Stockholders are not entitled the Energy Corporation
assets; (3) the dissolution of to cumulate their votes for preferred stock, the
Energy Partners; and (4) the election of directors. provisions in the Energy
amendments to the partnership Generally, matters requiring Corporation certificate of
agreement that would adversely the vote of the common stock incorporation and Energy
affect the interests of are approved by the vote of Corporation bylaws are
unitholders in any material the holders of a majority of substantially similar to those
respect. Each unitholder has a the shares of common stock in Consolidated Resources'
vote equal to his percentage voting in favor of the matter charter documents.
interest in Energy Partners. at a meeting of stockholders
The holders of each class of at which a quorum is present, The Energy Corporation bylaws
units have the right to vote except for matters governed by provide that special meetings
separately as a class on all Section 203 of the Delaware may be called by the Chairman
issues presented to the General Corporation Law. of the board or a majority of
unitholders. Generally, the members of the Energy
approval of matters submitted Directors are elected by a Corporation board then in
to unitholders requires the plurality of the votes of office.
affirmative vote of a shares present in person or
majority-in-interest of the represented by proxy and
holders of each class of units entitled to vote at a meeting
then outstanding. Hallwood for the election of directors
Group holds all of the Class B if a quorum of stockholders is
units; therefore, any action present.
requiring approval by a
percentage of each
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
UNITS COMMON STOCK COMMON STOCK
--------------- ---------------------- ------------------
<S> <C> <C>
class of unitholders will The Consolidated Resources
require the approval of certificate of incorporation
Hallwood Group. permits the issuance of pre-
ferred stock. Issuances of
Meetings of unitholders may be classes or series of preferred
called by the general partner stock that have the right to
or by unitholders owning at elect a designated director or
least 10% of the outstanding directors could adversely
units. affect the ability of the
holders of common stock to
elect a majority of the
Consolidated Resources board
of directors.
Consolidated Resources'
charter documents, as
permitted by Delaware law, do
not permit stockholders to
request an annual or special
meeting. Stockholders may
submit nominations for
director or proposals for
consideration only at annual
meetings and, in addition to
complying with federal
securities laws and other
laws, must deliver notice to
the Secretary of Consolidated
Resources. To be timely, a
stockholder's notice must be
delivered to or mailed and
received at Consolidated
Resources' principal executive
offices not less than 10 days
following the day on which
notice of the date of the
meeting was mailed or public
disclosure of the date of the
meeting was made. A stock-
holder's notice must include
specific information regarding
the director to be nominated
by the stockholder, including
the name, age and address of
the proposed nominee. If the
stockholder is proposing to
submit a matter for consider-
ation at the meeting, the
notice must give a brief
description of the business
desired to be brought before
the annual meeting and the
reasons for conducting that
business at the annual
meeting. Both notice
procedures require the
stockholder to provide his
name and address, the class
and number of shares of
Consolidated Resources common
stock that are beneficially
owned by the stockholder, and
any material interest of the
stockholder in the business
being proposed.
The Consolidated Resources
bylaws provide that, after
giving preference to the
rights of the holders of any
series of preferred stock
having a preference over the
common stock as to dividends
or upon liquidation, special
meetings of the stockholders
of Consolidated Resources may
be called only by the Chairman
of the board, the President,
or the Secretary at the
request of the Consolidated
Resources board.
AMENDMENTS
Amendments to the partnership Under Delaware law, the Energy Corporation must meet
agreement may be proposed by Consolidated Resources the same requirements as
the general partner or by certificate of incorporation Consolidated Resources under
unitholders owning at least may be amended upon the Delaware law relating to
10% of the limited partner recommendation of the amendments of the Energy
interests of Consolidated Resources board Corporation certifi-
if at
</TABLE>
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<PAGE> 99
<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
UNITS COMMON STOCK COMMON STOCK
--------------- ---------------------- ------------------
<S> <C> <C>
Energy Partners. Unless least 50% of the shares of cate of incorporation. The
approved by the general each class of stock Energy Corporation certificate
partner and unitholders outstanding and entitled to of incorporation provides that
holding at least 90% of each vote on the proposed the Energy Corporation cer-
class of units, no amendment amendment, voting sepa- tificate of incorporation may
to the partnership agreement rately, are present in person be amended, altered, or
will be effective unless or by proxy at annual or repealed if the holders of a
Energy Partners receives a special meetings of stock- majority of the outstanding
legal opinion that the holders and vote to approve voting stock of each class
proposed amendment would not the amendment. The vote in favor of the proposed
result in the loss of limited Consolidated Resources action.
liability to any unitholder or certificate of incorporation
cause Energy Partners to be provides that the Consolidated
taxed as a corporation. Resources certificate of
Proposed amendments, other incorporation may be amended
than those described below, in accordance with Delaware
must be approved by a law.
majority-in-interest of all
holders of limited partner
interests of Energy Part-
ners.
The general partner may make
amendments to the partnership
agreement without the approval
of the unitholders if, among
other things, those amendments
(1) are necessary to conform
the Partnership Agreement to
Delaware law; (2) change the
name of Energy Partners or the
location of its principal
place of business; (3) are
necessary to qualify Energy
Partners as a limited
partnership or a limited
liability partnership or to
ensure that Energy Partners
will not be taxed as a
corporation; (4) are necessary
or desirable to satisfy any
requirement, condition or
guideline contained in any
opinion, directive, order,
ruling or regulation of any
federal or state agency or
judicial authority or
contained in any federal or
state statute; (5) are
necessary or desirable to
facilitate the trading of the
units or to comply with any
rule, regulation, guideline or
requirement of any securities
exchange on which the units
are or will be listed for
trading; or (6) are
inconsequential and do not
adversely affect the
unitholders in any material
respect.
LIQUIDATION RIGHTS
In the event of the The Consolidated Resources In the event of the
liquidation, dissolution or certificate of incorporation liquidation of Energy
winding up of Energy Partners, and the Consolidated Re- Corporation, the holders of
holders of all units and the sources bylaws do not address Energy Corporation common
general partner would be the treatment of the stock and Energy Corporation
entitled to share ratably, in Consolidated Resources common preferred stock are entitled
accordance with their stock in the event of a to share ratably in any assets
percentage interests, in any liquidation of Consolidated of Energy Corporation
assets remaining after the Resources. remaining after creditors have
satisfaction of obligations to been paid or provided for,
creditors. after holders of Energy
Corporation preferred stock
have been paid all accrued and
unpaid dividends for and after
provision for any liquidation
preferences on any outstanding
class or series of preferred
stock.
LIMITATIONS OF LIABILITY OF MANAGEMENT
The partnership agreement has The Consolidated Resources The Energy Corporation
no provision with respect to certificate of incorporation, certificate of incorporation
limiting the liability of the as permitted by Delaware law, provides for the same limi-
general partner. eliminates the monetary tation of director liability
liability of as the Consoli-
</TABLE>
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<PAGE> 100
<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
UNITS COMMON STOCK COMMON STOCK
--------------- ---------------------- ------------------
<S> <C> <C>
its directors for a breach of dated Resources certificate of
their fiduciary duty as incorporation.
directors, except for
liability (1) for any breach
of the director's duty of
loyalty to Consolidated
Resources or its stockholders;
(2) for acts or omissions not
in good faith or that involve
intentional misconduct or a
knowing violation of law; (3)
under Section 174 of the
Delaware General Corporation
Law, which provides for
liability of directors for
unlawful payment of dividends
or unlawful stock purchases or
redemptions; or (4) for any
transaction from which the
director derived an improper
personal benefit.
INDEMNIFICATION
The partnership agreement Section 145 of the Delaware The Energy Corporation
provides that Energy Partners General Corporation Law certificate of incorporation
will indemnify and hold permits a corporation to provides indemnification and
harmless the general partner, indemnify any person who is, advancement of expenses to
its affiliates and all or is threatened to be made, a directors, officers, agents
officers, directors, employees party to any suit owing to the and employees in the same
and agents of the general fact that the person is or was manner as the Consolidated Re-
partner and its affiliates, a director, officer, employee sources charter documents.
provided that the party's con- or agent acting on behalf of
duct did not constitute gross the corporation, upon a
negligence or willful or determination by the board of
wanton misconduct and pro- directors that the person has
vided further that the party's met specified standards of
action was in good faith and conduct. Section 145 of the
in a manner believed to be in, Delaware General Corporation
or not opposed to, the best Law also provides that its
interests of Energy Partners. indemnity provisions are not
With respect to any criminal exclusive of any other rights
proceeding, these parties are to indemnification or
indemnified if the party had advancement of expenses. The
no reasonable cause to believe Consolidated Resources cer-
the conduct was unlawful. tificate of incorporation
requires indemnification and
advancement of expenses of any
director to the fullest extent
permitted by Delaware law and
permits indemnification of any
officer, employee or agent to
the fullest extent permitted
by Delaware law.
DERIVATIVE ACTIONS
In accordance with Delaware Under Delaware law, a Energy Corporation
law, a unitholder may stockholder may bring a stockholders will have the
institute legal action on derivative action on behalf of same right to bring a
behalf of Energy Partners, Consolidated Resources to derivative action that the
referred to as a "derivative recover a judgment in its Consolidated Resources' stock-
action," to recover damages favor if the Consolidated holders and the Energy
from a third party or from the Resources board has failed to Partners' unitholders
general partner if the general institute the action. The presently have.
partner has failed to provisions of Delaware law
institute the action. In relating to derivative actions
addition, a unitholder may are substantially similar to
institute legal action on the provisions of Delaware
behalf of himself and other partnership law relating to
similarly situated stockholder actions.
unitholders, in a class
action, to recover damages
from the general partner for
violations of its fiduciary
duties to the unitholders.
INSPECTION OF BOOKS AND RECORDS
On written request and at Delaware law provides that any Stockholders of Energy
reasonable times and, at his stockholder of Consolidated Corporation have the same
own expense, a unitholder may Resources, upon written inspection rights as Consoli-
inspect or copy any of Energy request stating the purpose of dated Resources' stockholders.
Partners' books, provided that the inspection, has the right
there is a valid business to inspect Consolidated
purpose related to that Resources' books and records,
unitholder's interest in provided that it is for a
Energy proper purpose
</TABLE>
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<PAGE> 101
<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
UNITS COMMON STOCK COMMON STOCK
--------------- ---------------------- ------------------
<S> <C> <C>
Partners. Unitholders may also related to the stockholders'
inspect and copy a list of the interest in Consolidated
names and amounts in interest Resources.
of all unitholders. The
general partner, however, has
the right to keep confidential
from unitholders, for a period
of time as the general partner
deems reasonable, any
information that the general
partner reasonably believes to
be in the nature of trade
secrets or other information,
including logs, well reports
and other data, the disclosure
of which the general partner
in good faith believes could
damage Energy Partners or its
business or that Energy
Partners is required by
agreements with third parties
to keep confidential.
DISTRIBUTIONS AND DIVIDENDS
Under the partnership Under Delaware law, Energy Corporation must meet
agreement, distributions on Consolidated Resources may the same requirements under
the units may be paid at the declare and pay dividends out Delaware law relating to
end of each calendar quarter of surplus, or, if there is no distributions as Consolidated
in the sole discretion of the surplus, out of net profits Resources does. The Energy
general partner. The Class C for the year in which the Corporation certificate of
units are entitled to a dividend is declared. If a incorporation is substantially
preferential distribution of dividend is paid out of net similar to the Consolidated
$1.00 per Class C unit per surplus, the amount of capital Resources certificate of
year, payable quarterly. Any of the corporation may not be incorporation regarding
distributions may be made from less than the aggregate amount dividends. Holders of shares
Energy Partners' revenues, of capital represented by the of the Energy Corporation pre-
capital contributions or issued and outstanding stock ferred stock are entitled to
borrowings. The general of all classes having a receive, if declared by the
partner may not make a preference upon the board of directors out of
distribution if, at the time distribution of assets. The funds legally available for
of the distribution and after term "surplus," under Delaware payment of dividends,
giving effect to the distribu- law, means the excess of the cumulative cash dividends at
tion, some types of net assets of the corporation the rate of $1.00 per share
liabilities of Energy Partners over its stated capital. The per year. Dividends are paid
would exceed the fair value of Consolidated Resources bylaws quarterly in arrears,
Energy Partners' assets. provide that the Con- commencing on June 30, 1999.
solidated Resources board may Payments will be paid to those
declare and pay dividends on holders of Energy Corporation
its outstanding shares in the preferred stock who hold their
form of cash, property or its shares of record at the close
own shares and according to of business on each of March
applicable law and the 31, June 30, September 30 and
Consolidated Resources cer- December 31 of each year.
tificate of incorporation. In
addition, Delaware law
provides that a corporation
may redeem or repurchase its
shares only out of surplus.
The Consolidated Resources
certificate of incorporation
provides that the holders of
Consolidated Resources
preferred stock, and any other
shares of preferred stock that
the Consolidated Resources
board may issue from time to
time, will receive
distributions in preference to
the holders of Consolidated
Resources common stock.
CHANGES OF CONTROL
Neither Delaware law nor the Some of the provisions in the The Energy Corporation
partnership agreement contain Consolidated Resources certificate of incorporation
any special provisions that certificate of incorpora- contains provisions to deter
apply to combinations, tion, including the ability of takeover attempts
takeover attempts or other the Consolidated Resources substantially similar to those
transactions with persons who board to issue classes or in the Consolidated Resources
have acquired a significant series of preferred stock, certificate of incorporation.
percentage of units, other restrictions on the ability of Energy Corporation must also
than the Unitholder Rights stockholders to call meetings comply with Section 203 of the
Plan adopted by Energy and propose business at meet- Delaware General Corporation
Partners. In addition, removal ings of the common Law. In addition, Energy
of the general partner stockholders and a prohibition Corporation has a staggered
requires a two-thirds vote of against stockholders acting by board of directors and has
each class of units. written consent, may impede a adopted a stockholder rights
takeover plan that
</TABLE>
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<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
UNITS COMMON STOCK COMMON STOCK
--------------- ---------------------- ------------------
<S> <C> <C>
attempt. Consolidated may also impede a takeover
Resources must comply with the attempt.
provisions of Section 203 of
the Delaware General
Corporation Law, which
restricts "business combina-
tions" involving Consolidated
Resources and an "interested
stockholder" for three years
following the date on which
the interested stockholder
acquired 15% or more of
Consolidated Resources' out-
standing voting stock unless
applicable statutory
exceptions are satisfied.
TRANSFERABILITY
The partnership agreement Shares of Consolidated Shares of Energy Corporation
permits the transfer of units Resources common stock are common stock will be freely
in accordance with appli- freely transferable. The transferable, except for
cable law, provided that the shares are listed on NASDAQ shares of Energy Corporation
transferee executes and under the symbol "HCRC." common stock issued to
delivers a satisfactory trans- "affiliates" of Energy
fer application to a transfer Partners and Consolidated
agent. The Class A units are Resources. Transfers of shares
traded on the American Stock of stock held by affiliates
Exchange under the symbol are restricted by federal and
"HEP." The Class C units are state securities laws. Upon
traded on the American Stock official notice of issuance,
Exchange under the symbol the Energy Corporation com-
"HEPC." mon stock will be listed on
NASDAQ under the symbol
"HECO."
APPRAISAL RIGHTS
Delaware law provides that a Under Delaware law, a holder Stockholders of Energy
partnership agreement may of Consolidated Resources Corporation will have the same
provide contractual ap- common stock who does not vote appraisal rights under
praisal rights with respect to in favor of a merger or Delaware law as the
a partnership interest, consolidation of Consolidated Consolidated Resources
however, the partnership Resources may, upon compliance stockholders.
agreement does not provide any with specified procedures, be
such contractual appraisal entitled to receive the fair
rights to its unitholders. value of the shares in cash
instead of the consideration
that the stockholders would
otherwise receive in a merger
or consolidation. Appraisal
rights are not available in
some types of mergers,
including (a) mergers in which
Consolidated Resources is the
surviving corporation and no
vote of its stockholders was
required and (b) mergers when
Consolidated Resources was
then listed on a national
securities exchange or held of
record by more than 2,000
holders and the holders of
common stock are not required
to accept in exchange for
their shares anything other
than shares of stock of the
surviving corporation and, on
the effective date of the
merger, those shares are
listed on a national
securities exchange or held of
record by more than 2,000
holders.
FIDUCIARY DUTIES
Under Delaware law, the Under Delaware law, the Directors of Energy
general partner has fiduciary directors of Consolidated Corporation will have the same
duties of good faith, loyalty Resources have fiduciary fiduciary duties to
and fair dealing to the duties of good faith, loyalty stockholders as the directors
unitholders in its management and fair dealing to its of Consolidated Resources.
of Energy Partners' affairs. stockholders in its manage- Delaware courts have generally
The duty of good faith ment of Consolidated described these duties in the
requires the general partner Resources' affairs. same way as the duties of a
to deal fairly and with candor general partner are de-
with the unitholders. The duty scribed under Delaware
of loyalty requires that, partnership law. At least one
without the limited Delaware court has stated
</TABLE>
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<TABLE>
<CAPTION>
ENERGY PARTNERS CONSOLIDATED RESOURCES ENERGY CORPORATION
UNITS COMMON STOCK COMMON STOCK
--------------- ---------------------- ------------------
<S> <C> <C>
partners' consent, the general that the fiduciary duties of a
partner may not have any general partner to limited
improper business or other partners are comparable to
interests that are adverse to those of a director to
the interests of Energy stockholders. Other courts,
Partners. The duty of fair however, have indicated that
dealing requires that all the fiduciary duties of a
transactions between the general partner to limited
general partner and Energy partners are greater than
Partners be fair both in the those of a director to
manner by which they are stockholders. Therefore,
conducted and in the amount of although it is unclear whether
the consideration received by or to what extent there are
Energy Partners in the differences in these fiduciary
transaction. duties, it is possible that
the fiduciary duties owed to
the stockholders by the
directors of Energy Corpo-
ration may be less than those
of the general partner of
Energy Partners to the
unitholders.
</TABLE>
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ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
AND OF THE ORGANIZATIONAL DOCUMENTS OF ENERGY CORPORATION
The Energy Corporation certificate of incorporation and Energy Corporation
bylaws contain a number of provisions that may inhibit or impede the acquisition
or attempted acquisition of control of Energy Corporation by means of a tender
offer, proxy contest or otherwise. These provisions are expected to discourage
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of Energy Corporation to negotiate first with
the Energy Corporation board. These provisions may increase the likelihood that
proposals initially will be on more attractive terms than would be the case in
their absence and increase the likelihood of negotiations. This might outweigh
the potential disadvantages of discouraging these proposals because, among other
things, negotiation of the proposals might result in an improvement of their
terms. The discussion below highlights some of these anti-takeover provisions in
the Energy Corporation charter documents. Because it is a summary, it may not
contain all of the information that might be important to you. We urge you to
read the Energy Corporation certificate of incorporation and the Energy
Corporation bylaws, copies of which have been filed as exhibits to the
registration statement of which this document is a part, as well as the Delaware
General Corporation Law for a complete description of these anti-takeover
provisions.
CLASSIFIED BOARD OF DIRECTORS
The Energy Corporation certificate of incorporation provides for a
classified or "staggered" board of directors. This means that all of the
directors' terms of office do not expire at the same time. Once the Energy
Corporation board consists of three or more directors, the Energy Corporation
board will be divided into three classes of directors, with each class
constituting approximately one-third of the total number of directors, and with
the classes serving staggered three-year terms. The classification of the Energy
Corporation board will have the effect of making it more difficult for
stockholders to change the composition of the Energy Corporation board and
therefore the control of Energy Corporation, because only a minority of the
directors are up for election at any one time, and may be replaced by a vote of
the stockholders.
The classification provisions also could have the effect of discouraging a
third party from accumulating a large block of the capital stock of Energy
Corporation or attempting to obtain control of Energy Corporation, even though
such an attempt might be beneficial to Energy Corporation and some, or a
majority, of Energy Corporation's stockholders. Accordingly, under some
circumstances stockholders could be deprived of opportunities to sell their
Energy Corporation common stock and Energy Corporation preferred stock at a
higher price than might otherwise be available.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
After giving preference to any rights of holders of preferred shares of
Energy Corporation to elect additional directors under specified circumstances,
the Energy Corporation certificate of incorporation and the Energy Corporation
bylaws provide that the number of directors must not be less than one nor more
than fifteen. In addition, the Energy Corporation certificate of incorporation
provides that, after giving preference to rights of holders of preferred shares,
any vacancies will be filled by majority of the remaining directors, even though
less than a quorum, or by a sole director and any vacancies created by an
increase in the total number of directors may be filled only by the Energy
Corporation board. Accordingly, the Energy Corporation board could temporarily
prevent any stockholder from enlarging the Energy Corporation board and then
filling the new positions with such stockholder's own nominees.
The Energy Corporation certificate of incorporation and the Energy
Corporation bylaws provide that, after giving preference to any rights of
holders of preferred shares, directors may be removed only for cause upon the
affirmative vote of holders of a majority of the entire voting power of all the
then-outstanding shares entitled to vote in the election of directors, voting
together as a single class.
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<PAGE> 105
ADVANCE NOTICE PROVISIONS FOR DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS
The Energy Corporation certificate of incorporation provides for an advance
notice procedure for stockholders to make nominations of candidates for director
or to bring other business before the annual meeting of stockholders. According
to this procedure (1) only persons who are nominated by, or at the direction of,
the Energy Corporation board, or by a stockholder who has given timely written
notice containing specified information to the Secretary of Energy Corporation
prior to the meeting at which directors are to be elected, will be eligible to
nominate candidates for director of Energy Corporation and (2) at an annual
meeting, only such business may be conducted as has been brought before the
meeting by, or at the direction of the Energy Corporation board or by a
stockholder who has given timely written notice to the Secretary of Energy
Corporation of his intention to bring the business before the meeting. In
general, for notice of stockholder nominations or proposed business to be
conducted at an annual meeting to be timely, the notice must be received by
Energy Corporation not less than 60 days nor more than 90 days prior to the
scheduled date of the meeting.
The purpose of requiring stockholders to give advance notice of nominations
and other business is to afford the Energy Corporation board a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business. To the extent necessary or
considered desirable by the Energy Corporation board, the advance notice
provision will allow the Energy Corporation board to inform stockholders and
make recommendations about the nominees or business, as well as to ensure an
orderly procedure for conducting meetings of stockholders. Although the Energy
Corporation certificate of incorporation does not give the Energy Corporation
board power to block stockholder nominations for the election of directors or
proposals for action, the advance notice procedure may have the effect of
discouraging a stockholder from proposing nominees or business, precluding a
contest for the election of directors or the consideration of stockholder
proposals if procedural requirements are not met. This might also deter third
parties from soliciting proxies for a non-management proposal or slate of
directors, without regard to the merits of the proposal or slate.
Any action required or permitted to be taken by the Energy Corporation
stockholders must be taken at a properly called annual or special meeting of the
Energy Corporation stockholders and may not be taken by written consent. Special
meetings of the Energy Corporation stockholders may be called at any time but
only by the Chairman of the board or by a majority of the directors then in
office.
PREFERRED SHARES
The Energy Corporation certificate of incorporation authorizes the Energy
Corporation board to establish one or more series of preferred shares, and to
determine preferences, rights and other terms of those series. The purpose of
allowing the Energy Corporation board to issue one or more series of preferred
shares is to provide increased flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs. The
authorized preferred shares are available for issuance without further action by
the Energy Corporation stockholders, unless the action is required by applicable
law or the rules of any stock exchange or automated quotation system on which
the Energy Corporation securities may be listed or traded. Other than the Energy
Corporation preferred stock and the preferred stock to be issued in conjunction
with the stockholders' rights plan, Energy Corporation has no present intention
to, although it could in the future, issue a series of preferred shares. A new
series of preferred stock, due to its terms, could impede a merger, tender offer
or other transaction that some, or a majority, of its stockholders might believe
to be in their best interests or in which stockholders might receive a premium
over then prevailing market prices for their Energy Corporation common stock.
AMENDMENT OF THE ENERGY CORPORATION CERTIFICATE OF INCORPORATION
The Energy Corporation certificate of incorporation provides that it may be
amended only if the holders of not less than a majority of the votes entitled to
be cast vote in favor of the amendment.
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BUSINESS COMBINATIONS UNDER DELAWARE LAW
Energy Corporation will be required to comply with the provisions of
Section 203 of the Delaware General Corporation Law, a statutory provision
restricting business combinations with a category of stockholders called
"interested stockholders," defined as persons who beneficially own or acquire
15% or more of a Delaware corporation's voting stock, with the exception of any
person who owned and has continued to own shares in excess of the 15% limitation
since December 23, 1987. Section 203 defines "business combination" broadly to
include mergers, consolidations, sales or other disposition of assets having a
total value in excess of 10% of the consolidated assets of the corporation, and
other transactions that would increase an interested stockholder's proportionate
share ownership in the corporation. Section 203 prohibits business combinations
between a publicly held Delaware corporation and any interested stockholder for
a period of three years after the date on which the interested stockholder
became an interested stockholder, unless (a) prior to that date, the
corporation's board approved either the proposed business combination or the
transaction that resulted in the interested stockholder becoming an interested
stockholder; (b) when the transaction that resulted in the interested
stockholder becoming an interested stockholder was completed, the interested
stockholder already owned at least 85% of the voting stock of the corporation
outstanding at the time; or (c) on the date on which the business combination is
approved by the corporation's board of directors and authorized at an annual or
special meeting of stockholders, the transaction was approved by at least
two-thirds of the outstanding voting stock that is not owned by the interested
stockholder. Hallwood Group will be exempt from the applicability of Section
203.
STOCKHOLDERS' RIGHTS PLAN
Energy Corporation will have a stockholders' rights plan, which is intended
to require any third party seeking to control more than 15% of Energy
Corporation's shares to obtain advance approval of the Energy Corporation board
or experience significant dilution. The following highlights material provisions
of the rights plan. Because it is a summary, it is not intended to be complete
and is qualified in its entirety by reference to the rights plan, which is
attached as an exhibit to the registration statement of which this document
forms a part.
Rights. Energy Corporation will issue one preferred share purchase right
for each outstanding share of Energy Corporation common stock. Each right
entitles the registered holder to purchase from Energy Corporation one
one-thousandth of a share of Series A Junior Participating preferred stock, par
value $.10 per share, of Energy Corporation at a purchase price of $40.00 per
one one-thousandth of a share of Series A preferred stock, subject to adjustment
in some circumstances to prevent dilution. The description and terms of the
rights are set forth in a rights agreement between Energy Corporation and
Registrar and Transfer Company, as rights agent.
Detachment of Rights. The rights will be evidenced, with respect to any of
the Energy Corporation common stock certificates outstanding as of the record
date, by the Energy Corporation common stock certificate, together with a copy
of the summary of rights until the "distribution date." The distribution date is
the earlier to occur of (1) 10 days following a public announcement that a
person or group of affiliated or associated persons has acquired beneficial
ownership of 15% or more of the outstanding shares of Energy Corporation common
stock, such person or group of persons called an "acquiring person," or (2) 10
business days, or such later date as may be determined by action of the Energy
Corporation board prior to such time as any person or group of affiliated
persons becomes an acquiring person, following the commencement of, or
announcement of an intention to make a tender offer or exchange offer, the
completion of which would result in the beneficial ownership by a person or
group of 15% or more of the outstanding shares of Energy Corporation common
stock.
The rights agreement provides that, until the distribution date, or earlier
expiration of the rights, the rights will be transferred with and only with the
Energy Corporation common stock. Until the distribution date, or earlier
expiration of the rights, new Energy Corporation common stock certificates
issued after the record date upon transfer or new issuances of Energy
Corporation common stock will contain a notation
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<PAGE> 107
incorporating the rights agreement by reference. Until the distribution date, or
earlier expiration of the rights, the surrender for transfer of any certificates
for shares of Energy Corporation common stock outstanding as of the record date,
even without the notation or a copy of the summary of rights, will also
constitute the transfer of the rights associated with the shares of Energy
Corporation common stock represented by the certificates. As soon as possible
following the distribution date, separate certificates evidencing the rights
will be mailed to holders of record of the Energy Corporation common stock as of
the close of business on the distribution date and the separate right
certificates alone will evidence the rights.
The rights are not exercisable until the distribution date. The final
expiration date of the rights is December 31, 2009, unless the final expiration
date is advanced or extended or unless the rights are redeemed earlier or
exchanged by Energy Corporation, in each case as described below.
If any person or group of affiliated or associated persons become an
acquiring person, each holder of a right, other than rights beneficially owned
by the acquiring person, which will become void at that point, will then have
the right to receive upon exercise of a right that number of shares of Energy
Corporation common stock having a market value of two times the exercise price
of the right.
If, after a person or group has become an acquiring person, Energy
Corporation is acquired in a merger or other business combination transaction or
50% or more of its consolidated assets or earning power are sold, proper
provisions will be made so that each holder of a right, other than rights
beneficially owned by an acquiring person, which will have become void, will
have the right to receive upon the exercise of a right that number of shares of
common stock of the acquiring person or its parent with whom Energy Corporation
has engaged in the transaction having a market value of two times the exercise
price of the right.
At any time after any person or group becomes an acquiring person and prior
to the earlier of one of the events described in the previous paragraph or the
acquisition by an acquiring person of 50% or more of the outstanding shares of
Energy Corporation common stock, the Energy Corporation board may exchange the
rights, other than rights owned by such acquiring person, which will have become
void, in whole or in part, for shares of Energy Corporation common stock or
Series A preferred stock or a series of Energy Corporation's preferred stock
having equivalent rights, preferences and privileges, at an exchange ratio of
one share of Energy Corporation common stock, or a fractional share of Series A
preferred stock, or other preferred stock, equivalent in value, per right.
Preferred Shares. Shares of Series A preferred stock purchasable upon
exercise of the rights will not be redeemable. Each share of Series A preferred
stock will be entitled, when, as and if declared, to a dividend payment per
share equal to an aggregate dividend of 1,000 times the dividend declared, if
any, per share of Energy Corporation common stock. Upon the liquidation,
dissolution or winding up of Energy Corporation, the holders of the Series A
preferred stock will be entitled to a minimum preferential payment of the
greater of $1.00 per share, plus any accrued but unpaid dividends or 1,000 times
the payment made per share of Energy Corporation common stock upon the
liquidation, dissolution or winding up. Each share of Series A preferred stock
will have 1,000 votes, voting together with the Energy Corporation common stock.
Finally, upon any merger, consolidation or other transaction in which
outstanding shares of Energy Corporation common stock are converted or
exchanged, each share of Series A preferred stock will be entitled to receive
1,000 times the amount received per share of Energy Corporation common stock in
the transactions. These rights are protected by customary antidilution
provisions.
Because of the nature of the Series A preferred stock's dividend,
liquidation and voting rights, the value of the one one-thousandth interest in a
share of Series A preferred stock purchasable upon exercise of each right should
approximate the value of one share of Energy Corporation common stock.
After the rights become exercisable, Energy Corporation will use its best
efforts to register the offer and sale of the Series A preferred stock or Energy
Corporation common stock issuable upon exercise of the rights under the
Securities Act.
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Antidilution and Other Adjustments. The number of one one-thousandths of a
share of Energy Corporation preferred stock or other securities or property
issuable upon exercise of the rights, and the purchase price payable, may be
adjusted from time to time to prevent dilution.
Redemption of Rights. At any time prior to the earlier of (1) the
distribution date or (2) the final expiration date, the board of directors of
Energy Corporation may redeem all but not less than all of the then outstanding
rights at a price of $0.01 per right. The redemption of the rights may be made
effective at such time, on such basis and with such conditions as the board of
directors in its sole discretion may establish. At the effective time of the
redemption, the right to exercise the rights will terminate and the only right
of the holders of rights will be to receive the redemption price.
No Rights as Stockholder. Until a right is exercised, the holder of the
right, as such, will have no rights as a stockholder of Energy Corporation
including the right to vote or to receive dividends.
Amendment of Rights. For so long as the rights are then redeemable, Energy
Corporation may, except with respect to the redemption price, amend the rights
agreement in any manner. After the rights are no longer redeemable, Energy
Corporation may, except with respect to the redemption price, amend the rights
agreement in any manner that does not adversely affect the interests of holders
of the rights.
WHERE YOU CAN GET INFORMATION
Energy Partners and Consolidated Resources file reports, proxy statements
and other information with the SEC pursuant to the Securities Exchange Act. You
may read and copy these reports, proxy statements and other information we file
at the SEC public reference facilities in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. In addition, such materials and other
information concerning, (1) Energy Partners can be inspected at the offices of
the American Stock Exchange, 86 Trinity Place, New York, New York, 10006-1881;
and (2) Consolidated Resources can be inspected at the offices of NASDAQ at 1735
K Street N.W., Washington, D.C., 20006. You can also find this information at
the SEC's World Wide Web site. The address of the site is http://www.sec.gov.
After the consolidation, Energy Corporation will be required to file the same
types of information with the SEC and NASDAQ.
Energy Corporation filed a registration statement on Form S-4 to register
the shares of Energy common stock and preferred stock issuable in connection
with the consolidation. This document is a part of the registration statement
and constitutes a prospectus of Energy Corporation in addition to being a proxy
statement for Energy Partners and Consolidated Resources and, as allowed by the
SEC, does not contain all the information in the registration statement.
You should rely only on the information contained in this document or other
information we have referred you to. We have not authorized anyone to provide
you with any information that is different.
STOCKHOLDER PROPOSALS
In the event the consolidation is not completed, stockholders of
Consolidated Resources may submit proposals on matters appropriate for action at
annual meetings in accordance with regulations adopted by the SEC. To be
considered for inclusion in the proxy statement and form of proxy relating to
the 1999 Consolidated Resources annual meeting, if held, a proposal must be
received by Consolidated Resources by June 30, 1999. However, the rules of the
SEC provide that, if an annual meeting is changed by more than 30 calendar days
from that contemplated at the time of the 1998 annual meeting of Consolidated
Resources, the proposal must be received by Consolidated Resources within a
reasonable time before the proxy solicitation is made. Proposals should be
directed to the attention of the Secretary of Consolidated Resources. Energy
Partners does not hold annual meetings as it is a limited partnership. If the
consolidation is completed, it is anticipated that the first annual meeting of
Energy Corporation's stockholders will be held on May 30, 2000. To be considered
for inclusion in the proxy statement and proxy, the proposal should be received
by Energy Corporation no later than March 2, 2000.
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OTHER MATTERS
The Hallwood G.P. board, the Consolidated Resources board and HEPGP are not
aware of any matters not set forth in this document that may come before the
meetings. If, however, further business properly comes before the meetings, the
persons named in the proxies will vote the shares represented by proxy in
accordance with their judgment. If, on the date of a meeting, the relevant
number of proxies needed to approve the consolidation have not been obtained,
then, to the extent permitted by law, that meeting will be adjourned until the
required number of proxies necessary to approve the consolidation have been
received.
LEGAL MATTERS
The validity of the Energy Corporation common stock and Energy Corporation
preferred stock to be issued in connection with the consolidation has been
passed upon for Hallwood Corporation by Jenkens & Gilchrist, a Professional
Corporation, Dallas, Texas. Donohoe Jameson & Carroll, P.C., Dallas, Texas, has
acted as special counsel to the Hallwood G.P. special committee in connection
with the consolidation. Vinson & Elkins L.L.P., Dallas, Texas, has acted as
special counsel to the Consolidated Resources special committee in connection
with the consolidation. Brown & Wood LLP, New York, New York, has acted as
counsel to Prudential Securities in connection with the consolidation.
EXPERTS
The consolidated financial statements of Hallwood Energy Partners, L.P. and
Hallwood Consolidated Resources Corporation included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
An opinion regarding aspects of the federal income tax consequences of the
consolidation has been rendered by PricewaterhouseCoopers.
The information included and incorporated by reference in this document
regarding the total proved reserves of Energy Partners, Consolidated Resources
and HEPGP was prepared by Hallwood Petroleum's in-house engineers. Approximately
80% was reviewed by Williamson Petroleum Consultants, Inc. as stated in their
letter report with respect to that information. The reserve review letter of
Williamson Petroleum Consultants, Inc. is filed as an exhibit to the
registration statement of which this document is a part in reliance upon the
authority of that firm as experts with respect to the matters covered by its
report and the giving of its report.
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GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below apply to the indicated terms as used in
this document. All volumes of natural gas referred to are stated at the legal
pressure base of the state or area where the reserves exist and at 60 degrees
Fahrenheit and in most instances are rounded to the nearest major multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Boe. One barrel of oil equivalent using the ratio of one barrel of crude
oil, condensate or gas liquids to 6 Mcf of gas.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Exploratory well. A well drilled to find and produce oil or gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir or to extend a known reservoir.
Finding and developing costs. Costs associated with acquiring and
developing proved oil and gas reserves which are capitalized pursuant to
generally accepted accounting principles, including all costs involved in
acquiring acreage, geological and geophysical work and the cost of drilling and
completing wells.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids,
which approximates the relative energy content of crude oil, condensate and
natural gas liquids as compared to natural gas. Prices have historically been
higher or substantially higher for crude oil than natural gas on an energy
equivalent basis.
Mmbtu. One million British Thermal Units, which is the English system unit
of heat used to measure the heat content of natural gas.
Mmcf. One million cubic feet.
Mmcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Present value. When used with respect to oil and gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
nonproperty-related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed reserves. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as "proved
developed reserves" only after
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testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be achieved.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage are limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Shut-in Well. A producing well that is not currently producing oil or gas.
Successful Well. A well for which production casing has been run for a
completion attempt.
Undeveloped acreage. Lease acreage 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 such acreage contains proved reserves.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Major remedial operations required to maintain, restore or
increase production rates.
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APPENDIX A
Merger and Asset Contribution Agreement, dated as of December 15, 1998, as
amended by the First Amendment to Merger and Asset Contribution Agreement, dated
as of March 9, 1999 and the Second Amendment to Merger and Asset Contribution
Agreement, dated as of April 29, 1999.
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MERGER
AND ASSET CONTRIBUTION AGREEMENT
THIS MERGER AND ASSET CONTRIBUTION AGREEMENT (this "Agreement"), dated as
of December 15, 1998, is between Hallwood Energy Corporation, a Delaware
corporation ("Hallwood Energy"), HEC Acquisition Partnership, L.P., a Delaware
limited partnership ("HEC Acquisition Partnership"), HEC Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Hallwood Energy ("HEC
Acquisition Corp."), in its capacity as general partner of HEC Acquisition
Partnership, Hallwood Energy Partners, L.P., a Delaware limited partnership
("HEP"), HCRC Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Hallwood Energy ("HCRC Acquisition Corp."), Hallwood Consolidated
Resources Corporation, a Delaware corporation ("HCRC"), and HEPGP Ltd., a
Colorado limited partnership ("HEPGP"). Hallwood Energy, HEC Acquisition
Partnership, HEC Acquisition Corp., HEP, HCRC Acquisition Corp., HCRC and HEPGP
are referred to collectively as the "Constituent Entities."
RECITALS
WHEREAS, the Boards of Directors of each of the Constituent Entities have
determined that a consolidation of the businesses of HEP, HCRC, and the energy
interests of The Hallwood Group Incorporated would be beneficial to the
unitholders and shareholders of each of the Constituent Entities;
WHEREAS, based upon such determination, each of the Constituent Entities
have entered into this Agreement to effectuate the consolidation;
WHEREAS, Hallwood Energy has been formed to be the entity resulting from
the consolidation;
WHEREAS, the consolidation, as more fully described below, will be effected
by (1) merging HEP with HEC Acquisition Partnership (with HEP as the surviving
entity), (2) merging HCRC with HCRC Acquisition Corp. (with HCRC as the
surviving entity), and (3) the contribution by The Hallwood Group Incorporated,
through HEPGP, of its energy related interests to Hallwood Energy;
WHEREAS, upon completion of the consolidation (1) HEP will be a
wholly-owned subsidiary of Hallwood Energy, (2) HCRC will be a wholly owned
subsidiary of Hallwood Energy, and (3) the energy interests of The Hallwood
Group Incorporated will be owned by Hallwood Energy;
WHEREAS, in connection with the consolidation, the currently outstanding
equity securities of HCRC and HEP will be canceled and the former equity
security holders of HCRC and HEP (other than equity securities of HCRC held by
HEP, or a Subsidiary of HEP, and equity securities of HEP held by HCRC, or a
Subsidiary of HCRC) will receive equity securities of Hallwood Energy;
WHEREAS, upon the terms and subject to the conditions of this Agreement and
in accordance with the Delaware Revised Uniform Limited Partnership Act
("DRULPA"), HEC Acquisition Partnership will merge (the "HEP Merger") with and
into HEP, with HEP as the surviving partnership (the "Surviving Partnership"),
with HEC Acquisition Corp. as the Surviving Partnership's general partner, and
with Hallwood Energy and Hallwood Consolidated Partners, L.P. as the Surviving
Partnership's limited partners;
WHEREAS, the Boards of Directors of Hallwood Energy, HEC Acquisition Corp.
and Hallwood G.P., Inc., a Delaware corporation ("Hallwood G.P."), the general
partner of HEPGP, which is the general partner of HEP, have determined that the
HEP Merger is advisable and is fair to, and in the best interests of, their
respective stockholders, partners and unitholders, as the case may be; have
approved and adopted this Agreement and the transactions contemplated hereby;
and have recommended approval and adoption of this Agreement by their respective
stockholders, partners and unitholders;
WHEREAS, upon the terms and subject to the conditions of this Agreement and
in accordance with the Delaware General Corporation Law ("DGCL"), HCRC
Acquisition Corp. will merge (the "HCRC
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Merger" and, with the HEP Merger, sometimes referred to herein as the "Mergers")
with and into HCRC, with HCRC as the surviving corporation (the "Surviving
Corporation");
WHEREAS, the Boards of Directors of Hallwood Energy, HCRC Acquisition Corp.
and HCRC have determined that the HCRC Merger is advisable and is fair to, and
in the best interests of, their respective stockholders; have approved and
adopted this Agreement and the transactions contemplated hereby; and have
recommended approval and adoption of this Agreement by their respective
stockholders;
WHEREAS, upon the terms and subject to the conditions of this Agreement,
HEPGP will contribute certain oil and gas related assets (the "Asset
Contribution" and, with the Mergers, sometimes referred to herein as the
"Transactions") to Hallwood Energy.
WHEREAS, the Boards of Directors of Hallwood Energy and Hallwood G.P.,
which is the general partner of HEPGP, have determined that the Asset
Contribution is advisable and is fair to, and in the best interests of, their
respective stockholders and partners; and have approved and adopted this
Agreement and the transactions contemplated hereby;
WHEREAS, for federal income tax purposes, it is intended that the Mergers
and the Asset Contribution will qualify as tax-free transactions under the
provisions of the United States Internal Revenue Code of 1986, as amended (the
"Code"), and it is also intended that the Mergers and the Asset Contribution
will be accounted for as a purchase by HEP of the assets of HCRC and HEPGP; and
WHEREAS, Hallwood Energy, HEC Acquisition Partnership, HEC Acquisition
Corp., HEP, HCRC Acquisition Corp., HCRC and HEPGP desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties agree as follows:
ARTICLE I
THE TRANSACTIONS; CLOSING; EFFECTIVE TIME
1.1 The Transactions.
(a) HEP Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.3) HEC Acquisition Partnership shall
be merged with and into HEP and the separate existence of HEC Acquisition
Partnership shall thereupon cease. HEP shall be the Surviving Partnership in the
HEP Merger and shall continue to be governed by the laws of the State of
Delaware, and the separate existence of HEP with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the HEP Merger.
The HEP Merger shall have the effects specified in DRULPA.
(b) HCRC Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time HCRC Acquisition Corp. shall be merged with and into HCRC and
the separate existence of HCRC Acquisition Corp. shall thereupon cease. HCRC
shall be the Surviving Corporation in the HCRC Merger and shall continue to be
governed by the laws of the State of Delaware, and the separate existence of
HCRC with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the HCRC Merger. The HCRC Merger shall have the effects
specified in DGCL.
(c) Asset Contribution. Subject to the terms and conditions of this
Agreement, immediately prior to the Effective Time, HEPGP shall contribute those
certain oil and gas related assets and assign those certain liabilities set
forth on Schedule 1.1(c) attached hereto (the "Contributed Assets") to Hallwood
Energy.
1.2 Closings. The closings (the "Closings") of the Transactions shall take
place (a) at the offices of Jenkens & Gilchrist, a Professional Corporation,
1445 Ross Avenue, Suite 3200, Dallas, Texas at 10:00 a.m. on the first business
day on which the last to be fulfilled or waived of the conditions set forth in
Article VIII (other than those conditions that by their nature are to be
satisfied at the Closings, but
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subject to the fulfillment or waiver of those conditions) shall be fulfilled or
waived in accordance with this Agreement or (b) at such other place and time
and/or on such other date as HEP, HCRC, HEPGP and Hallwood Energy may agree.
1.3 Effective Time. As soon as practicable following the Closings, and
provided that this Agreement has not been terminated or abandoned pursuant to
Article IX hereof, (a) each of HEP and HEC Acquisition Corp., on behalf of HEC
Acquisition Partnership, will cause a Certificate of Merger (the "HEP
Certificate of Merger") to be executed and filed with the Secretary of State of
Delaware as provided in Section 211 of DRULPA, (b) each of HCRC and HCRC
Acquisition Corp. will cause a Certificate of Merger (the "HCRC Certificate of
Merger") to be executed and filed with the Secretary of State of Delaware as
provided in Section 251 of the DGCL and (c) HEPGP will execute and deliver those
items necessary to transfer, convey and assign the Contributed Assets. The
Transactions shall become effective on the date on which (x) each Certificate of
Merger has been duly filed with the Secretary of State of Delaware and (y) all
of those items required to be delivered to consummate the Asset Contribution
have been delivered, and such time is hereinafter referred to as the "Effective
Time."
ARTICLE II
THE SURVIVING ENTITIES
2.1 The Surviving Partnership.
(a) The Agreement of Limited Partnership of HEC Acquisition Partnership
(the "Partnership Agreement") in effect at the Effective Time shall be the
Partnership Agreement of the Surviving Partnership, until duly amended in
accordance with the terms thereof and DRULPA.
(b) The general partner of HEC Acquisition Partnership, HEC Acquisition
Corp., will be the general partner of the Surviving Partnership.
2.2 The Surviving Corporation.
(a) The Certificate of Incorporation of HCRC (the "Certificate") in effect
at the Effective Time and the Bylaws of HCRC (the "Bylaws") in effect at the
Effective Time shall be the Certificate and Bylaws, respectively, of the
Surviving Corporation, until duly amended in accordance with the terms thereof
and DGCL.
(b) The directors and officers of HCRC at the Effective Time shall, from
and after the Effective Time, be the directors and officers, respectively, of
the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Certificate and Bylaws.
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ARTICLE III
CONVERSION OR CANCELLATION OF UNITS IN THE HEP MERGER
3.1 Conversion or Cancellation of Units. At the Effective Time, each Class
A and Class B Unit (other than those held by HCRC, or a Subsidiary of HCRC, a
"Common Unit") of HEP issued and outstanding immediately prior to the Effective
Time shall, by virtue of the HEP Merger and without any action on the part of
the holder thereof, be converted into the right to receive 0.7417 of one (the
"HEP Common Conversion Ratio") fully paid and nonassessable share of common
stock, par value $.01 per share, of Hallwood Energy (the "Hallwood Energy Common
Stock"). Each Class C Unit (other than those held by HCRC, or a Subsidiary of
HCRC, a "Class C Unit") of HEP issued and outstanding immediately prior to the
Effective Time shall, by virtue of the HEP Merger and without any action on the
part of the holder thereof, be converted into the right to receive one (the "HEP
Class C Conversion Ratio") fully paid and nonassessable share of Series A
Preferred Stock, par value $0.01 per share, of Hallwood Energy (the "Hallwood
Energy Preferred Stock"). The Hallwood Energy Common Stock and the Hallwood
Energy Preferred Stock are collectively referred to in this Agreement as the
"Hallwood Energy Stock" and the Hallwood Energy Stock to be received by holders
of Common Units and Class C Units at the Effective Time is referred to in this
Agreement as the "HEP Merger Consideration." At the Effective Time, all Common
Units and Class C Units (collectively, the "Units"), by virtue of the HEP Merger
and without any action on the part of the holders thereof (other than the Class
A Units and Class C Units held by HCRC or a Subsidiary of HCRC), shall no longer
be outstanding and shall be canceled and retired and shall cease to exist, and
each holder (other than HCRC or a Subsidiary of HCRC) of a certificate
representing any such Units (the "Converted Common Units" or the "Converted
Class C Units," as applicable, and collectively, the "Converted Units") shall
thereafter cease to have any rights with respect to the Converted Units, except
the right to receive the HEP Merger Consideration for such Converted Units upon
the surrender of such certificate in accordance with Section 3.5. After the
Effective Time, all Class A Units and Class C Units held by HCRC or a Subsidiary
of HCRC, shall continue to represent limited partner interests in the Surviving
Partnership.
3.2 HEP General Partnership Interest. At the Effective Time, by virtue of
the HEP Merger and without any action on the part of the holder thereof, the
general partnership interest in HEP shall be canceled in consideration of the
mutual covenants contained in this Agreement.
3.3 HEP Options. All options outstanding at the Effective Time to purchase
Common Units shall be canceled and the holder of each option shall receive in
consideration an amount in cash equal to the product of (i) the difference
between the exercise price per Common Unit of the option to purchase Common
Units held by the holder and the average closing price of a Common Unit on the
American Stock Exchange ("AMEX") for the 30 calendar days preceding the date of
the Closing; and (ii) the total number of Common Units subject to the option
held by the holder. All options outstanding at the Effective Time to purchase
Class C Units shall be canceled and the holder of each option shall receive in
consideration an amount in cash equal to the product of (x) the difference
between the exercise price per Class C Unit of the option to purchase Class C
Units held by the holder and the average closing price of a Class C Unit on AMEX
for the 30 calendar days preceding the date of the Closing; and (y) the total
numbers of Class C Units subject to the Option held by the holder."
3.4 Acquisition Partnership Interests. The general partner interest in HEC
Acquisition Partnership outstanding immediately prior to the HEP Merger shall
remain outstanding after the HEP Merger and shall represent the general partner
interest in the Surviving Partnership.
3.5 Exchange Agency; Surrender of Certificates.
(a) HEP Exchange Fund. At or prior to the Effective Time, Hallwood Energy
shall deposit, or cause to be deposited, with an agent designated by Hallwood
Energy (the "Exchange Agent"), for the benefit of the holders of Converted
Units, for exchange in accordance with this Article III, through the Exchange
Agent, (i) certificates evidencing a number of shares of Hallwood Energy Common
Stock equal to the product of the HEP Common Conversion Ratio multiplied by the
number of Converted Common
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Units issued and outstanding, and (ii) certificates evidencing a number of
shares of Hallwood Energy Preferred Stock equal to the product of the HEP Class
C Conversion Ratio multiplied by the number of Converted Class C Units issued
and outstanding. The certificates deposited with the Exchange Agent in
accordance with this Section 3.5(a) are referred to as the "HEP Exchange Fund."
The Exchange Agent shall, pursuant to irrevocable instructions, deliver Hallwood
Energy Common Stock and/or Hallwood Energy Preferred Stock, in exchange for
surrendered certificates pursuant to the terms of this Agreement out of the HEP
Exchange Fund.
(b) Exchange Procedures. As soon as practicable after the Effective Time,
Hallwood Energy shall cause the Exchange Agent to send to each record holder of
Units at the Effective Time (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the certificates
theretofore representing Units (the "Unit Certificates") shall pass, only upon
delivery of the Unit Certificates to the Exchange Agent and shall be in such
form and contain such other provisions as Hallwood Energy and HEP shall
reasonably determine), and (ii) instructions for use in effecting the surrender
of the Unit Certificates in exchange for certificates representing shares of
Hallwood Energy Stock into which the Units represented by such Unit Certificate
or Unit Certificates shall have been converted pursuant to this Agreement. Upon
surrender of a Unit Certificate for cancellation to the Exchange Agent, together
with the letter of transmittal, duly executed, the holder of such Unit
Certificate shall be entitled to receive in exchange therefor, a certificate
representing that number of whole shares of Hallwood Energy Stock that such
holder has the right to receive pursuant to the provisions of this Article III
and the Unit Certificate so surrendered shall be canceled. In the event of a
transfer of ownership of Units that are not registered in the transfer records
of HEP, a certificate evidencing the proper number of shares of Hallwood Energy
Stock may be issued to the transferee if the Unit Certificate evidencing the
Units shall be surrendered to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable transfer taxes have been paid. Until surrendered for exchange in
accordance with the provisions of Section 3.5 of this Agreement, each Unit
Certificate previously representing Converted Units shall from and after the
Effective Time represent for all purposes only the right to receive the
applicable HEP Merger Consideration as set forth in this Agreement. If any
holder of Converted Units shall be unable to surrender such holder's Unit
Certificates because such Unit Certificates have been lost or destroyed, such
holder may deliver in lieu thereof an affidavit and indemnity bond in form and
substance and with surety reasonably satisfactory to Hallwood Energy. No
interest shall be paid on any HEP Merger Consideration payable to former holders
of Converted Units.
(c) Distributions with Respect to Hallwood Energy Stock. No dividends or
other distributions declared or made after the Effective Time with respect to
Hallwood Energy Stock with a record date after the Effective Time shall be paid
to the holder of any unsurrendered Unit Certificate previously representing
Units, and no HEP Merger Consideration shall be paid to any such holder until
the holder of such Unit Certificate shall surrender such Unit Certificate
previously representing Units. Subject to applicable laws, following surrender
of any such Unit Certificate, there shall be paid to the holder of the
certificates evidencing whole shares of Hallwood Energy Stock issued in exchange
therefor, without interest, (i) promptly following the surrender of such Unit
Certificate, the amount of dividends or other distributions with a record date
after the Effective Time previously paid with respect to such whole shares of
Hallwood Energy Stock and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time,
but prior to surrender, and a payment date occurring after surrender, payable
with respect to such whole shares of Hallwood Energy Stock.
(d) No Fractional Shares. No certificates or scrip evidencing fractional
shares of Hallwood Energy Stock shall be issued upon the surrender for exchange
of Unit Certificates, and such fractional share interests shall not entitle the
owner thereof to any rights of a stockholder of Hallwood Energy. In lieu of
fractional shares, each holder of a Unit Certificate previously evidencing
Units, upon surrender of such Unit Certificate for exchange pursuant to this
Article III, shall receive a number of shares of Hallwood Energy Common Stock
rounded to the nearest whole share of Hallwood Energy Common Stock, with half
shares being rounded up to the nearest whole share of Hallwood Energy Common
Stock.
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(e) Termination of HEP Exchange Fund. Any portion of the HEP Exchange Fund
that remains unclaimed by the former holders of Converted Units 180 days after
the Closing Date shall be delivered to Hallwood Energy, upon demand, and any
former holders of Converted Units who have not complied with this Article III
shall thereafter look only to Hallwood Energy for the HEP Merger Consideration
and dividends or distributions to which they are entitled, without any interest
thereon. Neither Hallwood Energy nor HEP shall be liable to any former holder of
Converted Units for any HEP Merger Consideration (or dividends or distributions
with respect thereto) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar laws.
(f) Withholding. Hallwood Energy (or any affiliate thereof) shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any former holder of Converted Units such amounts
as Hallwood Energy (or any affiliate thereof) is required to deduct and withhold
with respect to the making of such payment under the Code or any other provision
of federal, state, local or foreign tax law and Hallwood Energy agrees to remit
to the proper taxing authority such amounts so withheld. To the extent that
amounts are so withheld by Hallwood Energy, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the former
holder of the Converted Units in respect of which such deduction and withholding
was made by Hallwood Energy.
3.6 Transfer of Units After the Effective Time. At the Effective Time, the
transfer books of HEP shall be closed and there shall be no further registration
of transfers of Units thereafter on the records of HEP. If, after the Effective
Time, Unit Certificates are presented to the Surviving Partnership, they shall
be canceled and exchanged for the HEP Merger Consideration, deliverable in
respect thereof pursuant to this Agreement in accordance with the procedures set
forth in this Article III.
ARTICLE IV
CONVERSION OR CANCELLATION OF SHARES IN THE HCRC MERGER
4.1 Conversion or Cancellation of Shares. At the Effective Time, each
share of common stock of HCRC, par value $.01 per share (other than those held
by HEP, or a Subsidiary of HEP, the "HCRC Common Stock"), issued and outstanding
immediately prior to the Effective Time shall, by virtue of the HCRC Merger and
without any action on the part of the holder thereof, be converted into the
right to receive 1.5918 (the "HCRC Conversion Ratio") fully paid and
nonassessable shares of Hallwood Energy Common Stock. The Hallwood Energy Common
Stock to be received by holders of HCRC Common Stock at the Effective Time is
referred to in this Agreement as the "HCRC Merger Consideration." At the
Effective Time, all shares of HCRC Common Stock (the "HCRC Shares"), by virtue
of the HCRC Merger and without any action on the part of the holders thereof,
shall no longer be outstanding and shall be canceled and retired and shall cease
to exist, and each holder (other than HEP or a Subsidiary of HEP) of a
certificate representing any such HCRC Shares (the "Converted Shares") shall
thereafter cease to have any rights with respect to the Converted Shares, except
the right to receive the HCRC Merger Consideration for such Converted Shares
upon the surrender of such certificate in accordance with Section 4.3. At the
Effective Time, all of the HCRC Common Stock held by HEP or a Subsidiary of HEP,
by virtue of the HCRC Merger and without any action on the part of HEP or a
Subsidiary of HEP, shall no longer be outstanding and shall be canceled and
retired and cease to exist.
4.2 HCRC Stock. Each share of common stock, par value $0.01 per share, of
HCRC Acquisition Corp. issued and outstanding immediately prior to the Effective
Time shall remain issued and outstanding and shall thereafter represent one
validly issued, fully paid and nonassessable share of common stock of the
Surviving Corporation, and shall not be converted or affected by virtue of the
HCRC Merger.
4.3 HCRC Options and Warrants. All options and warrants outstanding at the
Effective Time to purchase HCRC Common Stock shall be canceled and the holder of
each option shall receive in consideration an amount in cash equal to the
product of (i) the difference between the exercise per share of HCRC Common
Stock price of the option to purchase HCRC Common Stock held by the holder and
the average closing price of a share of HCRC Common Stock on The Nasdaq National
Market for the
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30 calendar days preceding the date of the Closing; and (ii) the total number of
shares of HCRC Common Stock subject to the Option held by the holder.
4.4 Exchange Agency; Surrender of Certificates.
(a) HCRC Exchange Fund. At or prior to the Effective Time, Hallwood Energy
shall deposit, or cause to be deposited, with the Exchange Agent, for the
benefit of the holders of Converted Shares, for exchange in accordance with this
Article IV, through the Exchange Agent, certificates evidencing a number of
shares of Hallwood Energy Common Stock equal to the product of the HCRC
Conversion Ratio multiplied by the number of Converted Shares issued and
outstanding. The certificates deposited with the Exchange Agent in accordance
with this Section 4.4(a) are referred to as the "HCRC Exchange Fund." The
Exchange Agent shall, pursuant to irrevocable instructions, deliver Hallwood
Energy Common Stock, in exchange for surrendered certificates pursuant to the
terms of this Agreement out of the HCRC Exchange Fund.
(b) Exchange Procedures. As soon as practicable after the Effective Time,
Hallwood Energy shall cause the Exchange Agent to send to each record holder of
HCRC Shares at the Effective Time (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
certificates theretofore representing HCRC Shares (the "Share Certificates")
shall pass, only upon delivery of the Share Certificates to the Exchange Agent
and shall be in such form and contain such other provisions as Hallwood Energy
and HCRC shall reasonably determine), and (ii) instructions for use in effecting
the surrender of the Share Certificates in exchange for certificates
representing shares of Hallwood Energy Stock into which the HCRC Shares
represented by such Share Certificate or Share Certificates shall have been
converted pursuant to this Agreement. Upon surrender of a Share Certificate for
cancellation to the Exchange Agent, together with the letter of transmittal,
duly executed, the holder of such Share Certificate shall be entitled to receive
in exchange therefor, a certificate representing that number of whole shares of
Hallwood Energy Stock that such holder has the right to receive pursuant to the
provisions of this Article IV, and the Share Certificate so surrendered shall be
canceled. In the event of a transfer of ownership of HCRC Shares that is not
registered in the transfer records of HCRC, a certificate evidencing the proper
number of shares of Hallwood Energy Stock may be issued to the transferee if the
Share Certificate evidencing the HCRC Shares shall be surrendered to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable transfer taxes have been paid.
Until surrendered for exchange in accordance with the provisions of Section 4.4
of this Agreement, each Share Certificate previously representing Converted
Shares shall from and after the Effective Time represent for all purposes only
the right to receive the applicable HCRC Merger Consideration as set forth in
this Agreement. If any holder of Converted Shares shall be unable to surrender
such holder's Share Certificates because such Share Certificates have been lost
or destroyed, such holder may deliver in lieu thereof an affidavit and indemnity
bond in form and substance and with surety reasonably satisfactory to Hallwood
Energy. No interest shall be paid on any HCRC Merger Consideration payable to
former holders of Converted Shares.
(c) Distributions with Respect to Hallwood Energy Stock. No dividends or
other distributions declared or made after the Effective Time with respect to
Hallwood Energy Stock with a record date after the Effective Time shall be paid
to the holder of any unsurrendered Share Certificate previously representing
HCRC Shares, and no HCRC Merger Consideration shall be paid to any such holder
until the holder of such Share Certificate shall surrender such Share
Certificate previously representing HCRC Shares. Subject to applicable laws,
following surrender of any such Share Certificate, there shall be paid to the
holder of the certificates evidencing whole shares of Hallwood Energy Stock
issued in exchange therefor, without interest, (i) promptly following the
surrender of such Share Certificate, the amount of dividends or other
distributions with a record date after the Effective Time previously paid with
respect to such whole shares of Hallwood Energy Stock and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time, but prior to surrender, and a payment date
occurring after surrender, payable with respect to such whole shares of Hallwood
Energy Stock.
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(d) No Fractional Shares. No certificates or scrip evidencing fractional
shares of Hallwood Energy Stock shall be issued upon the surrender for exchange
of Share Certificates, and such fractional share interests shall not entitle the
owner thereof to any rights of a stockholder of Hallwood Energy. In lieu of
fractional shares, each holder of a Share Certificate previously evidencing HCRC
Shares, upon surrender of such Share Certificate for exchange pursuant to this
Article IV, shall receive a number of shares of Hallwood Energy Common Stock
rounded to the nearest whole share of Hallwood Energy Common Stock, with half
shares being rounded up to the nearest whole share of Hallwood Energy Common
Stock.
(e) Termination of HCRC Exchange Fund. Any portion of the HCRC Exchange
Fund that remains unclaimed by the former holders of Converted Shares 180 days
after the Closing Date shall be delivered to Hallwood Energy, upon demand, and
any former holders of Converted Shares who have not complied with this Article
IV shall thereafter look only to Hallwood Energy for the HCRC Merger
Consideration and dividends or distributions to which they are entitled, without
any interest thereon. Neither Hallwood Energy nor HCRC shall be liable to any
former holder of Converted Shares for any HCRC Merger Consideration (or
dividends or distributions with respect thereto) delivered to a public official
pursuant to any applicable abandoned property, escheat or similar laws.
(f) Withholding. Hallwood Energy (or any affiliate thereof) shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any former holder of Converted Shares such amounts
as Hallwood Energy (or any affiliate thereof) is required to deduct and withhold
with respect to the making of such payment under the Code or any other provision
of federal, state, local or foreign tax law and Hallwood Energy agrees to remit
to the proper taxing authority such amounts so withheld. To the extent that
amounts are so withheld by Hallwood Energy, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the former
holder of the Converted Shares in respect of which such deduction and
withholding was made by Hallwood Energy.
4.5 Transfer of Shares After the Effective Time. At the Effective Time,
the transfer books of HCRC shall be closed and there shall be no further
registration of transfers of shares of HCRC Common Stock thereafter on the
records of HCRC. If, after the Effective Time, Share Certificates are presented
to the Surviving Corporation, they shall be canceled and exchanged for the HCRC
Merger Consideration, deliverable in respect thereof pursuant to this Agreement
in accordance with the procedures set forth in this Article IV.
ARTICLE V
CONTRIBUTION OF ASSETS
5.1 Contribution Consideration. In consideration for the contribution of
the Contributed Assets, Hallwood Energy shall issue 1,312,411 shares of Hallwood
Energy Common Stock to HEPGP.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties of HEP. HEP hereby represents and
warrants to Hallwood Energy and HCRC that:
(a) Organization and Qualification. Each of HEP and its Subsidiaries is a
corporation or partnership, as applicable, duly organized, validly existing and
in good standing, under the laws of its respective jurisdiction of incorporation
or organization and is qualified to do business and in good standing as a
foreign corporation or partnership, as applicable, in each jurisdiction where
the properties owned, leased or operated, or the business conducted, by it
require such qualification, except for where such failure to so qualify or be in
such good standing, which, when taken together with all other such failures,
could not reasonably be expected to have a Material Adverse Effect (as defined
below) on HEP. Each of HEP and its Subsidiaries has the requisite corporate
power and authority to carry on its respective
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businesses as they are now being conducted, except where the failure to have
such power or authority could not reasonably be expected to have a Material
Adverse Effect on HEP. As used in this Agreement, the term "Material Adverse
Effect" means a material adverse effect on the condition (financial or
otherwise), properties, assets, liabilities, business or results of operations
of an entity and its Subsidiaries, taken as a whole.
(b) Authorized Capital. At the date hereof, the total number of authorized
Units of HEP consists of 100,000,000 Units of which 10,011,854 Class A Units are
issued and outstanding, 143,773 Class B Units are issued and outstanding and
2,464,063 Class C Units are issued and outstanding. At the date hereof there
were 415,900 Class A Units and 120,000 Class C Units reserved for issuance
pursuant to HEP's Unit option plans. All of the outstanding Units have been duly
authorized and are validly issued, fully paid and nonassessable (subject to the
obligation of a limited partner to repay the amount of any distribution wrongly
received from HEP for a period of three years from the date of the
distribution). Except as set forth on Schedule 6.1(b), each of the outstanding
shares of capital stock or partnership interests, as applicable, of each of
HEP's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned, either directly or indirectly, by HEP free and clear of
all liens, pledges, security interests, claims or other encumbrances. Except as
set forth in the HEP Reports (as defined in Section 6.1(e)) filed with the
Securities and Exchange Commission (the "SEC"), there are no Units of HEP
authorized, issued or outstanding and there are no preemptive rights nor any
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of HEP or any of its Subsidiaries.
After the Effective Time, the Surviving Partnership will have no obligation to
issue, transfer or sell any Units or units of the Surviving Partnership pursuant
to any HEP unit or option plans or any other employee benefit plan of HEP.
(c) Authority. HEP has the requisite partnership power and authority and
has taken all partnership action necessary to execute and deliver this Agreement
and, subject only to approval of this Agreement by the holders of a majority of
each class of the outstanding Units, to consummate the transactions contemplated
hereby. This Agreement is a valid and binding agreement of HEP enforceable
against HEP in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors rights and to general equitable
principles.
(d) Governmental Filings; No Violations.
(1) Other than the filing of a certificate of merger under DRULPA,
filings under the Securities Act of 1933, as amended (the "Act") and
filings required to be made pursuant to the Securities and Exchange Act of
1934, as amended (together, the "HEP Regulatory Filings"), no notices,
reports or other filings are required to be made by HEP or any of its
Subsidiaries with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by HEP or any of its Subsidiaries
from, any governmental, regulatory or administrative authority, agency,
tribunal, commission or other entity, domestic, international or foreign
(each a "Governmental Entity"), in connection with the execution and
delivery of this Agreement by HEP and the consummation by HEP of the
transactions contemplated hereby, the failure to make or obtain any or all
of which could reasonably be expected to have a Material Adverse Effect on
HEP or could prevent or materially delay the transactions contemplated by
this Agreement, and
(2) The execution and delivery of this Agreement by HEP do not, and
the consummation by HEP of the transactions contemplated by this Agreement
will not, constitute or result in (A) a breach or violation of, or a
default under the partnership agreement of HEP or the comparable governing
instruments of any of its Subsidiaries, (B) except as provided in Schedule
6.1(d), a breach or violation of, a default under or the triggering of any
payment or other material obligations pursuant to, any of HEP's existing
employee benefit plans or any grant or award made under any of the
foregoing, (C) except as provided in Schedule 6.1(d), a breach or violation
of, or a default under, the acceleration of or the creation of a lien,
pledge, security interest or other encumbrance on assets (with
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or without the giving of notice or the lapse of time) pursuant to, any
provision of any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation ("Contracts") of HEP or any of its
Subsidiaries or any law, rule, ordinance or regulation or judgment, decree,
order, award or governmental or non-governmental permit or license to which
HEP or any of its Subsidiaries is subject or (D) any change in the rights
or obligations of any party under any of the Contracts, except, in the case
of clause (C) or (D) above, for those items provided in Schedule 6.1(d) and
such breaches, violations, defaults, accelerations or changes that, alone
or in the aggregate, could not reasonably be expected to have a Material
Adverse Effect on HEP or that could not prevent or materially delay the
transactions contemplated by this Agreement. Schedule 6.1(d) sets forth, to
the best knowledge of the officers of the general partner of the general
partner of HEP, a list of any consents required under any Contracts to be
obtained prior to consummation of the transactions contemplated by this
Agreement (whether or not subject to the exception set forth with respect
to clause (C) above). HEP will use its best efforts to obtain the consents
referred to on Schedule 6.1(d).
(e) Partnership Reports; Financial Statements. HEP has made available to
representatives of Hallwood Energy, HCRC and HEPGP each registration statement,
schedule, report, proxy statement or information statement prepared by it since
December 31, 1997 and filed with the SEC (the "HEP Audit Date"), including,
without limitation, (i) HEP's Annual Report on Form 10-K for the year ended
December 31, 1997, (ii) HEP's Quarterly Reports on Form 10-Q for the periods
ended March 31, 1998, June 30, 1998 and September 30, 1998, and (iii) the
registration statement on Form S-3 (No. 333-38973), each in the form (including
exhibits and any amendments thereto) filed with the SEC (collectively, the "HEP
Reports"). As of their respective dates, the HEP Reports did not, and any HEP
Reports filed with the SEC subsequent to the date hereof will not, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances in which they were made, not misleading. Each of the
consolidated balance sheets included in or incorporated by reference into the
HEP Reports (including the related notes and schedules) fairly presents the
consolidated financial position of HEP and its Subsidiaries as of its date and
each of the consolidated statements of income and of changes in financial
position included in or incorporated by reference into the HEP Reports
(including any related notes and schedules) fairly presents the results of
operations, earnings and changes in financial position, as the case may be, of
HEP and its Subsidiaries for the periods set forth therein (subject, in the case
of unaudited statements, to normal year-end adjustments that will not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein. Other than the HEP Reports, HEP has not filed
any other reports or statements with the SEC since the HEP Audit Date.
(f) Absence of Certain Changes. Except as disclosed in the HEP Reports
filed with the SEC prior to the date hereof, since the HEP Audit Date, HEP and
its Subsidiaries have conducted their respective businesses only in, and have
not engaged in any material transaction other than according to, the ordinary
and usual course of such businesses and there has not been: (i) any material
adverse change (including, without limitation, any change arising out of or
related to any natural disaster) in the condition (financial or otherwise),
properties, assets, liabilities, business or results of operations of HEP or any
of its Subsidiaries or any development or combination of developments of which
HEP or any of its Subsidiaries has knowledge which is reasonably likely to
result in any such change; (ii) any declaration, setting aside or payment of any
dividend or other distribution with respect to the equity interests of HEP,
other than in the ordinary course of business consistent with past practice; or
(iii) any change by HEP in accounting principles, practices or methods.
(g) Compliance with Laws. Since December 31, 1997, the businesses of HEP
and its Subsidiaries have not and are not being conducted in violation of, nor
were they conducted in violation of, any law, ordinance or regulation of any
Governmental Entity (provided that no representation or warranty is made in this
section with respect to Environmental Laws (as defined herein)), except as
disclosed in any of the
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HEP Reports and except for such violations as would not, individually or in the
aggregate, have a Material Adverse Effect on HEP.
(h) Brokers and Finders. Neither HEP nor any of its officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders fees in connection with the transactions
contemplated herein, except that Kirkpatrick Energy Associates (the "HEP
Financial Advisor") has been employed as financial advisor to the Board of
Directors of Hallwood G.P., acting as the general partner of the general partner
of HEP, and the arrangements with the HEP Financial Advisor have been disclosed
in writing to Hallwood Energy prior to the date hereof.
(i) Litigation. As of the date of this Agreement, except as disclosed in
any of the HEP Reports, there is no (i) class action litigation pending or, to
the best knowledge of HEP, threatened against or affecting HEP or any of its
Subsidiaries, (ii) other suit, action or proceeding pending (or any known basis
therefor) or, to the best knowledge of HEP, threatened against or affecting HEP
or any of its Subsidiaries or any of their respective properties that could
reasonably be expected to have a Material Adverse Effect on HEP or that in any
manner challenges or seeks to prevent, enjoin, alter or materially delay the HEP
Merger or any of the other transactions contemplated hereby, or (iii) judgment,
decree, injunction, rule or order of any court, Governmental Entity or
arbitrator outstanding against HEP or any of its Subsidiaries, which if
determined adversely to HEP, is reasonably likely to have a Material Adverse
Effect on HEP or that in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the HEP Merger or any of the other transactions
contemplated hereby.
(j) Permits. HEP and its Subsidiaries have such certificates, permits,
licenses, franchises, consents, approvals, orders, authorizations,
registrations, qualifications and clearances from appropriate Governmental
Entities ("Permits") as are necessary to own, lease or operate their properties
and to conduct their businesses in the manner described in the HEP Reports and
as currently owned or leased and conducted, and all such Permits are valid and
in full force and effect, except for such Permits the failure of which to have
or to be in full force and effect, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on HEP. Neither HEP nor
any of its Subsidiaries has received any written notice that any violations are
being or have been alleged in respect of any such Permit and no proceeding is
pending or, to the best of HEP's knowledge, after due inquiry, threatened, to
suspend, revoke or limit any such Permit. To the best of HEP's knowledge, after
due inquiry, HEP and its Subsidiaries are in compliance in all material respects
with their respective obligations under such Permits, with such exceptions as
individually or in the aggregate could not reasonably be expected to have a
Material Adverse Effect on HEP, and no event has occurred that allows, or after
notice or lapse of time would allow, revocation, suspension, limitation or
termination of such Permits, except such events as could not reasonably be
expected to have a Material Adverse Effect on HEP.
(k) Fairness Opinion. The Board of Directors of Hallwood G.P. has received
an opinion of the HEP Financial Advisor dated the date hereof, to the effect
that the HEP Merger is fair, from a financial point of view, to the holders of
Class A and Class C Units (other than HCRC and The Hallwood Group Incorporated
("Hallwood Group")).
(l) Reserve Report. With respect to the reserve report dated July 1, 1998
(the "HEP Reserve Report"), relating to certain of HEP's oil and gas properties,
a copy of which has been delivered to representatives of Hallwood Energy, HCRC
and HEPGP (i) the information furnished by HEP to the reserve engineers in
connection with the preparation of the HEP Reserve Report was true and correct
in all material respects; (ii) the estimates of proved reserves of oil and
natural gas set forth in the HEP Reserve Report are reasonable at the date of
the HEP Reserve Report in light of the properties involved; (iii) the
calculations and other methodology utilized in the preparation of the HEP
Reserve Report are consistent with generally accepted standards of petroleum
reservoir engineering; (iv) the estimates of proved reserves of oil and natural
gas set forth in the HEP Reserve Report are reasonable under the assumptions
utilized in the HEP Reserve Report; and (v) the information used in connection
with the preparation of the HEP Reserve Report was true and correct in all
material respects as of July 1, 1998, and no new information has come to the
attention of HEP that would result in a material change to the
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estimated reserves of HEP as of July 1, 1998. Williamson Petroleum Consultants
("Williamson") which are independent engineering consultants have reviewed
properties containing approximately 80% in value of the reserves reported in the
HEP Reserve Report (the "HEP Specified Properties"). A copy of Williamson's
report regarding their review has been provided to Hallwood Energy.
(m) Physical Condition of Facilities. The surface physical facilities on
the HEP Specified Properties have been maintained in accordance with normal
industry maintenance practices and are in a state of repair (normal wear and
tear excepted) that HEP believes to be adequate for the normal use of such
facilities in the ordinary conduct of the business of HEP. Without limiting the
foregoing, but subject to ordinary wear and tear, such facilities are not in
need of maintenance or improvements except for maintenance and improvements in
the ordinary course in accordance with normal industry practice.
(n) Environmental Matters. Except as previously described in the HEP
Reports, (i) each of HEP and its Subsidiaries is in material compliance with all
applicable federal, state, local and foreign laws, regulations, rules, orders,
decrees, treaties, judicial decisions, judgments, injunctions, permits and
governmental restrictions relating to pollution or protection of human health or
the environment (including, without limitation, ambient air, surface water,
ground water, land surface or subsurface strata) (collectively "Environmental
Laws"), except for such non-compliance as could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on HEP, and,
to the best knowledge of HEP, there are no circumstances that are reasonably
likely to materially prevent or interfere with such compliance in the next three
years, and (ii) neither HEP nor any of its Subsidiaries has received written
notice of or, to the best knowledge of HEP, is the subject of, any actions,
causes of action, claims, investigations, demands, notices, requests for
information, complaints, suits or proceedings by any Person alleging liability
under or non-compliance with any Environmental Law that are reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on HEP.
(o) Revenues; Expenses. HEP has not made any transfer or conveyance,
entered into any contract or agreement, or taken any action that has caused, or
will cause, it to be entitled to less than the net revenue interests, or to be
subject to more than the expense interests, set forth in the HEP Reserve Report
that would constitute a Material Adverse Effect on HEP, other than as disclosed
in the HEP Reports.
(p) Operating Contracts. No party to any operating contract is in dispute
with any other party to such contract or is in breach or default with respect to
any of its obligations under such contract that would constitute a Material
Adverse Effect on HEP, and there has not occurred any event, fact, or
circumstances that, with the lapse of time or giving of notice, or both, would
constitute a breach or default under such contract that would constitute a
Material Adverse Effect on HEP.
(q) Production Data. HEP has provided to representatives of Hallwood
Energy, HCRC and HEPGP aggregate production data on the HEP Specified Properties
and data on lease operating expenses incurred on the HEP Specified Properties.
All of such data is accurate and complete as of the date provided. Since the
date of the HEP Reserve Report, none of the HEP Specified Properties has
experienced any reduction in the average rate of production of oil, gas, or
other substances as compared with the average for the period from January 1,
1998, through the date of the HEP Reserve Report (except such as may be
occasioned by depletion due to normal operations) that would constitute a
Material Adverse Effect on HEP.
(r) Ordinary Course Operations. Except as disclosed on Schedule 6.1(r),
since the date of the HEP Reserve Report, HEP has not operated or in any manner
dealt with, incurred obligations with respect to, or undertaken any transactions
relating to, the HEP Specified Properties other than in the ordinary course of
business consistent with past practice and none of the HEP Specified Properties
has suffered any material destruction, damage, or loss (except depreciation of
equipment through ordinary wear and tear) or been subjected by HEP to any
mortgage, lien, encumbrance, claim, or security interest that has not previously
been disclosed to representatives of Hallwood Energy or that would constitute a
Material Adverse Effect on HEP.
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(s) Sale of Production. All contracts to which HEP is or will be, after
giving effect to the HEP Merger, a party, or to which the HEP Specified
Properties are subject, with respect to the sale of production from the HEP
Specified Properties have been made available by HEP to Hallwood Energy. Such
contracts have not been amended in any material respect and remain in full force
and effect in accordance with their respective terms. There has been no payment
to HEP, and no accrual of liability for payments under, such contracts for
production not yet taken by or delivered to the purchaser under such contracts.
Any imbalance that exists between HEP and any other owner of an interest in any
of the HEP Specified Properties with respect to the share of hydrocarbons
produced from a HEP Specified Property, since the date of first production, for
the account of HEP and such other owners when compared to the net revenue
interest of HEP and such other owners in any such property has been disclosed to
Hallwood Energy in writing.
6.2 Representations and Warranties of HCRC. HCRC hereby represents and
warrants to Hallwood Energy and HEP that:
(a) Organization and Qualification. Each of HCRC and its Subsidiaries is a
corporation or partnership, as applicable, duly organized, validly existing and
in good standing under the laws of its respective jurisdiction of incorporation
or organization and is qualified to do business and in good standing as a
foreign corporation or partnership, as applicable, in each jurisdiction where
the properties owned, leased or operated, or the business conducted, by it
require such qualification, except for where such failure to so qualify or be in
such good standing, which, when taken together with all other such failures,
could not reasonably be expected to have a Material Adverse Effect on HCRC. Each
of HCRC and its Subsidiaries has the requisite corporate power and authority to
carry on its respective businesses as they are now being conducted, except where
the failure to have such power or authority could not reasonably be expected to
have a Material Adverse Effect on HCRC.
(b) Authorized Capital. At the date hereof, the total number of authorized
shares of HCRC consists of 10,500,000 shares, of which 10,000,000 are shares of
HCRC Common Stock and 500,000 are shares of HCRC Preferred Stock, of which
3,007,852 shares of HCRC Common Stock are issued and outstanding, and no shares
of HCRC Preferred Stock are issued and outstanding. At the date hereof there
were 295,730 HCRC Shares reserved for issuance pursuant to HCRC's stock option
plans. All of the outstanding HCRC Shares have been duly authorized and are
validly issued, fully paid and nonassessable. Except as set forth on Schedule
6.2(b), each of the outstanding shares of capital stock or partnership
interests, as applicable, of each of HCRC's Subsidiaries is duly authorized,
validly issued, fully paid and nonassessable and owned, either directly or
indirectly, by HCRC free and clear of all liens, pledges, security interests,
claims or other encumbrances. Except as set forth in the HCRC Reports (as
defined in Section 6.2(e)) filed with the SEC, there are no HCRC Shares
authorized, issued or outstanding and there are no preemptive rights nor any
outstanding subscriptions, options, warrants, rights, convertible securities or
other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of HCRC or any of its Subsidiaries.
After the Effective Time, the Surviving Corporation will have no obligation to
issue, transfer or sell any HCRC Shares or shares of the Surviving Corporation
pursuant to any HCRC option plans or any other employee benefit plan of HCRC.
(c) Authority. HCRC has the requisite corporate power and authority and has
taken all corporate action necessary to execute and deliver this Agreement and,
subject only to approval of this Agreement by the holders of a majority of each
class of the outstanding HCRC Shares, to consummate the transactions
contemplated hereby. This Agreement is a valid and binding agreement of HCRC
enforceable against HCRC in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors rights and to general
equitable principles.
(d) Governmental Filings; No Violations.
(1) Other than the filing of a certificate of merger under DGCL,
filings under the Act and filings required to be made pursuant to the
Securities and Exchange Act of 1934, as amended (together, the "HCRC
Regulatory Filings"), no notices, reports or other filings are required to
be
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made by HCRC or any of its Subsidiaries with, nor are any consents,
registrations, approvals, permits or authorizations required to be obtained
by HCRC or any of its Subsidiaries from, any Governmental Entity, in
connection with the execution and delivery of this Agreement by HCRC and
the consummation by HCRC of the transactions contemplated hereby, the
failure to make or obtain any or all of which could reasonably be expected
to have a Material Adverse Effect on HCRC or could prevent or materially
delay the transactions contemplated by this Agreement, and
(2) The execution and delivery of this Agreement by HCRC do not, and
the consummation by HCRC of the transactions contemplated by this Agreement
will not, constitute or result in (A) a breach or violation of, or a
default under the Certificate of Incorporation or Bylaws of HCRC or the
comparable governing instruments of any of its Subsidiaries, (B) except as
provided in Schedule 6.2(d), a breach or violation of, a default under or
the triggering of any payment or other material obligations pursuant to,
any of HCRC's existing employee benefit plans or any grant or award made
under any of the foregoing, (C) except as provided in Schedule 6.2(d), a
breach or violation of, or a default under, the acceleration of or the
creation of a lien, pledge, security interest or other encumbrance on
assets (with or without the giving of notice or the lapse of time) pursuant
to, any provision of any Contracts of HCRC or any of its Subsidiaries or
any law, rule, ordinance or regulation or judgment, decree, order, award or
governmental or non-governmental permit or license to which HCRC or any of
its Subsidiaries is subject or (D) any change in the rights or obligations
of any party under any of the Contracts, except, in the case of clause (C)
or (D) above, for those items provided in Schedule 6.2(d) and such
breaches, violations, defaults, accelerations or changes that, alone or in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect on HCRC or that could not prevent or materially delay the
transactions contemplated by this Agreement. Schedule 6.2(d) sets forth, to
the best knowledge of the officers of HCRC, a list of any consents required
under any Contracts to be obtained prior to consummation of the
transactions contemplated by this Agreement (whether or not subject to the
exception set forth with respect to clause (C) above). HCRC will use its
best efforts to obtain the consents referred to on Schedule 6.2(d).
(e) Corporation Reports; Financial Statements. HCRC has made available to
representatives of Hallwood Energy, HEP and HEPGP each registration statement,
schedule, report, proxy statement or information statement prepared by it since
December 31, 1997 and filed with the SEC (the "HCRC Audit Date"), including,
without limitation, (i) HCRC's Annual Report on Form 10-K for the year ended
December 31, 1997 and (ii) HCRC's Quarterly Reports on Form 10-Q for the periods
ended March 31, 1998, June 30, 1998, and September 30, 1998, each in the form
(including exhibits and any amendments thereto) filed with the SEC
(collectively, the "HCRC Reports"). As of their respective dates, the HCRC
Reports did not, and any HCRC Reports filed with the SEC subsequent to the date
hereof will not, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading. Each of the consolidated balance sheets included in or
incorporated by reference into the HCRC Reports (including the related notes and
schedules) fairly presents the consolidated financial position of HCRC and its
Subsidiaries as of its date and each of the consolidated statements of income
and of changes in financial position included in or incorporated by reference
into the HCRC Reports (including any related notes and schedules) fairly
presents the results of operations, earnings and changes in financial position,
as the case may be, of HCRC and its Subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end
adjustments that will not be material in amount or effect), in each case in
accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein. Other than the HCRC
Reports, HCRC has not filed any other reports or statements with the SEC since
the HCRC Audit Date.
(f) Absence of Certain Changes. Except as disclosed in the HCRC Reports
filed with the SEC prior to the date hereof, since the HCRC Audit Date, HCRC and
its Subsidiaries have conducted their respective businesses only in, and have
not engaged in any material transaction other than according to, the ordinary
and usual course of such businesses and there has not been: (i) any material
adverse change
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(including, without limitation, any change arising out of or related to any
natural disaster) in the condition (financial or otherwise), properties, assets,
liabilities, business or results of operations of HCRC or any of its
Subsidiaries or any development or combination of developments of which HCRC or
any of its Subsidiaries has knowledge which is reasonably likely to result in
any such change; (ii) any declaration, setting aside or payment of any dividend
or other distribution with respect to the equity interests of HCRC, other than
in the ordinary course of business consistent with past practice; or (iii) any
change by HCRC in accounting principles, practices or methods.
(g) Compliance with Laws. Since December 31, 1997, the businesses of HCRC
and its Subsidiaries have not and are not being conducted in violation of, nor
were they conducted in violation of, any law, ordinance or regulation of any
Governmental Entity (provided that no representation or warranty is made in this
section with respect to Environmental Laws), except as disclosed in any of the
HCRC Reports and except for such violations as would not, individually or in the
aggregate, have a Material Adverse Effect on HCRC.
(h) Brokers and Finders. Neither HCRC nor any of its officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders fees in connection with the transactions
contemplated herein, except that Dain Rauscher Wessels, a division of Dain
Rauscher Incorporated (the "HCRC Financial Advisor") has been employed as
financial advisor to the Board of Directors of HCRC and the arrangements with
the HCRC Financial Advisor have been disclosed in writing to Hallwood Energy
prior to the date hereof.
(i) Litigation. As of the date of this Agreement, except as disclosed in
any of the HCRC Reports, there is no (i) class action litigation pending or, to
the best knowledge of HCRC, threatened against or affecting HCRC or any of its
Subsidiaries, (ii) other suit, action or proceeding pending (or any known basis
therefor) or, to the best knowledge of HCRC, threatened against or affecting
HCRC or any of its Subsidiaries or any of their respective properties that could
reasonably be expected to have a Material Adverse Effect on HCRC or that in any
manner challenges or seeks to prevent, enjoin, alter or materially delay the
HCRC Merger or any of the other transactions contemplated hereby, or (iii)
judgment, decree, injunction, rule or order of any court, Governmental Entity or
arbitrator outstanding against HCRC or any of its Subsidiaries, which if
determined adversely to HCRC, is reasonably likely to have a Material Adverse
Effect on HCRC or that in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the HCRC Merger or any of the other transactions
contemplated hereby.
(j) Permits. HCRC and its Subsidiaries have such Permits as are necessary
to own, lease or operate their properties and to conduct their businesses in the
manner described in the HCRC Reports and as currently owned or leased and
conducted, and all such Permits are valid and in full force and effect, except
for such Permits the failure of which to have or to be in full force and effect,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect on HCRC. Neither HCRC nor any of its Subsidiaries has
received any written notice that any violations are being or have been alleged
in respect of any such Permit and no proceeding is pending or, to the best of
HCRC's knowledge, after due inquiry, threatened, to suspend, revoke or limit any
such Permit. To the best of HCRC's knowledge, after due inquiry, HCRC and its
Subsidiaries are in compliance in all material respects with their respective
obligations under such Permits, with such exceptions as individually or in the
aggregate could not reasonably be expected to have a Material Adverse Effect on
HCRC, and no event has occurred that allows, or after notice or lapse of time
would allow, revocation, suspension, limitation or termination of such Permits,
except such events as could not reasonably be expected to have a Material
Adverse Effect on HCRC.
(k) Fairness Opinion. The Board of Directors of HCRC has received an
opinion of the HCRC Financial Advisor dated the date hereof, to the effect that
the HCRC Merger is fair, from a financial point of view, to the holders of HCRC
Shares (other than HEP).
(l) Reserve Report. With respect to the reserve report dated July 1, 1998
(the "HCRC Reserve Report"), relating to certain of HCRC's oil and gas
properties, a copy of which has been delivered to representatives of Hallwood
Energy, HEP and HEPGP (i) the information furnished by HCRC to the
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reserve engineers in connection with the preparation of the HCRC Reserve Report
was true and correct in all material respects; (ii) the estimates of proved
reserves of oil and natural gas set forth in the HCRC Reserve Report are
reasonable at the date of the HCRC Reserve Report in light of the properties
involved; (iii) the calculations and other methodology utilized in the
preparation of the HCRC Reserve Report are consistent with generally accepted
standards of petroleum reservoir engineering; (iv) the estimates of proved
reserves of oil and natural gas set forth in the HCRC Reserve Report are
reasonable under the assumptions utilized in the HCRC Reserve Report; and (v)
the information used in connection with the preparation of the HCRC Reserve
Report was true and correct in all material respects as of July 1, 1998, and no
new information has come to the attention of HCRC that would result in a
material change to the estimated reserves of HCRC as of July 1, 1998. Williamson
has reviewed properties containing approximately 80% in value of the reserves
reported in the HCRC Reserve Report (the "HCRC Specified Properties"). A copy of
Williamson's report regarding their review has been provided to Hallwood Energy.
(m) Physical Condition of Facilities. The surface physical facilities on
the HCRC Specified Properties have been maintained in accordance with normal
industry maintenance practices and are in a state of repair (normal wear and
tear excepted) that HCRC believes to be adequate for the normal use of such
facilities in the ordinary conduct of the business of HCRC. Without limiting the
foregoing, but subject to ordinary wear and tear, such facilities are not in
need of maintenance or improvements except for maintenance and improvements in
the ordinary course in accordance with normal industry practice.
(n) Environmental Matters. Except as previously described in the HCRC
Reports, (i) each of HCRC and its Subsidiaries is in material compliance with
all applicable Environmental Laws, except for such non-compliance as could not,
individually or in the aggregate reasonably be expected to have a Material
Adverse Effect on HCRC, and, to the best knowledge of HCRC, there are no
circumstances that are reasonably likely to materially prevent or interfere with
such compliance in the next three years, and (ii) neither HCRC nor any of its
Subsidiaries has received written notice of or, to the best knowledge of HCRC,
is the subject of, any actions, causes of action, claims, investigations,
demands, notices, requests for information, complaints, suits or proceedings by
any Person alleging liability under or non-compliance with any Environmental Law
that are reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on HCRC.
(o) Revenues; Expenses. HCRC has not made any transfer or conveyance,
entered into any contract or agreement, or taken any action that has caused, or
will cause, it to be entitled to less than the net revenue interests, or to be
subject to more than the expense interests, set forth in the HCRC Reserve Report
that would constitute a Material Adverse Effect on HCRC, other than as disclosed
in the HCRC Reports.
(p) Operating Contracts. No party to any operating contract is in dispute
with any other party to such contract or is in breach or default with respect to
any of its obligations under such contract that would constitute a Material
Adverse Effect on HCRC, and there has not occurred any event, fact, or
circumstances that, with the lapse of time or giving of notice, or both, would
constitute a breach or default under such contract that would constitute a
Material Adverse Effect on HCRC.
(q) Production Data. HCRC has provided to representatives of Hallwood
Energy, HEP and HEPGP aggregate production data on the HCRC Specified Properties
and data on lease operating expenses incurred on the HCRC Specified Properties.
All of such data is accurate and complete as of the date provided. Since the
date of the HCRC Reserve Report, none of the HCRC Specified Properties has
experienced any reduction in the average rate of production of oil, gas, or
other substances as compared with the average for the period from January 1,
1998, through the date of the HCRC Reserve Report (except such as may be
occasioned by depletion due to normal operations) that would constitute a
Material Adverse Effect on HCRC.
(r) Ordinary Course Operations. Except as disclosed on Schedule 6.2(r),
since the date of the HCRC Reserve Report, HCRC has not operated or in any
manner dealt with, incurred obligations with respect to, or undertaken any
transactions relating to, the HCRC Specified Properties other than in the
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ordinary course of business consistent with past practice and none of the HCRC
Specified Properties has suffered any material destruction, damage, or loss
(except depreciation of equipment through ordinary wear and tear) or been
subjected by HCRC to any mortgage, lien, encumbrance, claim, or security
interest that has not previously been disclosed to representatives of Hallwood
Energy or that would constitute a Material Adverse Effect on HCRC.
(s) Sale of Production. All contracts to which HCRC is or will be, after
giving effect to the HCRC Merger, a party, or to which the HCRC Specified
Properties are subject, with respect to the sale of production from the HCRC
Specified Properties have been made available by HCRC to Hallwood Energy. Such
contracts have not been amended in any material respect and remain in full force
and effect in accordance with their respective terms. There has been no payment
to HCRC, and no accrual of liability for payments under, such contracts for
production not yet taken by or delivered to the purchaser under such contracts.
Any imbalance that exists between HCRC and any other owner of an interest in any
of the HCRC Specified Properties with respect to the share of hydrocarbons
produced from a HCRC Specified Property, since the date of first production, for
the account of HCRC and such other owners when compared to the net revenue
interest of HCRC and such other owners in any such property has been disclosed
to Hallwood Energy in writing.
6.3 Representations and Warranties of HEPGP. HEPGP hereby represents and
warrants to Hallwood Energy, HEP and HCRC that:
(a) Organization and Qualification. Each of HEPGP and its Subsidiaries is a
corporation or partnership, as applicable, duly organized, validly existing and
in good standing under the laws of its respective jurisdiction of incorporation
or organization and is qualified to do business and in good standing as a
foreign corporation or partnership, as applicable, in each jurisdiction where
the properties owned, leased or operated, or the business conducted, by it
require such qualification, except for where such failure to so qualify or be in
such good standing, which, when taken together with all other such failures,
could not reasonably be expected to have a Material Adverse Effect on HEPGP.
Each of HEPGP and its Subsidiaries has the requisite corporate power and
authority to carry on its respective businesses as they are now being conducted,
except where the failure to have such power or authority could not reasonably be
expected to have a Material Adverse Effect on HEPGP.
(b) Authority. HEPGP has the requisite partnership power and authority and
has taken all partnership action necessary to execute and deliver this Agreement
and, subject only to approval of this Agreement by the holders of a majority of
each class of the outstanding partnership interest, to consummate the
transactions contemplated hereby. This Agreement is a valid and binding
agreement of HEPGP enforceable against HEPGP in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors rights and to general equitable principles.
(c) Governmental Filings; No Violations.
(1) Other than filings under the Act (the "HEPGP Filings"), no
notices, reports or other filings are required to be made by HEPGP or any
of its Subsidiaries with, nor are any consents, registrations, approvals,
permits or authorizations required to be obtained by HEPGP or any of its
Subsidiaries from, any Governmental Entity, in connection with the
execution and delivery of this Agreement by HEPGP and the consummation by
HEPGP of the transactions contemplated hereby, the failure to make or
obtain any or all of which could reasonably be expected to have a Material
Adverse Effect on HEPGP or could prevent or materially delay the
transactions contemplated by this Agreement, and
(2) The execution and delivery of this Agreement by HEPGP do not, and
the consummation by HEPGP of the transactions contemplated by this
Agreement will not, constitute or result in (A) a breach or violation of,
or a default under the partnership agreement of HEPGP or the comparable
governing instruments of any of its Subsidiaries, (B) except as provided in
Schedule 6.3(c), a breach or violation of, a default under or the
triggering of any payment or other material obligations pursuant
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to, any of HEPGP's existing employee benefit plans or any grant or award
made under any of the foregoing, (C) except as provided in Schedule 6.3(c),
a breach or violation of, or a default under, the acceleration of or the
creation of a lien, pledge, security interest or other encumbrance on
assets (with or without the giving of notice or the lapse of time) pursuant
to, any provision of any Contracts of HEPGP or any of its Subsidiaries or
any law, rule, ordinance or regulation or judgment, decree, order, award or
governmental or non-governmental permit or license to which HEPGP or any of
its Subsidiaries is subject or (D) any change in the rights or obligations
of any party under any of the Contracts, except, in the case of clause (C)
or (D) above, for those items provided in Schedule 6.3(c) and such
breaches, violations, defaults, accelerations or changes that, alone or in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect on HEPGP or that could not prevent or materially delay the
transactions contemplated by this Agreement. Schedule 6.3(c) sets forth, to
the best knowledge of the officers of the general partner of HEPGP, a list
of any consents required under any Contracts to be obtained prior to
consummation of the transactions contemplated by this Agreement (whether or
not subject to the exception set forth with respect to clause (C) above).
HEPGP will use its best efforts to obtain the consents referred to on
Schedule 6.3(c).
(d) Partnership Reports; Financial Statements. HEPGP has made available to
representatives of Hallwood Energy, HEP and HCRC each schedule, report, proxy
statement or information statement prepared by it since December 31, 1997 and
delivered to its general and limited partners (the "HEPGP Balance Sheet Date"),
including, without limitation, (i) HEPGP's unaudited financial statements for
the year ended December 31, 1997 and (ii) HEPGP's unaudited financial statements
for the periods ended March 31, 1998, June 30, 1998, and September 30, 1998 each
in the form (including exhibits and any amendments thereto) delivered to HEPGP's
general or limited partners (collectively, the "HEPGP Reports"). As of their
respective dates, the HEPGP Reports did not, and any HEPGP Reports delivered to
HEPGP's general or limited partners subsequent to the date hereof will not,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances in which they were made, not misleading. Each of
the consolidated balance sheets included in the HEPGP Reports (including the
related notes and schedules) fairly presents the consolidated financial position
of HEPGP and its Subsidiaries as of its date and each of the consolidated
statements of income and of changes in financial position included in the HEPGP
Reports (including any related notes and schedules) fairly presents the results
of operations, earnings and changes in financial position, as the case may be,
of HEPGP and its Subsidiaries for the periods set forth therein (subject, in the
case of unaudited statements, to normal year-end adjustments that will not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein. Other than the HEPGP Reports, HEPGP has not
filed any other reports or statements with the SEC since the HEPGP Balance Sheet
Date.
(e) Absence of Certain Changes. Except as disclosed in the HEPGP Reports
delivered to HEPGP's general or limited partners prior to the date hereof, since
the HEPGP Balance Sheet Date, HEPGP and its Subsidiaries have conducted their
respective businesses only in, and have not engaged in any material transaction
other than according to, the ordinary and usual course of such businesses and
there has not been: (i) any material adverse change (including, without
limitation, any change arising out of or related to any natural disaster) in the
condition (financial or otherwise), properties, assets, liabilities, business or
results of operations of HEPGP or any of its Subsidiaries or any development or
combination of developments of which HEPGP or any of its Subsidiaries has
knowledge which is reasonably likely to result in any such change; (ii) any
declaration, setting aside or payment of any dividend or other distribution with
respect to the equity interests of HEPGP, other than in the ordinary course of
business consistent with past practice; or (iii) any change by HEPGP in
accounting principles, practices or methods.
(f) Compliance with Laws. Since December 31, 1997, the businesses of HEPGP
and its Subsidiaries have not and are not being conducted in violation of, nor
were they conducted in violation of, any law,
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ordinance or regulation of any Governmental Entity (provided that no
representation or warranty is made in this section with respect to Environmental
Laws (as defined herein)), except as disclosed in any of the HEPGP Reports and
except for such violations as would not, individually or in the aggregate, have
a Material Adverse Effect on HEPGP.
(g) Brokers and Finders. Neither HEPGP nor any of its officers, directors
or employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders fees in connection with the transactions
contemplated herein, except that Prudential Securities Incorporated (the "HEPGP
Financial Advisor") has been employed as financial advisor to the Board of
Directors of Hallwood Group, on behalf of HEPGP, and the arrangements with the
HEPGP Financial Advisor have been disclosed in writing to Hallwood Energy prior
to the date hereof.
(h) Litigation. As of the date of this Agreement, except as disclosed in
any of the HEPGP Reports, there is no (i) class action litigation pending or, to
the best knowledge of HEPGP, threatened against or affecting HEPGP or any of its
Subsidiaries, (ii) other suit, action or proceeding pending (or any known basis
therefor) or, to the best knowledge of HEPGP, threatened against or affecting
HEPGP or any of its Subsidiaries or any of their respective properties that
could reasonably be expected to have a Material Adverse Effect on HEPGP or that
in any manner challenges or seeks to prevent, enjoin, alter or materially delay
the Asset Contribution or any of the other transactions contemplated hereby, or
(iii) judgment, decree, injunction, rule or order of any court, Governmental
Entity or arbitrator outstanding against HEPGP or any of its Subsidiaries, which
if determined adversely to HEPGP, is reasonably likely to have a Material
Adverse Effect on HEPGP or that in any manner challenges or seeks to prevent,
enjoin, alter or materially delay the Asset Contribution or any of the other
transactions contemplated hereby.
(i) Permits. HEPGP and its Subsidiaries have such Permits as are necessary
to own, lease or operate their properties and to conduct their businesses in the
manner described in the HEPGP Reports and as currently owned or leased and
conducted, and all such Permits are valid and in full force and effect, except
for such Permits the failure of which to have or to be in full force and effect,
individually or in the aggregate, could not reasonably be expected to have a
Material Adverse Effect on HEPGP. Neither HEPGP nor any of its Subsidiaries has
received any written notice that any violations are being or have been alleged
in respect of any such Permit and no proceeding is pending or, to the best of
HEPGP's knowledge, after due inquiry, threatened, to suspend, revoke or limit
any such Permit. To the best of HEPGP's knowledge, after due inquiry, HEPGP and
its Subsidiaries are in compliance in all material respects with their
respective obligations under such Permits, with such exceptions as individually
or in the aggregate could not reasonably be expected to have a Material Adverse
Effect on HEPGP, and no event has occurred that allows, or after notice or lapse
of time would allow, revocation, suspension, limitation or termination of such
Permits, except such events as could not reasonably be expected to have a
Material Adverse Effect on HEPGP.
(j) Reserve Report. With respect to the reserve report dated July 1, 1998
(the "HEPGP Reserve Report"), relating to certain of HEPGP's oil and gas
properties, a copy of which has been delivered to representatives of Hallwood
Energy, HEP and HCRC (i) the information furnished by HEPGP to the reserve
engineers in connection with the preparation of the HEPGP Reserve Report was
true and correct in all material respects; (ii) the estimates of proved reserves
of oil and natural gas set forth in the HEPGP Reserve Report are reasonable at
the date of the HEPGP Reserve Report in light of the properties involved; (iii)
the calculations and other methodology utilized in the preparation of the HEPGP
Reserve Report are consistent with generally accepted standards of petroleum
reservoir engineering; (iv) the estimates of proved reserves of oil and natural
gas set forth in the HEPGP Reserve Report are reasonable under the assumptions
utilized in the HEPGP Reserve Report; and (v) the information used in connection
with the preparation of the HEPGP Reserve Report was true and correct in all
material respects as of July 1, 1998, and no new information has come to the
attention of HEPGP that would result in a material change to the estimated
reserves of HEPGP as of July 1, 1998. Williamson Petroleum Consultants
("Williamson") which are independent engineering consultants have reviewed
properties containing approximately 80% in value of the reserves reported in the
HEPGP Reserve Report (the "HEPGP
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Specified Properties"). A copy of Williamson's report regarding their review has
been provided to Hallwood Energy.
(k) Physical Condition of Facilities. The surface physical facilities on
the HEPGP Specified Properties have been maintained in accordance with normal
industry maintenance practices and are in a state of repair (normal wear and
tear excepted) that HEPGP believes to be adequate for the normal use of such
facilities in the ordinary conduct of the business of HEPGP. Without limiting
the foregoing, but subject to ordinary wear and tear, such facilities are not in
need of maintenance or improvements except for maintenance and improvements in
the ordinary course in accordance with normal industry practice.
(l) Environmental Matters. Except as previously described in the HEPGP
Reports, (i) each of HEPGP and its Subsidiaries is in material compliance with
all applicable Environmental Laws, except for such non-compliance as could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on HEPGP, and, to the best knowledge of HEPGP, there are no
circumstances that are reasonably likely to materially prevent or interfere with
such compliance in the next three years, and (ii) neither HEPGP nor any of its
Subsidiaries has received written notice of or, to the best knowledge of HEPGP,
is the subject of, any actions, causes of action, claims, investigations,
demands, notices, requests for information, complaints, suits or proceedings by
any Person alleging liability under or non-compliance with any Environmental Law
that are reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on HEPGP.
(m) Revenues; Expenses. HEPGP has not made any transfer or conveyance,
entered into any contract or agreement, or taken any action that has caused, or
will cause, it to be entitled to less than the net revenue interests, or to be
subject to more than the expense interests, set forth in the HEPGP Reserve
Report that would constitute a Material Adverse Effect on HEPGP, other than as
disclosed in the HEPGP Reports.
(n) Operating Contracts. No party to any operating contract is in dispute
with any other party to such contract or is in breach or default with respect to
any of its obligations under such contract that would constitute a Material
Adverse Effect on HEPGP, and there has not occurred any event, fact, or
circumstances that, with the lapse of time or giving of notice, or both, would
constitute a breach or default under such contract that would constitute a
Material Adverse Effect on HEPGP.
(o) Production Data. HEPGP has provided to representatives of Hallwood
Energy, HEP and HCRC aggregate production data on the HEPGP Specified Properties
and data on lease operating expenses incurred on the HEPGP Specified Properties.
All of such data is accurate and complete as of the date provided. Since the
date of the HEPGP Reserve Report, none of the HEPGP Specified Properties has
experienced any reduction in the average rate of production of oil, gas, or
other substances as compared with the average for the period from January 1,
1998, through the date of the HEPGP Reserve Report (except such as may be
occasioned by depletion due to normal operations) that would constitute a
Material Adverse Effect on HEPGP.
(p) Ordinary Course Operations. Since the date of the HEPGP Reserve Report,
HEPGP has not operated or in any manner dealt with, incurred obligations with
respect to, or undertaken any transactions relating to, the HEPGP Specified
Properties other than in the ordinary course of business consistent with past
practice and none of the HEPGP Specified Properties has suffered any material
destruction, damage, or loss (except depreciation of equipment through ordinary
wear and tear) or been subjected by HEPGP to any mortgage, lien, encumbrance,
claim, or security interest that has not previously been disclosed to
representatives of Hallwood Energy or that would constitute a Material Adverse
Effect on HEPGP.
(q) Sale of Production. All contracts to which the HEPGP Specified
Properties are subject, with respect to the sale of production from the HEPGP
Specified Properties have been made available by HEPGP to Hallwood Energy. Such
contracts have not been amended in any material respect and remain in full force
and effect in accordance with their respective terms. There has been no payment
to HEPGP, and no accrual of liability for payments under, such contracts for
production not yet taken by or delivered to the purchaser under such contracts.
Any imbalance that exists between HEPGP and any other owner of
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an interest in any of the HEPGP Specified Properties with respect to the share
of hydrocarbons produced from a HEPGP Specified Property, since the date of
first production, for the account of HEPGP and such other owners when compared
to the net revenue interest of HEPGP and such other owners in any such property
has been disclosed to Hallwood Energy in writing.
(r) Contributed Assets. HEPGP is, or on or prior to the Effective Time will
be, the true and lawful owner of the Contributed Assets with sufficient title to
transfer the Contributed Assets to Hallwood Energy pursuant to the terms of this
Agreement.
6.4 Representations and Warranties of Hallwood Energy, HEC Acquisition
Partnership and HEC Acquisition Corp. Hallwood Energy, HEC Acquisition
Partnership and HEC Acquisition Corp. represent and warrant to HEP that:
(a) Organization and Qualification. Hallwood Energy and HEC Acquisition
Corp. are corporations duly organized, validly existing and in good standing
under the laws of Delaware. HEC Acquisition Partnership is a limited partnership
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Hallwood Energy and HEC Acquisition Corp. are in
good standing as foreign corporations and HEC Acquisition Partnership is in good
standing as a foreign partnership in each jurisdiction where the properties
owned, leased or operated, or the business conducted, by them require such
qualification, except for where such failure to so qualify or to be in such good
standing, which, when taken together with all other such failures, could not
reasonably be expected to have a Material Adverse Effect on Hallwood Energy.
(b) Authorized Capital. The total number of authorized shares of Hallwood
Energy consists of 30,000,000 shares, of which 25,000,000 shares are common
stock, par value $0.01 per share, of which 100 are issued and outstanding, and
5,000,000 shares are preferred stock, par value $0.01 per share, of which
2,750,000 will be designated as Series A Redeemable Preferred Stock, of which
none are issued and outstanding. All of the outstanding shares of Hallwood
Energy Common Stock and Hallwood Energy Preferred Stock have been duly
authorized and are validly issued, fully paid, and nonassessable. All of the
partnership interests of HEC Acquisition Partnership have been duly authorized
and are validly issued, fully paid and nonassessable (subject to the obligation
of a limited partner to repay the amount of any distribution wrongly received
from HEC Acquisition Partnership for a period of three years from the date of
the distribution). Each of the outstanding shares of capital stock or
partnership interests, as applicable, of each of Hallwood Energy's Subsidiaries,
including HEC Acquisition Corp., is duly authorized, validly issued, fully paid
and nonassessable and owned, either directly or indirectly, by Hallwood Energy
free and clear of all liens, pledges, security interests, claims or other
encumbrances. Except as set forth above, there are no shares of Hallwood Energy
Common Stock, Hallwood Energy Preferred Stock or partnership interests of HEC
Acquisition Partnership authorized, issued or outstanding and there are no
preemptive rights nor any outstanding subscriptions, options, warrants, rights,
convertible securities or other agreements or commitments of any character
relating to the issued or unissued capital stock or other securities of Hallwood
Energy, HEC Acquisition Partnership or any of Hallwood Energy's Subsidiaries.
(c) Authority. Each of Hallwood Energy, HEC Acquisition Corp. and HEC
Acquisition Partnership has the requisite corporate or partnership power and
authority and has taken all corporate or partnership action necessary in order
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby. This Agreement is a valid and binding agreement of Hallwood
Energy, HEC Acquisition Corp. and HEC Acquisition Partnership enforceable
against Hallwood Energy, HEC Acquisition Corp. and HEC Acquisition Partnership,
as applicable, in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors rights and to general equitable
principles.
(d) Governmental Filings; No Violations.
(1) Other than the filing of a certificate of merger under DRULPA,
filings under the Act and filings required to be made pursuant to the
Securities and Exchange Act of 1934, as amended (together, the "Hallwood
Energy Regulatory Filings"), no notices, reports or other filings are
required
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to be made by Hallwood Energy, HEC Acquisition Corp. or HEC Acquisition
Partnership with, nor are any consents, registrations, approvals, permits
or authorizations required to be obtained by Hallwood Energy, HEC
Acquisition Corp. or HEC Acquisition Partnership from, any Governmental
Entity in connection with the execution and delivery of this Agreement by
Hallwood Energy, HEC Acquisition Corp. or HEC Acquisition Partnership and
the consummation of the transactions contemplated hereby by Hallwood
Energy, HEC Acquisition Corp. or HEC Acquisition Partnership, the failure
to make or obtain any or all of which could reasonably be expected to have
a Material Adverse Effect on Hallwood Energy or could prevent or materially
delay the transactions contemplated by this Agreement, and
(2) The execution and delivery of this Agreement by Hallwood Energy,
HEC Acquisition Corp. and HEC Acquisition Partnership do not, and the
consummation by Hallwood Energy, HEC Acquisition Corp. and HEC Acquisition
Partnership of the transactions contemplated by this Agreement will not,
constitute or result in (A) a breach or violation of, or a default under
the Certificate of Incorporation or Bylaws of Hallwood Energy or the
partnership agreement of HEC Acquisition Partnership or the comparable
governing instruments of any of Hallwood Energy's Subsidiaries, (B) except
as provided in Schedule 6.4(d), a breach or violation of, a default under
or the triggering of any payment or other material obligations pursuant to,
any of Hallwood Energy's existing employee benefit plans or any grant or
award made under any of the foregoing, (C) a breach or violation of, or a
default under, the acceleration of or the creation of a lien, pledge,
security interest or other encumbrance on assets (with or without the
giving of notice or the lapse of time) pursuant to any Contracts of
Hallwood Energy, HEC Acquisition Partnership or any of Hallwood Energy's
Subsidiaries or any law, rule, ordinance or regulation or judgment, decree,
order, award or governmental or non-governmental permit or license to which
Hallwood Energy, HEC Acquisition Partnership or any of Hallwood Energy's
Subsidiaries is subject or (D) any change in the rights or obligations of
any party under any of the Contracts, except, in the case of clause (C) or
(D) above, for such breaches, violations, defaults, accelerations or
changes that, alone or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect on Hallwood Energy or that could not
prevent or materially delay the transactions contemplated by this
Agreement.
(e) Financial Statements. Hallwood Energy has made available to HEP the
balance sheet of Hallwood Energy as of December , 1998 (the "Hallwood Energy
Balance Sheet"). The Hallwood Energy Balance Sheet fairly presents the
consolidated financial position of Hallwood Energy and its Subsidiaries as of
its date and has been prepared in accordance with generally accepted accounting
principles (subject to normal year end adjustments that will not be material in
amount or effect), except as may be noted therein.
(f) Absence of Certain Changes. Since the date of the Hallwood Energy
Balance Sheet (the "Hallwood Energy Balance Sheet Date"), none of Hallwood
Energy, HEC Acquisition Partnership and Hallwood Energy's Subsidiaries have
conducted any business other than entering into this Agreement and actions
contemplated by this Agreement. There has not been: (i) any material adverse
change (including, without limitation, any change arising out of or related to
any natural disaster) in the condition (financial or otherwise), properties,
assets, liabilities, business or results of operations of Hallwood Energy, HEC
Acquisition Corp. or any of Hallwood Energy's Subsidiaries or any development or
combination of developments of which Hallwood Energy, HEC Acquisition Corp. or
any of Hallwood Energy's Subsidiaries has knowledge which is reasonably likely
to result in any such change; (ii) any declaration, setting aside or payment of
any dividend or other distribution with respect to the capital stock of Hallwood
Energy or the partnership interests of HEC Acquisition Partnership; or (iii) any
change by Hallwood Energy in accounting principles, practices or methods.
(g) Compliance with Laws. Since December 31, 1997, the businesses of
Hallwood Energy, HEC Acquisition Partnership and Hallwood Energy's Subsidiaries
have not and are not being conducted in violation of, nor were they conducted in
violation of, any law, ordinance or regulation of any Governmental Entity
(provided that no representation or warranty is made in this section with
respect to Environmental
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Laws), except as disclosed in any of the Hallwood Energy Regulatory Filings and
except for such violations as would not, individually or in the aggregate, have
a Material Adverse Effect on Hallwood Energy.
(h) Brokers and Finders. Neither Hallwood Energy, HEC Acquisition
Partnership nor any of their officers, directors or employees has employed any
broker or finder or incurred any liability for any brokerage fees, commissions
or finders fees in connection with the transactions contemplated herein.
(i) Litigation. As of the date of this Agreement, except as disclosed in
any of the Hallwood Energy Regulatory Filings, there is no (i) class action
litigation pending or, to the best knowledge of Hallwood Energy and any Hallwood
Energy Subsidiary, threatened against or affecting the forenamed parties, (ii)
other suit, action or proceeding pending (or any known basis therefor) or, to
the best knowledge of Hallwood Energy and any Hallwood Energy Subsidiary,
threatened against or affecting the forenamed parties or any of their respective
properties that could reasonably be expected to have a Material Adverse Effect
on Hallwood Energy or any Hallwood Energy Subsidiary or that in any manner
challenges or seeks to prevent, enjoin, alter or materially delay the HEP Merger
or any of the other transactions contemplated hereby, or (iii) judgment, decree,
injunction, rule or order of any court, Governmental Entity or arbitrator
outstanding against Hallwood Energy or any Hallwood Energy Subsidiary if
determined adversely to Hallwood Energy or any Hallwood Energy Subsidiary that
is reasonably likely to have a Material Adverse Effect on Hallwood Energy or
that in any manner challenges or seeks to prevent, enjoin, alter or materially
delay the HEP Merger or any of the other transactions contemplated hereby.
6.5 Representations and Warranties of Hallwood Energy and HCRC Acquisition
Corp. Hallwood Energy and HCRC Acquisition Corp. represent and warrant to HCRC
that:
(a) Organization and Qualification. Hallwood Energy and HCRC Acquisition
Corp. are corporations duly organized, validly existing and in good standing
under the laws of Delaware. Hallwood Energy and HCRC Acquisition Corp. are in
good standing as foreign corporations in each jurisdiction where the properties
owned, leased or operated, or the business conducted, by them require such
qualification, except for where such failure to so qualify or to be in such good
standing, which, when taken together with all other such failures, could not
reasonably be expected to have a Material Adverse Effect on Hallwood Energy.
(b) Authorized Capital. The total number of authorized shares of Hallwood
Energy consists of 30,000,000 shares, of which 25,000,000 shares are common
stock, par value $0.01 per share, of which 100 are issued and outstanding, and
5,000,000 shares are preferred stock, par value $0.01 per share, of which
2,750,000 will be designated as Series A Redeemable Preferred Stock, of which
none are issued and outstanding. All of the outstanding shares of Hallwood
Energy Common Stock and Hallwood Energy Preferred Stock have been duly
authorized and are validly issued, fully paid, and nonassessable. Each of the
outstanding shares of capital stock or partnership interests, as applicable, of
each of Hallwood Energy's Subsidiaries, including HCRC Acquisition Corp., is
duly authorized, validly issued, fully paid and nonassessable and owned, either
directly or indirectly, by Hallwood Energy free and clear of all liens, pledges,
security interests, claims or other encumbrances. Except as set forth above,
there are no shares of Hallwood Energy Common Stock or Hallwood Energy Preferred
Stock authorized, issued or outstanding and there are no preemptive rights nor
any outstanding subscriptions, options, warrants, rights, convertible securities
or other agreements or commitments of any character relating to the issued or
unissued capital stock or other securities of Hallwood Energy or any of Hallwood
Energy's Subsidiaries.
(c) Authority. Each of Hallwood Energy and HCRC Acquisition Corp. has the
requisite corporate power and authority and has taken all corporate action
necessary in order to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. This Agreement is a valid and binding
agreement of Hallwood Energy and HCRC Acquisition Corp. enforceable against
Hallwood Energy and HCRC Acquisition Corp., as applicable, in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors rights and to general equitable principles.
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(d) Governmental Filings; No Violations.
(1) Other than the filings of a certificate of merger under the DGCL
and the Hallwood Energy Regulatory Filings, no notices, reports or other
filings are required to be made by Hallwood Energy or HCRC Acquisition
Corp. with, nor are any consents, registrations, approvals, permits or
authorizations required to be obtained by Hallwood Energy or HCRC
Acquisition Corp. from, any Governmental Entity in connection with the
execution and delivery of this Agreement by Hallwood Energy or HCRC
Acquisition Corp. and the consummation of the transactions contemplated
hereby by Hallwood Energy or HCRC Acquisition Corp., the failure to make or
obtain any or all of which could reasonably be expected to have a Material
Adverse Effect on Hallwood Energy or could prevent or materially delay the
transactions contemplated by this Agreement, and
(2) The execution and delivery of this Agreement by Hallwood Energy
and HCRC Acquisition Corp. do not, and the consummation by Hallwood Energy
and HCRC Acquisition Corp. of the transactions contemplated by this
Agreement will not, constitute or result in (A) a breach or violation of,
or a default under the Certificate of Incorporation or Bylaws of Hallwood
Energy or the comparable governing instruments of any of Hallwood Energy's
Subsidiaries, (B) except as provided in Schedule 6.5(d), a breach or
violation of, a default under or the triggering of any payment or other
material obligations pursuant to, any of Hallwood Energy's existing
employee benefit plans or any grant or award made under any of the
foregoing, (C) a breach or violation of, or a default under, the
acceleration of or the creation of a lien, pledge, security interest or
other encumbrance on assets (with or without the giving of notice or the
lapse of time) pursuant to any Contracts of Hallwood Energy or any of
Hallwood Energy's Subsidiaries or any law, rule, ordinance or regulation or
judgment, decree, order, award or governmental or non-governmental permit
or license to which Hallwood Energy or any of Hallwood Energy's
Subsidiaries is subject or (D) any change in the rights or obligations of
any party under any of the Contracts, except, in the case of clause (C) or
(D) above, for such breaches, violations, defaults, accelerations or
changes that, alone or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect on Hallwood Energy or that could not
prevent or materially delay the transactions contemplated by this
Agreement.
(e) Financial Statements. Hallwood Energy has made available to HCRC the
Hallwood Energy Balance Sheet. The Hallwood Energy Balance Sheet fairly presents
the consolidated financial position of Hallwood Energy and its Subsidiaries as
of its date and has been prepared in accordance with generally accepted
accounting principles (subject to normal year end adjustments that will not be
material in amount or effect), except as may be noted therein.
(f) Absence of Certain Changes. Since the Hallwood Energy Balance Sheet
Date, none of Hallwood Energy and Hallwood Energy's Subsidiaries have conducted
any business other than entering into this Agreement and actions contemplated by
this Agreement. There has not been: (i) any material adverse change (including,
without limitation, any change arising out of or related to any natural
disaster) in the condition (financial or otherwise), properties, assets,
liabilities, business or results of operations of Hallwood Energy, HCRC
Acquisition Corp. or any of Hallwood Energy's Subsidiaries or any development or
combination of developments of which Hallwood Energy, HCRC Acquisition Corp. or
any of Hallwood Energy's Subsidiaries has knowledge which is reasonably likely
to result in any such change; (ii) any declaration, setting aside or payment of
any dividend or other distribution with respect to the capital stock of Hallwood
Energy; or (iii) any change by Hallwood Energy in accounting principles,
practices or methods.
(g) Compliance with Laws. Since December 31, 1997, the businesses of
Hallwood Energy and Hallwood Energy's Subsidiaries have not and are not being
conducted in violation of, nor were they conducted in violation of, any law,
ordinance or regulation or any Governmental Entity (provided that no
representation or warranty is made in this section with respect to Environmental
Laws), except as disclosed in any of the Hallwood Energy Regulatory Filings and
except for such violations as would not, individually or in the aggregate, have
a Material Adverse Effect on Hallwood Energy.
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(h) Brokers and Finders. Neither Hallwood Energy, HCRC Acquisition Corp.
nor any of their officers, directors or employees has employed any broker or
finder or incurred any liability for any brokerage fees, commissions or finders
fees in connection with the transactions contemplated herein.
(i) Litigation. As of the date of this Agreement, except as disclosed in
any of the Hallwood Energy Regulatory Filings, there is no (i) class action
litigation pending or, to the best knowledge of Hallwood Energy and any Hallwood
Energy Subsidiary, threatened against or affecting the forenamed parties, (ii)
other suit, action or proceeding pending (or any known basis therefor) or, to
the best knowledge of Hallwood Energy and any Hallwood Energy Subsidiary,
threatened against or affecting the forenamed parties or any of their respective
properties that could reasonably be expected to have a Material Adverse Effect
on Hallwood Energy or that in any manner challenges or seeks to prevent, enjoin,
alter or materially delay the HCRC Merger or any of the other transactions
contemplated hereby, or (iii) judgment, decree, injunction, rule or order of any
court, Governmental Entity or arbitrator outstanding against Hallwood Energy or
any Hallwood Energy Subsidiary if determined adversely to Hallwood Energy or any
Hallwood Energy Subsidiary that is reasonably likely to have a Material Adverse
Effect on Hallwood Energy or that in any manner challenges or seeks to prevent,
enjoin, alter or materially delay the HCRC Merger or any of the other
transactions contemplated hereby.
6.6 Representations and Warranties of Hallwood Energy. Hallwood Energy
represents and warrants to HEPGP that:
(a) Organization and Qualification. Hallwood Energy is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
Hallwood Energy is in good standing as a foreign corporation in each
jurisdiction where the properties owned, leased or operated, or the business
conducted, by it require such qualification, except for where such failure to so
qualify or to be in such good standing, which, when taken together with all
other such failures, could not reasonably be expected to have a Material Adverse
Effect on Hallwood Energy.
(b) Authorized Capital. The total number of authorized shares of Hallwood
Energy consists of 30,000,000 shares, of which 25,000,000 shares are common
stock, par value $0.01 per share, of which 100 are issued and outstanding, and
5,000,000 shares are preferred stock, par value $0.01 per share, of which
2,750,000 will be designated as Series A Redeemable Preferred Stock, of which
none are issued and outstanding. All of the outstanding shares of Hallwood
Energy Common Stock and Hallwood Energy Preferred Stock have been duly
authorized and are validly issued, fully paid, and nonassessable. Each of the
outstanding shares of capital stock or partnership interests, as applicable, of
each of Hallwood Energy's Subsidiaries is duly authorized, validly issued, fully
paid and nonassessable and owned, either directly or indirectly, by Hallwood
Energy free and clear of all liens, pledges, security interests, claims or other
encumbrances. Except as set forth above, there are no shares of Hallwood Energy
Common Stock or Hallwood Energy Preferred Stock authorized, issued or
outstanding and there are no preemptive rights nor any outstanding
subscriptions, options, warrants, rights, convertible securities or other
agreements or commitments of any character relating to the issued or unissued
capital stock or other securities of Hallwood Energy or any of Hallwood Energy's
Subsidiaries.
(c) Authority. Hallwood Energy has the requisite corporate power and
authority and has taken all corporate action necessary in order to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
This Agreement is a valid and binding agreement of Hallwood Energy enforceable
against Hallwood Energy in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors rights and to general
equitable principles.
(d) Governmental Filings; No Violations.
(1) Other than the Hallwood Energy Regulatory Filings, no notices,
reports or other filings are required to be made by Hallwood Energy with,
nor are any consents, registrations, approvals, permits or authorizations
required to be obtained by Hallwood Energy from, any Governmental Entity in
connection with the execution and delivery of this Agreement by Hallwood
Energy and the
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consummation of the transactions contemplated hereby by Hallwood Energy the
failure to make or obtain any or all of which could reasonably be expected
to have a Material Adverse Effect on Hallwood Energy or could prevent or
materially delay the transactions contemplated by this Agreement, and
(2) The execution and delivery of this Agreement by Hallwood Energy do
not, and the consummation by Hallwood Energy of the transactions
contemplated by this Agreement will not, constitute or result in (A) a
breach or violation of, or a default under the Certificate of Incorporation
or Bylaws of Hallwood Energy or the comparable governing instruments of any
of Hallwood Energy's Subsidiaries, (B) except as provided in Schedule
6.6(d), a breach or violation of, a default under or the triggering of any
payment or other material obligations pursuant to, any of Hallwood Energy's
existing employee benefit plans or any grant or award made under any of the
foregoing, (C) a breach or violation of, or a default under, the
acceleration of or the creation of a lien, pledge, security interest or
other encumbrance on assets (with or without the giving of notice or the
lapse of time) pursuant to any Contracts of Hallwood Energy or any of
Hallwood Energy's Subsidiaries or any law, rule, ordinance or regulation or
judgment, decree, order, award or governmental or non-governmental permit
or license to which Hallwood Energy or any of Hallwood Energy's
Subsidiaries is subject or (D) any change in the rights or obligations of
any party under any of the Contracts, except, in the case of clause (C) or
(D) above, for such breaches, violations, defaults, accelerations or
changes that, alone or in the aggregate, could not reasonably be expected
to have a Material Adverse Effect on Hallwood Energy or that could not
prevent or materially delay the transactions contemplated by this
Agreement.
(e) Financial Statements. Hallwood Energy has made available to HEPGP the
Hallwood Energy Balance Sheet. The Hallwood Energy Balance Sheet fairly presents
the consolidated financial position of Hallwood Energy and its Subsidiaries as
of its date and has been prepared in accordance with generally accepted
accounting principles (subject to normal year end adjustments that will not be
material in amount or effect), except as may be noted therein.
(f) Absence of Certain Changes. Since the Hallwood Energy Balance Sheet
Date, none of Hallwood Energy and Hallwood Energy's Subsidiaries have conducted
any business other than entering into this Agreement and actions contemplated by
this Agreement. There has not been: (i) any material adverse change (including,
without limitation, any change arising out of or related to any natural
disaster) in the condition (financial or otherwise), properties, assets,
liabilities, business or results of operations of Hallwood Energy or any of
Hallwood Energy's Subsidiaries or any development or combination of developments
of which Hallwood Energy or any of Hallwood Energy's Subsidiaries has knowledge
which is reasonably likely to result in any such change; (ii) any declaration,
setting aside or payment of any dividend or other distribution with respect to
the capital stock of Hallwood Energy; or (iii) any change by Hallwood Energy in
accounting principles, practices or methods.
(g) Compliance with Laws. Since December 31, 1997, the businesses of
Hallwood Energy and Hallwood Energy's Subsidiaries have not and are not being
conducted in violation of, nor were they conducted in violation of, any law,
ordinance or regulation or any Governmental Entity (provided that no
representation or warranty is made in this section with respect to Environmental
Laws), except as disclosed in any of the Hallwood Energy Regulatory Filings and
except for such violations as would not, individually or in the aggregate, have
a Material Adverse Effect on Hallwood Energy.
(h) Brokers and Finders. Neither Hallwood Energy, nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders fees in connection with
the transactions contemplated herein.
(i) Litigation. As of the date of this Agreement, except as disclosed in
any of the Hallwood Energy Regulatory Filings, there is no (i) class action
litigation pending or, to the best knowledge of Hallwood Energy and any Hallwood
Energy Subsidiary, threatened against or affecting the forenamed parties, (ii)
other suit, action or proceeding pending (or any known basis therefor) or, to
the best knowledge of Hallwood Energy and any Hallwood Energy Subsidiary,
threatened against or affecting the forenamed
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parties or any of their respective properties that could reasonably be expected
to have a Material Adverse Effect on Hallwood Energy or that in any manner
challenges or seeks to prevent, enjoin, alter or materially delay the Asset
Contribution or any of the other transactions contemplated hereby, or (iii)
judgment, decree, injunction, rule or order of any court, Governmental Entity or
arbitrator outstanding against Hallwood Energy or any Hallwood Energy Subsidiary
if determined adversely to Hallwood Energy or any Hallwood Energy Subsidiary
that is reasonably likely to have a Material Adverse Effect on Hallwood Energy
or that in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the Asset Contribution or any of the other transactions
contemplated hereby.
ARTICLE VII
COVENANTS
7.1 Conduct of HEP's, HCRC's, Hallwood Energy's and HEPGP's Business
Pending Transactions. Prior to the Effective Time, except as contemplated by
this Agreement or with the written consent of the other parties hereto, each of
HEP, HEC Acquisition Partnership, HEC Acquisition Corp., HCRC, HCRC Acquisition
Corp., HEPGP and Hallwood Energy will:
(a) conduct its business only in the usual, regular and ordinary course and
in substantially the same manner as heretofore conducted;
(b) use reasonable efforts to preserve intact its business organization and
goodwill and keep available the services of its officers and key employees;
(c) confer on a regular basis with one or more representatives of the other
parties to report material operational matters and any proposals to engage in
material transactions;
(d) promptly notify the other parties of any material emergency or other
material change in its business, financial condition, results of operations or
prospects;
(e) promptly deliver to the other party true and correct copies of any
report, statement or schedule filed with the SEC by such party subsequent to the
date of this Agreement;
(f) maintain its books and records in accordance with GAAP, consistently
applied, and not change in any material manner any of its methods, principles or
practices of accounting in effect at the applicable Audit Date or Balance Sheet
Date, except as may be required by applicable law or GAAP;
(g) duly and timely file all reports, tax returns and other documents
required to be filed with federal, state, local and other authorities, subject
to extensions permitted by law;
(h) except as provided in Schedule 7.1(h), not (i) acquire (other than
pursuant to an existing agreement), sell, lease, enter into any option to
acquire, sell or lease, or exercise an option or contract to acquire, sell or
lease, additional real property having a value greater than $2,000,000, (ii)
make any loans, or advances to any other Person (as defined in Section 10.14),
except loans or advances to employees in the ordinary course of business not in
excess of $25,000, (iii) incur additional indebtedness for borrowed money other
than under existing agreements or as permitted or contemplated by this
Agreement, or (iv) encumber or subject to any lien any of its properties or
assets, in any case having a value in excess of $1,000,000;
(i) except as provided in Schedule 7.1(i), not amend its partnership
agreement, articles or certificate of incorporation, bylaws or comparable
charter or organizational documents or the certificate or articles of
incorporation, bylaws, operating agreement, joint venture agreement or
comparable charter or organizational documents of any Subsidiary, without the
other parties' prior written consent, which consent will not be unreasonably
withheld, delayed or conditioned;
(j) not amend any material terms of any Contract of such party in a manner
adverse to the Surviving Partnership or the Surviving Corporation, as
applicable, in order to obtain the consent of the other party or parties to such
contract to any of the transactions contemplated by this Agreement without
obtaining the
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prior written consent of the other parties hereto, which consent will not be
unreasonably withheld, delayed or conditioned;
(k) make no change in the number of shares of capital stock, membership
interests or units of general or limited partnership interest issued and
outstanding, except pursuant to the exercise of outstanding options;
(l) grant no options or other right or commitment relating to its capital
stock, membership interests or units of general or limited partnership interest
or any security convertible into its capital stock, membership interests or
units of limited partnership interest, or any security the value of which is
measured by shares of capital stock, or any security subordinated to the claim
of its general creditors other than as contemplated by this Agreement;
(m) not (i) authorize, declare, set aside or pay any dividend or make any
other distribution or payment with respect to any shares of its capital stock or
change such party's normal record date for the payment of any permitted dividend
or distribution, other than distributions of no more than $0.52 per annum,
payable quarterly, on the Class A Units and distributions of no more than $1.00
per annum, payable quarterly, on the Class C Units, in the ordinary course of
business consistent with past practice, and (ii) directly or indirectly redeem,
purchase or otherwise acquire any shares of capital stock or units of
partnership interest or any option, warrant or right to acquire, or security
convertible into, shares of capital stock or units of partnership interest,
other than the conversion of the Units or options for the issuance of Units or
the conversion of the HCRC Shares or options for issuance of the HCRC Shares
pursuant to the terms of this Agreement;
(n) not adopt any new employee benefit plan or amend any existing plans or
rights, except for the adoption of a stock option plan reserving for issuance
approximately twelve percent (12%) of each class of the shares of Hallwood
Energy Common Stock and Hallwood Energy Preferred Stock issued and outstanding
immediately after the Effective Time, and for the adoption of employee benefit
plans and employee incentive plans substantially similar to those of HEP, HCRC
and HEPGP as of the date hereof and except for changes that are required by law
or changes which are not more favorable to participants than provisions
presently in effect;
(o) not settle any stockholder or unitholder derivative or class action
claims arising out of or in connection with any of the transactions contemplated
by this Agreement;
(p) not change the ownership of any of its Subsidiaries;
(q) not take any action that would cause the HEP Merger, HCRC Merger or the
Asset Contribution, as applicable, not to qualify as tax-free transactions under
the Code;
(r) promptly notify the other parties of any action, suit, proceeding,
claim or audit pending against or with respect to such party or its Subsidiaries
in respect of any taxes where there is a reasonable possibility of a
determination or decision which would materially increase the tax liabilities of
such party, and not change any of the tax elections, accounting methods,
conventions or principles which relate to such party or its Subsidiaries that
could reasonably be expected to increase such party's liabilities; or
(s) continue to maintain and repair all of its assets and properties in a
manner consistent with past practices.
7.2 Other Actions. Each of HEP, HEC Acquisition Partnership, HEC
Acquisition Corp., HCRC, HCRC Acquisition Corp, HEPGP and Hallwood Energy will
not, and will use commercially reasonable efforts to cause its respective
Subsidiaries not to, take any action that would result in (a) any of the
representations and warranties of such party set forth in this Agreement
becoming untrue, or (b) any of the conditions to the HEP Merger, HCRC Merger or
the Asset Contribution, as applicable, set forth in Article VIII not being
satisfied.
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7.3 Preparation of the Registration Statement and the Proxy Statement; HEP
Unitholders Meeting; HCRC Stockholders Meeting.
(a) As soon as practicable following the date of this Agreement, HEP, HCRC,
HEPGP and Hallwood Energy, will prepare and file with the SEC a preliminary
Joint Proxy Statement/Prospectus in form and substance satisfactory to each of
Hallwood Energy, HCRC, HEP and HEPGP and such other registration statements,
including a registration statement on Form S-4 (together with any supplements or
amendments thereto, the "Registration Statement"), as may be required to effect
the Transactions. To the extent practicable, the parties will utilize one
document for transmittal to their respective stockholders and unitholders to
meet applicable legal requirements. Each of HEP, HCRC, HEPGP and Hallwood Energy
will use its reasonable best efforts to (i) prepare and provide the other
parties as promptly as practicable the financial information required to be
disclosed in the Joint Proxy Statement/Prospectus, (ii) respond to any comments
of the SEC, and (iii) have the Registration Statement declared effective under
the Act and the rules and regulations promulgated thereunder as promptly as
practicable after such filing and to keep the Registration Statement effective
as long as is necessary to consummate the Transactions. Each of HEP, HCRC, HEPGP
and Hallwood Energy will use its reasonable best efforts to cause the Joint
Proxy Statement/Prospectus to be mailed to HEP's unitholders and HCRC's
stockholders, as applicable, as promptly as practicable after the Registration
Statement is declared effective under the Act. Each party will notify the others
promptly of the receipt of any comments from the SEC and of any request by the
SEC for amendments or supplements to the Registration Statement or the Joint
Proxy Statement/ Prospectus or for additional information and will supply the
others with copies of all correspondence between such party or any of its
representatives and the SEC with respect to the Registration Statement or the
Joint Proxy Statement/Prospectus. The Registration Statement and the Joint Proxy
Statement/ Prospectus will comply in all material respects with all applicable
requirements of law, including the filing of all appropriate exhibits. Whenever
any event occurs which is required to be set forth in an amendment or supplement
to the Registration Statement or the Joint Proxy Statement/Prospectus, as the
case may be, each party will promptly inform the others of such occurrences and
cooperate in filing with the SEC and/or mailing to the unitholders of HEP or
stockholders of HCRC, as applicable, such amendment or supplement to the
Registration Statement or the Joint Proxy Statement/Prospectus.
(b) None of the information supplied by any of HEP, HCRC, HEPGP or Hallwood
Energy for inclusion in the Registration Statement at the respective times the
Registration Statement or any amendments or supplements thereto are filed with
the SEC, will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in light of the circumstances under which they were
made, not misleading. Each of HEP, HCRC, HEPGP and Hallwood Energy agrees to
correct promptly any information in the Registration Statement or Joint Proxy
Statement/Prospectus if and to the extent that such information shall have
become false or misleading in any material respect; and each of HEP, HCRC, HEPGP
and Hallwood Energy further agrees to take all steps necessary to cause the
Joint Proxy Statement/Prospectus as so corrected to be filed with the SEC and
disseminated to the holders of Units and HCRC Shares, in each case as and to the
extent required by applicable federal securities laws.
(c) (i) HEP will, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of its
unitholders (the "HEP Meeting") for the purpose of obtaining the approval of the
HEP unitholders of the Transactions. HEP will, through the Hallwood G.P. Board
of Directors and the special committee of the Hallwood G.P. Board of Directors
(the "HEP Special Committee"), recommend to its unitholders adoption of this
Agreement; and (ii) if, on the date for the HEP Meeting, HEP has not received a
sufficient number of proxies to approve the adoption of this Agreement, then
HEP, to the extent permitted by law, will adjourn its meeting until the date on
which the requisite number of proxies approving the HEP Merger has been
obtained.
(d) (i) HCRC will, as soon as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of its
stockholders (the "HCRC Meeting") for the purpose of obtaining the approval of
the HCRC stockholders of the Transactions. HCRC will, through its Board of
Directors and the special committee of the HCRC Board of Directors (the "HCRC
Special Committee"),
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recommend to its stockholders adoption of this Agreement; and (ii) if, on the
date for the HCRC Meeting, HCRC has not received a sufficient number of proxies
to approve the adoption of this Agreement, then HCRC, to the extent permitted by
law, will adjourn its meeting until the date on which the requisite number of
proxies approving the HCRC Merger has been obtained.
7.4 Access to Information; Confidentiality. Subject to the requirements of
confidentiality agreements with third parties, each of HEP, HCRC, HEPGP and
Hallwood Energy will, and will cause each of its Subsidiaries to, afford to the
other parties and Hallwood G.P., and to the officers, employees, accountants,
counsel, financial advisors and other representatives of such other parties, and
Hallwood G.P., reasonable access during normal business hours prior to the
Effective Time to all their respective properties, books, Contracts,
commitments, personnel and records and, during such period, each of HEP, HCRC,
HEPGP and Hallwood Energy will, and will cause each of its Subsidiaries to,
furnish promptly to the other parties, and Hallwood G.P., (i) a copy of each
report, schedule, registration statement and other document filed by it during
such period pursuant to the requirements of federal or state securities laws and
(ii) all other information concerning its business, properties, Contracts and
personnel as such other parties, and Hallwood G.P., may reasonably request. Each
of HEP, HCRC, HEPGP and Hallwood Energy will, and will cause its Subsidiaries
to, and will use commercially reasonable efforts to cause its officers,
employees, accountants, counsel, financial advisors and other representatives
and affiliates to, hold any nonpublic information in confidence.
7.5 Comfort Letters.
(a) Hallwood Energy, HCRC and HEP shall each use its reasonable best
efforts to cause to be delivered to each other party "comfort" letters of
Deloitte & Touche LLP, their independent public accountants, dated on or prior
to the date on which the Joint Proxy Statement/Prospectus shall first be mailed
to the unitholders and shareholders, respectively, in a form reasonably
satisfactory to each and reasonably customary in scope and substance for letters
delivered by independent public accountants in connection with proxy statements
similar to the Joint Proxy Statement/Prospectus and transactions such as those
contemplated by this Agreement.
(b) Hallwood Energy, HCRC and HEP shall each use its reasonable best
efforts to cause to be delivered to each other party "comfort" letters of
Williamson Petroleum Consultants, their independent engineering consultants,
dated on or prior to the date on which the Joint Proxy Statement/Prospectus
shall first be mailed to the unitholders and shareholders, respectively, in a
form reasonably satisfactory to each and reasonably customary in scope and
substance for letters delivered by independent engineering consultants in
connection with proxy statements similar to the Joint Proxy Statement/Prospectus
and transactions such as those contemplated by this Agreement.
7.6 Consents; Notifications; Other Actions.
(a) Subject to the terms and conditions herein provided, HEP, HCRC, HEPGP
and Hallwood Energy will (i) use all reasonable best efforts to cooperate with
one another in (A) determining which filings are required to be made prior to
the Effective Time with, and which consents, approvals, Permits or
authorizations are required to be obtained prior to the Effective Time from, any
Governmental Entity and any third parties in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and (B) timely making all such filings and timely seeking all such
consents, approvals, Permits and authorizations, (ii) use all reasonable best
efforts to obtain in writing any consents required from third parties to
effectuate the HEP Merger, the HCRC Merger and the Asset Contribution, as
applicable, such consents to be in such form and substance as may be reasonably
satisfactory to Hallwood G.P., HCRC and Hallwood Energy, as applicable, and
(iii) use all reasonable best efforts to take, or cause to be taken, all other
action and do, or cause to be done, all other things necessary, proper or
appropriate to consummate and make effective the transactions contemplated by
this Agreement. If, at any time after the Effective Time, any further action is
necessary or desirable to carry out the purpose of this Agreement, the proper
officers and directors of Hallwood G.P., HCRC and Hallwood Energy will take all
such necessary action.
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(b) Each of HEP, HCRC, HEPGP and Hallwood Energy will give prompt notice to
the other (i) if any representation or warranty made by it contained in this
Agreement that is qualified as to materiality becomes untrue or inaccurate in
any material respect or any such representation or warranty that is not so
qualified becomes untrue or inaccurate in any material respect or (ii) of the
failure by it to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement; provided, however, that no such notification will affect the
representations, warranties or covenants of the parties or the conditions to the
obligations of the parties under this Agreement.
7.7 Tax Treatment. Each of HEP, HCRC, HEPGP and Hallwood Energy will use
its reasonable best efforts to cause the Transactions to qualify as tax-free
transactions under the Code and to obtain the opinions referred to in Sections
8.1(f).
7.8 Public Announcements. HEP, HCRC, HEPGP and Hallwood Energy will
consult with each other before issuing, and provide each other the opportunity
to review and comment upon, any press release or other written public statements
with respect to the transactions contemplated by this Agreement and will not
issue any such press release or make any such written public statement prior to
such consultation except to the extent it may be advised by counsel that it is
required by applicable law or legal process. The parties agree that the initial
press releases to be issued with respect to the transactions contemplated by
this Agreement will be in the form agreed to by the parties hereto prior to the
execution of this Agreement.
7.9 Listing. Prior to the Effective Time, Hallwood Energy will use its
best efforts to have The Nasdaq National Market approve for inclusion, upon
official notice of issuance, the Hallwood Energy Common Stock and the Hallwood
Energy Preferred Stock to be issued in the Transactions.
7.10 Affiliates; Etc. (a) Prior to the Closing Date, HEP will deliver to
Hallwood Energy a letter identifying all Persons who are, at the time this
Agreement is submitted for adoption by to the unitholders of HEP, "affiliates"
of HEP for purposes of Rule 145 under the Act. HEP will use reasonable efforts
to cause such Persons to deliver to Hallwood Energy on or prior to the Closing
Date a written agreement substantially in the form attached as Exhibit A. (b)
Prior to the Closing Date, HCRC will deliver to Hallwood Energy a letter
identifying all Persons who are, at the time this Agreement is submitted for
adoption by the stockholders of HCRC, "affiliates" of HCRC for purposes of Rule
145 under the Act. HCRC will use reasonable efforts to cause such Persons to
deliver to Hallwood Energy on or prior to the Closing Date a written agreement
substantially in the form attached as Exhibit A.
7.11 Filings; Other Action. Subject to the terms and conditions herein
provided, HEP, HCRC, HEPGP and Hallwood Energy shall: (a) promptly make their
respective Regulatory Filings and thereafter make any other required submissions
with respect to the Transactions; and (b) use their respective best efforts to
take promptly, or cause to be taken promptly, all other actions and do, or cause
to be done, all other things necessary, proper or appropriate under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement as soon as practicable.
7.12 Indemnification; Directors' and Officers Insurance.
(a) From and after the Effective Time, Hallwood Energy agrees that it will
indemnify and hold harmless (i) each present or former director and/or officer
of Hallwood G.P., HEP and HEP's Subsidiaries, determined as of the Effective
Time, (ii) each present or former director and/or officer of HCRC and HCRC's
Subsidiaries, determined as of the Effective Time, and (iii) each present or
former director and/or officer of HEPGP and HEPGP's Subsidiaries, determined as
of the Effective Time (collectively, the "Indemnified Parties"), that is made a
party or threatened to be made a party to any threatened, pending or completed,
action, suit, proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she was a director or officer of
Hallwood G.P., HEPGP, any Subsidiary of HEP, HCRC or any Subsidiary of HCRC
prior to the Effective Time and arising out of actions or omissions of the
Indemnified Party in any such capacity occurring at or prior to the Effective
Time (a "Claim") against any costs or expenses (including reasonable attorneys'
fees), judgments, fines,
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amounts paid in settlement pursuant to this Section 7.12, losses, claims,
damages or liabilities (collectively, "Costs") reasonably incurred in connection
with any Claim, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that HEP, HCRC or HEPGP, as applicable, would have
been permitted under Delaware law. Hallwood Energy shall also advance expenses
(including attorneys' fees) as incurred by the Indemnified Party to the fullest
extent permitted under applicable law, provided such Indemnified Party provides
an undertaking to repay such advances if it is ultimately determined that such
Indemnified Party is not entitled to indemnification.
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 7.12, upon learning of any such Claim, shall promptly notify
Hallwood Energy thereof, but the failure to so notify shall not relieve Hallwood
Energy of any liability it may have to such Indemnified Party if such failure
does not materially prejudice Hallwood Energy. In the event of any such Claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) Hallwood Energy shall have the right to assume the defense
thereof and Hallwood Energy shall not be liable to such Indemnified Parties for
any legal expenses of other counsel or any other expenses subsequently incurred
by such Indemnified Parties in connection with the defense thereof, except that
if Hallwood Energy elects not to assume such defense or counsel or the
Indemnified Parties advise Hallwood Energy that there are issues which raise
conflicts of interest between Hallwood Energy and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and Hallwood Energy
shall pay all reasonable fees and expenses of such counsel (plus one firm or
local counsel, if necessary) for the Indemnified Parties promptly as statements
therefor are received; provided, however, that Hallwood Energy shall be
obligated pursuant to this paragraph (b) to pay for only one firm or counsel for
all Indemnified Parties (plus one firm or local counsel, if necessary) in any
jurisdiction unless the use of one counsel for such Indemnified Parties would
present such counsel with a conflict of interest, (ii) the Indemnified Parties
will cooperate in the defense of any such matter and (iii) Hallwood Energy shall
not be liable for any settlement effected without its prior written consent,
which consent will not be unreasonably withheld; and provided, further, however,
that Hallwood Energy shall not have any obligation hereunder to any Indemnified
Party when and if a court of competent jurisdiction shall ultimately determine,
and such determination shall have become final and non-appealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby is
prohibited by applicable law. If such indemnity is not available with respect to
any Indemnified Party, then Hallwood Energy and the Indemnified Party shall
contribute to the amount payable in such proportion as is appropriate to reflect
relative faults and benefits, with any aspect of "fault" otherwise allocable to
HEP, HCRC or HEPGP, as applicable, being allocated to Hallwood Energy.
(c) If a claim for indemnification or advancement under this Section 7.12
is not paid in full by Hallwood Energy within thirty (30) days after a written
claim therefor has been received by Hallwood Energy, the Indemnified Party may
any time thereafter bring suit against Hallwood Energy to recover the unpaid
amount of the claim and, if successful in whole or in part, the Indemnified
Party shall be entitled to be paid also the expense of prosecuting such claims.
(d) Neither the failure of Hallwood Energy (including its Board of
Directors, independent legal counsel or shareholders) to have made a
determination prior to the commencement of such suit that indemnification of the
Indemnified Party is proper in the circumstances because he or she has met the
applicable standard of conduct, nor an actual determination by Hallwood Energy
(including its Board of Directors, independent legal counsel or shareholders)
that the Indemnified Party has not met such applicable standard of conduct,
shall be a defense to the suit or create a presumption that the Indemnified
Party has not met the applicable standard of conduct.
(e) For a period of six years after the Effective Time, Hallwood Energy
shall maintain directors and officers liability insurance equivalent to the
average liability insurance currently applicable to the directors and officers
of Hallwood G.P., HEP, HEP's Subsidiaries, HCRC, HCRC's Subsidiaries and HEPGP
("D&O Insurance"), which will provide coverage for those persons who are
directors and officers of HEP, HCRC or HEPGP as of the Effective Time, so long
as the annual premium therefor is not in excess of 150% of the last average
annual premium allocated to and paid by HEP, HCRC and HEPGP prior to the date
hereof (the "Current Premium"). If Hallwood Energy determines that it is unable
to maintain the
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existing or equivalent D&O Insurance that includes coverage for those persons
who are directors and officers of Hallwood G.P., HEP, HEP's Subsidiaries, HCRC,
HCRC's Subsidiaries and HEPGP as of the Effective Time for a premium not in
excess of 150% of the Current Premium, but maintains D&O Insurance for persons
who are directors and officers of Hallwood Energy then, for the six-year period
after the Effective Time, Hallwood Energy will provide D&O Insurance for those
persons who are directors and officers of Hallwood G.P., HEP, HEP's
Subsidiaries, HCRC, HCRC's Subsidiaries and HEPGP as of the Effective Time on
the same basis as Hallwood Energy maintains D&O Insurance for persons who are
then directors and officers of Hallwood Energy. If the D&O Insurance expires, is
terminated or canceled during the six-year period after the Effective Time and
Hallwood Energy does not then maintain D&O Insurance for persons who are
directors and officers of Hallwood Energy, Hallwood Energy will use its
reasonable best efforts to obtain D&O Insurance for such period providing at
least $5,000,000 of coverage for those persons who are directors and officers of
Hallwood G.P., HEP, HEP's Subsidiaries, HCRC, HCRC's Subsidiaries and HEPGP at
the Effective Time.
(f) In lieu of the insurance arrangements referred to in clause (e) of this
Section 7.12, the Surviving Partnership or the Surviving Corporation, as
applicable, may, on or before the Effective Time, enter into alternative
insurance arrangements, provided that such arrangements are approved by each of
the individuals who are Independent Directors (as defined in Section 10.5) at
any time from the date of this Agreement through the Effective Time.
(g) Hallwood Energy agrees that no amendment to the partnership agreement
of the Surviving Partnership or the certificate of incorporation of the
Surviving Corporation, as applicable, shall reduce in any way the elimination of
any personal liability of the directors of Hallwood G.P., HEP and HEP's
Subsidiaries, on the one hand, or HCRC and HCRC's Subsidiaries, on the other
hand, contained therein or adversely affect any then existing right of any
director or officer (or former director or officer) to be indemnified with
respect to acts, omissions or events occurring prior to the Effective Time.
7.13 Other Agreements.
(a) Takeover Statute. If any state takeover law shall become applicable to
the Mergers or the other transactions contemplated hereby, HEP and the members
of the Board of Directors of Hallwood G.P. or HCRC and the members of the Board
of Directors of HCRC, as applicable, shall grant such approvals and take such
actions as are necessary so that the transactions contemplated hereby may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of such statute or regulation
on the transactions contemplated hereby.
(b) Best Efforts and Cooperation. HEP, HEC Acquisition Partnership, HEC
Acquisition Corp., HCRC, HCRC Acquisition Corp., HEPGP and Hallwood Energy each
shall use (and shall cause its Subsidiaries to use) its commercially reasonable
best efforts to cause the conditions set forth in Article VIII, which are
applicable to them to be satisfied and to consummate the Transactions and the
other transactions contemplated by this Agreement. Without limiting the
generality of the foregoing, each of HEP, HCRC and HEPGP shall use (and shall
cause its respective Subsidiaries to use) its commercially reasonable best
efforts (including providing information and communication) to obtain each of
the consents or waivers identified pursuant to Section 6.1(d)(ii), Section
6.2(d)(ii) and Section 6.3(c)(ii), respectively, and to obtain as promptly as
practicable all necessary approvals, authorizations and consents of Governmental
Entities required to be obtained in order to consummate the transactions
contemplated hereby, and each of the parties hereto shall cooperate with the
others in obtaining all such consents, waivers, approvals and authorizations.
(c) Voting of Units and HCRC Shares.
(1) HEP will vote, or will cause to be voted, all of the HCRC Shares
held by HEP, or a Subsidiary of HEP (other than 455,454 HCRC Shares that
are subject to a certain contractual restriction), in favor of the HCRC
Merger; and
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(2) HCRC will vote, or will cause to be voted, all of the Units held
by HCRC, or a Subsidiary of HCRC, in favor of the HEP Merger.
ARTICLE VIII
CONDITIONS
8.1 Conditions to Obligations of Parties. The respective obligations of
the parties to consummate the Transactions are subject to the fulfillment of
each of the following conditions:
(a) Approvals. This Agreement shall have been duly approved by (i) the
holders of a majority of each class of the Units, in accordance with applicable
law and the partnership agreement of HEP, (ii) the holders of a majority of the
HCRC Common Stock, in accordance with applicable law and the certificate of
incorporation of HCRC and (iii) Hallwood Group, in accordance with applicable
law and the partnership agreement of HEPGP;
(b) Listing of Shares. The Nasdaq National Market shall have approved for
inclusion the Hallwood Energy Common Stock and the Hallwood Energy Preferred
Stock to be issued in the Transactions, subject to official notice of issuance;
(c) Registration Statement. The Registration Statement shall have become
effective under the Act and shall not be the subject of any stop order or
proceedings by the SEC seeking a stop order;
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
completion of the Transactions or any of the other transactions contemplated
hereby shall be in effect;
(e) Litigation. No court or other Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) that is in effect and prohibits
consummation of the Transactions;
(f) Tax Opinion. The parties shall have received from
PricewaterhouseCoopers LLP a written opinion, to the effect that the
Transactions, when effected in accordance with this Agreement, should qualify as
tax-free transactions under the Code;
(g) Consents. All consents, authorizations, orders and approvals of, or
filings or registrations with, any Governmental Entity required in connection
with the execution, delivery and performance of this Agreement shall have been
obtained or made, except for filings required under DRULPA and DGCL in
connection with the Mergers, and the parties shall have obtained all consents,
authorizations, waivers and approvals required from third parties required under
all Contracts by reason of the Transactions and the consummation of the
transactions contemplated hereby, except for such consents, authorizations,
waivers and approvals where the failure to obtain such could not reasonably be
expected to result in a Material Adverse Effect on Hallwood Energy.
(h) Burdensome Condition. There shall not be any action taken, or any
statute, rule, regulation, order or decree enacted, enforced or deemed
applicable to the Transactions or the other transactions contemplated hereby by
any Governmental Entity which imposes any condition or restriction (a
"Burdensome Condition") upon the Surviving Partnership, the Surviving
Corporation or Hallwood Energy, as applicable, which would reasonably be
expected to either (i) have a Material Adverse Effect after the Effective Time
on the Surviving Partnership, the Surviving Corporation or Hallwood Energy, as
applicable, or (ii) prevent the parties from realizing the major portion of the
economic benefits of the Transactions and the other transactions contemplated
hereby that they currently anticipate obtaining therefrom.
(i) On or before the Effective Time (1) that certain Financial Consulting
Agreement, dated as of December 31, 1996 between Hallwood Petroleum, Inc. and
The Hallwood Group Incorporated shall be terminated; (2) the payment of the
quarterly administrative fee to The Hallwood Group Incorporated shall
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be terminated; and (3) the reimbursement of administrative expenses to HSC
Financial, Inc. shall be terminated.
8.2 Conditions to Obligations of Hallwood Energy. The obligations of
Hallwood Energy to effect the Transactions and to consummate the other
transactions contemplated to occur on the Closing Date is further subject to the
following conditions, any one or more of which may be waived by Hallwood Energy:
(a) Representations and Warranties of HEP, HCRC and HEPGP. The
representations and warranties of HEP, HCRC and HEPGP set forth in this
Agreement shall be true and correct as of the date of this Agreement and as of
the Closing Date, as though made on and as of the Closing Date, except to the
extent the representation or warranty is expressly limited by its terms to
another date, and Hallwood Energy shall have received a certificate (which
certificate may be qualified by knowledge to the same extent as the
representations and warranties of HEP, HCRC and HEPGP contained herein are so
qualified) signed on behalf of HEP by the general partner of HEP, on behalf of
HCRC by the President of HCRC, in such capacity, and on behalf of HEPGP, by the
general partner of HEPGP, to such effect. For the purposes of this Section
8.2(a), the representations and warranties of HEP, HCRC and HEPGP will be deemed
true and correct unless the breach of such representations and warranties, in
the aggregate, could reasonably be expected to have a Material Adverse Effect on
HEP, HCRC or HEPGP, as applicable.
(b) Performance of Covenants of HEP, HCRC and HEPGP. Each of HEP, HCRC and
HEPGP shall have performed in all material respects all covenants required to be
performed by it under this Agreement at or prior to the Effective Time, and
Hallwood Energy shall have received a certificate signed on behalf of HEP by the
general partner of HEP, on behalf of HCRC by the President of HCRC, in such
capacity, and on behalf of HEPGP by the general partner of HEPGP, in such
capacity, to such effect.
(c) No Material Adverse Effect. Since the date of this Agreement, there
shall have been no event that has resulted or could reasonably be expected to
result in a Material Adverse Effect on HEP, HCRC or HEPGP, as applicable; and
Hallwood Energy shall have received a certificate signed on behalf of HEP by the
general partner of HEP, on behalf of HCRC by the President of HCRC, in such
capacity, and on behalf of HEPGP by the general partner of HEPGP, in such
capacity, and to their knowledge, to such effect.
8.3 Conditions To Obligations of HEP. The obligations of HEP to effect the
HEP Merger and to consummate the other transactions contemplated to occur on the
Closing Date is further subject to the following conditions, any one or more of
which may be waived by HEP:
(a) Representations and Warranties of Hallwood Energy, HCRC, HCRC
Acquisition Corp., HEC Acquisition Partnership, HEC Acquisition Corp. and
HEPGP. The representations and warranties of Hallwood Energy, HCRC, HCRC
Acquisition Corp., HEC Acquisition Partnership, HEC Acquisition Corp. and HEPGP
set forth in this Agreement shall be true and correct as of the date of this
Agreement and as of the Closing Date, as though made on and as of the Closing
Date, except to the extent the representation or warranty is expressly limited
by its terms to another date, and HEP shall have received a certificate (which
certificate may be qualified by knowledge to the same extent as the
representations and warranties of each entity contained herein are so qualified)
signed on behalf of each entity by the President or general partner of each
entity, in such capacity, to such effect. For the purposes of this Section
8.3(a), the representations and warranties of the parties set forth in this
Section will be deemed true and correct unless the breach of such
representations and warranties, in the aggregate, could reasonably be expected
to have a Material Adverse Effect on any such party.
(b) Performance of Covenants of Hallwood Energy, HCRC, HCRC Acquisition
Corp., HEC Acquisition Partnership, HEC Acquisition Corp. and HEPGP. Hallwood
Energy, HCRC, HCRC Acquisition Corp., HEC Acquisition Partnership, HEC
Acquisition Corp. and HEPGP shall have performed in all material respects all
covenants required to be performed by it under this Agreement at or
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prior to the Effective Time, and HEP shall have received a certificate signed on
behalf of each entity by the President or general partner of each, in such
capacity, and, to their knowledge, to such effect.
(c) No Material Adverse Effect. Since the date of this Agreement, there
shall have been no event that has resulted or could reasonably be expected to
result in a Material Adverse Effect on Hallwood Energy, HCRC or HEPGP; and HEP
shall have received a certificate signed on behalf of Hallwood Energy by the
President of Hallwood Energy, in such capacity, on behalf of HCRC by the
President of HCRC, in such capacity, and on behalf of HEPGP by the general
partner of HEPGP, in such capacity, and, to their knowledge, to such effect.
8.4 Conditions To Obligations of HCRC. The obligations of HCRC to effect
the HCRC Merger and to consummate the other transactions contemplated to occur
on the Closing Date is further subject to the following conditions, any one or
more of which may be waived by HCRC:
(a) Representations and Warranties of Hallwood Energy, HCRC Acquisition
Corp., HEP, HEC Acquisition Partnership, HEC Acquisition Corp. and HEPGP. The
representations and warranties of Hallwood Energy, HCRC Acquisition Corp., HEP,
HEC Acquisition Partnership, HEC Acquisition Corp. and HEPGP set forth in this
Agreement shall be true and correct as of the date of this Agreement and as of
the Closing Date, as though made on and as of the Closing Date, except to the
extent the representation or warranty is expressly limited by its terms to
another date, and HCRC shall have received a certificate (which certificate may
be qualified by knowledge to the same extent as the representations and
warranties of each entity contained herein are so qualified) signed on behalf of
each entity by the President or general partner of each, in such capacity, to
such effect. For the purposes of this Section 8.4(a), the representations and
warranties of the parties set forth in this Section will be deemed true and
correct unless the breach of such representations and warranties, in the
aggregate, could reasonably be expected to have a Material Adverse Effect on any
such party.
(b) Performance of Covenants of Hallwood Energy, HCRC Acquisition Corp.,
HEP, HEC Acquisition Partnership, HEC Acquisition Corp. and HEPGP. Hallwood
Energy, HCRC Acquisition Corp., HEP, HEC Acquisition Partnership, HEC
Acquisition Corp. and HEPGP shall have performed in all material respects all
covenants required to be performed by it under this Agreement at or prior to the
Effective Time, and HCRC shall have received a certificate signed on behalf of
each entity by the President or general partner of each, in such capacity, and,
to their knowledge, to such effect.
(c) No Material Adverse Effect. Since the date of this Agreement, there
shall have been no event that has resulted or could reasonably be expected to
result in a Material Adverse Effect on Hallwood Energy, HEP or HEPGP; and HCRC
shall have received a certificate signed on behalf of Hallwood Energy by the
President of Hallwood Energy, in such capacity, on behalf of HEP by the general
partner of HEP, in such capacity, and on behalf of HEPGP by the general partner
of HEPGP, in such capacity, and, to their knowledge, to such effect.
8.5 Conditions To Obligations of HEPGP. The obligations of HEPGP to effect
the Asset Contribution and to consummate the other transactions contemplated to
occur on the Closing Date is further subject to the following conditions, any
one or more of which may be waived by HEPGP.
(a) Representations and Warranties of Hallwood Energy, HEP, HEC Acquisition
Partnership, HEC Acquisition Corp., HCRC and HCRC Acquisition Corp. The
representations and warranties of Hallwood Energy, HEP, HEC Acquisition
Partnership, HEC Acquisition Corp., HCRC and HCRC Acquisition Corp. set forth in
this Agreement shall be true and correct as of the date of this Agreement and as
of the Closing Date, as though made on and as of the Closing Date, except to the
extent the representation or warranty is expressly limited by its terms to
another date, and HEPGP shall have received a certificate (which certificate may
be qualified by knowledge to the same extent as the representations and
warranties of each entity contained herein are so qualified) signed on behalf of
each by the President or general partner of each entity, in such capacity, to
such effect. For the purposes of this Section 8.5(a), the representations and
warranties of the parties set forth in this Section will be deemed true and
correct
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unless the breach of such representations and warranties, in the aggregate,
could reasonably be expected to have a Material Adverse Effect on any such
party.
(b) Performance of Covenants of Hallwood Energy, HEP, HEC Acquisition
Partnership, HEC Acquisition Corp., HCRC and HCRC Acquisition Corp. Hallwood
Energy, HEP, HEC Acquisition Partnership, HEC Acquisition Corp., HCRC and HCRC
Acquisition Corp. shall have performed in all material respects all covenants
required to be performed by it under this Agreement at or prior to the Effective
Time, and HEPGP shall have received a certificate signed on behalf of each
entity by the President or general partner of each entity, in such capacity,
and, to their knowledge to such effect.
(c) No Material Adverse Effect. Since the date of this Agreement, there
shall have been no event that has resulted or could reasonably be expected to
result in a Material Adverse Effect on Hallwood Energy, HEP or HCRC; and HEPGP
shall have received a certificate signed on behalf of Hallwood Energy by the
President of Hallwood Energy, in such capacity, on behalf of HEP, by the general
partner of HEP, and on behalf of HCRC, by the President of HCRC, in such
capacity and, to their knowledge, to such effect.
ARTICLE IX
TERMINATION
9.1 Termination by Mutual Consent. This Agreement may be terminated and
the Transactions may be abandoned at any time prior to the Effective Time,
before or after the approval by holders of Units or HCRC Shares, by the mutual
consent of Hallwood Energy, HEC Acquisition Partnership, HEC Acquisition Corp.,
HEP, HCRC, HCRC Acquisition Corp., and HEPGP by action of their or their general
partner's respective Boards of Directors.
9.2 Termination by Either Hallwood Energy, HEC Acquisition Partnership,
HEC Acquisition Corp, HEP, HCRC Acquisition Corp., HCRC or HEPGP. This Agreement
may be terminated and the Transactions may be abandoned by action of the Board
of Directors of Hallwood Energy, on behalf of Hallwood Energy, HEC Acquisition
Partnership, HEC Acquisition Corp. or HCRC Acquisition Corp. or by HEP, HCRC or
HEPGP if, (a) without fault of the terminating party, the Transactions shall not
have been consummated by September 30, 1999, whether or not such date is before
or after the approval by holders of Units or HCRC Shares; or (b) a United States
federal or state court of competent jurisdiction or a United States federal or
state governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement on substantially the terms contemplated by this Agreement and
such order, decree, ruling or other action shall have become final and
non-appealable; provided that the party seeking to terminate this Agreement
pursuant to this Section 9.2(b) shall have used its reasonable best efforts to
remove such restraint, injunction or prohibition.
9.3 Termination by Hallwood Energy, HEC Acquisition Partnership, HEC
Acquisition Corp. or HCRC Acquisition Corp. This Agreement may be terminated and
the Transactions may be abandoned at any time prior to the Effective Time,
before or after the approval by holders of Units or HCRC Shares, by action of
the Board of Directors of Hallwood Energy on behalf of Hallwood Energy, HEC
Acquisition Partnership, HEC Acquisition Corp. and HCRC Acquisition Corp., if:
(a) HEP, HCRC or HEPGP shall have failed to comply in any material respect with
any of the covenants or agreements contained in this Agreement to be complied
with or performed by HEP, HCRC or HEPGP at or prior to such date of termination;
or (b) the Board of Directors of Hallwood G.P. or HCRC or the Independent
Directors of either, shall have withdrawn or modified in a manner adverse to
Hallwood Energy, HEC Acquisition Partnership, HEC Acquisition Corp. or HCRC
Acquisition Corp. its approval or recommendation of this Agreement or the
Mergers or the Board of Directors of Hallwood G.P. or HCRC or the Independent
Directors of either, upon request by Hallwood Energy, HEC Acquisition
Partnership, HEC Acquisition
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Corp., or HCRC Acquisition Corp., shall fail to reaffirm such approval or
recommendation, or shall have resolved to do any of the foregoing.
9.4 Termination by HEP, HCRC or HEPGP. This Agreement may be terminated
and the Transactions may be abandoned at any time prior to the Effective Time,
before or after the approval by holders of Units or HCRC Shares by action of the
Board of Directors of Hallwood Energy, Hallwood G.P. or HCRC or by HEPGP, if any
Constituent Entity (other than the party terminating this Agreement) shall have
failed to comply in any material respect with any of the covenants or agreements
contained in this Agreement to be complied with or performed by such Constituent
Entity at or prior to such date of termination; provided, however, that such
Constituent Entity, upon receipt of written notice of such failure from the
party seeking to terminate this Agreement shall have ten (10) business days from
the receipt of such notice to cure such failure.
9.5 Termination by HEP or HCRC. This Agreement may be terminated by HEP or
HCRC upon ten business days' prior notice to the other Constituent Entities, if
as a result of a Takeover Proposal with respect to HEP or HCRC that the Board of
Directors of the terminating party has determined to be a Superior Takeover
Proposal, and the Board of Directors of the terminating party determines in good
faith (after consultation with and based on the advice of its outside counsel)
that the acceptance of such Superior Takeover Proposal could reasonably be
required by the fiduciary obligations of such directors under applicable law;
provided, however, that prior to any such termination, the terminating party
shall advise the other Constituent Entities in writing of the determination of
the Board of Directors of the terminating party that the Board of Directors of
the terminating party has determined that such Takeover Proposal is a Superior
Takeover Proposal, which notice will include a summary of such Takeover
Proposal. During such ten business day period, the other Constituent Entities
may propose to the terminating party an alternative transaction, and the
terminating party shall, and shall cause its respective financial and legal
advisors to, negotiate with the other Constituent Entities in good faith with
respect to such adjustments in the terms and conditions of this Agreement so
that such Takeover Proposal would not constitute a Superior Takeover Proposal
and thereby enable the terminating party to proceed with the transactions
contemplated herein. "Takeover Proposal" shall mean (a) any tender or exchange
offer, proposal for a merger, consolidation or other business combination
involving the terminating party, (b) any proposal or offer to acquire from the
terminating party in any manner, directly or indirectly, any equity or voting
securities of the terminating party in excess of 15% of the equity voting
securities of the terminating parties thereof or a material amount of the assets
of the terminating party, taken as a whole, or (c) any proposal or offer to
acquire from the stockholders of the terminating party by tender offer, exchange
offer or otherwise more than 15% of the outstanding common stock of the
terminating party. "Superior Takeover Proposal" means any bona fide Takeover
Proposal to acquire, directly or indirectly, for consideration consisting of
cash, securities or a combination thereof, all of the common stock of the
terminating party then outstanding or all or substantially all of the assets of
the terminating party on terms that the Board of Directors of the terminating
party determines in its good faith reasonable judgment (after consultation with
a financial advisor of nationally recognized reputation) to be more favorable to
the terminating party's stockholders or unitholders than the Transactions.
9.6 Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and abandonment of the
Transactions pursuant to this Sections 9.1, 9.2, 9.3 or 9.4, no party hereto (or
any of its directors or officers) shall have any liability or further obligation
to any other party to this Agreement, except that nothing herein will relieve
any party from any liability or damages for any breach of this Agreement.
(b) In the event of termination of this Agreement or abandonment of the
transactions pursuant to Section 9.5, the party terminating or abandoning this
Agreement pursuant to Section 9.5 shall be liable to each of the other
Constituent Entities for all costs and expenses, including, without limitation,
attorney's fees and expenses, of the other Constituent Entities incurred in
connection with the preparation and negotiation of this Agreement and the
contemplated consummation of the Transactions.
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9.7 Extension of Time. At any time prior to the Effective Time, a party to
the Agreement may, to the extent legally allowed, extend the time of performance
of any obligations or other acts of another party. Any agreement on the part of
a party hereto to any such extension shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension shall not
operate as a waiver of any obligation or action.
ARTICLE X
MISCELLANEOUS AND GENERAL
10.1 Payment of Expenses. If the Transactions are not consummated, each
party hereto shall pay its own expenses incident to preparing for, entering into
and carrying out this Agreement. If the Transactions are consummated, Hallwood
Energy shall pay the expenses of all parties incident to preparing for, entering
into and carrying out this Agreement and the consummation of the Transactions.
10.2 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement confirming the representations and warranties in this
Agreement will survive the Effective Time. This Section 10.2 will not limit any
covenant or agreement of the parties that by its terms contemplates performance
after the Effective Time.
10.3 Modification or Amendment. Subject to the applicable provisions of
DRULPA and the DGCL at any time prior to The Effective Time, the parties hereto
may modify or amend this Agreement, by written agreement executed and delivered
by duly authorized officers of the respective parties; provided, however, that
after any approval of the transactions contemplated by this Agreement by the
unitholders of HEP or the shareholders of HCRC, there may not be, without
further approval of the affected unitholders or shareholders, any amendment
which reduces the amount or changes the form of the applicable Merger
Consideration to be delivered to such unitholders or shareholders other than as
contemplated by this Agreement.
10.4 Waiver of Conditions. The conditions to each of the parties
obligations to consummate the Transactions are for the sole benefit of such
party and may be waived by such party in whole or in part to the extent
permitted by applicable law. Any agreement on the part of a party hereto to any
such extension shall be valid only if set forth in a written instrument signed
on behalf of such party, but such waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
10.5 Actions by Directors. No action taken by the Board of Directors of
Hallwood G.P. or HCRC, prior to the Mergers with respect to Sections 9.3 and
9.4, shall be effective unless such action is approved by the affirmative vote
of at least a majority of the directors of Hallwood G.P. or HCRC, as applicable,
who are not directors or officers of Hallwood Group (the "Independent
Directors").
10.6 Counterparts. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.
10.7 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL
BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF DELAWARE WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The
parties hereby irrevocably submit to the jurisdiction of the courts of the State
of Delaware and the Federal courts of the United States of America located in
the State of Delaware solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred to in this
Agreement, and in respect of the transactions contemplated hereby, and hereby
waive, and agree not to assert, as a defense in any action, suit or proceeding
for the interpretation or enforcement hereof or of any such document, that it is
not subject thereto or that such action, suit or proceeding may not be brought
or is not maintainable in said courts or
39
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that the venue thereof may not be appropriate or that this Agreement or any such
document may not be enforced in or by such courts, and the parties hereto
irrevocably agree that all claims with respect to such action, suit or
proceeding shall be heard and determined in such a state or Federal court. The
parties hereby consent to and grant any such court jurisdiction over The person
of such parties and over the subject matter of such dispute and agree that
mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 10.8 or in such other manner as may
be permitted by law, shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH SUCH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 10.7.
10.8 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid:
if to Hallwood Energy, HEC Acquisition Partnership, HEC Acquisition Corp.
or HCRC Acquisition Corp.:
The Hallwood Group Incorporated
3710 Rawlins
Suite 1500
Dallas, Texas 75219
Attention: Melvin J. Melle
with a copy to:
Jenkens & Gilchrist, A Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202-2799
Attention: W. Alan Kailer, Esq.
if to HEP or HCRC:
Hallwood Energy Partners, L.P.
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
Attention: Cathleen M. Osborn, Esq.
with a copy to:
Jenkens & Gilchrist, A Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202-2799
Attention: W. Alan Kailer, Esq.
40
<PAGE> 153
if to the HEP Special Committee:
Hallwood Energy Partners, L.P.
4582 South Ulster Street Parkway, Suite 1700
Denver, Colorado 80237
Attention: Cathleen M. Osborn, Esq.
with a copy to:
Donohoe Jameson & Carroll, P.C.
3400 Renaissance Tower
1201 Elm Street
Dallas, TX 75270-2120
Attention: Warren M.S. Ernst, Esq.
if to the HCRC Special Committee:
Hallwood Energy Partners, L.P.
4582 South Ulster Street Parkway, Suite 1700
Denver, Colorado 80237
Attention: Cathleen M. Osborn, Esq.
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: Jay Hebert, Esq.
or to such other persons or addresses as may be designated in writing by the
party to receive such notice.
10.9 Entire Agreement. This Agreement (including any annexes, exhibits or
schedules hereto) constitutes the entire agreement, and supersedes all other
prior agreements, understandings, representations and warranties both written
and oral, among the parties, with respect to the subject matter hereof.
10.10 Obligations of Hallwood Energy, HEC Acquisition Partnership, HEC
Acquisition Corp., HCRC Acquisition Corp. or HEP, HCRC and HEPGP. Whenever this
Agreement requires HEC Acquisition Partnership or HCRC Acquisition Corp. or,
after the Effective Time, the Surviving Partnership or the Surviving
Corporation, to take any action, such requirement shall be deemed to include an
undertaking on the part of Hallwood Energy to cause the Surviving Partnership or
the Surviving Corporation, as applicable, to take such action, including
providing the requisite funds to purchase Units or shares of HCRC Shares or make
any other payment obligation. Whenever this Agreement requires a Subsidiary of
HEP, HCRC or HEPGP to take any action, such requirement shall be deemed to
include an undertaking on the part of Hallwood G.P. on behalf of HEP and HEPGP
and of HCRC on behalf of HCRC to cause such Subsidiary to take such action and,
after the Effective Time, on the part of the Surviving Partnership or the
Surviving Corporation, as applicable, to cause such Subsidiary to take such
action.
10.11 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
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<PAGE> 154
10.12 Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Annex or Schedule,
such reference shall be to a Section of or Annex or Schedule to this Agreement
unless otherwise indicated. Whenever the words "include," "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation."
10.13 Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that Hallwood Energy may designate, by
written notice to HEP, HCRC and/or HEPGP, another wholly-owned direct or
indirect Subsidiary to be a Constituent Entity in lieu of HEC Acquisition
Partnership or HCRC Acquisition Corp., in the event of which, all references
herein to HEC Acquisition Partnership or HCRC Acquisition Corp. shall be deemed
references to such other Subsidiary, where applicable, except that all
representations and warranties made herein with respect to HEC Acquisition
Partnership or HCRC Acquisition Corp. as of the date of this Agreement shall be
deemed representations and warranties made with respect to such other Subsidiary
as of the date of such designation.
10.14 Definition of "Subsidiary" and "Person". When a reference is made in
this Agreement to a Subsidiary of a party, the word "Subsidiary" means any
corporation or other organization whether incorporated or unincorporated of
which at least a majority of the securities or interests having by the terms
thereof ordinary voting power to elect at least a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such party or by any one or more of its Subsidiaries, or by such party and
one or more of its Subsidiaries. When a reference is made in this Agreement to a
person, the word "person" means and includes any natural person, corporation,
partnership, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, governmental or political subdivision, regulatory
body or other entity.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto on the date first hereinabove
written.
HALLWOOD ENERGY CORPORATION
By: /s/ WILLIAM L. GUZZETTI
----------------------------------
William L. Guzzetti, President
HEC ACQUISITION PARTNERSHIP
By: HEC Acquisition Corp., general
partner
By: /s/ WILLIAM L. GUZZETTI
----------------------------------
William L. Guzzetti, President
42
<PAGE> 155
HEC ACQUISITION CORP.
By: /s/ WILLIAM L. GUZZETTI
--------------------------------
William L. Guzzetti, President
HALLWOOD ENERGY PARTNERS, L.P.
By: HEPGP Ltd., general partner
By: Hallwood G.P., Inc., general
partner
By: /s/ WILLIAM L. GUZZETTI
----------------------------------
William L. Guzzetti, President
HCRC ACQUISITION CORP.
By: /s/ WILLIAM L. GUZZETTI
----------------------------------
William L. Guzzetti, President
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By: /s/ WILLIAM L. GUZZETTI
----------------------------------
William L. Guzzetti, President
HEPGP LTD.
By: Hallwood G.P., Inc., general
partner
By: /s/ WILLIAM L. GUZZETTI
----------------------------------
William L. Guzzetti, President
43
<PAGE> 156
APPENDIX B
OPINION OF KIRKPATRICK ENERGY ASSOCIATES
<PAGE> 157
<TABLE>
<S> <C> <C>
KIRKPATRICK ENERGY ASSOCIATES, INC.
Dominion Plaza -- 1725 North
363 N. Sam Houston Pky East 600 Seventeenth Street
Suite 1100 Denver, CO 80202-5423 2206 Sutton Place
Houston, TX 77060 (303) 893-6633 Richardson, TX 75080
(281) 820-7881 (972) 231-7848
Fax (281) 9310 www.kirkpatrickenergy.com Fax (972) 231-7848
</TABLE>
The Special Committee of the Board of Directors of Hallwood G.P.
C/O Hallwood Energy Partners, L.P.
4582 South Ulster Parkway, #1700
Denver, CO 80237
Members of the Special Committee:
Kirkpatrick Energy Associates, Inc. ("Kirkpatrick") understands:
- Hallwood Energy Partners, L.P. ("HEP"), a Delaware limited partnership;
- Hallwood Consolidated Resources Corporation ("HCRC"), a Delaware
corporation;
- HEPGP Ltd. ("HEPGP"), a Colorado limited partnership;
- Hallwood Energy Corporation ("Newco"), a Delaware corporation;
- HEC Acquisition Partnership, L.P., a Delaware limited partnership;
- HEC Acquisition Corp., a Delaware corporation and wholly-owned subsidiary
of Newco;
- HCRC Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Newco; and
- HEPGP Acquisition Corp., a Delaware corporation, and wholly-owned
subsidiary of Newco, propose to enter into a Consolidation and Asset
Contribution Agreement on or about December 15, 1998, (the "Agreement").
Upon completion of the transactions contemplated by the Agreement (the
"Consolidation"):
- HEP will be a wholly-owned subsidiary of Newco;
- HCRC will be a wholly-owned subsidiary of Newco; and
- the energy interests of HEPGP, the parent of which is The Hallwood Group
("HWG"), will be owned directly by Newco.
Pursuant to the Agreement:
- Each Class A and Class B Unit of HEP, other than those held by HCRC, will
be converted into the right to receive 0.7417 shares of Newco common
stock;
- Each Class C Unit of HEP, other than those held by HCRC, will be
converted into the right to receive one share of Series A Cumulative
Preferred Stock of Newco;
- Each share of common stock of HCRC, other than those held by HEP, will be
converted into the right to receive 1.5918 shares of Newco common stock;
- HEPGP will receive 1,312,411 shares of Newco, as a result of its
relinquishment of its rights to certain fees and participation in
drilling and acquisitions and its contribution of assets and the general
partner interest in HEP to Newco.
<PAGE> 158
We have been engaged by the Special Committee of the Board of Directors of
Hallwood G.P. ("Special Committee") to act as financial advisor in connection
with the Consolidation. The Special Committee instructed Kirkpatrick, in its
role as financial advisor, to evaluate the fairness, from a financial
perspective, to HEPs Class A Unitholders, other than HCRC and HWG, of the
percentage of Newco common stock to be received by such Unitholders in the
Consolidation (the "HEP Exchange Percentage") in relation to the percentage of
Newco common stock to be received by common stockholders of HCRC, other than HEP
and by HWG in the Consolidation, and, in such regard, to conduct such
investigations as Kirkpatrick deemed appropriate for such purposes.
Additionally, the Special Committee instructed Kirkpatrick, in its role as
financial advisor, to evaluate the fairness from a financial perspective, to
HEP's Class C Unitholders, other than HCRC and HWG, regarding the exchange of
the Class C Units of HEP for the Series A Cumulative Preferred Stock of Newco.
We have not been requested to opine as to, and our opinion does not in any
manner address, HEP's underlying business decision to proceed with or effect the
Consolidation. The financial terms were based on negotiations among HEP, HCRC,
and HEPGP and we did not participate nor did we advise and were not asked to
advise in the negotiations.
For purposes of the opinion set forth herein, we have:
- Reviewed the 1996 and 1997 Annual Reports and Forms 10-K, the Forms 1O-Q
for each of the three quarters ended September 30, 1998, and related
financial information for HEP and HCRC and the related unaudited
financial information for HEP, HCRC, and HEPGP;
- Reviewed certain historical reserve reports ("Reserve Reports") as of
July 1, 1998 and certain projected reserve reports as of July 1, 1998 for
HEP, HCRC, and HEPGP prepared by management of HEP, HCRC, and HEPGP and
reviewed by Williamson Petroleum Consultants, Inc., independent petroleum
engineers, as well as, oil and gas reserve reports, as a result of the
Arcadia acquisition, for HEP, HCRC, and HEPGP as prepared by management
of HEP, HCRC, and HEPGP as of September 17, 1998;
- Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities, and prospects of
HEP, HCRC, and HEPGP prepared and furnished to us by the management of
HEP, HCRC, and HEPGP;
- Conducted discussions with members of senior management of HEP, HCRC, and
HEPGP concerning the past and current operations and financial condition
and the prospects before and after giving effect to the Consolidation;
- Reviewed the market prices and valuation multiples for HEP, HCRC, and
HEPGP and compared them with those of certain publicly traded companies
that we deemed relevant;
- Reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions that we deemed to be
relevant;
- Conducted discussions with representatives of Deloitte & Touche LLP, the
independent certified public accountants for HEP, HCRC, and HEPGP;
- Reviewed the reported prices and trading activity for the Class A and
Class C Units of HEP, and the common stock of HCRC;
- Reviewed the results of operations of HEP, HCRC, and HEPGP and compared
them with those of certain companies that we deemed relevant;
- Reviewed a draft of the Agreement and a draft of the Schedule 14-A and
related proxy statement dated December 11, 1998; and
- Reviewed such other financial studies and analyses and took into account
such other matters as we deemed appropriate.
2
<PAGE> 159
The Special Committee selected Kirkpatrick as its financial advisor because
Kirkpatrick is a recognized financial advising firm specializing in the oil and
gas industry and regularly engages in the valuation of oil and gas businesses
and their securities in connection with mergers and acquisitions.
In preparing our opinion, we have assumed and relied upon the accuracy and
completeness of all the financial and other information provided to us by the
management of HEP, HCRC, and HEPGP, or publicly available, and we have not
assumed any responsibility for the independent verification of such information.
In addition, we have not made an independent evaluation or appraisal of the
assets of HEP, HCRC, or HEPGP or been furnished with any such evaluation or
appraisal other than Reserve Reports.
With respect to financial forecasts, projections and other information
relating to the future performance of HEP, HCRC, and HEPGP made available to us
and used in our analyses, we have assumed they were prepared in good faith and
have a reasonable basis and reflect management's best judgement.
This opinion is based upon information set forth herein as reviewed by us
and circumstances existing as of the date hereof. Market, economic and other
events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We have not undertaken to reaffirm or revise
this opinion after the date hereof.
We are acting as financial advisor to the Special Committee in connection
with the Consolidation and will receive a fee for our services, a portion of
which is contingent upon the delivery of a fairness opinion letter. In addition,
HEP has agreed to indemnify us for certain liabilities arising out of our
engagement.
It is understood that this opinion is for the use and benefit of the
Special Committee. Our opinion does not address the merits of the underlying
decision by HEP to engage in the Consolidation, and does not constitute a
recommendation to any Unitholder as to how such Unitholder should vote on the
Consolidation.
We are not expressing any opinion herein as to the prices at which Newco
Common Stock or Series A Cumulative Preferred Stock of Newco will trade
following the consummation of the Consolidation. We are not opining, and were
not requested by you to opine, as to the fairness of any aspect of the
transaction other than the financial terms of the Agreement as they relate to
the Class A and Class C Units of HEP. We have assumed that the Agreement and all
other aspects of the proposed transaction will be, in all respects, in
compliance with all laws and regulations that are applicable to HEP, HCRC,
HEPGP, and Newco.
On the basis of, and subject to the foregoing, including the various
assumptions and limitations set forth herein, we are of the opinion that on the
date hereof, the consideration to be received by HEP's Class A and Class C
Unitholders in the Consolidation is fair from a financial point of view to the
holders of such Units, other than HCRC and HWG.
Very truly yours,
[/s/ KIRKPATRICK ENERGY ASSOCIATES,
INC.]
KIRKPATRICK ENERGY ASSOCIATES, INC.
3
<PAGE> 160
APPENDIX C
OPINION OF DAIN RAUSCHER WESSELS
<PAGE> 161
LOGO
December 15, 1998
The Special Committee of the Board of Directors
Hallwood Consolidated Resources Corporation
3710 Rawlins, Suite 1500
Dallas, TX 75219
Gentlemen:
You have requested our opinion, as of the date hereof, as to the fairness,
from a financial point of view, to the public holders of common stock of
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") of the
consideration to be received by such holders in the proposed consolidation (the
"Consolidation") of Hallwood Energy Partners, L.P. ("HEP"), HCRC and the energy
interests of HEPGP Ltd. ("HEPGP") into a newly formed Hallwood Energy
Corporation. After the Consolidation, existing public unitholders of HEP will
own 56% of the Hallwood Energy Corporation common stock, existing public
stockholders of HCRC will own 26% of the Hallwood Energy Corporation common
stock and HEPGP will own 18% of the Hallwood Energy Corporation common stock.
Dain Rauscher Wessels, as part of its investment banking services, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes. In the ordinary
course of business, Dain Rauscher Wessels (i) has published research materials
of, (ii) has acted as a market maker in the equity securities of, and (iii)
periodically may have positions in the equity securities of companies in the
energy industry. Dain Rauscher Wessels has performed services for affiliates of
HCRC, HEP and HEPGP in the past and has been paid customary fees for such
services. We have been engaged by the Special Committee of the Board of
Directors of the Company to act as financial advisor to the Company in
connection with the Consolidation, and we will receive fees for such services, a
portion of which is contingent upon the closing of the Consolidation. In
addition, the Company has agreed to indemnify us against certain liabilities
that may arise from activities related to our engagement.
In connection with this opinion, we have, among other things, reviewed (i)
a draft of the merger agreement relating to the Consolidation; (ii) certain
historical financial information for HEP, HCRC and HEPGP; (iii) a draft of the
Proxy Statement; (iv) certain limited projected financial information for HCRC,
HEP, and HEPGP prepared for financial planning purposes and furnished to us by
management; (v) reserve reports as of June 30, 1998 for HCRC, HEP and HEPGP
reviewed by Williamson Petroleum Consultants, Inc., independent petroleum
engineers; (vi) reserve reports projecting January 1, 1999 reserves for HCRC,
HEP and HEPGP prepared by management and (vii) the recent stock trading history
of HCRC common stock and the HEP A and C units. We made inquiries of the
management of HCRC
- --------------------------------------------------------------------------------
Cityplace, Suite 2400 (214) 989-1456 Dain Rauscher Incorporated
2711 North Haskell Avenue Member NYSE/SIPC
Dallas, TX 75204-2936
<PAGE> 162
regarding the past and current business operations, financial condition, and
future prospects for HCRC. In addition, we have held discussions with senior
management to understand their reasons for completing the Consolidation. We have
compared financial information on HCRC, HEP and HEPGP to similar information for
certain companies deemed comparable to HCRC and have reviewed stock market
information on such companies that have publicly traded securities. We have also
reviewed, to the extent publicly available, the financial terms of certain
merger and acquisition transactions involving companies with operating
businesses deemed similar to that of HCRC. In addition, we calculated a net
asset value analysis for HEP, HCRC and HEPGP using September 30, 1998 financial
information and management's projections of reserves at January 1, 1999. After
determining a valuation range for the entities based on these methodologies, we
used an iterative approach to determine the value of each entity to its public
shareholders.
In conducting our review and in rendering our opinion, we have assumed and
relied upon the accuracy, completeness and fairness of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independent verification of such information. It is
understood that we were retained by the Special Committee of the Board of
Directors of the Company, and that the Special Committee has not looked to us
for independent verification with respect to the financial and other information
provided to us or publicly available, including the projections of financial
information and reserves provided to us by management. We have further relied
upon the assurances of management that they are not aware of any facts that
would make the information supplied to us, or publicly available, inaccurate or
misleading. With respect to the projected financial statements and reserves for
HCRC, HEP and HEPGP, we have assumed that such projections have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgment of the management as to the future operating and financial performance
of the companies. We have relied as to certain legal matters on advice of
counsel to the Company.
We did not make an independent appraisal of the assets or liabilities of
HCRC, and we do not express an opinion regarding the liquidation value or
solvency of the Company. Furthermore, we do not express any opinion as to the
prices at which shares of Hallwood Energy Corporation's common stock may trade
following the consummation of the Consolidation. Our opinion as expressed herein
is limited to the fairness to the public stockholders of HCRC, from a financial
point of view, of the consideration to be received by such holders in the
Consolidation and does not address the Company's underlying business decision to
undertake the Consolidation. Our opinion is based solely on information
available to us on or before the date hereof and reflects general market,
economic, financial, monetary and other conditions as of the date hereof.
Although subsequent developments may affect this opinion, we do not have any
obligation to update, revise or reaffirm this opinion.
It is understood that this letter is solely directed to the Special
Committee of the Board of Directors of HCRC in its consideration of the equity
allocation to the public shareholders of HCRC to be received in the
Consolidation and may not be relied upon by any other person and may not be used
for any other purpose or reproduced, disseminated, quoted or referred to at any
time, in any manner or for any purpose without our prior written consent. This
opinion does not constitute a recommendation to the Board of Directors of HCRC
with respect to the approval of the Consolidation. Furthermore, this opinion
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed Consolidation.
- --------------------------------------------------------------------------------
Cityplace, Suite 2400 (214) 989-1456 Dain Rauscher Incorporated
2711 North Haskell Avenue Member NYSE/SIPC
Dallas, TX 75204-2936
2
<PAGE> 163
Based upon the foregoing, and other matters that we considered relevant, it
is our opinion that, as of the date hereof, the consideration to the existing
public stockholders of HCRC in the Consolidation is fair to such stockholders
from a financial point of view.
Very truly yours,
[/s/ DAIN RAUSCHER WESSELS]
Dain Rauscher Wessels,
a division of Dain Rauscher
Incorporated
- --------------------------------------------------------------------------------
Cityplace, Suite 2400 (214) 989-1456 Dain Rauscher Incorporated
2711 North Haskell Avenue Member NYSE/SIPC
Dallas, TX 75204-2936
3
<PAGE> 164
APPENDIX D
REPORT OF WILLIAMSON PETROLEUM CONSULTANTS
<PAGE> 165
WILLIAMSON Petroleum Consultants, Inc.
HOUSTON
MIDLAND
1010 LAMAR STREET
SUITE 100
HOUSTON, TEXAS
77002-6314
713 . 658 . 8278
FAX 713 . 658 . 0218
September 2, 1998
Hallwood Petroleum, Inc.
Stanford Place III, Suite 1700
4582 South Ulster Street Parkway
Denver, Colorado 80237
Attention Mr. Bruce A. Bowman
Gentlemen:
Subject: Review of Estimates Prepared by Hallwood Petroleum, Inc. of
Oil and Gas Reserves and Associated Future Net Revenues of
the Major-Value Properties to the Consolidated Interests of
Hallwood Consolidated Resources Corporation Effective July
1, 1998 for Disclosure to the Securities and Exchange
Commission Williamson Project 8.8616
Williamson Petroleum Consultants, Inc. (Williamson) has reviewed the
subject reserves and economics projections prepared by Hallwood
Petroleum, Inc. (Hallwood) to the consolidated interests of Hallwood
Consolidated Resources Corporation (HCRC). The term "consolidated
interests" refers to direct property interests held by HCRC as well
as reserves owned indirectly through HCRC's ownership in various
entities. These entities and the percentage of each attributable to
HCRC are as follows.
<TABLE>
<CAPTION>
ENTITY PERCENTAGE
------ ----------
<S> <C>
Hallwood San Juan..................................... 43.65
44 Canyon LLC......................................... 50.00
Sunburst Exploration, Inc............................. 50.00
</TABLE>
This review was authorized by Mr. Bruce A. Bowman of Hallwood.
The 203 reviewed major-value properties represent a future net
revenue discounted at 10.00 percent per annum (DFNR) of $54,624
thousand which is approximately 89.1 percent of the total DFNR
estimated by Hallwood for HCRC. A list of the properties reviewed by
Williamson is attached.
The estimates prepared by Hallwood for the reviewed properties
may be used for disclosing reserves and future net revenue to the
Securities and Exchange Commission (SEC) in Form 10-K or other SEC
filings. Reserves and future net revenues were calculated by Hallwood
utilizing average oil and gas prices for all properties and excluding
the effect of COPAS overhead costs on operated properties. Filings
with the SEC should include disclosure of the exclusion of COPAS
overhead costs and the use of 60-month average oil and gas prices.
<PAGE> 166
Following is a summary of the total reserves and economics
projections prepared by Hallwood effective July 1, 1998 for both the
reviewed and nonreviewed HCRC properties:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED
PRODUCING NONPRODUCING UNDEVELOPED TOTAL
(PDP) (PNP) (PUD) PROVED
--------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Net Reserves to the Evaluated
Interests:(1)
Oil Condensate, MBBL........ 3,442 219 273 3,935
Gas, MMCF................... 67,658 2,495 1,304 71,457
Future Net Revenue, M$:(1)
Discounted Per Annum at
10.00 Percent............ 57,704 2,646 985 61,335
</TABLE>
--------------------------
Note: Due to the method of rounding within Aries Software utilized by
Hallwood, Total Proved may not equal PDP + PNP + PUD.
(1) Values are totals for reviewed and nonreviewed properties.
The attached Definitions describe all categories of proved
reserves.
In performing this review, Williamson conducted an evaluation of
the methods and procedures utilized by Hallwood in the preparation of
the estimates of reserves and associated future net revenue and
performed tests and procedures considered necessary to render the
opinions set forth herein. Williamson accepted without independent
verification the accuracy and completeness of information, data, and
assumptions provided by Hallwood including and relating to, but not
limited to, oil and gas production, interests, oil and gas prices,
and development and operating costs.
Williamson reviewed production decline curves, pressure
performance data, volumetric data, and various other engineering data
utilized by Hallwood in its forecast of oil and gas reserves for the
203 major-value properties. Williamson also reviewed the
Hallwood-provided capital investments for lease development and lease
operating statements for pricing and lease operating expenses for
these properties. Ownership interests were accepted as provided. No
inspection of the properties was made as this was not considered
within the scope of this review. No investigation was made of any
environmental liabilities that might apply to the evaluated
properties, and no costs are included for any possible related
expenses.
If, in the course of the Williamson examination, something came
to our attention that brought into question the validity or
sufficiency of any data provided by Hallwood, Williamson did not rely
on that data until any questions relating thereto were resolved. All
significant differences of opinion relating to the reviewed reserves
estimates and forecasts have been resolved.
Based on our review, it is the opinion of Williamson that the
estimates of the reviewed oil and gas reserves and associated future
net revenues prepared by Hallwood effective July 1, 1998 are
reasonable in the aggregate and were prepared in accordance with
generally accepted petroleum engineering and evaluation principles as
set forth in "Standards Pertaining to the Estimating and Auditing of
Oil and Gas Reserves Information" promulgated by the Society of
Petroleum Engineers.
Williamson is an independent consulting firm and does not own
any interests in the oil and gas properties covered by this report.
No employee, officer, or director of Williamson is an employee,
officer, or director of Hallwood or HCRC. Neither the employment of
nor the
2
<PAGE> 167
compensation received by Williamson is contingent upon the values
assigned to the properties covered by this review.
It has been a pleasure to serve you by preparing this
engineering review. All related data will be retained in our files
and are available for your review.
Yours very truly,
/s/ WILLIAMSON PETROLEUM CONSULTANTS
WILLIAMSON PETROLEUM CONSULTANTS, INC.
JDS/jek
Attachments
3
<PAGE> 168
LIST OF ATTACHMENTS
DEFINITIONS OF RESERVES
LIST OF PROPERTIES
(BY LEASE)
4
<PAGE> 169
WILLIAMSON Petroleum Consultants, Inc.
DEFINITIONS OF OIL AND GAS RESERVES(1)
Proved Reserves(2)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under the economic criteria employed and existing operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices and costs include
consideration of changes provided only by contractual arrangements but not on
escalations based upon an estimate of true conditions.
A. Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. the immediately adjoining portions not yet drilled, but which can
be reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
B. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
C. Estimates of proved reserves do not include the following:
1. oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
2. crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal(3), gilsonite, and other such sources.
Proved Developed Reserves(4)
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as "proved developed reserves"
only after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery will
be achieved.
Proved Undeveloped Reserves
Provided undeveloped reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
5
<PAGE> 170
- ---------------
(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC Accounting Rules. Commerce Clearing House, Inc. October
1981, Paragraph 290, Regulation 210. 4-10, P. 329.
(2) Any variation to these definitions will be clearly stated in the report.
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed methane
gas.
(4) Williamson Petroleum Consultants, Inc. separates proved developed reserves
into proved developed producing and proved developed nonproducing reserves.
This is to identify proved developed producing reserves as those to be
recovered from actively producing wells; proved developed nonproducing
reserves as those to be recovered from wells or intervals within wells,
which are completed but shut in waiting on equipment or pipeline
connections, or wells where a relatively minor expenditure is required for
recompletion to another zone.
6
<PAGE> 171
WILLIAMSON Petroleum Consultants, Inc.
HOUSTON
MIDLAND
1010 LAMAR STREET
SUITE 100
HOUSTON, TEXAS
77002-6314
713 . 658 . 8278
FAX 713 . 658 . 0218
September 2, 1998
Hallwood Petroleum, Inc.
Stanford Place III, Suite 1700
4582 South Ulster Street Parkway
Denver, Colorado 80237
Attention Mr. Bruce A. Bowman
Gentlemen:
Subject: Review of Estimates Prepared by Hallwood Petroleum, Inc. of
Oil and Gas Reserves and Associated Future Net Revenues of
Certain Major-Value Properties to the Consolidated Interests
of HEPGP, Ltd. Effective July 1, 1998 for Disclosure to the
Securities and Exchange Commission Williamson Project 8.8616
Williamson Petroleum Consultants, Inc. (Williamson) has reviewed
the subject reserves and economics projections prepared by Hallwood
Petroleum, Inc. (Hallwood) to the consolidated interests of HEPGP,
Ltd. (HEPGP). The term "consolidated interests" refers to direct
property interests held by HEPGP as well as 2.00 percent of the
reserves in 44 Canyon LLC. The reviewed properties did not include
the HEPGP indirect interest in Hallwood Energy Partners, L.P. of
which HEPGP is the general partner.
This review was authorized by Mr. Bruce A. Bowman of Hallwood.
The 45 reviewed major-value properties represent a future net revenue
discounted at 10.00 percent per annum (DFNR) of $1,300 thousand which
is approximately 83.0 percent of the total DFNR estimated by Hallwood
for HEPGP. A list of the properties reviewed by Williamson is
attached.
The estimates prepared by Hallwood for the reviewed properties
may be used for disclosing reserves and future net revenue to the
Securities and Exchange Commission (SEC) in Form 10-K or other SEC
filings. Reserves and future net revenues were calculated by Hallwood
utilizing average oil and gas prices for all properties and excluding
the effect of COPAS overhead costs on operated properties. Filings
with the SEC should include disclosure of the exclusion of COPAS
overhead costs and the use of 60-month average oil and gas prices.
<PAGE> 172
Following is a summary of the total reserves and economics
projections prepared by Hallwood effective July 1, 1998 for both the
reviewed and nonreviewed HEPGP properties:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED
PRODUCING NONPRODUCING UNDEVELOPED TOTAL
(PDP) (PNP) (PUD) PROVED
--------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Net Reserves to the Evaluated
Interests:(1)
Oil Condensate, MBBL................. 122 9 4 135
Gas, MMCF............................ 1,518 66 6 1,589
Future Net Revenue, M$:(1)
Discounted Per Annum at 10.00
Percent........................... 1,478 84 4 1,567
</TABLE>
--------------------------
Note: Due to the method of rounding within Aries Software utilized by
Hallwood, Total Proved may not equal PDP + PNP + PUD.
(1) Values are totals for reviewed and nonreviewed properties.
The attached Definitions describe all categories of proved
reserves.
In performing this review, Williamson conducted an evaluation of
the methods and procedures utilized by Hallwood in the preparation of
the estimates of reserves and associated future net revenue and
performed tests and procedures considered necessary to render the
opinions set forth herein. Williamson accepted without independent
verification the accuracy and completeness of information, data, and
assumptions provided by Hallwood including and relating to, but not
limited to, oil and gas production, interests, oil and gas prices,
and development and operating costs.
Williamson reviewed production decline curves, pressure
performance data, volumetric data, and various other engineering data
utilized by Hallwood in its forecast of oil and gas reserves for the
45 major-value properties. Williamson also reviewed the
Hallwood-provided capital investments for lease development and lease
operating statements for pricing and lease operating expenses for
these properties. Ownership interests were accepted as provided. No
inspection of the properties was made as this was not considered
within the scope of this review. No investigation was made of any
environmental liabilities that might apply to the evaluated
properties, and no costs are included for any possible related
expenses.
If, in the course of the Williamson examination, something came
to our attention that brought into question the validity or
sufficiency of any data provided by Hallwood, Williamson did not rely
on that data until any questions relating thereto were resolved. All
significant differences of opinion relating to the reviewed reserves
estimates and forecasts have been resolved.
Based on our review, it is the opinion of Williamson that the
estimates of the reviewed oil and gas reserves and associated future
net revenues prepared by Hallwood effective July 1, 1998 are
reasonable in the aggregate and were prepared in accordance with
generally accepted petroleum engineering and evaluation principles as
set forth in "Standards Pertaining to the Estimating and Auditing of
Oil and Gas Reserves Information" promulgated by the Society of
Petroleum Engineers.
Williamson is an independent consulting firm and does not own
any interests in the oil and gas properties covered by this report.
No employee, officer, or director of Williamson is an employee,
officer, or director of Hallwood or HEPGP. Neither the employment of
nor the compensation received by Williamson is contingent upon the
values assigned to the properties covered by this review.
2
<PAGE> 173
It has been a pleasure to serve you by preparing this
engineering review. All related data will be retained in our files
and are available for your review.
Yours very truly,
/s/ WILLIAMSON PETROLEUM CONSULTANTS,
INC.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
JDS/jek
Attachments
3
<PAGE> 174
LIST OF ATTACHMENTS
DEFINITIONS OF RESERVES
LIST OF PROPERTIES
(BY LEASE)
4
<PAGE> 175
WILLIAMSON Petroleum Consultants, Inc.
DEFINITIONS OF OIL AND GAS RESERVES(1)
Proved Reserves(2)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under the economic criteria employed and existing operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices and costs include
consideration of changes provided only by contractual arrangements but not on
escalations based upon an estimate of true conditions.
A. Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. the immediately adjoining portions not yet drilled, but which can
be reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
B. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
C. Estimates of proved reserves do not include the following:
1. oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
2. crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal(3), gilsonite, and other such sources.
Proved Developed Reserves(4)
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as "proved developed reserves"
only after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery will
be achieved.
Proved Undeveloped Reserves
Provided undeveloped reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
5
<PAGE> 176
- ---------------
(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC Accounting Rules. Commerce Clearing House, Inc. October
1981, Paragraph 290, Regulation 210. 4-10, P. 329.
(2) Any variation to these definitions will be clearly stated in the report.
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed methane
gas.
(4) Williamson Petroleum Consultants, Inc. separates proved developed reserves
into proved developed producing and proved developed nonproducing reserves.
This is to identify proved developed producing reserves as those to be
recovered from actively producing wells; proved developed nonproducing
reserves as those to be recovered from wells or intervals within wells,
which are completed but shut in waiting on equipment or pipeline
connections, or wells where a relatively minor expenditure is required for
recompletion to another zone.
6
<PAGE> 177
WILLIAMSON Petroleum Consultants, Inc.
HOUSTON
MIDLAND
1010 LAMAR STREET
SUITE 100
HOUSTON, TEXAS
77002-6314
713 . 658 . 8278
FAX 713 . 658 . 0218
September 2, 1998
Hallwood Petroleum, Inc.
Stanford Place III, Suite 1700
4582 South Ulster Street Parkway
Denver, Colorado 80237
Attention Mr. Bruce A. Bowman
Gentlemen:
Subject: Review of Estimates Prepared by Hallwood Petroleum, Inc. of
Oil and Gas Reserves and Associated Future Net Revenues of
the Major-Value Properties to the Consolidated Interests of
Hallwood Energy Partners, L.P. Effective July 1, 1998 for
Disclosure to the Securities and Exchange Commission
Williamson Project 8.8616
Williamson Petroleum Consultants, Inc. (Williamson) has reviewed
the subject reserves and economics projections prepared by Hallwood
Petroleum, Inc. (Hallwood) to the consolidated interests of Hallwood
Energy Partners, L.P. (HEP). The term "consolidated interests" refers
to direct property interests held by HCRC as well as reserves owned
indirectly through HEP's ownership in various entities. These
entities and the percentage of each attributable to HEP are as
follows.
<TABLE>
<CAPTION>
ENTITY PERCENTAGE
------ ----------
<S> <C>
Hallwood San Juan........................................... 53.35
44 Canyon LLC............................................... 48.00
May Limited Partnership 1983-1.............................. 65.90
May Limited Partnership 1983-2.............................. 68.56
May Limited Partnership 1983-3.............................. 64.41
May Limited Partnership 1984-1.............................. 59.62
May Limited Partnership 1984-2.............................. 54.71
May Limited Partnership 1984-3.............................. 58.88
Sunburst Exploration, Inc................................... 50.00
</TABLE>
This review was authorized by Mr. Bruce A. Bowman of Hallwood.
The 232 reviewed major-value properties represent a future net
revenue discounted at 10.00 percent per annum (DFNR) of $89,254
thousand which is approximately 90.1 percent of the total DFNR
estimated by Hallwood for HEP. A list of the properties reviewed by
Williamson is attached.
The estimates prepared by Hallwood for the reviewed properties
may be used for disclosing reserves and future net revenue to the
Securities and Exchange Commission (SEC) in Form 10-K or other SEC
filings. Reserves and future net revenues were calculated by Hallwood
utilizing average oil and gas prices for all properties and excluding
the effect of COPAS overhead costs on operated properties. Filings
with the SEC should include disclosure of the exclusion of COPAS
overhead costs and the use of 60-month average oil and gas prices.
<PAGE> 178
Following is a summary of the total reserves and economics
projections prepared by Hallwood effective July 1, 1998 for both the
reviewed and nonreviewed HEP properties:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED
PRODUCING NONPRODUCING UNDEVELOPED TOTAL
(PDP) (PNP) (PUD) PROVED
--------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Net Reserves to the Evaluated
Interests:(1)
Oil Condensate, MBBL........ 4,481 244 497 5,221
Gas, MMCF................... 93,012 3,169 2,844 99,024
Future Net Revenue, M$:(1)
Discounted Per Annum at
10.00 Percent............ 94,754 2,706 1,588 99,048
</TABLE>
--------------------------
Note: Due to the method of rounding within Aries Software utilized by
Hallwood, Total Proved may not equal PDP + PNP + PUD.
(1) Values are totals for reviewed and nonreviewed properties.
The attached Definitions describe all categories of proved
reserves.
In performing this review, Williamson conducted an evaluation of
the methods and procedures utilized by Hallwood in the preparation of
the estimates of reserves and associated future net revenue and
performed tests and procedures considered necessary to render the
opinions set forth herein. Williamson accepted without independent
verification the accuracy and completeness of information, data, and
assumptions provided by Hallwood including and relating to, but not
limited to, oil and gas production, interests, oil and gas prices,
and development and operating costs.
Williamson reviewed production decline curves, pressure
performance data, volumetric data, and various other engineering data
utilized by Hallwood in its forecast of oil and gas reserves for the
232 major-value properties. Williamson also reviewed the
Hallwood-provided capital investments for lease development and lease
operating statements for pricing and lease operating expenses for
these properties. Ownership interests were accepted as provided. No
inspection of the properties was made as this was not considered
within the scope of this review. No investigation was made of any
environmental liabilities that might apply to the evaluated
properties, and no costs are included for any possible related
expenses.
If, in the course of the Williamson examination, something came
to our attention that brought into question the validity or
sufficiency of any data provided by Hallwood, Williamson did not rely
on that data until any questions relating, thereto were resolved. All
significant differences of opinion relating to the reviewed reserves
estimates and forecasts have been resolved.
Based on our review, it is the opinion of Williamson that the
estimates of the reviewed oil and gas reserves and associated future
net revenues prepared by Hallwood effective July 1, 1998 are
reasonable in the aggregate and were prepared in accordance with
generally accepted petroleum engineering and evaluation principles as
set forth in "Standards Pertaining to the Estimating and Auditing of
Oil and Gas Reserves Information" promulgated by the Society of
Petroleum Engineers.
Williamson is an independent consulting firm and does not own
any interests in the oil and gas properties covered by this report.
No employee, officer, or director of Williamson is an employee,
officer, or director of Hallwood or HEP. Neither the employment of
nor the
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compensation received by Williamson is contingent upon the values
assigned to the properties covered by this review.
It has been a pleasure to serve you by preparing this
engineering review. All related data will be retained in our files
and are available for your review.
Yours very truly,
/s/ WILLIAMSON PETROLEUM CONSULTANTS,
INC.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
JDS/jek
Attachments
3
<PAGE> 180
LIST OF ATTACHMENTS
DEFINITIONS OF RESERVES
LIST OF PROPERTIES
(BY LEASE)
4
<PAGE> 181
WILLIAMSON Petroleum Consultants, Inc.
DEFINITIONS OF OIL AND GAS RESERVES(1)
Proved Reserves(2)
Proved reserves are the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under the economic criteria employed and existing operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices and costs include
consideration of changes provided only by contractual arrangements but not on
escalations based upon an estimate of true conditions.
A. Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes:
1. that portion delineated by drilling and defined by gas-oil and/or
oil-water contacts, if any; and
2. the immediately adjoining portions not yet drilled, but which can
be reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
B. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
C. Estimates of proved reserves do not include the following:
1. oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
2. crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors;
3. crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and
4. crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal(3), gilsonite, and other such sources.
Proved Developed Reserves(4)
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as "proved developed reserves"
only after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased recovery will
be achieved.
Proved Undeveloped Reserves
Provided undeveloped reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
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(1) For evaluations prepared for disclosure to the Securities and Exchange
Commission, see SEC Accounting Rules. Commerce Clearing House, Inc. October
1981, Paragraph 290, Regulation 210. 4-10, P. 329.
(2) Any variation to these definitions will be clearly stated in the report.
(3) According to Staff Accounting Bulletin 85, excluding certain coalbed methane
gas.
(4) Williamson Petroleum Consultants, Inc. separates proved developed reserves
into proved developed producing and proved developed nonproducing reserves.
This is to identify proved developed producing reserves as those to be
recovered from actively producing wells; proved developed nonproducing
reserves as those to be recovered from wells or intervals within wells,
which are completed but shut in waiting on equipment or pipeline
connections, or wells where a relatively minor expenditure is required for
recompletion to another zone.
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APPENDIX E
THIRD AMENDMENT TO THE THIRD AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
HALLWOOD ENERGY PARTNERS, L.P.
<PAGE> 184
THIRD AMENDMENT TO THE THIRD AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
HALLWOOD ENERGY PARTNERS, L.P.
This Amendment (this "Amendment") to the Third Amended and Restated
Agreement of Limited Partnership (the "Partnership Agreement") of Hallwood
Energy Partners, L.P. (the "Partnership"), is executed by HEPGP Ltd., a Colorado
limited partnership, as general partner of the Partnership (the "General
Partner"), and as agent and attorney-in-fact for the Limited Partners on the
books and records of the Partnership, pursuant to the powers of attorney
executed by such Limited Partners according to Article XII of the Partnership
Agreement.
WHEREAS, the Board of Directors of the general partner of the General
Partner deems it to be in the best interests of the Partnership to amend the
Partnership Agreement to allow for the merger (the "Merger") of the Partnership
with HEC Acquisition Partnership, L.P., a Delaware limited partnership ("HEC
Acquisition Partnership"), and wholly-owned subsidiary of Hallwood Energy
Corporation, a Delaware corporation ("HEC"), with the Partnership as the
surviving partnership and becoming a subsidiary of HEC and with HEC Acquisition
Corp., a Delaware corporation ("HEC Acquisition Corp."), becoming the new
general partner of the Partnership pursuant to an Merger and Asset Contribution
Agreement (the "Agreement") by and among the Partnership, HEC, HEC Acquisition
Partnership, HEC Acquisition Corp., HCRC Acquisition Corp., Hallwood
Consolidated Resources Corporation, and HEPGP Ltd.; and
WHEREAS, in order to effectuate the Merger, it is necessary to amend the
Partnership Agreement to permit the Partnership to enter into the Agreement and
to consummate the Merger.
NOW, THEREFORE, in consideration of the foregoing, the Partnership
Agreement is amended as follows:
A new Article XXI is hereby added in its entirety as follows:
"ARTICLE XXI
MERGERS
21.1 Authority. The Partnership may merge or consolidate with one or more
limited partnerships formed under the laws of the State of Delaware or another
state of the United States of America pursuant to a written agreement of merger
or consolidation (a "Merger Agreement") in accordance with this Article.
21.2 Procedure for Merger or Consolidation. The merger or consolidation of
the Partnership pursuant to this Article requires the prior written consent of
the General Partner. If the General Partner determines, in the exercise of its
sole discretion, to consent to the merger or consolidation, the General Partner
shall approve the Merger Agreement, which shall set forth:
(a) The names and states of domicile of the limited partnerships or
corporations proposing to merge or consolidate;
(b) The names and states of domicile of the limited partnerships into
which they propose to merge or consolidate (the "Surviving Limited
Partnership");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the general and
limited partnership interests of each merging limited partnership for, or
into, cash, property, or general or limited partnership interests, rights,
securities or obligations of the Surviving Limited Partnership; and (i) if
any general or limited partnership interests of either merging limited
partnership are not to be exchanged or converted solely for, or into, cash,
property, or general or limited partnership interests, rights, securities
or obligations of the Surviving Limited Partnership, the cash, property, or
general or
<PAGE> 185
limited partnership interests, rights, securities or obligations of any
limited partnership (other than the Surviving Limited Partnership),
corporation, trust or other entity that the holders of such general or
limited partnership interests are to receive in exchange for, or upon
conversion of, their general or limited partnership interests, and (ii) in
the case of general or limited partnership interests represented by
certificates, upon the surrender of such certificates, whether cash,
property, or general or limited partnership interests, rights, securities
or obligations of the Surviving Limited Partnership or any limited
partnership (other than the Surviving Limited Partnership), corporation,
trust or other entity, or evidences thereof, are to be delivered;
(e) A statement of any changes in the certificate of limited
partnership of the Surviving Limited Partnership to be effected by such
merger or consolidation;
(f) The effective time of the merger, which may be the date of the
filing of the certificate of the merger pursuant to Section 21.4 or a later
date specified in or determinable in accordance with the Merger Agreement
(provided that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, it shall be established no
later than the time of the filing of the certificate of merger and stated
therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
21.3 Approval by Limited Partners of Merger or Consolidation.
(a) The General Partner of the Partnership, upon approval of the
Merger Agreement by the General Partner, shall direct that the Merger
Agreement be submitted to a vote of Limited Partners either at a meeting or
by written consent, in either case in accordance with the requirements of
Article XVI. A copy of a summary of the Merger Agreement shall be included
in or enclosed with the notice of a meeting or the written consent.
(b) The Merger Agreement shall be approved upon receiving the
affirmative vote or consent of the holders of at least a majority of the
Partnership Interests, unless the Merger Agreement contains any provision
which, if contained in an amendment to the Merger Agreement, would require
the vote or consent of a greater percentage of the Partnership Interests,
in which case such greater percentage vote or consent shall be required for
approval of the Merger Agreement.
(c) After such approval by vote or consent of the Limited Partners,
and at any time prior to the filing of the certificate of merger pursuant
to Section 21.4, the merger or consolidation may be abandoned pursuant to
provisions therefor, if any, set forth in the Merger Agreement.
21.4 Certificate of Merger. Upon the required approval by the General
Partner and the Limited Partners of the Merger Agreement, a certificate shall be
executed and filed with the Secretary of State in conformity with the
requirements of the Delaware Act.
21.5 Effect of Merger.
(a) Upon the effective date of the certificate of merger:
(i) all of the rights, privileges, and powers of each partnership
that has merged or consolidated, all property, real, personal and mixed,
all debts due to any of those partnerships, and all other things and
causes of action belonging to each of those partnerships are vested in
the Surviving Partnership and after the merger or consolidation are the
property of the Surviving Partnership to the extent they were of such
constituent partnership;
(ii) the title to any real property vested by deed or otherwise in
any of those partnerships does not revert and is not in any way impaired
because of the merger or consolidation:
(iii) all rights of creditors and all liens on or security
interests in property of any of those partnerships is preserved
unimpaired; and
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(iv) all debts, liabilities and duties of those partnerships attach
to the Surviving Limited Partnership, and may be enforced against it to
the same extent as if such debts, liabilities and duties had been
incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall
not be deemed to result in a transfer or assignment of assets or
liabilities from one entity to another having occurred."
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date first set forth above.
GENERAL PARTNER:
HEPGP LTD.
By: Hallwood G.P., Inc.,
its general partner
By:
------------------------------------
Name:
------------------------------------
Title:
------------------------------------
LIMITED PARTNERS
By: HEPGP Ltd.
as Attorney-in-Fact for each of
the
Limited Partners
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
3
<PAGE> 187
APPENDIX F
1999 LONG TERM INCENTIVE PLAN OF
HALLWOOD ENERGY CORPORATION
<PAGE> 188
1999 LONG-TERM INCENTIVE PLAN
OF
HALLWOOD ENERGY CORPORATION
ARTICLE I
GENERAL
SECTION 1.1. Purpose of the Plan. The 1999 Long-Term Incentive Plan of
Hallwood Energy Corporation is intended to advance the best interests of the
Company, its Subsidiaries and its stockholders in order to attract, retain and
motivate directors, officers, key employees and consultants by providing them
with additional incentives through (i) the grant of Options (including Reload
Options) to purchase shares of Common Stock or shares of Preferred Stock (which
Options may be Incentive Stock Options or Non-Qualified Stock Options; (ii) the
grant of Stock Appreciation Rights; (iii) the award of shares of Restricted
Stock; and (iv) Performance Awards.
SECTION 1.2. Definitions. For purposes of this Plan, the following
definitions shall apply:
(a) Award. "Award" means a grant under this Plan in the form of
Options (whether for Common Stock or Preferred Stock), Performance Awards,
Restricted Stock or Stock Appreciation Rights..
(b) Board. "Board" means the Board of Directors of the Company.
(c) Cause. "Cause" shall mean:
(i) the willful and continued failure by the Participant to
substantially perform his duties with the Company or a Subsidiary (other
than any such failure resulting from the Participant's Disability),
within a reasonable period of time after a written demand for
substantial performance is delivered to the Participant by the board of
directors of the Participant's employer, which demand specifically
identifies the manner in which the board of directors of the
Participant's employer believes that the Participant has not
substantially performed his duties;
(ii) the failure by the Participant to materially conform to the
Company's policies and procedures, within a reasonable period of time
after a written demand for substantial performance is delivered to the
Participant by the board of directors of the Participant's employer,
which demand specifically identifies the manner in which the board of
directors of the Participant's employer believes that the Participant
has failed to materially conform to the Company's policies and
procedures;
(iii) the willful engaging by the Participant in conduct that is
demonstrably and materially injurious to the Company or a Subsidiary,
monetarily or otherwise; or
(iv) the engaging by the Participant in egregious misconduct
involving serious moral turpitude to the extent that, in the reasonable
judgment of the board of directors of the Participant's employer, the
Participant's credibility and reputation no longer conform to the
standard of the employer's employees.
For purposes of the Plan, no act, or failure to act, on the Participant's
part shall be deemed "willful" unless done, or omitted to be done, by the
Participant not in good faith and without reasonable belief that the
Participant's action or omission was in the best interest of the Company.
(d) Change of Control. For purposes of the Plan "Change in Control"
shall mean any of the following events:
(1) the acquisition in one or more transactions by any "Person" (as
the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act")) of
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the 1934 Act) of twenty-five percent (25%) or more of the combined
voting power of the
<PAGE> 189
Company's then outstanding voting securities (the "Voting Securities"),
provided, however, that for purposes of this Section 1.2(d), the Voting
Securities acquired directly from the Company by any Person shall be
excluded from the determination of such Person's Beneficial Ownership of
Voting Securities (but such Voting Securities shall be included in the
calculation of the total number of Voting Securities then outstanding);
or
(2) the individuals who, as of , 1999, are members of
the Board (the "Incumbent Board"), cease for any reason to constitute at
least two-thirds of the Board; provided, however, that if the election,
or nomination for election by the Company's stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of the Plan, be considered
as a member of the Incumbent Board; or
(3) approval by stockholders of the Company of (a) a merger or
consolidation involving the Company if the stockholders of the Company,
immediately before such merger or consolidation, do not own, directly or
indirectly immediately following such merger or consolidation, more than
eighty percent (80%) of the combined voting power of the outstanding
voting securities of the corporation resulting from such merger or
consolidation in substantially the same proportion as their ownership of
the Voting Securities immediately before such merger or consolidation or
(b) a complete liquidation or dissolution of the Company or an agreement
for the sale or other disposition of all or substantially all of the
assets of the Company; or
(4) acceptance of stockholders of the Company of shares in a share
exchange if the stockholders of the Company, immediately before such
share exchange, do not own, directly or indirectly immediately following
such share exchange, more than eighty percent (80%) of the combined
voting power of the outstanding voting securities of the Company
resulting from such share exchange in substantially the same proportion
as their ownership of the Voting Securities outstanding immediately
before such share exchange.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because twenty-five (25%) or more of the then outstanding Voting
Securities is acquired by (i) a trustee or other fiduciary holding securities
under one or more employee benefit plans maintained by the Company or any of its
subsidiaries or (ii) any corporation which, immediately prior to such
acquisition, is owned directly or indirectly by the stockholders of the Company
in the same proportion as their ownership of stock in the Company immediately
prior to such acquisition.
(e) Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) Committee. "Committee" means a committee of at least three members
of the Board who, at the time of service on the Committee hereunder, are,
and at all times within one year prior thereto, shall not have been
employees of the Company or any of its subsidiaries and shall not have been
eligible for selection as persons to whom Awards may be made or to whom
Options may be granted pursuant to the Plan, or any other plan of the
Company. All members of the Committee shall be "Outside Directors," as
defined or interpreted for purposes of Section 162(m) of the Code.
(g) Common Stock. "Common Stock" means the common stock, par value
$0.01 per share, of the Company.
(h) Company. "Company" means Hallwood Energy Corporation and its
successors and assigns.
(i) Date of Termination. The Participant's "Date of Termination" shall
be the first day occurring on or after the date on which a Participant is
granted an award on which the Participant is not employed by the Company or
any Subsidiary, regardless of the reason for the termination of employment;
provided that a termination of employment shall not be deemed to occur by
reason of a transfer of the Participant between the Company and a
Subsidiary or between two Subsidiaries; and further provided that the
Participant's employment shall not be considered terminated while the
Participant is on a leave of absence from the Company or a Subsidiary
approved by the Participant's
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employer. If, as a result of a sale or other transaction, the Participant's
employer ceases to be a Subsidiary (and the Participant's employer is or
becomes an entity that is separate from the Company), the occurrence of
such transaction shall be treated as the Participant's Date of Termination
caused by the Participant being discharged by the employer.
(j) Disability. "Disability" shall mean, except as otherwise
determined by the Committee, a condition that renders the Participant
unable, by reason of a medically determinable physical or mental
impairment, to engage in any substantial gainful activity, which condition,
in the opinion of a physician selected by the Committee, is expected to
have a duration of not less than 120 days.
(k) Eligible Participant. An "Eligible Participant" means those
persons who are directors, officers or key employees of, or consultants to
the Company or its Subsidiaries.
(l) Expiration Date. The "Expiration Date" with respect to an Option
means the date established as the Expiration Date by the Committee at the
time of the grant; provided, however, that the Expiration Date with respect
to any Award shall not be later than the earliest to occur of:
(i) the ten-year anniversary of the date on which the Award is
granted retirement; provided, however, that the expiration date of an
Option granted to any person who owns, directly or indirectly, stock
possessing more than 10% of the total combined voting power of all
classes of the Company's stock shall be the fifth anniversary of the
date on which the Award is granted.
(ii) if the Participant's Date of Termination occurs by reason of
death, Retirement or Disability, the one-year anniversary of such Date
of Termination;
(iii) if the Participant's Date of Termination occurs for reasons
other than Retirement, death or Disability, 90 days after such Date of
Termination.
Notwithstanding the foregoing provisions of this Section 1.2(l), if the
Participant dies while the Award is otherwise exercisable, the Expiration Date
may be later than the dates set forth above, provided that it is not later than
the first anniversary of the date of death.
(m) Fair Market Value. "Fair Market Value" of a share of Common Stock
or a share of Preferred Stock 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 purposes of this Plan, the "Closing Price" of the
Common Stock or Preferred Stock on any business day shall be: (i) if the
Common Stock or Preferred Stock is 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 Common Stock
or Preferred Stock on such exchange or system, as reported in any newspaper
of general circulation; (ii) if the Common Stock or the Preferred Stock is
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 Common Stock or
Preferred Stock on such system; (iii) if neither clause (i) nor (ii) is
applicable, the mean between the high bid and low asked quotations for
Common Stock or Preferred Stock as reported by the National Quotation
Bureau, Incorporated if at least two securities dealers have inserted both
bid and asked quotations for Common Stock or Preferred Stock on at least
five of the ten preceding days; or, (iv) in lieu of the above, if actual
transactions in the Common Stock or Preferred Stock are reported on a
consolidated transaction reporting system, the last sale price of the
Common Stock or Preferred Stock for such day and on such system.
(n) Incentive Stock Options. "Incentive Stock Option" shall mean any
Option designated as such and granted in accordance with the requirements
of Section 422 of the Code.
(o) Non-Employee Director. "Non-Employee Director" means a member of
the Board who is not otherwise an employee of the Company or any
Subsidiary.
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(p) Non-Qualified Stock Option. A "Non-Qualified Stock Option" means
an Option granted under the other than an Incentive Stock Option.
(q) Original Option. An "Original Option" is an Option with respect to
which a Reload Option is granted pursuant to Section 2.1(y).
(r) Participant. A "Participant" means any Eligible Participant that
is granted an Award under the Plan.
(s) Performance Award. A "Performance Award" means an Award granted
pursuant to Article IV.
(t) Performance Measures. "Performance Measures" means the objectives
established by the Committee pursuant to Section 4.1(b).
(u) Performance Period. "Performance Period" means the period over
which the performance of a holder of a Performance Award is measured.
(v) Plan. "Plan" means the 1999 Long-Term Incentive Plan of Hallwood
Energy Corporation.
(w) Preferred Stock. "Preferred Stock" means the Series A Preferred
Stock, par value $0.01 per share of the Company.
(x) Reload Option. "Reload Option" means a Reload Option granted
pursuant to Section 2.1(g).
(y) Restricted Stock Award. "Restricted Stock Award" means an Award of
stock of the Company that is granted pursuant to Article III that is
subject to the restrictions imposed by Article III.
(z) Retirement. "Retirement" shall mean the termination of the
Participant's employment by the Company or a Subsidiary after completing at
least five years of service and attaining age 65.
(aa) Stock Appreciation Right. A "Stock Appreciation Right" means a
Stock Appreciation Right granted pursuant to Section 2.2 hereof.
(bb) Subsidiary. A "Subsidiary" of the Company means any corporation,
partnership or other entity affiliated with the Company.
(cc) Withholding Tax. "Withholding Tax" means any Federal, state or
local withholding tax liability.
SECTION 1.3. Administration of the Plan.
(a) The Plan shall be administered by the Board or the Committee. The
Committee shall have authority to interpret conclusively the provisions of
the Plan, to adopt such rules and regulations for carrying out the Plan as
it may deem advisable, to decide conclusively all questions of fact arising
in the application of the Plan, to establish performance criteria in
respect of Awards under the Plan, to certify that Plan requirements have
been met for any Participant in the Plan, to submit such matters as it may
deem advisable to the Company's stockholders for their approval, and to
make all other determinations and take all other actions necessary or
desirable for the administration of the Plan. The Committee is expressly
authorized to adopt rules and regulations limiting or eliminating its
discretion in respect of certain matters as it may deem advisable to comply
with or obtain preferential treatment under any applicable tax or other law
rule, or regulation. All decisions and acts of the Committee shall be final
and binding upon all affected Plan Participants.
(b) The Committee shall designate the Eligible Participants, if any,
to be granted Awards and the type and amount of such Awards and the time
when Awards will be granted. All Awards granted under the Plan shall be on
the terms and subject to the conditions determined by the Committee
consistent with the Plan.
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<PAGE> 192
SECTION 1.4. Eligible Participants. Directors of the Company, key
employees, including officers, and consultants to the Company and its
Subsidiaries shall be eligible for Awards under the Plan.
SECTION 1.5. Awards Under the Plan. Awards to Eligible Participants may be
in the form of (i) Options (including Reload Options); (ii) Stock Appreciation
Rights, which may be issued independent of or in tandem with Options; (iii)
shares of Restricted Stock; (iv) Performance Awards; or (v) any combination of
the foregoing.
SECTION 1.6. Shares Subject to the Plan.
(a) General limitation. The aggregate number of shares of Common Stock
that may be issued under the Plan shall be 1,200,000. The aggregate number
of shares of Preferred Stock that may be issued under the Plan shall be
180,000. Shares distributed pursuant to the Plan may consist of authorized
but unissued shares of treasury stock of the Company, as shall be
determined from time to time by the Board. If any Award under the Plan
shall expire, terminate or be canceled (including cancellation upon the
Participant's holder's exercise of a related Stock Appreciation Right) for
any reason without having been exercised in full, or if any Award shall be
forfeited to the Company, the unexercised or forfeited Award shall not
count against the above limits and shall again become available for grants
under the Plan (unless the holder of such Award received dividends or other
economic benefits with respect to such Award, which dividends or other
economic benefits are not forfeited, in which case the award shall count
against the above limits). Shares of Common Stock or Preferred Stock equal
in number to the shares surrendered in payment of the option price, and
shares of Common Stock or Preferred Stock that are withheld in order to
satisfy Federal, state or local tax liability, shall not count against the
above limits. Only the number of shares of Common Stock or Preferred Stock
actually issued upon exercise of a Stock Appreciation Right shall count
against the above limits, and any shares that were estimated to be used for
such purposes and were not in fact so used shall again become available for
grants under the Plan. Cash exercises of Stock Appreciation Rights and cash
settlement of other Awards will not count against the above limits.
(b) Additional Limitations.
(i) The aggregate number of shares of Common Stock that may be
granted pursuant to an Award of Options or Stock Appreciation Rights
that may be awarded to any Eligible Participant shall not exceed 600,000
during any calendar year. The aggregate number of shares of Preferred
Stock that may be granted pursuant to an Award of Options, to any
Eligible Participant during any calendar year may not exceed 90,000.
(ii) No more than 600,000 shares of Common Stock or 90,000 shares
of Preferred Stock may be subject to Restricted Stock Awards or
Performance Awards that are intended to be "performance based
compensation" (as that term is used in Section 162(m) of the Code) may
be granted.
(iii) The aggregate amount of cash that may be credited to any one
Eligible Participant pursuant to any Performance Award during any one
year may not exceed $1,000,000.
(iv) The number of shares of Common Stock that will be available
under the Plan for Options granted in accordance with Section 2.3(i) is
600,000. The number of shares of Preferred Stock that will be available
under the Plan for Options granted in accordance with Section 2.3(i) is
90,000.
SECTION 1.7. Other Compensation Programs. Nothing contained in the Plan
shall be construed to preempt or limit the authority of the Board to exercise
its corporate rights and powers, including, but not by way of limitation, the
right of the Board (i) to grant incentive Awards for proper corporate purposes
otherwise than under the Plan to any employee, officer, director or other person
or entity or (ii) to grant incentive Awards to, or assume incentive Awards of,
any person or entity in connection a Change of Control.
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SECTION 1.8. Award Agreements. Each Award shall be evidenced by an
agreement that may contain any term deemed necessary or desirable by the
Committee, provided such terms are not inconsistent with this Plan or applicable
law.
ARTICLE II
STOCK OPTIONS AND SARS
SECTION 2.1. Terms and Conditions of Options. Subject to the following
provisions, all Options granted under the Plan to an Eligible Participant shall
be in such form and shall have such terms and conditions as the Committee, in
its discretion, may from time to time determine consistent with the Plan.
(a) Exercise Price. The exercise price per share shall be determined
by the Committee, except that in the case of an Option granted in
accordance with Section 2.3(i) the exercise price per share shall not be
less than 100 percent of the Fair Market Value, as determined by the
Committee of a share of Common Stock or Preferred Stock, as applicable, on
the date the Option is granted (110 percent in the case of an Incentive
Stock Option granted to a person who owns (within the meaning of Section
422(b)(6) of the Code) ten percent or more of the Company's stock) (other
than in the case of substitute or assumed Options to the extent required to
qualify such Options for preferential tax treatment.
(b) Term of Option. The term of an Option shall be determined by the
Committee, except that, in the case of an Incentive Stock Option, the term
of the Option shall not exceed ten years from the date of grant, and,
notwithstanding any other provision of this Plan, no Option shall be
exercised after the expiration of its term.
(c) Exercise of Options. Options shall be exercisable at such time or
times and subject to such terms and conditions as the Committee shall
specify in the Option agreement. Unless the Option agreement specifies
otherwise, the Committee shall have discretion at any time to accelerate
such time or times and otherwise waive or amend any conditions in respect
of all or any portion of the Options held by any Participant. An Option may
be exercised in accordance with its terms as to any or all shares
purchasable thereunder.
(d) Payment for Shares. The Committee may authorize payment for shares
as to which an Option is exercised to be made in cash, shares of Common
Stock or Preferred Stock, as applicable, a combination thereof, by
"cashless exercise" or in such other manner as the Committee in its
discretion may provide. The Committee, in its sole discretion and on such
terms as it may determine, may loan money to the Participant, guarantee a
loan to the Participant, or otherwise assist the Participant to obtain the
necessary cash to exercise all, or a portion of, an Award granted
hereunder, or to pay any tax liability of the Participant attributable to
such exercise.
(e) Stockholder Rights. The holder of an Option shall, as such, have
none of the rights of a stockholder.
(f) Termination of Employment. The Committee shall have discretion to
specify in the Option Agreement, or, with the consent of the Participant,
an amendment thereof, provisions with respect to the period, not extending
beyond the term of the Option, during which the Option may be exercised
following the optionee's termination of employment, provided, however, that
Incentive Stock Options that have not previously exercised, must be
exercised within three months following the Participant's termination of
employment unless employment is terminated because of Disability, in which
event the exercise period is extended to one year following termination.
(g) Reload Options. The Committee shall have the authority to specify,
at the time of grant or, with respect to Non-Qualified Stock Options, at or
after the time of grant, that the Participant to whom an Option is or was
granted under this Plan (which may include a former salaried officer or key
employee of the Corporation or any Subsidiary shall be granted a Reload
Option in the event such person exercises all or a part of an Original
Option by surrendering in accordance with
6
<PAGE> 194
Section 2.1(d) of this Plan already owned shares of unrestricted Common
Stock in full or partial payment of the exercise price under such Original
Option, subject to the availability of shares of stock under this Plan at
the time of such exercise. Each Reload Option shall cover a number of
shares of stock equal to the number of shares of stock surrendered in
payment of the exercise price under such Original Option, shall have an
exercise price per share of stock equal to the Fair Market Value of the
stock on the date of grant of such Reload Option and shall expire on the
stated expiration date of the Original Option. A Reload Option shall be
exercisable at any time and from time to time from and after the date of
grant of such Reload Option (or, as the Committee in its sole discretion
shall determine at or after the time of grant, at such time or times as
shall be specified in the Reload Option). Any Reload Option may provide for
the grant, when exercised, of subsequent Reload Options to the extent and
upon such terms and conditions, consistent with this Section 2.1(g), as the
Committee in its sole discretion shall specify at or after the time of
grant of such Reload Option. A Reload Option shall contain such other terms
and conditions, which may include a restriction on the transferability of
the shares of stock received upon exercise of the Original Option
representing at least the after-tax profit received upon exercise of the
Original Option, as the Committee in its sole discretion shall deem
desirable and which may be set forth in rules or guidelines adopted by the
Committee or in the Option agreement evidencing the Reload Option.
SECTION 2.2. Stock Appreciation Rights. An Award of a Stock Appreciation
Right shall entitle the Participant, subject to terms and conditions determined
by the Committee, to receive upon exercise of the right, all or a portion of the
excess of (i) the Fair Market Value of a specified number of shares of Common
Stock at the time of exercise over (ii) a specified price that shall not be less
than 100% of the Fair Market Value of the shares of Common Stock at the time of
grant. Stock Appreciation Rights may be granted in connection with a previously
or contemporaneously granted Option, or independent of any Option. If issued in
connection with an Option, the Committee may impose a condition that exercise of
a Stock Appreciation Right cancels the Option with which it is connected. A
Stock Appreciation Right may not be exercised at any time when the Fair Market
Value of the shares of Common Stock to which it relates does not exceed the
exercise price of the Option associated with those shares of Common Stock. A
Stock Appreciation Right issued in connection with an Option may be exercised at
any time the Option to which it relates is exercisable, but only to the extent
the Option to which it relates is then exercisable, and shall be subject to the
conditions applicable to such Option.
SECTION 2.3. Statutory Options. Subject to the limitations on Option terms
set forth in Section 2.1(b), the Committee shall have the authority to grant (i)
Incentive Stock Options within the meaning of Section 422 of the Code and (ii)
Options containing such terms and conditions as shall be required to qualify
such Options for preferential tax treatment under the Code as in effect at the
time of such grant. Options granted pursuant to this Section 2.3 may contain
such other terms and conditions permitted by Article II of this Plan as the
Committee, in its discretion, may from time to time determine (including,
without limitation, provision for Stock Appreciation Rights), to the extent that
such terms and conditions do not cause the Options to lose their preferential
tax treatment; provided, however, that the aggregate Fair Market Value (as
determined on the date of the grant) of the stock with respect to which
Incentive Stock Options are exercisable for the first time by any Participant
during any calendar year shall not exceed $100,000.
SECTION 2.4. Change of Control. Notwithstanding the exercisability schedule
governing any Option or Stock Appreciation Right, unless otherwise provided in
the grant relating to a specific Award of an Option or Stock Appreciation Right
or other agreement with the Participant, upon the occurrence of a Change of
Control, all Options and Stock Appreciation Rights outstanding at the time of
such Change of Control and held by participants at the time of such Change of
Control shall become immediately exercisable and, unless the Participant agrees
otherwise in writing, remain exercisable for three years (but not beyond the
term of the Option or Stock Appreciation Right) after the Participant's
termination of employment for any reason other than termination by the Company
or a Subsidiary for Cause.
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ARTICLE III
RESTRICTED STOCK
SECTION 3.1. Terms and Conditions of Restricted Stock Awards. Subject to
the following provisions, all Awards of Restricted Stock under the Plan to an
Eligible Participant shall be in such form and shall have such terms and
conditions as the Committee, in its discretion, may from time to time determine
consistent with the Plan.
(a) Restricted Stock Award. The Restricted Stock Award shall specify
the number of shares of Restricted Stock to be awarded, the price, if any,
to be paid by the Participant receiving the Restricted Stock Award, and the
date or dates on which the Restricted Stock will vest. The vesting and
number of shares of Restricted Stock may be conditioned upon the completion
of a specified period of service with the Company or its Subsidiaries or
upon the attainment of any of the following specified performance goals as
fixed by the Committee: (i) net income before or after extraordinary items,
operating income, income before taxes, earnings before depreciation,
interest and taxes, cash flow or revenues of (x) the Company on a
consolidated basis, (y) one or more Subsidiaries or (z) one or more
operating divisions, departments, units or segments of the Company or one
or more of its Subsidiaries; (ii) return on equity; (iii) return on capital
employed; (iv) return on net assets; (v) increases in the market price of
the Common Stock or other securities of the Company before or after
dividends; (vi) the performance of the Company's Common Stock or other
securities in comparison to other stocks, stock indexes or groups of stocks
or other investments; (vii) increases in sales, margins or profit on a
Company, Subsidiary, division, department unit, segment, product or product
line basis; or (viii) any combination of the above.
(b) Restrictions on Transfer. Unless otherwise provided in the grant
relating to the Restricted Stock Award, stock certificates representing the
Restricted Stock granted to a Participant shall be registered in the
Participant's name or at the option of the Committee not issued until such
time as the Restricted Stock shall become vested or otherwise determined by
the Committee. If certificates are issued prior to the shares of Restricted
Stock becoming vested, such certificates shall either be held by the
Company on behalf of the Participant, or delivered to the Participant
bearing a legend to restrict transfer of the certificate until the
Restricted Stock has vested, as determined by the Committee. The Committee
shall determine whether the Participant shall have the right to vote and/or
receive dividends on the Restricted Stock before it has vested. Except as
may otherwise be expressly permitted by the Committee, no share of
Restricted Stock may be sold, transferred, assigned, or pledged by the
Participant until such share has vested in accordance with the terms of the
Restricted Stock Award. Unless the grant of a Restricted Stock Award
specifies otherwise, in the event of a Participant's termination of
employment before all the Participant's Restricted Stock has vested, or in
the event other conditions to the vesting of Restricted Stock have not been
satisfied prior to any deadline for the satisfaction of such conditions set
forth in the Award, the shares of Restricted Stock that have not vested
shall be forfeited and any purchase price paid by the employee shall be
returned to the Participant. At the time Restricted Stock vests (and, if
the Participant has been issued legend certificates of Restricted Stock,
upon the return of such certificates to the Company), a certificate for
such vested shares shall be delivered to the Participant (or the
beneficiary designated by the Participant in the event of death), free of
all restrictions.
(c) Accelerated Vesting. Notwithstanding the vesting conditions set
forth in the Restricted Stock Award unless the Restricted Stock Award grant
or other agreement with the Participant thereof specifies otherwise (i) the
Committee may in its discretion at any time accelerate the vesting of
Restricted Stock or otherwise waive or amend any conditions of a grant of a
Restricted Stock Award, and (ii) all shares of Restricted Stock shall vest
upon a Change of Control of the Company.
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<PAGE> 196
ARTICLE IV
PERFORMANCE AWARDS
SECTION 4.1. Terms and Conditions of Performance Awards. The Committee
shall be authorized to grant Awards that are intended to be "performance-based
compensation" ("Performance Awards"), which are payable in stock, cash or a
combination thereof, at the discretion of the Committee.
(a) Performance Period. The Committee shall establish with respect to
each Performance Award a Performance Period over which the performance of
the holder of such Performance Award shall be measured. The Performance
Period for a Performance Award shall be established at the time such
Performance Award is granted and may overlap with performance periods
relating to other Performance Awards granted hereunder to the same
Participant.
(b) Performance Objectives. The Committee shall establish a minimum
level of acceptable achievement for the Participant at the time of the
grant of each Performance Award. Each Performance Award shall be contingent
upon future performance and achievement of the Performance Measures fixed
by the Committee. Such Performance Measures shall be based on (i) net
income before or after extraordinary items, operating income, income before
taxes, earnings before depreciation, interest and taxes, cash flow or
revenues of (x) the Company on a consolidated basis, (y) one or more
Subsidiaries or (z) one or more operating divisions, departments, units or
segments of the Company or one or more of its Subsidiaries; (ii) return on
equity; (iii) return on capital employed; (iv) return on net assets; (v)
increases in the market price of the Common Stock or other securities of
the Company before or after dividends; (vi) the performance of the
Company's Common Stock or other securities in comparison to other stocks,
stock indexes or groups of stocks or other investments; (vii) increases in
sales, margins or profit on a Company, Subsidiary, division, department,
unit, segment, product or product line basis; or (viii) any combination of
the above. For Awards intended to be "performance-based compensation," the
grant of the Performance Award and the establishment of the Performance
Measures shall be made during the period required under Section 162(m) of
the Code.
(c) Amount, Frequency of Vesting. The Committee shall have the
authority to determine at the time of grant of the Performance Award the
maximum value of a Performance Award, the frequency of Performance Awards
and the date or dates when Performance Awards vest.
(d) Payment. Following the end of each Performance Period, the holder
of each Performance Award will be entitled to receive payment of an amount,
not exceeding the maximum value of the Performance Award, based on the
achievement of the Performance Measures for such Performance Period, as
determined by the Committee. If at the end of the Performance Period the
specified Performance Measures have been attained, the Participant shall be
deemed to have fully earned the Performance Award. Unless otherwise
provided in the Performance Award, if the Participant exceeds the specified
minimum level of acceptable achievement but does not attain such
objectives, the Participant shall be deemed to have partly earned the
Performance Award, and shall become entitled to receive a portion of the
total award, as determined by the Committee. Unless otherwise provided in
the Performance Award, if a Performance Award is granted after the start of
a Performance Period, the Performance Award shall be reduced to reflect the
portion of the Performance Period during which the Performance Award was in
effect. Unless the Performance Award specifies otherwise, the Committee may
adjust the payment of Performance Awards or the performance objectives if
events occur or circumstances arise which would cause a particular payment
or set of performance objectives to be inappropriate, as determined by the
Committee.
(e) Termination of Employment. Unless otherwise provided in the
agreement relating to the Performance Award or other agreement with the
Participant, a Participant that receives a Performance Award who, by reason
of death, Disability or Retirement, terminates employment before the end of
the applicable Performance Period shall be entitled to receive, to the
extent earned, a portion of the Performance Award that is proportional to
the portion of the Performance Period during which the Participant was
employed. Unless otherwise provided in the grant relating to the
Performance Award or other agreement with the Participant, a Participant
who receives a
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<PAGE> 197
Performance Award who terminates employment for any other reason shall not
be entitled to any part of the Performance Award unless the Committee
determines otherwise.
(f) Accelerated Vesting. Notwithstanding the vesting conditions set
forth in a Performance Award, unless the Performance Award specifies
otherwise (i) the Committee may in its discretion at any time accelerate
vesting of the Performance Award or otherwise waive or amend any conditions
(including but not limited to performance objectives) in respect of a
Performance Award, and (ii) all Performance Awards shall vest upon a Change
of Control of the Company. In addition, unless a Performance Award
specifies otherwise, each Participant shall receive the maximum Performance
Award such Participant could have earned for the proportionate part of the
Performance Period prior to the Change of Control, and shall retain the
right to earn any additional portion of his or her Performance Award if
such Participant remains in the Company's employ.
(g) Stockholder Rights. The holder of a Performance Award shall, as
such, have none of the rights of a stockholder.
ARTICLE V
ADDITIONAL PROVISIONS
SECTION 5.1. General Restrictions. Each Award under the Plan shall be
subject to the requirement that, if at any time the Committee shall determine
that (i) the listing, registration or qualification of the shares of Common
Stock or Preferred Stock subject or related thereto upon any securities exchange
or under any state or Federal law; (ii) the consent or approval of any
government regulatory body; or (iii) an agreement by the recipient of an Award
with respect to the disposition of shares of Common Stock or Preferred Stock, is
necessary or desirable (in connection with any requirement or interpretation of
any Federal or state securities law, rule or regulation) as a condition of, or
in connection with, the granting of such Award or the issuance, purchase or
delivery of shares of Common Stock or Preferred Stock thereunder, such Award may
not be consummated in whole or in part unless such listing, registration,
qualification, consent, approval or agreement shall have been effected or
obtained free of any conditions not acceptable to the Committee.
SECTION 5.2. Adjustments for Changes in Capitalization. In the event of any
stock dividends, stock splits, recapitalization, combinations, exchanges of
shares, mergers, consolidation, liquidations, split-ups, split-offs, spin-offs
or other similar changes in capitalization, or any distribution to stockholders,
including a rights offering, other than regular cash dividends, changes in the
outstanding stock of the Company by reason of any increase or decrease in the
number of issued shares of Common Stock or Preferred Stock resulting from a
split-up or consolidation of shares or any similar capital adjustment or the
payment of any stock dividend, any share repurchase at a price in excess of the
market price of the Common Stock or Preferred Stock at the time such repurchase
is announced or other increase or decrease in the number of such shares, the
Committee shall make appropriate adjustment in the number and kind of shares
authorized by the Plan (including shares available for Incentive Stock Options),
in the number, price or kind of shares covered by the Awards and in any
outstanding Awards under the Plan; provided, however, that no such adjustment
shall increase the aggregate value of any outstanding Award.
In the event of any adjustment in the number of shares covered by any
Award, any fractional shares resulting from such adjustment shall be disregarded
and each such Award shall cover only the number of full shares resulting from
such adjustment.
SECTION 5.3. Amendments.
(a) The Board may at any time and from time to time and in any respect
amend or modify the Plan.
(b) The Committee shall have the authority to amend any Award to
include any provision which, at the time of such amendment, is authorized
under the terms of the Plan; however, no outstanding Award may be revoked
or altered in a manner unfavorable to the holder without the written
consent of the holder.
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<PAGE> 198
SECTION 5.4. Cancellation of Awards. Any Award granted under the Plan may
be canceled at any time with the consent of the holder and a new Award may be
granted to such holder in lieu thereof, which award may, in the discretion of
the Committee, be on more favorable terms and conditions than the canceled
Award.
SECTION 5.5. Beneficiary. A Participant may file with the Company a written
designation of beneficiary, on such form as may be prescribed by the Committee,
to receive any Options, Stock Appreciation Rights, shares of Restricted Stock,
Common Stock, Preferred Stock and Performance Awards that become deliverable to
the Participant pursuant to the Plan after the Participant's death. A
Participant may, from time to time, amend or revoke a designation of
beneficiary. If no designated beneficiary survives the Participant, the executor
or administrator of the Participant's estate shall be deemed to be the
Participant's beneficiary.
SECTION 5.6. Withholding. Whenever the Company proposes or is required to
issue or transfer shares of Common Stock or Preferred Stock under the Plan, the
Company shall have the right to require the holder to pay an amount in cash or
to retain or sell without notice, or demand surrender of, shares of Common Stock
or Preferred Stock, as applicable, in value sufficient to satisfy any
Withholding Tax prior to the delivery of any certificate for such shares (or
remainder of shares if Common Stock or Preferred Stock is retained to satisfy
such Withholding Tax). Whenever payments under the Plan are to be made in cash,
such payments shall be net of an amount sufficient to satisfy any Withholding
Tax liability.
Whenever Common Stock or Preferred Stock is so retained, sold or
surrendered to satisfy Withholding Tax, the value of shares of Common Stock or
Preferred Stock so retained, sold or surrendered shall be determined by the
Committee, and the value of shares of Common Stock or Preferred Stock so sold
shall be the net proceeds (after deduction of commissions) received by the
Company from such sale, as determined by the Committee.
SECTION 5.7. Transferability. Except as expressly provided in the Plan or
as may be permitted by the Committee, no Award under the Plan shall be
assignable or transferable by the holder thereof except by will or by the laws
of descent and distribution. Except as expressly provided in the Plan or as may
be permitted by the Committee, during the life of the holder, Awards under the
Plan shall be exercisable only by such holder or by the guardian or legal
representative of such holder.
SECTION 5.8. Non-uniform Determinations. Determinations by the Committee
under the Plan (including, without limitation, determinations of the persons to
receive Awards; the form, amount and timing of such Awards; the terms and
provisions of such Awards and the agreements evidencing same; and provisions
with respect to termination of employment) need not be uniform and may be made
by it selectively among persons who receive, or are eligible to receive, Awards
under the Plan, whether or not such persons are similarly situated.
SECTION 5.9. No Guarantee of Employment. The grant of an Award under the
Plan shall not constitute an assurance of continued employment for any period or
any obligation of the Board of Directors to nominate any director for reelection
by the Company's stockholders.
SECTION 5.10. Deferred Compensation and Trust Agreements. The Committee may
authorize and establish deferred compensation agreements and arrangements in
connection with Awards under the Plan and may establish trusts and other
arrangements, including "rabbi trusts", with respect to such agreements and
appoint one or more trustees for such trusts. Shares of Common Stock or
Preferred Stock under the Plan may also be acquired by one or more trustees from
the Company, in the open market or otherwise.
SECTION 5.11. Duration and Termination.
(a) The Plan shall be of unlimited duration. Notwithstanding the
foregoing, no incentive stock option (within the meaning of Section 422 of
the Code) shall be granted under the Plan ten (10) years after the approval
of the Company's stockholders, but Awards granted prior to such date may
extend beyond such date, and the terms of this Plan shall continue to apply
to all Awards granted hereunder.
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<PAGE> 199
(b) The Board of Directors may suspend, discontinue or terminate the
Plan at any time. Such action shall not impair any of the rights of any
holder of any Award outstanding on the date of the Plan's suspension,
discontinuance or termination without the holder's written consent.
SECTION 5.12. Effective Date. The Plan shall be effective as of
,1999, subject to approval of a majority of the Company's stockholders present
and eligible to vote at a meeting of the stockholders of the Corporation at
which a quorum is present.
12
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APPENDIX G
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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-8921
----------
HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
----------
DELAWARE 84-0987088
(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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
CLASS A UNITS OF LIMITED PARTNERSHIP INTERESTS AMERICAN STOCK EXCHANGE
CLASS C UNITS OF LIMITED PARTNERSHIP INTERESTS AMERICAN STOCK EXCHANGE
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. [ ]
The aggregate market value of the Class A and Class C Units held by
nonaffiliates of the registrant as of March 24, 1999 was approximately
$30,238,000.
Number of Units outstanding as of March 24, 1999
Class A 10,011,852
Class B 143,773
Class C 2,464,063
Page 1 of 73
<PAGE> 201
PART I
ITEM 1 - BUSINESS
Hallwood Energy Partners, L.P. ("HEP" or the "Partnership") is a publicly traded
Delaware limited partnership engaged in the development, acquisition and
production of oil and gas properties in the continental United States. HEP's
objective is to provide its partners with an attractive return through a
combination of cash distributions and capital appreciation. To achieve its
objective, HEP utilizes operating cash flow, first, to reinvest in operations to
maintain its reserve base and production; second, to make stable cash
distributions to Unitholders; and third, to grow HEP's reserve base over time.
HEP's future growth will be driven by a combination of development of existing
projects, exploration for new reserves and select acquisitions. HEPGP Ltd.
("HEPGP") became the general partner of HEP on November 26, 1996 after the
former general partner, Hallwood Energy Corporation ("HEC") merged into The
Hallwood Group Incorporated ("Hallwood Group""). HEPGP Ltd. is a limited
partnership of which Hallwood Group is the limited partner and Hallwood G.P.,
Inc. ("Hallwood G.P."), a wholly owned subsidiary of Hallwood Group, is the
general partner. 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.
The activities of HEP are conducted by HEP Operating Partners, L.P. ("HEPO") and
EDP Operating Ltd. ("EDPO"). HEP is the sole limited partner and HEPGP Ltd. is
the sole general partner of HEPO and 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.
HEP does not engage in any other line of business nor does it have any
employees. Hallwood Petroleum, Inc. ("HPI"), an affiliated entity, operates the
properties and administers the day to day activities of HEP and its affiliates.
On March 24, 1999, HPI has 108 employees.
MARKETING
The oil and gas produced from the properties owned by HEP has typically been
marketed through normal channels for such products. The Partnership generally
sells its oil at local field prices generally paid by the principal purchasers
of crude oil in the areas where the majority of producing properties are
located. In response to the volatility in the oil markets, HEP has entered into
financial contracts for hedging the price of 2% of its estimated oil production
for 1999.
All of HEP's natural gas production is sold on the spot market or in short-term
contracts and is transported in intrastate and interstate pipelines. HEP has
entered into financial contracts for hedging the price of between 30% and 45% of
its estimated gas production for 1999 through 2002.
The purpose of the hedges is to provide protection against price decreases 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 an increase or decrease in 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. HEP 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 HEP's business
because there are numerous other purchasers in the areas in which HEP sells its
production. However, for the years ended December 31, 1998, 1997 and 1996,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Partnership:
-2-
<PAGE> 202
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Conoco Inc. 23% 20% 28%
El Paso Field Services Company 11% 11%
Marathon Petroleum Company 16% 11%
</TABLE>
Factors, if they were to occur, which might adversely affect HEP 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
HEP encounters competition from other oil and gas companies in all areas of its
operations, including the acquisition of exploratory prospects and proven
properties. The Partnership's competitors include major integrated oil and gas
companies and numerous independent oil and gas companies, individuals and
drilling and income programs. 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
Production and sale of oil and gas is subject to federal and state governmental
regulation in a variety of ways, including environmental regulations, labor
laws, 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 HEP 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, the general partner cannot predict
what effect possible future public or private action may have on the business of
HEP. The general partner is continually taking actions it believes are necessary
in its operations to ensure conformity with applicable federal, state and local
environmental regulations. As of December 31, 1998, HEP has not been fined or
cited for any environmental violations which would have a material adverse
effect upon capital expenditures, earnings, cash flows or the competitive
position of HEP in the oil and gas industry.
INSURANCE COVERAGE
HEP is subject to all the risks inherent in the exploration for, and development
of, oil and gas, including blowouts, fires and other casualties. HEP maintains
insurance coverage as is customary for entities of a similar size engaged in
operations similar to that of HEP, 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 HEP's earnings, cash flows and financial position.
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<PAGE> 203
ISSUES RELATED TO THE YEAR 2000
General. The following Year 2000 statements constitute a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998. The Year 2000 problem has arisen because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs do not properly recognize and process date-sensitive
information beyond 1999. In general, there are two areas where Year 2000
problems may exist for the Partnership: information technology such as
computers, programs and related systems ("IT") and non-information technology
systems such as embedded technology on a silicon chip ("Non IT").
The Plan. The Partnership's Year 2000 Plan (the "Plan") has four phases: (i)
assessment, (ii) inventory, (iii) remediation, testing and implementation and
(iv) contingency plans. Approximately twelve months ago, the Partnership began
its phase one assessment of its particular exposure to problems that might arise
as a result of the new millennium. The assessment and inventory phases have been
substantially completed and have identified the Partnership's IT systems that
must be updated or replaced in order to be Year 2000 compliant. In particular,
the software used by the Partnership for reservoir engineering must be updated
or replaced. Remediation, testing and implementation are scheduled to be
completed by June 30, 1999, and the contingency plans phase of the Plan is
scheduled to be completed by September 30, 1999.
However, the effects of the Year 2000 problem on IT systems are exacerbated
because of the interdependence of computer systems in the United States. The
Partnership's assessment of the readiness of third parties whose IT systems
might have an impact on the Partnership's business has thus far not indicated
any material problems; responses have been received to approximately 50% of the
172 inquiries made.
With regard to the Partnership's Non IT systems, the Partnership believes that
most of these systems can be brought into compliance on schedule. The
Partnership's assessment of third party readiness is not yet completed. Because
Non IT systems are embedded chips, it is difficult to determine with complete
accuracy where all such systems are located. As part of its Plan, the
Partnership is making formal and informal inquiries of its vendors, customers
and transporters in an effort to determine the third party systems that might
have embedded technology requiring remediation.
Estimated Costs. Although it is difficult to estimate the total costs of
implementing the Plan through January 1, 2000 and beyond, the Partnership's
preliminary estimate is that such costs will not be material. To date, the
Partnership has determined that its IT systems are either compliant or can be
made compliant for less than $150,000. However, although management believes
that its estimates are reasonable, there can be no assurance, for the reasons
stated in the next paragraph, that the actual cost of implementing the Plan will
not differ materially from the estimated costs.
Potential Risks. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. This risk exists both as to the Partnership's IT and
Non IT systems, as well as to the systems of third parties. Such failures could
materially and adversely affect the Partnership's results of operations, cash
flow and financial condition. Due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third party suppliers, vendors and transporters, the Partnership is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Partnership's results of operations, cash
flow or financial condition. Although the Partnership is not currently able to
determine the consequences of Year 2000 failures, its current assessment is that
its area of greatest potential risk in its third party relationships is in
connection with the transporting and marketing of the oil and gas produced by
the Partnership. The Partnership is contacting the various purchasers and
pipelines with which it regularly does business to determine their state of
readiness for the Year 2000. Although in general the purchasers and pipelines
will not guaranty their state of readiness, the responses received to date have
indicated no material problems. The Partnership believes that in a worst case
scenario, the failure of its purchasers and transporters to conduct business in
a normal fashion could have a material adverse effect on cash flow for a period
of six to nine months. The Partnership's Year 2000 Plan is expected to
significantly reduce the Partnership's level of uncertainty about the compliance
and readiness of these material third parties. The evaluation of third party
readiness will be followed by the Partnership's development of contingency
plans.
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<PAGE> 204
Cautionary Statement Regarding Forward-Looking Statements. The dates for
completion of the phases of the Year 2000 Plan are based on the Partnership's
best estimates, which were derived using numerous assumptions of future events.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-parties and the
interconnection of computer systems, the Partnership cannot ensure its ability
to timely and cost-effectively resolve problems associated with the Year 2000
issue that may affect its operations and business. Accordingly, partners are
cautioned that certain events or circumstances could cause actual results to
differ materially from those projected, estimated or predicted.
ITEM 2 - PROPERTIES
EXPLORATION AND DEVELOPMENT PROJECTS AND ACQUISITIONS
In 1998, HEP incurred $40,936,000 in direct property additions, development,
exploitation and exploration costs. The costs were comprised of $28,756,000 for
property acquisitions and approximately $12,180,000 for domestic exploration and
development. The expenditures resulted in the drilling, recompletion, or
workover of 44 development wells and 36 exploration wells. HEP completed 39
development wells (89%) and 18 exploration wells (50%) for an overall completion
rate of 71%. HEP's 1998 capital program led to the replacement, including
revisions to prior year reserves, of 72% of 1998 production using year-end
prices of $10.00 per bbl and $1.90 per mcf. Using five-year average prices of
$16.75 per bbl and $1.86 per mcf, HEP's reserve replacement for 1998 would have
been 136% of 1998 production. Management utilizes average price reserves
internally because it believes these prices more accurately reflect the value to
be achieved over time. Excluded from these calculations are sales of reserves in
place in 1998, which were approximately 2% of 1998 production. In 1998, HEP
expended approximately $1,495,000 for land and seismic costs, which HEP
anticipates will yield prospects for 1999 and subsequent years.
PROPERTY SALES
During 1998, HEP received approximately $454,000 for the sale of 67 nonstrategic
properties located in eight states.
REGIONAL AREA DESCRIPTIONS AND 1998 CAPITAL BUDGET
The following discussion of HEP's properties and capital projects contains
forward-looking statements that are based on current expectations, estimates and
projections about the oil and gas industry, management's beliefs and assumptions
made by management. Words such as "projects," "believes," "expects,"
"anticipates," "estimates," "plans," "could," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Please refer to the section entitled "Cautionary Statement Regarding
Forward-Looking Statements" for a discussion of factors which could affect the
outcome of the forward-looking statements.
GREATER PERMIAN REGION
HEP has significant interests in the Greater Permian Region, which includes West
Texas and Southeast New Mexico. In this region, HEP has interests in 537
productive oil and gas wells (423 of which are operated), 38 operated shut-in
oil and gas wells and 17 (15 operated) salt water disposal wells or injection
wells. In 1998, HEP expended approximately $12,070,000 (29%) of its capital
budget on projects in this area. HEP spent approximately $2,598,000 for
drilling, recompletion, or workover of 24 development wells and for drilling 18
exploration wells. Seventy-nine percent of the wells drilled or recompleted are
producing. The following is a description of the significant areas and 1998
capital projects within the Greater Permian Region.
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ARCADIA ACQUISITION. In October 1998, HEP purchased for $8,200,000 oil and gas
properties including interests in approximately 570 wells located primarily in
Texas, numerous proven and unproven drilling locations, exploration acreage, and
3-D seismic data. HPI operates approximately 85% of the proven property value.
The acquisition added estimated proven reserves of approximately 565,000 barrels
of oil and 5.3 billion cubic feet of natural gas at five-year average prices,
and approximately 465,000 barrels of oil and 5.3 billion cubic feet of natural
gas at year-end pricing. HEP's estimated proven reserve addition of 8.7 bcfe
represents approximately 47% of HEP's 1998 production at five-year average
prices, and 43% of HEP's 1998 production at year-end prices. HEP estimates that
gross 1999 production from the properties could be approximately 1.1 bcfe. In
1999, HEP plans to divest approximately 400 of the wells acquired from Arcadia.
The wells to be sold are nonstrategic, nonoperated, and represent only 6% of the
acquisition's production and 4% of its average price value. During 1999 HEP
plans to study the areas for future development project implementation.
CARLSBAD/CATCLAW AREA. HEP's interests in the Carlsbad/Catclaw Area as of
December 31, 1998 consisted of 93 producing wells that produce primarily natural
gas and are located on the northwestern edge of the Delaware Basin in Lea, Eddy
and Chaves Counties, New Mexico. HPI operates 37 of these wells. The wells
produce at depths ranging from approximately 2,500 feet to 14,000 feet from the
Delaware, Atoka, Bone Springs and Morrow formations. In 1998, HEP spent
approximately $886,000 recompleting or drilling nine producing development wells
and drilling one unsuccessful exploration well. HEP expects to continue operated
development drilling in the Hat Mesa Field.
EAST KEYSTONE AREA. HEP's interest in the East Keystone Area as of December 31,
1998 consisted of 55 producing wells, 37 of which are operated by HPI, in
Winkler County, Texas. The primary focus of this area is the development of the
Holt and San Andreas formations at a depth of 5,100 feet. During 1998, HEP had
eight development projects, of which seven were successful. HEP's future
development plans include a total of three projects for this area.
MERKLE AREA. HEP's interest in the Merkle Area as of December 31, 1998 consisted
of 29 producing wells, 16 of which are operated by HPI in Taylor and Nolan
Counties, Texas. HEP's nonoperated interest in the Merkle Area includes 10
square miles of proprietary seismic data in Jones, Nolan and Taylor Counties,
Texas, which was acquired in 1995. Based on its initial success in the
nonoperated Merkle Area, HEP acquired 74 additional miles of proprietary 3-D
seismic data adjacent to the nonoperated area. HEP's focus in this area is
exploration of the Canyon, Strawn, Flippen, Tannehill and Ellenberger formations
at depths of 2,500 to 6,500 feet. In 1998, HEP drilled 11 exploration wells and
one development well, nine of which were completed. HEP incurred approximately
$975,000 in costs in 1998 for the 12 wells drilled. HEP owns an average 28.5%
working interest in the wells. Even with current low crude oil prices, continued
drilling in this area is economic, and HEP anticipates additional 1999 drilling
to continue to exploit the reef structures.
GRIFFIN PROJECT. In 1998, HEP purchased land for $102,000 and incurred costs of
approximately $420,000 to drill three exploration wells and one development well
in Gaines County, Texas. None of the four nonoperated 7,500 foot Leonardian Sand
wells was successful. Due to limited delineation drilling potential in this
crude oil focused area and low oil prices, HEP will delay future drilling and
evaluate the viability of the remaining exploration projects. HEP owns an
average 22% working interest in the prospect area.
SPRABERRY AREA. HEP's interests in the Spraberry Area consist of 360 producing
wells, 13 salt water disposal wells and 36 shut-in wells in Dawson, Upton,
Reagan and Irion Counties, Texas. HPI operates 380 of these wells. Most of the
current production from the wells is from the Upper and Lower Spraberry,
Clearfork Canyon, Dean and Fusselman formations at depths ranging from 5,000
feet to 9,000 feet. During 1998, HEP drilled or recompleted three wells, all of
which are producing. As a result of low crude oil prices, HEP abandoned
twenty-three wells in this area in 1998. During 1999, HEP plans to shut-in 29
uneconomic wells and has scheduled 25 additional wells for abandonment. The
wells scheduled for shut-in produce, in total, only 150 mcfe per day, net to
HEP, and were operating at a net loss to HEP of $270,000 per year. Future plans
for this area include eight development wells and workovers and additional
projects contingent upon future evaluation. The price of crude oil must increase
before these projects can be considered viable.
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GULF COAST REGION
HEP has significant interests in the Gulf Coast Region in Louisiana and South
and East Texas. HEP's most significant interest in the Gulf Coast Region
consists of 23 producing gas wells and six salt water disposal wells located in
Lafayette Parish, Louisiana. The wells produce principally from the Bol Mex
formations at 13,500 to 14,500 feet and 11 are operated by HPI. The two most
significant wells in the area are the A.L. Boudreaux #1 and the G.S. Boudreaux
Estate #1. In South and East Texas, HEP has interests in 203 wells, 65 of which
are operated by HPI and produce primarily from the Austin Chalk, Paluxy, Lower
Frio and Cotton Valley formations at depths from 7,000 to 13,000 feet. During
1998, HEP expended approximately $5,821,000 (14%) of its capital budget in this
region. The following discussion relates to major 1998 capital projects within
the region.
BELL PROJECT. HEP has a 30% working interest in an operated project to evaluate
the Buda, Carrizo, Woodbine, and Dexter sands in Houston County, Texas. HEP's
drilling costs in 1998 for a 9,200-foot horizontal well were approximately
$615,000. The well encountered Buda pay and sales of production began in
December 1998, after gas processing equipment was installed. The well primarily
produces oil. HEP achieved gross sustained production rates of 8.2 mmcfe per
day; however, due to current low oil prices, flowing rates have been reduced to
approximately 4 mmcfe per day. HEP also incurred $375,000 in 1998 for land and
leasehold costs relating to the project. HEP plans additional delineation
drilling in 1999. HEP anticipates that single or multi-lateral horizontal
drilling will be the principal drilling practice used in this area. The gross
targeted potential for the project could be 2.4 bcfe per well. There can be no
assurance, however, that any wells drilled will be successful.
BISON PROSPECT. HEP participated in a nonoperated 18,000 foot exploratory well
in Lafayette Parish, Louisiana, targeting a large Klump sands structure.
Drilling problems prevented the well from reaching total depth and testing the
primary target horizon in the prospect; however, the secondary target horizon
was tested and found to be non-productive. The well was plugged and abandoned.
Total land and drilling costs incurred by HEP during 1998 for its 7.5% working
interest were approximately $550,000.
BLUE MOON PROJECT. During 1998, HEP entered into a farmout arrangement under
which it contributed acreage to a project drilled in Lafayette Parish,
Louisiana. A well was recently completed and tested over 14 mmcfe of gas per
day. HEP's after payout working interest in the well depends on unit boundary
determinations, but HEP anticipates that its working interest will be between 5%
and 7%. HEP paid no capital costs for its interest in the well, and payout is
expected to occur during the second quarter of 1999.
EAST SMITH POINT. In 1998, HEP participated in a Frio sand recompletion and a
3-D seismic review of the deep Vicksburg located in Chambers County, Texas. HEP
owns a 49% working interest in the project and spent approximately $305,000 for
drilling costs and approximately $426,000 for land and geologic and geophysical
data. In 1998, the first 14,000-foot recompletion was unsuccessful.
HEP does not plan additional activity in this area.
ESPERANZA PROJECT. HEP owns a 7.9% working interest in a nonoperated 15,400-foot
directional exploration discovery in the Wilcox formation in LaVaca County,
Texas. The natural gas prospect was developed using proprietary 3-D seismic
data, and the prospect could have a gross target of 60 bcf. The initial well has
been completed and showed gross production rates of 10 mmcfd at a flowing tubing
pressure of 9,000 psi. HEP spent approximately $365,000 in 1998 for its share of
costs. HEP plans to participate in additional wells in 1999 to further exploit
this discovery.
INTERCOASTAL PROSPECT. In 1998, HPI took over operation of a well in which it
did not own an interest in Vermilion Parish, Louisiana. The Planulina sands were
faulted out in the original wellbore, and HEP sidetracked the well at a depth of
14,467 feet to test the sands. The well was drilled and logged, and the
objective sands, although well-developed, were found to contain water. The well
was plugged and abandoned. HEP spent $263,000 to test the concept.
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MIRASOLES PROJECT. In 1998, HEP spent approximately $430,000 for land costs
related to the Mirasoles project in Kenedy County, Texas. HEP owns an interest
in 63 square miles of proprietary 3-D seismic data which defines a large
structural prospect that could have a gross potential of 395 bcfe. HEP spent
approximately $941,000 in 1998 for its 17.5% working interest share of the cost
of drilling a 17,000-foot Frio formation exploration well. The exploratory well
is being completed, and depending upon test results, additional delineation and
development drilling could be required to properly exploit the structure. There
can be no assurance, however, that any well drilled will be successful.
WHITEWATER FIELD. HEP's share of 1998 costs associated with plugging two
nonoperated near shore platform wells in Nueces County, Texas was approximately
$600,000. HEP has abandoned this field and plans no further activity.
ROCKY MOUNTAIN REGION
HEP has significant interests in the Rocky Mountain Region, which include
producing properties in Colorado, Montana, North Dakota and Northwest New
Mexico. HEP has interests in 207 producing oil and gas wells, 168 of which are
operated by HPI, 27 shut-in wells, 25 of which are operated by HPI, and five
salt water disposal wells. HEP expended approximately $21,810,000 (53%) of its
1998 capital budget in this area. Approximately $17,291,000 of the capital
budget was used for the purchase of the volumetric production payment discussed
below. In 1998, HEP spent approximately $3,125,000 to expand a New Mexico
gathering system, to recomplete or drill 12 development wells and to drill three
exploration wells. Twelve of the wells were completed. A discussion of the major
projects in the region follows.
CAJON LAKE FIELD. In 1998, HEP sidetracked a 6,000-foot Ismay formation
exploration well in San Juan County, Utah. HEP developed the prospect from
proprietary 3-D seismic data and HPI is the operator of the project. HEP owns an
approximate 15% working interest in the project and spent approximately $120,000
to complete the exploration well in 1998. Sales of crude oil production began in
November; however, production will be significantly curtailed until a natural
gas pipeline is constructed to eliminate flaring. HEP projects that the fully
developed prospect could have 6 bcfe gross potential. There can be no assurance,
however, that any additional wells drilled will be successful. Despite low oil
prices, additional delineation drilling is anticipated in 1999.
COLORADO WESTERN SLOPE PROJECT. HEP drilled and completed two 5,500-foot Dakota
Formation wells in the Piceance Basin in western Colorado. HEP owns an average
29% working interest in the wells. The wells had a combined initial production
rate of 1.5 mmcf per day, and both wells began sales of production in the third
quarter of 1998. In 1998, HEP also recompleted an additional well. Total costs
in 1998 for the three wells were approximately $390,000. HEP has identified
fourteen additional development locations. HEP projects that the total project
area could have gross potential reserves of 0.8 bcfe, which is the typical
reserve potential for this area. There can be no assurance, however, that any
additional wells drilled will be successful.
TOOLE COUNTY AREA. HEP's interests in the Toole County Area consist of 61
producing wells and 17 shut-in wells, 66 of which are operated by HPI. The oil
wells produce from the Nisku formation at depths of approximately 3,000 feet,
and the gas wells produce from the Bow Island formation at depths of 900 to
1,200 feet. In 1998, HEP drilled three horizontal wells in the East Kevin Field
to the Nisku formation. Two of the oil wells were completed and had combined
initial production rates of 1.3 mmcfe per day. HEP has a 50% working interest in
the project and spent approximately $728,000 in 1998. Because of current low oil
prices in this sour, lower gravity crude area, HEP has halted the drilling of
additional development wells and has postponed the re-entry and sidetrack of the
remaining well drilled in 1998.
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<PAGE> 208
SAN JUAN BASIN PROJECT - COLORADO. In July 1996, HEP and its affiliate Hallwood
Consolidate Resources Corporation ("HCRC") acquired interests in 34 wells in
LaPlata County, Colorado producing from the Fruitland Coal formation at
approximately 3,000 feet. An unaffiliated large East Coast financial institution
formed an entity to utilize tax credits generated from the wells. All production
from the wells generates an additional payment of approximately $.68 per mcf. An
affiliate of Enron Corp. financed the project through a volumetric production
payment ("VPP"). During May 1998, a limited liability company owned equally by
HEP and HCRC, purchased the VPP from the affiliate of Enron Corp. HEP funded its
$17,291,000 share of the acquisition price from operating cash flow and
borrowings under its Credit Agreement. As a result of its acquisition HEP
replaced the higher cost and administratively burdensome VPP financing with
lower cost conventional borrowings under its Credit Agreement. At the time of
the purchase, HEP entered into a financial contract to hedge the volumes subject
to the production payment at an average price of $2.11 per mmbtu. Under the
terms of the original 1996 transaction, HEP and HCRC were already responsible
for costs associated with the wells. HPI has managed and operated the wells
since July 1996, and has increased the wells' gross production from 14 mmcf to
approximately 23.5 mmcf per day through workovers and gas gathering facilities
improvement programs. The acquisition increased HEP's current average daily
production by 6.25 mmcf per day.
SAN JUAN BASIN PROJECT - NEW MEXICO. HEP's interest in the San Juan Basin
consists of 51 producing gas wells and 10 shut-in wells located in San Juan
County, New Mexico. HPI operates all 51 producing wells in New Mexico, 31 of
which produce from the Fruitland Coal formation at approximately 2,200 feet and
20 of which produce from the Pictured Cliffs, Mesa Verde and Dakota formations
at 1,200 to 7,000 feet. Costs associated with expansion of the gathering system
for HEP's coalbed methane properties totaled approximately $1,028,000 during
1998. The expansion of the gathering system significantly increased gas
gathering, processing and compression capacity for the associated properties,
which resulted in gross production increases of 3.0 mmcf per day in 1998. In
addition to proceeds from the sale of gas. HEP also receives a payment of $.36
per mcf for tax credits generated by production from the 31 coalbed methane
wells.
OTHER
HEP owns various other interests in properties in Kansas, Oklahoma, California
and South Central Texas. The remaining $1,235,000 of HEP's 1998 capital
expenditures were incurred in this area. The costs include $325,000 for an
unsuccessful exploration project in Carter County, Oklahoma, $157,000 for the
completion of an exploration well in Canadian County, Oklahoma and for drilling
four unsuccessful exploration wells in Yolo County, California and other
miscellaneous projects. During 1998, HEP also participated in two nonoperated
3-D seismic projects in nearby Solano and Colusa Counties, California. HEP is in
the process of divesting its interests in California projects.
PERU BLOCK Z-3 PROJECT. HEP's partner on the Peruvian offshore Z-3 Block
completed 1,200 miles of 2-D seismic data acquisition to supplement existing
seismic data. Data interpretation is in progress, and it will be reviewed by HEP
in the first quarter of 1999. HEP has a 7.5% working interest in the project,
but it will not incur capital costs until actual drilling operations begin.
Although the production-sharing contract provides that drilling operations must
begin no later than January 2002, it is anticipated that the Peruvian government
will enact legislation to extend the period for all drilling commitments by one
year.
For 1999, HEP's capital budget, which will be paid from cash generated from
operations and cash on hand has been set at $11,848,000. HEP has budgeted
continued low oil prices for 1999 which significantly impacts cash generated
from operations. Consequently, the capital budget has been set at a lower amount
than the budget for past years. The capital budget for 1999 will be reduced if
oil and gas prices decrease further.
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<PAGE> 209
PARTNERSHIP RESERVES, PRODUCTION AND DISCUSSION BY SIGNIFICANT REGIONS
The following table presents the December 31, 1998 reserve data by significant
regions.
<TABLE>
<CAPTION>
Proved Reserve Quantities Present Value of Future Net Cash Flows
--------------------------- ------------------------------------------
Proved Proved
Mcf of Gas Bbls of Oil Undeveloped Developed Total
---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
(In thousands)
Greater Permian Region 18,471 2,774 $ 16,542 $ 16,542
Gulf Coast Region 23,555 988 $ 1,791 36,146 37,937
Rocky Mountain Region 50,956 612 42,768 42,768
Other 1,957 113 19 3,734 3,753
-------- -------- -------- -------- --------
94,939 4,487 $ 1,810 $ 99,190 $101,000
======== ======== ======== ======== ========
</TABLE>
The following table presents the oil and gas production for significant regions
for the periods indicated.
<TABLE>
<CAPTION>
Production for the Production for the
Year Ended December 31, 1998 Year Ended December 31, 1997
---------------------------- ----------------------------
Natural Gas Bbls of Oil Natural Gas Bbls of Oil
----------- ----------- ----------- -----------
(mcf) (bbls) (mcf) (bbls)
(In thousands)
<S> <C> <C> <C> <C>
Greater Permian Region 2,893 401 2,803 423
Gulf Coast Region 5,291 175 4,859 184
Rocky Mountain Region 5,233 133 3,562 100
Other 620 78 550 63
------ ------ ------ ------
14,037 787 11,774 770
====== ====== ====== ======
</TABLE>
The following table presents the Partnership's extensions and discoveries by
significant regions.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 For the Year Ended December 31, 1997
------------------------------------ ------------------------------------
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Greater Permian Region 217 167 1,423 232
Gulf Coast Region 1,201 164 1,527 75
Rocky Mountain Region 78 83 1,153 490
Other 46 1 125 20
------ ------ ------ ------
1,542 415 4,228 817
====== ====== ====== ======
</TABLE>
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<PAGE> 210
AVERAGE SALES PRICES AND PRODUCTION COSTS
The following table presents the average oil and gas sales price and average
production costs per equivalent mcf of gas computed at the ratio of six mcf of
gas to one barrel of oil.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Oil and condensate -
includes the effects of hedging (per bbl) $ 13.65 $ 19.08 $ 20.10
Natural gas -
includes the effects of hedging (per mcf) 2.02 2.31 2.24
Production costs (per equivalent mcf of gas) .65 .67 .62
</TABLE>
PRODUCTIVE OIL AND GAS WELLS
The following table summarizes the productive oil and gas wells as of December
31, 1998 attributable to HEP's direct interests. Productive wells are producing
wells and wells capable of production. Gross wells are the total number of wells
in which HEP has an interest. Net wells are the sum of HEP's fractional
interests owned in the gross wells.
<TABLE>
<CAPTION>
Gross Net
----- -----
<S> <C> <C>
Productive Wells
Oil 1,263 164
Gas 352 69
----- -----
Total 1,615 233
===== =====
</TABLE>
OIL AND GAS ACREAGE
The following table sets forth the developed and undeveloped leasehold acreage
held directly by HEP as of December 31, 1998. 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 HEP has a working interest. Net acres are the sum of HEP's fractional
interests owned in the gross acres.
<TABLE>
<CAPTION>
Gross Net
-------- --------
<S> <C> <C>
Developed acreage 101,257 46,771
Undeveloped acreage 323,108 82,976
-------- --------
Total 424,365 129,747
======== ========
</TABLE>
HEP holds undeveloped acreage in Texas, Louisiana, Montana, Wyoming, New Mexico,
Kansas, Colorado and North Dakota.
-11-
<PAGE> 211
DRILLING ACTIVITY
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,
-----------------------
1998 1997 1996
------ ------ -----
Gross Net Gross Net Gross Net
----- ---- ----- ---- ----- ----
Development Wells:
<S> <C> <C> <C> <C> <C> <C>
Productive 12 3.6 23 4.5 29 6.6
Dry 5 1.5 5 .8 4 .9
---- ---- ---- ---- ---- ----
Total 17 5.1 28 5.3 33 7.5
==== ==== ==== ==== ==== ====
Exploratory Wells:
Productive 17 4.3 14 2.2 2 .2
Dry 17 3.0 22 5.4 4 .6
---- ---- ---- ---- ---- ----
Total 34 7.3 36 7.6 6 .8
==== ==== ==== ==== ==== ====
</TABLE>
OFFICE SPACE
HPI leases office space in Denver, Colorado under a lease which expires in June
1999, for approximately $600,000 per year. During February 1999, HPI entered
into another office lease for approximately $600,000 per year. The new lease
commences upon occupancy, which is expected to be in June or July 1999, and
terminates in seven and one-half years. The lease payments are included in the
allocation of general and administrative expenses to HEP and other affiliated
entities. HEP is guarantor of 60% of the lease obligation, and HCRC is guarantor
of the remaining 40% of the obligation.
ITEM 3 - LEGAL PROCEEDINGS
See Notes 13 and 14 to the financial statements included 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 1998.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED UNITHOLDER MATTERS
HEP's Class A Units are traded on the American Stock Exchange (the "Exchange")
under the symbol "HEP." As of March 24, 1999, 10,011,852 Class A Units were
outstanding, held by approximately 18,386 unitholders of record and 143,773
Class B Units were outstanding, held by Hallwood Group. The Class B Units are
not publicly traded. The following table sets forth, for the periods indicated,
the high and low reported sales prices for the Class A Units as reported on the
Exchange and the distributions paid per Class A Unit for the corresponding
periods.
-12-
<PAGE> 212
<TABLE>
<CAPTION>
Class A Units High Low Distributions
- ------------- ---------- --------- -------------
<S> <C> <C> <C>
First quarter 1997 $ 10 3/4 $ 8 1/16 $ .13
Second quarter 1997 9 7 1/8 .13
Third quarter 1997 8 15/16 6 15/16 .13
Fourth quarter 1997 10 1/4 7 1/2 .13
-----
$ .52
=====
First quarter 1998 $ 8 5/8 $ 6 3/8 $ .13
Second quarter 1998 7 6 .13
Third quarter 1998 7 4 11/16 .13
Fourth quarter 1998 5 7/8 3 .13
-----
$ .52
=====
</TABLE>
On January 17, 1996, HEP's Class C Units began trading on the Exchange under the
symbol "HEPC." On February 17, 1998, HEP closed its public offering of 1.8
million Class C Units which were priced at $10.00 per Unit. As of March 24,
1999, 2,464,063 Class C Units were outstanding, held by approximately 13,822
unitholders of record. The following table sets forth, for the periods
indicated, the high and low reported sales prices for the Class C Units as
reported on the Exchange and distributions paid per Class C Unit for the
corresponding periods.
<TABLE>
<CAPTION>
Class C Units High Low Distributions
- ------------- ---------- --------- -------------
<S> <C> <C> <C>
First quarter 1997 $ 10 $ 8 5/8 $ .25
Second quarter 1997 9 3/8 8 3/4 .25
Third quarter 1997 10 1/2 8 7/8 .25
Fourth quarter 1997 14 7/8 10 .25
------
$ 1.00
First quarter 1998 $ 11 $ 9 1/8 $ .25
Second quarter 1998 9 13/16 8 3/8 .25
Third quarter 1998 8 1/2 6 3/4 .25
Fourth quarter 1998 7 15/16 5 7/8 .25
------
$ 1.00
</TABLE>
HEP's debt agreements limit aggregate distributions paid by HEP in any twelve
month period to 50% of cash flow from operations before working capital changes
and 50% of distributions received from affiliates, if the principal amount of
debt of HEP is 50% or more of the borrowing base. Aggregate distributions paid
by HEP are limited to 65% of cash flow from operations before working capital
changes and 65% of distributions received from affiliates, if the principal
amount of debt is less than 50% of the borrowing base.
-13-
<PAGE> 213
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding HEP's financial
position and results of operations as of the dates indicated. As a result of the
issuance of Class A Units in connection with a litigation settlement, all Unit
and per Unit information for periods prior to December 31, 1995 has been
retroactively restated.
<TABLE>
<CAPTION>
As of and For the Year Ended December 31,
-----------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands except per Unit)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Oil and gas revenues and
pipeline operations $ 43,177 $ 44,707 $ 50,644 $ 43,454 $ 43,899
Total revenue 43,586 45,103 51,066 43,780 44,482
Production operating expense 12,175 11,060 11,511 11,298 12,177
Depreciation, depletion and
amortization 15,720 11,961 13,500 15,827 18,168
Impairment 14,000 10,943 7,345
General and administrative
expense 5,045 5,333 4,540 5,580 5,630
Net income (loss) (13,895) 12,803 15,726 (9,031) (10,093)
Basic net income (loss) per
Class A and Class B Unit (1.86) 1.09 1.35 (1.07) (1.20)
Diluted net income (loss) per
Class A and Class B Unit (1.86) 1.07 1.35 (1.07) (1.20)
Distributions per Class A Unit .52 .52 .52 .80 .80
Distributions per Class B Unit .80 .80
BALANCE SHEET
Working capital deficit $ (8,722) $ (973) $ (1,355) $ (4,363) $ (9,390)
Property, plant and equipment,
net 105,005 94,331 88,549 94,926 107,414
Total assets 139,091 131,603 122,792 125,152 136,281
Long-term debt 40,381 34,986 29,461 37,557 25,898
Long-term contract settlement
obligation 2,512 2,397 2,666
Deferred liability 1,050 1,180 1,533 1,718 1,931
Minority interest in affiliates 2,788 3,258 3,336 3,042 2,923
Partners' capital 62,632 69,064 64,215 57,572 78,803
</TABLE>
-14-
<PAGE> 214
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
During 1998, HEP had a net loss of $13,895,000, compared to net income of
$12,803,000 for 1997. The 1998 period includes noncash charges in the second,
third and fourth quarters totaling $14,000,000 for property impairments which
were taken to lower the capitalized cost of HEP's properties to an amount equal
to the present value, discounted at 10%, of the future net revenues attributable
to those properties. Also included in the net loss is a noncash charge of
$4,888,000 which represents HEP's equity in the loss of HCRC. This amount is
largely comprised of HEP's share of HCRC's property impairments.
HEP's 1998 property impairments were recorded pursuant to ceiling test
limitations required by the Securities and Exchange Commission for companies
using the full cost method of accounting. The total impairment was primarily
attributable to the decline in commodity prices and the write-off of certain
unproved acreage.
The weighted average prices received by HEP for oil and gas have declined in
each of the last four quarters. HEP's hedges mitigated the price reductions, by
increasing both the average oil and gas prices by 6%. HEP's weighted average oil
and gas prices, when the effects of hedging are considered, were 28% and 13%
lower, respectively, for 1998 compared to 1997.
Although HEP's production for 1998 was 14% greater than the prior year, and
operating, general and administrative and interest expenses were lower on a unit
of production basis, net income was lower because of low commodity prices and
costs associated with the resolution of litigation.
In December 1998, HEP announced a proposal to consolidate HEP with HCRC and the
energy interests of Hallwood Group into a new corporation called Hallwood Energy
Corporation. The consolidation proposal was approved by the Board of Directors
of HCRC and the general partner of HEP in December 1998. Because of the larger
size of the new corporation, HEP anticipates that the new company will have the
ability to take advantage of opportunities that are unavailable to smaller
entities such as HEP and will have a better ability to raise capital. Hallwood
Energy Corporation will focus on reserve growth. A Joint Proxy
Statement/Prospectus for the consolidation was filed with the Securities
Exchange Commission on December 30, 1998 and is proceeding through the usual SEC
comment process. It is presently anticipated that the Joint Proxy
Statement/Prospectus will be mailed to unitholders of HEP and shareholders of
HCRC in April and that the consolidation will be concluded in May 1999. There
can be no assurance, however, that all conditions to the consolidation will be
satisfied by that time.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
HEP generated $26,277,000 of cash flow from operating activities during 1998.
The other primary cash inflows were:
o Proceeds from long-term debt of $33,000,000;
o Proceeds from the issuance of Class C Units, net of syndication costs of
$16,518,000;
o Distributions received from affiliate of $1,583,000;
o Proceeds from the sale of property of $454,000;
o Exercise of Unit Options of $199,000; and
o Capital contribution from the general partner of $171,000.
-15-
<PAGE> 215
Cash was used primarily for:
o Additions to property, exploration and development costs of $40,936,000;
o Payments of long-term debt of $18,286,000;
o Distributions to partners of $9,495,000; and
o Payment of contract settlement of $2,767,000.
When combined with miscellaneous other cash activity during the year, the result
was an increase in HEP's cash and cash equivalents of $5,252,000 from $6,622,000
at December 31, 1997 to $11,874,000 at December 31, 1998.
PROPERTY PURCHASES, SALES AND CAPITAL BUDGET
In 1998, HEP incurred $40,936,000 in direct property additions, development,
exploitation and exploration costs. The costs were comprised of $28,756,000 for
property acquisitions and approximately $12,180,000 for domestic exploration and
development. HEP's 1998 capital program led to the replacement, including
revisions to prior year reserves, of 72% of 1998 production. This reserve
replacement figure is calculated using year-end prices of $10.00 per barrel of
oil and $1.90 per mcf of gas. If five-year average prices of $16.75 per bbl and
$1.86 per mcf are used, HEP replaced 136% of 1998 production.
In the Greater Permian Region, HEP expended $8,385,000 acquiring oil and gas
properties, including interests in approximately 570 wells, numerous proven and
unproven drilling locations, exploration acreage, and 3-D seismic data.
Additionally, HEP spent approximately $886,000 to recomplete or drill nine
producing development wells and one unsuccessful exploration well in the
Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico. Also,
approximately $975,000 was spent to drill 11 exploration wells and one
development well, nine of which were completed in the Merkle Project. HEP
incurred approximately $420,000 drilling three exploration wells and one
development well in the Griffin area, all of which were unsuccessful.
In the Gulf Coast Region, HEP spent approximately $430,000 for land and $941,000
to drill one Mirasoles project exploration well in Kenedy County, Texas which is
currently in the completion phase. HEP incurred approximately $365,000 to drill
one successful exploration well in LaVaca County, Texas. Approximately $375,000
was incurred by HEP for land and leasehold costs and an additional $615,000 for
costs associated with drilling one successful exploration well in Bell County,
Texas. 1998 costs relating to the East Smith Point project in Chambers County,
Texas were approximately $426,000 for land and geologic and geophysical data,
and an additional $305,000 to drill one unsuccessful exploration well in the
area. Approximately $550,000 was incurred in 1998 by HEP to drill one well now
plugged and abandoned as part of the Bison project in Lafayette Parish,
Louisiana, and approximately $600,000 for plugging costs associated with two
nonoperated near shore platform wells in the Whitewater Field.
HEP's significant property acquisition in the Rocky Mountain Region was
approximately $17,291,000 for the purchase of a volumetric production payment in
the Colorado San Juan Basin. Additionally, HEP's significant exploration and
development expenditures in the Rocky Mountain Region included approximately
$1,028,000 to expand a New Mexico gathering system; approximately $120,000 to
complete a successful exploration well within the Cajon Lake Field in Utah;
approximately $390,000 to drill three successful wells in the Colorado Western
Slope area; approximately $245,000 to drill an unsuccessful exploration well in
the West Sioux area of Montana; and approximately $728,000 to drill three
horizontal wells in Toole County Montana, two of which were successful.
See Item 2 - Properties, for further discussion of HEP's exploration and
development projects.
Long-lived assets, other than oil and gas properties, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. To date, the Partnership has not
recognized any impairment losses on long-lived assets other than oil and gas
properties.
-16-
<PAGE> 216
DISTRIBUTIONS
During 1998, HEP declared distributions of $.52 per Class A Unit and $1.00 per
Class C Unit to its Unitholders. Distributions on the Class B Units are
suspended if the Class A Units receive a distribution of less than $.20 per
Class A Unit per calendar quarter. In any quarter for which distributions of
$.20 or more per unit are made on the Class A Units, the Class B Units are
entitled to be paid, in whole or in part, suspended distributions. The Class C
Units have a distribution preference of $1.00 per year, payable quarterly, which
began in the first quarter of 1996. HEP may not declare or make any cash
distributions on the Class A or Class B Units unless all accrued and unpaid
distributions on the Class C Units have been paid.
The Board of Directors of HEP's General Partner is considering the distribution
level for future quarters, taking into account oil and gas prices, cash flow,
long-term debt and borrowing base levels, and the capital needs of HEP.
UNIT OPTION PLANS
On January 31, 1995, the Board of Directors of the general partner approved the
adoption of the 1995 Class A Unit Option Plan to be used for the motivation and
retention of directors, employees and consultants performing services for HEP.
The plan authorizes the issuance of options to purchase 425,000 Class A Units.
Grants of the total options authorized were made on January 31, 1995, vesting
one-third at that time, an additional one-third on January 31, 1996 and the
remaining one-third on January 31, 1997. The exercise price of the options is
$5.75, which was the closing price of the Class A Units on January 30, 1995. As
of December 31, 1998, 34,600 options have been exercised.
During the second quarter of 1998, HEP adopted a Class C Unit Option Plan
covering 120,000 Class C Units. Options to purchase all of the Units were
granted effective May 5, 1998 at an exercise price of $10.00 per Unit, which was
equal to the fair market value of the Units on the date of grant. One-half of
the options vested on the date of grant, and the remainder vest on the first
anniversary of the date of grant. As of December 31, 1998, no options have been
exercised.
On May 5, 1998, HEP granted options to purchase 25,500 Class A Units at an
exercise price of $6.625 per Unit, which was equal to the fair market value of
the Units on the date of grant. These options were not granted pursuant to a
previously existing plan but are subject to terms and conditions identical to
those in HEP's 1995 Unit Option Plan. One-third of the options vested on the
date of grant, and the remainder vest one-half on the first anniversary of the
date of grant and one-half on the second anniversary of the date of grant. As of
December 31, 1998, no options have been exercised.
During 1996, HEP adopted the disclosure provisions of 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.
Because the Partnership elected the disclosure only provisions of SFAS 123, the
adoption of SFAS 123 did not have a material effect on the financial position or
results of operations of HEP.
FINANCING
During the first quarter of 1997, HEP and its lenders amended HEP's Second
Amended and Restated Credit Agreement (as amended, the "Credit Agreement") to
extend the term date of its Credit Agreement to May 31, 1999. The lenders are
Morgan Guaranty Trust Company, First Union National Bank and NationsBank of
Texas. Under the Credit Agreement, HEP has a borrowing base of $62,000,000. HEP
had amounts outstanding at December 31, 1998 of $49,700,000. HEP's unused
borrowing base totaled $12,300,000 at March 24, 1999.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was
7.125% at December 31, 1998. Interest is payable monthly, and quarterly
principal payments of $3,106,500 commence May 31, 1999.
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<PAGE> 217
The borrowing base for the Credit Agreement is redetermined semiannually, and
the next redetermination is scheduled for the second quarter of 1999. HEP
anticipates that, because of low oil and gas prices, its lenders will reduce the
borrowing base. HEP does not anticipate that a reduced borrowing base will have
a material adverse effect. The Credit Agreement is secured by a first lien on
approximately 80% in value of HEP's oil and gas properties. Additionally,
aggregate distributions which may be paid by HEP in any 12 month period are
limited to 50% of cash flow from operations before working capital changes and
distributions received from affiliates, if the principal amount of debt of HEP
is 50% or more of the borrowing base. Aggregate distributions which may be paid
by HEP are limited to 65% of cash flow from operations before working capital
changes and 65% of distributions which may be received from affiliates, if the
principal amount of debt is less than 50% of the borrowing base.
As a part of its risk management strategy, HEP enters into financial contracts
to hedge the interest payments related to a portion of its outstanding
borrowings under its Credit Agreement. HEP does not use the hedges for trading
purposes, but rather to protect against the variability of the cash flows under
its Credit Agreement, which has a floating interest rate. The amounts received
or paid upon settlement of these transactions are recognized as interest expense
at the time the interest payments are due.
As of March 24, 1999, HEP was a party to six contracts with three
counterparties. The following table provides a summary of HEP's financial
contracts.
<TABLE>
<CAPTION>
Average
Amount of Contract
Period Debt Hedged Floor Rate
------ ----------- ----------
<S> <C> <C>
1999 $27,000,000 5.70%
2000 30,000,000 5.65%
2001 24,000,000 5.23%
2002 25,000,000 5.23%
2003 25,000,000 5.23%
2004 4,000,000 5.23%
</TABLE>
GAS BALANCING
HEP uses the sales method for recording its gas balancing. Under this method,
HEP recognizes revenue on all of its sales of production, and any
over-production or under-production is recovered or repaid at a future date.
As of December 31, 1998, HEP had a net over-produced position of 157,000 mcf
($298,000 valued at year-end gas prices). The general partner believes that this
imbalance can be made up from production on existing wells or from wells which
will be drilled as offsets to existing wells and that this imbalance will not
have a material effect on HEP's results of operations, liquidity and capital
resources. The reserves disclosed in Item 8 have been decreased by 157,000 mcf
in order to reflect HEP's gas balancing position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Partnership adopted SFAS 130 on January 1, 1998. The Partnership does not
have any items of other comprehensive income for the years ended December 31,
1998, 1997 and 1996. Therefore, total comprehensive income (loss) is the same as
net income (loss) for those periods.
-18-
<PAGE> 218
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting selected information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 requires that an entity report financial and descriptive information
about its operating segments which are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. HEP adopted FAS 131 in 1998.
The Partnership engages in the development, production and sale of oil and gas,
and the acquisition, exploration, development and operation of oil and gas
properties in the continental United States. In addition, the Partnership's
activities exhibit similar economic characteristics and involve the same
products, production processes, class of customers, and methods of distribution.
Management of the Partnership evaluates its performance as a whole rather than
by product or geographically. As a result, HEP's operations consist of one
reportable segment.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Partnership is required to
adopt SFAS 133 on January 1, 2000. The Partnership has not completed the process
of evaluating the impact that will result from adopting SFAS 133.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In the interest of providing the partners with certain information regarding the
Partnership's future plans and operations, certain statements set forth in this
Form 10-K relate to management's future plans and objectives. Such statements
are forward-looking statements. Although any forward-looking statements
contained in this Form 10-K or otherwise expressed by or on behalf of the
Partnership are, to the knowledge and in the judgment of the officers and
directors of the general partner, expected to prove true and come to pass,
management is not able to predict the future with absolute certainty.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Partnership's actual performance and financial results in
future periods to differ materially from any projection, estimate or forecasted
result.
These risks and uncertainties include, among others:
Volatility of oil and gas prices. It is impossible to predict future oil and gas
price movements with certainty. Declines in oil and gas prices may materially
adversely affect HEP's financial condition, liquidity, ability to finance
planned capital expenditures and results of operations. Lower oil and gas prices
may also reduce the amount of oil and gas that HEP can produce economically.
HEP's revenues, profitability, future growth and ability to borrow funds or
obtain additional capital, as well as the carrying value of its properties, will
be substantially dependent upon prevailing prices of oil and gas. Historically,
the markets for oil and gas have been volatile, and they are likely to continue
to be volatile in the future. Prices for oil and gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional factors that are
beyond HEP's control.
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<PAGE> 219
Competition from larger, more established oil and gas companies. HEP encounters
competition from other oil and gas companies in all areas of its operation,
including the acquisition of exploratory prospects and proven properties. HEP's
competitors include major integrated oil and gas companies and numerous
independent oil and gas companies, individuals and drilling and income programs.
Many of its competitors are large, well-established companies with substantially
larger operating staffs and greater capital resources than HEP's and, in many
instances, have been engaged in the oil and gas business for a much longer time
than HEP. Those companies may be able to pay more for exploratory prospects and
productive oil and gas properties, and may be able to define, evaluate, bid for
and purchase a greater number of properties and prospects than HEP's financial
or human resources permit. HEP's ability to explore for oil and gas prospects
and to acquire additional properties in the future will be dependent upon its
ability to conduct its operations, to evaluate and select suitable properties
and to consummate transactions in highly competitive environments.
Risks of drilling activities. HEP's success will be materially dependent upon
the continued success of its drilling program. HEP's future drilling activities
may not be successful and, if drilling activities are unsuccessful, such failure
will have an adverse effect on HEP's future results of operations and financial
condition. Oil and gas drilling involves numerous risks, including the risk that
no commercially productive oil or gas reservoirs will be encountered, even if
the reserves targeted are classified as proved. The cost of drilling, completing
and operating wells is often uncertain, and drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, adverse weather conditions, compliance with
governmental requirements and shortages or delays in the availability of
drilling rigs and the delivery of equipment. Although HEP has identified
numerous drilling prospects, there can be no assurance that such prospects will
be drilled or that oil or gas will be produced from any such identified
prospects or any other prospects.
Risks relating to the acquisition of oil and gas properties. The successful
acquisition of producing properties requires an assessment of recoverable
reserves, future oil and gas prices, operating costs, potential environmental
and other liabilities and other factors. Such assessments are necessarily
inexact and their accuracy inherently uncertain. In connection with such an
assessment, HEP will perform a review of the subject properties that it believes
to be generally consistent with industry practices. This usually includes
on-site inspections and the review of reports filed with various regulatory
entities. Such a review, however, will not reveal all existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to fully assess their deficiencies and capabilities. Inspections may
not always be performed on every well, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken. Even when
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of these problems. There
can be no assurances that any acquisition of property interests by HEP will be
successful and, if an acquisition is unsuccessful, that the failure will not
have an adverse effect on HEP's future results of operations and financial
condition.
Hazards relating to well operations and lack of insurance. The oil and gas
business involves certain hazards such as well blowouts; craterings; explosions;
uncontrollable flows of oil, gas or well fluids; fires; formations with abnormal
pressures; pollution; and releases of toxic gas or other environmental hazards
and risks, any of which could result in substantial losses to HEP. In addition,
HEP may be liable for environmental damages caused by previous owners of
property purchased or leased by HEP. As a result, substantial liabilities to
third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of HEP's properties. While HEP believes that
it maintains all types of insurance commonly maintained in the oil and gas
industry, it does not maintain business interruption insurance. In addition, HEP
cannot predict with certainty the circumstances under which an insurer might
deny coverage. The occurrence of an event not fully covered by insurance could
have a materially adverse effect on HEP's financial condition and results of
operations.
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<PAGE> 220
Future oil and gas production depends on continually replacing and expanding
reserves. In general, the volume of production from oil and gas properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. HEP's future oil and gas production is, therefore,
highly dependent upon its ability to economically find, develop or acquire
additional reserves in commercial quantities. Except to the extent HEP acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of HEP will decline as
reserves are produced. The business of exploring for, developing or acquiring
reserves is capital-intensive. To the extent cash flow from operations is
reduced, and external reserves of capital become limited or unavailable, HEP's
ability to make the necessary capital investments to maintain or expand its
asset base of oil and gas reserves would be impaired. In addition, there can be
no assurance that HEP's future exploration, development and acquisition
activities will result in additional proved reserves or that HEP will be able to
drill productive wells at acceptable costs. Furthermore, although HEP's revenues
could increase if prevailing prices for oil and gas increase significantly,
HEP's finding and development costs could also increase.
Estimates of reserves and future cash flows are imprecise. Reservoir engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. Estimates of economically
recoverable oil and gas reserves and of future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical production
from the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies, and assumptions concerning
future oil and gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected from them
prepared by different engineers, or by the same engineers but at different
times, may vary substantially, and such reserve estimates may be subject to
downward or upward adjustment based upon such factors. In addition, the status
of the exploration and development program of any oil and gas company is
ever-changing. Consequently, reserve estimates also vary over time. Actual
production, revenues and expenditures with respect to HEP's reserves will likely
vary from estimates, and such variances may be material.
INFLATION AND CHANGING PRICES
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEP, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, storage capacity and government regulations
and tax laws. Prices for both oil and gas have fluctuated from 1996 through
1998, with a distinct downward trend in both oil and gas prices occurring in the
calendar year 1998. HEP anticipates that both oil and gas prices will remain low
throughout 1999. In preparing its 1999 budget, HEP has estimated that the
weighted average oil price (for barrels not hedged) will be $11.00 per barrel,
and the weighted average price of natural gas (for mcf not hedged) will be $1.70
per mcf for the year. There can be no assurance that HEP's forecast is accurate.
If prices decrease further, it can be expected that the results of operations
and cash flow will be affected, and HEP's capital budget will decrease.
The following table presents the weighted average prices received per year by
HEP, and the effects of the hedging transactions discussed below.
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding effects (including effects (excluding effects (including effects
of hedging of hedging of hedging of hedging
transactions) transactions) transactions) transactions)
------------- ------------- ------------- -------------
(per bbl) (per bbl) (per mcf) (per mcf)
<S> <C> <C> <C> <C>
1998 $12.82 $13.65 $1.99 $2.02
1997 19.35 19.08 2.54 2.31
1996 20.85 20.10 2.38 2.24
</TABLE>
-21-
<PAGE> 221
As part of its risk management strategy, HEP enters into financial contracts to
hedge the price of its oil and natural gas. The purpose of the hedges is to
provide protection against price decreases 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 hedge contracts are recognized as oil or gas
revenue at the time the hedged volumes are sold. During 1998, HEP did not enter
into additional oil price hedges for future years because hedge contracts at
prices HEP considers advantageous are not available.
The financial contracts used by HEP to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HEP sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices. As of March 24,
1999, HEP was a party to 26 financial contracts with three different
counterparties.
The following table provides a summary of HEP's financial contracts.
<TABLE>
<CAPTION>
Oil
----------
Percent of
Production Contract
Period Hedged Floor Price
------ ------ -----------
(per bbl)
<S> <C> <C>
1999 2% $14.88
</TABLE>
All of the oil volumes hedged are subject to a participating hedge whereby HEP
will receive the contract price if the posted futures price is lower than the
contract price, and will receive the contract price plus 25% of the difference
between the contract price and the posted futures price if the posted futures
price is greater than the contract price. All of the volumes hedged are subject
to a collar agreement whereby HEP will receive the contract price if the spot
price is lower than the contract price, the cap price if the spot price is
higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap prices range from $16.50 to $18.35 per
barrel.
<TABLE>
<CAPTION>
Gas
----------
Percent of
Production Contract
Period Hedged Floor Price
------ ------ -----------
(per bbl)
<S> <C> <C>
1999 45% $2.02
2000 42% $2.07
2001 38% $2.04
2002 30% $2.09
</TABLE>
Between 15% and 25% of the gas volumes hedged in each year are subject to a
collar agreement whereby HEP will receive the contract price if the spot price
is lower than the contract price, the cap price is the spot price is higher than
the cap price, and the spot price if that price is between the contract price
and the cap price. The cap prices range from $2.63 per mcf to $2.80 per mcf.
During the first quarter through March 24, 1999, the weighted average oil price
(for barrels not hedged) was approximately $10.95 per barrel, and the weighted
average price of natural gas (for mcf not hedged) was approximately $1.65 per
mcf.
INFLATION
Inflation did not have a material impact on HEP in 1998, 1997 and 1996 and is
not anticipated to have a material impact in 1999.
-22-
<PAGE> 222
RESULTS OF OPERATIONS
The following tables are presented to contrast HEP's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative. The "direct owned" column represents HEP's direct
royalty and working interests in oil and gas properties. The "Mays" column
represents the results of operations of six May Limited Partnerships which are
consolidated with HEP. In 1998, HEP owned interests which ranged from 54.8% to
69.1% of the Mays; in 1997 HEP's ownership in the Mays ranged from 54.7% to
68.7%, and in 1996 HEP's ownership in the Mays ranged from 54.5% to 68.5%.
-23-
<PAGE> 223
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 For the Year Ended December 31, 1997
------------------------------------ ------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gas production (mcf) 12,893 1,144 14,037 10,426 1,348 11,774
Oil production (bbl) 735 52 787 691 79 770
Average gas price $ 1.99 $ 2.38 $ 2.02 $ 2.23 $ 2.91 $ 2.31
Average oil price $ 13.69 $ 13.04 $ 13.65 $ 18.94 $ 20.27 $ 19.08
Gas revenue $ 25,643 $ 2,723 $ 28,366 $ 23,302 $ 3,918 $ 27,220
Oil revenue 10,063 678 10,741 13,089 1,601 14,690
Pipeline and other revenue 4,070 4,070 2,797 2,797
Interest income 346 63 409 324 72 396
-------- -------- -------- -------- -------- --------
Total revenue 40,122 3,464 43,586 39,512 5,591 45,103
-------- -------- -------- -------- -------- --------
Production operating 11,740 435 12,175 10,498 562 11,060
Facilities operating 498 498 641 641
General and administrative 4,671 374 5,045 4,953 380 5,333
Depreciation, depletion, and amortization 14,500 1,220 15,720 10,630 1,331 11,961
Impairment of oil and gas properties 14,000 14,000
Interest 2,797 2,797 3,096 3,096
Equity in (income) loss of HCRC 4,888 4,888 (1,348) (1,348)
Minority interest 976 976 1,797 1,797
Litigation 1,382 1,382 (234) (6) (240)
-------- -------- -------- -------- -------- --------
Total expense 54,476 3,005 57,481 28,236 4,064 32,300
-------- -------- -------- -------- -------- --------
Net income (loss) $(14,354) $ 459 $(13,895) $ 11,276 $ 1,527 $ 12,803
======== ======== ======== ======== ======== ========
</TABLE>
-24-
<PAGE> 224
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
------------------------------------------
Direct
Owned Mays Total
-------- -------- --------
<S> <C> <C> <C>
Gas production (mcf) 11,003 1,783 12,786
Oil production (bbl) 862 110 972
Average gas price $ 2.11 $ 3.05 $ 2.24
Average oil price $ 19.92 $ 21.52 $ 20.10
Gas revenue $ 23,178 $ 5,440 $ 28,618
Oil revenue 17,167 2,367 19,534
Pipeline and other revenue 2,492 2,492
Interest income 356 66 422
-------- -------- --------
Total revenue 43,193 7,873 51,066
-------- -------- --------
Production operating 10,782 729 11,511
Facilities operating 726 726
General and administrative 4,131 409 4,540
Depreciation, depletion, and amortization 11,729 1,771 13,500
Interest 3,878 3,878
Equity in income of HCRC (1,768) (1,768)
Minority interest 2,723 2,723
Litigation 223 7 230
-------- -------- --------
Total expense 29,701 5,639 35,340
-------- -------- --------
Net income $ 13,492 $ 2,234 $ 15,726
======== ======== ========
</TABLE>
-25-
<PAGE> 225
1998 COMPARED TO 1997
GAS REVENUE
Gas revenue increased $1,146,000 during 1998 compared with 1997. The increase is
comprised of an increase in gas production from 11,774,000 mcf during 1997 to
14,037,000 mcf during 1998, partially offset by a decrease in the average gas
price from $2.31 per mcf in 1997 to $2.02 per mcf in 1998. Production increased
because two temporarily shut-in wells were back on line. The two wells were
temporarily shut-in during the second quarter of 1997 while workover procedures
were performed. The increase in gas production is also due to an expansion of
the gathering system in San Juan County, New Mexico during 1998.
The effect of HEP's hedging transactions as described under "Inflation and
Changing Prices" was to increase HEP's average gas price from $1.99 per mcf to
$2.02 per mcf, representing a $421,000 increase in gas revenues for 1998.
OIL REVENUE
Oil revenue decreased $3,949,000 during 1998 compared with 1997. The decrease is
comprised of a decrease in the average oil price from $19.08 per barrel in 1997
to $13.65 per barrel in 1998, partially offset by an increase in production,
from 770,000 barrels in 1997 to 787,000 barrels in 1998. Production increased
slightly because two temporarily shut-in wells were back on line. The two wells
were temporarily shut-in during the second quarter of 1997 while workover
procedures were performed. The production increase was partially offset by
normal production declines.
The effect of HEP's hedging transactions was to increase HEP's average oil price
from $12.82 per barrel to $13.65 per barrel, resulting in a $653,000 increase in
oil revenue for 1998.
PIPELINE AND OTHER
Pipeline and other revenue consists primarily of facilities income from two
gathering systems located in New Mexico, revenues derived from salt water
disposal and incentive payments related to certain wells in San Juan County, New
Mexico. Pipeline facilities and other revenue increased $1,273,000 during 1998
compared with 1997 primarily due to an increase in incentive payment income
resulting from HEP's acquisition of a volumetric production payment during May
1998.
INTEREST INCOME
The increase in interest income of $13,000 during 1998 compared with 1997
resulted from a higher average cash balance during 1998 compared with 1997.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $1,115,000 during 1998 compared with
1997. The increase is due to increased operating costs resulting from the
drilling projects completed during 1997 as well as the additional operating
expenses related to the properties acquired in the Arcadia acquisition during
October 1998.
FACILITIES OPERATING EXPENSE
Facilities operating expense represents operating expenses associated with
various smaller gathering systems operating by HEP. The decrease in facilities
operating expense of $143,000 is primarily due to decreased maintenance activity
during 1998 compared with 1997.
-26-
<PAGE> 226
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports, as well as
allocated internal overhead incurred by the operating company on behalf of HEP.
These expenses decreased $288,000 during 1998 compared with 1997 primarily due
to a decrease in performance based compensation during 1998.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Depreciation, depletion and amortization expense increased $3,759,000 during
1998 compared with 1997. The increase is due to a higher depletion rate
resulting from the increased production discussed above as well as higher
capitalized costs during 1998.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties during 1998 represents the property
impairments recorded during 1998 because capitalized costs exceeded the present
value (discounted at 10%) of estimated future net revenues from proved oil and
gas reserves at June 30, 1998, September 30, 1998 and December 31, 1998, based
on prices of $13.00 per barrel of oil and $2.00 per mcf of gas, $12.80 per bbl
of oil and $1.90 per mcf of gas and $10.00 per bbl of oil and $1.90 per mcf of
gas, respectively.
INTEREST EXPENSE
Interest expense decreased $299,000 during 1998 as compared with 1997. The
decrease is due to a lower average outstanding debt balance during 1998 as
compared to 1997.
EQUITY IN EARNINGS (LOSS) OF HCRC
Equity in earnings (loss) of HCRC represents HEP's share of its equity
investment in HCRC. HEP's equity in HCRC's earnings decreased $6,236,000 during
1998 as compared to 1997. The decrease is primarily the result of property
impairments recorded by HCRC during 1998.
MINORITY INTEREST IN NET INCOME OF AFFILIATES
Minority interest in net income of affiliates represents unaffiliated partners'
interest in the net income of the May Partnerships. The decrease of $821,000 is
due to a decrease in the net income of the May Partnerships resulting primarily
from lower oil and gas prices and decreased production from their properties.
LITIGATION
Litigation expense during 1998 includes the settlement of the Ellender lawsuit
described in Item 8, Note 14, and the costs related to the Arcadia arbitration
described in Item 8, Note 13. Litigation income during 1997 is comprised of
insurance proceeds which reimbursed a portion of expense incurred in a prior
period to settle certain litigation.
1997 COMPARED TO 1996
GAS REVENUE
Gas revenue decreased by $1,398,000 during 1997 as compared with 1996. The
decrease is comprised of a decrease in gas production from 12,786,000 mcf during
1996 to 11,774,000 mcf during 1997, partially offset by an increase in the
average gas price from $2.24 per mcf in 1996 to $2.31 per mcf in 1997. The
decrease in production is due to the temporary shut-in of two wells in Louisiana
during the second quarter of 1997 while workover procedures were performed and
to normal production declines.
-27-
<PAGE> 227
The effect of HEP's hedging transactions as described under "Inflation and
Changing Prices" was to decrease HEP's average gas price from $2.54 per mcf to
$2.31 per mcf, representing a $2,708,000 decrease in gas revenues for 1997.
OIL REVENUE
Oil revenue decreased $4,844,000 during 1997 as compared with 1996. The decrease
is comprised of a decrease in the average oil price from $20.10 per barrel in
1996 to $19.08 per barrel in 1997, and a decrease in production, from 972,000
barrels in 1996 to 770,000 barrels in 1997. The decrease in production is due to
the temporary shut-in of two wells in Louisiana during the second quarter of
1997 while workover procedures were performed and to normal production declines.
The effect of HEP's hedging transactions described under "Inflation and Changing
Prices" was to decrease HEP's average oil price from $19.35 per barrel to $19.08
per barrel, resulting in a $208,000 decrease in oil revenue for 1997.
PIPELINE AND OTHER
Pipeline and other revenue increased $305,000 during 1997 as compared with 1996
primarily due to increased salt water disposal income.
INTEREST INCOME
The decrease in interest income of $26,000 during 1997 as compared with 1996
resulted from a lower average cash balance during 1997 as compared with 1996.
PRODUCTION OPERATING EXPENSE
Production operating expense decreased $451,000 during 1997 as compared with
1996, primarily as a result of decreased production taxes due to the 13%
decrease in oil and gas revenue during 1997 discussed above.
FACILITIES OPERATING EXPENSE
The decrease in facilities operating expense of $85,000 is primarily due to
decreased maintenance activity during 1997 as compared with 1996.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $793,000 during 1997 as compared
with 1996 primarily due to an increase in performance based compensation and an
increase in bank fees due to the extension of the term date of HEP's line of
credit during 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Depreciation, depletion and amortization expense decreased $1,539,000 during
1997 as compared with 1996. The decrease is primarily the result of a lower
depletion rate in 1997 as compared with 1996, due to the 13% decrease in
production discussed above.
INTEREST EXPENSE
Interest expense decreased $782,000 during 1997 as compared with 1996. The
decrease is due to a lower average outstanding debt balance during 1997 as
compared to 1996.
-28-
<PAGE> 228
EQUITY IN EARNINGS (LOSS) OF HCRC
HEP's equity in HCRC's earnings (loss) decreased $420,000 during 1997 as
compared to 1996. The decrease is primarily the result of lower oil and gas
revenues during 1997 caused primarily by HCRC's decreased oil and gas
production.
MINORITY INTEREST IN NET INCOME OF AFFILIATES
Minority interest in net income of affiliates represents unaffiliated partners'
interest in the net income of the May Partnerships. The decrease of $926,000 is
due to a decrease in the net income of the May Partnerships resulting primarily
from decreased production from their properties.
LITIGATION
Litigation settlement income during 1997 is comprised of insurance proceeds
which reimbursed a portion of expense incurred in a prior period to settle
certain litigation. Litigation settlement expense during 1996 consists primarily
of expenses incurred to settle various individually insignificant claims against
HEP.
-29-
<PAGE> 229
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HEP's primary market risks relate to changes in interest rates and in the prices
received from sales of oil and natural gas. HEP's primary risk management
strategy is to partially mitigate the risk of adverse changes in its cash flows
caused by increases in interest rates on its variable rate debt and decreases in
oil and natural gas prices, by entering into derivative financial and commodity
instruments, including swaps, collars and participating commodity hedges. By
hedging only a portion of its market risk exposures, HEP is able to participate
in the increased earnings and cash flows associated with decreases in interest
rates and increases in oil and natural gas prices; however, it is exposed to
risk on the unhedged portion of its variable rate debt and oil and natural gas
production.
Historically, HEP has attempted to hedge the exposure related to its variable
rate debt and its forecasted oil and natural gas production in amounts which it
believes are prudent based on the prices of available derivatives and, in the
case of production hedges, the Partnership's deliverable volumes. HEP attempts
to manage the exposure to adverse changes in the fair value of its fixed rate
debt agreements by issuing fixed rate debt only when business conditions and
market conditions are favorable.
HEP does not use or hold derivative instruments for trading purposes nor does it
use derivative instruments with leveraged features. HEP's derivative instruments
are designated and effective as hedges against its identified risks, and do not
of themselves expose HEP to market risk because any adverse change in the cash
flows associated with the derivative instrument is accompanied by an offsetting
change in the cash flows of the hedged transaction.
Notes 1 and 5 to the financial statements provide further disclosure with
respect to derivatives and related accounting policies.
All derivative activity is carried out by personnel who have appropriate skills,
experience and supervision. The personnel involved in derivative activity must
follow prescribed trading limits and parameters that are regularly reviewed by
the Board of Directors of the general partner and by senior management. HEP uses
only well-known, conventional derivative instruments and attempts to manage its
credit risk by entering into financial contracts with reputable financial
institutions.
Following are disclosures regarding HEP's market risk sensitive instruments by
major category. Investors and other users are cautioned to avoid simplistic use
of these disclosures. Users should realize that the actual impact of future
interest rate and commodity price movements will likely differ from the amounts
disclosed below due to ongoing changes in risk exposure levels and concurrent
adjustments to hedging positions. It is not possible to accurately predict
future movements in interest rates and oil and natural gas prices.
Interest Rate Risks (non trading) - HEP uses both fixed and variable rate debt
to partially finance operations and capital expenditures. As of December 31,
1998, HEP's debt consists of borrowings under its Credit Agreement which bears
interest at a variable rate. HEP hedges a portion of the risk associated with
this variable rate debt through derivative instruments, which consist of
interest rate swaps and collars. Under the swap contracts, HEP makes interest
payments on its Credit Agreement as scheduled and receives or makes payments
based on the differential between the fixed rate of the swap and a floating rate
plus a defined differential. These instruments reduce HEP's exposure to
increases in interest rates on the hedged portion of its debt by enabling it to
effectively pay a fixed rate of interest or a rate which only fluctuates within
a predetermined ceiling and floor. A hypothetical increase in interest rates of
two percentage points would cause a loss in income and cash flows of $995,000
during 1999, assuming that outstanding borrowings under the Credit Agreement
remain at current levels. This loss in income and cash flows would be offset by
a $520,000 increase in income and cash flows associated with the interest rate
swap and collar agreements that are in effect for 1999.
-30-
<PAGE> 230
Commodity Price Risk (non trading) - HEP hedges a portion of the price risk
associated with the sale of its oil and natural gas production through the use
of derivative commodity instruments, which consist of swaps, collars and
participating hedges. These instruments reduce HEP's exposure to decreases in
oil and natural gas prices on the hedged portion of its production by enabling
it to effectively receive a fixed price on its oil and gas sales or a price that
only fluctuates between a predetermined floor and ceiling. HEP's participating
hedges also enable HEP to receive 25% of any increase in prices over the fixed
prices specified in the contracts. As of March 24, 1999, HEP has entered into
derivative commodity hedges covering an aggregate of 16,000 barrels of oil and
18,308,000 mcf of gas that extend through 2002. Under the these contracts, HEP
sells its oil and natural gas production at spot market prices and receives or
makes payments based on the differential between the contract price and a
floating price which is based on spot market indices. The amount received or
paid upon settlement of these contracts is recognized as oil or natural gas
revenues at the time the hedged volumes are sold. A hypothetical decrease in oil
and natural gas prices of 10% from the prices in effect as of December 31, 1998
would cause a loss in income and cash flows of $3,800,000 during 1999, assuming
that oil and gas production remain at 1998 levels. This loss in income and cash
flows would be offset by a $1,220,000 increase in income and cash flows
associated with the oil and natural gas derivative contracts that are in effect
for 1999.
-31-
<PAGE> 231
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE NO.
--------
FINANCIAL STATEMENTS:
<S> <C>
Independent Auditors' Report 33
Consolidated Balance Sheets at December 31, 1998 and 1997 34-35
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 36
Consolidated Statements of Partners' Capital for the years
ended December 31, 1998, 1997 and 1996 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 38
Notes to Consolidated Financial Statements 39-55
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 56-59
</TABLE>
-32-
<PAGE> 232
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF HALLWOOD ENERGY PARTNERS, L.P.:
We have audited the consolidated financial statements of Hallwood Energy
Partners, L.P. as of December 31, 1998 and 1997 and for each of the three years
in the period ended December 31, 1998, listed in the index at Item 8. These
financial statements are the responsibility of the partnership'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 Partners, L.P. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 24, 1999
-33-
<PAGE> 233
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 11,874 $ 6,622
Accounts receivable:
Oil and gas revenues 5,911 8,772
Trade 4,040 5,069
Due from affiliates 119 588
Prepaid expenses and other current assets 1,338 1,091
Net working capital of affiliate 236
--------- ---------
Total 23,518 22,142
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method):
Proved mineral interests 664,799 624,621
Unproved mineral interests - domestic 2,694 2,315
Furniture, fixtures and other 3,411 3,513
--------- ---------
Total 670,904 630,449
Less accumulated depreciation, depletion,
amortization and property impairment (565,899) (536,118)
--------- ---------
Total 105,005 94,331
--------- ---------
OTHER ASSETS
Investment in common stock of HCRC 10,160 15,048
Deferred expenses and other assets 408 82
--------- ---------
Total 10,568 15,130
--------- ---------
TOTAL ASSETS $ 139,091 $ 131,603
========= =========
</TABLE>
(Continued on the following page)
-34-
<PAGE> 234
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except Units)
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 22,921 $ 19,915
Current portion of long-term debt 9,319
Net working capital deficit of affiliate 448
Current portion of contract settlement 2,752
--------- ---------
Total 32,240 23,115
--------- ---------
NONCURRENT LIABILITIES
Long-term debt 40,381 34,986
Deferred liability 1,050 1,180
--------- ---------
Total 41,431 36,166
--------- ---------
Total liabilities 73,671 59,281
--------- ---------
MINORITY INTEREST IN AFFILIATES 2,788 3,258
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
PARTNERS' CAPITAL
Class A Units - 10,011,854 and 9,977,254 Units
issued in 1998 and 1997, respectively;
9,121,612 and 9,077,949 Units outstanding in
1998 and 1997, respectively 44,198 66,184
Class B Subordinated Units - 147,773 Units
outstanding in 1998 and 1997 1,143 1,411
Class C Units - 2,464,063 and 664,063 Units
outstanding in 1998 and 1997, respectively 21,386 4,868
General Partner 2,814 3,580
Treasury Units - 890,242 and 899,305 Units in
1998 and 1997, respectively (6,909) (6,979)
--------- ---------
Partners' capital - net 62,632 69,064
--------- ---------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 139,091 $ 131,603
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-35-
<PAGE> 235
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per Unit)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gas revenue $ 28,366 $ 27,220 $ 28,618
Oil revenue 10,741 14,690 19,534
Pipeline and other 4,070 2,797 2,492
Interest 409 396 422
-------- -------- --------
43,586 45,103 51,066
-------- -------- --------
EXPENSES:
Production operating 12,175 11,060 11,511
Facilities operating 498 641 726
General and administrative 5,045 5,333 4,540
Depreciation, depletion and amortization 15,720 11,961 13,500
Impairment of oil and gas properties 14,000
Interest 2,797 3,096 3,878
-------- -------- --------
50,235 32,091 34,155
-------- -------- --------
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of HCRC (4,888) 1,348 1,768
Minority interest in net income of affiliates (976) (1,797) (2,723)
Litigation (1,382) 240 (230)
-------- -------- --------
(7,246) (209) (1,185)
-------- -------- --------
NET INCOME (LOSS) (13,895) 12,803 15,726
CLASS C UNIT DISTRIBUTIONS ($1.00 PER UNIT) 2,464 664 664
-------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
GENERAL PARTNER, CLASS A AND
CLASS B LIMITED PARTNERS $(16,359) $ 12,139 $ 15,062
======== ======== ========
ALLOCATION OF NET INCOME (LOSS):
General partner $ 886 $ 2,097 $ 2,569
======== ======== ========
Class A and Class B Limited partners $(17,245) $ 10,042 $ 12,493
======== ======== ========
Per Class A Unit and Class B Unit - basic $ (1.86) $ 1.09 $ 1.35
======== ======== ========
Per Class A Unit and Class B Unit - diluted $ (1.86) $ 1.07 $ 1.35
======== ======== ========
Weighted average Class A Units and Class B
Units outstanding 9,258 9,222 9,240
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-36-
<PAGE> 236
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(In thousands)
<TABLE>
<CAPTION>
General Class A Class B Class C Treasury
Partner Units Units Units Units Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 2,981 $ 59,614 $ 1,062 $ (6,085) $ 57,572
Increase in Treasury Units (894) (894)
Syndication costs (12) (12)
Issuance of Class C Units (5,146) $ 5,146
Distributions (2,243) (5,270) (664) (8,177)
Net income 2,569 12,301 192 664 15,726
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 3,307 61,487 1,254 5,146 (6,979) 64,215
Syndication costs (278) (278)
Distributions (1,824) (5,188) (664) (7,676)
Net income 2,097 9,885 157 664 12,803
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 3,580 66,184 1,411 4,868 (6,979) 69,064
Issuance of Class C Units, net of
syndication costs 16,518 16,518
General Partner contribution 171 171
Exercise of Unit Options 199 199
Decrease in Treasury Units 70 70
Distributions (1,823) (5,208) (2,464) (9,495)
Net income (loss) 886 (16,977) (268) 2,464 (13,895)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ 2,814 $ 44,198 $ 1,143 $ 21,386 $ (6,909) $ 62,632
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-37-
<PAGE> 237
HALLWOOD ENERGY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(13,895) $ 12,803 $ 15,726
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 15,720 11,961 13,500
Impairment of oil and gas properties 14,000
Depreciation charged to affiliates 249 221 265
Asset disposals (188)
Amortization of deferred loan costs and other assets 82 81 167
Noncash interest expense 15 241 219
Minority interest in net income 976 1,797 2,723
Take-or-pay recoupment (130) (126) (376)
Equity in (earnings) loss of HCRC 4,888 (1,348) (1,768)
Undistributed (earnings) loss of affiliates (1,319) 197 (187)
Changes in operating assets and liabilities provided
(used) cash net of noncash activity:
Oil and gas revenues receivable 2,861 633 (2,638)
Trade receivables 1,029 (562) (1,647)
Due from affiliates (362) (2,948) 2,808
Prepaid expenses and other current assets (247) (163) 163
Deferred expenses and other assets (408)
Accounts payable and accrued liabilities 3,006 4,730 (2,159)
Due to affiliates (133) (373)
-------- -------- --------
Net cash provided by operating activities 26,277 27,384 26,423
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (28,756) (3,233) (3,148)
Exploration and development costs incurred (12,180) (12,983) (9,467)
Proceeds from sales of property, plant and equipment 454 133 5,294
Distributions received from affiliate 1,583
Investment in affiliates (20) (76) (449)
Investment in Spraberry properties (4,715)
Other investing activities (29)
-------- -------- --------
Net cash used in investing activities (38,919) (16,188) (12,485)
-------- -------- --------
FINANCING ACTIVITIES:
Payments of long-term debt (18,286) (7,285) (11,373)
Proceeds from the issuance of Class C Units, net
of syndication costs 16,518
Proceeds from long-term debt 33,000 7,000 9,000
Distributions paid (9,495) (7,676) (8,177)
Distributions paid by consolidated affiliates
to minority interest (1,446) (1,875) (2,429)
Payment of contract settlement (2,767) (305)
Exercise of Unit Options 199
Capital contribution from the general partner 171
Other financing activities (278) (91)
-------- -------- --------
Net cash provided by (used in) financing activities 17,894 (10,114) (13,375)
-------- -------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 5,252 1,082 563
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 6,622 5,540 4,977
-------- -------- --------
END OF YEAR $ 11,874 $ 6,622 $ 5,540
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-38-
<PAGE> 238
HALLWOOD ENERGY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Hallwood Energy Partners, L.P. ("HEP" or the "Partnership") is a publicly traded
Delaware limited partnership engaged in the development, acquisition and
production of oil and gas properties in the continental United States. HEP's
objective is to provide its partners with an attractive return through a
combination of cash distributions and capital appreciation. To achieve its
objective, HEP utilizes operating cash flow, first, to reinvest in operations to
maintain its reserve base and production; second to make stable cash
distributions to Unitholders; and third, to grow HEP's reserve base over time.
HEP's future growth will be driven by a combination of development of existing
projects, exploration for new reserves and select acquisitions. HEPGP Ltd.
became the general partner of HEP on November 26, 1996 after its former general
partner, Hallwood Energy Corporation ("HEC") merged into The Hallwood Group
Incorporated ("Hallwood Group"). HEPGP Ltd. is a limited partnership of which
Hallwood Group is the limited partner and Hallwood G.P., Inc. ("Hallwood G.P."),
a wholly owned subsidiary of Hallwood Group, is the general partner. 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.
The activities of HEP are conducted through HEP Operating Partners, L.P.
("HEPO") and EDP Operating, Ltd. ("EDPO"). HEP is the sole limited partner and
HEPGP Ltd. is the sole general partner of HEPO and 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.
ACCOUNTING POLICIES
CONSOLIDATION
HEP fully consolidates entities in which it owns a greater than 50% equity
interest and reflects a minority interest in the consolidated financial
statements. HEP accounts for its interest in 50% or less owned affiliated oil
and gas partnerships and limited liability companies using the proportionate
consolidation method of accounting. HEP's investment in approximately 46% of the
common stock of its affiliate, Hallwood Consolidated Resources Corporation
("HCRC"), is accounted for under the equity method.
The accompanying financial statements include the activities of HEP, its
subsidiaries, Hallwood Petroleum, Inc. ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood Oil") and majority owned affiliates, the May Limited Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2, 1984-3 ("Mays").
DERIVATIVES
As of March 24, 1999, HEP was a party to 26 financial contracts to hedge the
price of its oil and natural gas. The purpose of the hedges is to provide
protection against price decreases 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.
As of March 24 1999, HEP was a party to six financial contracts to hedge the
interest payments under its Credit Agreement. The purpose of the hedges is the
protect against the variability of the cash flows under its Credit Agreement
which has a floating interest rate. The amounts received or paid upon settlement
of these transactions are recognized as interest expense at the time the
interest payments are due.
GAS BALANCING
HEP uses the sales method for recording its gas balancing. Under this method,
HEP recognizes revenue on all of its sales of production, and any
over-production or under-production is recovered at a future date.
-39-
<PAGE> 239
As of December 31, 1998, HEP had a net over-produced position of 157,000 mcf
($298,000 valued at year-end gas prices). The general partner believes that this
imbalance can be made up with production on existing wells or from wells which
will be drilled as offsets to existing wells and that this imbalance will not
have a material effect on HEP's results of operations, liquidity and capital
resources. HEP's oil and gas reserves as of December 31, 1998 have been
decreased by 157,000 mcf in order to reflect HEP's gas balancing position.
ALLOCATIONS
Partnership costs and revenues are allocated to Class A and Class B Unitholders
and the general partner pursuant to the partnership agreement as set forth
below.
<TABLE>
<CAPTION>
Unitholders General Partner
----------- ---------------
<S> <C> <C>
Property Costs and Revenues
Initial acquisition costs -
Acreage other than exploratory 100% 0%
Exploratory acreage 98% 2%
Producing wells -
Costs and revenues 98% 2%
Development wells (1) -
Costs through completion 100% 0%
All other costs and revenues 95% 5%
Exploratory wells (1) -
Costs through completion 90% 10%
All other costs and revenues 75% 25%
All other costs and revenues 98% 2%
</TABLE>
(1) These percentages are for wells drilled under the EDPO partnership
agreement. The majority of wells drilled under the HEPO partnership
agreement share costs through completion in a ratio of 7.5% to the
general partner and 92.5% to the Unitholders and share all other costs
and revenues in a ratio of 18.75% to the general partner and 81.25% to
the Unitholders.
PROPERTY, PLANT AND EQUIPMENT
HEP follows the full cost method of accounting whereby all costs related to the
acquisition and development 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 current 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
assuming continuation of existing economic conditions. During the second, third
and fourth quarters of 1998, using oil and gas prices of $13.00 per barrel of
oil and $2.00 per mcf of gas, $12.80 per barrel of oil and $1.90 per mcf of gas
and $10.00 per barrel of oil and $1.90 per mcf of gas, respectively, HEP
recorded oil and gas property impairments totaling $14,000,000.
HEP does not accrue costs for future site restoration, dismantlement and
abandonment costs related to proved oil and gas properties because the
Partnership estimates that such costs will be offset by the salvage value of the
equipment sold upon abandonment of such properties. The Partnership's estimates
are based upon its historical experience and upon review of current properties
and restoration obligations.
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<PAGE> 240
Unproved properties are withheld from the amortization base until such time as
they are either developed or abandoned. The properties are evaluated
periodically for impairment.
Long-lived assets, other than oil and gas properties which are evaluated for
impairment as described above, are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. To date, HEP has not recognized any impairment losses on long-lived
assets other than oil and gas properties.
DEFERRED LIABILITY
The deferred liability as of December 31, 1998 and 1997 consists primarily of
HEP's share of the unrecouped portion of a 1989 take-or-pay settlement, which is
recoupable in gas volumes.
DISTRIBUTIONS
HEP paid a $.13 per Class A Unit and a $.25 per Class C Unit distribution on
February 12, 1999 to Unitholders of record on December 31, 1998. This amount and
the general partner distribution were accrued as of year end. At December 31,
1998 and 1997, distributions payable of $2,423,000 and $2,093,000, respectively
were included in accounts payable and accrued liabilities. HEP declared
distributions of $.52 per Class A Unit and $1.00 per Class C Unit for 1998, 1997
and 1996.
INCOME TAXES
No provision for federal income taxes is included in HEP's financial statements
because, as a partnership, it is not subject to federal income tax and the tax
effects of its activities accrue to the partners. In certain circumstances,
partnerships may be held to be associations taxable as corporations. The
Internal Revenue Service has issued regulations specifying circumstances under
current law when such a finding may be made, and management has obtained an
opinion of counsel based on those regulations that HEP is not an association
taxable as a corporation. A finding that HEP is an association taxable as a
corporation could have a material adverse effect on the financial position, cash
flows and results of operations of HEP.
As a result of differences between the accounting treatment of certain items for
income tax purposes and financial reporting purposes, primarily depreciation,
depletion and amortization of oil and gas properties and the recognition of
intangible drilling costs as an expense or capital item, the income tax basis of
oil and gas properties differs from the basis used for financial reporting
purposes. At December 31, 1998 and 1997, the income tax bases of the
Partnership's oil and gas properties were approximately $94,100,000 and
$94,000,000, respectively.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
COMPUTATION OF NET INCOME PER UNIT
Basic income (loss) per Class A and Class B Unit is computed by dividing net
income (loss) attributable to the Class A and Class B limited partners' interest
(net income excluding income (loss) attributable to the general partner and
Class C Units) by the weighted average number of Class A Units and Class B Units
outstanding during the periods. Diluted income per Class A and Class B Unit
includes the potential dilution that could occur upon exercise of the options to
acquire Class A Units described in Note 10, computed using the treasury stock
method which assumes that the increase in the number of Units is reduced by the
number of Units which could have been repurchased by the Partnership with the
proceeds from the exercise of the options (which were assumed to have been made
at the average market price of the Class A Units during the reporting period).
Unit options have been ignored in the computation of diluted loss per share in
1998 because their inclusion would be anti-dilutive.
-41-
<PAGE> 241
The following table reconciles the number of Units outstanding used in the
calculation of basic and diluted income (loss) per Class A and Class B Unit.
<TABLE>
<CAPTION>
Income
(Loss) Units Per Unit
-------- -------- --------
(In thousands except per Unit)
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Net loss per Class A Unit and Class B Unit - basic $(17,245) 9,258 $ (1.86)
-------- -------- ========
Net Loss per Class A Unit and Class B Unit - diluted $(17,245) 9,258 $ (1.86)
======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1997
Net income per Class A Unit and Class B Unit - basic $ 10,042 9,222 $ 1.09
========
Effect of Unit Options 137
-------- --------
Net Income per Class A Unit and Class B Unit - diluted $ 10,042 9,359 $ 1.07
======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1996
Net income per Class A Unit and Class B Unit - basic $ 12,493 9,240 $ 1.35
========
Effect of Unit Options 13
-------- --------
Net Income per Class A Unit and Class B Unit - diluted $ 12,493 9,253 $ 1.35
======== ======== ========
</TABLE>
TREASURY UNITS
HEP owns approximately 46% of the outstanding common stock of HCRC, while HCRC
owns approximately 19% of HEP's Class A Units. Consequently, HEP has an interest
in 890,242 and 899,305 of its own Units at December 31, 1998 and 1997,
respectively. The Units are treated as Treasury Units in the accompanying
financial statements.
USE OF ESTIMATES
The preparation of the financial statements for the Partnership 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.
SIGNIFICANT CUSTOMERS
Although the Partnership sells the majority of its oil and gas production to a
few purchasers, there are numerous other purchasers in the area in which HEP
sells its production; therefore, the loss of its significant customers would not
adversely affect HEP's operations. For the years ended December 31, 1998, 1997
and 1996, purchases by the following companies exceeded 10% of the total oil and
gas revenues of the Partnership:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Conoco Inc. 23% 20% 28%
El Paso Field Services Company 11% 11%
Marathon Petroleum Company 16% 11%
</TABLE>
ENVIRONMENTAL CONCERNS
HEP is continually taking actions it believes are necessary in its operations to
ensure conformity with applicable federal, state and local environmental
regulations. As of December 31, 1998, HEP 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 HEP in the oil and gas
industry.
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<PAGE> 242
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Partnership adopted SFAS 130 on January 1, 1998. The Partnership does not
have any items of other comprehensive income for the years ended December 31,
1998, 1997 and 1996. Therefore, total comprehensive income (loss) is the same as
net income (loss) for those periods.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting selected information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 requires that an entity report financial and descriptive information
about its operating segments which are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. HEP adopted FAS 131 in 1998.
The Partnership engages in the development, production and sale of oil and gas,
and the acquisition, exploration, development and operation of oil and gas
properties in the continental United States. In addition, the Partnership's
activities exhibit similar economic characteristics and involve the same
products, production processes, class of customers, and methods of distribution.
Management of the Partnership evaluates its performance as a whole rather than
by product or geographically. As a result, HEP's operations consist of one
reportable segment.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Partnership is required to
adopt SFAS 133 on January 1, 2000. The Partnership has not completed the process
of evaluating the impact that will result from adopting SFAS 133.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
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<PAGE> 243
NOTE 2 - OIL AND GAS PROPERTIES
The following table summarizes cost information related to HEP's oil and gas
activities:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Property acquisition costs:
Proved $28,397 $ 1,942 $ 2,321
Unproved 379 1,071 560
Development costs 8,087 7,607 8,218
Exploration costs 6,043 6,950 2,200
------- ------- -------
Total $42,906 $17,570 $13,299
======= ======= =======
</TABLE>
Depreciation, depletion, amortization and impairment expense related to proved
oil and gas properties per equivalent mcf of production for the years ended
December 31, 1998, 1997 and 1996, was $1.57, $.73 and $.73, respectively.
At December 31, unproved properties consist of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Texas $1,857 $ 982
North Dakota 499 314
California 447
Other 338 572
------ ------
$2,694 $2,315
====== ======
</TABLE>
NOTE 3 - PRINCIPAL ACQUISITIONS AND SALES
As a result of the arbitration discussed in Note 13, HEP completed an $8,200,000
acquisition of properties located primarily in Texas during October 1998. The
acquisition included interests in 570 wells, numerous proven and unproven
drilling locations, exploration acreage and 3-D seismic data.
In July 1996, HEP and its affiliate, HCRC, acquired interests in 38 wells
located primarily in LaPlata County, Colorado. An unaffiliated large East Coast
financial institution formed an entity to utilize the tax credits generated from
the wells. The project was financed by an affiliate of Enron Corp. through a
volumetric production payment. During May 1998, a limited liability company
owned equally by HEP and HCRC purchased the volumetric production payment from
the affiliate of Enron Corp. HEP funded its $17,257,000 share of the acquisition
price from operating cash flow and borrowings under its Credit Agreement.
During 1997, HEP had no individually significant property acquisitions or sales.
NOTE 4 - CLASS C UNIT ISSUANCE
On February 17, 1998, HEP closed its public offering of 1.8 million Class C
Units, priced at $10.00 per Unit. Proceeds to HEP, net of underwriting expenses,
were approximately $16,518,000. HEP used $14,000,000 of the net proceeds to
repay borrowings under its Credit Agreement and applied the remaining proceeds
toward the repayment of HEP's outstanding contract settlement obligation at
December 31, 1997 of $2,752,000.
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<PAGE> 244
NOTE 5 - DERIVATIVES
As part of its risk management strategy, HEP enters into financial contracts to
hedge the price of its oil and natural gas. HEP does not use these hedges for
trading purposes, but rather for the purpose of providing protection against
price decreases 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 is recognized as oil or gas revenue at the
time the hedged volumes are sold.
The financial contracts used by HEP to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HEP sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices. As of March 24,
1999, HEP was a party to 26 financial contracts with three different
counterparties.
The following table provides a summary of HEP's financial contracts:
<TABLE>
<CAPTION>
Oil
----------------------
Quantity of Production
Period Hedged Contract Floor Price
------ ---------------------- --------------------
(bbls) (per bbl)
<S> <C> <C>
1996 300,000 $18.33
1997 346,000 17.78
1998 175,000 16.62
1999 16,000 14.88
</TABLE>
All of the oil volumes hedged in 1999 are subject to a participating hedge
whereby HEP will receive the contract price if the posted futures price is lower
than the contract price, and will receive the contract price plus 25% of the
difference between the contract price and the posted futures price if the posted
futures price is greater than the contract price. All of the volumes hedged in
1999 are subject to a collar agreement whereby HEP will receive the contract
price if the spot price is lower than the contract price, the cap price if the
spot price is higher than the cap price, and the spot price if that price is
between the contract price and the cap price. The cap prices range from $16.50
to $18.35 per barrel.
<TABLE>
<CAPTION>
Gas
----------------------
Quantity of Production
Period Hedged Contract Floor Price
------ ---------------------- --------------------
(mcf) (per mcf)
<S> <C> <C>
1996 5,479,000 $1.94
1997 5,386,000 1.97
1998 7,101,000 2.09
1999 6,655,000 2.02
2000 5,037,000 2.07
2001 3,892,000 2.04
2002 2,724,000 2.09
</TABLE>
From 1999 forward, between 15% and 25% of the gas volumes hedged in each year
are subject to a collar agreement whereby HEP will receive the contract price if
the spot price is lower than the contract price, the cap price if the spot price
is higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap price ranges from $2.63 per mcf to
$2.80 per mcf.
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<PAGE> 245
In the event of nonperformance by the counterparties to the financial contracts,
HEP is exposed to credit loss, but has no off-balance sheet risk of accounting
loss. The Partnership anticipates that the counterparties will be able to
satisfy their obligations under the contracts because the counterparties consist
of well-established banking and financial institutions which have been in
operation for many years. Certain of HEP's hedges are secured by the lien on
HEP's oil and gas properties which also secures HEP's Credit Agreement described
in Note 7.
NOTE 6 - INVESTMENT IN AFFILIATED CORPORATION
HEP accounts for its approximate 46% interest in HCRC using the equity method of
accounting. The following presents summarized financial information for HCRC at
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current assets $ 12,566 $ 15,145 $ 10,802
Noncurrent assets 88,601 77,226 67,666
Current liabilities 18,262 11,007 10,849
Noncurrent liabilities 53,316 32,678 24,558
Revenue 32,410 32,411 34,445
Net income (loss) (20,279) 5,585 8,210
</TABLE>
No other individual entity in which HEP owns an interest comprises in excess of
10% of the revenues, net income or assets of HEP.
HCRC repurchased approximately 99,000 and 78,000 shares of its common stock in
odd lot repurchase offers which were completed January 26, 1996 and May 3, 1996,
respectively. HCRC resold 38,895 of these shares to HEP at the price paid by
HCRC for such shares. As a result of these transactions, HEP's ownership in HCRC
increased from 40% to 46% at the end of May 1996.
The following amounts represent HEP's share of the property related costs and
reserve quantities and values of its equity investee HCRC (in thousands):
CAPITALIZED COSTS RELATING TO OIL AND GAS ACTIVITIES:
<TABLE>
<CAPTION>
As of December 31,
------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Unproved properties $ 1,286 $ 1,040 $ 573
Proved properties 147,600 118,966 113,085
Accumulated depreciation, depletion,
amortization and property impairment (100,890) (92,511) (89,175)
---------- ---------- ----------
Net property $ 47,996 $ 27,495 $ 24,483
========== ========== ==========
</TABLE>
COSTS INCURRED IN OIL AND GAS ACTIVITIES:
<TABLE>
<CAPTION>
For the Year Ended of December 31,
----------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Acquisition costs $ 12,879 $ 1,303 $ 1,008
Development costs 2,636 2,060 3,670
Exploration costs 2,606 2,851 382
-------- -------- --------
Total $ 18,121 $ 6,214 $ 5,060
======== ======== ========
</TABLE>
-46-
<PAGE> 246
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Oil and gas revenue $ 10,372 $ 10,889 $ 11,690
Production operating expense (4,272) (3,746) (3,790)
Depreciation, depletion, amortization
and property impairment expense (13,773) (3,336) (3,257)
Income tax benefit (expense) (761) 23
-------- -------- --------
Net income (loss) from oil and gas activities $ (7,673) $ 3,046 $ 4,666
======== ======== ========
</TABLE>
PROVED OIL AND GAS RESERVE QUANTITIES:
<TABLE>
<CAPTION>
Gas Oil
Mcf Bbl
------ -----
(unaudited)
<S> <C> <C>
Balance, December 31, 1998 32,000 1,470
====== =====
Balance, December 31, 1997 27,268 2,065
====== =====
Balance, December 31, 1996 22,786 2,680
====== =====
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
December 31, 1998 $ 30,134
========
December 31, 1997 $ 31,245
========
December 31, 1996 $ 47,701
========
</TABLE>
NOTE 7 - DEBT
HEP's long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Credit Agreement $ 49,700 $ 30,700
Note Purchase Agreement 4,286
-------- --------
Total 49,700 34,986
Less current maturities 9,319
-------- --------
Long-term debt $ 40,381 $ 34,986
======== ========
</TABLE>
During the first quarter of 1997, HEP and its lenders amended HEP's Second
Amended and Restated Credit Agreement (as amended, the "Credit Agreement") to
extend the term date of its Credit Agreement to May 31, 1999. The lenders are
Morgan Guaranty Trust Company, First Union National Bank and NationsBank of
Texas. Under the Credit Agreement HEP has a borrowing base of $62,000,000. HEP
had amounts outstanding at December 31, 1998 of $49,700,000. HEP's unused
borrowing base totaled $12,300,000 at March 24, 1999.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. At December 31, 1998, the applicable
interest rate was 7.125%. Interest is payable monthly, and quarterly principal
payments of $3,106,500 commence May 31, 1999.
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<PAGE> 247
The borrowing base for the Credit Agreement is redetermined semiannually. The
Credit Agreement is secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. Additionally, aggregate distributions which may be
paid by HEP in any 12 month period are limited to 50% of cash flow from
operations before working capital changes and distributions received from
affiliates, if the principal amount of debt of HEP is 50% or more of the
borrowing base. Aggregate distributions which may be paid by HEP are limited to
65% of cash flow from operations before working capital changes and 65% of
distributions which may be received from affiliates, if the principal amount of
debt is less than 50% of the borrowing base.
At December 31, 1998, HEP's debt maturity schedule is as follows.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999 $ 9,319
2000 12,425
2001 12,425
2002 12,425
2003 3,106
-------
Total $49,700
=======
</TABLE>
As part of its risk management strategy, HEP enters into financial contracts to
hedge the interest rate payments under its Credit Agreement. HEP does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit Agreement, which has a floating interest rate.
The amounts received or paid upon settlement of these transactions are
recognized as interest expense at the time the interest payments are due.
Approximately one third of the debt hedged in 1998 was subject to a collar
agreement with a floor rate of 7.55% and a ceiling rate of 9.85%. All other
contracts are interest rate swaps with fixed rates. As of March 24, 1999, HEP
was a party to six contracts with three different counterparties.
The following table provides a summary of HEP's financial contracts.
<TABLE>
<CAPTION>
Average
Amount of Contract
Period Debt Hedged Floor Rate
------ ----------- ----------
<S> <C> <C>
1996 $10,000,000 6.65%
1997 15,000,000 6.56%
1998 15,000,000 6.84%
1999 27,000,000 5.70%
2000 30,000,000 5.65%
2001 24,000,000 5.23%
2002 25,000,000 5.23%
2003 25,000,000 5.23%
2004 4,000,000 5.23%
</TABLE>
-48-
<PAGE> 248
NOTE 8 - CONTRACT SETTLEMENT OBLIGATION
In the first quarter of 1989, HEP settled a take-or-pay contract claim on its
Bethany-Longstreet field. In accordance with the settlement, HEP received
$7,623,000 in cash. This amount was recoupable in cash or gas volumes from April
1992 through March 1996, with a cash balloon payment due during the first
quarter of 1998. A liability was recorded equal to the present value of this
amount discounted at 10.68%, HEP's estimated borrowing rate at the time of
settlement. At December 31, 1997, the current contract settlement balance
consisted of a payment of $2,767,000 net of unaccreted discount of $15,000,
which was paid during February 1998.
NOTE 9 - PARTNERS' CAPITAL
HEP Units that trade on the American Stock Exchange under the symbol "HEP" are
referred to as "Class A Units," and Units that trade under the symbol "HEPC" are
referred to as "Class C Units."
CLASS B SUBORDINATED UNITS
The Class B Units have equal liquidation rights and identical tax allocation
rights and provisions to the Class A Units. However, the Class B Units have the
following subordinated distribution provisions:
1. Distribution rights equal to Class A Units while the Class A Units receive
distributions of $.20 or more per Class A Unit per calendar quarter.
2. No current distribution right should Class A Units receive distributions
less than $.20 per Class A Unit for any calendar quarter.
3. An accumulated distribution deficit account is maintained for the benefit
of the Class B Units for any distributions suspended under 2 above. The
amount in the deficit account is payable in whole or in part to the Class B
Unitholders in any quarter in which distributions are equal to or greater
than $.20 per Class A Unit.
The Class B Units may be converted into Class A Units on a 1:1 ratio at the
option of the holder or holders thereof. Upon conversion, any amount remaining
unpaid in the accumulated distribution deficit account relating to Class B Units
converted is waived.
The Class B Units vote as a separate class on all matters required or otherwise
brought for a vote of the Unitholders of HEP.
CLASS C UNITS
The Class C Units were issued on January 19, 1996 to Class A Unitholders in the
ratio of one Class C Unit for every 15 Class A Units outstanding. In connection
with the issuance of the Class C Units, HEP transferred $5,146,000 of partners
capital from the Class A Unitholders to the Class C Unitholders based on the
initial trading price of the Class C Units.
The Class C Units have a distribution preference of $1.00 per year, payable
quarterly, commencing in the first quarter of 1996. HEP may not declare or make
any cash distributions on the Class A or Class B Units unless all accrued and
unpaid distributions on the Class C Units have been paid.
Class C Units vote as a separate class on all matters submitted to the
Unitholders of HEP for a vote.
RIGHTS PLAN
On February 6, 1995 the Board of Directors of the general partner approved the
adoption of a rights plan designed to protect Unitholders in the event of a
takeover action that would otherwise deny them the full value of their
investment.
-49-
<PAGE> 249
Under the terms of the rights plan, one right was distributed for each Class A
Unit of HEP to holders of record at the close of business on February 17, 1995.
The rights trade with the Class A Units. The rights will become exercisable only
in the event, with certain exceptions, that an acquiring party accumulates 15%
or more of HEP's Class A Units, or if a party announces an offer to acquire 30%
or more of HEP. The rights will expire on February 6, 2005. In addition, upon
the occurrence of certain events, holders of the rights will be entitled to
purchase, for $24, either HEP Class A Units or shares in an "acquiring entity,"
with a market value at that time of $48.
HEP will generally be entitled to redeem the rights at one cent per right at any
time until the tenth day following the acquisition of a 15% position in its
Units.
NOTE 10 - EMPLOYEE INCENTIVE PLANS
Every year beginning in 1992, the Board of Directors of the general partner has
adopted an incentive plan. Each year the Board of Directors determines the
percentage of HEP's interest in the cash flow from certain wells drilled,
recompleted or enhanced during the year allocated to the incentive plan for that
year. The specified percentage was 2.75% for 1998, and 2.40% for 1997 and 1996.
The specified percentage of cash flow is then allocated among certain key
employees who are participants in the Plan for that year. Each award under the
plan (with regard to domestic properties) represents the right to receive for
five years a portion of the specified share of the cash award, at the conclusion
of which the participants are each paid a share of an amount equal to a
specified percentage (80% for 1998, 1997 and 1996) of the remaining net present
value of the qualifying wells, and the award for that year terminates. The
expenses attributable to the plans were $125,000 in 1998, $277,000 in 1997 and
$148,000 in 1996 and are included in general and administrative expense in the
accompanying financial statements.
On January 31, 1995, the Board of Directors of the general partner approved the
adoption of the Class A Unit Option Plan to be used for the motivation and
retention of directors, employees and consultants performing services for HEP.
The plan authorizes the issuance of options to purchase 425,000 Class A Units.
Grants of the total options authorized were made on January 31, 1995, vesting
one-third at that time, an additional one-third on January 31, 1996 and the
remaining one-third on January 31, 1997. The exercise price of the options is
$5.75, which was the closing price of the Class A Units on January 30, 1995.
On May 5, 1998, HEP granted options to purchase 25,500 Class A Units at an
exercise price of $6.625 per Unit, which was equal to the fair market value of
the Units on the date of grant. These options were not granted pursuant to a
previously existing plan but are subject to terms and conditions identical to
those in HEP's 1995 Class A Unit Option Plan. One-third of the options vested on
the date of grant, and the remainder vest one-half on the first anniversary of
the date of grant and one-half on the second anniversary of the date of grant.
During the second quarter of 1998, HEP adopted a Class C Unit Option Plan
covering 120,000 Class C Units. Options to purchase all of the Units were
granted effective May 5, 1998 at an exercise price of $10.00 per Unit, which was
equal to the fair market value of the Units on the date of grant. One-half of
the options vested on the date of grant, and the remainder vest on the first
anniversary of the date of grant.
-50-
<PAGE> 250
A summary of options granted to purchase Class A Units and the changes therein
during the years ended December 31, 1998, 1997, and 1996 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Units Price Units Price Units Price
------- ------- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 425,000 $ 5.75 425,000 $5.75 425,000 $5.75
Granted 25,500 6.625
Exercised (34,600) 5.75
------- ------- ------- ----- ------- -----
Outstanding at end of year 415,900 $ 5.80 425,000 $5.75 425,000 $5.75
======= ======= ======= ===== ======= =====
Options exercisable at year end 398,900 $ 5.80 425,000 $5.75 283,330 $5.75
======= ======= ======= ===== ======= =====
</TABLE>
A summary of options granted under the Class C Unit Option Plan and the changes
therein during the year ended December 31, 1998 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Units Price
-------- --------
<S> <C> <C>
Outstanding at beginning of year -- $ --
Granted 120,000 10.00
-------- --------
Outstanding at end of year 120,000 $ 10.00
======== ========
Options exercisable at year end 60,000 $ 10.00
======== ========
</TABLE>
The Partnership has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized for options granted to purchase Class A and Class C Units. Had
compensation expense for options granted been determined based on the fair value
at the grant date for the options, consistent with the provisions of SFAS 123,
HEP's net income (loss) and net income (loss) per Unit would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss): as reported $(13,895,000) $12,803,000 $15,726,000
pro forma (14,022,000) 12,730,000 15,544,000
Net income (loss)
per Class A and B Unit - basic:
as reported $ (1.86) $ 1.09 $ 1.35
pro forma $ (1.88) $ 1.08 $ 1.33
Net income (loss)
per Class A and B Unit - diluted:
as reported $ (1.86) $ 1.07 $ 1.35
pro forma $ (1.88) $ 1.07 $ 1.33
</TABLE>
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<PAGE> 251
The fair value of the Unit options for disclosure purposes was estimated on the
date of the grant using the Binomial Option Pricing Model with the following
assumptions:
<TABLE>
<CAPTION>
1995 Class A 1998 Class A 1998 Class C
Option Plan Options Option Plan
------------ ------------ ------------
<S> <C> <C> <C>
Expected dividend yield 6% 8% 11%
Expected price volatility 28% 27% 29%
Risk-free interest rate 7.6% 6.4% 6.4%
Expected life of options 10 years 10 years 10 years
</TABLE>
NOTE 11 - RELATED PARTY TRANSACTIONS
HPI manages and operates certain oil and gas properties on behalf of independent
joint interest owners, HEP and its affiliates. In such capacity, HPI pays all
costs and expenses of operations and distributes all revenues associated with
such properties. HPI has receivables from affiliates of HEP of $119,000 and
$588,000 at December 31, 1998 and 1997, respectively, which represent net
revenues net of operating costs and expenses. The intercompany balances are
settled monthly. During 1998, HEPGP had a payable balance to HPI which ranged
from $182,000 to $729,000.
HPI is reimbursed by HEP for costs and expenses which include office rent,
salaries and associated overhead for personnel of HPI engaged in the acquisition
and evaluation of oil and gas properties (technical expenditures which are
capitalized as costs of oil and gas properties) and lease operating and general
and administrative expenses necessary to conduct the business of HEP
(nontechnical expenditures which are expensed as general and administrative or
production operating expenses). Reimbursements during 1998, 1997, and 1996 were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Technical $1,398 $966 $1,249
Nontechnical 924 896 1,110
</TABLE>
Included in the nontechnical allocation attributable to HEP's direct interest
for 1998, 1997 and 1996 is approximately $274,000, $275,000, and $152,000,
respectively, of consulting fees under a consulting agreement with Hallwood
Group. Also included in the nontechnical allocation is $317,000, $301,000 and
$309,000 in 1998, 1997 and 1996, respectively, representing costs incurred by
Hallwood Group and its affiliates on behalf of the Partnership.
During the third quarter of 1994, HPI entered into a consulting agreement with
its Chairman of the Board to provide advisory services regarding the activities
of its affiliates. The agreement was terminated effective December 1996. The
amount of consulting fees allocated to the Partnership under this agreement was
$125,000 in 1996.
NOTE 12 - STATEMENT OF CASH FLOWS
Cash paid during 1998, 1997 and 1996 for interest totaled $2,700,000, $2,775,000
and $3,492,000, respectively.
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<PAGE> 252
NOTE 13 - ARBITRATION
In connection with the Demand for Arbitration filed by Arcadia Exploration and
Production Company ("Arcadia") with the American Arbitration Association against
Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation,
E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P.
(collectively referred to as "Hallwood"), the arbitrators ruled that the
original agreement entered into in August 1997 to purchase oil and gas
properties should proceed, with a reduction in the total purchase price of
approximately $2,500,000 for title defects. The arbitrators also ruled that
Arcadia was not entitled to enforce its claim that Hallwood was required to
purchase an additional $8,000,000 in properties and denied Arcadia's claim for
attorneys fees. The arbitrators granted Arcadia prejudgment interest on the
adjusted purchase price, but an issue exists between Hallwood and Arcadia as to
the proper calculation of the limitation which the panel placed on the amount of
prejudgment interest. The parties plan to ask the arbitrators to rule on this
issue. The Partnership has accrued $452,000 in its financial statements as of
December 31, 1998 in connection with this dispute.
In October 1998, HEP and its affiliate, HCRC, closed the acquisition of oil and
gas properties from Arcadia pursuant to the ruling which included interests in
approximately 570 wells, numerous proven and unproven drilling locations,
exploration acreage, and 3-D seismic data. HEP's share of the purchase price was
$8,200,000.
NOTE 14 - LITIGATION SETTLEMENTS
Concise Oil and Gas Partnership ("Concise"), a wholly owned subsidiary of the
Partnership, was a defendant in a lawsuit styled Dr. Allen J. Ellender, Jr. et
al. vs. Goldking Production Company, et al., filed in the Thirty-Second Judicial
District Court, Terrebonne Parish, Louisiana on May 30, 1996. The portion of the
lawsuit against Concise was settled in consideration of the payment by Concise
of $600,000. This amount was recorded as litigation settlement expense in the
second quarter of 1998. Concise has been dismissed with prejudice from the
lawsuit.
In June 1996, HEP and the other parties to the lawsuits styled Lamson Petroleum
Corporation v. Hallwood Petroleum, Inc. et al. settled the lawsuits. The
plaintiffs in the lawsuits claimed they had valid leases covering streets and
roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul
Castille #1 well, Evangeline Shrine Club #1 well and Duhon #1 well, which
represented approximately .4% to 2.3% of HEP's interest in these properties, and
they were entitled to a portion of the production from the wells dating from
February 1990. In the settlement, HEP and the plaintiffs agreed to cross-convey
interests in certain leases to one another, and HEP agreed to pay the plaintiffs
$728,000. HEP had not recognized revenue attributable to the contested leases
since January 1993. These revenues plus accrued interest, totaling $506,000, had
been placed in escrow pending the resolution of the lawsuits. The excess of the
cash paid over the escrowed amounts is reflected as litigation settlement
expense in the accompanying financial statements. The cross-conveyance of the
interests in the leases resulted in a decrease in HEP's reserves of $374,000 in
future net revenues, discounted at 10% based on oil and gas prices in effect as
of December 31, 1996.
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<PAGE> 253
NOTE 15 - COMMITMENTS
HPI currently leases office facilities under an operating lease which expires in
June 1999. During February 1999, HPI entered into another office lease for
approximately $600,000 per year. The new lease commences upon occupancy, which
is expected to be in June or July 1999, and terminates in seven and one-half
years. The lease payments are included in the allocation of general and
administrative expenses to HEP and other affiliated entities. HEP is guarantor
of 60% of the lease obligation, and HCRC is guarantor of the remaining 40% of
the obligation. Rent expense under these leases is allocated to HEP and its
affiliates. Remaining commitments under these leases mature as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Annual Rentals
------------ --------------
(In thousands)
<S> <C>
1999 $ 316
2000 601
2001 601
2002 601
2003 601
Thereafter 1,979
------
$4,699
======
</TABLE>
Rent expense allocated to HEP was $287,000, $288,000 and $304,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
NOTE 16 - 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 Partnership, 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 Partnership 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, 1998
-----------------
Carrying Estimated Fair
Amount Value
-------- --------------
(In thousands)
<S> <C> <C>
ASSETS (LIABILITIES):
Oil and gas hedge contracts $ -- $ 4,254
Interest rate hedge contracts -- (812)
Long-term debt (49,700) (49,700)
</TABLE>
The estimated fair value of the interest rate hedge contracts is computed by
multiplying the difference between the quoted contract termination interest rate
and the contract interest rate by the amounts under contract. This amount has
been discounted using an interest rate that could be available to the
Partnership.
The estimated fair value of the oil and gas hedge contracts is determined by
multiplying the difference between the quoted termination prices for oil and gas
and the hedge contract prices by the quantities under contract. This amount has
been discounted using an interest rate that could be available to the
Partnership.
-54-
<PAGE> 254
Long-term debt is carried in the accompanying balance sheet at an amount which
is a reasonable estimate of its fair value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively reevaluated for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
-55-
<PAGE> 255
HALLWOOD ENERGY PARTNERS, L.P.
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1998
(Unaudited)
The following reserve quantity and future net cash flow information for HEP
represents proved reserves which are located in the United States. The reserves
have been estimated by HPI's in-house engineers. A majority of these reserves
has 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 HEP's proved oil and gas reserves from year to year. No
consideration has been given to future income taxes for HEP as it is not a tax
paying entity. Under the guidelines set forth by the Securities and Exchange
Commission (SEC), the calculation is performed using year end prices. The oil
and gas prices used at December 31, 1998, 1997 and 1996 were $10.00 per bbl and
$1.90 per mcf, $16.90 per bbl and $2.30 per mcf and $24.18 per bbl and $3.76 per
mcf, respectively, for HEP, including its indirect interests in affiliated
partnerships and the Mays. Future production costs are based on year end costs
and include severance taxes. The present value of future cash inflows is based
on a 10% discount rate. The reserve calculations using these December 31, 1998
prices result in 4.5 million bbls of oil, and 94.9 billion cubic feet of gas and
a standardized measure of $101,000,000. The Mays are included on a consolidated
basis, and 28,000 bbls of oil and 1.1 billion cubic feet of gas, representing a
discounted present value of $2,100,000 are attributable to the minority
ownership of these entities. This standardized measure is not necessarily
representative of the market value of HEP's properties. The portion of the
reserves attributable to the general partner's interest totaled 203,000 bbls of
oil and 5 billion cubic feet of gas with a standardized measure of $7,000,000 at
December 31, 1998.
HEP's standardized measure of future net cash flows has been increased by
$2,771,000 at December 31, 1998 for the effects of its 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%.
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<PAGE> 256
HALLWOOD ENERGY PARTNERS, L.P.
RESERVE QUANTITIES
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Gas Oil
Mcf Bbls
-------- --------
<S> <C> <C>
PROVED RESERVES:
Balance, December 31, 1995 83,112 8,098
Extensions and discoveries 1,683 484
Revisions of previous estimates 10,552 385
Sales of reserves in place (3,369) (481)
Purchases of reserves in place 9,350 17
Production (12,786) (972)
-------- --------
Balance, December 31, 1996 88,542 7,531
Extensions and discoveries 4,228 817
Revisions of previous estimates 11,578 (1,930)
Sales of reserves in place (140) (9)
Purchases of reserves in place 619 128
Production (11,774) (770)
-------- --------
Balance, December 31, 1997 93,053 5,767
Extensions and discoveries 1,542 415
Revisions of previous estimates (9,369) (1,385)
Sales of reserves in place (244) (35)
Purchases of reserves in place 23,994 512
Production (14,037) (787)
-------- --------
Balance, December 31, 1998 94,939 4,487
======== ========
PROVED DEVELOPED RESERVES:
Balance, December 31, 1996 85,848 7,056
======== ========
Balance, December 31, 1997 89,816 5,181
======== ========
Balance, December 31, 1998 90,915 3,577
======== ========
</TABLE>
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<PAGE> 257
HALLWOOD ENERGY PARTNERS, L.P.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Future cash flows $ 245,000 $ 293,000 $ 509,000
Future production and development costs (102,000) (115,000) (175,000)
---------- ---------- ----------
Future net cash flows before discount 143,000 178,000 334,000
10% discount to present value (42,000) (49,000) (128,000)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows $ 101,000 $ 129,000 $ 206,000
========== ========== ==========
</TABLE>
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<PAGE> 258
HALLWOOD ENERGY PARTNERS, L.P.
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Standardized measure of discounted future net
cash flows at beginning of year $ 129,000 $ 206,000 $ 124,000
Sales of oil and gas produced, net of production costs (26,932) (30,209) (35,915)
Net changes in prices and production costs (21,211) (78,965) 75,085
Extensions and discoveries, net of future production
and development costs 3,546 9,592 7,144
Changes in estimated future development costs (9,738) (10,012) (6,515)
Development costs incurred 8,087 7,607 8,218
Revisions of previous quantity estimates (15,547) (8) 20,032
Purchases of reserves in place 23,802 1,457 14,721
Sales of reserves in place (399) (204) (9,742)
Accretion of discount 12,936 20,600 12,400
Changes in production rates and other (2,544) 3,142 (3,428)
---------- ---------- ----------
Standardized measure of discounted future net
cash flows at end of year $ 101,000 $ 129,000 $ 206,000
========== ========== ==========
</TABLE>
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<PAGE> 259
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The registrant is a limited partnership managed by the general partner and has
no officers or directors. The general partner is HEPGP Ltd., a Colorado limited
partnership. The general partner of HEPGP Ltd. is Hallwood G.P., Inc., a
Delaware corporation, which is a wholly owned subsidiary of Hallwood Group.
The principal duties and powers of the general partner are arranging financing
for HEP, seeking out, negotiating and acquiring for HEP suitable leases and
other prospects, managing properties owned by HEP, generally dealing for HEP
with third parties and attending to the general administration of HEP and its
relations with the limited partners.
Hallwood Petroleum, Inc. ("HPI") performs duties related to the management of
HEP, including the operations of various properties in which HEP owns an
interest.
DIRECTORS, OFFICERS AND KEY EMPLOYEES
Neither the Partnership nor its general partner has any employees. Following are
brief biographies of the directors, officers and key employees of Hallwood G.P.
and HPI.
ANTHONY J. GUMBINER, 54, has served as a director and Chief Executive Officer of
Hallwood G.P. since March 1997. He was Chairman of the Board of Hallwood Energy
Corporation ("HEC") from May 1984 until HEC's merger into The Hallwood Group
Incorporated ("Hallwood Group") in November 1996. He was Chief Executive Officer
of HEC from February 1987 to November 1996. He has also served as Chairman of
the Board of Directors of Hallwood Group, a diversified holding company with
energy, real estate, textile products and hotel operations, since 1981 and as
Chief Executive Officer of Hallwood Group since April 1984. Mr. Gumbiner has
been a director and Chief Executive Officer of Hallwood Consolidated Resources
Corporation ("HCRC") since February 1992. Mr. Gumbiner has also served as
Chairman of the Board of Directors and as a director of Hallwood Holdings S.A.,
a Luxembourg real estate investment company, since March 1984. He has been a
director of Hallwood Realty Corporation ("Hallwood Realty"), which is the
general partner of Hallwood Realty Partners, L.P., since November 1990. He is a
Solicitor of the Supreme Court of Judicature of England.
WILLIAM L. GUZZETTI, 55, has been President of Hallwood G.P. and HPI since
October 1989, and a director of Hallwood G.P. and HPI since August 1989. He was
President, Chief Operating Officer and a director of HEC from February 1985
until November 1996. Mr. Guzzetti joined HEC in February 1976 as Vice President,
Secretary and General Counsel and served in these positions until November 1980.
He served as Senior Vice President, Secretary and General Counsel of HEC from
November 1980 until February 1985, when he became President of HEC. Mr. Guzzetti
has been President, Chief Operating Officer and a director of HCRC since May
1991. Mr. Guzzetti is also an Executive Vice President of Hallwood Group and in
that capacity may devote a portion of his time to the activities of Hallwood
Group, including the management of real estate investments, acquisitions and
restructurings of entities controlled by Hallwood Group. He is a director and
President of Hallwood Realty and in that capacity may devote a portion of his
time to the activities of Hallwood Realty.
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<PAGE> 260
RUSSELL P. MEDUNA, 44, has served as Executive Vice President of Hallwood G.P.
and HPI since October 1989. He was Executive Vice President of HEC from June
1991 until November 1996. He was Vice President of HEC from May 1990 until June
1991. Mr. Meduna became Executive Vice President of HCRC in June 1992. Mr.
Meduna was Vice President of Hallwood G.P. and HPI from April 1989 to October
1989 and Manager of Operations from January 1989 to April 1989. He joined HPI in
1984 as Production Manager. Prior to joining HPI, he was employed by both major
and independent oil companies. Mr. Meduna is a registered professional engineer
in the States of Colorado and Texas.
CATHLEEN M. OSBORN, 46, has served as Vice President, Secretary and General
Counsel of Hallwood G.P. and HPI since September 1986. She was Vice President,
Secretary and General Counsel of HEC from June 1991 until November 1996. Ms.
Osborn became Secretary and General Counsel of HCRC in May 1992 and Vice
President in June 1992. She joined Hallwood G.P. and HPI in 1985 as senior staff
attorney. Ms. Osborn is a member of the Colorado Bar Association.
THOMAS J. JUNG, 50, has served as Vice President and Chief Financial Officer of
Hallwood G.P., HCRC and HPI since May 1998. From January 1997 until April 1998,
he was a Senior Financial Associate with Trinity Petroleum Management, and
during that period, he also provided consulting services to other companies
involved in the development, financing, management and monetization of tax
credits for alternative energy projects. From 1994 to 1996, he was Chief
Executive Officer of FAR Gas Acquisitions Corp. From 1986 to 1994, he was Vice
President and Chief Financial Officer of NICOR Exploration & Production Company
and Reliance Pipeline Company.
BETTY J. DIETER, 51, has been Vice President of HPI responsible for domestic
operations since January 1995. Her previous positions with HPI have included
Operations Manager, Rocky Mountain and Mid-Continent District Manager and
Manager for Operations Accounting and Administration. She joined HPI in 1985,
and has 26 years experience in accounting and operations, 19 of which are in the
oil and gas industry. Ms. Dieter is a Certified Public Accountant.
GEORGE BRINKWORTH, 57, has been Vice President-Exploration and International
Division of HPI since August 1994. He became associated with HPI in 1987 when he
was President of a joint venture program funded by HPI and two other domestic
oil companies. Mr. Brinkworth has 34 years experience with various exploration
and production companies, including previous responsibility for operations in
the United Kingdom, Spain, Morocco, Egypt and Indonesia. He is a registered
geophysicist in the State of California.
WILLIAM H. MARBLE, 48, has served as Vice President of HPI since December 1990.
His previous positions with HPI have included Texas/Gulf Coast District Manager,
Manager of Nonoperated Properties and Chief Engineer. He joined a predecessor
general partner of the Partnership in 1984. Mr. Marble is a registered engineer
in the State of Colorado and has 24 years oil and gas engineering experience.
BRIAN M. TROUP, 51, has served as a director of Hallwood G.P. since March 1997.
Mr. Troup was a director of HEC from May 1984 until November 1996. He has been
President and Chief Operating Officer of Hallwood Group since April 1986, and he
is a director of Hallwood Group. He has been a director of HCRC since February
1992. Mr. Troup is a director of Hallwood Holdings S.A. and of Hallwood Realty.
He is an associate of the Institute of Bankers in Scotland and a member of the
Society of Investment Analysts in the United Kingdom.
HANS-PETER HOLINGER, 56, has served as a director of Hallwood G.P. since March
1997. He was a director of HEC from May 1984 until November 1996. Mr. Holinger
served as Managing Director of Interallianz Bank Zurich A.G. from 1977 to
February 1993. Since February 1993, he has been the majority owner of Holinger
Asset Management AG, Zurich. Mr. Holinger is a citizen of Switzerland.
REX A. SEBASTIAN, 69, has served as a director of Hallwood G.P. since March
1997. He was a director of HEC from January 1993 until November 1996. Mr.
Sebastian is a member of the board of directors of Ferro Corporation. He served
as Senior Vice President--Operations of Dresser Industries, Inc. from January
1975 until his retirement in July 1985. He joined Dresser in 1966. Mr. Sebastian
is now a private investor.
-61-
<PAGE> 261
NATHAN C. COLLINS, 64, has served as a director of Hallwood G.P. since March
1997. He was a director of HEC from March 1995 until November 1996. Since
February 1999, he has been a consultant in banking products development for
Nordstrom, Inc. He is also a director of First State Bank of Flagstaff. From
March 1, 1995 to March 1, 1996, he was President, Chief Executive Officer and a
director of Flemington National Bank & Trust Co. in Flemington, New Jersey. From
November 1987 until December 1994, he was Chairman of the Board of Directors,
President and Chief Executive Officer of BancTexas Group Inc. He began his
banking career in August 1964 with the Valley National Bank in Phoenix, Arizona
and held various positions there, finally becoming Executive Vice President,
Senior Credit Officer and Manager of Asset/Liability Group of the bank.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the officers and
directors of Hallwood G.P., Inc., and persons who own more than ten percent of
HEP's Units, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent owners are required by SEC regulation to furnish HEP with copies of all
Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no forms were
required for those persons, HEP believes that, during the year ended December
31, 1998, all officers and directors of Hallwood G.P., Inc. and greater than
ten-percent beneficial owners complied with applicable filing requirements,
except that Mr. Thomas Jung filed his initial statement of beneficial ownership
late. Mr. Jung did not beneficially own any Units of HEP.
ITEM 11 - EXECUTIVE COMPENSATION
GENERAL
Neither the Partnership nor its general partner has any employees. Management
services are provided to the Partnership by HPI, a subsidiary of the
Partnership. Employees of HPI perform all duties related to the management of
the Partnership on behalf of the General Partner. Since HPI also performs
services for HCRC, the Partnership is charged for management services by HPI
based on an allocation procedure that takes into account the amount of time
spent on management, the number of properties owned by the Partnership and the
Partnership's performance relative to HCRC and other related entities. The
allocation procedure is applied consistently to all related entities for which
HPI performs services. In 1998 the Partnership reimbursed HPI for approximately
$2,322,000 of expenses, of which $548,000 was attributable to compensation paid
to executive officers of Hallwood G.P.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation to the Chief Executive Officer
of Hallwood G.P. and each of the four other most highly compensated officers of
Hallwood G.P. whose compensation paid by HPI exceeded $100,000 (determined for
the year ended December 31, 1998) for services to the Partnership, its
subsidiaries and its General Partner for the years ended December 31, 1998, 1997
and 1996.
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<PAGE> 262
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------- ------------
Securities
Underlying LTIP All Other
Name & Principal Position Year Salary Bonus Options/SARs Payouts Compensation
- ------------------------- ---- ------ ----- ------------ ------- ------------
(#) (1)
--- ---
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Gumbiner (2) 1998 $ 0 $ 0 (5) $ (6) $ 0
Chief Executive 1997 0 0 (3) (6) 0
Officer 1996 250,000 0 0 (6) 0
William L. Guzzetti 1998 204,811 162,800 (5) 30,523 4,800
President and Chief 1997 204,294 143,870 (3) 42,854 4,750
Operating Officer 1996 204,294 131,500 0 33,170 5,699
Russell P. Meduna 1998 163,664 99,000 (5) 30,523 4,800
Executive Vice 1997 163,664 111,520 (3) 42,854 4,750
President 1996 163,664 101,900 0 33,170 4,500
Thomas J. Jung 1998 82,850 60,000 (4)(5) 0 1,922
Vice President and
Chief Financial Officer
Cathleen M. Osborn 1998 119,614 74,500 (5) 21,458 4,800
Vice President and 1997 105,685 100,000 (3) 30,124 4,750
General Counsel 1996 105,685 62,400 0 23,092 4,500
</TABLE>
(1) Employer contribution to 401(k) and a service award of $1,199 paid to
Mr. Guzzetti in 1996.
(2) For 1996, Mr. Gumbiner had a Compensation Agreement with HPI. $250,000
was paid under this agreement in 1996. The Compensation Agreement
terminated effective December 1996. In addition to compensation listed
in the table, HPI had a consulting agreement with Hallwood Group for
1996, pursuant to which Hallwood Group received an annual consulting fee
of $300,000 from affiliates of HPI. During 1997 and 1998, the
Partnership participated in a new financial consulting agreement between
HPI and Hallwood Group, pursuant to which Hallwood Group received a fee
of $550,000 from the Partnership and its affiliates. The consulting
services were provided by HSC Financial Corporation ("HSC Financial"),
through the services of Mr. Gumbiner and Mr. Troup, and Hallwood Group
paid the annual fee it received to HSC Financial.
(3) Consists of the following HCRC options granted in 1997, which have been
adjusted for a 3-for-1 split effective in 1997.
<TABLE>
<CAPTION>
Securities Underlying
---------------------
Name Options/SARs (#)
---- ---------------------
<S> <C>
Anthony J. Gumbiner 47,700
William L. Guzzetti 23,850
Russell P. Meduna 22,260
Cathleen M. Osborn 9,540
</TABLE>
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<PAGE> 263
(4) Consists of the following options granted in 1998.
<TABLE>
<CAPTION>
Securities Underlying
Name Company Options/SARs (#)
---- ------- ----------------
<S> <C> <C>
Thomas J. Jung HEP 25,500
HCRC 9,540
</TABLE>
(5) Consists of the following HEP Class C Unit options granted in 1998.
<TABLE>
<CAPTION>
Securities Underlying
Name Options/SARs (#)
---- ----------------
<S> <C>
Anthony J. Gumbiner 34,588
William L. Guzzetti 16,588
Russell P. Meduna 14,118
Cathleen M. Osborn 10,024
Thomas J. Jung 10,024
</TABLE>
(6) Payments were made to HSC Financial, with which Mr. Gumbiner is
associated, in the amount of $67,977 for 1998, $54,750 for 1997 and
$9,943 for 1996.
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth the options to purchase Class C Units of HEP
granted to executive officers during 1998. No options to purchase Class C Units
granted to executive officers were exercised in 1998.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realized Value at
Assumed Annual Rates of
Unit Price Appreciation
Individual Grants for Option Term (2)
----------------- ---------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted Exercise or 5% 10%
Options/SARs Employees in Base Price Expiration $16.29 $25.94
Name Granted (1) Fiscal Year ($/Unit) Date Unit Price Unit Price
---- ----------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony J Gumbiner 34,588 24 $10.00 05/05/08 $217,522 $551,244
William L. Guzzetti 16,588 11 10.00 05/05/08 104,321 264,370
Russell P. Meduna 14,118 10 10.00 05/05/08 88,787 225,005
Cathleen M. Osborn 10,024 7 10.00 05/05/08 63,040 159,757
Thomas J. Jung 10,024 7 10.00 05/05/08 63,040 159,757
</TABLE>
(1) Options have a ten-year term and vest cumulatively 1/2 on the grant date
and 1/2 on first anniversary of the grant date. All Options vest
immediately in the event of certain changes in control of HEP.
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<PAGE> 264
(2) Securities and Exchange Commission Rules require calculation of
potential realizable value assuming that the market price of the Class C
Units appreciates in value at 5% and 10% annualized rates. At a 5%
annualized rate of appreciation, the Class C Unit price would be $16.29
at the end of ten years. At a 10% annualized rate of appreciation, the
Class C Unit price would be $25.94 at the end of ten years. No gain to
an executive officer is possible without an appreciation in Class C Unit
value, which will benefit all holders of Class C Units. The actual value
an executive officer may receive depends on market prices for the Class
C Units, and there can be no assurance that the amounts reflected will
actually be realized.
The following table sets forth the options to purchase Class A Units of HEP
granted to an executive officer during 1998. None of these options were
exercised in 1998.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realized Value at
Assumed Annual Rates of
Unit Price Appreciation
Individual Grants for Option Term (2)
----------------- ---------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted Exercise or 5% 10%
Options/SARs Employees in Base Price Expiration $10.79 $17.18
Name Granted (1) Fiscal Year ($/Share) Date Unit Price Unit Price
---- ----------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Jung 25,500 18 $6.625 05/05/08 $106,244 $269,243
</TABLE>
(1) Options have a ten-year term and vest cumulatively over three years at
the rate of 1/3 on the grant date and the first two anniversaries of the
grant date. All Options vest immediately in the event of certain changes
in control of HEP.
(2) Securities and Exchange Commission Rules require calculation of
potential realizable value assuming that the market price of the Class A
Units appreciates in value at 5% and 10% annualized rates. At a 5%
annualized rate of appreciation, the Class A Unit price would be $10.79
at the end of ten years. At a 10% annualized rate of appreciation, the
Class A Unit price would be $17.18 at the end of ten years. No gain to
an executive officer is possible without an appreciation in Class A Unit
value, which will benefit all holders of Class A Units. The actual value
an executive officer may receive depends on market prices for the Class
A Units, and there can be no assurance that the amounts reflected will
actually be realized.
-65-
<PAGE> 265
The following table shows exercises of options to purchase Units and shares of
common stock during 1998 and the value of unexercised options on December 31,
1998.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY - End (#) at FY -End ($)
Units Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable (1)(3) Unexercisable (2)(4)
---- --------------- ------------ -------------------- --------------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner HEP 144,794 / 17,294 0 / 0
HCRC 4,000 33,820 75,500 / 15,900 189,221 / 0
William L. Guzzetti HEP 72,044 / 8,294 0 / 0
HCRC 39,750 / 7,950 103,271 / 0
Russell P. Meduna HEP 66,559 / 7,059 0 / 0
HCRC 2,500 21,700 34,600 / 7,420 85,561 / 0
Cathleen M. Osborn HEP 9,100 11,497 21,412 / 5,012 0 / 0
HCRC 5,000 42,900 10,900 / 3,180 19,658 / 0
Thomas J. Jung HEP 13,512 / 22,012 0 / 0
HCRC 6,360 / 12,720 0 / 0
</TABLE>
(1) The HEP Class A Unit Options have a ten year term and vest cumulatively
over three years at the rate of 1/3 on each of the date of grant and the
first two anniversaries of the grant date. The HEP Class C Unit Options
have a ten year term and vest 1/2 on the date of grant and 1/2 on the
first anniversary of the grant date. All options vest immediately in the
event of certain changes in control of the Partnership.
(2) The exercise price of the HEP Class A Unit Options granted in 1995 and
in 1998 is $5.75 and $6.625 per Class A Unit, respectively. The exercise
price of the HEP Class C Unit Options granted in 1998 is $10.00 per
Class C Unit. The closing price of the Class A Units was $3.625 on
December 31, 1998 and the closing price of the Class C Units was $6.625
on December 31, 1998.
(3) The HCRC options have a ten-year term and vest cumulatively over three
years at the rate of 1/3 on each of the date of grant and the first two
anniversaries of the grant date. All options vest immediately in the
event of certain changes in control of the Company. The number of
options has been adjusted to reflect a 3-for-1 stock split effective in
1997.
(4) The exercise price of the HCRC options granted in 1995 is $6.67 per
share, and the exercise price of the HCRC options granted in 1997 is
$20.33 per share. The closing price of the common stock was $11.00 on
December 31, 1998. The exercise prices have been adjusted to reflect a
3-for-1 stock split effective in 1997.
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<PAGE> 266
LONG-TERM INCENTIVE PLAN
The following table describes performance units awarded to the executive
officers of Hallwood G.P. for 1998 under the incentive Plan (as described below)
for the Partnership and affiliated entities. The value of awards under each plan
depends primarily on the Partnership's success in drilling, completing and
achieving production from new wells each year and from certain recompletions and
enhancements of existing wells.
Long-Term Incentive Plan Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Performance or Estimated Future
Number of Other Period Payouts under Non-Stock
Name Units Unit Payout Price-Based Plans (1)
---- ----------- --------------- -----------------------
<S> <C> <C> <C>
Anthony J. Gumbiner(2) -- -- $ --
William L. Guzzetti 0.0727 2003 18,176
Russell P. Meduna 0.0727 2003 18,176
Cathleen M. Osborn 0.0545 2003 13,625
</TABLE>
(1) The amount represents an award under the Incentive Plan. There are no
minimum, maximum or target amounts payable under the Incentive Plan.
Payments under the awards will be equal to the indicated percentage of
Plan net cash flow from certain wells for the first five years after an
award and, in the sixth year, the indicated percentage of 80% of the
remaining net percent value of estimated future production from the
wells allocated to the Plan. The amounts shown above are estimates based
on estimated reserve quantities and future prices. Because of the
uncertainties inherent in estimating quantities of reserves and prices,
it is not possible to predict cash flow or remaining net present value
of estimated future production with any degree of certainty.
(2) In addition, an award of .3818 units, with an estimated future payout of
$95,453, was made to HSC Financial, with which Mr. Gumbiner is
associated. The payout period ends in 2003.
The Incentive Plan for the Partnership and its affiliated entities, including
HCRC, is intended to provide incentive and motivation to HPI's key employees to
increase the oil and gas reserves of the various affiliated entities for which
HPI provides services and to enhance those entities' ability to attract,
motivate and retain key employees and consultants upon whom, in large measure,
those entities' success depends.
Under the Incentive Plan, the Board of Directors of Hallwood G.P. (the "Board")
annually determines the portion of the Partnership's collective interests in the
cash flow from certain international projects and from domestic wells drilled,
recompleted or enhanced during that year (the "Plan Year") which will be
allocated to participants in the plan and the participants will receive payment
in the sixth year of an award. The portion allocated to participants in the plan
is referred to as the Plan Cash Flow. The Board then determines which key
employees and consultants may participate in the plan for the Plan Year and
allocates the Plan Cash Flow among the participants. Awards under the plan do
not represent any actual ownership interest in the wells. Awards are made in the
Board's discretion.
Each award under the Incentive Plan represents the right to receive for five
years a specified share of the Plan Cash Flow attributable to certain domestic
wells drilled, recompleted or enhanced during the Plan Year. In the sixth year
afterward, the participant is paid an amount equal to a specified percentage of
the remaining net present value of estimated future production from the wells
and the award is terminated. Cash flow from international projects, if any,
allocated to the Incentive Plan is paid to participants for a 10-year period,
with no buy-out for estimated future production.
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<PAGE> 267
The awards for the 1998 Plan Year were made in January 1998. No other awards
were made in 1998. For the 1998 Plan Year, the Compensation Committee of
Hallwood G.P. determined that the total Plan Cash Flow would be equal to 2.75%
of the cash flow of the domestic wells completed, recompleted or enhanced during
the Plan Year. Accordingly, the value of awards for each Plan Year depends
primarily on the Partnership's success in drilling, completing and achieving
production from new wells each year and from certain recompletions and
enhancements of existing wells. The Compensation Committee also determined that
the participants' interests in eligible domestic wells for the 1998 Plan Year
would be purchased in the sixth year at 80% of the remaining net present value
of the wells completed in the Plan Year. The Compensation Committee also
determined that the total award would be allocated among key employees primarily
on the basis of salary and, to a lesser extent, on the basis of contribution to
HEP's drilling activity.
DIRECTOR COMPENSATION
Each director of Hallwood G.P. who is not an officer of Hallwood G.P. or HCRC or
an employee of HPI, is paid an annual fee of $20,000 that is proportionately
reduced if the director attends fewer than four regularly scheduled meetings of
the Board during the year. During 1998, Messrs. Holinger, Sebastian and Collins
were each paid $20,000. In addition, all directors are reimbursed for their
expenses in attending meetings of the Board and committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of directors of Hallwood G.P. makes compensation decisions for the
Partnership during the first quarter of each year. Mr. Gumbiner is Chief
Executive Officer of Hallwood G.P. and serves on the compensation committee of
Hallwood Group, of which Mr. Troup is President and Mr. Guzzetti is Executive
Vice President. Mr. Gumbiner is also Chief Executive Officer and a director of
HCRC, of which Mr. Troup is a director and Mr. Guzzetti is a director and
President. Messrs. Gumbiner, Troup and Guzzetti served on HCRC's Board of
Directors which made compensation decisions for HCRC in January 1998. Mr.
Gumbiner is Chief Executive Officer and a director, and Mr. Guzzetti is
President and a director, of Hallwood Realty. During 1998, Mr. Gumbiner and Mr.
Guzzetti served on the compensation committee of Hallwood Realty.
The Partnership participates in a financial consulting agreement between HPI and
Hallwood Group, pursuant to which Hallwood Group furnishes consulting and
advisory services to HPI, the Partnership and their affiliates. Under the terms
of this agreement, HPI and its affiliates are obligated to pay Hallwood Group
$550,000 per year until June 30, 2000. The agreement automatically renews for
successive three year terms; either party may terminate the agreement on not
less than 30 days written notice prior to the expiration of any three year term.
The financial consulting agreement replaced both a previous financial consulting
agreement and a compensation agreement with Mr. Gumbiner. Under the terms of the
previous financial consulting agreement, HPI and its affiliates were obligated
to pay Hallwood Group three annual payments of $300,000 beginning June 30, 1994,
and Hallwood group was obligated to furnish consulting and advisory services to
HPI and its affiliates through June 30, 1997. In 1997, the consulting services
were provided by HSC Financial Corporation, through the services of Mr. Gumbiner
and Mr. Troup, and Hallwood Group paid the annual fee it received to HSC
Financial. A fee of approximately $274,000 and $275,000 was paid in 1998 and
1997, respectively by the Partnership pursuant to this arrangement. For 1996,
Mr. Gumbiner had a compensation agreement with HPI pursuant to which Mr.
Gumbiner was paid $250,000 by HPI, the Partnership and their affiliates. This
agreement was terminated effective December 31, 1996. See "Summary Compensation
Table" and footnotes for additional discussion of this arrangement.
The Partnership reimburses Hallwood Group for expenses incurred on behalf of the
Partnership. In 1998, 1997 and 1996 the Partnership reimbursed Hallwood Group
for approximately $317,000, $301,000 and $309,000 of expenses, respectively.
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<PAGE> 268
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information, as of March 24, 1999, about any
individual, partnership or corporation that is known to the Partnership to be
the beneficial owner of more than 5% of each class of Units issued and
outstanding and each executive officer and director of Hallwood G.P. and all
executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount
Title of Beneficially
Name Class of Units Owned Percent of Class
---- -------------- ------------ ----------------
<S> <C> <C> <C>
The Hallwood Group Incorporated (1) Class A 657,260(5) 6.5
Class B 143,773 100.0
Class C 43,816 1.8
Hallwood Consolidated Resources Corporation (2) Class A 1,948,189 19.5
Class C 129,877 5.3
Heartland Advisors, Inc. (3) Class A 803,760(6) 8.0
Estate of William Baxter Lee, III (4) Class A 715,000(7) 7.1
Class C 40,033(8) 1.6
Anthony J. Gumbiner Class A 127,500(9) 1.3
Class C 17,294(10) *
William L. Guzzetti Class A 63,850(9) *
Class C 8,300(10) *
Russell P. Meduna Class A 59,500(9) *
Class C 7,059(10) *
Cathleen M. Osborn Class A 16,400(9) *
Class C 5,112(10) *
Thomas J. Jung Class A 8,500(9) *
Class C 5,012(10) *
Brian M. Troup Class A 85,000(9) *
Class C 11,294(10) *
Hans-Peter Holinger Class A -- --
Class C -- --
Rex A. Sebastian Class A 400 *
Class C 26 *
Nathan C. Collins Class A -- --
Class C -- --
Bill M. Van Meter Class A -- --
Class C -- --
All directors and executive officers of Class A 361,150(11) 3.7
Hallwood G.P. as a group (9 persons) Class C 54,097(12) *
</TABLE>
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<PAGE> 269
- ----------------------
* Less than 1%
(1) The address of Hallwood Group is 3710 Rawlins Street, Suite 1500,
Dallas, Texas 75219.
(2) The address of Hallwood Consolidated Resources is 4582 S. Ulster Street
Parkway, Suite 1700, Denver, Colorado 80237.
(3) The address of Heartland Advisors, Inc. is 790 North Milwaukee Street,
Milwaukee, WI 53202.
(4) The address of the Estate of William Baxter Lee, III, is c/o Glankler
Brown, PLLC, 1700 One Commerce Sq., Memphis, TN 38103.
(5) Includes 143,773 Class B Units (100% of the Class B Units) that are
convertible into Class A Units one-for-one.
(6) According to the Amendment No. 4 to Schedule 13G filed January 26, 1999
by Heartland Advisors, Inc., the Units to which the schedule relates are
held in investment advisory accounts of Heartland Advisors, Inc. As a
result, various persons have the right to receive or the power to direct
the receipt of dividends from, or the proceeds from the sale of, the
securities. No such account is known to have an interest relating to
more than 5% of the class.
(7) According to Schedule 13G dated February 23, 1999.
(8) According to Schedule 13G dated February 23, 1999.
(9) The following numbers of Class A Units issuable upon the exercise of
currently exercisable options are included in the amounts shown: Mr.
Gumbiner, 127,500; Mr. Troup, 85,000; Mr. Guzzetti, 63,750; Mr. Meduna,
59,500; Ms. Osborn, 16,400; Mr. Jung 8,500.
(10) The following numbers of Class C Units issuable upon the exercise of
currently exercisable options are included in the amounts shown: Mr.
Gumbiner, 17,294; Mr. Troup, 11,294; Mr. Guzzetti, 8,294; Mr. Meduna,
7,059; Ms. Osborn, 5,012; Mr. Jung, 5,012.
(11) Consists of 500 Class A Units and currently exercisable options to
purchase 360,650 Class A Units.
(12) Consists of 132 Class C Units and currently exercisable options to
purchase 53,965 Class C Units.
See Item 8 - Financial Statements and Supplementary Data (Note 10 to the
Financial Statements) for a description of HEP's Unit Option Plans.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 8 - Financial statements and Supplementary Data (Note 11 to the
Financial Statements).
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.
HEP filed no current reports on Form 8-K during the last quarter of the
period covered by this report.
(c) Exhibits.
(1) 4.1 - Third Amended and Restated Agreement of Limited Partnership
of Hallwood Energy Partners, L.P.
(4) 4.2 - Unit Purchase Rights Agreement dated as of February 6, 1995
between HEP and The First National Bank of Boston.
(7) 4.3 - First Amendment to the Third Amended and Restated Agreement
of Limited Partnership of Hallwood Energy Partners, L. P.
(8) 4.4 - Amendment to the Third Amended and Restated Agreement of
Limited Partnership of Hallwood Energy Partners, L.P.
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<PAGE> 270
(12) 4.5 - Correction to the First Amendment to the Third Amended and
Restated Limited Partnership Agreement of Hallwood Energy
Partners, L.P.
(3) 10.1 - Third Amended and Restated Agreement of Limited Partnership
of HEP Operating Partners, L.P.
(5) 10.3 - Second Amended and Restated Credit Agreement dated March 31,
1995
(2) 10.4 - Amended and Restated Note Purchase Agreement dated May 7,
1990. (Exhibit 10.2)
(3) 10.5 - Amended and Restated Agreement of Limited Partnership of
EDP Operating, Ltd.
*(5) 10.9 - Domestic Incentive Plan between the Partnership and Hallwood
Petroleum, Inc. dated January 14, 1993
*(6) 10.10 - 1995 Unit Option Plan
*(5) 10.11 - 1995 Unit Option Plan Loan Program
(8) 10.12 - Amendment to the Third Amended and Restated Agreement of
Limited Partnership of HEP Operating Partners, L.P.
(8) 10.13 - Second Amendment to the Second Amended and Restated Agreement
of Limited Partnership of HEP Operating Partners, L.P.
*(9) 10.14 - Financial Consulting Agreement dated as of December 31, 1996
(10) 10.15 - Third Amended and Restated Credit Agreement dated as of
May 31, 1997
(11) 10.16 - Amendment No. 1 to Third Amended and Restated Credit
Agreement dated as of October 31, 1997
*(13) 10.17 - 1998 Class C Unit Option Plan dated May 5, 1998
*(13) 10.18 - 1998 Class C Unit Option Loan Program dated May 5, 1998
*(13) 10.19 - Class A Unit Option letter to Thomas Jung dated May 5, 1998
(13) 10.20 - Extension of Management Agreement between Hallwood Petroleum,
Inc. and HEP dated May 5, 1998.
(14) 10.21 - Merger and Asset Contribution Agreement By and Among Hallwood
Energy Corporation, and HEC Acquisition Corp., Hallwood
Energy Partners, L.P. and HCRC Acquisition Corp., Hallwood
Consolidated Resources Corporation and HEPGP Ltd. dated as
of December 15, 1998.
(7) 21 - Subsidiaries of Registrant
23.1 - Consent of Deloitte & Touche LLP
23.2 - Consent of Deloitte & Touche LLP
27 - Financial Data Schedule
- ------------
(1) Incorporated by reference to Prospectus/Proxy Statement dated February
14, 1990 as supplemented March 22, 1990, March 30, 1990 and April 5,
1990, of Hallwood Energy Partners, L.P., filed as part of Registration
Statement No. 33-33452.
(2) Incorporated by reference to the exhibit shown in parentheses filed with
current report on Form 8-K dated May 9, 1990 of Hallwood Energy
Partners, L.P.
(3) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for fiscal year ended December
31, 1990.
(4) Incorporated by reference to Exhibit 1 filed with the Registrant's Form
8-A for Limited Partner Unit Purchase Rights filed with the SEC on
February 8, 1995.
(5) Incorporated by reference to the same exhibit number filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995.
(6) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for fiscal year ended December
31, 1994.
(7) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
(8) Incorporated by reference to the same exhibit number filed with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
(9) Incorporated by reference to the same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
(10) Incorporated by reference to the same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
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<PAGE> 271
(11) Incorporated by reference to the same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(12) Incorporated by reference to same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q ended March 31, 1998.
(13) Incorporated by reference to same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q ended June 30, 1998.
(14) Incorporated by reference to Schedule 14A of HEP dated December 30,1998.
*Designates management contracts or compensatory plans or arrangements.
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<PAGE> 272
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 PARTNERS, L.P.
BY: HEPGP LTD
GENERAL PARTNER
BY: HALLWOOD G.P., INC.
GENERAL PARTNER
Date: March 24, 1999 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.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Anthony J. Gumbiner Chairman of the Board and March 24, 1999
- -------------------------------- Director (Chief Executive Officer)
Anthony J. Gumbiner
/s/ Brian M. Troup Director March 24, 1999
- --------------------------------
Brian M. Troup
/s/ Hans-Peter Holinger Director March 24, 1999
- --------------------------------
Hans-Peter Holinger
/s/ Rex A. Sebastian Director March 24, 1999
- --------------------------------
Rex A. Sebastian
/s/ Nathan C. Collins Director March 24, 1999
- --------------------------------
Nathan C. Collins
/s/ Thomas J. Jung Principal Accounting Officer March 24, 1999
- --------------------------------
Thomas J. Jung
</TABLE>
-73-
<PAGE> 273
APPENDIX H
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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19931
----------
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
----------
DELAWARE 84-1176750
(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
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, $.01 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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 24, 1999 was approximately $17,249,000.
Shares of Common Stock outstanding at March 24, 1999: 3,007,852 shares.
Page 1 of 66
<PAGE> 274
PART 1
ITEM 1 - BUSINESS
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a
Delaware corporation engaged in the development, production and sale of oil and
gas, and in the acquisition, exploration, development and operation of oil and
gas properties. The principal objective of HCRC is to maximize shareholder value
by increasing its reserves, production and cash flow through a balanced program
of development and high potential exploration drilling, as well as selective
acquisitions. The Company's properties are primarily located in West Texas,
South Louisiana, New Mexico and Kansas. HCRC does not engage in any other line
of business.
HCRC does not have any employees. Hallwood Petroleum, Inc. ("HPI"), an affiliate
of HCRC, operates the properties and administers the day to day activities of
HCRC and its affiliates. On March 24, 1999, HPI had 108 employees.
MARKETING
The oil and gas produced from the properties owned by HCRC 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 the producing properties are located. In response to the
volatility in the oil markets, HCRC has entered into financial contracts for
hedging the price of 4% of its estimated oil production for 1999.
All of HCRC's gas production is sold on the spot market or in short-term
contracts and is transported in intrastate and interstate pipelines. HCRC has
entered into financial contracts for hedging the price of between 32% and 42% of
its estimated gas production for 1999 through 2002.
The purpose of the hedges is to provide protection against price decreases 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 increases or decreases in 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. HCRC 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 HCRC's business
because there are numerous other purchasers in the areas in which HCRC sells it
production. However, for the years ended December 31, 1998, 1997 and 1996,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of HCRC.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
El Paso Field Services 17% 17% 11%
Williams Gas Marketing 13% 13%
Koch Oil Company 12% 23%
Conoco Inc. 12% 13%
Scurlock Permian Corporation 14%
</TABLE>
Factors, if they were to occur, which might adversely affect HCRC include
decreases in oil and gas prices, the reduced availability of a market for
production, rising operating costs of producing oil and gas, compliance with and
changes in environmental control statutes and increasing costs and difficulties
of transportation.
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<PAGE> 275
COMPETITION
HCRC encounters competition from other oil and gas companies in all areas of its
operations, including the acquisition of exploratory prospects and proven
properties. The Company's competitors include major integrated oil and gas
companies and numerous independent oil and gas companies, individuals and
drilling income programs. As described under "Marketing," production is sold on
the spot market, thereby reducing sales competition. Moreover, oil and gas must
compete with coal, atomic energy, hydro-electric power and other forms of
energy.
REGULATION
Production and sale of oil and gas are subject to federal and state governmental
regulations in a variety of ways including environmental regulations, labor
laws, 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 HCRC 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, HCRC cannot predict the effect of
possible future public or private action on its business. HCRC is continually
taking actions it believes are necessary in its operations to ensure conformity
with applicable federal, state and local environmental regulations. As of
December 31, 1998, HCRC 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 HCRC in the oil and gas industry.
INSURANCE COVERAGE
HCRC is subject to all the risks inherent in the exploration for, and
development of, oil and gas, including blowouts, fires and other casualties.
HCRC maintains insurance coverage as is customary for entities of a similar size
engaged in operations similar to that of HCRC, 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 HCRC's earnings, cash flows and financial position.
ISSUES RELATED TO THE YEAR 2000
General. The following Year 2000 statements constitute a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998. The Year 2000 problem has arisen because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs do not properly recognize and process date-sensitive
information beyond 1999. In general, there are two areas where Year 2000
problems may exist for the Company: information technology such as computers,
programs and related systems ("IT") and non-information technology systems such
as embedded technology on a silicon chip ("Non IT").
The Plan. The Company's Year 2000 Plan (the "Plan") has four phases: (i)
assessment, (ii) inventory, (iii) remediation, testing and implementation and
(iv) contingency plans. Approximately twelve months ago, the Company began its
phase one assessment of its particular exposure to problems that might arise as
a result of the new millennium. The assessment and inventory phases have been
substantially completed and have identified the Company's IT systems that must
be updated or replaced in order to be Year 2000 compliant. In particular, the
software used by the Company for reservoir engineering must be updated or
replaced. Remediation, testing and implementation are scheduled to be completed
by June 30, 1999, and the contingency plans phase of the Plan is scheduled to be
completed by September 30, 1999.
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<PAGE> 276
However, the effects of the Year 2000 problem on IT systems are exacerbated
because of the interdependence of computer systems in the United States. The
Company's assessment of the readiness of third parties whose IT systems might
have an impact on the Company's business has thus far not indicated any material
problems; responses have been received to approximately 50% of the 172 inquiries
made.
With regard to the Company's Non IT systems, the Company believes that most of
these systems can be brought into compliance on schedule. The Company's
assessment of third party readiness is not yet completed. Because the potential
problem with Non IT systems involves embedded chips, it is difficult to
determine with complete accuracy where all such systems are located. As part of
its Plan, the Company is making formal and informal inquiries of its vendors,
customers and transporters in an effort to determine the third party systems
that might have embedded technology requiring remediation.
Estimated Costs. Although it is difficult to estimate the total costs of
implementing the Plan through January 1, 2000 and beyond, the Company's
preliminary estimate is that such costs will not be material. To date, the
Company has determined that its IT systems are either compliant or can be made
compliant for less than $150,000. However, although management believes that its
estimates are reasonable, there can be no assurance, for the reasons stated in
the next paragraph, that the actual cost of implementing the Plan will not
differ materially from the estimated costs.
Potential Risks. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations. This risk exists both as to the Company's IT and Non
IT systems, as well as to the systems of third parties. Such failures could
materially and adversely affect the Company's results of operations, cash flow
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third party suppliers, vendors and transporters, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company's results of operations, cash flow or financial
condition. Although the Company is not currently able to determine the
consequences of Year 2000 failures, its current assessment is that its area of
greatest potential risk in its third party relationships is in connection with
the transporting and marketing of the oil and gas produced by the Company. The
Company is contacting the various purchasers and pipelines with which it
regularly does business to determine their state of readiness for the Year 2000.
Although the purchasers and pipelines will not guaranty their state of
readiness, the responses received to date have indicated no material problems.
The Company believes that in a worst case scenario, the failure of its
purchasers and transporters to conduct business in a normal fashion could have a
material adverse effect on cash flow for a period of six to nine months. The
Company's Year 2000 Plan is expected to significantly reduce the Company's level
of uncertainty about the compliance and readiness of these material third
parties. The evaluation of third party readiness will be followed by the
Company's development of contingency plans.
Cautionary Statement Regarding Forward-Looking Statements. In addition, the
dates for completion of the phases of the Year 2000 Plan are based on the
Company's best estimates, which were derived using numerous assumptions of
future events. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of
third-parties and the interconnection of computer systems, the Company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the Year 2000 issue that may affect its operations and business.
Accordingly, shareholders and potential investors are cautioned that certain
events or circumstances could cause actual results to differ materially from
those projected, estimated or predicted.
ITEM 2 - PROPERTIES
EXPLORATION AND DEVELOPMENT PROJECTS AND ACQUISITIONS
In 1998, HCRC incurred $37,565,000 in direct property additions, development,
exploitation and exploration costs. The costs were comprised of $28,182,000 for
property acquisitions and approximately $9,383,000 for domestic exploration and
development. The expenditures resulted in the drilling, recompletion, or
workover of 41 development wells and 34 exploration wells. HCRC completed 37
development wells (90%) and 18 exploration wells (53%) for an overall completion
rate of 73%. HCRC's 1998 capital program led to the replacement, including
revisions to prior year reserves, of 120% of 1998 production using year-end
prices of $10.00 per bbl and $1.85 per mcf. Using five year average price of
$16.64 per bbl and $1.78 per mcf, HCRC's reserve replacement for 1998
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<PAGE> 277
would have been 200% of 1998 production. Management utilizes average price
reserves internally because it believes these prices more accurately reflect the
value to be achieved over time. Excluded from these calculations are sales of
reserves in place in 1998, which were approximately 3% of 1998 production. In
1998, HCRC expended approximately $1,672,000 for land and seismic costs, which
HCRC anticipates will yield prospects for 1999 and subsequent years.
PROPERTY SALES
During 1998, HCRC received approximately $107,000 for the sale of 67
nonstrategic properties located in eight states.
REGIONAL AREA DESCRIPTIONS AND 1998 CAPITAL BUDGET
The following discussion of HCRC's properties and capital projects contains
forward-looking statements that are based on current expectations, estimates and
projections about the oil and gas industry, management's beliefs and assumptions
made by management. Words such as "projects," "believes," "expects,"
"anticipates," "estimates," "plans," "could," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Please refer to the section entitled "Cautionary Statement Regarding
Forward-Looking Statements" for a discussion of factors which could affect the
outcome of the forward-looking statements.
GREATER PERMIAN REGION
HCRC has significant interests in the Greater Permian Region, which includes
West Texas and Southeast New Mexico. In this region, HCRC has interests in 537
productive oil and gas wells (423 of which are operated), 38 operated shut-in
oil and gas wells and 17 (15 operated) salt water disposal wells or injection
wells. In 1998, HCRC expended approximately $11,685,000 (31%) of its capital
budget on projects in this area. HCRC spent approximately $2,200,000 for
drilling, recompletion, or workover of 23 development wells and for drilling 18
exploration wells. Seventy-eight percent of the wells drilled or recompleted are
producing. The following is a description of the significant areas and 1998
capital projects within the Greater Permian Region.
ARCADIA ACQUISITION. In October 1998, HCRC purchased for $8,200,000 oil and gas
properties, including interests in approximately 570 wells located primarily in
Texas, numerous proven and unproven drilling locations, exploration acreage, and
3-D seismic data. HPI operates approximately 85% of the proven property value.
The acquisition added estimated proven reserves of approximately 576,000 barrels
of oil and 5.5 billion cubic feet of natural gas at five-year average prices,
and approximately 473,000 barrels of oil and 5.5 billion cubic feet of natural
gas at year-end pricing. HCRC's estimated proven reserve addition of 9.0 bcfe
represents approximately 61% of HCRC's 1998 production at five-year average
prices, and 56% of HCRC's 1998 production at year-end prices. HCRC estimates
that gross 1999 production from the properties could be approximately 1.1 bcfe.
In 1999, HCRC plans to divest approximately 400 of the wells acquired from
Arcadia. The wells to be sold are nonstrategic, nonoperated, and represent only
6% of the acquisition's production and 4% of its average price value. During
1999 HCRC plans to study areas for future development project implementation.
CARLSBAD/CATCLAW AREA. HCRC's interests in the Carlsbad/Catclaw Area as of
December 31, 1998 consisted of 93 producing wells that produce primarily natural
gas and are located on the northwestern edge of the Delaware Basin in Lea, Eddy
and Chaves Counties, New Mexico. HPI operates 37 of these wells. The wells
produce at depths ranging from approximately 2,500 feet to 14,000 feet from the
Delaware, Atoka, Bone Springs and Morrow formations. In 1998, HCRC spent
approximately $488,000 recompleting or drilling eight producing development
wells and drilling one unsuccessful exploration well. HCRC expects to continue
operated development drilling in the Hat Mesa Field.
EAST KEYSTONE AREA. HCRC's interest in the East Keystone Area as of December 31,
1998 consisted of 55 producing wells, 37 of which are operated by HPI, in
Winkler County, Texas. The primary focus of this area is the development of the
Holt and San Andreas formations at a depth of 5,100 feet. During 1998, HCRC had
eight development projects, of which seven were successful. HCRC's future
development plans include a total of three projects for this area.
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<PAGE> 278
MERKLE AREA. HCRC's interest in the Merkle Area as of December 31, 1998 consists
of 29 producing wells, 16 of which are operated by HPI in Taylor and Nolan
Counties, Texas. HCRC's nonoperated interest in the Merkle Area includes 10
square miles of proprietary seismic data in Jones, Nolan and Taylor Counties,
Texas, which was acquired in 1995. Based on its initial success in the
nonoperated Merkle Area, HCRC acquired 74 additional miles of proprietary 3-D
seismic data adjacent to the nonoperated area. HCRC's focus in this area is
exploration of the Canyon, Strawn, Flippen, Tannehill and Ellenberger formations
at depths of 2,500 to 6,500 feet. In 1998, HCRC drilled 11 exploration wells and
one development well, nine of which were completed. HCRC incurred approximately
$1,054,000 in costs in 1998 for the 12 wells drilled. HCRC owns an average 28.5%
working interest in the wells. Even with current low crude oil prices, continued
drilling in this area is economic, and HCRC anticipates additional 1999 drilling
to continue to exploit the reef structures.
GRIFFIN PROJECT. In 1998, HCRC purchased land for $105,000 and incurred costs of
approximately $452,000 to drill three exploration wells and one development well
in Gaines County, Texas. None of the four nonoperated 7,500 foot Leonardian sand
wells was successful. Due to limited delineation drilling potential in this area
and low oil prices, HCRC will delay future drilling and evaluate the viability
of the remaining exploration projects. HCRC owns an average 25% working interest
in the prospect area.
SPRABERRY AREA. HCRC's interests in the Spraberry Area consist of 360 producing
wells, 13 salt water disposal wells and 36 shut-in wells in Dawson, Upton,
Reagan and Irion Counties, Texas. HPI operates 380 of these wells. Most of the
current production from the wells is from the Upper and Lower Spraberry,
Clearfork Canyon, Dean and Fusselman formations at depths ranging from 5,000
feet to 9,000 feet. During 1998, HCRC drilled or recompleted three wells, all of
which are producing. As a result of low crude oil prices, HCRC abandoned
twenty-three wells in this area in 1998. During 1999, HCRC plans to shut-in 29
uneconomic wells and has scheduled 25 additional wells for abandonment. The
wells scheduled for shut-in produce, in total, only 40 mcfe per day, net to
HCRC, and were operating at a net loss to HCRC of $65,000 per year. Future plans
for this area include eight development wells and workovers and additional
projects contingent upon future evaluation. The price of crude oil must increase
before these projects can be considered viable.
GULF COAST REGION
HCRC has significant interests in the Gulf Coast Region in Louisiana and South
and East Texas. HCRC's most significant interest in the Gulf Coast Region
consists of 23 producing gas wells and six salt water disposal wells located in
Lafayette Parish, Louisiana. The wells produce principally from the Bol Mex
formations at 13,500 to 14,500 feet and 11 are operated by HPI. The two most
significant wells in the area are the A.L. Boudreaux #1 and the G.S. Boudreaux
Estate #1. In South and East Texas, HCRC has interests in 203 wells, 65 of which
are operated by HPI and produce primarily from the Austin Chalk, Paluxy, Lower
Frio and Cotton Valley formations at depths from 7,000 to 13,000 feet. During
1998, HCRC expended approximately $4,240,000 (11%) of its capital budget in this
region in Louisiana and South and East Texas. The following discussion relates
to major 1998 capital projects within the region.
BELL PROJECT. HCRC has a 30% working interest in an operated project to evaluate
the Buda, Carrizo, Woodbine, and Dexter sands in Houston County, Texas. HCRC's
drilling costs in 1998 for a 9,200-foot horizontal well were approximately
$615,000. The well encountered Buda pay and sales of production began in
December 1998, after gas processing equipment was installed. The well primarily
produces oil. HCRC achieved gross sustained production rates of 8.2 mmcfe per
day; however, due to current low oil prices, flowing rates have been reduced to
approximately 4 mmcfe per day. HCRC also incurred $375,000 in 1998 for land and
leasehold costs relating to the project. HCRC plans additional delineation
drilling in 1999. HCRC anticipates that single or multi-lateral horizontal
drilling will be the principal drilling practice used in this area. The gross
targeted potential for the project could be 2.4 bcfe per well. There can be no
assurance, however, that any well drilled will be successful.
BISON PROSPECT. HCRC participated in a nonoperated 18,000 foot exploratory well
in Lafayette Parish, Louisiana targeting a large Klump sands structure. Drilling
problems prevented the well from reaching total depth and testing the primary
target horizon in the prospect; however, the secondary target horizon was tested
and found to be non-productive. The well was plugged and abandoned. Total land
and drilling costs incurred by HCRC during 1998 for its 2.5% working interest
were approximately $217,000.
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<PAGE> 279
BLUE MOON PROJECT. During 1998, HCRC entered into a farmout arrangement under
which it contributed acreage to a project drilled in Lafayette Parish,
Louisiana. A well was recently completed and tested over 14 mmcfe of gas per
day. HCRC's after payout working interest in the well depends on unit boundary
determinations, but HEP anticipates that its working interest will be between 5%
and 7%. HCRC paid no capital costs for its interest in the well, and payout is
expected to occur during the second quarter of 1999.
EAST SMITH POINT. In 1998, HCRC participated in a Frio sand recompletion and a
3-D seismic review of the deep Vicksburg in Chambers County, Texas. HCRC owns a
49% working interest in the project and spent approximately $305,000 for
drilling costs and approximately $426,000 for land and geologic and geophysical
data. In 1998, the first 14,000-foot recompletion was unsuccessful. HCRC does
not plan additional activity in this area.
ESPERANZA PROJECT. HCRC owns a 7.9% working interest in a nonoperated
15,400-foot directional exploration discovery in the Wilcox formation in LaVaca
County, Texas. The natural gas prospect was developed using proprietary 3-D
seismic data, and the prospect could have a gross target of 60 bcf. The initial
well has been completed and showed gross production rates of 10 mmcfd at a
flowing tubing pressure of 9,000 psi. HCRC spent approximately $365,000 in 1998
for its share of costs. HCRC plans to participate in additional wells in 1999 to
further exploit this discovery. There can be no assurance, however, that any
well drilled will be successful.
INTERCOASTAL PROSPECT. In 1998, HPI took over operation of a well in which it
did not own an interest in Vermilion Parish, Louisiana. The Planulina sands were
faulted out in the original wellbore, and HCRC sidetracked the well at a depth
of 14,467 feet to test the sands. The well was drilled and logged, and the
objective sands, although well-developed, were found to contain water. The well
was plugged and abandoned. HCRC spent $263,000 to test the concept.
MIRASOLES PROJECT. In 1998, HCRC spent approximately $430,000 for land costs
related to the Mirasoles project in Kenedy County, Texas. HCRC owns an interest
in 63 square miles of proprietary 3-D seismic data which defines a large
structural prospect that could have a gross potential of 395 bcfe. HCRC spent
approximately $941,000 in 1998 for its 17.5% working interest share of the cost
of drilling a 17,000-foot Frio formation exploration well. The exploratory well
is being completed, and depending upon test results, additional delineation and
development drilling could be required to properly exploit the structure. There
can be no assurance, however, that any well drilled will be successful.
ROCKY MOUNTAIN REGION
HCRC has significant interests in the Rocky Mountain Region, which include
producing properties in Colorado, Montana, North Dakota and Northwest New
Mexico. HCRC has interests in 207 producing oil and gas wells, 168 of which are
operated by HPI, 27 shut-in wells, 25 of which are operated by HPI, and five
salt water disposal wells. HCRC expended approximately $20,669,000 (55%) of its
1998 capital budget in this area. Approximately $17,291,000 of the capital
budget was used for the purchase of the volumetric production payment discussed
below. In 1998, HCRC spent approximately $2,215,000 to recomplete or drill 13
development wells and to drill three exploration wells. Thirteen of the wells
were completed. A discussion of the major projects in the region follows.
CAJON LAKE FIELD. In 1998, HCRC sidetracked a 6,000-foot Ismay formation
exploration well in San Juan County, Utah. HCRC developed the prospect from
proprietary 3-D seismic data and HPI is the operator of the project. HCRC owns
an approximate 15% working interest in the project and spent approximately
$120,000 to complete the exploration well in 1998. Sales of crude oil production
began in November; however, production will be significantly curtailed until a
natural gas pipeline is constructed to eliminate flaring. HCRC projects that the
fully developed prospect could have 6 bcfe gross potential. There can no
assurance, however, that any well drilled will be successful. Despite low oil
prices, additional delineation drilling is anticipated in 1999.
-7-
<PAGE> 280
COLORADO WESTERN SLOPE PROJECT. HCRC drilled and completed two 5,500 foot Dakota
formation wells in the Piceance Basin in Western Colorado. HCRC owns an average
51% working interest in the wells. The wells had a combined initial production
rate of 1.5 mmcf per day, and both wells began sales of production in the third
quarter of 1998. In 1998, HCRC also recompleted an additional well. Total costs
in 1998 for the three wells were approximately $565,000. HCRC has identified
fourteen additional development locations. HCRC projects that the total project
area could have gross potential reserves of 0.8 bcfe, which is the typical
reserve potential for this area. There can no assurance, however, that any well
drilled will be successful.
TOOLE COUNTY AREA. HCRC's interests in the Toole County Area consist of 61
producing wells and 17 shut-in wells, 66 of which are operated by HPI. The oil
wells produce from the Nisku formation at depths of approximately 3,000 feet,
and the gas wells produce from the Bow Island formation at depths of 900 to
1,200 feet. In 1998, HCRC drilled three horizontal wells in the East Kevin Field
to the Nisku formation. Two of the oil wells were completed and had combined
initial production rates of 1.3 mmcfe per day. HCRC has a 50% working interest
in the project and spent approximately $728,000 in 1998. Because of current low
oil prices in this sour, lower gravity crude area, HCRC has halted the drilling
of additional development wells and has postponed the re-entry and sidetrack of
the remaining well drilled in 1998.
SAN JUAN BASIN PROJECT - COLORADO. In July 1996, HCRC and its affiliate Hallwood
Energy Partners, L.P. ("HEP") acquired interests in 34 wells in LaPlata County,
Colorado producing from the Fruitland Coal formation at approximately 3,000
feet. An unaffiliated large East Coast financial institution formed an entity to
utilize tax credits generated from the wells. All production from the wells
generates an additional payment of approximately $.68 per mcf. An affiliate of
Enron Corp. financed the project through a volumetric production payment
("VPP"). During May 1998, a limited liability company owned equally by HCRC and
HEP, purchased the VPP from the affiliate of Enron Corp. HCRC funded its
$17,291,000 share of the acquisition price from operating cash flow and
borrowings under its Credit Agreement. As a result of the acquisition, HCRC
replaced the higher cost and administratively burdensome VPP financing with
lower cost conventional borrowings under its line of credit. At the time of the
purchase, HCRC entered into a financial contract to hedge the volumes subject to
the production payment at an average price of $2.11 per mmbtu. Under the terms
of the original 1996 transaction, HCRC and HEP were already responsible for
costs associated with the wells. HPI has managed and operated the wells since
July 1996, and has increased the wells' gross production from 14 mmcf to
approximately 23.5 mmcf per day through workovers and gas gathering facilities
improvement programs. The acquisition increased HCRC's current average daily
production by 6.25 mmcf per day.
SAN JUAN BASIN PROJECT - NEW MEXICO. HCRC's interest in the San Juan Basin
consists of 51 producing gas wells and 10 shut-in wells located in San Juan
County, New Mexico. HPI operates all 51 producing wells in New Mexico, 31 of
which produce from the Fruitland Coal formation at approximately 2,200 feet and
20 of which produce from the Pictured Cliffs, Mesa Verde and Dakota formations
at 1,200 to 7,000 feet. The expansion of the gathering system significantly
increased gas gathering, processing and compression capacity for the associated
properties, which resulted in gross production increases of 3.0 mmcf per day in
1998. In addition to proceeds from the sale of gas, HCRC also receives a payment
of $.36 per mcf for tax credits generated by production from the coalbed methane
wells.
OTHER
HCRC owns various other interests in properties in Kansas, Oklahoma, California
and South Central Texas. The remaining $971,000 of HCRC's 1998 capital
expenditures were incurred in this area. The costs include $325,000 for an
unsuccessful exploration project in Carter County, Oklahoma, $157,000 for the
completion of an exploration well in Canadian County, Oklahoma and for drilling
four unsuccessful exploration wells in Yolo County, California and other
miscellaneous projects. During 1998, HCRC also participated in two nonoperated
3-D seismic projects in nearby Solano and Colusa Counties, California. HCRC is
in the process of divesting its interests in California projects. As a result of
low oil prices and high lifting costs, HCRC plan to shut-in 35 uneconomic wells
and to outsource its field workforce in 1999. These cost reduction measures are
projected to save $230,000 per year in net operating expenses.
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<PAGE> 281
PERU BLOCK Z-3 PROJECT. HCRC's partner on the Peruvian offshore Z-3 Block
completed 1,200 miles of 2-D seismic data acquisition to supplement existing
seismic data. Data interpretation is in progress, and it will be reviewed by
HCRC in the first quarter of 1999. HCRC has a 7.5% working interest in the
project, but it will not incur capital costs until actual drilling operations
begin. Although the production-sharing contract provides that drilling
operations must begin no later than January 2002, it is anticipated that the
Peruvian government will enact legislation to extend the period for all drilling
commitments by one year.
For 1999, HCRC's capital budget, which will be paid from cash generated from
operations and cash on hand, has been set at $5,152,000. HCRC has budgeted
continued low oil prices for 1999 which significantly impacts cash generated
from operations. Consequently, the capital budget has been set at a lower amount
than the budget for past years. The capital budget for 1999 will be reduced if
HCRC is required to make a principal payment on its debt and if oil and gas
prices decrease further.
COMPANY RESERVES, PRODUCTION AND DISCUSSION BY SIGNIFICANT REGIONS
The following table presents the December 31, 1998 reserve data by significant
regions.
<TABLE>
<CAPTION>
Present Value of
Estimated Future Net Cash Flows
Proved Reserve Quantities -------------------------------
------------------------- Proved Proved
Mcf of Gas Bbls of Oil Undeveloped Developed Total
---------- ----------- ----------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Greater Permian Region 10,980 1,950 $11,480 $11,480
Gulf Coast Region 14,574 840 $ 1,735 19,027 20,762
Rocky Mountain Region 60,226 706 48,009 48,009
Mid-Continent Region 1,087 517 1,710 1,710
Other 140 20 45 1,994 2,039
------- ------- ------- ------- -------
87,007 4,033 $ 1,780 $82,220 $84,000
======= ======= ======= ======= =======
</TABLE>
The following table presents the oil and gas production for significant regions.
<TABLE>
<CAPTION>
Production for the Production for the
Year Ended 1998 Year Ended 1997
------------------ ------------------
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Greater Permian Region 1,705 318 1,719 308
Gulf Coast Region 2,481 75 1,875 64
Rocky Mountain Region 5,983 104 3,977 107
Mid-Continent Region 214 201 234 214
Other 172 18 158 18
------ ------ ------ ------
10,555 716 7,963 711
====== ====== ====== ======
</TABLE>
The following table presents the Company's extensions and discoveries by
significant regions.
<TABLE>
<CAPTION>
Year Ended 1998 Year Ended 1997
------------------ ------------------
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Greater Permian Region 217 207 529 238
Gulf Coast Region 998 186 295 21
Rocky Mountain Region 91 96 1,756 234
Mid-Continent Region 53 1 43
Other 4 314 26
----- ----- ----- -----
1,363 490 2,894 562
===== ===== ===== =====
</TABLE>
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<PAGE> 282
AVERAGE SALES PRICES AND PRODUCTION COSTS
The following table presents the average oil and gas sales price and average
production costs per equivalent mcf computed at the ratio of six mcf of gas to
one barrel of oil.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average sales price (including effects of hedging):
Oil and condensate (per bbl) $ 13.12 $ 18.87 $ 20.13
Natural gas (per mcf) 1.91 2.17 1.99
Production costs (per equivalent mcf) .78 .84 .78
</TABLE>
PRODUCTIVE OIL AND GAS WELLS
The following table summarizes the productive oil and gas wells as of December
31, 1998 attributable to HCRC's direct interests. Productive wells are producing
wells and wells capable of production. Gross wells are the total number of wells
in which HCRC has an interest. Net wells are the sum of HCRC's fractional
interests owned in the gross wells.
<TABLE>
<CAPTION>
Gross Net
----- ---
<S> <C> <C>
Productive Wells
Oil 1,209 104
Gas 319 65
----- ---
1,528 169
===== ===
</TABLE>
OIL AND GAS ACREAGE
The following table sets forth the developed and undeveloped leasehold acreage
held directly by HCRC as of December 31, 1998. 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 HCRC has a working interest. Net acres are the sum of HCRC's fractional
interest owned in the gross acres.
<TABLE>
<CAPTION>
Gross Net
----- ---
<S> <C> <C>
Developed acreage 91,436 28,728
Undeveloped acreage 306,437 73,727
------- -------
Total 397,873 102,455
======= =======
</TABLE>
HCRC holds undeveloped acreage in Texas, Louisiana, Montana, Wyoming, New
Mexico, Kansas, Colorado and North Dakota.
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<PAGE> 283
DRILLING ACTIVITY
The following table sets forth the number of wells attributable to HCRC's direct
interest drilled in the most recent three years.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
DEVELOPMENT WELLS:
Productive 11 3.4 23 4.0 29 6.2
Dry 5 1.5 4 1.0 4 1.0
--- --- --- --- --- ---
Total 16 4.9 27 5.0 33 7.2
=== === === === === ===
EXPLORATORY WELLS:
Productive 17 4.9 14 2.7 1 .1
Dry 16 3.3 22 4.2 4 .6
--- --- --- --- --- ---
Total 33 8.2 36 6.9 5 .7
=== === === === === ===
</TABLE>
OFFICE SPACE
HCRC is guarantor of 40% of the obligation under the Denver, Colorado office
leases which are in the name of HPI. Hallwood Energy Partners, L.P. ("HEP") is
guarantor of the remaining 60% of the obligation. HPI's current lease, for
approximately $600,000 per year, expires in June 1999. During February 1999, HPI
entered into another office lease for approximately $600,000 per year. The new
lease commences upon occupancy, which is expected to be in June or July 1999,
and terminates in seven and one-half years.
ITEM 3 - LEGAL PROCEEDINGS
See Notes 14 and 15 to the financial statements included 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 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HCRC's common stock has traded over the counter on the NASDAQ National Market
System under the symbol "HCRC," since June 4, 1992. As of March 24, 1999, there
were 2,123 holders of record of HCRC's common stock. 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. HCRC did not pay
a dividend during the periods shown. During the third quarter of 1997, the
stockholders of HCRC approved a three-for-one split of HCRC's common stock. The
stock split was effected by issuing, as a stock dividend, two additional shares
of Common Stock for each share outstanding. The stock dividend was paid on
August 11, 1997 to shareholders of record on August 4, 1997. The stockholders
also approved an increase in the number of authorized shares of common stock
from 2,000,000 shares to 10,000,000 shares.
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<PAGE> 284
<TABLE>
<CAPTION>
HCRC Common Stock High Low
- ----------------- ---- ---
<S> <C> <C>
First quarter 1997 30 1/6 22 3/4
Second quarter 1997 25 15
Third quarter 1997 30 1/2 20
Fourth quarter 1997 26 21 1/4
First quarter 1998 21 9/16 14 1/4
Second quarter 1998 16 15/16 14 3/8
Third quarter 1998 17 3/8 12
Fourth quarter 1998 15 9 1/2
</TABLE>
All share and per share information has been retroactively restated for the
three-for-one stock split effective August 11, 1997.
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<PAGE> 285
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding HCRC's
financial position and results of operations as of the dates indicated. All per
share information has been restated to reflect the three-for-one stock split,
which was effective August 11, 1997.
<TABLE>
<CAPTION>
Hallwood Consolidated Resources Corporation
-------------------------------------------
As of and for the Year Ended December 31,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except per share)
<S> <C> <C> <C> <C> <C>
Summary of Operations
- ---------------------
Oil and gas revenues and
pipeline operations $ 32,230 $ 32,258 $ 34,308 $ 25,349 $ 20,459
Total revenue 32,410 32,411 34,445 25,484 20,644
Production operating expense 11,642 10,218 10,383 8,514 8,367
Depreciation, depletion and
amortization 11,463 8,605 9,246 8,206 7,340
Impairment 19,600 9,277 4,721
General and administrative expense 4,451 4,884 4,011 4,630 3,842
Net income (loss) (20,279) 5,585 8,210 (4,670) (2,974)
Net income (loss) per share - basic (7.38) 2.05 3.00 (1.48) (.93)
Net income (loss) per share - diluted (7.38) 1.97 2.91 (1.48) (.93)
Balance Sheet
- -------------
Working capital (deficit) $ (5,696) $ 4,867 $ (47) $ (7,202) $ 430
Property, plant and equipment, net 87,322 76,031 67,285 65,433 55,011
Total assets 101,167 92,371 78,468 73,939 62,125
Noncurrent liabilities 53,316 32,678 24,558 21,790 11,890
Stockholders' equity 29,589 48,686 43,061 36,635 43,589
</TABLE>
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<PAGE> 286
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During 1998, HCRC had a net loss of $20,279,000, compared to a net income of
$5,585,000 for 1997. The 1998 period includes noncash charges in the second,
third and fourth quarters totaling $19,600,000 for property impairments which
were taken to lower the capitalized cost of HCRC's properties to an amount equal
to the present value, discounted at 10%, of the future net revenues attributable
to those properties.
HCRC's 1998 property impairments were recorded pursuant to ceiling test
limitations required by the Securities and Exchange Commission for companies
using the full cost method of accounting. The total impairment was primarily
attributable to the decline in commodity prices and the write-off of certain
unproved acreage.
The weighted average prices received by HCRC for oil and gas have declined in
each of the last four quarters. HCRC's hedges mitigated the price reductions by
increasing the average oil and gas prices by 3% and 2%, respectively. HCRC's
weighted average oil and gas prices, when the effects of hedging are considered,
were 30% and 12% lower, respectively, for 1998 compared to 1997.
Although HCRC's production for 1998 was 21% greater than the prior year, and
operating and general and administrative expenses were lower on a unit of
production basis, net income was lower because of low commodity prices and costs
associated with the resolution of litigation.
In December 1998 HCRC announced a proposal to consolidate HCRC with HEP and the
energy interests of Hallwood Group into a new corporation called Hallwood Energy
Corporation. The consolidation proposal was approved by the Board of Directors
of HCRC and the general partner of HEP in December 1998. Because of the larger
size of the new corporation, HCRC anticipates that the new company will have the
ability to take advantage of opportunities that are unavailable to smaller
entities such as HCRC and will have a better ability to raise capital. Hallwood
Energy Corporation will focus on reserve growth. A Joint Proxy
Statement/Prospectus for the consolidation was filed with the Securities
Exchange Commission on December 30, 1998 and is proceeding through the usual SEC
comment process. It is presently anticipated that the Joint Proxy
Statement/Prospectus will be mailed to shareholders of HCRC and unitholders of
HEP in April and that the consolidation will be concluded in May 1999. There can
be no assurance, however, that all conditions to the consolidation will be
satisfied by that time.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
HCRC generated $6,130,000 of cash flow from operating activities during 1998.
The other primary cash inflows were:
o $25,500,000 from borrowings under long-term debt and
o $2,792,000 in distributions received from affiliates.
Cash was primarily used for:
o $37,565,000 for property additions, exploration and development costs
and
o $1,045,000 for payments on contract settlement obligation.
When combined with miscellaneous other cash activity during the year, the result
was a decrease in HCRC's cash and cash equivalents of $3,941,000 for the year,
from $4,492,000 at December 31, 1997 to $551,000 at December 31, 1998.
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<PAGE> 287
PROPERTY PURCHASES, SALES AND CAPITAL BUDGET
In 1998, HCRC incurred $37,565,000 in direct property additions, development,
exploitation and exploration costs. The costs were comprised of $28,182,000 for
property acquisitions and approximately $9,383,000 for domestic exploration and
development. HCRC's 1998 capital program led to the replacement, including
revisions to prior year reserves, of 120% of 1998 production using year-end
prices of $10.00 per bbl and $1.85 per mcf.
In the Greater Permian Region, HCRC expended $8,385,000 acquiring oil and gas
properties, including interests in approximately 570 wells, numerous proven and
unproven drilling locations, exploration acreage, and 3-D seismic data.
Additionally, HCRC spent approximately $488,000 to recomplete or drill nine
producing development wells and one unsuccessful exploration well in the
Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico. Also,
approximately $1,066,000 was spent to drill 11 exploration wells and one
development well, nine of which were completed in the Merkle Project. HCRC
incurred approximately $452,000 drilling three exploration wells and one
development well in the Griffin area, all of which were unsuccessful.
In the Gulf Coast Region, HCRC spent approximately $430,000 for land and
$941,000 to drill one Mirasoles exploration well in Kenedy County, Texas, which
is currently in the completion phase. HCRC incurred approximately $365,000 to
drill one successful exploration well relating to the Esperanza project in
LaVaca County, Texas. Approximately $375,000 was incurred by HCRC for land and
leasehold costs and an additional $615,000 for costs associated with drilling
one successful exploration well in Bell County, Texas. 1998 costs relating to
the East Smith Point project in Chambers County, Texas were approximately
$426,000 for land and geologic and geophysical data and an additional $305,000
to drill one unsuccessful exploration well in the area. In addition
approximately $217,000 was incurred in 1998 by HCRC to drill one well now
plugged and abandoned as part of the Bison project in Lafayette Parish,
Louisiana.
HCRC's significant property acquisition in the Rocky Mountain Region was
approximately $17,291,000 for the purchase of a volumetric production payment in
the Colorado San Juan Basin. Additionally, HCRC's significant exploration and
development expenditures in the Rocky Mountain Region included approximately
$120,000 to complete a successful exploration well within the Cajon Lake Field
in Utah; approximately $565,000 to drill three successful wells in the Colorado
Western Slope area; approximately $245,000 to drill an unsuccessful exploration
well in the West Sioux area of Montana; and approximately $728,000 to drill
three horizontal wells in Toole County, Montana, two of which were successful.
See Item 2 - Properties, for further discussion of HCRC's exploration and
development projects.
Long-lived assets, other than oil and gas properties, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. To date, the Company has not recognized
any impairment losses on long-lived assets other than oil and gas properties.
The Company made an offer to repurchase odd lot holdings of 99 or fewer shares
from its stockholders of record as of November 30, 1995. The offer was initially
for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 296,607 shares through the January 26, 1996 closing date for $2,382,000 at a
purchase price of $8.03 per share, of which $1,312,000 was expended during 1996.
On April 1, 1996, HCRC made another offer to purchase holding of 99 or fewer
shares from its stockholders of record as of March 25, 1996. The offer was for
the period from April 1, 1996 through May 3, 1996. The Company repurchased a
total of 77,790 shares at a price of $11.33 per share. HCRC resold 38,895 of
these shares to HEP at the price paid by HCRC for such shares, resulting in a
net repurchase cost to HCRC of $438,000.
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<PAGE> 288
FINANCING
On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes
("Subordinated Notes") due December 23, 2007 to The Prudential Insurance Company
of America ("Prudential"). HCRC also sold Warrants to Prudential to purchase
98,599 shares of Common Stock at an exercise price of $28.99 per share. The
Subordinated Notes bear interest at the rate of 10.32% per annum on the unpaid
balance, payable quarterly. Annual principal payments of $5,000,000 are due on
each of December 23, 2003 through December 23, 2007.
The proceeds from the Subordinated Notes were allocated to the Subordinated
Notes and to the Warrants based upon the relative fair values of the
Subordinated Notes without the Warrants and of the Warrants themselves at the
time of issuance. The allocated value of the Warrants of $1,032,000 was recorded
as paid-in-capital. The discount on the Subordinated Notes is being amortized
over the term of the Subordinated Notes using the interest method of
amortization.
Because of the substantial property impairments taken in 1998, HCRC's net worth
at December 31, 1998, was less than the amount required under the terms of its
Subordinated Note agreement. At December 31, 1998, HCRC was not in compliance
with the net worth covenant under the Subordinated Note agreement and under its
Credit Agreement. HCRC has obtained a waiver of compliance with the covenants
from both the Subordinated Note holder and HCRC's lenders under its Credit
Agreement. In March 1999, the Subordinated Note agreement was amended to reduce
the net worth requirement to $25,000,000 until the earlier of March 31, 2000 or
the last day of the fiscal quarter immediately before the consolidation with
HEP.
During 1997, the Company and its banks amended their Credit Agreement to extend
the term date of the line of credit to May 31, 1999. The banks are Morgan
Guaranty Trust Company, First Union National Bank and NationsBank of Texas.
Under the Credit Agreement, HCRC has a borrowing base of $26,500,000. As of
December 31, 1998, the Company had amounts outstanding of $25,500,000. HCRC's
unused borrowing base totaled $1,000,000 at March 24, 1999.
Borrowings against the Credit Agreement bear interest, at the option of the
Company, at either (i) the banks' Certificate of Deposit rate plus from 1.375%
to 1.875%, (ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the
higher of the prime rate of Morgan Guaranty Trust or the sum of one-half of 1%
and the Federal funds rate, plus .75%. The applicable interest rate was 6.75% at
December 31, 1998. Interest is payable at least quarterly, and quarterly
principal payments of $1,594,000 commence May 31, 1999. The Credit Agreement is
secured by a first lien on approximately 80% in value of the Company's oil and
gas properties.
The borrowing base for the Credit Agreement is redetermined semiannually, and
the next redetermination is scheduled for the second quarter of 1999. HCRC
anticipates that, because of low oil and gas prices, its lenders will reduce the
borrowing base and that HCRC will be required to make a principal payment on its
debt. Any required principal payment will reduce the amount available for HCRC's
capital budget.
As part of its risk management strategy, HCRC enters into financial contracts to
hedge the interest payments related to a portion of its outstanding borrowings
under its Credit Agreement. HCRC does not use the hedges for trading purposes,
but rather to protect against the variability of cash flows under its Credit
Agreement, which has a floating interest rate. The amounts received or paid upon
settlement of these transactions are recognized as interest expense at the time
the interest payments are due.
-16-
<PAGE> 289
As of March 24, 1999, HCRC was a party to six contracts with three
counterparties. The following table provides a summary of the Company's
financial contracts.
<TABLE>
<CAPTION>
Average
Amount of Contract
Period Debt Hedged Floor Rate
------ ----------- ----------
<S> <C> <C>
1999 $13,000,000 5.70%
2000 15,000,000 5.65%
2001 12,000,000 5.23%
2002 12,500,000 5.23%
2003 12,500,000 5.23%
2004 2,000,000 5.23%
</TABLE>
STOCK SPLIT
During July 1997, the stockholders of HCRC approved an increase in the number of
authorized shares of its Common Stock from 2,000,000 shares to 10,000,000
shares. HCRC also declared a three-for-one split of its outstanding, Common
Stock. The stock split was effected by issuing, as a stock dividend, two
additional shares of Common Stock for each share outstanding. The stock dividend
was paid on August 11 to shareholders of record on August 4. All share and per
share information has been restated to reflect the three-for-one stock split.
STOCK OPTION PLANS
During 1995, the Company adopted a stock option plan covering 159,000 shares of
Common Stock and granted options for all of the shares under the plan. The
options were granted effective July 1, 1995 at an exercise price of $6.67 per
share, which was equal to the fair market value of the Common Stock on the date
of grant. The options expire on July 1, 2005, unless sooner terminated pursuant
to the provisions of the plan. During 1997, options to purchase 9,200 shares
were exercised, and during 1998 options to purchase 21,040 shares were
exercised.
During the second quarter of 1997, the Company adopted a stock option plan
covering 159,000 shares of Common Stock and granted options for all of the
shares under the plan. The terms of this plan are generally consistent with the
terms of the Company's existing 1995 Stock Option Plan. The options were granted
effective June 17, 1997 at an exercise price of $20.33 per share, which was
equal to the fair market value of the Common Stock on the date of grant. The
options expire on June 17, 2007, unless sooner terminated pursuant to the
provisions of the plan. The options are exercisable one-third on June 17, 1997,
an additional one-third June 17, 1998, and the remaining one-third on June 17,
1999. In addition, the plan provides that vesting of the options may be
accelerated under certain conditions.
On May 5, 1998, HCRC granted options to purchase 9,540 shares of Common Stock
under its 1997 Stock Option Plan at an exercise price of $15.75 which was equal
to the fair market value of the Common Stock on the date of grant. One-third of
the options vest immediately, and the remainder vest one-half on the first
anniversary of the date of grant and one-half on the second anniversary of the
date of grant.
On May 5, 1998, HCRC also granted options to purchase 9,540 shares of Common
Stock at an exercise price of $15.75 per share which was equal to the fair
market value of the Common Stock on the date of grant. These options were not
granted pursuant to a previously existing plan, but are subject to terms and
conditions identical to those in HCRC's 1995 Stock Option Plan. One-third of the
options vest immediately, and the remainder vest one-half on the first
anniversary of the date of grant and one-half on the second anniversary of the
date of grant.
GAS BALANCING
HCRC uses the sales method to account for gas balancing. Under this method, HCRC
recognizes revenue on all of its sales of production, and any over-production or
under-production is recovered at a future date.
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<PAGE> 290
As of December 31, 1998, HCRC had a net over-produced position of 347,000 mcf
($642,000 valued at year-end prices). The management of HCRC believes that this
imbalance can be made up with production from existing wells or from wells which
will be drilled as offsets to current producing wells and that this imbalance
will not have a material effect of HCRC's results of operations, liquidity and
capital resources. The reserves discussed in Item 2 and Item 8 have been reduced
by 347,000 mcf in order to reflect HCRC's gas balancing position.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company adopted SFAS 130 on January 1, 1998. The Company does not have any
items of other comprehensive income for the years ended December 31, 1998, 1997
and 1996. Therefore, total comprehensive income (loss) is the same as net income
(loss) for those years.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting selected information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 requires that an entity report financial and descriptive information
about its operating segments which are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. HCRC adopted FAS 131 in 1998.
The Company engages in the development, production and sale of oil and gas, and
the acquisition, exploration, development and operation of oil and gas
properties in the continental United States. These activities exhibit similar
economic characteristics and involve the same products, production processes,
class of customers, and methods of distribution. Management of the Company
evaluates its performance as a whole rather than by product or geographically.
As a result, HCRC's operations consist of one reportable segment.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Company is required to
adopt SFAS 133 on January 1, 2000. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 133.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In the interest of providing the shareholders with certain information regarding
the Company's future plans and operations, certain statements set forth in this
Form 10-K relate to management's future plans and objectives. Such statements
are forward-looking statements within the meanings of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although any forward-looking statements contained in
this Form 10-K or otherwise expressed by or on behalf of the Company are, to the
knowledge and in the judgment of the officers and directors of the Company,
expected to prove true and come to pass, management is not able to predict the
future with absolute certainty. Forward-looking statements involve known and
unknown risks and uncertainties which may cause the Company's actual performance
and financial results in future periods to differ materially from any
projection, estimate or forecasted result.
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<PAGE> 291
These risks and uncertainties include, among others:
Volatility of oil and gas prices. It is impossible to predict future oil and gas
price movements with certainty. Declines in oil and gas prices may materially
adversely affect HCRC's financial condition, liquidity, ability to finance
planned capital expenditures and results of operations. Lower oil and gas prices
may also reduce the amount of oil and gas that HCRC can produce economically.
HCRC's revenues, profitability, future growth and ability to borrow funds or
obtain additional capital, as well as the carrying value of its properties, will
be substantially dependent upon prevailing prices of oil and gas. Historically,
the markets for oil and gas have been volatile, and they are likely to continue
to be volatile in the future. Prices for oil and gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional factors that are
beyond HCRC's control.
Competition from larger, more established oil and gas companies. HCRC encounters
competition from other oil and gas companies in all areas of its operations,
including the acquisition of exploratory prospects and proven properties. HCRC's
competitors include major integrated oil and gas companies and numerous
independent oil and gas companies, individuals and drilling and income programs.
Many of its competitors are large, well-established companies with substantially
larger operating staffs and greater capital resources than HCRC's and, in many
instances, have been engaged in the oil and gas business for a much longer time
than HCRC. Those companies may be able to pay more for exploratory prospects and
productive oil and gas properties, and may be able to define, evaluate, bid for
and purchase a greater number of properties and prospects than HCRC's financial
or human resources permit. HCRC's ability to explore for oil and gas prospects
and to acquire additional properties in the future will be dependent upon its
ability to conduct its operations, to evaluate and select suitable properties
and to consummate transactions in highly competitive environments.
Risks of drilling activities. HCRC's success will be materially dependent upon
the continued success of its drilling program. HCRC's future drilling activities
may not be successful and, if drilling activities are unsuccessful, such failure
will have an adverse effect on HCRC's future results of operations and financial
condition. Oil and gas drilling involves numerous risks, including the risk that
no commercially productive oil or gas reservoirs will be encountered, even if
the reserves targeted are classified as proved. The cost of drilling, completing
and operating wells is often uncertain, and drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, adverse weather conditions, compliance with
governmental requirements and shortages or delays in the availability of
drilling rigs and the delivery of equipment. Although HCRC has identified
numerous drilling prospects, there can be no assurance that such prospects will
be drilled or that oil or gas will be produced from any such identified
prospects or any other prospects.
Risks relating to the acquisition of oil and gas properties. The successful
acquisition of producing properties requires an assessment of recoverable
reserves, future oil and gas prices, operating costs, potential environmental
and other liabilities and other factors. Such assessments are necessarily
inexact and their accuracy inherently uncertain. In connection with such an
assessment, HCRC will perform a review of the subject properties that it
believes to be generally consistent with industry practices. This usually
includes on-site inspections and the review of reports filed with various
regulatory entities. Such a review, however, will not reveal all existing or
potential problems, nor will it permit a buyer to become sufficiently familiar
with the properties to fully assess their deficiencies and capabilities.
Inspections may not always be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection is
undertaken. Even when problems are identified, the seller may be unwilling or
unable to provide effective contractual protection against all or part of these
problems. There can be no assurances that any acquisition of property interests
by HCRC will be successful and, if an acquisition is unsuccessful, that the
failure will not have an adverse effect on HCRC's future results of operations
and financial condition.
-19-
<PAGE> 292
Hazards relating to well operations and lack of insurance. The oil and gas
business involves certain hazards such as well blowouts; craterings; explosions;
uncontrollable flows of oil, gas or well fluids; fires; formations with abnormal
pressures; pollution; and releases of toxic gas or other environmental hazards
and risks, any of which could result in substantial losses to HCRC. In addition,
HCRC may be liable for environmental damages caused by previous owners of
property purchased or leased by HCRC. As a result, substantial liabilities to
third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of HCRC's properties. While HCRC believes
that it maintains all types of insurance commonly maintained in the oil and gas
industry, it does not maintain business interruption insurance. In addition,
HCRC cannot predict with certainty the circumstances under which an insurer
might deny coverage. The occurrence of an event not fully covered by insurance
could have a materially adverse effect on HCRC's financial condition and results
of operations.
Future oil and gas production depends on continually replacing and expanding
reserves. In general, the volume of production from oil and gas properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. HCRC's future oil and gas production is, therefore,
highly dependent upon its ability to economically find, develop or acquire
additional reserves in commercial quantities. Except to the extent HCRC acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of HCRC will decline as
reserves are produced. The business of exploring for, developing or acquiring
reserves is capital-intensive. To the extent cash flow from operations is
reduced, and external reserves of capital become limited or unavailable, HCRC's
ability to make the necessary capital investments to maintain or expand its
asset base of oil and gas reserves would be impaired. In addition, there can be
no assurance that HCRC's future exploration, development and acquisition
activities will result in additional proved reserves or that HCRC will be able
to drill productive wells at acceptable costs. Furthermore, although HCRC's
revenues could increase if prevailing prices for oil and gas increase
significantly, HCRC's finding and development costs could also increase.
Estimates of reserves and future cash flows are imprecise. Reservoir engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. Estimates of economically
recoverable oil and gas reserves and of future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical production
from the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies, and assumptions concerning
future oil and gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected from them
prepared by different engineers, or by the same engineers but at different
times, may vary substantially, and such reserve estimates may be subject to
downward or upward adjustment based upon such factors. In addition, the status
of the exploration and development program of any oil and gas company is
ever-changing. Consequently, reserve estimates also vary over time. Actual
production, revenues and expenditures with respect to HCRC's reserves will
likely vary from estimates, and such variances may be material.
INFLATION AND CHANGING PRICES
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HCRC, 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 from 1996 through 1998, with a
distinct downward trend in both oil and gas prices occurring in the calendar
year 1998. HCRC anticipates that both oil and gas prices will remain low
throughout 1999. In preparing its 1999 budget, HCRC has estimated that the
weighted average oil price (for barrels not hedged) will be $11.00 per barrel,
and the weighted average price of natural gas (for mcf not hedged) will be $1.70
per mcf for the year. There can be no assurance that HCRC's forecast is
accurate. If prices decrease further, it can be expected that the results of
operations and cash flow will be affected, and HCRC's capital budget will
decrease.
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<PAGE> 293
The following table presents the weighted average prices received per year by
HCRC, and the effects of the hedging transactions discussed below.
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding the effects (including the effects (excluding the effects (including the effects
of hedging of hedging of hedging of hedging
transactions) transactions) transactions) transactions)
---------------------- ---------------------- --------------------- ----------------------
(Bbl) (Bbl) (Mcf) (Mcf)
<S> <C> <C> <C> <C>
1998 $12.75 $13.12 $1.87 $1.91
1997 19.13 18.87 2.39 2.17
1996 20.96 20.13 2.11 1.99
</TABLE>
As part of its risk management strategy, HCRC enters into financial contracts to
hedge the price of its oil and natural gas. The purpose of the hedges is to
provide protection against price decreases 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 the hedge contracts are recognized as
increases or decreases in oil or gas revenue at the time the hedged volumes are
sold. During 1998, HCRC did not enter into additional oil price hedges for
future years because hedge contracts at prices HCRC considers advantageous are
not available.
The financial contracts used by HCRC to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HCRC sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices. As of March 24,
1999, HCRC was a party to 18 financial contracts with three different
counterparties.
The following table provides a summary of the Company's financial contracts:
<TABLE>
<CAPTION>
Oil
---------------
Percent of Direct Production Contract
Period Hedged Floor Price
------ --------------- -----------
(per bbl)
<S> <C> <C>
1999 4% $14.88
</TABLE>
All of the oil volumes hedged are subject to participating hedges whereby HCRC
will receive the contract price if the posted futures price is lower than the
contract price, and will receive the contract price plus 25% of the difference
between the contract price and the posted futures price if the posted futures
price is greater than the contract price. All of the volumes hedged are subject
to a collar agreement whereby HCRC will receive the contract price if the spot
price is lower than the contract price, the cap price if the spot price is
higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap prices range from $16.50 to $18.35 per
barrel.
<TABLE>
<CAPTION>
Oil
---------------
Percent of Direct Production Contract
Period Hedged Floor Price
------ --------------- -----------
(per mcf)
<S> <C> <C>
1999 42% $1.95
2000 33% 1.95
2001 33% 1.92
2002 32% 1.98
</TABLE>
During the first quarter through March 24, 1999, the weighted average oil price
(for barrels not hedged) was approximately $10.95 per barrel, and the weighted
average price of natural gas (for mcfs not hedged) was approximately $1.65 per
mcf.
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<PAGE> 294
INFLATION
Inflation did not have a material impact on the Company in 1998, 1997 and 1996
and is not anticipated to have a material impact in 1999.
RESULTS OF OPERATIONS
The following tables are presented to contrast HCRC's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative.
The "direct owned" column represents HCRC's direct royalty and working share
interests in oil and gas properties. The "HEP" column represents HCRC's share of
the results of operations of HEP; HCRC owned approximately 19% of the
outstanding limited partner units of HEP during 1996, 1997 and 1998.
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<PAGE> 295
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 For the Year Ended December 31, 1997
------------------------------------ ------------------------------------
Direct Direct
Owned HEP Total Owned HEP Total
------ --- ----- ------- --- -----
<S> C> <C> <C> <C> <C> <C>
Gas production (mcf) 8,139 2,416 10,555 5,951 2,012 7,963
Oil production (bbl) 576 140 716 576 135 711
Average gas price $ 1.87 $ 2.04 $ 1.91 $ 2.14 $ 2.25 $ 2.17
Average oil price $ 12.97 $ 13.71 $ 13.12 $ 18.84 $ 19.00 $ 18.87
Gas revenue $ 15,222 $ 4,920 $ 20,142 $ 12,719 $ 4,532 $ 17,251
Oil revenue 7,473 1,919 9,392 10,851 2,565 13,416
Pipeline and other 1,947 749 2,696 1,035 556 1,591
Interest income 112 68 180 84 69 153
-------- -------- -------- -------- -------- --------
Total revenue 24,754 7,656 32,410 24,689 7,722 32,411
Production operating 9,349 2,293 11,642 8,108 2,110 10,218
General and administrative 3,535 916 4,451 3,908 976 4,884
Interest 3,634 526 4,160 1,675 583 2,258
Depreciation, depletion, and amortization 8,948 2,515 11,463 6,621 1,984 8,605
Impairment of oil and gas properties 19,600 19,600
Litigation 827 260 1,087
-------- -------- -------- -------- -------- --------
45,893 6,510 52,403 20,312 5,653 25,965
INCOME (LOSS) BEFORE INCOME
TAXES (21,139) 1,146 (19,993) 4,377 2,069 6,446
-------- -------- -------- -------- -------- --------
PROVISION (BENEFIT) FOR
INCOME TAXES:
Current (164) (164) 961 961
Deferred 450 450 (100) (100)
-------- -------- -------- --------
286 286 861 861
-------- -------- -------- --------
NET INCOME (LOSS) $(21,425) $ 1,146 $(20,279) $ 3,516 $ 2,069 $ 5,585
======== ======== ======== ======== ======== ========
</TABLE>
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<PAGE> 296
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
-------------------------------------------
Direct
Owned HEP Total
------ --- -----
<S> <C> <C> <C>
Gas production (mcf) 6,134 2,146 8,280
Oil production (bbl) 668 169 837
Average gas price $ 1.93 $ 2.15 $ 1.99
Average oil price $ 20.17 $ 19.98 $ 20.13
Gas revenue $ 11,826 $ 4,620 $ 16,446
Oil revenue 13,476 3,376 16,852
Pipeline and other 510 500 1,010
Interest income 28 109 137
-------- -------- --------
Total revenue 25,840 8,605 34,445
Production operating 8,203 2,180 10,383
General and administrative 3,186 825 4,011
Interest 1,800 730 2,530
Depreciation, depletion, and amortization 7,050 2,196 9,246
Other 24 90 114
-------- -------- --------
20,263 6,021 26,284
INCOME BEFORE INCOME TAXES 5,577 2,584 8,161
-------- -------- --------
PROVISION (BENEFIT) FOR
INCOME TAXES:
Current 301 301
Deferred (350) (350)
-------- --------
(49) (49)
-------- --------
NET INCOME $ 5,626 $ 2,584 $ 8,210
======== ======== ========
</TABLE>
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<PAGE> 297
1998 COMPARED TO 1997
GAS REVENUE
Gas revenue increased $2,891,000 during 1998 compared with 1997. The increase is
comprised of an increase in production from 7,963,000 mcf in 1997 to 10,555,000
mcf in 1998 partially offset by a decrease in the average gas price from $2.17
per mcf in 1997 to $1.91 per mcf in 1998. Production increased because two
temporarily shut-in wells were back on line. The two wells were temporarily
shut-in during the second quarter of 1997 while workover procedures were
performed. The increase in gas production is also due to an expansion of the
gathering system in San Juan County, New Mexico during 1998.
The effect of HCRC's hedging activity was to increase HCRC's average price from
$1.87 per mcf to $1.91 per mcf, resulting in a $422,000 increase in revenue.
OIL REVENUE
Oil revenue decreased $4,024,000 during 1998 compared with 1997. The decrease in
revenue is primarily due to a decrease in price from $18.87 per barrel in 1997
to $13.12 per barrel in 1998, partially offset by an increase in production from
711,000 barrels in 1997 to 716,000 barrels in 1998. Production increased
slightly because two temporarily shut-in wells were back on line. The two wells
were temporarily shut-in during the second quarter of 1997 while workover
procedures were performed. This increase in production was partially offset by
normal production declines.
The effect of HCRC's hedging transactions was to increase HCRC's average oil
price from $12.75 per barrel to $13.12 per barrel, resulting in a $265,000
increase in revenue.
PIPELINE AND OTHER
Pipeline and other revenue consists of revenue derived from saltwater disposal,
incentive and tax credit payments from certain coalbed methane wells, and other
miscellaneous revenue. Pipeline and other revenue increased $1,105,000 during
1998 compared to 1997, primarily due to increased incentive payment income
resulting from HCRC's acquisition of a volumetric production payment during May
1998.
INTEREST INCOME
Interest income increased $27,000 during 1998 compared with 1997 primarily due
to an increase in the average cash balance during 1998.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $1,424,000 during 1998 compared to 1997.
The increase is due to increased operating costs resulting from the drilling
projects completed during 1997 as well as the additional operating expenses
related to the properties acquired in the Arcadia acquisition during October
1998.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports as well as
allocated internal overhead incurred by HPI on behalf of the Company. These
costs decreased $433,000 during 1998 compared to 1997, primarily as a result of
decreased performance based compensation during 1998.
INTEREST EXPENSE
Interest expense increased $1,902,000 in 1998 compared to 1997, primarily as a
result of a higher average debt balance during 1998.
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<PAGE> 298
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Depreciation, depletion and amortization expense associated with proved oil and
gas properties increased $2,858,000 during 1998 compared with 1997. This
increase is due to a higher depletion rate resulting from the increased
production discussed above, as well as higher capitalized costs during 1998.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties during 1998 represents the impairments
recorded during 1998 because capitalized costs exceeded the present value
(discounted at 10%) of estimated future net revenues from proved oil and gas
reserves at June 30, 1998, September 30, 1998 and December 31, 1998, based on
prices of $13.00 per barrel of oil and $1.90 per mcf of gas, $12.75 per barrel
of oil and $1.80 per mcf of gas and $10.00 per barrel of oil and $1.85 per mcf
of gas, respectively.
LITIGATION
Litigation expense during 1998 is comprised of the costs related to the Arcadia
arbitration described in Item 8, Note 14.
1997 COMPARED TO 1996
GAS REVENUE
Gas revenue increased $805,000 during 1997 as compared with 1996. The increase
is comprised of an increase in the average gas price from $1.99 per mcf in 1996
to $2.17 per mcf in 1997, partially offset by a decrease in production from
8,280,000 mcf in 1996 to 7,963,000 mcf in 1997. The decrease in production is
due to the temporary shut-in of two wells in Louisiana during the second quarter
of 1997 while workover procedures were performed and to normal production
declines.
The effect of HCRC's hedging activity was to decrease HCRC's average gas price
from $2.39 per mcf to $2.17 per mcf, resulting in a $1,752,000 decrease in
revenue.
OIL REVENUE
Oil revenue decreased $3,436,000 during 1997 as compared with 1996. The decrease
in revenue is comprised of a decrease in price from $20.13 per barrel in 1996 to
$18.87 per barrel in 1997 and a 15% decrease in oil production from 837,000
barrels in 1996 to 711,000 barrels in 1997. The decrease in production is due to
the temporary shut-in of two wells in Louisiana during the second quarter of
1997 while workover procedures were performed and to normal production declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average oil
price from $19.13 per barrel to $18.87 per barrel, resulting in a $185,000
decrease in revenue.
PIPELINE AND OTHER
Pipeline and other revenue increased $581,000 during 1997 as compared to 1996,
primarily due to the receipt of insurance proceeds during 1997, which reimbursed
a portion of expense incurred in a prior period to settle certain litigation.
PRODUCTION OPERATING EXPENSE
Production operating expense decreased $165,000 during 1997 as compared to 1996.
The decrease is the result of lower production taxes due to the decrease in
production discussed above.
-26-
<PAGE> 299
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased $873,000 during 1997 as compared to
1996, primarily as a result of increased performance based compensation during
1997.
INTEREST EXPENSE
Interest expense decreased $272,000 in 1997 as compared to 1996, primarily as a
result of a lower average debt balance during 1997.
DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE
Depreciation, depletion and amortization expense decreased $641,000 during 1997
as compared with 1996. This decrease is due to a lower depletion rate resulting
from the decreased production discussed above.
OTHER
Other expense for 1996 is comprised of numerous miscellaneous items, none of
which is individually significant.
-27-
<PAGE> 300
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HCRC's primary market risks relate to changes in interest rates and in the
prices received from sales of oil and natural gas. HCRC's primary risk
management strategy is to partially mitigate the risk of adverse changes in its
cash flows caused by increases in interest rates on its variable rate debt, and
decreases in oil and natural gas prices, by entering into derivative financial
and commodity instruments, including swaps, collars and participating commodity
hedges. By hedging only a portion of its market risk exposures, HCRC is able to
participate in the increased earnings and cash flows associated with decreases
in interest rates and increases in oil and natural gas prices; however, it is
exposed to risk on the unhedged portion of its variable rate debt and oil and
natural gas production.
Historically, HCRC has attempted to hedge the exposure related to its variable
rate debt and its forecasted oil and natural gas production in amounts which it
believes are prudent based on the prices of available derivatives and, in the
case of production hedges, the Company's deliverable volumes. HCRC attempts to
manage the exposure to adverse changes in the fair value of its fixed rate debt
agreements by issuing fixed rate debt only when business conditions and market
conditions are favorable.
HCRC does not use or hold derivative instruments for trading purposes nor does
it use derivative instruments with leveraged features. HCRC's derivative
instruments are designated and effective as hedges against its identified risks,
and do not of themselves expose HCRC to market risk because any adverse change
in the cash flows associated with the derivative instrument is accompanied by an
offsetting change in the cash flows of the hedged transaction.
Notes 1 and 4 to the financial statements provide further disclosure with
respect to derivatives and related accounting policies.
All derivative activity is carried out by personnel who have appropriate skills,
experience and supervision. The personnel involved in derivative activity must
follow prescribed trading limits and parameters that are regularly reviewed by
the Board of Directors and by senior management. HCRC uses only well-known,
conventional derivative instruments and attempts to manage its credit risk by
entering into financial contracts with reputable financial institutions.
Following are disclosures regarding HCRC's market risk sensitive instruments by
major category. Investors and other users are cautioned to avoid simplistic use
of these disclosures. Users should realize that the actual impact of future
interest rate and commodity price movements will likely differ from the amounts
disclosed below due to ongoing changes in risk exposure levels and concurrent
adjustments to hedging positions. It is not possible to accurately predict
future movements in interest rates and oil and natural gas prices.
Interest Rate Risks (non trading) - HCRC uses both fixed and variable rate debt
to partially finance operations and capital expenditures. As of December 31,
1998, HCRC's debt consists of $25.5 million in borrowings under its Credit
Agreement which bear interest at a variable rate, and $25 million in borrowings
under its 10.32% Senior Subordinated Notes which bear interest at a fixed rate.
HCRC hedges a portion of the risk associated with its variable rate debt through
derivative instruments, which consist of interest rate swaps and collars. Under
the swap contracts, HCRC makes interest payments on its Credit Agreement as
scheduled and receives or makes payments based on the differential between the
fixed rate of the swap and a floating rate plus a defined differential. These
instruments reduce HCRC's exposure to increases in interest rates on the hedged
portion of its debt by enabling it to effectively pay a fixed rate of interest
or a rate which only fluctuates within a predetermined ceiling and floor. A
hypothetical increase in interest rates of two percentage points would cause a
loss in income and cash flows of $510,000 during 1999, assuming that outstanding
borrowings under the Credit Agreement remain at current levels. This loss in
income and cash flows would be offset by a $201,500 increase in income and cash
flows associated with the interest rate swap and collar agreements that are in
effect for 1999.
A hypothetical decrease in interest rates of two percentage points would cause
an increase in the fair value of $2,282,000 in HCRC's Senior Subordinated Notes
from their fair value at December 31, 1998.
-28-
<PAGE> 301
Commodity Price Risk (non trading) - HCRC hedges a portion of the price risk
associated with the sale of its oil and natural gas production through the use
of derivative commodity instruments, which consist of swaps, collars and
participating hedges. These instruments reduce HCRC's exposure to decreases in
oil and natural gas prices on the hedged portion of its production by enabling
it to effectively receive a fixed price on its oil and natural gas sales or a
price that only fluctuates between a predetermined floor and ceiling. HCRC's
participating hedges also enable HCRC to receive 25% of any increase in prices
over the fixed prices specified in the contracts. As of March 24, 1999, HCRC had
entered into derivative commodity hedges covering an aggregate of 23,000 barrels
of oil and 11,787,000 mcf of gas that extend through 2002. Under the these
contracts, HCRC sells its oil and natural gas production at spot market prices
and receives or makes payments based on the differential between the contract
price and a floating price which is based on spot market indices. The amount
received or paid upon settlement of these contracts is recognized as oil or
natural gas revenues at the time the hedged volumes are sold. A hypothetical
decrease in oil and natural gas prices of 10% from the prices in effect as of
December 31, 1998 would cause a loss in income and cash flows of $2,890,000
during 1999, assuming that oil and gas production remain at 1998 levels. This
loss in income and cash flows would be offset by a $705,000 increase in income
and cash flows associated with the oil and natural gas derivative contracts that
are in effect for 1999.
-29-
<PAGE> 302
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report 31
Consolidated Balance Sheets at December 31, 1998 and 1997 32-33
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 34
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 36
Notes to Consolidated Financial Statements 37-49
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 50-53
</TABLE>
-30-
<PAGE> 303
INDEPENDENT AUDITORS' REPORT
TO THE STOCKHOLDERS OF HALLWOOD CONSOLIDATED RESOURCES CORPORATION:
We have audited the consolidated financial statements of Hallwood Consolidated
Resources Corporation as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998, listed in the accompanying 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 Consolidated Resources
Corporation at December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 24, 1999
-31-
<PAGE> 304
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 551 $ 4,492
Accrued oil and gas revenue 3,053 4,266
Due from affiliates 4,246 2,418
Prepaid and other assets 285 115
Current assets of affiliates 4,431 3,854
--------- ---------
Total current assets 12,566 15,145
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved oil and gas properties 336,713 294,922
Unproved mineral interests - domestic 2,813 2,250
--------- ---------
Total 339,526 297,172
Less - accumulated depreciation, depletion,
amortization and impairment (252,204) (221,141)
--------- ---------
Net property, plant and equipment 87,322 76,031
--------- ---------
OTHER ASSETS
Deferred expenses 1,201 729
Deferred tax asset 450
Noncurrent assets of affiliate 78 16
--------- ---------
Total other assets 1,279 1,195
--------- ---------
TOTAL ASSETS $ 101,167 $ 92,371
========= =========
</TABLE>
(Continued on the following page)
-32-
<PAGE> 305
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 3,886 $ 3,087
Current portion of long-term debt 4,781
Current portion of contract settlement obligation 1,039
Current liabilities of affiliates 9,595 6,881
--------- ---------
Total current liabilities 18,262 11,007
--------- ---------
NONCURRENT LIABILITIES
Long-term debt 44,774 25,000
Long-term obligations of affiliates 8,482 7,589
Deferred liability 60 89
--------- ---------
Total noncurrent liabilities 53,316 32,678
--------- ---------
Total liabilities 71,578 43,685
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 11)
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; 10,000,000 shares authorized;
3,007,852 shares issued in 1998 and 2,986,812 shares
issued in 1997 30 30
Additional paid-in capital 81,283 80,111
Accumulated deficit (47,860) (27,581)
Treasury stock - 258,395 shares in 1998 and 259,278
shares in 1997 (3,864) (3,874)
--------- ---------
Stockholders' equity - net 29,589 48,686
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 101,167 $ 92,371
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-33-
<PAGE> 306
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Gas revenue $ 20,142 $ 17,251 $ 16,446
Oil revenue 9,392 13,416 16,852
Pipeline and other 2,696 1,591 1,010
Interest 180 153 137
-------- -------- --------
32,410 32,411 34,445
-------- -------- --------
EXPENSES:
Production operating 11,642 10,218 10,383
General and administrative 4,451 4,884 4,011
Interest 4,160 2,258 2,530
Depreciation, depletion and amortization 11,463 8,605 9,246
Impairment of oil and gas properties 19,600
Litigation 1,087
Other 114
-------- -------- --------
52,403 25,965 26,284
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (19,993) 6,446 8,161
-------- -------- --------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current (164) 961 301
Deferred 450 (100) (350)
-------- -------- --------
286 861 (49)
-------- -------- --------
NET INCOME (LOSS) $(20,279) $ 5,585 $ 8,210
======== ======== ========
NET INCOME (LOSS) PER SHARE - BASIC $ (7.38) $ 2.05 $ 3.00
======== ======== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ (7.38) $ 1.97 $ 2.91
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,747 2,719 2,733
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-34-
<PAGE> 307
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated Treasury
Stock Capital Deficit Stock Total
------ ---------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 30 $ 81,811 $(41,376) $ (3,830) $ 36,635
Repurchase and retirement
of common stock (1,750) (1,750)
Exercise of common stock options 10 10
Increase in treasury shares (44) (44)
Net income 8,210 8,210
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1996 30 80,071 (33,166) (3,874) 43,061
Exercise of common stock options 61 61
Other (21) (21)
Net income 5,585 5,585
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 30 80,111 (27,581) (3,874) 48,686
Exercise of common stock options 140 140
Allocated value of common
stock warrants 1,032 1,032
Decrease in treasury shares 10 10
Net loss (20,279) (20,279)
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $ 30 $ 81,283 $(47,860) $ (3,864) $ 29,589
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-35-
<PAGE> 308
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(20,279) $ 5,585 $ 8,210
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization 11,463 8,605 9,246
Impairment of oil and gas properties 19,600
Amortization of deferred loan costs and debt
discount 203
Deferred income tax (benefit) expense 450 (100) (350)
Noncash interest expense 6 91 83
Recoupment of take-or-pay liability (29) (28) (110)
Undistributed earnings of affiliates (5,040) (3,843) (5,173)
Changes in operating assets and liabilities provided (used)
cash net of noncash activity:
Accrued oil and gas revenue 1,213 542 (2,134)
Due from affiliates (1,498) (1,569) (1,071)
Prepaid and other assets (286) 378 (382)
Deferred expenses (472) (729)
Accounts payable and accrued liabilities 799 814 (1,402)
-------- -------- --------
Net cash provided by operating activities 6,130 9,746 6,917
-------- -------- --------
INVESTING ACTIVITIES:
Additions to oil and gas properties (28,182) (2,822) (2,182)
Exploration and development costs incurred (9,383) (9,284) (7,578)
Proceeds from oil and gas property sales 107 40 1,368
Distributions received from affiliates 2,792 1,144 1,144
Investment in Spraberry properties (6,338)
-------- -------- --------
Net cash used in investing activities (34,666) (10,922) (13,586)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 25,500 29,000 10,000
Payments of long-term debt (24,000) (2,000)
Repurchase and retirement of common stock (1,750)
Payments on contract settlement obligation (1,045) (118)
Exercise of stock options 140 61 10
Other financing activities (21) 16
-------- -------- --------
Net cash provided by financing activities 24,595 5,040 6,158
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (3,941) 3,864 (511)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 4,492 628 1,139
-------- -------- --------
END OF YEAR $ 551 $ 4,492 $ 628
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
-36-
<PAGE> 309
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a
Delaware corporation engaged in the development, production, and sale of oil and
gas, and in the acquisition, exploration, development and operation of oil and
gas properties. The Company's properties are primarily located in the Rocky
Mountain, Mid-Continent, Greater Permian and Gulf Coast regions of the United
States. The principal objective of the Company is to maximize shareholder value
by increasing its reserves, production and cash flow through a balanced program
of development and high potential exploration drilling, as well as selective
acquisitions.
ACCOUNTING POLICIES
CONSOLIDATION
HCRC accounts for its interest in affiliated oil and gas partnerships and
limited liability companies using the proportionate consolidation method of
accounting. The accompanying financial statements include the activities of HCRC
and its pro rata share of the activities of Hallwood Energy Partners, L.P.
("HEP").
PROPERTY, PLANT AND EQUIPMENT
The Company follows the full cost method of accounting whereby all costs related
to the acquisition and development 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. During the second, third and
fourth quarters of 1998, using oil and gas prices of $13.00 per barrel of oil
and $1.90 per mcf of gas, $12.75 per barrel of oil and $1.80 per mcf of gas and
$10.00 per barrel of oil and $1.85 per mcf of gas, respectively, HCRC recorded
oil and gas property impairment expense totaling $19,600,000.
The Company 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 for impairment.
Long-lived assets other than oil and gas properties which are evaluated for
impairment as described above, are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. To date, the Company has not recognized any impairment losses on
long-lived assets other than oil and gas properties.
-37-
<PAGE> 310
DERIVATIVES
As of March 24, 1999, HCRC was a party to 18 financial contracts to hedge the
price of its oil and natural gas. The purpose of the hedges is to provide
protection against price decreases 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 increases or
decreases in oil or gas revenue at the time the hedged volumes are sold.
As of March 24, 1999, HCRC was a party to six financial contracts to hedge the
interest payments under its Credit Agreement. The purpose of the hedges is to
protect against the variability of the cash flows under its Credit Agreement
which has a floating interest rate. The amounts received or paid upon settlement
of these transactions are recognized as interest expense at the time the
interest payments are due.
GAS BALANCING
HCRC uses the sales method to account for gas balancing. Under this method, HCRC
recognizes revenue on all of its sales of production and any over-production or
under-production is recovered or repaid at a future date.
As of December 31, 1998, HCRC had a net over-produced position of 347,000 mcf
($642,000 valued at year-end prices). Current imbalances can be made up with
production from existing wells or from wells which will be drilled as offsets to
current producing wells. HCRC's oil and gas reserves as of December 31, 1998
have been reduced by 347,000 mcf in order to reflect HCRC's gas balancing
position.
STOCK SPLIT
During July 1997, the stockholders of HCRC approved an increase in the number of
authorized shares of its Common Stock from 2,000,000 shares to 10,000,000
shares. HCRC also declared a three-for-one split of its outstanding Common
Stock. The stock split was effected by issuing, as a stock dividend, two
additional shares of Common Stock for each share outstanding. The stock dividend
was paid on August 11, 1997 to shareholders of record on August 4, 1997. All
share and per share information has been restated to reflect the three-for-one
stock split.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
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 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.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares. Diluted income per share includes the
potential dilution that could occur upon exercise of the options to acquire
common stock described in Note 10, computed using the treasury stock method
which assumes that the increase in the number of shares is reduced by the number
of shares which could have been repurchased by the Company with the proceeds
from the exercise of the options (which were assumed to have been made at the
average market price of the common shares during the reporting period). The
warrants described in Note 6 have been ignored in the computation of diluted net
income (loss) per share in all periods and the stock options have been ignored
in the computation of diluted loss per share in 1998 because their inclusion
would be antidilutive. All share and per share information has been restated to
reflect the three-for-one stock split.
-38-
<PAGE> 311
The following table reconciles the number of shares outstanding used in the
calculation of basic and diluted income (loss) per share.
<TABLE>
<CAPTION>
Income
(Loss) Shares Per Share
------ ------ ---------
(In thousands except per Share)
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Net loss per share - basic $(20,279) 2,747 $(7.38)
-------- -------- ======
Net loss per share - diluted $(20,279) 2,747 $(7.38)
======== ======== ======
FOR THE YEAR ENDED DECEMBER 31, 1997
Net income per share - basic $ 5,585 2,719 $ 2.05
======
Effect of Options 116
-------- --------
Net income per share - diluted $ 5,585 2,835 $ 1.97
======== ======== ======
FOR THE YEAR ENDED DECEMBER 31, 1996
Net income per share - basic $ 8,210 2,733 $ 3.00
======
Effect of Options 87
-------- --------
Net income per share - diluted $ 8,210 2,820 $ 2.91
======== ======== ======
</TABLE>
TREASURY STOCK
At December 31, 1998 and 1997, the Company owns approximately 19% of the
outstanding units of HEP, which owns approximately 46% of the Company's shares;
consequently, the Company has an interest in 258,395 and 259,278 of its own
shares at December 31, 1998 and 1997, respectively. These shares are treated as
treasury stock in the accompanying financial statements.
SIGNIFICANT CUSTOMERS
Both oil and natural gas are purchased by refineries, major oil companies,
public utilities, industrial customers and other users and processors of
petroleum products. HCRC 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 HCRC's business
because there are numerous other purchasers in the areas in which HCRC sells it
production. However, for the years ended December 31, 1998, 1997 and 1996,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Company:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
El Paso Field Services 17% 17% 11%
Williams Gas Marketing 13% 13%
Koch Oil Company 12% 23%
Conoco Inc. 12% 13%
Scurlock Permian Corporation 14%
</TABLE>
ENVIRONMENTAL CONCERNS
The Company is continually taking actions it believes are necessary in its
operations to ensure conformity with applicable federal, state and local
environmental regulations. As of December 31, 1998, the Company has not been
fined or cited for any environmental violations which would have a material
adverse effect upon capital expenditures, earnings, cash flows or the
competitive position of the Company in the oil and gas industry.
-39-
<PAGE> 312
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company adopted SFAS 130 on January 1, 1998. The Company does not have any
items of other comprehensive income for the years ended December 31, 1998, 1997
and 1996. Therefore, total comprehensive income (loss) is the same as net income
(loss) for those years.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting selected information about operating segments and related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 requires that an entity report financial and descriptive information
about its operating segments which are regularly evaluated by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. HCRC adopted FAS 131 in 1998.
The Company engages in the development, production and sale of oil and gas, and
the acquisition, exploration, development and operation of oil and gas
properties in the continental United States. These activities exhibit similar
economic characteristics and involve the same products, production processes,
class of customers, and methods of distribution. Management of the Company
evaluates its performance as a whole rather than by product or geographically.
As a result, HCRC's operations consist of one reportable segment.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Company is required to
adopt SFAS 133 on January 1, 2000. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 133.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
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<PAGE> 313
NOTE 2 - OIL AND GAS PROPERTIES
The following table summarizes cost information related to the Company's oil and
gas activities, including its pro rata share of HEP's oil and gas activities.
The Company has no material long-term supply agreements, and all reserves are
located within the United States.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Property acquisition costs $32,172 $ 3,350 $ 2,830
Development costs 6,904 6,531 8,617
Exploration costs 6,552 8,064 2,206
------- ------- -------
Total $45,628 $17,945 $13,653
======= ======= =======
</TABLE>
Depreciation, depletion, amortization and property impairment related to proved
oil and gas properties per equivalent mcf of production for the years ended
December 31, 1998, 1997 and 1996 was $2.09, $.70 and $.70, respectively.
At December 31, unproved properties consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Texas $2,004 $ 935
North Dakota 499 314
California 447
Other 310 554
------ ------
$2,813 $2,250
====== ======
</TABLE>
NOTE 3 - PRINCIPAL ACQUISITIONS AND SALES
As a result of the arbitration discussed in Note 14, HCRC completed an
$8,200,000 acquisition of properties located primarily in Texas during October
1998. The acquisition included interests in 570 wells, numerous proven and
unproven drilling locations, exploration acreage and 3-D seismic data.
In July 1996, HCRC and its affiliate, HEP, acquired interests in 38 wells
located primarily in LaPlata County, Colorado. An unaffiliated large East Coast
financial institution formed an entity to utilize the tax credits generated from
the wells. The project was financed by an affiliate of Enron Corp. through a
volumetric production payment. During May 1998, a limited liability company
owned equally by HCRC and HEP purchased the volumetric production payment from
the affiliate of Enron Corp. HCRC funded its $17,257,000 share of the
acquisition price from operating cash flow and borrowings under its Credit
Agreement.
During 1997, HCRC had no individually significant property acquisitions or
sales.
NOTE 4 - DERIVATIVES
As part of its risk management strategy, HCRC enters into financial contracts to
hedge the price of its oil and natural gas. HCRC does not use these hedges for
trading purposes, but rather for the purpose of providing protection against
price decreases 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 is recognized as oil or gas revenue at the
time the hedged volumes are sold.
-41-
<PAGE> 314
The financial contracts used by HCRC to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HCRC sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices. As of March 24,
1999, HCRC was a party to 18 financial contracts with three different
counterparties.
The following table provides a summary of HCRC's financial contracts:
<TABLE>
<CAPTION>
Oil
------------
Quantity of Production Contract
Period Hedged Floor Price
------ ------------ -----------
(bbls) (per bbl)
<S> <C> <C>
1996 219,000 $18.47
1997 262,000 17.88
1998 82,000 14.07
1999 23,000 14.88
</TABLE>
All of the oil volumes hedged in 1999 are subject to participating hedges
whereby HCRC will receive the contract price if the posted futures price is
lower than the contract price, and will receive the contract price plus 25% of
the difference between the contract price and the posted futures price if the
posted futures price is greater than the contract price. All of the volumes
hedged in 1999 are subject to a collar agreement whereby HCRC will receive the
contract price if the spot price is lower than the contract price, the cap price
if the spot price is higher than the cap price, and the spot price if that price
is between the contract price and the cap price. The cap prices range from
$16.50 to $18.35 per barrel.
<TABLE>
<CAPTION>
Oil
------------
Quantity of Production Contract
Period Hedged Floor Price
------ ------------ -----------
(mcf) (per mcf)
<S> <C> <C>
1996 2,429,000 $1.77
1997 2,413,000 1.89
1998 3,545,000 1.96
1999 4,237,000 1.95
2000 2,923,000 1.95
2001 2,503,000 1.92
2002 2,124,000 1.98
</TABLE>
In the event of nonperformance by the counterparties to the financial contracts,
HCRC is exposed to credit loss, but has no off-balance sheet risk of accounting
loss. The Company anticipates that the counterparties will be able to satisfy
their obligations under the contracts because the counterparties consist of
well-established banking and financial institutions which have been in operation
for many years. Certain of HCRC's hedges are secured by the lien on HCRC's oil
and gas properties which also secures HCRC's Credit Agreement described in
Note 6.
NOTE 5 - RELATED PARTY TRANSACTIONS
Hallwood Petroleum, Inc. ("HPI"), an affiliated entity, manages and operates
certain oil and gas properties on behalf of other joint interest owners and the
Company. In such capacity, HPI pays all costs and expenses of operations and
distributes all revenues associated with such properties. The Company had
receivables from HPI of $4,246,000 and $2,418,000 and as of December 31, 1998
and 1997, respectively. The amounts consist primarily of revenues net of
operating costs and expenses.
-42-
<PAGE> 315
The Company reimburses HPI for actual costs and expenses, which include office
rent, salaries and associated overhead for personnel of HPI engaged in the
acquisition and evaluation of oil and gas properties (technical expenditures
which are capitalized as costs of oil and gas properties) and general and
administrative and lease operating expenditures necessary to conduct the
business of the Company (nontechnical expenditures which are expensed as general
and administrative or production operating expense). Reimbursements during 1998,
1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
Technical Nontechnical
Expenditures Expenditures
------------ ------------
<S> <C> <C>
1998 $984 $1,392
1997 856 1,225
1996 823 1,293
</TABLE>
Included in the nontechnical allocation from HPI attributable to the Company's
direct interest is approximately $241,000 during the years ended December 31,
1998 and 1997 and $115,000 during the year ended December 31, 1996 of consulting
fees under a contract with The Hallwood Group Incorporated ("Hallwood"), an
affiliated company. Also included in the nontechnical allocation is $246,000,
$232,000 and $234,000 in 1998, 1997 and 1996, respectively, representing costs
incurred by Hallwood and its affiliates on behalf of the Company.
During the third quarter of 1994, HPI entered into a consulting agreement with
its Chairman of the Board to provide advisory services regarding the
international activities of its affiliates. The amount of consulting fees
allocated to the Company under this agreement was $125,000 in 1996. The
agreement terminated effective December 31, 1996.
NOTE 6 - DEBT
On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes
("Subordinated Notes") due December 23, 2007 to The Prudential Insurance Company
of America ("Prudential"). HCRC also sold Warrants to Prudential to purchase
98,599 shares of Common Stock at an exercise price of $28.99 per share. The
Subordinated Notes bear interest at the rate of 10.32% per annum on the unpaid
balance, payable quarterly. Annual principal payments of $5,000,000 are due on
each of December 23, 2003 through December 23, 2007.
The proceeds from the Subordinated Notes were allocated to the Subordinated
Notes and to the Warrants based upon the relative fair values of the
Subordinated Notes without the Warrants and of the Warrants themselves at the
time of issuance. The allocated value of the Warrants of $1,032,000 was recorded
as paid-in-capital. The discount on the Subordinated Notes is being amortized
over the term of the Subordinated Notes using the interest method of
amortization.
At December 31, 1998, HCRC was not in compliance with one of the debt covenants
in its Subordinated Note agreement which requires HCRC to maintain a minimum
level of consolidated net worth. This also resulted in noncompliance with a
covenant under HCRC's Credit Agreement. HCRC received waivers of compliance with
this covenant as of December 31, 1998 from the Subordinated Note holder and from
HCRC's lenders under its Credit Agreement. The Subordinated Note agreement was
amended to reduce the required level of net worth. As a result, the obligations
under these agreements have been classified as noncurrent liabilities as of
December 31, 1998.
During 1997, the Company and its banks amended their Credit Agreement to extend
the term date of the line of credit to May 31, 1999. The banks are Morgan
Guaranty Trust Company, First Union National Bank and NationsBank of Texas.
Under the Credit Agreement, HCRC has a borrowing base of $26,500,000. As of
December 31, 1998, the Company had amounts outstanding of $25,500,000. HCRC's
unused borrowing base totaled $1,000,000 at March 24, 1999.
-43-
<PAGE> 316
Borrowings against the Credit Agreement bear interest, at the option of the
Company, at either (i) the banks' Certificate of Deposit rate plus from 1.375%
to 1.875%, (ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the
higher of the prime rate of Morgan Guaranty Trust or the sum of one-half of 1%
and the Federal funds rate, plus .75%. The applicable interest rate was 6.75% at
December 31, 1998. Interest is payable at least quarterly, and quarterly
principal payments of $1,594,000 commence May 31, 1999. The Credit Agreement is
secured by a first lien on approximately 80% in value of the Company's oil and
gas properties.
The borrowing base for the Credit Agreement is redetermined semiannually, and
the next redetermination is scheduled for the second quarter of 1999. HCRC
anticipates that, because of low oil and gas prices, its lenders will reduce the
borrowing base and that HCRC will be required to make a principal payment on its
debt. Any required principal payment will reduce the amount available for HCRC's
capital budget.
At December 31, 1998, HCRC's debt maturity schedule is as follows.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1999 $ 4,781
2000 6,375
2001 6,375
2002 6,375
2003 6,594
Thereafter 19,055
------
Total $49,555
=======
</TABLE>
As part of its risk management strategy, HCRC enters into contracts to hedge its
interest rate payments related to a portion of its outstanding borrowings under
its Credit Agreement. HCRC does not use the hedges for trading purposes, but
rather to protect against the volatility of the cash flows under its Credit
Agreement, which has a floating interest rate. The amounts received or paid upon
settlement of these transactions are recognized as interest expense at the time
the interest payments are due.
Approximately one third of the debt hedged in 1998 was subject to a collar
agreement with a floor rate of 7.55% and a ceiling rate of 9.85%. All other
contracts are interest rate swaps with fixed rates. As of March 24, 1999, HCRC
was a party to six contracts with three different counterparties.
The following table provides a summary of HCRC's financial contracts.
<TABLE>
<CAPTION>
Amount of Contract
Period Debt Hedged Floor Rate
- ------ ----------- ----------
<S> <C> <C>
1996 $ 7,000,000 7.00%
1997 10,000,000 6.84%
1998 10,000,000 7.00%
1999 13,000,000 5.70%
2000 15,000,000 5.65%
2001 12,000,000 5.23%
2002 12,500,000 5.23%
2003 12,500,000 5.23%
2004 2,000,000 5.23%
</TABLE>
-44-
<PAGE> 317
NOTE 7 - CONTRACT SETTLEMENT OBLIGATION
In March 1989, the Company received $2,877,000 as a recoupable take-or-pay
settlement on a contract with a gas pipeline. The settlement was recoupable
monthly in cash or gas volumes, from April 1992 through March 1996 with a
balloon payment due during the first quarter of 1998. A liability was recorded
equal to the present value of the settlement discounted at 10.68%, HCRC's
estimated borrowing rate at the time of the settlement. At December 31, 1997,
the current portion of contract settlement balance consisted of a payment of
$1,045,000 net of unaccreted discount of $6,000, which was paid during February
1998.
NOTE 8 - STATEMENT OF CASH FLOWS
Cash paid for interest during 1998, 1997 and 1996 was $3,292,000, $1,434,000 and
$1,374,000, respectively. A net cash refund of income tax expense of $336,000
was received during 1998. Cash paid for income taxes during 1997 and 1996 was
$1,416,000 and $185,000, respectively.
NOTE 9 - INCOME TAXES
The following is a summary of the income tax provision (benefit):
<TABLE>
<CAPTION>
For the Year
Ended December 31,
------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
State $ 13 $ 369 $ 236
Federal - Current (177) 592 65
Deferred 450 (100) (350)
----- ----- -----
Total $ 286 $ 861 $ (49)
===== ===== =====
</TABLE>
Reconciliations of the expected tax at the statutory tax rate to the effective
tax are as follows:
<TABLE>
<CAPTION>
For the Year
Ended December 31,
------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Expected tax expense (benefit) at the
statutory rate $(6,797) $ 2,192 $ 2,775
State taxes net of federal benefit 8 243 156
Change in valuation allowance 6,859 (1,444) (3,739)
Other 216 (130) 759
------- ------- -------
Effective tax expense (benefit) $ 286 $ 861 $ (49)
======= ======= =======
</TABLE>
-45-
<PAGE> 318
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 5,187 $ 2,835
Capital loss carryforward 1,763 1,889
Temporary differences between
book and tax basis of property 4,110 461
Minimum tax credit carryforward 534
-------- -------
Total 11,594 5,185
Valuation allowance (11,594) (4,735)
-------- -------
Net deferred tax asset $ -0- $ 450
======== =======
</TABLE>
The Company's net operating loss carryforwards expire between 2008 and 2013.
NOTE 10 - EMPLOYEE INCENTIVE PLANS
Every year beginning in 1992, the Company's Board of Directors has adopted an
incentive plan. Each year the Board of Directors determines the percentage of
HCRC's interest in the cash flow from certain wells drilled, recompleted or
enhanced during the year allocated to the incentive plan for that year. The
specified percentage was 2.75% for 1998 and 2.4% for 1997 and 1996. The
specified percentage of cash flow is allocated among certain key employees who
are participants in the plan for that year. Each award under the plan (with
regard to domestic properties) represents the right to receive for five years a
portion of the specified share of the cash flow attributable to qualifying wells
included in the plan for that year. In the sixth year after the award, the
participants are each paid a share of an amount equal to a specified percentage
(80% for 1998, 1997 and 1996) of the remaining net present value of the
qualifying wells, and the award for that year terminates. The expenses
attributable to the plans were $123,000 in 1998, $400,000 in 1997 and $119,000
in 1996 and are included in general and administrative expense in the
accompanying financial statements.
During 1995, the Company adopted a stock option plan covering 159,000 shares of
Common Stock and granted options for all of the shares under the plan. The
options were granted effective July 1, 1995 at an exercise price of $6.67 per
share, which was equal to the fair market value of the Common Stock on the day
preceding the date of grant. The options expire on July 1, 2005, unless sooner
terminated pursuant to the provisions of the plan. During the years ended
December 31, 1998, 1997 and 1996, options to purchase 21,040, 9,270 and 1,500
shares, respectively, were exercised.
During the second quarter of 1997, the Company adopted a stock option plan
covering 159,000 shares of Common Stock and granted options for all of the
shares under the plan. The terms of this plan are generally consistent with the
terms of the Company's existing 1995 Stock Option Plan. The options were granted
effective June 17, 1997 at an exercise price of $20.33 per share, which was
equal to the fair market value of the Common Stock on the date of grant. The
options expire on June 17, 2007, unless sooner terminated pursuant to the
provisions of the plan. The options are exercisable one-third on June 17, 1997,
an additional one-third June 17, 1998, and the remaining one-third on June 17,
1999. In addition, the Plan provides that vesting of the options may accelerate
under certain conditions.
On May 5, 1998, HCRC granted options to purchase 9,540 shares of Common Stock
under its 1997 Stock Option Plan at an exercise price of $15.75 which was equal
to the fair market value of the Common Stock on the date of grant. One-third of
the options vest immediately, and the remainder vest one-half on the first
anniversary of the date of grant and one-half on the second anniversary of the
date of grant.
-46-
<PAGE> 319
On May 5, 1998, HCRC also granted options to purchase 9,540 shares of Common
Stock at an exercise price of $15.75 per share which was equal to the fair
market value of the Common Stock on the date of grant. These options were not
granted pursuant to a previously existing plan, but are subject to terms and
conditions identical to those in HCRC's 1995 Stock Option Plan. One-third of the
options vest immediately, and the remainder vest one-half on the first
anniversary of the date of grant and one-half on the second anniversary of the
date of grant.
A summary of options to purchase HCRC's common stock and the changes therein for
the years ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 307,230 $ 13.74 157,500 $ 6.67 159,000 $ 6.67
Granted 19,080 15.75 159,000 20.33
Expired (9,540) 20.33
Exercised (21,040) 6.67 (9,270) 6.67 (1,500) 6.67
-------- -------- -------- -------- -------- --------
Outstanding at
end of year 295,730 $ 10.54 307,230 $ 13.74 157,500 $ 6.67
======== ======== ======== ======== ======== ========
Options exercisable
at year end 233,190 $ 19.40 201,230 $ 10.26 104,500 $ 6.67
======== ======== ======== ======== ======== ========
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation cost has been recognized for options granted
by the Company. Had compensation expense for the options granted been determined
based on the fair value at the grant dates, consistent with the provisions of
SFAS 123, HCRC's net income (loss) and net income (loss) per share would have
been changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss): as reported $(20,279,000) $5,585,000 $8,210,000
pro forma (20,789,000) 4,627,000 8,025,000
Net income (loss) per share - basic:
as reported $ (7.38) $ 2.05 $ 3.00
pro forma (7.57) 1.70 2.94
Net income (loss) per share - diluted:
as reported $ (7.38) $ 1.97 $ 2.91
pro forma (7.57) 1.63 2.85
</TABLE>
The fair value of the options for disclosure purposes was estimated on the date
of the grant using the Black-Scholes Model with the following assumptions:
<TABLE>
<CAPTION>
1995 Options 1997 Options 1998 Options
------------ ------------ ------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected price volatility 40% 33% 29%
Risk-free interest rate 6.2% 6.35% 6.4%
Expected life of options 10 years 6 years 10 years
</TABLE>
-47-
<PAGE> 320
NOTE 11 - COMMITMENTS
The Company is a guarantor of 40% of the obligation under the Denver, Colorado
office leases which are in the name of HPI. HEP is guarantor of the remaining
60% of the obligation. HPI leases office facilities under an operating lease
which expires in June 1999 for approximately $600,000 per year. During February
1999, HPI entered into another lease, for approximately $600,000 per year. The
new lease commences upon occupancy, which is expected to be in June or July
1999, and terminates in seven and one-half years.
NOTE 12 - ODD LOT REPURCHASE
The Company made an offer to repurchase odd lot holdings of 99 or fewer shares
from its stockholders of record as of November 30, 1995. The offer was initially
for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 296,607 shares through the January 26, 1996 closing date. The repurchase
price was $8.03 per share.
On April 1, 1996, HCRC made another offer to purchase holdings of 99 or fewer
shares from its stockholders of record as of March 25, 1996. The offer was for
the period from April 1, 1996 through May 3, 1996. The Company repurchased a
total of 77,790 shares at a purchase price of $11.33 per share. HCRC resold
38,895 of these shares to HEP at the price paid by HCRC for such shares.
NOTE 13 - INVESTMENT IN AFFILIATED ENTITIES
HCRC accounts for its 19% investment in HEP using the pro rata method of
accounting. The following presents summarized financial information for HEP as
of and for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
HEP 1998 1997 1996
--- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current assets $ 23,518 $ 22,142 $ 20,380
Noncurrent assets 115,573 109,461 102,412
Current liabilities 32,240 23,115 21,735
Noncurrent liabilities 41,431 36,166 33,506
Minority interest 2,788 3,258 3,336
Revenue 43,586 45,103 51,066
Net income (loss) (13,895) 12,803 15,726
</TABLE>
No other individual entity in which HCRC owns an interest comprises in excess of
10% of the revenues, net income (loss) or assets of HCRC.
NOTE 14 - ARBITRATION
In connection with the Demand for Arbitration filed by Arcadia Exploration and
Production Company ("Arcadia") with the American Arbitration Association against
Hallwood Consolidated Resources Corporation, Hallwood Energy Partners, L.P.,
E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P.
(collectively referred to as "Hallwood"), the arbitrators ruled that the
original agreement entered into in August 1997 to purchase oil and gas
properties should proceed, with a reduction in the total purchase price of
approximately $2,500,000 for title defects. The arbitrators also ruled that
Arcadia was not entitled to enforce its claim that Hallwood was required to
purchase an additional $8,000,000 in properties and denied Arcadia's claim for
attorneys fees. The arbitrators granted Arcadia prejudgment interest on the
adjusted purchase price, but an issue exists between Hallwood and Arcadia as to
the proper calculation of the limitation which the panel placed on the amount of
prejudgment interest. The parties plan to ask the arbitrators to rule on this
issue. The Company has accrued $452,000 in its financial statements as of
December 31, 1998 in connection with this dispute.
-48-
<PAGE> 321
In October 1998, HCRC and its affiliate, HEP, closed the acquisition of oil and
gas properties from Arcadia pursuant to the ruling, which included interests in
approximately 570 wells, numerous proven and unproven drilling locations,
exploration acreage, and 3-D seismic data. HCRC's share of the purchase price
was $8,200,000.
NOTE 15 - LEGAL PROCEEDINGS
On April 23, 1992, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Tappe v. Hallwood Consolidated Resources Corporation,
Hallwood Consolidated Partners, L. P., Hallwood Oil and Gas, Inc., Hallwood
Energy Partners, L. P., and Hallwood Petroleum, Inc. (C. A. No 12536). The
lawsuit sought to rescind the conversion of Hallwood Consolidated Partners, L.P.
("HCP") into the Company ("Conversion") and to recover damages in unspecified
amounts. In January 1999, the plaintiff and the defendants entered into a joint
stipulation of dismissal, with prejudice as to the plaintiff only. The court
approved the dismissal.
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 16 - 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, 1998
-----------------
Carrying Estimated Fair
Amount Value
-------- --------------
(In thousands)
<S> <C> <C>
Assets (Liabilities):
Oil and gas hedge contracts $ -0- $ 1,921
Interest rate hedge contracts -0- (404)
Long-term debt (49,555) (47,659)
</TABLE>
The estimated fair value of the oil and gas hedge contracts is determined by
multiplying the difference between contract termination prices for oil and gas
and the hedge contract price by the quantities under contract. This amount has
been discounted using an interest rate that could be available to the Company.
The estimated fair value of the interest rate hedge contracts is computed by the
difference between the quoted contract termination interest rate and the
contract interest rate by the amounts under contract. This amount has been
discounted using an interest rate that could have been available to the Company.
The estimated fair value of long-term debt is computed using interest rates that
could be available to the Company for similar instruments with similar terms.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998. 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.
-49-
<PAGE> 322
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
(Unaudited)
The following reserve quantity and future net cash flow information for the
Company represents proved reserves which are located in the United States. The
reserve estimates presented have been prepared by in-house petroleum engineers,
and a majority of these reserves has 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 the Company's proved oil and gas reserves from year to year. No
consideration has been given to future income taxes as of December 31, 1998
because the tax basis of HCRC's oil and gas properties 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. The oil and gas prices used at December 31, 1998, 1997 and 1996 were
$10.00 per bbl and $1.85 per mcf, $16.77 per bbl and $2.20 per mcf and $23.96
per bbl and $3.75 per mcf, respectively, for the Company, including its interest
in HEP. Future production costs are based on year end costs and include
severance taxes. The present value of future cash inflows is based on a 10%
discount rate. The reserve calculations using these December 31, 1998 prices
result in 4 million bbls of oil, 87 billion cubic feet of gas and a standardized
measure of $84,000,000. This standardized measure is not necessarily
representative of the market value of the Company's properties.
HCRC's standardized measure of future net cash flows has been increased by
$2,717,000 at December 31, 1998 for the effect of its hedge contracts. This
amount represents the difference between year end oil and gas prices and the
hedge contract prices multiplied by the quantities under contract, discounted at
10%.
-50-
<PAGE> 323
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
RESERVE QUANTITIES
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Gas Oil
(Mcf) (Bbls)
----- ------
<S> <C> <C>
PROVED RESERVES:
Balance, December 31, 1995 53,672 7,645
Extensions and discoveries 1,947 491
Revisions of previous estimates 7,701 (28)
Sales of reserves in place (1,627) (160)
Purchases of reserves in place 11,488 70
Production (8,280) (837)
------- -------
Balance, December 31, 1996 64,901 7,181
Extensions and discoveries 2,894 562
Revisions of previous estimates 15,261 (1,672)
Sales of reserves in place (163) (3)
Purchases of reserves in place 645 168
Production (7,963) (711)
------- -------
Balance, December 31, 1997 75,575 5,525
Extensions and discoveries 1,363 490
Revisions of previous estimates (8,515) (1,858)
Sales of reserves in place (297) (35)
Purchases of reserves in place 29,436 627
Production (10,555) (716)
------- -------
Balance, December 31, 1998 87,007 4,033
======= =======
Proved Developed Reserves:
Balance, December 31, 1996 63,044 6,431
======= =======
Balance, December 31, 1997 73,250 5,080
======= =======
Balance, December 31, 1998 83,717 3,173
======= =======
</TABLE>
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<PAGE> 324
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Future sales $ 215,000 $ 227,000 $ 413,000
Future production and development costs (94,000) (100,000) (158,000)
Provision for income tax* (8,000) (30,000)
--------- --------- ---------
Future cash flows 121,000 119,000 225,000
10% discount to present value (37,000) (31,000) (91,000)
--------- --------- ---------
Standardized measure of discounted future
net cash flows $ 84,000 $ 88,000 $ 134,000
========= ========= =========
</TABLE>
*No consideration has been given to future income taxes as of December 31, 1998
since the tax basis of HCRC's oil and gas properties and net operating loss
carryforwards exceed future net cash flows.
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<PAGE> 325
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Standardized measure of discounted future net cash
flows at beginning of year $ 88,000 $ 134,000 $ 85,000
Sales of oil and gas produced, net of production costs (17,892) (20,449) (22,915)
Net changes in prices and production costs (10,359) (71,933) 46,516
Extensions and discoveries net of future production
and development costs 3,411 5,616 7,011
Changes in estimated future development costs (9,542) (6,480) (7,292)
Development costs incurred 6,904 6,531 8,617
Revisions of previous quantity estimates (15,587) 4,688 10,802
Purchases of reserves in place 26,316 1,482 17,061
Sales of reserves in place (402) (162) (3,707)
Accretion of discount 8,818 13,439 8,513
Net change in income taxes 5,825 16,206 (15,332)
Changes in production rates and other (1,492) 5,062 (274)
--------- --------- ---------
Standardized measure of discounted future
net cash flows at end of year $ 84,000 $ 88,000 $ 134,000
========= ========= =========
</TABLE>
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<PAGE> 326
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, OFFICERS AND KEY EMPLOYEES
HCRC does not have any employees. Hallwood Petroleum, Inc. ("HPI"), an affiliate
of HCRC, operates the properties and administers the day to day activities of
HCRC and its affiliates. On March 24, 1999, HPI had 108 employees. Following are
brief biographies of the directors, officers and key employees of HCRC and HPI.
ANTHONY J. GUMBINER, 54, has served as a director of the HCRC since February
1992. He has also served as Chairman of the Board of Directors of The Hallwood
Group Incorporated ("Hallwood Group"), a diversified holding company with real
estate, textile products, hotel and energy operations, since 1981 and as Chief
Executive Officer of Hallwood Group since April 1984. He has been Chairman of
the Board since 1984 and Chief Executive Officer since 1987 of the general
partner of HEP. Mr. Gumbiner has also served as Chairman of the Board of
Directors and as a director of Hallwood Holdings S.A., a Luxembourg real estate
investment company, since March 1984. He has been a director of Hallwood Realty
Corporation ("Hallwood Realty"), which is the general partner of Hallwood Realty
Partners, L.P., since November 1990. He is a Solicitor of the Supreme Court of
Judicature of England.
WILLIAM L. GUZZETTI, 55, has been President and a director of HCRC since May
1991 and of HPI since October 1989, and a director of HPI since August 1989. Mr.
Guzzetti is also an Executive Vice President of Hallwood Group and in that
capacity may devote a portion of his time to the activities of Hallwood Group,
including the management of real estate investments, acquisitions and
restructurings of entities controlled by Hallwood Group. He is a director and
President of Hallwood Realty and in that capacity may devote a portion of his
time to the activities of Hallwood Realty.
RUSSELL P. MEDUNA, 44, has served as Executive Vice President of HCRC since June
1992 and of HPI since October 1989. Mr. Meduna was Vice President of HPI from
April 1989 to October 1989 and Manager of Operations from January 1989 to April
1989. He joined HPI in 1984 as Production Manager. Prior to joining HPI, he was
employed by both major and independent oil companies. Mr. Meduna is a registered
professional engineer in the States of Colorado and Texas.
CATHLEEN M. OSBORN, 46, has served as Secretary and General Counsel of HCRC
since May 1992 and as Vice President since June 1992. She has been Vice
President, Secretary and General Counsel of HPI since September 1986. She joined
HPI in 1985 as senior staff attorney. Ms. Osborn is a member of the Colorado Bar
Association.
THOMAS J. JUNG, 50, has served as Vice President and Chief Financial Officer of
Hallwood G.P., HCRC and HPI since May 1998. From January 1997 until April 1998,
he was a Senior Financial Associate with Trinity Petroleum Management, and
during that period, he also provided consulting services to other companies
involved in the development, financing, management and monetization of tax
credits for alternative energy projects. From 1994 to 1996, he was Chief
Executive Officer of FAR Gas Acquisitions Corp. From 1986 to 1994, he was Vice
President and Chief Financial Officer of NICOR Exploration & Production Company
and Reliance Pipeline Company.
BETTY J. DIETER, 51, has been Vice President of HPI responsible for domestic
operations since January 1995. Her previous positions with HPI have included
Operations Manager, Rocky Mountain and Mid-Continent District Manager and
Manager for Operations Accounting and Administration. She joined HPI in 1985,
and has 26 years experience in accounting and operations, 19 of which are in the
oil and gas industry. Ms. Dieter is a Certified Public Accountant.
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<PAGE> 327
GEORGE BRINKWORTH, 57, has been Vice President-Exploration and International
Division of HPI since August 1994. He became associated with HPI in 1987 when he
was President of a joint venture program funded by HPI and two other domestic
oil companies. Mr. Brinkworth has 34 years experience with various exploration
and production companies, including previous responsibility for operations in
the United Kingdom, Spain, Morocco, Egypt and Indonesia. He is a registered
geophysicist in the State of California.
WILLIAM H. MARBLE, 48, has served as Vice President of HPI since December 1990.
His previous positions with HPI have included Texas/Gulf Coast District Manager,
Manager of Nonoperated Properties and Chief Engineer. He joined a predecessor
general partner of the Partnership in 1984. Mr. Marble is a registered engineer
in the State of Colorado and has 24 years oil and gas engineering experience.
BRIAN M. TROUP, 51, has served as a director of HCRC since February 1992. He has
been President and Chief Operating Officer of Hallwood Group since April 1986,
and he is a director. Mr. Troup has been a director of the general partner of
HEP since May 1984. Mr. Troup is a director of Hallwood Holdings S.A. and of
Hallwood Realty. He is an associate of the Institute of Bankers in Scotland and
a member of the Society of Investment Analysts in the United Kingdom.
JOHN R. ISAAC, JR., 49, has served as a director of HCRC since June 1992. Since
October 1997, Mr. Isaac has been Chief Executive Officer and President of Ideas,
Inc., a retail consulting company. From February 1996 to October 1997, Mr. Isaac
was President and Chief Executive Office of Thorn Americas, Inc., parent of
Rent-A-Center USA. From March 1995 until February 1996, Mr. Isaac was President
and Chief Operating Officer of Rent-A-Center USA. From February 1991 to February
1995, Mr. Isaac was President and Chief Operating Officer of Everything's A
Dollar, a division of Value Merchants, Inc. He was President and Chief Executive
Officer of Hallwood Industries Incorporated from August 1987 to October 1991. He
was President of Tradevest, Inc., a mail order catalog retailer, from 1986 to
1987, and a Vice President of Service Merchandise Co., Inc., a catalog showroom
retailer, from 1981 to 1986.
JERRY A. LUBLINER, 43, has served as a director of HCRC since June 1992. Dr.
Lubliner is a medical doctor who has been in private practice since 1986. From
1986 to 1988, he was Associate Chief-Sports Medicine at the Hospital for Joint
Diseases-Orthopedic Institute in New York. Dr. Lubliner is a Fellow of the
American Academy of Orthopedic Surgeons. He is also a director of New York
Orthopedics and Sports Medicine, P.C.
HAMILTON P. SCHRAUFF, 62, has served as a director of HCRC since September 1996.
From March 1997 until June 1998, he was Chief Financial Officer of Burns
Controls Company. From March 1996 to January 1997 he was Vice President of
Capital Alliance. From August 1995 to February 1996 he was an independent
financial consultant. From October 1991 to August 1995 he was Vice President and
Chief Financial Officer of Basic Capital Management, Inc., Syntek Asset
Management, Inc., American Realty Trust Investors, Inc., Income Opportunity
Realty Trust and Transcontinental Realty Investors, Inc. From October 1991 to
February 1994 he was Executive Vice President and Chief Financial Officer of
National Income Realty Trust and Vinland Property Trust. From December 1990 to
October 1991 he was Vice President Finance-Partnership Investments of Hallwood
Group. From October 1980 to October 1990 he was Vice President Finance and
Treasurer, and from November 1976 to September 1980 he was Vice President
Finance of Texas Oil and Gas Corporation. Mr. Schrauff is a Certified Public
Accountant and a Certified Financial Planner. He is a member of the American
Institute of Certified Public Accountants, the Texas Society of Certified Public
Accountants and the Financial Executives Institute.
BILL M. VAN METER, 65, has served as a director of HCRC since September 1996.
From 1986 until May 1996, Mr. Van Meter was President of the Energy Companies of
ONEOK division of ONEOK Inc. From 1958 to 1996, Mr. Van Meter was employed by
both major and independent oil companies.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the officers and
directors of HCRC and persons who own more than ten percent of the Common Stock,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than ten percent owners are
required by SEC regulation to furnish HCRC with copies of all Section 16(a)
forms they file.
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<PAGE> 328
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no forms were
required for those persons, HCRC believes that, during the year ended December
31, 1998, all officers and directors of the Company and greater than ten-percent
beneficial owners complied with applicable filing requirements, except that Mr.
Thomas Jung filed his initial statement of beneficial ownership late. Mr. Jung
did not beneficially own any Common Stock of HCRC.
ITEM 11 - EXECUTIVE COMPENSATION
GENERAL
The Company has no employees. Management services are provided to the Company by
HPI, an affiliate of the Company. Employees of HPI perform all duties related to
the management of the Company, including the operations of various properties in
which the Company owns an interest. The Company is charged for management
services by HPI based on an allocation procedure that takes into account the
amount of time spent on management, the number of properties owned by the
Company and the Company's performance relative to its affiliates. The allocation
procedure is applied consistently to all related entities for which HPI performs
services. In 1998 the Company reimbursed HPI for approximately $2,376,000 of
expenses, of which $442,000 was attributable to compensation paid to executive
officers of the Company.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation to the Chief Executive Officer
and each of the four other most highly compensated officers whose compensation
paid by HPI exceeded $100,000 (determined for the year ended December 31, 1998).
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<PAGE> 329
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying LTIP All Other
Name & Principal Position Year Salary Bonus Options/SARs Payouts Compensation
- ------------------------- ---- ------ ----- ------------ ------- ------------
(#) (1)
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Gumbiner (2) 1998 $ 0 $ 0 0 $ (5) $ 0
Chief Executive 1997 0 0 (3) (5) 0
Officer 1996 125,000 0 0 (5) 0
William L. Guzzetti 1998 79,038 71,876 0 15,032 1,852
President and Chief 1997 82,535 65,677 (3) 24,855 1,919
Operating Officer 1996 82,943 60,490 0 14,927 2,314
Russell P. Meduna 1998 63,159 43,709 0 15,032 1,852
Executive Vice 1997 66,120 50,909 (3) 24,855 1,919
President 1996 66,448 46,874 0 14,927 1,827
Thomas J. Jung 1998 31,972 26,490 (4) 0 742
Vice President and
Chief Financial Officer
Cathleen M. Osborn 1998 46,160 32,892 0 10,568 1,852
Vice President and 1997 42,697 45,650 (3) 17,472 1,919
General Counsel 1996 42,908 28,704 0 10,391 1,827
</TABLE>
(1) Employer contribution to 401(k) and a service award of $487 paid to Mr.
Guzzetti in 1996.
(2) For 1996, Mr. Gumbiner had a Compensation Agreement with HPI. $125,000 of
his compensation was allocated to the Company in 1996. The Compensation
Agreement terminated effective December 1996. In addition to compensation
listed in the table, HPI had a consulting agreement with Hallwood Group for
1996, pursuant to which Hallwood Group received an annual consulting fee of
$300,000 from affiliates of HPI. The Company paid approximately $122,000 in
1996 pursuant to this arrangement. During 1997 and 1998, the Company
participate in a new financial consulting agreement between HPI and
Hallwood Group, pursuant to which Hallwood Group received a fee of $550,000
from affiliates of HPI. The Company paid Hallwood Group approximately
$241,000 in 1998 and 1997 for the Company's share of the consulting
agreement. The consulting services were provided by HSC Financial
Corporation ("HSC Financial"), through the services of Mr. Gumbiner and Mr.
Troup, and Hallwood Group paid the annual fee it received to HSC Financial.
(3) Consists of the following options granted in 1997, which have been adjusted
for a 3-for-1 split effective in 1997.
<TABLE>
<CAPTION>
Securities Underlying
Name Options/SARs (#)
---- ---------------------
<S> <C>
Anthony J. Gumbiner 47,700
William L. Guzzetti 23,850
Russell P. Meduna 22,260
Cathleen M. Osborn 9,540
</TABLE>
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<PAGE> 330
(4) Consists of the following options granted in 1998.
<TABLE>
<CAPTION>
Securities Underlying
Name Options/SARs (#)
---- ---------------------
<S> <C>
Thomas J. Jung 19,080
</TABLE>
(5) Payments were made to HSC Financial, with which Mr. Gumbiner is associated,
in the amount of $33,479 for 1998, $31,755 in 1997 and $4,474 for 1996.
OPTION GRANTS AND EXERCISES IN LAST FISCAL YEAR
The following table sets forth the options to purchase Common Stock of the
Company granted to executive officers during 1998.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realized Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (2)
----------------- ---------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted Exercise or 5% 10%
Options/SARs Employees in Base Price Expiration $25.66 $40.85
Name Granted (1) Fiscal Year ($/Share) Date Share Price Share Price
---- ----------- ------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas J. Jung 19,080 100 $15.75 05/05/08 $189,989 $478,936
</TABLE>
(1) Options have a ten-year term and vest cumulatively over two years at the
rate of 1/3 on the grant date and the 1/3 on first two anniversaries of the
grant date. All options vest immediately in the event of certain changes in
control of HCRC.
(2) Securities and Exchange Commission Rules require calculation of potential
realizable value assuming that the market price of the Common Stock
appreciates in value at 5% and 10% annualized rates. At a 5% annualized
rate of appreciation, the Common Stock price would be $25.66 at the end of
ten years. At a 10% annualized rate of appreciation, the Common Stock price
would be $40.85 at the end of ten years. No gain to an executive officer is
possible without an appreciation in Common Stock value, which will benefit
all holders of Common Stock. The actual value an executive officer may
receive depends on market prices for the Common Stock, and there can be no
assurance that the amounts reflected will actually be realized.
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<PAGE> 331
The following table shows exercises of options to purchase Common Stock during
1998 and the value of the unexercised options on December 31, 1998.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY - End (#) at FY -End ($)
Stock Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized ($) Unexercisable (1) Unexercisable (2)
---- --------------- ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Anthony J. Gumbiner 4,000 $33,820 75,500 / 15,900 189,221 / 0
William L. Guzzetti 39,750 / 7,950 103,271 / 0
Russell P. Meduna 2,500 21,700 34,600 / 7,420 85,561 / 0
Cathleen M. Osborn 5,000 42,900 10,900 / 3,180 19,658 / 0
Thomas J. Jung 6,360 / 12,720 0 / 0
</TABLE>
- --------------
(1) The options have a ten-year term and vest cumulatively over three years
at the rate of 1/3 on each of the date of grant and the first two
anniversaries of the grant date. All options vest immediately in the
event of certain changes in control of the Company. The number of
options has been adjusted to reflect a 3-for-1 stock split effective in
1997.
(2) The exercise price of the options granted in 1995 is $6.67 per share,
the exercise price of the options granted in 1997 is $20.33 per share
and the exercise price of the options granted in 1998 is $15.75 per
share. The closing price of the common stock was $11.00 on December 31,
1998. The exercise prices have been adjusted to reflect a 3-for-1 stock
split effective in 1997.
LONG-TERM INCENTIVE PLAN
The following table describes performance units awarded to the executive
officers of the Company for 1998 under the incentive Plan (as described below)
for the Company and affiliated entities. The value of awards under each plan
depends primarily on the Company's success in drilling, completing and achieving
production from new wells each year and from certain recompletions and
enhancements of existing wells. The amounts shown below are the portion of
awards under the plan allocated to the Company.
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<PAGE> 332
Long-Term Incentive Plan Awards in Last Fiscal Year
<TABLE>
<CAPTION>
Performance or Estimated Future
Number of Other Period Payouts under Non-Stock
Name Units Unit Payout Price-Based Plans (1)
---- --------- -------------- -----------------------
<S> <C> <C> <C>
Anthony J. Gumbiner(2) -- -- $ --
William L. Guzzetti 0.0727 2003 8,951
Russell P. Meduna 0.0727 2003 8,951
Cathleen M. Osborn 0.0545 2003 6,710
</TABLE>
- ----------
(1) The amount represents an award under the Incentive Plan. There are no
minimum, maximum or target amounts payable under the Incentive Plan.
Payments under the awards will be equal to the indicated percentage of Plan
net cash flow from certain wells for the first five years after an award
and, in the sixth year, the indicated percentage of 80% of the remaining
net percent value of estimated future production from the wells allocated
to the Plan. The amounts shown above are estimates based on estimated
reserve quantities and future prices. Because of the uncertainties inherent
in estimating quantities of reserves and prices, it is not possible to
predict cash flow or remaining net present value of estimated future
production with any degree of certainty.
(2) In addition, an award of .3818 units, with an estimated future payout of
$47,010, was made to HSC Financial, with which Mr. Gumbiner is associated.
The payout period ends in 2003.
The Incentive Plan for the Company is intended to provide incentive and
motivation to HPI's key employees to increase the oil and gas reserves of the
various affiliated entities for which HPI provides services and to enhance those
entities' ability to attract, motivate and retain key employees and consultants
upon whom, in large measure, those entities' success depends.
Under the Incentive Plan, the Board of Directors of the Company (the "Board")
annually determines the portion of the Company's collective interests in the
cash flow from certain international projects and from domestic wells drilled,
recompleted or enhanced during that year (the "Plan Year") which will be
allocated to participants in the plan and the participants will receive payment
in the sixth year of an award. The portion allocated to participants in the plan
is referred to as the Plan Cash Flow. The Board then determines which key
employees and consultants may participate in the plan for the Plan Year and
allocates the Plan Cash Flow among the participants. Awards under the plan do
not represent any actual ownership interest in the wells. Awards are made in the
Board's discretion.
Each award under the Incentive Plan represents the right to receive for five
years a specified share of the Plan Cash Flow attributable to certain domestic
wells drilled, recompleted or enhanced during the Plan Year. In the sixth year
afterward, the participant is paid an amount equal to a specified percentage of
the remaining net present value of estimated future production from the wells
and the award is terminated. Cash flow from international projects, if any,
allocated to the Incentive Plan is paid to participants for a 10-year period,
with no buy-out for estimated future production.
The awards for the 1998 Plan Year were made in January 1998. No other awards
were made in 1998. For the 1998 Plan Year, the Compensation Committee of
Hallwood G.P. determined that the total Plan Cash Flow would be equal to 2.75%
of the cash flow of the domestic wells completed, recompleted or enhanced during
the Plan Year. Accordingly, the value of awards for each Plan Year depends
primarily on the Company's success in drilling, completing and achieving
production from new wells each year and from certain recompletions and
enhancements of existing wells. The Compensation Committee also determined that
the participants' interests in eligible domestic wells for the 1998 Plan Year
would be purchased in the sixth year
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<PAGE> 333
at 80% of the remaining net present value of the wells completed in the Plan
Year. The Compensation Committee also determined that the total award would be
allocated among key employees primarily on the basis of salary, and, to a lesser
extent, on the basis of contribution to HCRC's drilling activity.
DIRECTOR COMPENSATION
Each director of the Company who is not an officer of HCRC or an employee of
HPI, is paid an annual fee of $20,000 that is proportionately reduced if the
director attends fewer than four regularly scheduled meetings of the Board
during the year. During 1998, Messrs. Lubliner, Van Meter and Schrauff were each
paid $20,000. In addition, all directors are reimbursed for their expenses in
attending meetings of the Board and committees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of HCRC makes compensation decisions for the Company
during the first quarter of each year. Mr. Gumbiner is Chief Executive Officer
and serves on the compensation committee of Hallwood Group, of which Mr. Troup
is President and Mr. Guzzetti is Executive Vice President. Mr. Gumbiner is Chief
Executive Officer and a director, and Mr. Guzzetti is President and a director,
of Hallwood Realty. During 1998, Mr. Gumbiner and Mr. Guzzetti served on the
compensation committee of Hallwood Realty.
The Company participates in a financial consulting agreement between HPI and
Hallwood Group, pursuant to which Hallwood Group furnishes consulting and
advisory services to HPI, the Company and their affiliates. Under the terms of
this agreement, HPI and its affiliates are obligated to pay Hallwood Group
$550,000 per year until June 30, 2000. The agreement automatically renews for
successive three year terms; either party may terminate the agreement on not
less than 30 days written notice prior to the expiration of any three year term.
The financial consulting agreement replaced both a previous financial consulting
agreement and a compensation agreement with Mr. Gumbiner. Under the terms of the
previous financial consulting agreement, HPI and its affiliates were obligated
to pay Hallwood Group three annual payments of $300,000 beginning June 30, 1994,
and Hallwood group was obligated to furnish consulting and advisory services to
HPI and its affiliates through June 30, 1997. In 1997, the consulting services
were provided by HSC Financial Corporation, through the services of Mr. Gumbiner
and Mr. Troup, and Hallwood Group paid the annual fee it received to HSC
Financial. A fee of approximately $241,000 was paid in 1998 and 1997 and
$122,000 was paid in 1996, by the Company pursuant to this arrangement. For
1996, Mr. Gumbiner had a compensation agreement with HPI under which the Company
was allocated $125,000 in consulting fees. This agreement was terminated
effective December 31, 1996.
The Company reimburses Hallwood Group for expenses incurred on behalf of the
Company. The Company reimbursed Hallwood Group for approximately $246,000,
$232,000 and $234,000 of expenses during 1998, 1997 and 1996, respectively.
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<PAGE> 334
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information, as of March 24, 1999, about any
individual, partnership or corporation that is known to Hallwood Consolidated
Resources to be the beneficial owner of more than 5% of Hallwood Consolidated
Resources Common Stock issued and outstanding and each executive officer and
director of Hallwood Consolidated Resources and all executive officers and
directors of Hallwood Consolidated Resources as a group.
<TABLE>
<CAPTION>
Amount
Beneficially
Name Owned Percent of Class
---- ------------ ----------------
<S> <C> <C>
Hallwood Energy Partners, L.P. (1) 1,374,465(5) 45.7
Heartland Advisors, Inc. (2) 476,500(6) 15.8
Estate of William Baxter Lee, III (3) 293,800(7) 9.8
FMR Corp. (4) 241,550(8) 8.0
Anthony J. Gumbiner 1,449,965(9)(10) 47.0
William L. Guzzetti 1,414,215(9)(10) 46.4
Russell P. Meduna 34,879(10) 1.2
Cathleen M. Osborn 10,990(10) *
Thomas J. Jung 6,360(10) *
Brian M. Troup 53,000(10) 1.7
Jerry A. Lubliner - -
Hamilton P. Schrauff - -
Bill M. Van Meter - -
John R. Isaac, Jr. - -
All directors and executive officers of 1,594,944(11) 49.4
HCRC as a group (10 persons)
</TABLE>
- ----------------------
* Less than 1%
(1) The address of Hallwood Energy Partners is 4582 S. Ulster Street Parkway,
Suite 1700, Denver, Colorado 80237.
(2) The address of Heartland Advisors, Inc. is 790 North Milwaukee Street,
Milwaukee, WI 53202.
(3) The address of the Estate of William Baxter Lee, III, is c/o Glankler
Brown, PLLC, 1700 One Commerce Sq., Memphis, TN 38103.
(4) The address of FMR Corp. is 82 Devonshire Street, Boston, MA 02109.
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<PAGE> 335
(5) Includes 40,323 shares held by Hallwood Oil and Gas, Inc., a subsidiary of
Hallwood Energy Partners. Hallwood Energy Partners has sole voting and
investment power with respect to the shares reported. The general partner
of Hallwood Energy Partners is HEPGP Ltd., a limited partnership, the
general partner of which is Hallwood G.P. The executive officers of
Hallwood G.P. and Hallwood Consolidated Resources are the same individuals:
Anthony J. Gumbiner, William L. Guzzetti, Russell R. Meduna, Cathleen M.
Osborn and Thomas J. Jung.
(6) Information is from Amendment No. 6 to the Schedule 13G of Heartland
Advisors dated January 26, 1999. The Schedule 13G states that the shares
are held in investment advisory accounts of Heartland Advisors, Inc. and
that the interests of one such account, Heartland Value Fund, a series of
Heartland Group, Inc., a registered investment company, relates to more
than 5% of the Common Stock.
(7) Information is from Schedule 13G filed February 23, 1999.
(8) According to Schedule 13G filed February 12, 1999, Fidelity Management &
Research Company is the beneficial owner of the shares and acts as
investment adviser to Fidelity Low-Price Stock Fund which owns the shares.
Edward C. Johnson 3d, FMR Corp. and Fidelity Low-Price Stock Fund each has
sole power to dispose of the shares. The power to vote the shares resides
with the Board of Trustees of Fidelity Low-Price Stock Fund.
(9) Includes 1,374,465 shares beneficially owned by Hallwood Energy Partners.
Mr. Gumbiner is Chief Executive Officer and Mr. Guzzetti is President and a
director of the general partner of the general partner of Hallwood Energy
Partners.
(10) The following numbers of shares issuable upon the exercise of currently
exercisable options are included in the amounts shown: Mr. Troup, 53,000
shares; Mr. Gumbiner, 75,500 shares; Mr. Guzzetti, 39,750 shares; Mr.
Meduna, 34,600 shares; Ms. Osborn, 10,900 shares and Mr. Jung 6,360 shares.
(11) Consists of 1,374,465 shares beneficially owned by Hallwood Energy
Partners, currently exercisable options to purchase 220,110 shares and 369
shares owned by directors and executive officers.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 8 - Financial Statements and Supplementary Data (Note 5 to the
Financial Statements).
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
See Index at Item 8
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1998.
-63-
<PAGE> 336
EXHIBITS
(1) 3.1 Restated Certificate of Incorporation of HCRC, as amended
through January 21, 1992
(1) 3.2 Bylaws of HCRC
(2) 3.3 Amendment to Bylaws of HCRC
(3) 3.4 Certificate of Amendment of Restated Certificate of
Incorporation dated November 9, 1995.
(7) 3.5 Certificate of Amendment of Restated Certificate of
Incorporation, effective August 1, 1997.
(9) 4.1 Common Stock Purchase Warrant dated December 23, 1997.
(9) 4.2 Registration Rights Agreement dated as of December 23, 1997.
(1) 10.1 Agreement of Limited Partnership of Hallwood Consolidated
Partners, L.P.(originally, agreement of HCP Acquisition, L.P.)
(1) 10.5 Management Agreement between Hallwood Petroleum, Inc. and HCRC
(4) 10.7 Amended and Restated Credit Agreement dated as of March 31,
1995 among HCRC and the Banks listed therein.
(7) 10.8 Extension of Management Agreement between HCRC and Hallwood
Petroleum, Inc. dated May 1, 1997.
* (4) 10.9 Domestic Incentive Plan between HCRC and Hallwood Petroleum,
Inc. dated January 14, 1993.
* (5) 10.10 1995 Stock Option Plan
* (5) 10.11 1995 Stock Option Loan Program
(7) 10.13 Second Amended and Restated Credit Agreement dated as of
May 31, 1997.
* (7) 10.14 1997 Stock Option Plan
* (8) 10.15 1997 Stock Option Plan Loan Program
(8) 10.16 Amendment No. 1 to Second Amended and Restated Credit
Agreement dated as of October 31, 1997.
(9) 10.17 Subordinated Note and Warrant Purchase Agreement dated as of
December 23, 1997.
(9) 10.18 Amendment No. 2 to Second Amended and Restated Credit
Agreement dated as of December 23, 1997.
* (10)10.19 Option Letter to Thomas Jung dated May 5, 1998
(10)10.20 Extension of Management Agreement between Hallwood Petroleum,
Inc., and HCRC dated May 5, 1998.
(11)10.21 Merger and Asset Contribution Agreement By and Among Hallwood
Energy Corporation, and HEC Acquisition Partnership, L.P., HEC
Acquisition Corp., Hallwood Consolidated Resources Corporation
and HEPGP Ltd. dated as of December 15, 1998.
-64-
<PAGE> 337
10.22 Letter Amendment No. 1 to Subordinated Note and Warrant
Purchase Agreement.
(6) 21 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- ------------------
(1) Incorporated by reference to the Registrant's
Registration Statement No. 33-45729 on Form S-4 filed
on February 14, 1992.
(2) Incorporated by reference to the Annual Report on
Form 10-K for the year ended December 31, 1992.
(3) Incorporated by reference to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995.
(4) Incorporated by reference to the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
(5) Incorporated by reference to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995.
(6) Incorporated by reference to the Annual Report on
Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
(8) Incorporated by reference to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997.
(9) Incorporated by reference to the Annual Report of
Form 10-K for the year ended December 31, 1997.
(10) Incorporated by reference to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998
(11) Incorporated by reference to Schedule 14A of HCRC
dated December 30, 1998.
* Designates management contract or compensatory plan or arrangement.
-65-
<PAGE> 338
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 CONSOLIDATED RESOURCES CORPORATION
Date: March 24, 1999 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.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Anthony J. Gumbiner Chairman of the Board and March 24, 1999
- ----------------------------- Director -------------------
Anthony J. Gumbiner
/s/ Brian M.Troup Director March 24, 1999
- ----------------------------- -------------------
Brian M. Troup
/s/ John R. Isaac, Jr. Director March 24, 1999
- ----------------------------- -------------------
John R. Isaac, Jr.
/s/ Jerry A. Lubliner Director March 24, 1999
- ----------------------------- -------------------
Jerry A. Lubliner
/s/ Hamilton P. Schrauff Director March 24, 1999
- ----------------------------- -------------------
Hamilton P. Schrauff
/s/ Bill M. Van Meter Director March 24, 1999
- ----------------------------- -------------------
Bill M. Van Meter
/s/ Thomas J. Jung Vice President March 24, 1999
- ----------------------------- Chief Financial Officer -------------------
Thomas J. Jung (Principal Accounting Officer)
</TABLE>
-66-
<PAGE> 339
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Certificate of Incorporation of the Registrant provides that each
person who was or is made a party or is threatened to be made a party or is
involved in any threatened, pending or completed action, suit or proceeding,
whether formal or informal, whether of a civil, criminal, administrative or
investigative nature (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or was a
director or officer of the Registrant, whether the basis of such proceeding is
an alleged action or inaction in an official capacity or in any other capacity
while serving as a director or officer, shall be indemnified and held harmless
by the Registrant to the fullest extent permissible under Delaware law, as the
same exists or may hereafter exist in the future (but, in the case of any future
change, only to the extent that such change permits the Registrant to provide
broader indemnification rights than the law permitted prior to such change),
against all costs, charges, expenses, liabilities and losses (including, without
limitation, attorneys' fees, judgments, fines, ERISA excise taxes, or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith and such indemnification shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of his or her heirs, executors and administrators.
(b) The Registrant shall pay expenses actually incurred by a director or
officer in connection with any proceeding in advance of its final disposition;
provided, however, that if Delaware law then requires, the payment of such
expenses incurred in advance of the final disposition of a proceeding shall be
made only upon delivery to the Registrant of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified.
(c) If a claim under paragraph (a) of this Section is not paid in full by
the Registrant within 30 days after a written claim has been received by the
Registrant, the claimant may at any time thereafter bring suit against the
Registrant to recover the unpaid amount of the claim and, if successful in whole
or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. Neither the failure of the Registrant (including its
Board of Directors, independent legal counsel, or its stockholders) to have made
a determination that indemnification of the claimant is permissible in the
circumstances because the claimant has met the applicable standard of conduct,
if any, nor an actual determination by the Registrant (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant has
not met the standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the standard of conduct.
(d) The Registrant has also adopted provisions in its Certificate of
Incorporation that limit the liability of its directors and officers. Under the
Certificate of Incorporation, and as permitted the laws of the State of
Delaware, a director is not liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty, except for liability for (i) any
breach of the director's duty of loyalty to the Registrant or its stockholders;
(ii) acts or omissions which involve intentional misconduct or a knowing
violation of the law; (iii) the payment of any unlawful dividend, stock purchase
or redemption; or (iv) any transaction from which the director derived any
improper personal benefit.
II-1
<PAGE> 340
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2.1 -- Merger and Asset Contribution Agreement, dated December
15, 1998, by and among Hallwood Energy Corporation, HEC
Acquisition Partnership, HEC Acquisition Corp., Hallwood
Energy Partners, L.P., HCRC Acquisition Corp., Hallwood
Consolidated Resources Corporation and HEPGP Ltd.,
included as Appendix A to the Joint Proxy
Statement/Prospectus forming part of this Registration
Statement
*2.2 -- First Amendment to Merger and Asset Contribution
Agreement, dated March 9, 1999, by and among Hallwood
Energy Corporation, HEC Acquisition Partnership, HEC
Acquisition Corp., Hallwood Energy Partners, L.P., HCRC
Acquisition Corp., Hallwood Consolidated Resources
Corporation and HEPGP Ltd.
*2.3 -- Second Amendment to Merger and Asset Contribution
Agreement, dated April 29, 1999, by and among Hallwood
Energy Corporation, HEC Acquisition Partnership, HEC
Acquisition Corp., Hallwood Energy Partners, L.P., HCRC
Acquisition Corp., Hallwood Consolidated Resources
Corporation and HEPGP Ltd.
*3.1 -- Certificate of Incorporation of Hallwood Energy
Corporation
*3.2 -- Bylaws of Hallwood Energy Corporation
*4.1 -- Certificate of Designations of the Series A Cumulative
Preferred Stock of Hallwood Energy Corporation
*4.2 -- Form of Certificate of Designations of Series A Junior
Participating Preferred Stock of Hallwood Energy
Corporation included as Exhibit A to Exhibit 10.1 filed
herewith
*5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation
*8.1 -- Opinion of PriceWaterhouseCoopers LLP
*10.1 -- Form of Rights Agreement
+*10.2 -- 1999 Long-Term Incentive Plan of Hallwood Energy
Corporation included as Appendix F to the Joint Proxy
Statement/Prospectus forming part of this Registration
Statement
+*10.3 -- 1999 Long-Term Incentive Plan Loan Program of Hallwood
Energy Corporation
*10.4 -- Form of Option Cancellation Agreement
*21 -- Subsidiaries of the Registrant
*23.1 -- Consent of Deloitte and Touche LLP
*23.2 -- Consent of Dain Rauscher Wessels
*23.3 -- Consent of Kirkpatrick Energy Associates
*23.4 -- Consent of Williamson Petroleum Consultants
*23.5 -- Consent of Jenkens & Gilchrist, included in Exhibit 5.1
*23.6 -- Consent of PricewaterhouseCoopers LLP, included in
Exhibit 8.1
*23.7 -- Consent to be named director of Nathan C. Collins
*23.8 -- Consent to be named director of Jerry A. Lubliner
*23.9 -- Consent to be named director of John R. Isaac, Jr.
*23.10 -- Consent to be named director of Rex A. Sebastian
*23.11 -- Consent to be named director of Brian M. Troup
</TABLE>
II-2
<PAGE> 341
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION
------- -----------
<C> <S>
*23.12 -- Consent to be named director of Anthony J. Gumbiner
*23.13 -- Consent to be named director of Hamilton P. Schrauff
*23.14 -- Consent to be named director of Hans-Peter Holinger
*23.15 -- Consent to be named director of Bill M. Van Meter
*24 -- Power of Attorney, included on signature page
*99.1 -- Form of Proxy Card of Hallwood Energy Partners, L.P.
*99.2 -- Form of Proxy Card of Hallwood Consolidated Resources
Corporation
</TABLE>
- ---------------
* Filed herewith.
+ Compensation plan, benefit plan or employment contract or arrangement.
ITEM 22. UNDERTAKINGS
(1) The undersigned registrant hereby undertakes:
(A) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(B) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(C) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulations S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-3
<PAGE> 342
(4) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(5) The registrant undertakes that every prospectus (a) that is filed
pursuant to paragraph 3 immediately preceding, or (b) that purports to meet the
requirements of section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof.
(6) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(7) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(8) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE> 343
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Dallas, Texas, on April 29, 1999.
HALLWOOD ENERGY CORPORATION
By: /s/ WILLIAM L. GUZZETTI
----------------------------------
William L. Guzzetti
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated. Each person whose signature appears below
in so signing also makes, constitutes and appoints William L. Guzzetti and
Cathleen M. Osborn, his true and lawful attorneys-in-fact, and each of them with
full power of substitution, for each of them in any and all capacities, to
execute and cause to be filed with the Securities and Exchange Commission any or
all amendments and post-effective amendments to this Registration Statement,
with exhibits thereto and other documents in connection therewith, and hereby
ratifies and confirms all that said attorneys-in-fact or their substitute or
substitutes may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM L. GUZZETTI President, Principal Executive April 29, 1999
- ----------------------------------------------------- Officer, Director
William L. Guzzetti
/s/ THOMAS J. JUNG Vice President, Principal April 29, 1999
- ----------------------------------------------------- Financial Officer
Thomas J. Jung
</TABLE>
II-5
<PAGE> 344
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION
------- -----------
<C> <S>
*2.1 -- Merger and Asset Contribution Agreement, dated December
15, 1998, by and among Hallwood Energy Corporation, HEC
Acquisition Partnership, HEC Acquisition Corp., Hallwood
Energy Partners, L.P., HCRC Acquisition Corp., Hallwood
Consolidated Resources Corporation and HEPGP Ltd.,
included as Appendix A to the Joint Proxy
Statement/Prospectus forming part of this Registration
Statement
*2.2 -- First Amendment to Merger and Asset Contribution
Agreement, dated March 9, 1999, by and among Hallwood
Energy Corporation, HEC Acquisition Partnership, HEC
Acquisition Corp., Hallwood Energy Partners, L.P., HCRC
Acquisition Corp., Hallwood Consolidated Resources
Corporation and HEPGP Ltd.
*2.3 -- Second Amendment to Merger and Asset Contribution
Agreement, dated April 29, 1999, by and among Hallwood
Energy Corporation, HEC Acquisition Partnership, HEC
Acquisition Corp., Hallwood Energy Partners, L.P., HCRC
Acquisition Corp., Hallwood Consolidated Resources
Corporation and HEPGP Ltd.
*3.1 -- Certificate of Incorporation of Hallwood Energy
Corporation
*3.2 -- Bylaws of Hallwood Energy Corporation
*4.1 -- Certificate of Designations of the Series A Cumulative
Preferred Stock of Hallwood Energy Corporation
*4.2 -- Form of Certificate of Designations of Series A Junior
Participating Preferred Stock of Hallwood Energy
Corporation included as Exhibit A to Exhibit 10.1 filed
herewith
*5.1 -- Opinion of Jenkens & Gilchrist, a Professional
Corporation
*8.1 -- Opinion of PriceWaterhouseCoopers LLP
*10.1 -- Form of Rights Agreement
+*10.2 -- 1999 Long-Term Incentive Plan of Hallwood Energy
Corporation included as Appendix F to the Joint Proxy
Statement/Prospectus forming part of this Registration
Statement
+*10.3 -- 1999 Long-Term Incentive Plan Loan Program of Hallwood
Energy Corporation
*10.4 -- Form of Option Cancellation Agreement
*21 -- Subsidiaries of the Registrant
*23.1 -- Consent of Deloitte and Touche LLP
*23.2 -- Consent of Dain Rauscher Wessels
*23.3 -- Consent of Kirkpatrick Energy Associates
*23.4 -- Consent of Williamson Petroleum Consultants
*23.5 -- Consent of Jenkens & Gilchrist, included in Exhibit 5.1
*23.6 -- Consent of PricewaterhouseCoopers LLP, included in
Exhibit 8.1
*23.7 -- Consent to be named director of Nathan C. Collins
*23.8 -- Consent to be named director of Jerry A. Lubliner
*23.9 -- Consent to be named director of John R. Isaac, Jr.
*23.10 -- Consent to be named director of Rex A. Sebastian
*23.11 -- Consent to be named director of Brian M. Troup
*23.12 -- Consent to be named director of Anthony J. Gumbiner
*23.13 -- Consent to be named director of Hamilton P. Schrauff
*23.14 -- Consent to be named director of Hans-Peter Holinger
</TABLE>
<PAGE> 345
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION
------- -----------
<C> <S>
*23.15 -- Consent to be named director of Bill M. Van Meter
*24 -- Power of Attorney, included on signature page
*99.1 -- Form of Proxy Card of Hallwood Energy Partners, L.P.
*99.2 -- Form of Proxy Card of Hallwood Consolidated Resources
Corporation
</TABLE>
- ---------------
* Filed herewith.
+ Compensation plan, benefit plan or employment contract or arrangement.
<PAGE> 1
EXHIBIT 2.2
FIRST AMENDMENT TO
MERGER AND ASSET
CONTRIBUTION AGREEMENT
------------------------------------
THIS AMENDMENT (the "Amendment"), dated March 9, 1999 to that certain
Merger and Asset Contribution Agreement (the "Merger Agreement"), dated as of
December 15, 1998, by and among Hallwood Energy Corporation, a Delaware
corporation ("Hallwood Energy"); HEC Acquisition Partnership, L.P., a Delaware
limited partnership ("HEC Acquisition Partnership"); HEC Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Hallwood Energy ("HEC
Acquisition Corp.") in its capacity as general partner of HEC Acquisition
Partnership; Hallwood Energy Partners, L.P., a Delaware limited partnership
("HEP"); HCRC Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Hallwood Energy ("HCRC Acquisition Corp."); Hallwood Consolidated
Resources Corporation, a Delaware corporation ("HCRC"); and HEPGP Ltd., a
Colorado limited partnership ("HEPGP"). Hallwood Energy, HEC Acquisition
Partnership, HEC Acquisition Corp., HEP, HCRC , HCRC Acquisition Corp. and HEPGP
are referred to collectively as the "Constituent Entities."
WHEREAS, the Constituent Entities desire to amend (the "Amendment") the
Merger Agreement pursuant to the terms set forth in the Amendment, attached
hereto as Exhibit A and, in accordance with Section 10.3 of the Merger
Agreement.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the undersigned parties hereby agree
as follows:
1. Capitalized terms used in this Amendment and not otherwise defined
have the meanings given in the Merger Agreement.
2. The Constituent Parties acknowledge that the Certificate of
Designations of the Series A Cumulative Preferred Stock of Hallwood Energy has
been revised to provide that the Series A Preferred Stock shall not be
redeemable prior to December 31, 2003, and the Constituent Parties hereby
consent to such revision pursuant to Section 7.1(i) of the Merger Agreement.
3. The eleventh recital of the Merger Agreement is hereby amended to
delete the reference to HEPGP Acquisition Corp. and to read as follows:
"WHEREAS, upon the terms and subject to the conditions of this
Agreement, HEPGP will contribute certain oil and gas related assets
(the "Asset Contribution" and, with the Mergers, sometimes referred to
herein as the "Transactions") to Hallwood Energy;"
4. Section 1.1(c) of the Merger Agreement is hereby amended to delete
the reference to HEPGP Acquisition Corp. and to read as follows:
"(c) Asset Contribution. Subject to the terms and conditions of this
Agreement, immediately prior to the Effective Time, HEPGP shall
contribute those certain oil and gas related assets and assign those
certain liabilities set forth on Schedule 1.1(c) attached hereto (the
"Contributed Assets") to Hallwood Energy."
5. Section 3.3 of the Merger Agreement is hereby amended to read as
follows:
"3.3 HEP Options. All options outstanding at the Effective Time
to purchase Common Units shall be canceled and the holder of each
option shall receive in consideration an amount in cash equal to the
product of (i) the difference between the exercise price per Common
Unit of the option to purchase Common Units held by the holder and
the average closing price of a Common Unit on the American Stock
Exchange ("AMEX") for the 30 calendar days preceding the date of the
Closing; and (ii) the total number of Common Units subject to the
option held by the holder. All options outstanding at the Effective
Time to purchase Class C Units shall be canceled and the holder of
each option shall receive in consideration an amount in cash equal
to the product of (x) the difference
<PAGE> 2
between the exercise price per Class C Unit of the option to
purchase Class C Units held by the holder and the average closing
price of a Class C Unit on AMEX for the 30 calendar days preceding
the date of the Closing; and (y) the total numbers of Class C Units
subject to the Option held by the holder."
6. Section 4.3 of the Merger Agreement is hereby amended as follows:
"4.3 HCRC Options and Warrants. All options and warrants
outstanding at the Effective Time to purchase HCRC Common Stock
shall be canceled and the holder of each option shall receive in
consideration an amount in cash equal to the product of (i) the
difference between the exercise per share of HCRC Common Stock price
of the option to purchase HCRC Common Stock held by the holder and
the average closing price of a share of HCRC Common Stock on The
Nasdaq National Market for the 30 calendar days preceding the date
of the Closing; and (ii) the total number of shares of HCRC Common
Stock subject to the Option held by the holder.
2
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as of the date first written above.
Hallwood Energy Corporation
By: /s/ William L. Guzzetti
-------------------------------------------
William L. Guzzetti, President
HEC Acquisition Partnership
By: HEC Acquisition Corp., general partner
By: /s/ William L. Guzzetti
-------------------------------------
William L. Guzzetti, President
HEC Acquisition Corp.
By: /s/ William L. Guzzetti
-------------------------------------------
William L. Guzzetti, President
Hallwood Energy Partners, L.P.
By: HEPGP Ltd., general partner
By: Hallwood G.P., Inc., general partner
By: /s/ William L. Guzzetti
-------------------------------------
William L. Guzzetti, President
HCRC Acquisition Corp.
By: /s/ William L. Guzzetti
-------------------------------------------
William L. Guzzetti, President
Hallwood Consolidated Resources Corporation
By: /s/ William L. Guzzetti
-------------------------------------------
William L. Guzzetti, President
HEPGP Ltd.
By: Hallwood G.P., Inc., general partner
By: /s/ William L. Guzzetti
-------------------------------------
William L. Guzzetti, President
3
<PAGE> 1
EXHIBIT 2.3
SECOND AMENDMENT TO
MERGER AND ASSET
CONTRIBUTION AGREEMENT
------------------------------------
THIS AMENDMENT (the "Amendment"), dated April 29, 1999 to that certain
Merger and Asset Contribution Agreement (the "Merger Agreement"), dated as of
December 15, 1998, by and among Hallwood Energy Corporation, a Delaware
corporation ("Hallwood Energy"); HEC Acquisition Partnership, L.P., a Delaware
limited partnership ("HEC Acquisition Partnership"); HEC Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Hallwood Energy ("HEC
Acquisition Corp.") in its capacity as general partner of HEC Acquisition
Partnership; Hallwood Energy Partners, L.P., a Delaware limited partnership
("HEP"); HCRC Acquisition Corp., a Delaware corporation and wholly-owned
subsidiary of Hallwood Energy ("HCRC Acquisition Corp."); Hallwood Consolidated
Resources Corporation, a Delaware corporation ("HCRC"); and HEPGP Ltd., a
Colorado limited partnership ("HEPGP"). Hallwood Energy, HEC Acquisition
Partnership, HEC Acquisition Corp., HEP, HCRC , HCRC Acquisition Corp. and HEPGP
are referred to collectively as the "Constituent Entities."
WHEREAS, the Constituent Entities desire to amend (the "Amendment") the
Merger Agreement in accordance with Section 10.3 of the Merger Agreement.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the undersigned parties hereby agree
as follows:
1. Capitalized terms used in this Amendment and not otherwise defined
have the meanings given in the Merger Agreement.
2. A new Section 8.1(i) is hereby added in its entirety as follows:
"(i) On or before the Effective Time, that certain Financial
Consulting Agreement, dated as of December 31, 1996 between Hallwood Petroleum,
Inc. and The Hallwood Group Incorporated shall be terminated."
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as of the date first written above.
Hallwood Energy Corporation
By: /s/ WILLIAM L. GUZZETTI
-------------------------------------------
William L. Guzzetti, President
HEC Acquisition Partnership
By: HEC Acquisition Corp., general partner
By: /s/ WILLIAM L. GUZZETTI
-------------------------------------
William L. Guzzetti, President
HEC Acquisition Corp.
By: /s/ WILLIAM L. GUZZETTI
-------------------------------------------
William L. Guzzetti, President
Hallwood Energy Partners, L.P.
By: HEPGP Ltd., general partner
By: Hallwood G.P., Inc., general partner
By: /s/ WILLIAM L. GUZZETTI
-------------------------------------
William L. Guzzetti, President
HCRC Acquisition Corp.
By: /s/ WILLIAM L. GUZZETTI
-------------------------------------------
William L. Guzzetti, President
Hallwood Consolidated Resources Corporation
By: /s/ WILLIAM L. GUZZETTI
-------------------------------------------
William L. Guzzetti, President
HEPGP Ltd.
By: Hallwood G.P., Inc., general partner
By: /s/ WILLIAM L. GUZZETTI
-------------------------------------
William L. Guzzetti, President
3
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
HALLWOOD ENERGY CORPORATION
- --------------------------------------------------------------------------------
Pursuant to the provisions of Section 102 of the General Corporation
Law of the State of Delaware
- --------------------------------------------------------------------------------
I, the undersigned, for the purpose of creating and organizing a
corporation under the provisions of and subject to the requirements of the
General Corporation Law of Delaware do HEREBY CERTIFY as follows:
ARTICLE I
The name of the corporation is Hallwood Energy Corporation (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle.
The name of the Corporation's registered agent at such address is The
Prentice-Hall Corporation System, Inc.
ARTICLE III
SECTION 1. The purposes of the Corporation are to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "DGCL").
SECTION 2. The private property of the stockholders shall not be
subject to the payment of corporate debts to any extent whatsoever.
ARTICLE IV
The Corporation is to have perpetual existence.
ARTICLE V
SECTION 1. The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 30,000,000 shares, consisting of
25,000,000 shares of common stock, par value $0.01 per share ("Common Stock"),
and 5,000,000 shares of preferred stock, par value $0.01 per share ("Preferred
Stock").
SECTION 2. The Board of Directors is hereby expressly authorized, by
resolution or resolutions from time to time adopted, to provide, out of the
unissued shares of Preferred Stock, for the issuance of the Preferred Stock in
one or more classes or series. Before any shares of any such class or series are
issued, the Board of Directors shall fix and state, and hereby is expressly
empowered to fix, by resolution or resolutions, the designations, preferences,
and relative, participating, optional or other special rights of the shares of
each such series, and the qualifications, limitations or restrictions thereon,
including, but not limited to, determination of any of the following:
(a) the designation of such class or series, the number of
shares to constitute such class or series and the stated value thereof
if different from the par value thereof;
(b) whether the shares of such class or series shall have
voting rights, in addition to any voting rights provided by law, and,
if so, the terms of such voting rights, which may be full, special or
limited, and whether the shares of such class or series shall be
entitled to vote as a separate class either alone or together with the
shares of one or more other classes or series of stock;
<PAGE> 2
(c) the dividends, if any, payable on such class or series,
whether any such dividends shall be cumulative, and, if so, from what
dates, the conditions and dates upon which such dividends shall be
payable, the preference or relation that such dividends shall bear to
the dividends payable on any shares of stock of any other class or any
other series of the same class;
(d) whether the shares of such class or series shall be
subject to redemption by the Corporation at its option or at the option
of the holders of such shares or upon the happening of a specified
event, and, if so, the times, prices and other terms, conditions and
manner of such redemption;
(e) the preferences, if any, and the amount or amounts payable
upon shares of such series upon, and the rights of the holders of such
class or series in, the voluntary or involuntary liquidation,
dissolution or winding up, or upon any distribution of the assets, of
the Corporation;
(f) whether the shares of such class or series shall be
subject to the operation of a retirement or sinking fund and, if so,
the extent to and manner in which any such retirement or sinking fund
shall be applied to the purchase or redemption of the shares of such
class or series for retirement or other corporate purposes and the
terms and provisions relative to the operation thereof;
(g) whether the shares of such class or series shall be
convertible into, or exchangeable for, at the option of either the
holder or the Corporation or upon the happening of a specified event,
shares of stock of any other class or any other series of the same
class or any other class or classes of securities or property and, if
so, the price or prices or the rate or rates of conversion or exchange
and the method, if any, of adjusting the same, and any other terms and
conditions of conversion or exchange;
(h) the limitations and restrictions, if any, to be effective
while any shares of such class or series are outstanding, upon the
payment of dividends or the making of other distributions on, and upon
the purchase, redemption or other acquisition by the Corporation of,
the Common Stock or shares of stock of any other class or any other
series of the same class;
(i) the conditions or restrictions, if any, upon the creation
of indebtedness of the Corporation or upon the issue of any additional
stock, including additional shares of such series or of any other
series of the same class or of any other class; and
(j) any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations
and restrictions thereof.
The powers, preferences and relative, participating, optional and other
special rights of each class or series of Preferred Stock, and the
qualifications, limitations and restrictions thereof, if any, may differ from
those of any and all other classes or series at any time outstanding. All shares
of any one series of Preferred Stock shall be identical in all respects with all
other shares of such series, except that shares of any one series issued at
different times may differ as to the dates from which dividends thereof shall be
cumulative. The Board of Directors may increase the number of shares of the
Preferred Stock designated for any existing class or series by a resolution
adding to such class or series authorized and unissued shares of the Preferred
Stock not designated for any other class or series. The Board of Directors may
decrease the number of shares of Preferred Stock designated for any existing
class or series by a resolution subtracting from such class or series unissued
shares of the Preferred Stock designated for such class or series, and the
shares so subtracted shall become authorized, unissued, and undesignated shares
of the Preferred Stock.
SECTION 3. Each share of Common Stock of the Corporation shall have
identical privileges in every respect. Each holder of Common Stock shall be
entitled to one vote for each share of Common Stock held of record on all
matters on which stockholders generally are entitled to vote. Subject to the
provisions of law and the rights of the Preferred Stock or any class or series
of Preferred Stock, dividends may be paid on the Common Stock out of assets
legally available for dividends, but only at such times and in such amounts as
the Board of Directors shall determine and declare. Upon the dissolution,
liquidation or winding up of the Corporation, after any preferential amounts to
be distributed to the holders of the Preferred Stock or any class or series of
Preferred Stock have been paid or declared and set apart for payment, the
holders
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<PAGE> 3
of the Common Stock shall be entitled to receive all the remaining assets of the
Corporation available for distribution to its stockholders ratably in proportion
to the number of shares held by them, respectively.
ARTICLE VI
Unless otherwise specified in this Certificate of Incorporation, no
holder of shares of stock of the Corporation shall have any preemptive or other
right to receive any securities of the Corporation.
ARTICLE VII
SECTION 1. Except as otherwise fixed by or pursuant to the provisions
of Article V hereof relating to the rights of the holders of any class or series
of stock having a preference over the Common Stock as to dividends or upon
liquidation, the number of the directors of the Corporation shall be fixed from
time to time by this Certificate of Incorporation or pursuant to the Bylaws of
the Corporation. The Directors on the Board of Directors shall be classified
with respect to the time for which they shall severally hold office by dividing
them into three classes. The number of directors of the Corporation shall not be
less than one (1) nor more than fifteen (15). The initial Board of Directors
shall consist of one (1) member who shall be William L. Guzzetti. If the total
number of directors is evenly divisible by three, then each class shall have
one-third of the total number of directors. If the total number of directors is
not evenly divisible by three, the Board of Directors shall by resolution
determine the number of directors in each class, which shall be, as nearly as
possible, the same for each class. All directors of the Corporation shall hold
office until their resignation or removal or until their successors are duly
elected and qualified. The directors of the first class shall hold office until
the first annual meeting of the stockholders to be held after the date upon
which such director was elected and until their successors are duly elected and
qualified; the directors of the second class shall hold office until the second
annual meeting of the stockholders to be held after such date and until their
successors are duly elected and qualified; and the directors of the third class
shall hold office until the third annual meeting of the stockholders to be held
after such date and until their successors are duly elected and qualified. At
each annual meeting of the stockholders following the first annual meeting, the
successors to the class of directors whose terms shall expire in that year shall
be elected, and said successors shall hold office until the third following
annual meeting of stockholders and until the election and qualification of their
respective successors. If successors to the class of directors whose term shall
expire at an annual meeting of stockholders are not elected at such meeting or
if such meeting is not held, directors may be elected at a special meeting of
stockholders as successors to that class of directors.
SECTION 2. Advance notice of nominations for the election of directors
shall be given in the manner and to the extent provided in the Certificate of
Incorporation of the Corporation.
SECTION 3. Except as otherwise provided for or fixed by or pursuant to
the provisions of Article V hereof relating to the rights of the holders of any
class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, newly created directorships resulting from any
increase in the number of directors may be filled by the Board of Directors and
any vacancies on the Board of Directors resulting from death, resignation,
removal or other cause shall only be filled by the affirmative vote of a
majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors, or by a sole remaining director, and in
accordance with the Bylaws of the Corporation. Any director elected in
accordance with the preceding sentence of this Section 3 shall hold office for
the remainder of the full term of the director and until such director's
successor shall have been elected and qualified.
SECTION 4. Any director or the entire Board of Directors may be removed
only for cause and only by the vote of the holders of a majority of the
securities of the Corporation then entitled to vote at an election of directors.
For purposes of this Certificate of Incorporation, "cause" shall mean gross
neglect or willful misconduct in the performance of the duties as a director.
ARTICLE VIII
Nominations of persons for election to the Board of Directors may be
made at an annual meeting of stockholders or special meeting of stockholders
called by the Board of Directors for the purpose of electing directors (i) by or
at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation entitled to vote for the election of directors at such meeting who
complies with the notice of procedures set forth in this Article VIII. Such
nominations, other than those
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<PAGE> 4
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the scheduled date of the meeting, regardless of any
postponement, deferral or adjournment of that meeting to a later date; provided,
however, that if less than 70 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, notice by the stockholder
to be timely must be so delivered or received not later than the close of
business on the 10th day following the earlier of (i) the day on which such
notice of the date of the meeting was mailed or (ii) the day on which such
public disclosure was made.
A stockholder's notice to the Secretary shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation that are beneficially owned by such
person on the date of such stockholder's notice and (d) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, or any
successor statute thereto (including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to the stockholder giving notice (a) the name and
address, as such information appears on the Corporation's books, of such
stockholder and any other stockholders known by such stockholder to be
supporting such nominee(s), (b) the class and number of shares of the
Corporation that are beneficially owned by such stockholder and each other
stockholder known by such stockholder to be supporting such nominee(s) on the
date of such stockholder notice, (c) a representation that the stockholder is a
holder of record of stock of the Corporation entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; and (iii) a description of all
arrangements or understandings between the stockholder and each nominee and
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder.
Subject to the rights, if any, of the holders of any series of
Preferred Stock then outstanding, no person shall be eligible for election as a
director of the Corporation unless nominated in accordance with the procedures
set forth in this Article VIII. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by this Article VIII and if he should
so determine, he shall so declare to the meeting and the defective nomination
shall be disregarded.
ARTICLE IX
At the annual meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before the annual meeting of stockholders (i) by or at the
direction of the Board of Directors or (ii) by a stockholder of the Corporation
who complies with the procedures set forth in this Article IX. For business or a
proposal to be properly brought before an annual meeting of stockholders by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the scheduled
date of the annual meeting, regardless of any postponement, deferral or
adjournment of that meeting to a later date; provided, however, that if less
than 70 days' notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so delivered or mailed and received not later than the close of business
on the 10th day following the earlier of (i) the day on which such notice of the
date of the meeting was mailed or (ii) the day on which such public disclosure
was made.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before an annual meeting of
stockholders (i) a description, in 500 words or less, of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as such information
appears on the Corporation's books, of the stockholder proposing such business
and any other stockholder known by such stockholder to be supporting such
proposal, (iii) the class and number of shares of the Corporation that are
beneficially owned by such stockholder and each other stockholder known by such
stockholder to be supporting such proposal on the date of such stockholder's
notice, (iv) a description, in 500 words or less, of any interest of the
stockholder in such proposal and (v) a representation that the stockholder is a
holder of record of stock of the Corporation and intends to appear in person or
by proxy at the meeting to present the proposal specified in the notice.
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<PAGE> 5
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the business was not properly brought before the
meeting in accordance with the procedures prescribed by this Article IX, and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing, nothing in this Article IX shall be interpreted or construed to
require the inclusion of information about any such proposal in any proxy
statement distributed by, at the direction of, or on behalf of, the Board of
Directors.
ARTICLE X
Subject to the rights of the holders of the Preferred Stock or any
other class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, special meetings of the stockholders, unless
otherwise prescribed by statute, may be called at any time only by the Chairman
of the Board of Directors or a majority of the members of the Board of Directors
then in office. Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders. Advance notice of items of business to be
considered at any meeting of the stockholders shall be given in the manner and
to the extent provided in this Certificate of Incorporation of the Corporation.
ARTICLE XI
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ARTICLE XII
SECTION 1. Limitation of Liability of Directors. A director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
If the DGCL is amended after the date hereof to authorize action by
corporations organized pursuant to the DGCL to further eliminate or limit the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as amended.
SECTION 2. Indemnification of Directors and Officers.
(a) Each person who was or is made a party or is threatened to
be made a party or is involved in any threatened, pending or completed action,
suit or proceeding, whether formal or informal, whether of a civil, criminal,
administrative or investigative nature (hereinafter a "proceeding"), by reason
of the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer of the Corporation, whether the
basis of such proceeding is an alleged action or inaction in an official
capacity or in any other capacity while serving as a director or officer, shall
be indemnified and held harmless by the Corporation to the fullest extent
permissible under Delaware law, as the same exists or may hereafter exist in the
future (but, in the case of any future change, only to the extent that such
change permits the
5
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Corporation to provide broader indemnification rights than the law permitted
prior to such change), against all costs, charges, expenses, liabilities and
losses (including, without limitation, attorneys' fees, judgments, fines, ERISA
excise taxes, or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators.
(b) The Corporation shall pay expenses actually incurred by a
director or officer in connection with any proceeding in advance of its final
disposition; provided, however, that if Delaware law then requires, the payment
of such expenses incurred in advance of the final disposition of a proceeding
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified.
(c) If a claim under paragraph (a) of this Section is not paid
in full by the Corporation within 30 days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination that indemnification of the claimant
is permissible in the circumstances because the claimant has met the applicable
standard of conduct, if any, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met the standard of conduct, shall be a
defense to the action or create a presumption that the claimant has not met the
standard of conduct.
SECTION 3. Indemnification of Employees and Agents. The Corporation may
provide indemnification to employees and agents of the Corporation to the
fullest extent permissible under Delaware law.
SECTION 4. Expenses as a Witness. To the extent that any director,
officer, employee or agent of the Corporation is, by reason of such position, or
position with another entity at the request of the Corporation, a witness in any
action, suit or proceeding, he or she shall be indemnified against all costs and
expenses actually and reasonably incurred by him or her on his or her behalf in
connection therewith.
SECTION 5. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under Delaware law.
SECTION 6. Indemnity Agreements. The Corporation may enter into
agreements with any director, officer, employee or agent of the Corporation
providing for indemnification to the fullest extent permissible under Delaware
law.
SECTION 7. Separability. Each and every paragraph, sentence, term and
provision of this Article XII is separate and distinct, so that if any
paragraph, sentence, term or provision hereof shall be held to be invalid or
unenforceable for any reason, such invalidity or unenforceability shall not
affect the validity or unenforceability of any other paragraph, sentence, term
or provision hereof. To the extent required, any paragraph, sentence, term or
provision of this Article XII may be modified by a court of competent
jurisdiction to preserve its validity and to provide the claimant with, subject
to the limitations set forth in this Article XII and any agreement between the
Corporation and claimant, the broadest possible indemnification permitted under
applicable law.
SECTION 8. Contract Right. Each of the rights conferred on directors
and officers of the Corporation by Sections 1, 2 and 4 of this Article and on
employees or agents of the Corporation by Sections 3 and 4 of this Article shall
be a contract right and any repeal or amendment of the provisions of this
Article shall not adversely affect any right hereunder of any person existing at
the time of such repeal or amendment with respect to any act or omission
occurring prior to the time of such repeal or amendment and, further, shall not
apply to any proceeding, irrespective of when the proceeding is initiated,
arising from the service of such person prior to such repeal or amendment.
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SECTION 9. Nonexclusivity. The rights conferred in this Article XII
shall not be exclusive of any other rights that any person may have or hereafter
acquire under any statute, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
ARTICLE XIII
The Corporation reserves the right to amend, add, alter, change, repeal
or adopt any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation. In addition to any
affirmative vote required by applicable law or any other provision of this
Certificate of Incorporation or specified in any agreement, and in addition to
any voting rights granted to or held by the holders of any series of Preferred
Stock, the affirmative vote of the holders of not less than a majority of the
voting power of all issued and outstanding voting stock of the Corporation
entitled to vote generally in the election of directors shall be required to
amend, add, alter, change, repeal or adopt any provisions of this Certificate of
Incorporation.
The name and mailing address of the incorporator of the corporation is
Jannat C. Thompson, Esq., Jenkens & Gilchrist, a Professional Corporation, 1445
Ross Avenue, Suite 3200, Dallas, Texas 75202.
THE UNDERSIGNED being the incorporator hereinafter named, for the
purpose forming a corporation pursuant to the General Corporation Law of
Delaware, does make this Certificate, hereby acknowledging and declaring and
certifying that the foregoing Certificate of Incorporation is her act and deed
and the facts herein stated are true and accordingly has hereunto set her hand
this 14th day of December, 1998.
/s/ Jannat C. Thompson
---------------------------
Jannat C. Thompson
7
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
HALLWOOD ENERGY CORPORATION
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
PREAMBLE
These Bylaws are subject to, and governed by the General Corporation
Law of the State of Delaware (the "DGCL") and the Certificate of Incorporation
of Hallwood Energy Corporation (the "Corporation"). In the event of a direct
conflict between the provisions of these Bylaws and the mandatory provisions of
the DGCL, or the provisions of the Certificate of Incorporation of the
Corporation, such provisions of the DGCL or the Certificate of Incorporation, as
the case may be, will be controlling.
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. Annual Meetings. The annual meeting of the stockholders of
the Corporation for the election of directors and for the transaction of such
other business as may properly come before the meeting shall be held at such
place, on such date and at such time as may from time to time be fixed by the
Board of Directors, the Chairman of the Board or the President.
SECTION 2. Special Meetings. Except as otherwise required by law and
subject to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation, special
meetings of the stockholders for any purpose or purposes may be called only by
the Chairman of the Board or a majority of the members of the Board of Directors
then in office. Special meetings of the stockholders may be called at such
place, on such date and at such time as fixed by the appropriate person calling
such special meeting of the stockholders. Only such business as is specified in
the notice of any special meeting of the stockholders shall come before such
meeting.
SECTION 3. Notice of Meetings. Except as otherwise provided by law,
written notice of each meeting of the stockholders, whether annual or special,
shall be given, either by personal delivery or by mail, not less than 10 nor
more than 60 days before the date of the meeting to each stockholder of record
entitled to notice of the meeting. If mailed, such notice shall be deemed given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
who shall attend such meeting in person or by proxy without protesting, at the
commencement of the meeting, the lack of proper notice to such stockholder, or
who shall waive notice thereof as provided in Article VIII of these Bylaws.
SECTION 4. Quorum. Except as otherwise provided by law or by the
Certificate of Incorporation of the Corporation, the holders of a majority of
the votes entitled to be cast by the stockholders entitled to vote (which, if
any vote is to be taken by classes, shall mean the holders of a majority of the
votes entitled to be cast by the stockholders of each such class) present in
person or by proxy, shall constitute a quorum for the transaction of business at
any meeting of the stockholders. The stockholders present at a duly convened
meeting may continue to transact business until adjournment notwithstanding any
withdrawal of stockholders that may leave less than a quorum remaining.
SECTION 5. Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, without notice to the stockholders, if the time and place to which it is
adjourned is announced at such meeting, unless the adjournment is for more than
30 days or, after adjournment, a new record date is fixed for the adjourned
meeting. In the absence of a quorum, the holders of a majority of the votes
entitled
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to be cast by the stockholders, present in person or by proxy, may adjourn the
meeting from time to time. At any such adjourned meeting at which a quorum may
be present, any business may be transacted that might have been transacted at
the meeting as originally called.
SECTION 6. Order of Business. Such person as the Board of Directors may
have designated or, in the absence of such person, the highest ranking officer
of the Corporation who is present shall call to order any meeting of the
stockholders and act as chairman of the meeting. In the absence of the Secretary
of the Corporation, the secretary of the meeting shall be such person as the
chairman appoints. The order of business at each such meeting shall be as
determined by the chairman of the meeting. The chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts and things as are necessary or desirable for the proper
conduct of the meeting, including, without limitation, the establishment of
procedures for the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls.
SECTION 7. List of Stockholders. It shall be the duty of the Secretary
or other officer of the Corporation who has charge of the stock ledger to
prepare and make, at least 10 days before each meeting of the stockholders, a
complete list of the stockholders entitled to vote thereat, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in such stockholder's name. Such list shall be produced and
kept available at the times and places required by law.
SECTION 8. Voting. Except as otherwise provided by law or by the
Certificate of Incorporation of the Corporation, each stockholder of record of
any class or series of stock having a preference over the Common Stock of the
Corporation as to dividends or upon liquidation shall be entitled on each matter
submitted to a vote at each meeting of stockholders to such number of votes for
each share of such stock as may be fixed in the Certificate of Incorporation or
in the resolution or resolutions adopted by the Board of Directors providing for
the issuance of such stock, and each stockholder of record of Common Stock shall
be entitled at each meeting of stockholders to one vote for each share of such
stock, in each case, registered in such stockholder's name on the books of the
Corporation on the date fixed pursuant to Section 6 of Article V of these Bylaws
as the record date for the determination of stockholders entitled to notice of
and to vote at such meeting, or if no such record date shall have been so fixed,
then at the close of business on the day next preceding the day on which notice
of such meeting is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held.
Each stockholder entitled to vote at any meeting of stockholders may
authorize another person or persons to act for such stockholder by a proxy
signed by such stockholder or such stockholder's attorney-in-fact. Any such
proxy shall be delivered to the secretary of such meeting at or prior to the
time designated for holding such meeting, but in any event not later than the
time designated in the order of business for so delivering such proxies. No such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period.
If a quorum is present in person or represented by proxy at any meeting
of the stockholders, all corporate actions to be taken by vote of the
stockholders (except as otherwise required by law and except as otherwise
provided in the Certificate of Incorporation of the Corporation) shall be
authorized by a majority of the votes cast by the stockholders entitled to vote
thereon, (unless the question is one on which by express provision of law, the
Certificate of Incorporation, or these Bylaws a different vote is required, in
which event such express provision shall govern and control the decision of such
question) and where a separate vote by class is required, a majority of the
votes cast by the stockholders of such class, present in person or represented
by proxy, shall be the act of such class.
Unless required by law or determined by the chairman of the meeting to
be advisable, the vote on any matter, including the election of directors, need
not be by written ballot. In the case of a vote by written ballot, each ballot
shall be signed by the stockholder voting, or by such stockholder's proxy, and
shall state the number of shares voted.
The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
the meeting. No ballot, proxies or votes, nor any revocations thereof or changes
thereto, shall be accepted by the inspectors at the closing of the polls unless
the Court of Chancery upon application by a stockholder shall determine
otherwise.
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Any action required or permitted to be taken at any annual or special
meeting of stockholders may only be taken upon the vote of the stockholders at
an annual or special meeting duly called and may not be taken by written
consent.
SECTION 9. Closing of Stock Ledger. For the purpose of determining
stockholders entitled to notice of, or to vote at, any meeting of stockholders
or any adjournment thereof, or entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Corporation of any of its
own shares) or a share dividend, or in order to make a determination of
stockholders for any other proper purpose, the Board of Directors may provide
that the stock ledger of the Corporation shall be closed for a stated period but
not to exceed in any event 60 days. If the stock ledger is closed for the
purpose of determining stockholders entitled to notice of, or to vote at, a
meeting of stockholders, such records shall be closed for at least ten days
immediately preceding such meeting. In lieu of closing the stock ledger, the
board of directors may fix in advance a date as the record date pursuant to
Section 6 of Article V of these Bylaws for any such determination of
stockholders. If the stock ledger is not closed and if no record date is fixed
for the determination of stockholders entitled to notice of, or to vote at, a
meeting of stockholders or entitled to receive a distribution (other than a
distribution involving a purchase or redemption by the Corporation of any of its
own shares) or a share dividend, the date next preceding the date on which the
notice of the meeting is mailed or the date on which the resolution of the board
of directors declaring such distribution or share dividend is adopted, as the
case may be, shall be the record date for such determination of stockholders.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this Section 9, such determination
shall apply to any adjournment thereof except where the determination has been
made through the closing of the stock ledger and the stated period of closing
has expired.
SECTION 10. Inspectors.
(a) The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at the meeting and make a
written report thereof. The Board of Directors may designate one or more persons
as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at a meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of the inspector's
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of the inspector's
ability.
(b) The inspectors shall (i) ascertain the number of shares
outstanding and the voting power of each, (ii) determine the shares represented
at the meeting and the validity of proxies and ballots, (iii) count all votes
and ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
(v) certify their determination of the number of shares represented at the
meeting, and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors.
(c) In determining the validity and counting of proxies and
ballots, the inspectors shall be limited to an examination of the proxies, any
envelopes submitted with those proxies, any information provided in accordance
with Section 212(c)(2) of the DGCL, ballots and the regular books and records of
the Corporation, except that the inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, other nominees or similar persons that appear
to represent more votes than the holder of proxies is authorized by the record
owner to cast or appear to represent more votes than the stockholder holds of
record. If the inspectors consider other reliable information for the limited
purpose permitted herein, the inspectors at the time may make their
certification pursuant to paragraph B(v) of this section and shall specify the
precise information considered by them, including the person or persons from
whom they obtained the information, when the information was obtained, the means
by which the information was obtained and the basis for the inspectors' belief
that such information is accurate and reliable.
(d) Notwithstanding the foregoing, this section shall not
apply to the Corporation if it does not have a class of voting stock that is (i)
listed on a national securities exchange; (ii) authorized for quotation on any
dealer quotation system of the registered national securities association; or
(iii) held of record by more than 2,000 stockholders.
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ARTICLE II
BOARD OF DIRECTORS
SECTION 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate of Incorporation of the
Corporation or by these Bylaws directed or required to be exercised or done by
the stockholders.
SECTION 2. Number; Election; Term; Qualification. The number of
directors which shall constitute the Board of Directors shall be not less than
one. The first Board of Directors shall consist of the number of directors named
in the Certificate of Incorporation of the Corporation. Thereafter, the number
of directors that shall constitute the entire Board of Directors and whether
such board is classified shall be determined by the provisions of the
Certificate of Incorporation or if not so provided in the Certificate of
Incorporation, as determined by resolution of the Board of Directors at any
meeting thereof or by the stockholders at any meeting thereof, but shall never
be less than one. At each annual meeting, directors shall be elected to hold
office for a term of office expiring at the annual meeting at which the term of
office of the class, if any, to which they have been elected expires and until
their successors are elected and qualified. No director need be a stockholder, a
resident of the State of Delaware, or a citizen of the United States.
SECTION 3. Removal. Any director or the entire Board of Directors may
be removed only for cause and only by the vote of the holders of a majority of
the shares then entitled to vote at the election of directors. For purposes of
these Bylaws "cause" shall mean gross neglect or willful misconduct in the
performance of the duties as a director.
SECTION 4. Quorum and Manner of Acting. Except as otherwise provided by
law, the Certificate of Incorporation of the Corporation or these Bylaws, a
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business at any meeting of the Board of Directors, and, except as
so provided, the vote of a majority of the directors present at any meeting at
which a quorum is present shall be the act of the Board of Directors. In the
absence of a quorum, a majority of the directors may adjourn the meeting to
another time and place. Notice of any adjourned meeting shall be given as set
forth in Section 8 of this Article II. At any adjourned meeting at which a
quorum is present, any business may be transacted that might have been
transacted at the meeting as originally called and noticed.
SECTION 5. Place of Meeting. The Board of Directors may hold its
meetings at such place or places within or without the State of Delaware as the
Board of Directors may from time to time determine or as shall be specified or
fixed in the respective notices or waivers of notice thereof.
SECTION 6. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board of Directors shall from time
to time by resolution determine.
SECTION 7. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board or by the Secretary
upon the request of a majority of the directors.
SECTION 8. Notice of Meetings. Notice of regular meetings of the Board
of Directors or of any adjourned meeting thereof need not be given. Notice of
each special meeting of the Board of Directors shall be mailed to each director,
addressed to such director at such director's residence or usual place of
business, at least two days before the day on which the meeting is to be held or
shall be sent to such director at such place in writing or by electronic medium
or be given personally or by telephone, not later than the day before the
meeting is to be held, but notice need not be given to any director who shall,
either before or after the meeting, submit a signed waiver of such notice or who
shall attend such meeting without protesting, prior to or at its commencement,
the lack of notice to such director. Every such notice shall state the time and
place but need not state the purpose of the meeting.
SECTION 9. Rules and Regulations. The Board of Directors may adopt such
rules and regulations not inconsistent with the provisions of law, the
Certificate of Incorporation of the Corporation or these Bylaws for the conduct
of its meetings and management of the affairs of the Corporation as the Board of
Directors may deem proper.
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SECTION 10. Participation in Meeting by Communications Equipment. Any
one or more members of the Board of Directors or any committee thereof may
participate in any meeting of the Board of Directors or of any such committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such meeting.
SECTION 11. Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if all of the members of the Board of Directors or of
any such committee consent thereto in writing and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or of such
committee.
SECTION 12. Resignations. Any director of the Corporation may at any
time resign by giving written notice to the Board of Directors, the Chairman of
the Board, the President or the Secretary of the Corporation. Such resignation
shall take effect at the time specified therein or, if the time be not
specified, upon receipt thereof; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 13. Vacancies. Subject to the rights of the holders of any
class or series of stock having a preference over the Common Stock of the
Corporation as to dividends or upon liquidation, any vacancies on the Board of
Directors resulting from death, resignation, removal or other cause, shall only
be filled by the affirmative vote of a majority of the remaining directors then
in office, even though less than a quorum of the Board of Directors, or by a
sole remaining director, and newly created directorships resulting from any
increase in the number of directors shall be filled by the Board of Directors,
or if not so filled, by the stockholders at the next annual meeting thereof or
at a special meeting called for that purpose in accordance with Section 2 of
Article I of these Bylaws. Any director elected in accordance with the preceding
sentence of this Section 13 shall hold office until such director's successor
shall have been elected and qualified.
SECTION 14. Compensation. Directors shall be entitled to receive from
the Corporation such amount per annum and such fees for attendance at meetings
of the Board of Directors or of committees of the Board of Directors, or both,
as the Board of Directors shall from time to time determine. In addition,
directors shall be entitled to receive from the Corporation reimbursement for
the reasonable expenses incurred by such person in connection with the
performance of such person's duties as a director. Nothing contained in this
Section 14 shall preclude any director from serving the Corporation or any of
its subsidiaries in any other capacity and receiving proper compensation
therefor.
ARTICLE III
COMMITTEES
SECTION 1. Committees of the Board of Directors. The Board of Directors
may, by resolution adopted by a majority of the entire Board of Directors,
designate from among its members one or more committees, each committee to
consist of one or more directors of the Corporation, and each of which shall,
except as otherwise prescribed by law, have such authority of the Board of
Directors as may be specified in the resolution of the Board of Directors
designating such committee. A majority of all the members of such committee may
determine its action and fix the time and place of its meetings, unless the
Board of Directors shall otherwise provide. The Board of Directors shall have
power at any time to change the membership of, to increase or decrease the
membership of, to fill all vacancies in and to discharge any such committee, or
any member thereof, either with or without cause.
SECTION 2. Procedure; Meetings; Quorum. Regular meetings of any
committee of the Board of Directors, of which no notice shall be necessary, may
be held at such times and places as shall be fixed by resolution adopted by a
majority of the members thereof. Special meetings of any committee of the Board
of Directors shall be called at the request of any member thereof. Notice of
each special meeting of any committee of the Board of Directors shall be mailed
to each member thereof, addressed to such member at such member's residence or
usual place of business, at least two days before the day on which the meeting
is to be held or shall be sent to such member at such place in writing or by
electronic medium or be given personally or by telephone, not later than the day
before the meeting is to be held, but notice need not be given to any member who
shall, either before or after the meeting, submit a signed waiver of such notice
or who shall attend such meeting without protesting, prior to or at its
commencement, the lack of notice to such
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member. Every such notice shall state the time and place but need not state the
purpose of the meeting. Any special meeting of any committee of the Board of
Directors shall be a legal meeting without any notice thereof having been given,
if all the members thereof shall be present thereat. Notice of any adjourned
meeting of any committee of the Board of Directors need not be given. Any
committee of the Board of Directors may adopt such rules and regulations not
inconsistent with the provisions of law, the Certificate of Incorporation of the
Corporation or these Bylaws for the conduct of its meetings as the committee
deems proper. A majority of any committee of the Board of Directors shall
constitute a quorum for the transaction of business at any meeting, and the vote
of a majority of the members thereof present at any meeting at which a quorum is
present shall be the act of such committee. In the absence or disqualification
of a member, the remaining members, whether or not a quorum, may fill a vacancy.
Any committee of the Board of Directors shall keep written minutes of its
proceedings, a copy of which is to be filed with the Secretary of the
Corporation, and shall report on such proceedings to the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. Number; Term of Office. The officers of the Corporation
shall consist of a Chairman of the Board (who shall be the Chief Executive
Officer), a President (who shall be the Chief Operating Officer), a Secretary
and such other officers as may from time to time be appointed by the Board of
Directors. Officers shall be elected by the Board of Directors and shall hold
office until a successor is elected and qualified or until earlier resignation
or removal. Any number of offices may be held by the same person. The Board of
Directors may from time to time authorize any officer to appoint and remove any
such other officers and agents and to prescribe their powers and duties.
SECTION 2. Removal. Any officer may be removed, either with or without
cause, by the Board of Directors at any meeting thereof called for the purpose,
or, except in the case of any officer elected by the Board of Directors, by any
committee or superior officer upon whom such power may be conferred by the Board
of Directors.
SECTION 3. Resignation. Subject at all times to the right of removal as
provided in Section 2 of this Article IV, any officer may resign at any time by
giving notice to the Board of Directors, the President or the Secretary of the
Corporation. Any such resignation shall take effect at the date of receipt of
such notice or at any later date specified therein; provided that the President
or, in the event of the resignation of the President, the Board of Directors may
designate an effective date for such resignation that is earlier than the date
specified in such notice but that is not earlier than the date of receipt of
such notice; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these Bylaws for election to such
office.
SECTION 5. Powers and Duties of Officers. The officers of the
Corporation shall have such powers and duties in the management of the
Corporation as may be prescribed by the Board of Directors and, to the extent
not so provided, as generally pertain to their respective offices, subject to
the control of the Board of Directors.
ARTICLE V
CAPITAL STOCK
SECTION 1. Certificates for Shares. Certificates representing shares of
stock of each class of the Corporation, whenever authorized by the Board of
Directors, shall be in such form as shall be approved by the Board of Directors.
The certificates representing shares of stock of each class shall be issued in
consecutive order and shall be numbered in the order of their issue, shall be
signed by, or in the name of, the Corporation by the Chairman of the Board or
the President or a Vice-President and by the Secretary or an Assistant Secretary
or the Treasurer or an Assistant Treasurer of the Corporation, and sealed with
the seal of the Corporation, which may be by a facsimile thereof. Any or all
such signatures may be facsimiles if countersigned by a transfer agent or
registrar. Although any officer, transfer agent or registrar whose manual or
facsimile signature is affixed to such a certificate ceases to be such officer,
transfer
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agent or registrar before such certificate has been issued, it may nevertheless
be issued by the Corporation with the same effect as if such officer, transfer
agent or registrar were still such at the date of its issue.
The stock ledger and blank share certificates shall be kept by the
Secretary, transfer agent, registrar or by any other officer or agent designated
by the Board of Directors.
SECTION 2. Transfer of Shares. Transfers of shares of stock of each
class of the Corporation shall be made only on the books of the Corporation by
the holder thereof, or by such holder's attorney thereunto authorized by a power
of attorney duly executed and filed with the Secretary of the Corporation or a
transfer agent for such stock, if any, and on surrender of the certificate or
certificates for such shares properly endorsed or accompanied by a duly executed
stock transfer power or other evidence of succession, assignment or authority to
transfer and the payment of all taxes thereon. The person in whose name shares
stand on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation; provided, however, that whenever any
transfer of shares shall be made for collateral security and not absolutely, and
written notice thereof shall be given to the Secretary or to such transfer
agent, such fact shall be stated in the entry of the transfer. No transfer of
shares shall be valid as against the Corporation, its stockholders and creditors
for any purpose, except to render the transferee liable for the debts of the
Corporation to the extent provided by law, until it shall have been entered in
the stock records of the Corporation by an entry showing from and to whom
transferred.
SECTION 3. Addresses of Stockholders. Each stockholder shall designate
to the Secretary or transfer agent of the Corporation an address at which
notices of meetings and all other corporate notices may be served or mailed to
such person, and, if any stockholder shall fail to designate such address,
corporate notices may be served upon such person by mail directed to such person
at such person's post office address, if any, as the same appears on the share
record books of the Corporation or at such person's last known post office
address.
SECTION 4. Lost, Destroyed and Mutilated Certificates. The holder of
any share of stock of the Corporation shall immediately notify the Corporation
of any loss, theft, destruction or mutilation of the certificate therefor; the
Corporation may issue to such holder a new certificate or certificates for
shares, upon the surrender of the mutilated certificate or, in the case of loss,
theft or destruction of the certificate, upon satisfactory proof of such loss,
theft or destruction; the Board of Directors, or a committee designated hereby,
or the transfer agents and registrars for the stock may, in their discretion,
require the owner of the lost, stolen or destroyed certificate, or such person's
legal representative, to give the Corporation a bond in such sum and with such
surety or sureties as they may direct to indemnify the Corporation and said
transfer agents and registrars against any claim that may be made on account of
the alleged loss, theft or destruction of any such certificate or the issuance
of such new certificate.
SECTION 5. Regulations. The Board of Directors may make such
additional rules and regulations as it may deem expedient concerning the issue
and transfer of certificates representing shares of stock of each class of the
Corporation and may make such rules and take such action as it may deem
expedient concerning the issue of certificates in lieu of certificates claimed
to have been lost, destroyed, stolen or mutilated.
SECTION 6. Fixing Date for Determination of Stockholders of Record. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournments thereof, or
entitled to receive payment of any dividend or other distribution or allotment
or any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than 60 nor less than 10 days before the date of such meeting, nor more
than 60 days prior to any other action. A determination of stockholders entitled
to notice of or to vote at a meeting of the stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
ARTICLE VI
SEAL
The corporate seal shall have the name of the Corporation inscribed
thereon and shall be in such form as may be approved from time to time by the
Board of Directors. Unless otherwise provided in these Bylaws or by law, it
shall
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not be mandatory that the corporate seal or its facsimile be impressed or
affixed on any document executed an behalf of the Corporation.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall be determined by resolution of
the Board of Directors.
ARTICLE VIII
WAIVER OF NOTICE
Whenever any notice whatsoever is required to be given by these Bylaws,
by the Certificate of Incorporation of the Corporation or by law, the person
entitled thereto may, either before or after the meeting or other matter in
respect of which such notice is to be given, waive such notice in writing, which
writing shall be filed with or entered upon the records of the meeting or the
records kept with respect to such other matter, as the case may be, and in such
event such notice need not be given to such person and such waiver shall be
deemed equivalent to such notice.
ARTICLE IX
AMENDMENTS
The power to amend or repeal these Bylaws or to adopt new Bylaws is
vested in the Board of Directors; provided that any proposed amendment or repeal
of Article X hereof must be approved by a majority of the directors who are not
employees of the Corporation and in each case subject to the right of the
stockholders to amend or repeal these Bylaws by the affirmative vote of the
holders of a majority of the shares entitled to vote in the election of
directors.
ARTICLE X
AFFILIATED TRANSACTIONS
SECTION 1. Validity. Except as may be otherwise provided for in the
Certificate of Incorporation of the Corporation and except as otherwise provided
in this Bylaw, if Section 2 is satisfied, no contract or transaction between the
Corporation and any of its directors, officers or security holders, or any
corporation, partnership, association or other organization in which any of such
directors, officers or security holders are directly or indirectly financially
interested, shall be void or voidable solely because of this relationship, or
solely because of the presence of the director, officer or security holder at
the meeting authorizing the contract or transaction, or solely because of his or
their participation in the authorization of such contract or transaction or vote
at the meeting therefor, whether or not such participation or vote was necessary
for the authorization of such contract or transaction.
SECTION 2. Disclosure, Approval; Fairness. Section 1 shall apply if:
(a) The material facts as to the relationship or interest and as
to the contract or transaction are disclosed or are known:
(i) to the Board of Directors (or committee thereof) and it
nevertheless in good faith authorizes or ratifies the
contract or transaction by a majority of the directors
present, each such interested director to be counted in
determining whether a quorum is present but not in
calculating the majority necessary to carry the vote; or
(ii) to the stockholders and they nevertheless authorize or
ratify the contract or transaction by a majority of the
shares present at a meeting considering such contract or
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transaction, each such interested person (stockholder) to be
counted in determining whether a quorum is present and for
voting purposes; or
(b) The contract or transaction is fair to the Corporation as of
the time it is authorized or ratified by the Board of Directors (or committee
thereof) or the stockholders.
SECTION 3. Nonexclusive. This provision shall not be construed to
invalidate a contract or transaction that would be valid in the absence of this
provision.
ARTICLE XI
MISCELLANEOUS
SECTION 1. Execution of Documents. The Board of Directors shall
designate the officers, employees and agents of the Corporation who shall have
power to execute and deliver deeds, contracts, mortgages, bonds, debentures,
checks, drafts and other orders for the payment of money and other documents for
and in the name of the Corporation and may authorize such officers, employees
and agents to delegate such power (including authority to redelegate) by written
instrument to other officers, employees or agents of the Corporation. Such
delegation may be by resolution or otherwise and the authority granted shall be
general or confined to specific matters, all as the Board of Directors may
determine. In the absence of such designation referred to in the first sentence
of this Section 1, the officers of the Corporation shall have such power so
referred to incident to the normal performance of their duties.
SECTION 2. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
or otherwise as the Board of Directors or any officer of the Corporation to whom
power in that respect shall have been delegated by the Board of Directors shall
select.
SECTION 3. Checks. All checks, drafts and other orders for the payment
of money out of the funds of the Corporation, and all notes or other evidences
of indebtedness of the Corporation, shall be signed on behalf of the Corporation
in such manner as shall from time to time be determined by resolution of the
Board of Directors or of any committee thereof empowered to authorize the same.
SECTION 4. Proxies in Respect of Stock or Other Securities of Other
Corporations. The Board of Directors shall designate the officers of the
Corporation who shall have authority from time to time to appoint an agent or
agents of the Corporation to exercise in the name and on behalf of the
Corporation the powers and rights that the Corporation may have as the holder of
stock or other securities in any other corporation, and to vote or consent in
respect of such stock or securities; such designated officers may instruct the
person or persons so appointed as to the manner of exercising such powers and
rights; and such designated officers may execute or cause to be executed in the
name and on behalf of the Corporation and under its corporate seal, or
otherwise, such written proxies, powers of attorney or other instruments as they
may deem necessary or proper in order that the Corporation may exercise its said
powers and rights.
9
<PAGE> 1
EXHIBIT 4.1
CERTIFICATE OF DESIGNATIONS
OF THE
SERIES A CUMULATIVE PREFERRED STOCK
OF
HALLWOOD ENERGY CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
HALLWOOD ENERGY CORPORATION, a Delaware corporation (the
"Corporation"), HEREBY CERTIFIES that resolutions were duly adopted by the Board
of Directors of the Corporation in accordance with Section 151(g) of the General
Corporation Law of the State of Delaware pursuant to the authority conferred
upon the Board of Directors of the Corporation by the provisions of the
Certificate of Incorporation of the Corporation, as follows:
RESOLVED, that a series of the Corporation's Preferred Stock, par value
$0.01 per share ("Preferred Stock"), designated as Series A Cumulative Preferred
Stock be and hereby is created and that the designation and number of shares
thereof and the powers, preferences and rights thereof are as follows:
SERIES A CUMULATIVE PREFERRED STOCK
1. Designation and Amount; No Fractional Shares. There shall be a series of
Preferred Stock designated as "Series A Cumulative Preferred Stock" (the "Series
A Preferred Stock") and the authorized number of shares constituting such series
shall be 2,750,000. The Series A Preferred Stock is issuable in whole shares
only.
2. Dividends.
(a) Holders of shares of Series A Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors, or a duly
authorized committee thereof, out of funds of the Corporation legally available
for payment of dividends, cumulative cash dividends equal to $1.00 per annum per
share of Series A Preferred Stock. Dividends on the Series A Preferred Stock
shall be payable quarterly in arrears to holders of record as they appear in the
records of the Corporation at the close of business on each of March 31, June
30, September 30 and December 31 of each year, commencing March 31, 1999 and
shall be paid 45 days after that date (each a "Dividend Payment Date"). If any
date on which dividends would otherwise be payable is a Saturday, Sunday or a
day on which banking institutions in the States of Colorado or New York are
authorized or obligated by law or executive order to close, then the dividends
otherwise payable on such date shall instead be payable on the next succeeding
business day.
(b) Dividends on shares of the Series A Preferred Stock shall be fully
cumulative and shall accumulate (whether or not earned or declared and whether
or not the Corporation has funds legally available for the payment of
dividends), on a daily basis, without interest, from the previous Dividend
Payment Date, except that the first dividend shall accrue, without interest
commencing March 31, 1999. Accumulated and unpaid dividends shall not bear
interest. Any dividend payable on shares of the Series A Preferred Stock for any
dividend period that is shorter or longer than a full quarterly period shall be
computed on the basis of a 360-day year consisting of twelve 30-day months.
(c) No dividends may be declared or paid or set apart for payment on any
stock of the Corporation ranking on a parity with the Series A Preferred Stock
with respect to the payment of dividends unless there shall also be or have been
declared and paid or set apart for payment on the Series A Preferred Stock
dividends for all dividend payment periods of the Series A Preferred Stock
ending on or before the dividend payment date of such parity stock, ratably in
proportion to the respective amounts of dividends (x) accumulated and unpaid or
payable on such parity stock, on the one hand, and (y) accumulated and unpaid
through the dividend payment period or periods of the Series A Preferred Stock
next preceding such dividend payment date, on the other hand.
<PAGE> 2
(d) A Preferred Stock have been paid through the most recently completed
quarterly dividend period for the Series A Preferred Stock, no dividends (other
than in common stock, par value $.01 per share (the "Common Stock"), of the
Corporation) may be paid or declared and set apart for payment or other
distribution made upon the Common Stock or on any other stock of the Corporation
ranking junior to or on a parity with the Series A Preferred Stock as to
dividends, nor may any Common Stock or any other stock of the Corporation
ranking junior to or on a parity with the Series A Preferred Stock as to
dividends be redeemed, purchased or otherwise acquired for any consideration (or
any payment be made to or available for a sinking fund for the redemption of any
shares of such stock; provided, however, that any moneys previously deposited in
any sinking fund with respect to any such stock in compliance with the
provisions of such sinking fund may thereafter be applied to the purchase or
redemption of such stock in accordance with the terms of such sinking fund,
regardless of whether at the time of such application full cumulative dividends
upon shares of the Series A Preferred Stock outstanding to the most recent
Dividend Payment Date shall have been paid or declared and set apart for
payment) by the Corporation; provided that any such junior or parity stock or
Common Stock may be converted into or exchanged for stock of the Corporation
ranking junior to the Series A Preferred Stock as to dividends.
3. Liquidation.
(a) On any liquidation, dissolution or winding up of the Corporation, the
shares of Series A Preferred Stock shall be entitled to receive payment of all
dividends (whether or not earned or declared) accrued and accumulated and unpaid
on the shares of Series A Preferred Stock to the date of payment, before any
distribution of assets is made to holders of shares of Common Stock or any other
class or series of stock of the Corporation that ranks junior to the Series A
Preferred Stock as to rights to distributions upon liquidation, dissolution or
winding up. The holders of the Series A Preferred Stock shall not be entitled to
receive the preferential amounts until the liquidation preference of any other
stock of the Corporation ranking senior to the Series A Preferred Stock as to
rights to distributions upon liquidation, dissolution or winding up shall have
been paid (or a sum set aside therefor sufficient to provide for payment) in
full.
(b) On any liquidation, dissolution or winding up of the Corporation, no
amounts may be paid or set apart for payment on any stock of the Corporation
ranking on a parity with the Series A Preferred Stock as to rights to
distributions upon liquidation, dissolution or winding up unless there shall
also be or have been set aside for payment on the Series A Preferred Stock an
amount equal to all dividends (whether or not earned or declared) accrued and
accumulated and unpaid on the shares of Series A Preferred Stock to the date of
payment, ratably in proportion to the respective amounts (x) to be paid or set
apart for payment on such parity stock, on the one hand, and (y) to be paid or
set apart for payment on the Series A Preferred Stock, on the other hand.
(c) After these payments have been made with respect to the Series A
Preferred Stock, each share of Series A Preferred Stock shall rank, as to rights
to distributions on liquidation, dissolution or winding up of the Corporation,
on a parity with one share of Common Stock, so that in the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Series A Preferred Stock shall be entitled to
participate with the holders of the Common Stock in the distribution of the
assets of the Corporation legally available for distribution to its
stockholders.
(d) If, upon any liquidation, dissolution or winding up of the Corporation,
the assets of the Corporation, or proceeds thereof, distributable among the
holders of shares of Series A Preferred Stock and any stock ranking on a parity
with the Series A Preferred Stock as to rights to distributions on liquidation,
dissolution or winding up of the Corporation are insufficient to pay in full the
payments to which such stock would be entitled, then such assets, or the
proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full.
(e) For the purposes hereof, neither a consolidation nor a merger of the
Corporation with or into any other corporation, nor a merger of any one or more
other corporations with or into the Corporation, nor a sale, lease, exchange or
transfer of all or substantially all of the Corporation's assets shall be
considered a liquidation, dissolution or winding up of the Corporation.
4. Conversion. The Series A Preferred Stock is not convertible into, or
exchangeable for, other securities or property.
2
<PAGE> 3
5. Voting Rights. The Series A Preferred Stock shall vote together with the
Common Stock in the election of directors and, on all other matters brought to a
vote of the stockholders, shall vote as a separate class.
6. Redemption.
(a) The shares of Series A Preferred Stock shall not be redeemable prior to
December 31, 2003. On or after such date the Corporation, at its option, may
redeem the shares of Series A Preferred Stock, in whole or in part, out of funds
legally available therefor, at any time or from time to time, subject to the
notice provisions and provisions for partial redemption described below, at a
redemption price per share of $10.00 plus, in each case, an amount equal to all
dividends (whether or not earned or declared) accrued and accumulated and unpaid
to the date fixed for redemption, without interest (the "Redemption Price").
(b) If full cumulative dividends on the Series A Preferred Stock have not
been paid or set apart for payment with respect to all prior dividend periods,
the Series A Preferred Stock may not be redeemed in part and the Corporation may
not purchase or acquire any shares of the Series A Preferred Stock otherwise
than pursuant to a purchase or exchange offer made on the same terms to all
holders of the Series A Preferred Stock. If fewer than all the outstanding
shares of Series A Preferred Stock are to be redeemed, the number of shares to
be redeemed shall be determined by the Board of Directors and the shares to be
redeemed shall be selected by lot or pro rata or by any other means determined
by the Board of Directors in its sole discretion to be equitable.
(c) If the Corporation redeems shares of Series A Preferred Stock, written
notice of the redemption shall be given by first class mail, postage prepaid,
mailed not less than 30 days nor more than 60 days prior to the redemption date,
to each holder of record of the shares to be redeemed at the holder's address as
the same appears on the stock books of the Corporation and notice shall also be
given by publication during the same period prior to the redemption date in a
newspaper of general circulation in the Borough of Manhattan, the City of New
York; provided, however, that no failure to give such notice nor any defect
therein shall affect the validity of the proceedings for the redemption of any
shares of Series A Preferred Stock to be redeemed except as to a holder to whom
the Corporation has failed to mail the notice or except as to a holder whose
notice was defective. Each notice shall state: (i) the redemption date; (ii) the
number of shares of Series A Preferred Stock to be redeemed and, if less than
all the shares held by such holder are to be redeemed from the holder, the
number of shares to be redeemed from the holder; (iii) the redemption price and
any accumulated and unpaid dividends to the redemption date; (iv) the place or
places where certificates for shares are to be surrendered for payment of the
redemption price; and (v) that dividends on the shares to be redeemed will cease
to accrue on such redemption date (unless the Corporation shall default in
providing funds for the payment of the redemption price of the shares called for
redemption at the time and place specified in such notice).
(d) If a notice of redemption has been given pursuant to this Paragraph 6 and
if, on or before the date fixed for redemption, the funds necessary for
redemption have been set aside by the Corporation, separate and apart from its
other funds, in trust for the pro rata benefit of the holders of the shares of
Series A Preferred Stock called for redemption, then, notwithstanding that any
certificates for such shares have not been surrendered for cancellation, on the
redemption date dividends shall cease to accrue on the shares to be redeemed,
and at the close of business on the redemption date the holders of those shares
shall cease to be stockholders with respect to those shares and shall have no
interest in or claims against the Corporation by virtue thereof and shall have
no voting or other rights with respect to those shares, except the right to
receive the moneys payable upon surrender (and endorsement, if required by the
Corporation) of their certificates, and the shares evidenced thereby shall no
longer be outstanding. The Corporation's obligation to provide funds for the
payment of the redemption price (and any accumulated and unpaid dividends to the
redemption date) of the shares called for redemption shall be deemed fulfilled
if, on or before a redemption date, the Corporation shall deposit, with a bank
or trust company, or an affiliate of a bank or trust company, having an office
or agency in the City of New York and having a capital and surplus of at least
$50,000,000, such funds sufficient to pay the redemption price (and any
accumulated and unpaid dividends to the redemption date) of the shares called
for redemption, in trust for the account of the holders of the shares to be
redeemed (and so as to be and continue to be available therefor), with
irrevocable instructions and authority to such bank or trust company that such
funds be delivered upon redemption of the shares of Series A Preferred Stock
called for redemption.
(e) Subject to applicable escheat laws, any moneys so set aside by the
Corporation and unclaimed at the end of two years from the redemption date shall
revert to the general funds of the Corporation, after which the holders of the
shares called for redemption shall look only to the general funds of the
Corporation for the payment of the amounts payable upon redemption. Any interest
accrued on funds deposited shall be paid to the Corporation from time to time.
3
<PAGE> 4
(f) Shares of Series A Preferred Stock that have been issued and reacquired
in any manner, including shares purchased or redeemed, shall (upon compliance
with any applicable provisions of the laws of the State of Delaware) have the
status of authorized and unissued shares of the class of preferred stock
undesignated as to series and may be redesignated and reissued as part of any
series of the preferred stock.
7. Amendment of Resolution. The Board of Directors reserves the right from time
to time to increase or decrease the number of shares that constitute the Series
A Preferred Stock (but not below the number of shares thereof then outstanding)
and in other respects to amend this Certificate of Designations within the
limitations provided by law, this resolution and the Certificate of
Incorporation.
8. Rank. Any stock of any class or classes or series of the Corporation shall be
deemed to rank:
(a) prior to shares of the Series A Preferred Stock, either as to dividends
or upon liquidation, dissolution or winding up, or both, if the holders of stock
of the class or classes or series are entitled by the terms thereof to the
receipt of dividends or of amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in preference or priority to the holders of
shares of the Series A Preferred Stock;
(b) on a parity with shares of the Series A Preferred Stock, either as to
dividends or upon liquidation, dissolution or winding up, or both, whether or
not the dividend rates, dividend payment dates, or redemption or liquidation
prices per share thereof are different from those of the Series A Preferred
Stock, if the holders of stock of the class or classes or series are entitled by
the terms thereof to the receipt of dividends or of amounts distributed upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or liquidation prices, without preference or
priority of one over the other as between the holders of the stock and the
holders of shares of Series A Preferred Stock; and
(c) junior to shares of the Series A Preferred Stock, either as to dividends
or upon liquidation, dissolution or winding up, or both, if the class or classes
or series is Common Stock or if the holders of the Series A Preferred Stock are
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of stock of such class or classes or series.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed on its behalf by the undersigned ________ __, 1998.
HALLWOOD ENERGY CORPORATION
By:
----------------------------------
Name:
-------------------------------
Title:
------------------------------
4
<PAGE> 1
EXHIBIT 5.1
April 29, 1999
Hallwood Energy Corporation
3710 Rawlins, Suite 1500
Dallas, Texas 75219
Re: Hallwood Energy Corporation Common Stock
Gentlemen:
We have acted as counsel to Hallwood Energy Corporation (the
"Company"), a Delaware corporation, in connection with the registration of
10,000,000 shares of common stock, par value $0.01 per share, of the Company
(the "Common Stock") and 2,290,370 shares of Series A Cumulative Preferred
Stock, par value $0.01 per share, of the Company (the "Preferred Stock")
pursuant to a Registration Statement on Form S-4 (the "Registration Statement"),
originally filed with the Securities and Exchange Commission under the
Securities Act of 1933 on December 31, 1998.
In connection therewith, we have examined and relied upon the original,
or copies, certified to our satisfaction, of (i) Certificate of Incorporation,
including the Certificate of Designations for the Preferred Stock (the
"Certificate") of the Company; (ii) minutes and records of the corporate
proceedings of the Company with respect to the issuance of the Common Stock,
Preferred Stock and related matters; (iii) the Registration Statement and
exhibits thereto; and (iv) such other documents and instruments as we have
deemed necessary for the expression of opinions herein contained. In making the
foregoing examinations, we have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals, and the
conformity to original documents of all documents submitted to us as certified
or photostatic copies. As to various questions of fact material to this opinion
and as to the content and form of the Certificate, minutes, records, resolutions
and other documents or writings of the Company, we have relied, to the extent we
deem reasonably appropriate, upon representations or certificates of officers or
directors of the Company and upon documents, records and instruments furnished
to us by the Company, without independent check or verification of their
accuracy.
Based upon the foregoing examination, we are of the opinion that the
Common Stock and the Preferred Stock to be issued as described in the
Registration Statement, has been duly authorized for issuance and upon issuance,
the Common Stock and the Preferred Stock will be validly issued, fully paid and
non-assessable.
<PAGE> 2
Hallwood Energy Corporation
April 29, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name as it appears under the
caption "Legal Matters" in the Joint Proxy Statement/Prospectus forming a part
of the Registration Statement. In giving such consent, we do not admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, and the rules and regulations of the
Securities and Exchange Commission issued thereunder.
Sincerely,
JENKENS & GILCHRIST,
a Professional Corporation
By: /s/ W. ALAN KAILER
------------------------------
W. Alan Kailer, for the Firm
<PAGE> 1
EXHIBIT 8.1
[Letterhead of PriceWaterhouseCoopers LLP]
April 29, 1999
Hallwood Energy Corporation
Hallwood Energy Partners, L. P.
Hallwood Consolidated Resources Corporation
HEPGP Ltd.
4582 S. Ulster Street Parkway, Suite 1700
Denver, Colorado 80237
RE: PROPOSED MERGERS
Ladies and Gentlemen:
Hallwood Energy Corporation, a Delaware corporation ("Company"), filed
a Registration Statement on or about April 29, 1999 (the "Registration
Statement") with the Securities Exchange Commission (the "Commission") on Form
S-4 under the Securities Act of 1933) as amended (the "Securities Act"). Except
as otherwise indicated, all terms used herein shall have the meaning assigned
to them in the Registration Statement. The Company filed the Registration
Statement in connection with the consolidation (as defined in the Registration
Statement) pursuant to (i) the merger of HEC Acquisition Partnership with and
into Hallwood Energy Partners and (ii) the merger of HCRC Acquisition Corp.
with and into Hallwood Consolidated Resources Corporation (collectively the
"Mergers").
You have asked for the opinion (the "Opinion") of
PricewaterhouseCoopers LLP (the "Firm") regarding the material federal income
tax consequences of each of the Mergers. The Firm's opinion is based upon the
facts set forth in the Registration Statement and certain additional facts and
assumptions. You have certified the accuracy and completeness of these facts
(or, in the case of the HEP and HCRC, certain portions thereof) in the
certificates attached hereto as Exhibit A and Exhibit B (the "Certificates").
The Firm has relied upon the Certificates in rendering its opinion. Section I
of this letter (the "Opinion Letter") contains the Opinion and Section 11
contains limitations on the Opinion.
I. OPINION
We have reviewed all authorities as of the date hereof relevant to the
material federal income tax consequences of the Mergers to the Company, Hallwood
Energy Partners, Hallwood Consolidated Resources Corporation, the Unitholders
and the Stockholders. Based upon our analysis of those authorities and the facts
and assumptions set forth in the Registration Statement and the Certificates, it
is the Firm's opinion that the discussion in the Prospectus under the heading
"Material Federal Income Tax Consequences" accurately sets forth the material
United States federal income tax considerations of general application to the
Unitholders and Stockholders associated with the Mergers.
II. LIMITATIONS
1. Except as otherwise indicated, the opinion set forth in Section I is
based upon the, Code and its legislative history, the regulations promulgated
thereunder, judicial decisions and current administrative rulings and practices
of the IRS, all as in effect on the date of this Opinion Letter. These
authorities may be amended or revoked at any time. Any such changes may or may
not be retroactive with respect to transactions entered into or contemplated
prior to the effective date thereof and could significantly alter the Opinion.
There is no assurance that legislative, judicial or administrative changes will
not occur in the future. The Firm assumes no obligation to update or modify this
Opinion Letter to reflect any developments that occur after the date of this
Opinion Letter.
2. The Opinion is not binding on the IRS or the courts and is dependent
upon the accuracy and completeness of the facts set forth in the Registration
Statement and the facts and assumptions set forth in the Certificates. The Firm
has relied upon these facts and assumptions, and any inaccuracy or
incompleteness in the Firm's understanding of those facts or assumptions could
adversely affect the Opinion.
<PAGE> 2
Hallwood Energy Corporation
April 29, 1999
Page 2
3. In connection with the Opinion, the Firm examined copies or
originals, certified or otherwise identified, of such documents and records as
it has deemed necessary or advisable for purposes of the Opinion, including:
(a) The Registration Statement.
(b) The Merger and Asset Contribution Agreement.
The Firm has assumed that all signatures on all documents presented to it are
genuine, that all documents submitted to it as originals are accurate originals
thereof, that all information submitted to it was accurate and complete, and
that all persons executing and delivering originals or copies of documents
examined by it were competent to execute and deliver such documents.
4. The Firm is expressing its opinion only as to the matters expressly
set forth in Section I. No opinion should be inferred as to any other matters.
5. This Opinion Letter is issued solely for the benefit of the Company,
Hallwood Energy Partners, Hallwood Consolidated Resources Corporation, the
Unitholders and the Stockholders. No other person or entity may rely hereon
without the express written consent of the Firm.
This opinion may be filed as an exhibit to the Registration Statement.
Consent is also given the reference to the Firm under the caption "Experts" in
the Prospectus as having rendered the opinion in the "Material Federal Income
Tax Consequences" section of such Prospectus. The Firm does not admit by giving
this consent that it comes into the category of persons whose consent is
required under section 7 of the Securities Act or the rules and regulations of
the Commission promulgated thereunder.
Respectfully submitted,
PricewaterhouseCoopers LLP
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
<PAGE> 1
EXHIBIT 10.1
----------------------------
HALLWOOD ENERGY CORPORATION
AND
REGISTRAR AND TRANSFER COMPANY , AS RIGHTS AGENT
----------------------------
RIGHTS AGREEMENT
DATED AS OF __________ __, 1999
----------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Certain Definitions.....................................................................................1
Section 2. Appointment of Rights Agent..................................................4
Section 3. Issue of Right Certificates..................................................4
Section 4. Form of Right Certificates...................................................5
Section 5. Countersignature and Registration............................................5
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates......................5
Section 7. Exercise of Rights, Purchase Price; Expiration Date of Rights................6
Section 8. Cancellation and Destruction of Right Certificates...........................7
Section 9. Availability of Shares of Preferred Stock....................................7
Section 10. Preferred Stock Record Date..................................................8
Section 11. Adjustment of Purchase Price; Number and Kind of Shares and Number of
Rights.......................................................................8
Section 12. Certificate of Adjusted Purchase Price or Number of Shares..................13
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power........13
Section 14. Fractional Rights and Fractional Shares.....................................15
Section 15. Rights of Action............................................................16
Section 16. Agreement of Right Holders..................................................16
Section 17. Right Certificate Holder Not Deemed a Stockholder...........................16
Section 18. Concerning the Rights Agent.................................................16
Section 19. Merger or Consolidation or Change of Name of Rights Agent...................17
Section 20. Duties of Rights Agent......................................................17
Section 21. Change of Rights Agent......................................................18
Section 22. Issuance of New Right Certificates..........................................19
Section 23. Redemption..................................................................19
Section 24. Exchange....................................................................19
Section 25. Notice of Certain Events....................................................20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 26. Notices.....................................................................20
Section 27. Supplements and Amendments..................................................21
Section 28. Successors..................................................................21
Section 29. Benefits of this Agreement..................................................21
Section 30. Determinations and Actions by the Board of Directors........................21
Section 31. Severability................................................................21
Section 32. Governing Law...............................................................22
Section 33. Counterparts................................................................22
Section 34. Descriptive Headings........................................................22
</TABLE>
ii
<PAGE> 4
RIGHTS AGREEMENT
Rights Agreement, dated as of __________ __, 1999 ("Agreement"),
between Hallwood Energy Corporation, a Delaware corporation (the "Company"), and
Registrar and Transfer Company, a __________ corporation, as Rights Agent (the
"Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each share of
Common Stock (as hereinafter defined) of the Company outstanding as of the Close
of Business (as defined below) on ______________________ ____, 1999 (the "Record
Date"), each Right representing the right to purchase one one-thousandth
(subject to adjustment) of a share of Preferred Stock (as hereinafter defined),
upon the terms and subject to the conditions herein set forth, and has further
authorized and directed the issuance of one Right (subject to adjustment as
provided herein) with respect to each share of Common Stock that shall become
outstanding between the Record Date and the earlier of the Distribution Date and
the Expiration Date (as such terms are hereinafter defined); provided, however,
that Rights may be issued with respect to shares of Common Stock that shall
become outstanding after the Distribution Date and prior to the Expiration Date
in accordance with SECTION 22.
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meaning indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which shall be the Beneficial Owner (as such term is
hereinafter defined) of 15% or more of the shares of Common Stock then
outstanding, but shall not include (i) an Exempt Person (as such term is
hereinafter defined) or (ii) any such Person who has reported or is required to
report such ownership (but less than 25%) on Schedule 13G under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (or any comparable or
successor report) or on Schedule 13D under the Exchange Act (or any comparable
or successor report), which Schedule 13D (including an amendment to Schedule
13D) does not state any intention to or reserve the right to control or
influence the management or policies of the Company or engage in any of the
actions specified in Item 4 of such Schedule 13D (other than the disposition of
the Common Stock) and, within 10 Business Days (as such term is hereinafter
defined) of being requested by the Company to advise it regarding the same,
certifies to the Company that such Person acquired shares of Common Stock in
excess of 14.99% inadvertently or without knowledge of the effect of the terms
of the Rights and who, together with all Affiliates and Associates, thereafter
does not acquire additional shares of Common Stock while the Beneficial Owner of
15% or more of the shares of Common Stock then outstanding; provided, however,
that (A) if the Person requested to so certify fails to do so within 10 Business
Days or (B) if such Person thereafter becomes obligated to file a Schedule 13D
(including an amendment to a Schedule 13D) that would state any intention to or
reserve the right to control or influence the management or policies of the
Company or engage in any of the actions specified in Item 4 of such Schedule 13D
(other than the disposition of the Common Stock), then such Person shall become
an Acquiring Person immediately thereafter. Notwithstanding the foregoing, (x)
if, as of the date hereof, any Person is the Beneficial Owner of 15% or more of
the shares of Common Stock outstanding, such Person shall not be or become an
"Acquiring Person" unless and until such time as such Person shall become the
Beneficial Owner of an additional 1% of the shares of Common Stock (other than
pursuant to a dividend or distribution paid or made by the Company on the
outstanding Common Stock in shares of Common Stock or pursuant to a split or
subdivision of the outstanding Common Stock), unless, upon becoming the
Beneficial Owner of such additional shares of Common Stock, either such Person
is not then the Beneficial Owner of 15% or more of the shares of Common Stock
then outstanding or such Person is exempted from the definition of "Acquiring
Person" pursuant to SECTION 1(a)(ii) hereof and (y) no Person shall become an
"Acquiring Person" as the result of an acquisition of shares of Common Stock by
the Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares of Common Stock beneficially owned by such Person
to 15% or more of the shares of Common Stock then outstanding; provided,
however, that if a Person shall become the Beneficial Owner of 15% or more of
the shares of Common Stock then outstanding by reason of such share acquisitions
by the Company and shall thereafter become the Beneficial Owner of any
additional shares of Common Stock (other than pursuant to a dividend or
distribution paid or made by the Company on the outstanding Common Stock in
shares of Common Stock or pursuant to a split or subdivision of the outstanding
Common Stock), then such Person shall be deemed to be an "Acquiring Person"
unless, upon becoming the Beneficial Owner of such additional shares of Common
Stock, either such Person is not then the Beneficial Owner of 15% or more of the
shares of
<PAGE> 5
Common Stock then outstanding or such Person is exempted from the definition of
"Acquiring Person" pursuant to SECTION 1(a)(ii) hereof. For all purposes of this
Agreement, any calculation of the number of shares of Common Stock outstanding
at any particular time, including for purposes of determining the particular
percentage of such outstanding shares of Common Stock of which any Person is the
Beneficial Owner, shall be made in accordance with the last sentence of Rule
13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act as in
effect on the date hereof.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on the date hereof.
(c) A Person shall be deemed the "Beneficial Owner" of, shall be deemed
to have "Beneficial Ownership" of and shall be deemed to "beneficially own" any
securities:
(i) which such Person or any of such Person's Affiliates or
Associates is deemed to beneficially own, directly or indirectly, within the
meaning of Rule 13d-3 of the General Rules and Regulations under the Exchange
Act as in effect on the date hereof;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights, warrants or options, or otherwise; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially own, (x)
securities tendered pursuant to a tender or exchange offer made by or on behalf
of such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase, (y) securities which such Person
has a right to acquire upon the exercise of Rights at any time prior to the time
that any Person becomes an Acquiring Person or (z) securities issuable upon the
exercise of Rights from and after the time that any Person becomes an Acquiring
Person if such Rights were acquired by such Person or any of such Person's
Affiliates or Associates prior to the Distribution Date or pursuant to SECTION
3(A) or SECTION 22 hereof ("Original Rights") or pursuant to SECTION 11(I) or
SECTION 11(N) with respect to an adjustment to Original Rights; or (B) the right
to vote pursuant to any agreement, arrangement or understanding; provided,
however, that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, any security by reason of such agreement, arrangement or
understanding if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations promulgated under
the Exchange Act and (2) is not also then reportable on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person and with respect to which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or understanding (other
than customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except to the extent contemplated by the
proviso to SECTION 1(C)(II)(B)) or disposing of such securities of the Company;
provided, however, that no Person who is an officer, director or employee of an
Exempt Person shall be deemed, solely by reason of such Person's status or
authority as such, to be the "Beneficial Owner" of, to have "Beneficial
Ownership" of or to "beneficially own" any securities that are "beneficially
owned" (as defined in this SECTION 1(C)), including, without limitation, in a
fiduciary capacity, by an Exempt Person or by any other such officer, director
or employee of an Exempt Person.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday
or a day on which banking institutions in the State of New York, or the city in
which the principal office of the Rights Agent is located, are authorized or
obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 p.m., Dallas,
Texas time, on such date; provided, however, that if such date is not a Business
Day it shall mean 5:00 p.m., Dallas, Texas time, on the next succeeding Business
Day.
(f) "Common Stock" when used with reference to the Company shall mean
the Common Stock, presently par value $.02 per share, of the Company. "Common
Stock" when used with reference to any Person other than the Company shall mean
the common stock (or, in the case of an unincorporated entity, the equivalent
equity interest) with the
2
<PAGE> 6
greatest voting power of such other Person or, if such other Person is a
subsidiary of another Person, the Person or Persons which ultimately control
such first-mentioned Person.
(g) "Common Stock Equivalents" shall have the meaning set forth in
SECTION 11(A)(III) hereof.
(h) "Current Value" shall have the meaning set forth in SECTION
11(A)(III) hereof.
(i) "Distribution Date" shall have the meaning set forth in SECTION 3
hereof.
(j) "Equivalent Preferred Shares" shall have the meaning set forth in
SECTION 11(B) hereof.
(k) "Exempt Person" shall mean the Company or any Subsidiary (as such
term is hereinafter defined) of the Company, in each case including, without
limitation, in its fiduciary capacity, or any employee benefit plan of the
Company or of any Subsidiary of the Company, or any entity or trustee holding
Common Stock for or pursuant to the terms of any such plan or for the purpose of
funding any such plan or funding other employee benefits for employees of the
Company or of any Subsidiary of the Company.
(l) "Exchange Ratio" shall have the meaning set forth in SECTION 24
hereof.
(m) "Expiration Date" shall have the meaning set forth in SECTION 7
hereof.
(n) "Flip-In Event" shall have the meaning set forth in SECTION
11(A)(II) hereof.
(o) "Final Expiration Date" shall have the meaning set forth in SECTION
7 hereof.
(p) "NASDAQ" shall mean The Nasdaq National Market.
(q) "New York Stock Exchange" shall mean the New York Stock Exchange,
Inc.
(r) "Person" shall mean any individual, firm, corporation, partnership,
limited liability company, trust or other entity, and shall include any
successor (by merger or otherwise) to such entity.
(s) "Preferred Stock" shall mean the Series A Junior Participating
Preferred Stock, par value $.10 per share, of the Company having the rights and
preferences set forth in the Form of Certificate of Designation attached to this
Agreement as EXHIBIT A.
(t) "Principal Party" shall have the meaning set forth in SECTION 13(B)
hereof.
(u) "Redemption Date" shall have the meaning set forth in SECTION 7
hereof.
(v) "Redemption Price" shall have the meaning set forth in SECTION 3
hereof.
(w) "Right Certificate" shall have the meaning set forth in SECTION 3
hereof.
(x) "Securities Act" shall mean the Securities Act of 1933, as amended.
(y) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth
in SECTION 11(a)(iii) hereof.
(z) "Spread" shall have the meaning set forth in SECTION 11(A)(III)
hereof.
(aa) "Stock Acquisition Date" shall mean the first date of public
announcement (which for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the
Company or an Acquiring Person that an Acquiring Person has become such, or such
earlier date as a majority of the Board of Directors shall become aware of the
existence of an Acquiring Person.
3
<PAGE> 7
(bb) "Subsidiary" of any Person shall mean any corporation or other
entity of which securities or other ownership interests having ordinary voting
power sufficient to elect a majority of the board of directors or other persons
performing similar functions are beneficially owned, directly or indirectly, by
such Person, and any corporation or other entity that is otherwise controlled by
such Person.
(cc) "Substitution Period" shall have the meaning set forth in SECTION
11(a)(iii) hereof.
(dd) "Summary of Rights" shall have the meaning set forth in SECTION 3
hereof.
(ee) "Trading Day" shall have the meaning set forth in SECTION 11(d)(i)
hereof.
SECTION 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co- Rights Agents as it may deem
necessary or desirable.
SECTION 3. ISSUE OF RIGHT CERTIFICATES.
(a) Until the Close of Business on the earlier of (i) the tenth day
after the Stock Acquisition Date or (ii) the tenth Business Day (or such later
date as may be determined by action of the Board of Directors prior to such time
as any Person becomes an Acquiring Person) after the date of the commencement by
any Person (other than an Exempt Person) of, or of the first public announcement
of the intention of such Person (other than an Exempt Person) to commence, a
tender or exchange offer the consummation of which would result in any Person
(other than an Exempt Person) becoming the Beneficial Owner of shares of Common
Stock aggregating 15% or more of the Common Stock then outstanding (the earlier
of such dates being herein referred to as the "Distribution Date"; provided,
however, that if either of such dates occurs after the date of this Agreement
and on or prior to the Record Date, then the Distribution Date shall be the
Record Date), (x) the Rights will be evidenced (subject to the provisions of
SECTION 3(B) hereof) by the certificates for Common Stock registered in the
names of the holders thereof and not by separate Right Certificates, and (y) the
Rights will be transferable only in connection with the transfer of Common
Stock. As soon as practicable after the Distribution Date, the Company will
prepare and execute, the Rights Agent will countersign and the Company will send
or cause to be sent (and the Rights Agent will, if requested, send) by
first-class, insured, postage-prepaid mail, to each record holder of Common
Stock as of the close of business on the Distribution Date (other than any
Acquiring Person or any Associate or Affiliate of an Acquiring Person), at the
address of such holder shown on the records of the Company, a Right Certificate,
in substantially the form of EXHIBIT B hereto (a "Right Certificate"),
evidencing one Right (subject to adjustment as provided herein) for each share
of Common Stock so held. As of the Distribution Date, the Rights will be
evidenced solely by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Shares of Preferred
Stock, in substantially the form of EXHIBIT C hereto (the "Summary of Rights"),
by first-class, postage-prepaid mail, to each record holder of Common Stock as
of the Close of Business on the Record Date (other than any Acquiring Person or
any Associate or Affiliate of any Acquiring Person), at the address of such
holder shown on the records of the Company. With respect to certificates for
Common Stock outstanding as of the Record Date, until the Distribution Date, the
Rights will be evidenced by such certificates registered in the names of the
holders thereof together with the Summary of Rights. Until the Distribution Date
(or, if earlier, the Expiration Date), the surrender for transfer of any
certificate for Common Stock outstanding on the Record Date, with or without a
copy of the Summary of Rights, shall also constitute the transfer of the Rights
associated with the Common Stock represented thereby.
(c) Certificates issued for Common Stock (including, without
limitation, upon transfer of outstanding Common Stock, disposition of Common
Stock out of treasury stock or issuance or reissuance of Common Stock out of
authorized but unissued shares) after the Record Date but prior to the earlier
of the Distribution Date and the Expiration Date shall have impressed on,
printed on, written on or otherwise affixed to them the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights ("Rights") as set forth in a Rights Agreement
between Hallwood Energy Corporation (the "Company") and Registrar
and Transfer Company, as Rights Agent, dated as of , as the same
may be amended from time to time (the "Rights Agreement"), the
terms of which are hereby incorporated herein by reference and a
copy of which
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<PAGE> 8
is on file at the principal executive offices of the Company. Under
certain circumstances, as set forth in the Rights Agreement such
Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. The Company will mail to
the holder of this certificate a copy of the Rights Agreement
without charge after receipt of a written request therefor. Under
certain circumstances, as set forth in the Rights Agreement, Rights
owned by or transferred to any Person who is or becomes an
Acquiring Person (as defined in the Rights Agreement) and certain
transferees thereof will become null and void and will no longer be
transferable.
With respect to such certificates containing the foregoing legend, until the
Distribution Date the Rights associated with the Common Stock represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate, except as otherwise provided
herein, shall also constitute the transfer of the Rights associated with the
Common Stock represented thereby. If the Company purchases or otherwise acquires
any Common Stock after the Record Date but prior to the Distribution Date, any
Rights associated with such Common Stock shall be deemed canceled and retired so
that the Company shall not be entitled to exercise any Rights associated with
the Common Stock that are no longer outstanding.
Notwithstanding this paragraph (c), the omission of a legend shall not
affect the enforceability of any part of this Agreement or the rights of any
holder of the Rights.
SECTION 4. FORM OF RIGHT CERTIFICATES. The Right Certificates (and the
forms of election to purchase shares and of assignment to be printed on the
reverse thereof) shall be substantially in the form set forth in EXHIBIT B
hereto and may have such marks of identification or designation and such
legends, summaries or endorsements, printed thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange or interdealer quotation system on which the Rights may from time to
time be listed or quoted, or to conform to usage. Subject to the provisions of
SECTIONS 11, 13 and 22 hereof, the Right Certificates shall entitle the holders
thereof to purchase such number of one one- thousandths of a share of Preferred
Stock as shall be set forth therein at the price per one one-thousandth of a
share of Preferred Stock set forth therein (the "Purchase Price"), but the
number of such one one-thousandths of a share of Preferred Stock and the
Purchase Price shall be subject to adjustment as provided herein.
SECTION 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Right Certificates shall be executed on behalf of the Company
by the President of the Company or any other duly authorized officer, either
manually or by facsimile signature, and shall be attested by the Secretary of
the Company, either manually or by facsimile signature. The Right Certificates
shall be manually countersigned by the Rights Agent and shall not be valid for
any purpose unless countersigned. In case any officer of the Company who shall
have signed any of the Right Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Right Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the Person who signed such Right Certificates had not ceased to
be such officer of the Company; and any Right Certificate may be signed on
behalf of the Company by any Person who, at the actual date of the execution of
such Right Certificate, shall be a proper officer of the Company to sign such
Right Certificate, although at the date of the execution of this Agreement any
such Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at an office or agency designated for such purpose, books for
registration and transfer of the Right Certificates issued hereunder. Such books
shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the date of each of the Right Certificates.
SECTION 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.
(a) Subject to the provisions of SECTIONS 7(E), 11(a)(ii), 13 and 14
hereof, at any time after the Distribution Date and prior to the Expiration
Date, any Right Certificate or Right Certificates may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of one
5
<PAGE> 9
one-thousandths of a share of Preferred Stock as the Right Certificate or Right
Certificates surrendered then entitled such holder to purchase. Any registered
holder desiring to transfer, split up, combine or exchange any Right Certificate
or Right Certificates shall make such request in writing delivered to the Rights
Agent, and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the office or agency of the
Rights Agent designated for such purpose. Thereupon the Rights Agent shall
countersign and deliver to the Person entitled thereto a Right Certificate or
Right Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Right Certificates.
(b) Subject to the provisions of SECTION 11(A)(II) hereof, at any time
after the Distribution Date and prior to the Expiration Date, upon receipt by
the Company and the Rights Agent of evidence reasonably satisfactory to them of
the loss, theft, destruction or mutilation of a Right Certificate, and, in case
of theft or destruction, of indemnity or security reasonably satisfactory to
them, and, at the Company's request, reimbursement to the Company and the Rights
Agent of all reasonable expenses incidental thereto, and upon surrender to the
Rights Agent and cancellation of the Right Certificate if mutilated, the Company
will make and deliver a new Right Certificate of like tenor to the Rights Agent
for delivery to the registered holder in lieu of the Right Certificate so lost,
stolen, destroyed or mutilated.
SECTION 7. EXERCISE OF RIGHTS, PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Except as otherwise provided herein, the Rights shall become
exercisable on the Distribution Date, and thereafter the registered holder of
any Right Certificate may, subject to SECTION 11(A)(II) hereof and except as
otherwise provided herein, exercise the Rights evidenced thereby in whole or in
part upon surrender of the Right Certificate, with the form of election to
purchase on the reverse side thereof duly executed, to the Rights Agent at the
office or agency of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of one
one-thousandths of a share of Preferred Stock (or other securities, cash or
other assets, as the case may be) as to which the Rights are exercised, at any
time that is both after the Distribution Date and prior to the time (the
"Expiration Date") that is the earliest of (i) the Close of Business on
_____________________ ___, 2009 (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in SECTION 23 hereof (the "Redemption
Date"), or (iii) the time at which such Rights are exchanged as provided in
SECTION 24 hereof.
(b) The Purchase Price shall be initially $40.00 for each one
one-thousandth of a share of Preferred Stock purchasable upon the exercise of a
Right. The Purchase Price and the number of one one-thousandths of a share of
Preferred Stock or other securities or property to be acquired upon exercise of
a Right shall be subject to adjustment from time to time as provided in SECTIONS
11 and 13 hereof and shall be payable in lawful money of the United States of
America in accordance with paragraph (c) of this SECTION 7.
(c) Except as otherwise provided herein, upon receipt of a Right
Certificate representing exercisable Rights, with the form of election to
purchase duly executed, accompanied by payment of the aggregate Purchase Price
for the shares of Preferred Stock to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with SECTION 9 hereof, in cash or by certified check,
cashier's check or money order payable to the order of the Company, the Rights
Agent shall thereupon promptly (i) (A) requisition from any transfer agent of
the Preferred Stock certificates for the number of shares of Preferred Stock to
be purchased and the Company hereby irrevocably authorizes its transfer agent to
comply with all such requests, or (B) requisition from the depositary agent
depositary receipts representing interests in such number of one one-thousandths
of a share of Preferred Stock as are to be purchased (in which case certificates
for the Preferred Stock represented by such receipts shall be deposited by the
transfer agent with the depositary agent) and the Company hereby directs the
depositary agent to comply with such request, (ii) when appropriate, requisition
from the Company the amount of cash to be paid in lieu of issuance of fractional
shares in accordance with SECTION 14 hereof, (iii) promptly after receipt of
such certificates or depositary receipts, cause the same to be delivered to or
upon the order of the registered holder of such Right Certificate, registered in
such name or names as may be designated by such holder and (iv) when
appropriate, after receipt, promptly deliver such cash to or upon the order of
the registered holder of such Right Certificate.
(d) Except as otherwise provided herein, in case the registered holder
of any Right Certificate shall exercise less than all of the Rights evidenced
thereby, a new Right Certificate evidencing Rights equivalent to the exercisable
Rights
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<PAGE> 10
remaining unexercised shall be issued by the Rights Agent to the registered
holder of such Right Certificate or to his duly authorized assigns, subject to
the provisions of SECTION 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, neither
the Rights Agent nor the Company shall be obligated to undertake any action with
respect to a registered holder of Rights upon the occurrence of any purported
transfer or exercise of Rights pursuant to SECTION 6 hereof or this SECTION 7
unless such registered holder shall have (i) completed and signed the
Certificate contained in the form of assignment or form of election to purchase
set forth on the reverse side of the Rights Certificate surrendered for such
transfer or exercise and (ii) provided such additional evidence of the identity
of the Beneficial Owner (or former Beneficial Owner) thereof as the Company
shall reasonably request.
SECTION 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall so cancel and
retire, any other Right Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Right Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Right Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
SECTION 9. AVAILABILITY OF SHARES OF PREFERRED STOCK.
(a) The Company covenants and agrees that it will cause to be reserved
and kept available out of its authorized and unissued shares of Preferred Stock
or any shares of Preferred Stock held in its treasury; the number of shares of
Preferred Stock that will be sufficient to permit the exercise in full of all
outstanding Rights.
(b) So long as the shares of Preferred Stock issuable upon the exercise
of Rights may be listed or admitted to trading on any national securities
exchange, or quoted on NASDAQ, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares reserved
for such issuance to be listed or admitted to trading on such exchange, or
quoted on NASDAQ, upon official notice of issuance upon such exercise.
(c) From and after such time as the Rights become exercisable, the
Company shall use its best efforts, if then necessary to permit the issuance of
shares of Preferred Stock upon the exercise of Rights, to register and qualify
such shares of Preferred Stock under the Securities Act and any applicable state
securities or "Blue Sky" laws (to the extent exemptions therefrom are not
available), cause such registration statement and qualifications to become
effective as soon as possible after such filing and keep such registration and
qualifications effective until the earlier of the date as of which the Rights
are no longer exercisable for such securities and the Expiration Date. The
Company may temporarily suspend, for a period of time not to exceed 90 days, the
exercisability of the Rights in order to prepare and file a registration
statement under the Securities Act and permit it to become effective. Upon any
such suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained and until a registration statement
under the Securities Act (if required) shall have been declared effective.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all shares of Preferred Stock delivered upon
exercise of Rights shall, at the time of delivery of the certificates therefor
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and charges that may be
payable in respect of the issuance or delivery of the Right Certificates or of
any shares of Preferred Stock upon the exercise of Rights. The Company shall
not, however, be required to pay any transfer tax that may be payable in respect
of any transfer or delivery of Right Certificates to a Person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Stock in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or deliver
any certificates or depositary receipts for Preferred Stock upon the exercise of
any Rights until any such tax shall have been paid (any such tax being payable
by that
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<PAGE> 11
holder of such Right Certificate at the time of surrender) or until it has been
established to the Company's reasonable satisfaction that no such tax is due.
SECTION 10. PREFERRED STOCK RECORD DATE. Each Person in whose name any
certificate for Preferred Stock is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the shares of
Preferred Stock represented thereby on, and such certificate shall be dated, the
date upon which the Right Certificate evidencing such Rights was duly
surrendered and payment of the Purchase Price (and any applicable transfer
taxes) was made; provided, however, that if the date of such surrender and
payment is a date upon which the Preferred Stock transfer books of the Company
are closed, such Person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the Preferred Stock transfer books of the Company are open. Prior to
the exercise of the Rights evidenced thereby, the holder of a Right Certificate
shall not be entitled to any rights of a holder of Preferred Stock for which the
Rights shall be exercisable, including, without limitation, the right to vote or
to receive dividends or other distributions, and shall not be entitled to
receive any notice of any proceedings of the Company, except as provided herein.
SECTION 11. ADJUSTMENT OF PURCHASE PRICE; NUMBER AND KIND OF SHARES AND
NUMBER OF RIGHTS. The Purchase Price, the number of shares of Preferred Stock or
other securities or property purchasable upon exercise of each Right and the
number of Rights outstanding are subject to adjustment from time to time as
provided in this SECTION 11.
(a) (i) If the Company shall at any time after the date of this
Agreement (A) declare and pay a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C)
combine the outstanding Preferred Stock into a smaller number of shares of
Preferred Stock or (D) issue any shares of its capital stock in a
reclassification of the Preferred Stock (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), except as otherwise provided in this SECTION 11(a),
the Purchase Price in effect at the time of the record date for such dividend or
of the effective date of such subdivision, combination or reclassification, and
the number and kind of shares of capital stock issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised after such
time shall be entitled to receive the aggregate number and kind of shares of
capital stock that, if such Right had been exercised immediately prior to such
date and at a time when the Preferred Stock transfer books of the Company were
open, the holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, subdivision, combination or
reclassification; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company issuable upon exercise of one Right.
(ii) Subject to SECTION 24 of this Agreement, if any Person becomes
an Acquiring Person (the first occurrence of such event being referred to
hereinafter as the "Flip-In Event"), then (A) the Purchase Price shall be
adjusted to be the Purchase Price in effect immediately prior to the Flip-In
Event multiplied by the number of one one-thousandths of a share of Preferred
Stock for which a Right was exercisable immediately prior to such Flip-In Events
whether or not such Right was then exercisable, and (B) each holder of a Right,
except as otherwise provided in this SECTION 11(a)(ii) and SECTION 11(a)(iii)
hereof, shall thereafter have the right to receive, upon exercise thereof at a
price equal to the Purchase Price (as so adjusted), in accordance with the terms
of this Agreement and in lieu of shares of Preferred Stock, such number of
shares of Common Stock as shall equal the result obtained by dividing the
Purchase Price (as so adjusted) by 50% of the current per share market place of
the Common Stock (determined pursuant to SECTION 11(d) hereof) on the date of
such Flip-In Event; provided, however, that the Purchase Price (as so adjusted)
and the number of shares of Common Stock so receivable upon exercise of a Right
shall, following the Flip-In Event, be subject to further adjustment as
appropriate in accordance with SECTION 11(f) hereof. Notwithstanding anything in
this Agreement to the contrary, however, from and after the Flip-In Event, any
Rights that are beneficially owned by (x) any Acquiring Person (or any Affiliate
or Associate of any Acquiring Person), (y) a transferee of any Acquiring Person
(or any such Affiliate or Associate) who becomes a transferee after the Flip-In
Event or (z) a transferee of any Acquiring Person (or any such Affiliate or
Associate) who became a transferee prior to or concurrently with the Flip-In
Event pursuant to either (i) a transfer from the Acquiring Person to holders of
its equity securities or to any Person with whom it has any continuing
agreement, arrangement or understanding regarding the transferred Rights or
(ii) a transfer that the Board of Directors has determined is part of the plan,
arrangement or understanding which has the purpose or effect of avoiding the
provisions of this paragraph and subsequent transferees of such Persons, shall
be void without any further action and any holder of such Rights shall
thereafter have no rights whatsoever with respect to such Rights under any
provision of this Agreement. The Company shall use all reasonable efforts to
ensure that the provisions of this SECTION 11(a)(ii) are complied with, but
shall have no liability to any holder of Right
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<PAGE> 12
Certificates or other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or its Affiliates, Associates
or transferees hereunder. From and after the Flip-In Event, no Right Certificate
shall be issued pursuant to SECTION 3 or SECTION 6 hereof that represents Rights
that are or have become void pursuant to the provisions of this paragraph and
any Right Certificate delivered to the Rights Agent that represents Rights that
are or have become void pursuant to the provisions of this paragraph shall be
canceled. From and after the occurrence of an event specified in SECTION 13(a)
hereof, any Rights that theretofore have not been exercised pursuant to this
SECTION 11(a)(ii) shall thereafter be exercisable only in accordance with
SECTION 13 and not pursuant to this SECTION 11(a)(ii).
(iii) The Company may at its option substitute for a share of
Common Stock issuable upon the exercise of Rights in accordance with the
foregoing subparagraph (ii) a number of shares of Preferred Stock or fraction
thereof such that the current per share market price of one share of Preferred
Stock multiplied by such number or fraction is equal to the current per share
market price of one share of Common Stock. If there shall not be sufficient
shares of Common Stock issued but not outstanding or authorized but unissued to
permit the exercise in full of the Rights in accordance with the foregoing
subparagraph (ii), the Board of Directors shall, to the extent permitted by
applicable law and any material agreements then in effect to which the Company
is a party (A) determine the excess (such excess, the "Spread") of (1) the value
of the shares of Common Stock issuable upon the exercise of a Right in
accordance with the foregoing subparagraph (ii) (the "Current Value") over (2)
the Purchase Price (as adjusted in accordance with the foregoing subparagraph
(ii)), and (B) with respect to each Right (other than Rights that have become
void pursuant to the foregoing subparagraph (ii)), make adequate provision to
substitute for the shares of Common Stock issuable in accordance with the
foregoing subparagraph (ii) upon exercise of the Right and payment of the
Purchase Price (as adjusted in accordance therewith), (1) cash, (2) a reduction
in such Purchase Price, (3) shares of Preferred Stock or other equity securities
of the Company (including, without limitation, shares or fractions of shares of
preferred stock that, by virtue of having dividend, voting and liquidation
rights substantially comparable to those of the shares of Common Stock, are
deemed in good faith by the Board of Directors to have substantially the same
value as the shares of Common Stock (such shares of Preferred Stock and shares
or fractions of shares of Preferred Stock are hereinafter referred to as "Common
Stock Equivalents")), (4) debt securities of the Company, (5) other assets, or
(6) any combination of the foregoing, having a value that, when added to the
value of the shares of Common Stock issued upon exercise of such Right, shall
have an aggregate value equal to the Current Value (less the amount of any
reduction in such Purchase Price), where such aggregate value has been
determined by the Board of Directors upon the advice of a nationally recognized
investment banking firm selected in good faith by the Board of Directors;
provided, however, that if the Company shall not make adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days following the
Flip-In Event (the "Section 11(a)(ii) Trigger Date"), then the Company shall be
obligated to deliver, to the extent permitted by applicable law and any material
agreement then in effect to which the Company is a party, upon the surrender for
exercise of a Right and without requiring payment of such Purchase Price, shares
of Common Stock (to the extent available), and then, if necessary, such number
or fractions of shares of Preferred Stock (to the extent available) and then, if
necessary, cash, which shares and/or cash have an aggregate value equal to the
Spread. If, upon the occurrence of the Flip- In Event, the Board of Directors
shall determine in good faith that it is likely that sufficient additional
shares of Common Stock could be authorized for issuance upon exercise in full of
the Rights, then, if the Board of Directors so elects, the thirty (30) day
period set forth above may be extended to the extent necessary, but not more
than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that
the Company may seek stockholder approval for the authorization of such
additional shares (such thirty (30) day period, as it may be extended, is herein
called the "Substitution Period"). To the extent that the Company determines
that some action need be taken pursuant to the second and/or third sentence of
this SECTION 11(a)(iii), the Company (x) shall provide, subject to SECTION
11(a)(ii) hereof and the last sentence of this SECTION 11(a)(iii) hereof, that
such action shall apply uniformly to all outstanding Rights and (y) may suspend
the exercisability of the Rights until the expiration of the Substitution Period
in order to seek any authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to such second sentence and
to determine the value thereof. Upon any such suspension, the Company shall
issue a public announcement stating that the exercisability of the Rights has
been temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this SECTION 11(a)(iii), the
value of the shares of Common Stock shall be the current per share market price
(as determined pursuant to SECTION 11(d)(i)) on the Section 11(a)(ii) Trigger
Date and the per share or fractional value of any "Common Stock Equivalent"
shall be deemed to equal the current per share market price of the Common Stock.
The Board of Directors of the Company may, but shall not be required to,
establish procedures to allocate the right to receive shares of Common Stock
upon the exercise of the Rights among holders of Rights pursuant to this SECTION
11(a)(iii).
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<PAGE> 13
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Stock (or shares having the same rights,
privileges and preferences as the Preferred Stock ("equivalent preferred
shares")) or securities convertible into Preferred Stock or equivalent preferred
shares at a price per share of Preferred Stock or equivalent preferred shares
(or having a conversion price per share, if a security convertible into shares
of Preferred Stock or equivalent preferred shares) less than the then current
per share market price of the Preferred Stock (determined pursuant to SECTION
11(d) hereof) on such record date, the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of shares of Preferred Stock and equivalent preferred shares
outstanding on such record date plus the number of shares of Preferred Stock and
equivalent preferred shares which the aggregate offering price of the total
number of shares of Preferred Stock and/or equivalent preferred shares so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and
the denominator of which shall be the number of shares of Preferred Stock and
equivalent preferred shares outstanding on such record date plus the number of
additional shares of Preferred Stock and/or equivalent preferred shares to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible); provided, however, that in no event
shall the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company issuable
upon exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Shares of Preferred Stock and equivalent preferred
shares owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed; and if such rights,
options or warrants are not so issued, the Purchase Price shall be adjusted to
be the Purchase Price that would then be in effect if such record date had not
been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Stock) or subscription rights or warrants (excluding those referred to
in SECTION 11(b) hereof), the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
then current per share market price of the Preferred Stock (determined pursuant
to SECTION 11(d) hereof) on such record date, less the fair market value (as
determined in good faith by the Board of Directors of the Company whose
determination shall be described in a statement filed with the Rights Agent) of
the portion of the assets or evidences of indebtedness so to be distributed or
of such subscription rights or warrants applicable to one share of Preferred
Stock, and the denominator of which shall be such current per share market price
(determined pursuant to SECTION 11(d) hereof) of the Preferred Stock; provided,
however, that in no event shall the consideration to be paid upon the exercise
of one Right be less than the aggregate par value of the shares of capital stock
of the Company to be issued upon exercise of one Right. Such adjustments shall
be made successively whenever such a record date is fixed; and if such
distribution is not so made, the Purchase Price shall again be adjusted to be
the Purchase Price that would then be in effect if such record date had not been
fixed.
(d) (i) Except as otherwise provided herein, for the purpose of any
computation hereunder, the "current per share market price" of any security (a
"Security" for the purpose of this SECTION 11(d)(i)) on any date shall be deemed
to be the average of the daily closing prices per share of such Security for the
30 consecutive Trading Days (as such term is hereinafter defined) immediately
prior to such date; provided, however, that, if the current per share market
price of the Security is determined during a period following the announcement
by the issuer of such Security of (A) a dividend or distribution on such
Security payable in shares of such Security or securities convertible into such
shares, or (B) any subdivision, combination or reclassification of such
Security, and prior to the expiration of 30 Trading Days after the ex-dividend
date for such dividend or distribution or the record date for such subdivision,
combination or reclassification, then, and in each such case, the current per
share market price shall be appropriately adjusted to reflect the current market
price per share equivalent of such Security. The closing price for each day
shall be the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in
either case as reported by the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if the Security is not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Security is listed or admitted to trading or,
if the Security is not listed or admitted to trading on any
10
<PAGE> 14
national securities exchange, the last quoted price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by NASDAQ or such other system then in use, or, if on any such date the
Security is not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the Security selected by the Board of Directors of the Company. The term
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Security is listed or admitted to trading is open for the
transaction of business or, if the Security is not listed or admitted to trading
on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, if the Preferred
Stock is publicly traded, the "current per share market price" of the Preferred
Stock shall be determined in accordance with the method set forth in SECTION
11(d)(i). If the Preferred Stock is not publicly traded but the Common Stock is
publicly traded, the "current per share market price" of the Preferred Stock
shall be conclusively deemed to be the current per share market price of the
Common Stock as determined pursuant to SECTION 11(d)(i) multiplied by the then
applicable Adjustment Number (as defined in and determined in accordance with
the Certificate of Designation for the Preferred Stock). If neither the Common
Stock nor the Preferred Stock is publicly traded, "current per share market
price" shall mean the fair value per share as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this SECTION
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this SECTION 11
shall be made to the nearest cent or to the nearest one hundred-thousandth of a
share of Preferred Stock or one-hundredth of a share of Common Stock or other
share or security as the case may be. Notwithstanding the first sentence of this
SECTION 11(e), any adjustment required by this SECTION 11 shall be made no later
than the earlier of (i) three years from the date of the transaction that
requires such adjustment or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to SECTION 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than the Preferred
Stock, thereafter the Purchase Price and the number of such other shares so
receivable upon exercise of a Right shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Preferred Stock contained in SECTIONS 11(a),
11(b), 11(c), 11(e), 11(h), 11(i) and 11(m) hereof, as applicable, and the
provisions of SECTIONS 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Stock shall apply on like terms, to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
SECTION 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in SECTIONS 11(b) and 11(c), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Purchase Price, that number of one one-
thousandths of a share of Preferred Stock (calculated to the nearest one
hundred-thousandth of a share of Preferred Stock) obtained by (i) multiplying
(x) the number of one one-thousandths of a share purchasable upon the exercise
of a Right immediately prior to such adjustment by (y) the Purchase Price in
effect immediately prior to such adjustment of the Purchase Price and (ii)
dividing the product so obtained by the Purchase Price in effect immediately
after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price pursuant to SECTIONS 11(b) or 11(c) hereof to adjust the number
of Rights, in substitution for any adjustment in the number of one
one-thousandths of a share of Preferred Stock purchasable upon the exercise of a
Right. Each of the Rights outstanding after such adjustment of the number of
Rights shall be exercisable for the number of one one-thousandths of a share of
Preferred Stock for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest
one-hundredth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately
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<PAGE> 15
after adjustment of the Purchase Price. The Company shall make a public
announcement of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. Such record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Right Certificates have
been issued, shall be at least 10 days later than the date of the public
announcement. If Right Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this SECTION 11(i), the Company may, as
promptly as practicable, cause to be distributed to holders of record of Right
Certificates on such record date Right Certificates evidencing, subject to
SECTION 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Right Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Right Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Right Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein and shall be registered in
the names of the holders of record of Right Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-thousandths of a share of Preferred Stock issuable upon
the exercise of a Right, the Right Certificates theretofore and thereafter
issued may continue to express the Purchase Price and the number of one
one-thousandths of a share of Preferred Stock that were expressed in the initial
Right Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the then par value, if any, of the fraction of
Preferred Stock or other shares of capital stock issuable upon exercise of a
Right, the Company shall take any corporate action that may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable shares of Preferred Stock or other such
shares at such adjusted Purchase Price.
(l) In any case in which this SECTION 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event issuing to the holder of any Right exercised after such record date the
Preferred Stock and other capital stock or securities of the Company, if any,
issuable upon such exercise over and above the Preferred Stock and other capital
stock or securities of the Company, if any, issuable upon such exercise on the
basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this SECTION 11 to the contrary notwithstanding, the
Company shall be entitled to make such adjustments in the Purchase Price, in
addition to those adjustments expressly required by this SECTION 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Stock, issuance
wholly for cash of any shares of Preferred Stock at less than the current market
price, issuance wholly for cash of Preferred Stock or securities which by their
terms are convertible into or exchangeable for Preferred Stock, dividends on
Preferred Stock payable in shares of Preferred Stock or issuance of rights,
options or warrants referred to hereinabove in SECTION 11(b), hereafter made by
the Company to holders of its Preferred Stock shall not be taxable to such
stockholders.
(n) Anything in this Agreement to the contrary notwithstanding, if at
anytime after the date of this Rights Agreement and prior to the Distribution
Date, the Company shall (i) declare and pay any dividend on the Common Stock
payable in Common Stock or (ii) effect a subdivision, combination or
consolidation of the Common Stock (by reclassification or otherwise than by
payment of a dividend payable in Common Stock) into a greater or lesser number
of shares of Common Stock, then, in each such case, the number of Rights
associated with each share of Common Stock then outstanding, or issued or
delivered thereafter, shall be proportionately adjusted so that the number of
Rights thereafter associated with each share of Common Stock following any such
event shall equal the result obtained by multiplying the number of Rights
associated with each share of Common Stock immediately prior to each event by a
fraction, the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the occurrence of the event and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately following the occurrence of such event.
(o) The Company agrees that, after the earlier of the Distribution Date
or the Stock Acquisition Date, it will not, except as permitted by SECTION 23,
24 or 27 hereof, take (or permit any Subsidiary to take) any action if at the
time such
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<PAGE> 16
action is taken it is reasonably foreseeable that such action will diminish
substantially or eliminate the benefits intended to be afforded by the Rights.
SECTION 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in SECTION 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Stock and the
Preferred Stock a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Right Certificate in accordance with SECTION 25 hereof (if
so required under SECTION 25 hereof). The Rights Agent shall be fully protected
in relying on any such certificate and on any adjustment therein contained and
shall not be deemed to have knowledge of any such adjustment unless and until it
shall have received such certificate.
SECTION 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) If, directly or indirectly, at any time after the Flip-In Event (i)
the Company shall consolidate with or shall merge into any other Person, (ii)
any Person shall merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in connection with such
merger, all or part of the Common Stock shall be changed into or exchanged for
stock or other securities of any other Person (or of the Company) or cash or any
other property, or (iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person (other than the Company or one or more wholly owned Subsidiaries of
the Company), then upon the first occurrence of such event, proper provision
shall be made so that: (A) each holder of a Right (other than Rights that have
become void pursuant to SECTION 11(a)(ii) hereof) shall thereafter have the
right to receive, upon the exercise thereof at the Purchase Price (as
theretofore adjusted in accordance with SECTION 11(a)(ii) hereof), in accordance
with the terms of this Agreement and in lieu of shares of Preferred Stock or
Common Stock of the Company, such number of validly authorized and issued, fully
paid, non-assessable and freely tradeable shares of Common Stock of the
Principal Party (as such term is hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall equal
the result obtained by dividing the Purchase Price (as theretofore adjusted in
accordance with SECTION 11(a)(ii) hereof) by 50% of the current per share market
price of the Common Stock of such Principal Party (determined pursuant to
SECTION 11(d) hereof) on the date of consummation of such consolidation, merger,
sale or transfer; provided, however, that the Purchase Price (as theretofore
adjusted in accordance with SECTION 11(a)(ii) hereof) and the number of shares
of Common Stock of such Principal Party so receivable upon exercise of a Right
shall be subject to further adjustment as appropriate in accordance with SECTION
11(f) hereof to reflect any events occurring in respect of the Common Stock of
such Principal Party after the occurrence of such consolidation, merger, sale or
transfer; (B) such Principal Party shall thereafter be liable for, and shall
assume, by virtue of such consolidation, merger, sale or transfer, all the
obligations and duties of the Company pursuant to this Rights Agreement; (C) the
term "Company" shall thereafter be deemed to refer to such Principal Party; and
(D) such Principal Party shall take such steps (including, but not limited to,
the reservation of a sufficient number of its shares of Common Stock in
accordance with SECTION 9 hereof) in connection with such consummation of any
such transaction as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
shares of its Common Stock thereafter deliverable upon the exercise of the
Rights; provided, however, that, upon the subsequent occurrence of any
consolidation, merger, sale or transfer of assets or other extraordinary
transaction in respect of such Principal Party, each holder of a Right shall
thereupon be entitled to receive, upon exercise of a Right and payment of the
Purchase Price as provided in this SECTION 13(a), such cash, shares, rights,
warrants and other property that such holder would have been entitled to receive
had such holder, at the time of such transaction, owned the Common Stock of the
Principal Party receivable upon the exercise of a Right pursuant to this SECTION
13(a), and such Principal Party shall take such steps (including, but not
limited to, reservation of shares of stock) as may be necessary to permit the
subsequent exercise of the Rights in accordance with the terms hereof for such
cash, shares, rights, warrants and other property.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in (i) or (ii) of the
first sentence of SECTION 13(a) hereof: (A) the Person that is the issuer of the
securities into which the shares of Common Stock are converted in such merger or
consolidation, or, if there is more than one such issuer, the issuer the shares
of Common Stock of which have the greatest aggregate market value of shares
outstanding, or (B) if no securities are so issued, (x) the Person that is the
other party to the merger, if such Person survives said merger, or, if there is
more than one such Person, the Person the shares of Common
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<PAGE> 17
Stock of which have the greatest aggregate market value of shares outstanding or
(y) if the Person that is the other party to the merger does not survive the
merger, the Person that does survive the merger (including the Company if it
survives) or (z) the Person resulting from the consolidation; and
(ii) in the case of any transaction described in (iii) of the first
sentence in SECTION 13(a) hereof, the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions, or, if each Person that is a party to such
transaction or transactions receives the same portion of the assets or earning
power so transferred or if the Person receiving the greatest portion of the
assets or earning power cannot be determined, whichever of such Persons is the
issuer of Common Stock having the greatest aggregate market value of shares
outstanding; provided, however, that in any such case described in the foregoing
clause (b)(i) or (b)(ii), if the Common Stock of such Person is not at such time
or has not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, then (1) if such Person is a direct or indirect
Subsidiary of another Person the Common Stock of which is and has been so
registered, the term "Principal Party" shall refer to such other, or (2) if such
Person is a Subsidiary, directly or indirectly, of more than one Person, the
Common Stock of all of which is and has been so registered, the term "Principal
Party" shall refer to whichever of such Persons is the issuer of Common Stock
having the greatest aggregate market value of shares outstanding, or (3) if such
Person is owned, directly or indirectly, by a joint venture formed by two or
more Persons that are not owned, directly or indirectly, by the same Person, the
rules set forth in clauses (1) and (2) above shall apply to each of the owners
having an interest in the venture as if the Person owned by the joint venture
was a Subsidiary of both or all of such joint venturers, and the Principal Party
in each such case shall bear the obligations set forth in this SECTION 13 in the
same ratio as its interest in such Person bears to the total of such interests.
(c) The Company shall not consummate any consolidation, merger, sale or
transfer referred to in SECTION 13(a) hereof unless prior thereto the Company
and the Principal Party involved therein shall have executed and delivered to
the Rights Agent an agreement confirming that the requirements of SECTIONS 13(a)
and (b) hereof shall promptly be performed in accordance with their terms and
that such consolidation, merger, sale or transfer of assets shall not result in
a default by the Principal Party under this Agreement as the same shall have
been assumed by the Principal Party pursuant to SECTIONS 13(a) and (b) hereof
and providing that, as soon as practicable after executing such agreement
pursuant to this SECTION 13, the Principal Party will:
(i) prepare and file a registration statement under the Securities
Act, if necessary, with respect to the Rights and the securities purchasable
upon exercise of the Rights on an appropriate form, use its best efforts to
cause such registration statement to become effective as soon as practicable
after such filing and use its best efforts to cause such registration statement
to remain effective (with a prospectus at all times meeting the requirements of
the Securities Act) until the Expiration Date and similarly comply with
applicable state securities laws;
(ii) use its best efforts, if the Common Stock of the Principal
Party shall be listed or admitted to trading on the New York Stock Exchange or
on another national securities exchange, to list or admit to trading (or
continue the listing of) the Rights and the securities purchasable upon exercise
of the Rights on the New York Stock Exchange or such securities exchange, or, if
the Common Stock of the Principal Party shall not be listed or admitted to
trading on the New York Stock Exchange or a national securities exchange, to
cause the Rights and the securities receivable upon exercise of the Rights to be
authorized for quotation on NASDAQ or on such other system then in use;
(iii) deliver to holders of the Rights historical financial
statements for the Principal Party that comply in all respects with the
requirements for registration on Form 10 (or any successor form) under the
Exchange Act; and
(iv) obtain waivers of any rights of first refusal or preemptive
rights in respect of the Common Stock of the Principal Party subject to purchase
upon exercise of outstanding Rights.
(d) In case the Principal Party has a provision in any of its
authorized securities or in its certificate of incorporation or by-laws or other
instrument governing its corporate affairs, which provision would have the
effect of (i) causing such Principal Party to issue (other than to holders of
Rights pursuant to this SECTION 13), in connection with, or as a consequence of,
the consummation of a transaction referred to in this SECTION 13, shares of
Common Stock or Common Stock Equivalents of such Principal Party at less than
the then current market price per share thereof (determined pursuant to SECTION
11(d) hereof) or securities exercisable for, or convertible into, Common Stock
or Common Stock Equivalents of such Principal Party at less than such then
current market price, or (ii) providing for any special payment, tax or similar
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provision in connection with the issuance of the Common Stock of such Principal
Party pursuant to the provisions of SECTION 13, then, in such event, the Company
hereby agrees with each holder of Rights that it shall not consummate any such
transaction unless prior thereto the Company and such Principal Party shall have
executed and delivered to the Rights Agent a supplemental agreement providing
that the provision in question of such Principal Party shall have been canceled,
waived or amended, or that the authorized securities shall be redeemed, so that
the applicable provision will have no effect in connection with, or as a
consequence of, the consummation of the proposed transaction.
(e) The Company covenants and agrees that it shall not, at any time
after the Flip-In Event, enter into any transaction of the type described in
clauses (i) through (iii) of SECTION 13(a) hereof if (i) at the time of or
immediately after such consolidation, merger, sale, transfer or other
transaction there are any rights, warrants or other instruments or securities
outstanding or agreements in effect that would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights, (ii)
prior to, simultaneously with or immediately after such consolidation, merger,
sale, transfer or other transaction, the stockholders of the Person who
constitutes, or would constitute, the Principal Party for purposes of SECTION
13(B) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates or Associates or (iii) the form or nature
of organization of the Principal Party would preclude or limit the
exercisability of the Rights.
SECTION 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Right Certificates that evidence fractional Rights (except prior
to the Distribution Date in accordance with SECTION 11(n) hereof). In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Right Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this SECTION 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Rights are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Rights are listed or admitted to trading or, if the Rights are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Rights selected by the Board of
Directors of the Company. If on any such date no such market maker is making a
market in the Rights, the fair value of the Rights on such date as determined in
good faith by the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Stock (other than fractions that are integral multiples of one one-thousandth of
a share of Preferred Stock) or to distribute certificates that evidence
fractional shares of Preferred Stock (other than fractions that are integral
multiples of one one-thousandth of a share of Preferred Stock) upon the exercise
or exchange of Rights. Interests in fractions of Preferred Stock in integral
multiples of one one-thousandth of a share of Preferred Stock may, at the
election of the Company be evidenced by depositary receipts, pursuant to an
appropriate agreement between the Company and a depositary selected by it;
provided, however, that such agreement shall provide that the holders of such
depositary receipts shall have all the rights, privileges and preferences to
which they are entitled as beneficial owners of the Preferred Stock represented
by such depositary receipts. In lieu of fractional shares of Preferred Stock
that are not integral multiples of one one-thousandth of a share of Preferred
Stock, the Company shall pay to the registered holders of Right Certificates at
the time such Rights are exercised or exchanged as herein provided an amount in
cash equal to the same fraction of the current market value of a whole share of
Preferred Stock (as determined in accordance with SECTION 14(a) hereof) for the
Trading Day immediately prior to the date of such exercise or exchange.
(c) The Company shall not be required to issue fractions of shares of
Common Stock or to distribute certificates that evidence fractional shares of
Common Stock upon the exercise or exchange of Rights. In lieu of such fractional
shares of Common Stock, the Company shall pay to the registered holder of the
Right Certificates with regard to which such fractional shares of Common Stock
would otherwise be issuable an amount in cash equal to the same fraction
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<PAGE> 19
of the current market value of a whole share of Common Stock (as determined in
accordance with SECTION 14(A) hereof) for the Trading Day immediately prior to
the date of such exercise or exchange.
(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise or exchange of a Right (except as provided above).
SECTION 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
SECTION 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Stock), on his own behalf and for his own
benefit, may enforce, and may institute and maintain any suit, action or
proceeding against the Company to enforce, or otherwise act in respect to his
right to exercise the Rights evidenced by such Right Certificate (or, prior to
the Distribution Date, such Common Stock) in the manner provided therein and in
this Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights, it is specifically acknowledged that the holders of Rights
would not have an adequate remedy at law for any breach of this Agreement and
will be entitled to specific performance of the obligations under, and
injunctive relief against actual or threatened violations of, the obligations of
any Person subject to this Agreement.
SECTION 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Stock;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office or agency of the Rights Agent designated for such purpose, duly
endorsed or accompanied by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the Person in
whose name the Right Certificate (or, prior to the Distribution Date, the Common
Stock certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the Common Stock certificate made by anyone other than the
Company or the Rights Agent) for all purposes whatsoever, and neither the
Company nor the Rights Agent shall be affected by any notice to the contrary.
SECTION 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Stock or any
other securities of the Company which may at any time be issuable on the
exercise or exchange of the Rights represented thereby, nor shall anything
contained herein or in any Right Certificate be construed to confer upon the
holder of any Right Certificate, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting stockholders (except as provided in this Agreement), or to
receive dividends or subscription rights, or otherwise, until the Rights
evidenced by such Right Certificate shall have been exercised or exchanged in
accordance with the provisions hereof.
SECTION 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability or expense, incurred without gross negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability arising therefrom, directly or indirectly. In no case will the Rights
Agent be liable for special, indirect, incidental or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if the Rights Agent has been advised of the possibility of such damages.
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<PAGE> 20
(b) The Rights Agent shall be protected and shall incur no liability
for, or in respect of any action taken, suffered or omitted by it in connection
with, its administration of this Agreement in reliance upon any Right
Certificate or certificate for the Preferred Stock or Common Stock or for other
securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged by the
proper Person or Persons, or otherwise upon the advice of counsel as set forth
in SECTION 20 hereof.
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any successor Rights
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
stock transfer or corporate trust powers of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; provided, however, that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
SECTION 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Right Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of the predecessor Rights Agent and deliver such
Right Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor Rights
Agent or in the name of the successor Rights Agent; and in all such cases such
Right Certificates shall have the full force provided in the Right Certificates
and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned but
not delivered, the Rights Agent may adopt the countersignature under its prior
name and deliver Right Certificates so countersigned; and in case at that time
any of the Right Certificates shall not have been countersigned, the Rights
Agent may countersign such Right Certificates either in its prior name or in its
changed name and in all such cases such Right Certificates shall have the full
force provided in the Right Certificates and in this Agreement.
SECTION 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the President and the Secretary of the
Company and delivered to the Rights Agent; and such certificate shall be full
authorization to the Rights Agent for any action taken or suffered in good faith
by it under the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to SECTION 11(a)(ii) hereof) or any
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<PAGE> 21
adjustment in the terms of the Rights provided for in SECTIONS 3, 11, 13, 23 and
24, or the ascertaining of the existence of facts that would require any such
change or adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after receipt of a certificate furnished pursuant to SECTION
12, describing such change or adjustment); nor shall it by any act hereunder be
deemed to make any representation or warranty as to the authorization or
reservation of any shares of Preferred Stock or other securities to be issued
pursuant to this Agreement or any Right Certificate or as to whether any shares
of Preferred Stock or other securities will, when issued, be validly authorized
and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
person reasonably believed by the Rights Agent to be one of the President or the
Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered by it in good faith in accordance with instructions of
any such officer or for any delay in acting while waiting for those
instructions. Any application by the Rights Agent for written instructions from
the Company may, at the option of the Rights Agent, set forth in writing any
action proposed to be taken or omitted by the Rights Agent under this Agreement
and the date on and/or after which such action shall be taken or such omission
shall be effective. The Rights Agent shall not be liable for any action taken
by, or omission of, the Rights Agent in accordance with a proposal included in
any such application on or after the date specified in such application (which
date shall not be less than five Business Days after the date any officer of the
Company actually receives such application unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such action
(or the effective date in the case of an omission), the Rights Agent shall have
received written instructions in response to such application specifying the
action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate contained in the form of
assignment or the form of election to purchase set forth on the reverse thereof,
as the case may be, has not been completed to certify the holder is not an
Acquiring Person (or an Affiliate or Associate thereof), the Rights Agent shall
not take any further action with respect to such requested exercise or transfer
without first consulting with the Company.
SECTION 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Stock or Preferred Stock by registered or certified mail, and,
following the Distribution Date, to the holders of the Right Certificates by
first-class mail. The Company may remove the Rights Agent or any successor
Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Common Stock or Preferred Stock by registered or certified mail, and, following
the Distribution Date, to the holder of the Right Certificates by first-class
mail. If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Rights Agent.
If the Company shall fail to make such appointment within a period of 30 days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Right Certificate (who shall, with such notice, submit his
Right Certificate for inspection by the Company), then the registered holder of
any Right Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be either (A) a corporation organized
and doing
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business under the laws of the United States or the laws of any state of the
United States or the District of Columbia, in good standing, having an office in
the State of Texas or the State of New York, which is authorized under such laws
to exercise corporate trust or stock transfer powers and is subject to
supervision or examination by federal or state authority and which has at the
time of its appointment as Rights Agent a combined capital and surplus of at
least $50 million, or (B) an affiliate of such corporation. After appointment,
the successor Rights Agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Stock or Preferred Stock, and, following
the Distribution Date, mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this SECTION 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
SECTION 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such forms
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Stock following the Distribution Date and
prior to the Expiration Date, the Company may with respect to shares of Common
Stock so issued or sold pursuant to (i) the exercise of stock options, (ii)
under any employee plan or arrangement, (iii) upon the exercise, conversion or
exchange of securities, notes or debentures issued by the Company or (iv) a
contractual obligation of the Company, in each case existing prior to the
Distribution Date, issue Right Certificates representing the appropriate number
of Rights in connection with such issuance or sale.
SECTION 23. REDEMPTION.
(a) The Board of Directors of the Company may, at any time prior to the
Flip-In Event, redeem all but not less than all of the then outstanding Rights
at a redemption price of $.01 per Right, appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (the redemption price being hereinafter referred to as the "Redemption
Price"). The redemption of the Rights may be made effective at such time, on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish. The Redemption Price shall be payable, at the option
of the Company, in cash, shares of Common Stock, or such other form of
consideration as the Board of Directors shall determine.
(b) Immediately upon the action of the Board of Directors ordering the
redemption of the Rights pursuant to paragraph (a) of this SECTION 23 (or at
such later time as the Board of Directors may establish for the effectiveness of
such redemption), and without any further action and without any notice, the
right to exercise the Rights will terminate and the only right thereafter of the
holders of Rights shall be to receive the Redemption Price. The Company shall
promptly give public notice of any such redemption; provided, however, that the
failure to give, or any defect in, any such notice shall not affect the validity
of such redemption. Within 10 days after such action of the Board of Directors
ordering the redemption of the Rights (or such later time as the Board of
Directors may establish for the effectiveness of such redemption), the Company
shall mail a notice of redemption to all the holders of the then outstanding
Rights at their last addresses as they appear upon the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
transfer agent for the Common Stock. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption shall state the method by which the
payment of the Redemption Price will be made.
SECTION 24. EXCHANGE.
(a) The Board of Directors of the Company may, at its option, at any
time after the Flip- In Event, exchange all or part of the then outstanding and
exercisable Rights (which shall not include Rights that have become void
pursuant to the provisions of SECTION 11(A)(II) hereof) for Common Stock at an
exchange ratio of one share of Common Stock per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such amount per Right being hereinafter referred to as the
"Exchange Ratio"). Notwithstanding the foregoing, the Board
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<PAGE> 23
of Directors shall not be empowered to effect such exchange at any time after an
Acquiring Person shall have become the Beneficial Owner of shares of Common
Stock aggregating 50% or more of the shares of Common Stock then outstanding.
From and after the occurrence of an event specified in SECTION 13(a) hereof, any
Rights that theretofore have not been exchanged pursuant to this SECTION 24(a)
shall thereafter be exercisable only in accordance with SECTION 13 and may not
be exchanged pursuant to this SECTION 24(a). The exchange of the Rights by the
Board of Directors may be made effective at such time, on such basis and with
such conditions as the Board of Directors in its sole discretion may establish.
(b) Immediately upon the effectiveness of the action of the Board of
Directors of the Company ordering the exchange of any Rights pursuant to
paragraph (a) of this SECTION 24 and without any further action and without any
notice, the right to exercise such Rights shall terminate and the only right
thereafter of a holder of such Rights shall be to receive that number of shares
of Common Stock equal to the number of such Rights held by such holder
multiplied by the Exchange Ratio. The Company shall promptly give public notice
of any such exchange; provided, however, that the failure to give, or any defect
in, such notice shall not affect the validity of such exchange. The Company
shall promptly mail a notice of any such exchange to all of the holders of the
Rights so exchanged at their last addresses as they appear upon the registry
books of the Rights Agent. Any notice that is mailed in the manner herein
provided shall be deemed given, whether or not the holder receives the notice.
Each such notice of exchange will state the method by which the exchange of the
shares of Common Stock for Rights will be effected and, upon any partial
exchange, the number of Rights that will be exchanged. Any partial exchange
shall be effected pro rata based on the number of Rights (other than Rights that
have become void pursuant to the provisions of SECTION 11(a)(ii) hereof) held by
each holder of Rights.
(c) The Company may at its option substitute, and, if there shall not
be sufficient shares of Common Stock issued but not outstanding or authorized
but unissued to permit an exchange of Rights for Common Stock as contemplated in
accordance with this SECTION 24, the Company shall substitute to the extent of
such insufficiency, for each share of Common Stock that would otherwise be
issuable upon exchange of a Right, a number of shares of Preferred Stock or
fraction thereof (or equivalent preferred shares, as such term is defined in
SECTION 11(b)) such that the current per share market price (determined pursuant
to SECTION 11(d) hereof) of one share of Preferred Stock (or equivalent
preferred share) multiplied by such number or fraction is equal to the current
per share market price of one share of Common Stock (determined pursuant to
SECTION 11(d) hereof) as of the date of such exchange.
SECTION 25. NOTICE OF CERTAIN EVENTS.
(a) In case the Company shall at any time after the earlier of the
Distribution Date or the Stock Acquisition Date propose (i) to pay any dividend
payable in stock of any class to the holders of its Preferred Stock or to make
any other distribution to the holders of its Preferred Stock (other than a
regular quarterly cash dividend), (ii) to offer to the holders of its Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, (iii) to effect any reclassification of its Preferred Stock
(other than a reclassification involving only the subdivision or combination of
outstanding Preferred Stock), (iv) to effect the liquidation, dissolution or
winding up of the Company, or (v) to pay any dividend on the Common Stock
payable in Common Stock or to effect a subdivision, combination or consolidation
of the Common Stock (by reclassification or otherwise than by payment of
dividends in Common Stock), then, in each such case, the Company shall give to
each holder of a Right Certificate, in accordance with SECTION 26 hereof, a
notice of such proposed action, which shall specify the record date for the
purposes of such stock dividend, or distribution of rights or warrants, or the
date on which such liquidation, dissolution or winding up is to take place and
the date of participation therein by the holders of the Common Stock and/or
Preferred Stock, if any such date is to be fixed, and such notice shall be so
given in the case of any action covered by clause (i) or (ii) above at least 10
days prior to the record date for determining holders of the Preferred Stock for
purposes of such action, and in the case of any such other action, at least 10
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Stock and/or Preferred Stock,
whichever shall be the earlier.
(b) In case any event described in SECTION 11(a)(ii) or SECTION 13
shall occur then the Company shall as soon as practicable thereafter give to
each holder of a Right Certificate (or if occurring prior to the Distribution
Date, the holders of the Common Stock) in accordance with SECTION 26 hereof, a
notice of the occurrence of such event, which notice shall describe such event
and the consequences of such event to holders of Rights under SECTION 11(a)(ii)
and SECTION 13 hereof.
20
<PAGE> 24
SECTION 26. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Hallwood Energy Corporation
3710 Rawlins, Suite 500
Dallas, Texas 75219
Subject to the provisions of SECTION 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
Registrar and Transfer Company
------------------------------
------------------------------
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
SECTION 27. SUPPLEMENTS AND AMENDMENTS. Except as provided in the
penultimate sentence of this SECTION 27, for so long as the Rights are then
redeemable, the Company may in its sole and absolute discretion, and the Rights
Agent shall if the Company so directs, supplement or amend any provision of this
Agreement in any respect without the approval of any holders of the Rights. At
any time when the Rights are no longer redeemable, except as provided in the
penultimate sentence of this SECTION 27, the Company may, and the Rights Agent
shall, if the Company so directs, supplement or amend this Agreement without the
approval of any holders of Rights in order to (i) cure any ambiguity, (ii)
correct or supplement any provision contained herein that may be defective or
inconsistent with any other provision herein, (iii) shorten or lengthen any time
period hereunder, or (iv) change or supplement the provisions hereunder in any
manner which the Company may deem necessary or desirable; provided, however,
that no such supplement or amendment shall adversely affect the interests of the
holders of Rights as such (other than an Acquiring Person or an Affiliate or
Associate of an Acquiring Person), and no such amendment may cause the Rights
again to become redeemable or cause the Agreement again to become amendable
other than in accordance with this sentence; further, provided, that this
Agreement may not be supplemented or amended to lengthen, pursuant to clause
(iii) of this sentence, (A) a time period relating to when the Rights may be
redeemed at such time as the Rights are not then redeemable or (B) any other
time period unless such lengthening is for the purpose of protecting, enhancing
or clarifying the rights of, and/or the benefits to, the holders of Rights.
Notwithstanding anything contained in this Agreement to the contrary, no
supplement or amendment shall be made which changes the Redemption Price. Upon
the delivery of a Certificate from an appropriate officer of the Company that
states that the proposed supplement or amendment is in compliance with the terms
of this SECTION 27, the Rights Agent shall execute such supplement or amendment.
SECTION 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Stock) any legal or equitable right, remedy or claim under this
Agreement; but this Agreement shall be for the sole and exclusive benefit of the
Company, the Rights Agent and the registered holders of the Right Certificates
(and, prior to the Distribution Date, the Common Stock).
SECTION 30. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. The
Board of Directors of the Company shall have the exclusive power and authority
to administer this Agreement and to exercise the rights and powers specifically
granted to the Board of Directors of the Company or to the Company, or as may be
necessary or advisable in the administration of this Agreement, including,
without limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for the
administration of this Agreement (including, without limitation, a determination
to redeem or not redeem the Rights or to amend this Agreement). All such
21
<PAGE> 25
actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing) that
are done or made by the Board of Directors of the Company in good faith, shall
(x) be final, conclusive and binding on the Company, the Rights Agent, the
holders of the Rights, as such, and all other parties, and (y) not subject the
Board of Directors to any liability to the holders of the Rights.
SECTION 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
SECTION 32. GOVERNING LAW. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
SECTION 33. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
SECTION 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
22
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
HALLWOOD ENERGY CORPORATION
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
REGISTRAR AND TRANSFER COMPANY, AS RIGHTS AGENT,
By:
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
23
<PAGE> 27
Exhibit A
FORM OF
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
HALLWOOD ENERGY CORPORATION
Pursuant to Section 151 of the
Delaware General Corporation Law
Hallwood Energy Corporation, a corporation organized and existing under
the laws of the State of Delaware, in accordance with the provisions of Section
103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Certificate of Incorporation of the said
Corporation, as amended, the said Board of Directors on ___________ 1999,
adopted the following resolution creating a series of shares of Preferred Stock
designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board
of Directors of this Corporation in accordance with the provisions of
the Certificate of Incorporation, a series of Preferred Stock, par
value $.10 per share, of the Corporation be and hereby is created, and
that the designation and number of shares thereof and the voting and
other powers, preferences and relative, participating, optional or
other rights of the shares of such series and the qualifications,
limitations and restrictions thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred Stock
that shall be designated as "Series A Junior Participating Preferred Stock," and
the number of shares constituting such series shall be [____]. Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, however, that no decrease shall reduce the number of shares of Series
A Junior Participating Preferred Stock to less than the number of shares then
issued and outstanding plus the number of shares issuable upon exercise of
outstanding rights, options or warrants or upon conversion of outstanding
securities issued by the Corporation.
2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of any
shares of any class or series of stock of the Corporation ranking prior and
superior to the shares of Series A Junior Participating Preferred Stock with
respect to dividends, the holders of shares of Series A Junior Participating
Preferred Stock, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the 15th day of January, April, July and October,
in each year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance, of a share or fraction of a share of Series A Junior
Participating Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the Adjustment Number (as defined below) times the aggregate per
share amount of all cash dividends, and the Adjustment Number times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.01 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Junior Participating Preferred Stock. The "Adjustment Number" shall initially be
1000. If the Corporation shall at any time after __________, 1999 (the "Rights
Declaration Date"), (i) declare and pay any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide
A - 1
<PAGE> 28
the outstanding Common Stock or (iii) combine the outstanding Common Stock into
a smaller number of shares, then in each such case the Adjustment Number in
effect immediately prior to such event shall be adjusted by multiplying such
Adjustment Number by a fraction, the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock).
(C) The Board of Directors may fix a record date for the
determination of holders of shares of Series A Junior Participating Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 60 days prior to the date fixed
for the payment thereof.
3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock
shall entitle the holder thereof to a number of votes equal to the Adjustment
Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as required by law and by SECTION 10 hereof, holders of
Series A Junior Participating Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent they are
entitled to vote with holders of Common Stock as set forth herein) for taking
any corporate action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
SECTION 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior Participating
Preferred Stock, except dividends paid ratably on the Series A Junior
Participating Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the holders of
all such shares are then entitled; or
(iii) purchase or otherwise acquire for consideration any shares
of Series A Junior Participating Preferred Stock, or any shares of stock ranking
on a parity with the Series A Junior Participating Preferred Stock, except in
accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of Series A Junior
Participating Preferred Stock, or to such holders and holders of any such shares
ranking on a parity therewith, upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this SECTION 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired promptly after the acquisition thereof. All such
shares
A - 2
<PAGE> 29
shall upon their retirement become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors, subject to any
conditions and restrictions on issuance set forth herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation,
dissolution or winding up of the Corporation, voluntary or otherwise, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock unless, prior thereto, the holders
of shares of Series A Junior Participating Preferred Stock shall have received
an amount per share (the "Series A Liquidation Preference") equal to the greater
of (i) $1.00 plus an amount equal to accrued and unpaid dividends and
distributions thereon whether or not declared, to the date of such payment, or
(ii) the Adjustment Number times the per share amount of all cash and other
property to be distributed in respect of the Common Stock upon such liquidation,
dissolution or winding up of the Corporation.
(B) If, however, there are not sufficient assets available to permit
payment in full of the Series A Liquidation Preference and the liquidation
preferences of all other classes and series of stock of the Corporation, if any,
that rank on a parity with the Series A Junior Participating Preferred Stock in
respect thereof, then the assets available for such distribution shall be
distributed ratably to the holders of the Series A Junior Participating
Preferred Stock and the holders of such parity shares in proportion to their
respective liquidation preferences.
(C) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this SECTION
6.
7. Consolidation, Merger, Etc. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the
outstanding shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each share
of Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. No Redemption. Shares of Series A Junior Participating Preferred
Stock shall not be subject to redemption by the Company.
9. Ranking. The Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Preferred Stock as to the payment of
dividends, and as to the distribution of assets upon liquidation, dissolution or
winding up, unless the terms of any such series shall provide otherwise, and
shall rank senior to the Common Stock as to such matters.
10. Amendment. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Certificate of Incorporation
of the Corporation shall not be amended in any manner that would materially
alter or change the powers, preferences or special rights of the Series A Junior
Participating Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds of the outstanding shares of
Series A Junior Participating Preferred Stock, voting separately as a class.
11. Fractional Shares. Series A Junior Participating Preferred Stock
may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's factional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Junior Participating Preferred Stock.
A - 3
<PAGE> 30
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of __________ __, 1999.
HALLWOOD ENERGY CORPORATION
By:
---------------------------------
Name: William L. Guzzetti
Title: President
A - 4
<PAGE> 31
Exhibit B
Form of Right Certificate
Certificate No. R-__________ __________ Rights
NOT EXERCISABLE AFTER JANUARY 31, 2009, OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO
REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE ON THE TERMS SET
FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES AS
SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS OWNED BY OR
TRANSFERRED TO ANY PERSON WHO IS OR BECOMES AN ACQUIRING
PERSON (AS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN
TRANSFEREES THEREOF WILL BECOME NULL AND VOID AND WILL NO
LONGER BE TRANSFERABLE.
RIGHT CERTIFICATE
Hallwood Energy Corporation
This certifies that ____________ or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of __________ __, 1999, as the same may be amended from time
to time (the "Rights Agreement"), between Hallwood Energy Corporation, a
Delaware corporation (the "Company"), and Registrar and Transfer Company, as
Rights Agent (the "Rights Agent"), to purchase from the Company at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 p.m., Dallas, Texas time, on __________, 2009 at the office or
agency of the Rights Agent designated for such purpose, or of its successor as
Rights Agent, one one-thousandth of a fully paid non-assessable share of Series
A Junior Participating Preferred Stock, par value $.10 per share (the "Preferred
Stock"), of the Company at a purchase price of $40.00 per one one-thousandth of
a share of Preferred Stock (the "Purchase Price"), upon presentation and
surrender of this Right Certificate with the Form of Election to Purchase duly
executed. The number of Rights evidenced by this Right Certificate (and the
number of one one-thousandths of a share of Preferred Stock that may be
purchased upon exercise hereof) set forth above, and the Purchase Price set
forth above, are the number and Purchase Price as of __________ __, 1999, based
on the Preferred Stock as constituted at such date. As provided in the Rights
Agreement, the Purchase Price, the number of one one-thousandths of a share of
Preferred Stock (or other securities or property) that may be purchased upon the
exercise of the Rights and the number of Rights evidenced by this Right
Certificate are subject to modification and adjustment upon the happening of
certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the above-mentioned office or agency of the Rights Agent. The
Company will mail to the holder of this Right Certificate a copy of the Rights
Agreement without charge after receipt of a written request therefor.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office or agency of the Rights Agent designated for such
purpose, may be exchanged for another Right Certificate or Right Certificates of
like tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of shares of Preferred Stock as the Rights evidenced by the
Right Certificate or Right Certificates surrendered shall have entitled such
holder to purchase. If this Right Certificate shall be exercised in part, the
holder shall be entitled to receive upon surrender hereof another Right
Certificate or Right Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate (i) may be redeemed by the Company at a redemption price of
$.01 per Right or (ii) may be exchanged in whole or in part for shares of the
Company's Common Stock, par value $.02 per share, or shares of Preferred Stock.
B - 1
<PAGE> 32
No fractional shares of Preferred Stock or Common Stock will be issued
upon the exercise or exchange of any Right or Rights evidenced hereby (other
than fractions of Preferred Stock that are integral multiples of one
one-thousandth of a share of Preferred Stock, which may, at the election of the
Company, be evidenced by depository receipts), but in lieu thereof, a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of the Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise or exchange hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement) or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised or exchanged as provided in the Rights
Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
B - 2
<PAGE> 33
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of __________.
HALLWOOD ENERGY CORPORATION
By:
------------------------------
Name: William L. Guzzetti
Title: President
ATTEST:
- ------------------------------
[Title]
Countersigned:
REGISTRAR AND TRANSFER COMPANY, AS RIGHTS AGENT
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
B - 3
<PAGE> 34
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate)
FOR VALUE RECEIVED,________________ hereby sells, assigns and transfers unto
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
- --------------------------------------------------------------------------------
Rights represented by this Right Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
_________________________, Attorney, to transfer said Rights on the books of the
within-named Company, with full power of substitution.
Dated:
---------------------------
------------------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a bank, trust company, broker, dealer
or other eligible institution participating in a recognized signature guarantee
medallion program.
- --------------------------------------------------------------------------------
(To be completed)
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by, were not acquired by the
undersigned from, and are not being assigned to an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
------------------------------
Signature
B - 4
<PAGE> 35
Form of Reverse Side of Right Certificate - continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate)
To ______________________:
The undersigned hereby irrevocably elects to exercise _________ Rights
represented by this Right Certificate to purchase the shares of Preferred Stock
(or other securities or property) issuable upon the exercise of such Rights and
requests that certificates for such shares of Preferred Stock (or such other
securities) be issued in the name of:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identification number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
Dated:
---------------------------
------------------------------
Signature
(Signature must conform to holder specified on Right Certificate)
Signature Guaranteed:
Signature must be guaranteed by a bank, trust company, broker, dealer
or other eligible institution participating in a recognized signature guarantee
medallion program.
Form of Reverse Side of Right Certificate - continued
- --------------------------------------------------------------------------------
(To be completed)
The undersigned certifies that the Rights evidenced by this Right
Certificate are not beneficially owned by, and were not acquired by the
undersigned from, an Acquiring Person or an Affiliate or Associate thereof (as
defined in the Rights Agreement).
------------------------------
Signature
B - 5
<PAGE> 36
- --------------------------------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
If certification set forth above in the Form of Assignment or the Form
of Election to Purchase, as the case may be, is not completed, such Assignment
or Election to Purchase will not be honored.
B - 6
<PAGE> 37
Exhibit C
UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS
AGREEMENT, RIGHTS OWNED BY OR TRANSFERRED TO ANY PERSON
WHO IS OR BECOMES AN ACQUIRING PERSON (AS DEFINED IN
THE RIGHTS AGREEMENT) AND CERTAIN TRANSFEREES THEREOF
WILL BECOME NULL AND VOID AND WILL NO LONGER BE
TRANSFERABLE.
SUMMARY OF RIGHTS TO PURCHASE
SHARES OF PREFERRED STOCK OF
----------------------
On February 1, 1999, the Board of Directors of ______________________
(the "Company") declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of common stock, par value $.01 per share,
of the Company (the "Common Stock"). The dividend is payable on February 12,
1999 (the "Record Date"), to the stockholders of record on that date. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series A Junior Participating Preferred Stock, par value $.10 per
share, of the Company (the "Preferred Stock") at a price of $40.00 per one
one-thousandth of a share of Preferred Stock (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement dated as of February 1, 1999, as the same may be amended from time to
time (the "Rights Agreement"), between the Company and _________________, as
Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (with
certain exceptions, an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of Common Stock or (ii) 10 business days
(or such later date as may be determined by action of the Board of Directors
prior to such time as any person or group of affiliated persons becomes an
Acquiring Person) following the commencement of, or announcement of an intention
to make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of the
outstanding shares of Common Stock (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to any of the
Common Stock certificates outstanding as of the Record Date, by such Common
Stock certificate together with a copy of this Summary of Rights.
The Rights Agreement provides that, until the Distribution Date (or
earlier expiration of the Rights), the Rights will be transferred with and only
with the Common Stock. Until the Distribution Date (or earlier expiration of the
Rights), new Common Stock certificates issued after the Record Date upon
transfer or new issuances of Common Stock will contain a notation incorporating
the Rights Agreement by reference. Until the Distribution Date (or earlier
expiration of the Rights), the surrender for transfer of any certificates for
shares of Common Stock outstanding as of the Record Date, even without such
notation or a copy of this Summary of Rights, will also constitute the transfer
of the Rights associated with the shares of Common Stock represented by such
certificates. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on __________, 2009 (the "Final Expiration Date"), unless the Final
Expiration Date is advanced or extended or unless the Rights are earlier
redeemed or exchanged by the Company, in each case as described below.
The Purchase Price payable, and the number of shares of Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) upon a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights
or warrants to subscribe for or purchase Preferred Stock at a price, or
securities convertible into Preferred Stock with a conversion price, less than
the then-current market price of the Preferred Stock or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends or dividends payable in
Preferred Stock) or of subscription rights or warrants (other than those
referred to above).
C - 1
<PAGE> 38
The number of outstanding Rights is subject to adjustment upon the
occurrence of a stock dividend on the Common Stock payable in shares of Common
Stock or subdivisions, consolidations or combinations of the Common Stock
occurring, in any such case, prior to the Distribution Date.
Shares of Preferred Stock purchasable upon exercise of the Rights will
not be redeemable. Each share of Preferred Stock will be entitled, when, as and
if declared, to a dividend payment per share equal to an aggregate dividend of
1,000 times the dividend declared per share of Common Stock. Upon liquidation,
dissolution or winding up of the Company, the holders of the Preferred Stock
will be entitled to a minimum preferential payment of $1.00 per share (plus any
accrued but unpaid dividends) but will be entitled to an aggregate payment of
1,000 times the payment made per share of Common Stock. Each share of Preferred
Stock will have 1,000 votes, voting together with the Common Stock. Finally,
upon any merger, consolidation or other transaction in which outstanding shares
of Common Stock are converted or exchanged, each share of Preferred Stock will
be entitled to receive 1,000 times the amount received per share of Common
Stock. These rights are protected by customary antidilution provisions.
Because of the nature of the Preferred Stock's dividend, liquidation
and voting rights, the value of the one one-thousandth interest in a share of
Preferred Stock purchasable upon exercise of each Right should approximately be
the value of one share of Common Stock.
If any person or group of affiliated or associated persons becomes an
Acquiring Person, each holder of a Right, other than Rights beneficially owned
by the Acquiring Person (which will thereupon become void), will thereafter have
the right to receive upon exercise of a Right that number of shares of Preferred
Stock having a market value of two times the exercise price of the Right.
If, after a person or group has become an Acquiring Person, the Company
is acquired in a merger or other business combination transaction or 50% or more
of its consolidated assets or earning power are sold, proper provisions will be
made so that each holder of a Right (other than Rights beneficially owned by an
Acquiring Person which will have become void) will thereafter have the right to
receive upon the exercise of a Right that number of shares of common stock of
the person with whom the Company has engaged in the foregoing transaction (or
its parent) that at the time of such transaction have a market value of two
times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and
prior to the earlier of one of the events described in the previous paragraphs
or the acquisition by such Acquiring Person of 50% or more of the outstanding
shares of Common Stock, the Board of Directors of the Company may exchange the
Rights (other than Rights owned by such Acquiring Person which will have become
void), in whole or in part, for shares of Common Stock or Preferred Stock (or a
series of the Company's preferred stock having equivalent rights, preferences
and privileges), at an exchange ratio of one share of Common Stock, or a
fractional share of Preferred Stock (or other preferred stock) equivalent in
value thereto, per Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Preferred Stock or Common Stock
will be issued (other than fractions of Preferred Stock that are integral
multiples of one one-thousandth of a share of Preferred Stock, which may, at the
election of the Company, be evidenced by depositary receipts), and in lieu
thereof an adjustment in cash will be made based on the current market price of
the Preferred Stock or the Common Stock.
At any time prior to the time an Acquiring Person becomes such, the
Board of Directors of the Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right (the "Redemption Price"). The redemption of
the Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
For so long as the Rights are then redeemable, the Company may, except
with respect to the redemption price, amend the Rights Agreement in any manner.
After the Rights are no longer redeemable, the Company may, except with respect
to the redemption price, amend the Rights Agreement in any manner that does not
adversely affect the interests of holders of the Rights.
C - 2
<PAGE> 39
Until a Right is exercised or exchanged, the holder thereof, as such,
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated
_________________ ___, 1999. A copy of the Rights Agreement is available free of
charge from the Company. This summary description of the Rights does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, as the same may be amended from time to time, which is hereby
incorporated herein by reference.
C - 3
<PAGE> 1
EXHIBIT 10.3
1999 LONG-TERM INCENTIVE PLAN LOAN PROGRAM
FOR
HALLWOOD ENERGY CORPORATION
SECTION 1. PURPOSE. This 1999 Long Term Incentive Plan Loan Program
(this "LOAN PROGRAM") for Hallwood Energy Corporation (the "Corporation") has
been established in connection with the adoption of the 1999 Long-Term Incentive
Plan for the Corporation (the "PLAN"). This Loan Program provides for the making
of loans by the Corporation, upon the terms and conditions hereinafter set
forth, to the recipients of options (an "Option") to purchase shares of common
stock or preferred stock of the Corporation granted pursuant to the 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
Corporation in order to comply with applicable federal or state income tax
withholding requirements.
SECTION 2. DEFINITIONS. Terms not otherwise defined herein shall have
the meanings ascribed to them in the Plan. 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 due to a Change in Control
(as defined in the Plan).
(b) "CORPORATION INTEREST RATE" shall mean the rate of interest
payable by the Corporation with respect to its revolving line of credit
with its primary lender or, if the Corporation has no revolving line of
credit, the rate of interest payable by any affiliate of the
Corporation selected by the Committee with respect to such affiliate's
revolving line of credit with its primary lender.
(c) "FAIR MARKET VALUE" shall mean:
(i) "Fair Market Value" of a share of Common Stock or a
share of Preferred Stock 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 purposes
of this Plan, the "Closing Price" of the Common Stock or
Preferred Stock on any business day shall be: (A) if the Common
Stock or Preferred Stock is listed or admitted for trading on
any United Sates 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 Common Stock or Preferred Stock on such exchange
or system, as reported in any newspaper of general circulation;
(B) if the Common Stock or the Preferred Stock is 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 Common Stock or Preferred Stock on such system; (C) if
neither clause (A) nor (B) is applicable, the mean between the
high bid and low asked quotations for Common Stock or Preferred
Stock as reported by the National Quotation Bureau, Incorporated
if at least two securities dealers have inserted both bid and
asked quotations for Common Stock or Preferred Stock on at least
five of the ten preceding days; or, (D) in lieu of the above, if
actual transactions in the Common Stock or Preferred Stock are
reported on a consolidated transaction reporting system, the
last sale price of the Common Stock or Preferred Stock 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.
(d) "FULLY SECURED" shall mean that the Optionee shall have
created in favor of the Corporation a perfected security interest in
(i) the Shares or Preferred Shares acquired upon exercise of the
Related Option
<PAGE> 2
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).
(e) "LOAN" shall mean any loan extended to an Optionee pursuant
to this Loan Program.
(f) "LOAN DATE" shall mean, with respect to any Loan, the date
on which such Loan is made by the Corporation.
(g) "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 Shares or Preferred Shares acquired upon exercise
of the Related Option.
(h) "OPTIONEE" shall mean the holder of an Option granted
pursuant to the Plan.
(i) "OTHER COLLATERAL" shall mean any property of an Optionee
other than Shares acquired upon exercise of a Related Option that is
pledged to secure any portion of a Loan.
(j) "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.
(k) "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 Shares 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) 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 (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 within the United States, any other documentation
required by the Committee, in its sole discretion, to create in favor
of the Corporation a perfected security interest in such property.
(l) "TAX PAYMENTS" shall mean payments to the Corporation in
compliance with applicable federal or state income tax withholding
requirements.
(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 credit
obligation of the United States of America.
All capitalized terms not otherwise defined herein shall have the meanings
assigned to them in the Plan.
SECTION 3. LOANS.
(a) The Corporation, 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 Corporation
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;
2
<PAGE> 3
(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 Corporation Interest Rate in effect as of
the Loan Date; and
(v) accrued interest shall be payable on the last day of each of
the Corporation'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 Corporation 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 Corporation'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
Corporation 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 Shares, owned by the Optionee for at least
six months, having a Fair Market Value as of the date of such repayment equal to
such principal balance.
(e) The Corporation 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 Corporation be required to make a Loan if, as
reflected on the Corporation's latest regularly prepared books and records, the
Corporation 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 Corporation'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
Corporation 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 Corporation 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 Corporation has registered on Form FR G-1, then the
Corporation shall, within 30 days following June 30 of every year, file Federal
Reserve Form FR G-4.
3
<PAGE> 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
Corporation or other benefits with respect to Optionee's position with the
Corporation, a Subsidiary or an Affiliate. 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 Corporation 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
Corporation 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 Corporation, 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 Corporation; provided, however, the
Corporation may recover any and all damages, fees, expenses and costs arising
out of any actions taken by the Corporation to enforce its rights under this
Loan Program or any Required Loan Document.
(e) Records of the Corporation shall be conclusive for all purposes
under this Loan Program or any Loan, unless determined by the Committee to be
incorrect.
(f) The Corporation 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 Corporation 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.
4
<PAGE> 5
(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 Corporation 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 Corporation 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 Corporation, 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: ________ _____, 1999.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
5
<PAGE> 6
EXHIBIT A
OPTIONEE LOAN APPLICATION FORM
1. Name of Optionee: ---------------------------
2. Number of Shares or Preferred Shares
Subject to Option: ---------------------------
3. Number of Shares or Preferred Shares being
acquired pursuant to exercise of such Option: ---------------------------
4. Exercise price per Share or Preferred Share
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:
------------------------
<PAGE> 7
EXHIBIT B
PROMISSORY NOTE
<PAGE> 8
PROMISSORY NOTE
$_________ _____________, 199__
____________________________________ ("Maker"), for value received,
promises and agrees to pay, as herein provided, to the order of Hallwood Energy
Corporation, a Delaware ("PAYEE"), at such address or to such bank account as
Payee may direct, in lawful money of the United States of America, the principal
sum of _______________________________________ Dollars ($_________). This note
("NOTE") is issued under the terms of that certain 1999 Stock Option Plan Loan
Program for Hallwood Energy Corporation 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 shares of
common stock, par value $0.01 per share, of Payee owned by the Maker for at
least six months 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 that 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 Delaware.
(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 that 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
<PAGE> 9
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 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 Delaware.
-----------------------------------
Name of Maker
2
<PAGE> 10
EXHIBIT C
PLEDGE AGREEMENT
<PAGE> 11
PLEDGE AGREEMENT
This PLEDGE AGREEMENT (this "AGREEMENT"), dated as of _______________,
19___, is entered into by and between ______________________________ ("PLEDGOR")
and Hallwood Energy Corporation, a Delaware corporation (the "CORPORATION"), in
order to secure the payment of the indebtedness hereinafter referred to of
Pledgor to the Corporation.
R E C I T A L S
As a condition to the Corporation 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 Corporation 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 Corporation in
the principal amount of $_______________ (the "NOTE") and (ii) the reimbursement
of all costs incurred by the Corporation to obtain, preserve and enforce this
Agreement, collect the Secured Obligations and maintain and preserve the
Collateral, including without limitation the Corporation's reasonable attorneys'
fees, disbursements and legal expenses.
SECTION 4. DELIVERY OF COLLATERAL. Upon the execution hereof, Pledgor
shall deliver to the Corporation 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 Corporation. Upon the occurrence and
during the continuance of an Event of Default, the Corporation 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 Corporation 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.
<PAGE> 12
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
Corporation may reasonably request, in order to perfect and protect the Security
Interest granted or purported to be granted hereby or to enable the Corporation
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 Corporation shall continue in
such Collateral or any part thereof notwithstanding such sale or other
disposition, and Pledgor will deliver any proceeds thereof to the Corporation to
be held as Collateral hereunder.
SECTION 8. CORPORATION APPOINTED ATTORNEY-IN-FACT. Pledgor hereby
irrevocably appoints the Corporation 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 Corporation's discretion, to take any action and to execute
any instrument that the Corporation 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. CORPORATION 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 Corporation may itself perform, or
cause performance of, such agreement, and the expenses of the Corporation
incurred in connection therewith shall be payable by Pledgor under SECTION 12.
SECTION 10. REASONABLE CARE. The Corporation shall have an obligation
to exercise reasonable care with respect to Collateral in its possession;
provided, however, that the Corporation shall be deemed to have exercised
reasonable care if the Collateral is accorded treatment substantially comparable
to that which the Corporation accords its own property or treatment
substantially in accordance with actions requested by Pledgor in writing
(although the Corporation 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 Corporation accelerates the payment of the principal and interest
thereunder such that such Secured Obligations shall become immediately due and
payable.
If upon or after the occurrence of any Event of Default, the
Corporation 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 Corporation 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 [DELAWARE] at that time, and the
Corporation 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 Corporation'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 Corporation 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 Corporation 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 Corporation 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
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<PAGE> 13
with all applicable federal and state securities laws or exemptions therefrom.
The Corporation 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 Corporation 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 Corporation 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 Corporation 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 that might have been obtained at a
public sale or was less than the Secured Obligations, even if the Corporation
accepts the first offer received and does not offer the Collateral to more than
one offeree (other than the Corporation or an affiliate of the Corporation),
unless such sale was not commercially reasonable under the circumstances.
To the extent notice of sale shall be required by law, the Corporation
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
Corporation, 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 Corporation the whole or any part of the Collateral. The
Corporation shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Corporation 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 Corporation until the sale price is paid by the purchaser or purchasers
thereof, but the Corporation 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
Corporation 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 [DELAWARE] from time to time.
As an alternative to exercising the power of sale herein conferred upon
it, the Corporation 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 Corporation as Collateral and all
cash proceeds received by the Corporation 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 Corporation as collateral
for the Note, and (ii) following the occurrence of an Acceleration may be held
by the Corporation as Collateral and/or then or at any time thereafter applied
as follows: (x) first, to the payment to the Corporation 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 Corporation pursuant to SECTION 12, and (y) second, to the Corporation for
application against or on account of all or any part of the Note.
(c) Any surplus of such cash or cash proceeds held by the
Corporation 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 Corporation 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
that the Corporation 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 Corporation 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 Corporation
hereunder, the interest, and all obligations of Pledgor hereunder, shall be
absolute and unconditional irrespective of:
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<PAGE> 14
(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 Corporation 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 Corporation 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 Corporation
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
Corporation 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 Corporation 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 Corporation 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 Corporation (until notice of a change thereof is given as
provided in this SECTION 17), and the address of the Corporation (until notice
of a change thereof is given as provided in this SECTION 17) shall be as
follows:
Hallwood Energy Corporation
[3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219]
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 Corporation and their respective successors
and assigns, and (iii) inure, together with the rights, powers and remedies of
Pledgor and the Corporation hereunder, to the benefit of Pledgor, the
Corporation and their respective successors, transferees and assigns, as the
case may be.
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<PAGE> 15
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 Delaware.
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 Corporation 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.
CORPORATION:
HALLWOOD ENERGY CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
PLEDGOR:
-----------------------------------------
Print Name:
------------------------------
<PAGE> 16
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.
<PAGE> 17
(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 Mortgager 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 Mort gaged Property or any part thereof and to
apply for and obtain any planning permissions building
regulation approvals and any other permissions consents
or licenses 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 Mort gaged 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 favor 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;
PROVIDED NEVERTHELESS THAT the Receiver shall not be authorized 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
authorize 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
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<PAGE> 18
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 authorized 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 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 entitle 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
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<PAGE> 19
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
reenactment 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.
4
<PAGE> 20
THE SCHEDULE ABOVE REFERRED TO
The property known as or being
compromised in the document(s) particulars of which are set out below:--
<TABLE>
<CAPTION>
================================================================================
Description (Conveyance, Lease, Assignment,
Date Mortgage, Assent, Etc.) Parties
- --------------------------------------------------------------------------------
<S> <C> <C>
================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Last Certificate(s) Title No.(s) County/London Borough
- --------------------------------------------------------------------------------
<S> <C>
================================================================================
</TABLE>
Signed sealed and delivered by the above named
- ------------------------------------------------------------
in the presence of
SIGNATURE OF WITNESS
----------------------------------------
NAME OF WITNESS SEAL
--------------------------------------------
ADDRESS
-----------------------------------------------------
- ------------------------------------------------------------
OCCUPATION
--------------------------------------------------
Signed sealed and delivered by the above named
- ------------------------------------------------------------
in the presence of
SIGNATURE OF WITNESS
----------------------------------------
NAME OF WITNESS SEAL
---------------------------------------------
ADDRESS
-----------------------------------------------------
- ------------------------------------------------------------
OCCUPATION
--------------------------------------------------
EXECUTED AND DELIVERED AS A DEED BY
DIRECTOR
- ----------------------------------------------------
SECRETARY
- ---------------------------------------------------
Company's registered number
-------------------------
The address of the Bank for service (if title is registered) is:
<PAGE> 1
EXHIBIT 10.4
AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of ______________, 1999,
by and among HALLWOOD ENERGY PARTNERS, L.P., a Delaware limited partnership (the
"Partnership"),, HALLWOOD CONSOLIDATED RESOURCES CORPORATION, a Delaware
corporation ("HCRC"), Hallwood Energy Corporation, a Delaware corporation
("HEC") and ________________, an individual (the "Holder").
WHEREAS, HEP, HCRC and HEC are parties to that certain Merger and Asset
Contribution Agreement (the "Merger Agreement"), dated as of December 15, 1998,
as amended as of March 9, 1999 and _________, 1999.
WHEREAS, Sections 3.3 and 4.3 of the Merger Agreement provide that,
simultaneously upon the closing (the "Closing") of the transactions contemplated
by the Merger Agreement, all outstanding options for Class A Units and Class C
Units (the "HEP Options") of HEP and options for shares of common stock (the
"HCRC Common Stock") of HCRC (the "HCRC Options") shall be canceled and the
holders thereof shall receive cash consideration (the "Consideration") in
exchange therefor;
WHEREAS, the undersigned Holder holds (i) Options to purchase _____
Class A Units at an exercise price of $ and/or _____ Class C Units at an
exercise price of $_____; and (ii) HCRC Options to purchase _____ shares of HCRC
Common Stock at an exercise price of $_____ per share and/or _____ shares of
HCRC Common Stock at an exercise price of $_____ per share.
NOW THEREFORE, in consideration of the foregoing and the covenants and
agreements contained herein, the parties to this Agreement agree as follows:
1. CANCELLATION OF OPTIONS. The Options held by the holder shall be
canceled in exchange for the Consideration as follows: All HEP Options and HCRC
Options held by the Holder to purchase Class A Units, Class C Units or HCRC
Common Stock shall be canceled and the Holder thereof shall receive an amount in
cash equal to the product of (i) the aggregate positive difference between the
exercise price (the "Exercise Price") per share of Class A Units, Class C Units
and HCRC Common Stock of the Option to purchase Class A Units, Class C Units or
HCRC Common Stock, respectively, held by the Holder and the average closing
price (the "Closing Price") of the Class A Units, Class C Units or HCRC Common
Stock, respectively, on the American Stock Exchange or the Nasdaq National
Market for the 30 calendar days preceding the date of the Closing; and (ii) the
total number of Class A Units, Class C Units or shares of HCRC Common Stock,
respectively, subject to the Option held by the Holder.
2. ACKNOWLEDGMENT OF CONSIDERATION. The Holder acknowledges that the
Consideration to be received by the Holder pursuant to the foregoing Paragraph 1
is in full consideration of the cancellation of all HEP Options and HCRC Options
held by such Holder.
3. SURRENDER OF OPTIONS. Holder agrees that (1) as a condition to such
Holder's receipt of the Consideration hereunder, Holder shall surrender to HEP
and HCRC the original Option Agreement(s) relating to the HEP Options and HCRC
Options for which such Holder is receiving the Consideration; and (2) the Option
Agreement(s) shall no longer evidence the right to purchase the Class A Units,
Class C Units or shares of HCRC Common Stock covered by such HEP Option or HCRC
Option.
4. GOVERNING LAW This Agreement shall be construed and enforced in
accordance with and governed by the internal laws of the State of Delaware
without regard its principles of conflicts of laws.
5. SUCCESSORS AND ASSIGNS All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective executors, heirs, legal representatives, successors and
permitted assigns.
6. COUNTERPARTS This Agreement may be executed by the parties in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts shall together constitute but one
and
<PAGE> 2
the same instrument. A telecopy or facsimile transmission of a signed
counterpart of this Agreement shall be sufficient to bind the party or parties
whose signature(s) appear(s) thereon.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
HALLWOOD ENERGY PARTNERS, L.P.
By: HEPGP Ltd., general partner
By: Hallwood G.P., Inc., general partner
By:
-----------------------------------
William L. Guzzetti, President
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By:
---------------------------------------------
HALLWOOD ENERGY CORPORATION
By:
-----------------------------------
William L. Guzzetti, President
HOLDER:
------------------------------------------------
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HALLWOOD ENERGY CORPORATION
HEC Acquisition Corp., a Delaware corporation
HEC Acquisition Partnership, L.P., a Delaware limited partnership
HCRC Acquisition Corp., a Delaware corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Hallwood Energy
Corporation on Form S-4 of our reports dated March 24, 1999, relating to the
financial statements of Hallwood Energy Partners, L.P. and Hallwood Consolidated
Resources Corporation appearing in this prospectus which is part of this
Registration Statement, and to the reference to us under
the heading "Experts" in such prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
April 29, 1999
<PAGE> 1
EXHIBIT 23.2
Board of Directors
Hallwood Consolidated Resources Corporation
3710 Rawlins, Suite 1500
Dallas, Texas 75219
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Special
Committee of the Board of Directors of Hallwood Consolidated Resources
Corporation ("Hallwood Consolidated Resources") as Appendix C to the Joint Proxy
Statement/Prospectus of Hallwood Consolidated Resources, Hallwood Energy
Partners, L.P. and Hallwood Energy Corporation relating to the proposed
consolidation of Hallwood Consolidated Resources Corporation, Hallwood Energy
Partners, L.P. and the energy interests of the The Hallwood Group Incorporated
into the newly formed Hallwood Energy Corporation and references thereto in such
Joint Proxy Statement/Prospectus under the captions "Summary - Opinions of
Financial Advisors," "The Consolidation - Background of the Consolidation,"
"The Consolidation - Recommendation of Hallwood Consolidated Resources Special
Committee and the Hallwood Consolidated Resources Board," and "The Consolidation
- - Opinion of Consolidated Resources' Financial Advisor." In giving such consent,
we do not admit that we come within the category of persons whose consent is
required under, and we do not admit that we are "experts" for purposes of, the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.
Very truly yours,
/s/ Dain Rauscher Wessels
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
April 29, 1999
<PAGE> 1
EXHIBIT 23.3
Board of Directors
Hallwood G.P., Inc.
3710 Rawlins, Suite 1500
Dallas, Texas 75219
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Special
Committee of the Board of Directors of Hallwood G.P., Inc. ("Hallwood G.P.") as
Appendix B to the Joint Proxy Statement/Prospectus of Hallwood Consolidated
Resources Corporation, Hallwood Energy Partners, L.P. and Hallwood Energy
Corporation relating to the proposed consolidation of Hallwood Consolidated
Resources Corporation, Hallwood Energy Partners, L.P. and the energy interests
of the The Hallwood Group Incorporated into the newly formed Hallwood Energy
Corporation and references thereto in such Joint Proxy Statement/Prospectus
under the captions "Summary - Opinions of Financial Advisors," "The
Consolidation - Background of the Consolidation," "The Consolidation
Recommendation of Hallwood G.P. Special Committee and the Hallwood G.P. Board,"
and "The Consolidation - Opinion of Energy Partners' Financial Advisor." In
giving such consent, we do not admit that we come within the category of persons
whose consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
Very truly yours,
/s/ Kirkpatrick Energy Associates
Kirkpatrick Energy Associates
April 29, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF WILLIAMSON PETROLEUM CONSULTANTS, INC.
As independent oil and gas consultants, Williamson Petroleum Consultants, Inc.,
hereby consents (a) to the inclusion of our letters dated September 2, 1998 and
entitled (1) "Review of Estimates Prepared by Hallwood Petroleum, Inc. of Oil
and gas Reserves and Associated Future Net Revenues of the Major-Value
Properties to the Consolidated Interests of Hallwood Consolidated Resources
Corporation, Effective July 1, 1998, for Disclosure to the Securities and
Exchange Commission Williamson Project 8.8616"; (2) "Review of Estimated
Prepared by Hallwood Petroleum, Inc. of Oil and Gas Reserves and Associated
Future Net Revenues of Certain Major-Value Properties to the Consolidated
Interests of HEPGP, Ltd., Effective July 1, 1998, for Disclosure to the
Securities and Exchange Commission Williamson Project 8.8616"; (3) "Review of
Estimates Prepared by Hallwood Petroleum Inc. of Oil and Gas Reserves and
Associated Future Net Revenues of the Major-Value Properties to the Consolidated
Interests of Hallwood Energy Partners, L.P., Effective July 1, 1998, for
Disclosure to the Securities and Exchange Commission, Williamson Project
8.8616," and (b) to the references to our firm in this Registration Statement on
Form S-4 of Hallwood Energy Corporation to be filed with the Securities and
Exchange Commission on or about April 29, 1999.
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
-------------------------------------------
Williamson Petroleum Consultants, Inc.
Houston, Texas
April 29, 1999
<PAGE> 1
EXHIBIT 23.7
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Nathan C. Collins
-------------------------------
Name: Nathan C. Collins
Date: 4/12/99
--------------------------
<PAGE> 1
EXHIBIT 23.8
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Jerry A. Lubliner
-------------------------------
Name: Jerry A. Lubliner
Date: 4/9/99
--------------------------
<PAGE> 1
EXHIBIT 23.9
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ John R. Isaac, Jr.
-----------------------------
Name: John R. Isaac, Jr.
Date: 4/19/99
-------------------------
<PAGE> 1
EXHIBIT 23.10
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Rex A. Sebastian
---------------------------------
Name: Rex A. Sebastian
Date: 4/9/99
----------------------------
<PAGE> 1
EXHIBIT 23.11
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Brian M. Troup
---------------------------------
Name: Brian M. Troup
Date: 4/9/99
----------------------------
<PAGE> 1
EXHIBIT 23.12
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Anthony J. Gumbiner
---------------------------------
Name: Anthony J. Gumbiner
Date: 4/8/99
----------------------------
<PAGE> 1
EXHIBIT 23.13
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Hamilton P. Schrauff
--------------------------------
Name: Hamilton P. Schrauff
Date: 4/10/99
---------------------------
<PAGE> 1
EXHIBIT 23.14
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Hans-Peter Holinger
--------------------------------
Name: Hans-Peter Holinger
Date: 4/12/99
---------------------------
<PAGE> 1
EXHIBIT 23.15
CONSENT OF PROPOSED DIRECTOR
The undersigned hereby consents to being named as a proposed member of
the Board of Directors of Hallwood Energy Corporation (the "Registrant") in the
Prospectus constituting part of the Joint Proxy Statement/Registration Statement
of the Registrant filed under the Securities Act of 1933, as amended.
/s/ Bill M. Van Meter
-----------------------------
Name: Bill M. Van Meter
Date: 4/9/99
------------------------
<PAGE> 1
EXHIBIT 99.1
REVOCABLE PROXY
HALLWOOD ENERGY PARTNERS, L.P.
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
FOR SPECIAL MEETING OF UNITHOLDERS
MAY 25, 1999
Proxy Solicited on Behalf of the Board of Directors of the General Partner
The undersigned hereby appoints William L. Guzzetti and Cathleen M. Osborn,
and each of them, with full power of substitution, to act as attorneys and
proxies for the undersigned to vote all units of Hallwood Energy Partners, L.P.,
which the undersigned is entitled to vote at the Special Meeting of Unitholders
to be held at 3710 Rawlins, Suite 1500, Dallas, Texas, on Tuesday May 25, 1999,
at 10:00 a.m. (the "Special Meeting"), and at any and all adjournments or
postponements thereof. Said proxies are herein specifically authorized to vote
upon a proposal to approve the Consolidation Agreement.
PLEASE VOTE ALL CLASSES OF UNITS YOU OWN.
Class A Units
1. The approval of the Consolidation Agreement and the transactions
contemplated by it.
For Against Abstain
[ ] [ ] [ ]
Class C Units
1. The approval of the Consolidation Agreement and the transactions
contemplated by it.
For Against Abstain
[ ] [ ] [ ]
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY WILL BE VOTED FOR THE APPROVAL OF THE CONSOLIDATION AGREEMENT.
IF YOU OWN BOTH CLASSES OF UNITS AND GIVE DIRECTION FOR VOTING ONLY ONE
CLASS, THIS PROXY WILL BE VOTED IN THE SAME MANNER FOR BOTH CLASSES.
Please be sure to sign and date this Proxy below.
Date:
------------------------ ------------------------------------
Unitholder sign above
------------------------------------
Co-holder (if any) sign above
- --------------------------------------------------------------------------------
o Detach above card, sign, date and mail in postage paid envelope provided o
HALLWOOD ENERGY PARTNERS, L.P.
- --------------------------------------------------------------------------------
Please sign exactly as your name appears above on this card. When signing as
attorney, executor, trustee or guardian, please give full title. Corporation
proxies should be signed in corporate name by an authorized officer. If units
are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
FOR MORE INFORMATION ON THE CONSOLIDATION, YOU
MAY CALL OUR SOLICITATION AGENT, THE HERMAN
GROUP, TOLL-FREE AT (877) 731-5210.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.2
REVOCABLE PROXY
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
FOR SPECIAL MEETING OF STOCKHOLDERS
MAY 25, 1999
Proxy Solicited on Behalf of the Board of Directors
The undersigned hereby appoints William L. Guzzetti and Cathleen M. Osborn,
and each of them, with full power of substitution, to act as attorneys and
proxies for the undersigned to vote all shares of common stock of Hallwood
Consolidated Resources Corporation which the undersigned is entitled to vote at
the Special Meeting of Stockholders to be held at 3710 Rawlins, Suite 1500,
Dallas, Texas, on Tuesday May 25, 1999, at 11:00 a.m. (the "Special Meeting"),
and at any and all adjournments or postponements thereof. Said proxies are
herein specifically authorized to vote upon a proposal to approve the
Consolidation Agreement.
1. The approval of the Consolidation Agreement and the transactions
contemplated by it.
For Against Abstain
[ ] [ ] [ ]
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE
SPECIFIED, THIS PROXY WILL BE VOTED FOR THE APPROVAL OF THE CONSOLIDATION
AGREEMENT.
Please be sure to sign and date this Proxy below.
Date:
------------------------ ------------------------------------
Stockholder sign above
------------------------------------
Co-holder (if any) sign above
- --------------------------------------------------------------------------------
o Detach above card, sign, date and mail in postage paid envelope provided o
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
- --------------------------------------------------------------------------------
Please sign exactly as your name appears above on this card. When signing as
attorney, executor, trustee or guardian, please give full title. Corporation
proxies should be signed in corporate name by an authorized officer. If shares
are held jointly, each holder should sign.
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
FOR MORE INFORMATION ON THE CONSOLIDATION, YOU
MAY CALL OUR SOLICITATION AGENT, THE HERMAN
GROUP, TOLL-FREE AT (877) 731-5210.
- --------------------------------------------------------------------------------
