UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-9579
HALLWOOD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-1489099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4610 South Ulster Street Parkway
Suite 200
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Number of shares outstanding as of August 11, 1999
Common Stock 9,999,754
Series A Cumulative Preferred Stock 2,334,165
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, December 31,
1999 1998
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 8,576 $ 11,874
Accounts receivable:
Oil and gas revenues 10,988 5,911
Trade 4,259 4,040
Due from affiliates 1,334 119
Prepaid expenses and other current assets 1,614 1,338
Net working capital of affiliate 236
------------- ----------
Total 26,771 23,518
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 739,526 664,799
Unproved mineral interests - domestic 5,654 2,694
Furniture, fixtures and other 3,636 3,411
--------- ---------
Total 748,816 670,904
Less accumulated depreciation, depletion,
amortization and property impairment (574,821) (565,899)
------- -------
Total 173,995 105,005
------- -------
OTHER ASSETS
Deferred expenses and other assets 1,352 408
Deferred tax asset 100
Investment in common stock of HCRC 10,160
------------- --------
Total 1,452 10,568
--------- --------
TOTAL ASSETS $202,218 $139,091
======= =======
<FN>
(Continued on the following page)
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
June 30, December 31,
1999 1998
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 20,164 $ 22,921
Current portion of long-term debt 9,319
----- -----
Total 20,164 32,240
-------- --------
NONCURRENT LIABILITIES
Long-term debt 105,372 40,381
Deferred liability 927 1,050
---------- ---------
Total 106,299 41,431
------- --------
Total Liabilities 126,463 73,671
------- --------
MINORITY INTEREST IN AFFILIATES 539 2,788
---------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY
Series A Cumulative Preferred Stock; 5,000,000 shares authorized; 2,334,165
shares issued and outstanding in 1999 and
1998 21,386 21,386
Common Stock par value $.01 per share; 25,000,000 shares
authorized; 9,999,754 shares issued and outstanding in 1999 and
5,599,754 shares issued and outstanding in 1998 100 56
Additional paid-in capital 69,197 58,052
Accumulated deficit (15,467) (16,862)
-------- --------
Stockholders' equity - net 75,216 62,632
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $202,218 $139,091
======= =======
<FN>
The accompanying notes are an integral part of
the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months Ended
June 30,
1999 1998
REVENUES:
<S> <C> <C>
Gas revenue $ 7,546 $ 6,994
Oil revenue 3,031 2,640
Pipeline, facilities and other 1,430 976
Interest 61 186
--------- --------
12,068 10,796
------ ------
EXPENSES:
Production operating 3,432 3,000
Facilities operating 152 93
General and administrative 1,152 1,084
Depreciation, depletion and amortization 4,519 3,078
Impairment of oil and gas properties 2,600
Interest 1,273 549
------- --------
10,528 10,404
------ ------
OTHER INCOME (EXPENSES):
Equity in income (loss) of HCRC 63 (2,229)
Minority interest in net income of affiliates (64) (271)
Litigation 100 (600)
--------- --------
99 (3,100)
---------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,639 (2,708)
------- -------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 26
Deferred (100)
(74)
NET INCOME (LOSS) 1,713 (2,708)
PREFERRED DIVIDENDS 584 616
-------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 1,129 $ (3,324)
======= =======
NET INCOME (LOSS) PER SHARE - BASIC $ .17 $ (.59)
========= =========
NET INCOME (LOSS) PER SHARE - DILUTED $ .17 $ (.59)
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,664 5,600
======= =======
PRO FORMA INFORMATION ASSUMING PROVISION
FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)
Income (loss) before income taxes $ 1,639 $ (2,708)
Provision (benefit) for income taxes
Net income (loss) $ 1,639 $ (2,708)
======= =======
Net income (loss) attributable to common shareholders $ 1,055 $ (3,324)
======= =======
Net income (loss) per share - basic $ .16 $ (.59)
========= =========
Net income (loss) per share - diluted $ .16 $ (.59)
========= =========
<FN>
The accompanying notes are an integral part of
the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Six Months Ended
June 30,
1999 1998
REVENUES:
<S> <C> <C>
Gas revenue $ 14,036 $ 13,738
Oil revenue 5,198 5,730
Pipeline, facilities and other 2,639 1,676
Interest 177 326
-------- --------
22,050 21,470
------ ------
EXPENSES:
Production operating 6,490 6,061
Facilities operating 327 245
General and administrative 2,494 2,249
Depreciation, depletion and amortization 8,812 6,617
Impairment of oil and gas properties 2,600
Interest 2,091 1,193
------- -------
20,214 18,965
------ ------
OTHER INCOME (EXPENSES):
Equity in loss of HCRC (419) (2,323)
Minority interest in net income of affiliates (196) (584)
Litigation 100 (555)
-------- --------
(515) (3,462)
-------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,321 (957)
------- --------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 26
Deferred (100)
(74)
NET INCOME (LOSS) 1,395 (957)
PREFERRED DIVIDENDS 1,200 1,232
------- -------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 195 $ (2,189)
======== =======
NET INCOME (LOSS) PER SHARE - BASIC $ .03 $ (.39)
========= =========
NET INCOME (LOSS) PER SHARE - DILUTED $ .03 $ (.39)
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 6,135 5,600
======= =======
PRO FORMA INFORMATION ASSUMING PROVISION
FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)
Income (loss) before income taxes $ 1,321 $ (957)
Provision (benefit) for income taxes
Net income (loss) $ 1,321 $ (957)
======== ========
Net income (loss) attributable to common shareholders $ 121 $ (2,189)
========= =======
Net income (loss) per share - basic $ .02 $ (.39)
========== =========
Net income (loss) per share - diluted $ .02 $ (.39)
========== =========
<FN>
The accompanying notes are an integral part of
the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
June
30,
1999 1998
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,395 $ (957)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation, depletion and amortization 8,812 6,617
Impairment of oil and gas properties 2,600
Depreciation charged to affiliates 110 126
Equity in loss of HCRC 419 2,323
Minority interest in net income 196 584
Undistributed (earnings) loss of affiliates (1,176) 282
Deferred tax benefit (100)
Gain on asset disposals (188)
Amortization of deferred loan costs and debt discount 17 50
Noncash interest expense 15
Recoupment of take-or-pay liability (123) (67)
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable (1,454) 2,425
Trade receivables 130 (172)
Due from affiliates (3,638) (725)
Prepaid expenses and other current assets (2,603) 29
Deferred expenses and other 2,830
Accounts payable and accrued liabilities (5,411) 1,197
------- --------
Net cash provided by (used in) operating activities (596) 14,139
-------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,182) (18,563)
Costs incurred in connection with the Consolidation (2,634)
Exploration and development costs incurred (3,568) (6,221)
Proceeds from sales of property, plant and equipment 129 91
Distributions received from affiliate 1,833
--------
Net cash used in investing activities (5,422) (24,693)
------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt 6,000 21,500
Proceeds from equity offering net of syndication costs 16,517
Payments of long-term debt (18,285)
Dividends paid (2,893) (4,664)
Payment of contract settlement (2,767)
Distribution paid by consolidated affiliates to minority interest (340) (873)
Exercise of options 199
Capital contribution 171
Syndication costs (47)
---------
Net cash provided by financing activities 2,720 11,798
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,298) 1,244
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 11,874 6,622
------- --------
END OF PERIOD $ 8,576 $ 7,866
======== ========
<FN>
The accompanying notes are an integral part of
the financial statements.
</FN>
</TABLE>
<PAGE>
HALLWOOD ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Corporation ("HEC" or the "Company") is a Delaware corporation
engaged in the development, exploration, acquisition and production of oil and
gas properties. HEC began operations June 8, 1999, in connection with the
consolidation ("Consolidation") of Hallwood Energy Partners, L.P. ("HEP") and
Hallwood Consolidated Resources Corporation ("HCRC") and the acquisition of the
direct energy interests of The Hallwood Group Incorporated ("Hallwood Group").
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy interests of Hallwood Group.
Accordingly, the assets and liabilities of HEP, including its 46% share of
assets and liabilities of HCRC owned prior to the Consolidation, have been
recorded at historical cost, and the remaining assets and liabilities of HCRC
and the direct energy interests of Hallwood Group have been recorded at
estimated fair values as of the date of purchase. All information presented for
periods prior to June 8, 1999 represents the historical information of HEP
because HEP is considered to be the acquiring entity for accounting purposes.
The financial statements for periods prior to June 8, 1999 have been
retroactively restated to reflect the corporate structure of HEC, and all share
and per share information assumes that the shares of HEC issued to HEP in
connection with the Consolidation were outstanding for all periods prior to June
8, 1999. 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 objectives of the Company are to explore for, develop, acquire and
produce oil and gas properties.
The following pro forma information presents the financial information of HEP,
HCRC and the direct property interests of Hallwood Group as if the Consolidation
had taken place on January 1 of each year presented.
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------
1999 1998
------------ --------
As Acquired As Acquired
Reported Interests Pro Forma Reported Interests Pro Forma
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues $12,068 $ 5,431 $17,499 $10,796 $ 5,903 $ 16,699
Net income (loss) 1,713 (87) 1,626 (2,708) (10,806) (13,514)
Net income (loss)
attributable to
common
shareholders 1,129 (87) 1,042 (3,324) (10,806) (14,130)
Net income (loss)
per share - basic $ .17 $ .10 $ (.59) $ (1.41)
========= ========= ========= =========
Net income (loss)
per share - diluted $ .17 $ .10 $ (.59) $ (1.41)
========= ========= ========= =========
Production:
Gas (mcf) 3,960 1,756 5,716 3,396 1,852 5,248
Oil (bbl) 193 100 293 191 148 339
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
------------ --------
As Acquired As Acquired
Reported Interests Pro Forma Reported Interests Pro Forma
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues $22,050 $ 11,971 $34,021 $21,470 $ 11,610 $ 33,080
Net income (loss) 1,395 (1,065) 330 (957) (10,814) (11,771)
Net income (loss)
attributable to
common
shareholders 195 (1,065) (870) (2,189) (10,814) (13,003)
Net income (loss)
per share - basic $ .03 $ (.09) $ (.39) $ (1.30)
========= ======== ======== =========
Net income (loss)
per share - diluted $ .03 $ (.09) $ (.39) $ (1.30)
========= ======== ======== =========
Production:
Gas (mcf) 7,540 4,097 11,637 6,661 3,536 10,197
Oil (bbl) 383 252 635 393 303 696
</TABLE>
The pro forma information shown above excludes any additional provision or
benefit for income taxes because of the Company's net operating loss
carryforwards and related valuation allowance.
The interim financial data are unaudited; however, in the opinion of management,
the interim data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. These financial statements should be read in conjunction with the
financial statements and accompanying notes included in HEP's 1998 Annual Report
on Form 10-K.
Accounting Policies
Consolidation
HEC fully consolidates entities in which it owns a greater than 50% equity
interest and reflects a minority interest in the consolidated financial
statements.
Pro Forma Information
The pro forma information included in the statements of operations has been
presented to reflect the provision for income taxes, using statutory rates, as
though the Company had been a taxable corporation for all periods presented.
Because of the Company's net operating loss carryforwards and its recent
operating losses, it is assumed that the Company would have had a full valuation
allowance. Accordingly, no provision or benefit for income taxes has been
recorded in any period.
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 outstanding during the periods. Diluted
income per common share includes the potential dilution that could occur upon
exercise of options or warrants to acquire common stock, 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 or warrants (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 2 and the stock
options described in Note 4 have been ignored in the computation of diluted net
income (loss) per share because their inclusion would be antidilutive.
<PAGE>
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 data)
For the Three Months Ended June 30, 1999
<S> <C> <C> <C>
Net income per share - basic $ 1,129 6,664 $ .17
------- ------ =====
Net income per share - diluted $ 1,129 6,664 $ .17
======= ====== =====
For the Six Months Ended June 30, 1999
Net income per share- basic $ 195 6,135 $ .03
------- ------ =====
Net income per share- diluted $ 195 6,135 $ .03
======= ====== =====
For the Three Months Ended June 30, 1998
Net loss per share- basic $ (3,324) 5,600 $ (.59)
------- ------ =====
Net loss per share - diluted $ (3,324) 5,600 $ (.59)
======= ====== =====
For the Six Months Ended June 30, 1998
Net loss per share - basic $ (2,189) 5,600 $ (.39)
------- ------ =====
Net loss per share - diluted $ (2,189) 5,600 $ (.39)
======= ====== =====
</TABLE>
Recently Issued Accounting Pronouncements
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, 2001. 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 the prior period amounts to conform
to the classifications used in the current period.
NOTE 2 - DEBT
On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended, the "Credit Agreement") to extend the term date of its
line of credit to May 31, 2002. The lenders are Morgan Guaranty Trust Company,
First Union National Bank and Nationsbank of Texas. Under the Credit Agreement,
HEC has a borrowing base of $84,500,000. At June 30, 1999, HEC had amounts
outstanding of $82,200,000, and therefore, HEC's unused borrowing base totaled
$2,300,000.
<PAGE>
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 2.125%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was 7.2%
at June 30, 1999. Interest is payable monthly, and quarterly principal payments
of $10,275,000 commence May 31, 2002.
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
HEC's oil and gas properties. Additionally, aggregate dividends paid by HEC 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 HEC is 50% or more of the borrowing base. Aggregate
dividends paid by HEC are limited to 65% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt is less than 50% of the borrowing base.
At the time of the Consolidation, HCRC had $25,000,000 of 10.32% Senior
Subordinated Notes ("Subordinated Notes") due December 23, 2007 and warrants to
purchase common stock which were held by The Prudential Insurance Company of
America ("Prudential"). On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase Agreement was amended to issue warrants to Prudential
to purchase 309,278 shares of HEC's Common Stock at an exercise price of $7.00
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 December 23, 2003 through December 23, 2007.
HEC recorded the Subordinated Notes and the warrants based upon the relative
fair values of the Subordinated Notes without the warrants and of the warrants
themselves at the time of Consolidation. The allocated value of the warrants of
$1,828,000 was recorded as additional 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.
As part of its risk management strategy, HEC enters into financial contracts to
hedge the interest rate payments under its Credit Agreement. HEC 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.
All contracts are interest rate swaps with fixed rates. As of June 30, 1999, HEC
was a party to eight contracts with three different counterparties.
The following table provides a summary of HEC's financial contracts.
Average
Amount of Contract
Period Debt Hedged Floor Rate
Last six months of 1999 $45,000,000 5.65%
2000 45,000,000 5.65
2001 36,000,000 5.23
2002 37,500,000 5.23
2003 37,500,000 5.23
2004 6,000,000 5.23
NOTE 3 - STATEMENTS OF CASH FLOWS
In connection with the Consolidation, the purchase of the common stock of HCRC
and the direct energy interests of Hallwood Group was recorded through the
issuance of approximately 2,600,000 shares of HEC common stock to HCRC and
1,800,000 shares of HEC common stock to Hallwood Group based on the estimated
fair value of the assets acquired and the liabilities assumed as of the date of
purchase.
This noncash investing activity is summarized as follows:
<PAGE>
Fair Value of
Acquired Interest
(In thousands)
Current assets $ 4,637
Oil and gas properties - net 81,348
Other assets 1,140
Current liabilities (2,592)
Long-term debt (49,672)
Other noncurrent liabilities (62)
At the time of the Consolidation, HEC recorded the allocated value of the
warrants, described in Note 2, as $1,828,000 in additional paid-in-capital which
represented a noncash financing transaction during the first six months of 1999.
Cash paid for interest during the six months ended June 30, 1999 and 1998 was
$2,051,000 and $1,129,000, respectively.
NOTE 4 - STOCK OPTION GRANT
On June 9, 1999, HEC granted options to purchase 600,000 shares of common stock
at an exercise price of $7.00 per share which was equal to the fair market value
of the common stock on the date of grant. The options expire on June 9, 2006,
unless sooner terminated pursuant to the provisions of the plan. One-third of
the options vest immediately, and the remainder vest one-third on June 8, 2000
and one-third on June 8, 2001.
NOTE 5 - CAPITAL STOCK
HEC's stock trades on the NASDAQ under the symbol "HECO" for Common Stock and
"HECOP" for Series A Cumulative Preferred Stock.
Common Stock
Under its charter, HEC is authorized to issue up to 25,000,000 shares of HEC
common stock with a par value of $.01 per share. The common shareholders are
entitled to one vote per share on all matters voted on by shareholders. After
giving effect to any preferential rights of any series of preferred stock
outstanding, the holders of HEC common stock are entitled to participate in
dividends, if any, as may be declared from time to time by the board of
directors of HEC. Upon liquidation, the common shareholders are entitled to
receive a pro rata share of all of the assets of HEC that are available for
distribution to such holders. The holders of HEC common stock have no preemptive
rights with respect to future issuances of HEC common stock.
Preferred Stock
HEC is authorized to issue up to 5,000,000 shares of preferred stock from time
to time, in one or more series, without shareholder 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 HEC board
of directors.
In connection with the Consolidation, the board of directors of HEC has
authorized the issuance of 2,334,165 shares of Series A cumulative preferred
stock. Each share of preferred stock is entitled to one vote on all matters on
which shareholders may vote. The preferred shareholders vote together with the
common shareholders in the election of directors and vote as a separate class on
all other matters.
<PAGE>
Preferred shareholders are entitled to receive cumulative cash dividends at the
rate of $1.00 per share per year, if declared by the HEC board of directors.
Dividends are paid quarterly in arrears commencing on June 30, 1999. The
dividends are fully cumulative and accumulate, whether or not earned or declared
and whether or not HEC has funds legally available to pay them, without interest
on a daily basis. HEC may not declare or pay dividends to common shareholders
unless full cumulative dividends have been paid on the preferred stock.
Upon liquidation or dissolution of HEC, all accrued dividends must be paid to
the preferred shareholders before any assets may be distributed to the common
shareholders. Once all accrued preferred dividends are paid, the preferred
shareholders are entitled to participate equally with the common shareholders in
the distribution of the remaining assets of HEC in a liquidation or dissolution.
The HEC preferred stock is redeemable at the option of HEC after December 31,
2003. After that date, HEC may redeem shares of preferred stock in whole or in
part at any time at a redemption price of $10.00 per share, plus accrued
dividends which are unpaid on the redemption date. Preferred stock may not be
redeemed in part if full cumulative dividends have not been paid or set aside
for payment with respect to all prior dividend periods.
Rights Plan
During the second quarter of 1999, the board of directors of HEC approved the
adoption of a rights plan designed to protect shareholders in the event of a
takeover action that would otherwise deny them the full value of their
investment.
Under the terms of the rights plan, one right was distributed for each common
share of HEC to holders of record at the close of business on June 8, 1999. The
rights trade with the common stock. The rights will become exercisable only in
the event, with certain exceptions, that an acquiring party accumulates 15% or
more of HEC's outstanding common stock. The rights will expire on June 7, 2009.
HEC 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
common shares.
NOTE 6 - 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 for $16,400,000 should proceed, with a reduction to 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 worth of properties and denied
Arcadia's claim for attorneys' fees. The arbitrators granted Arcadia prejudgment
interest on the adjusted purchase price, in the amount of $904,000 of which HEP
paid $452,000. That amount was accrued in the December 31, 1998 financial
statements of the Company and was paid during the second quarter of 1999.
In October 1998, HEP and its affiliate, HCRC, closed the acquisition of oil and
gas properties from Arcadia, including 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.
<PAGE>
NOTE 7 - LEGAL SETTLEMENT
In connection with the Consolidation, HEC assumed the liability for two lawsuits
filed against Hallwood Group and certain individuals and related to the direct
energy interests acquired from Hallwood Group. These lawsuits, both filed in
federal court in Denver, Colorado, have been settled, and payment of the
settlement amount and dismissal of the cases will occur thirty days after the
court has given final approval for the settlement. HEC is obligated to pay
approximately $650,000 in connection with these lawsuits, and that amount has
been accrued as a liability on the Company's balance sheet in connection with
the Consolidation. It is anticipated that the court will give its final approval
for the settlement prior to the end of 1999.
Concise Oil and Gas Partnership ("Concise"), a wholly owned subsidiary of the
Company, 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 addition to the litigation noted above, the Company and its subsidiaries are
from time to time subject to routine litigation and claims incidental to their
business, which the Company believes will be resolved without material effect on
the Company's financial condition, cash flows or operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HEC began operations on June 8, 1999, in connection with the Consolidation of
HEP and HCRC and the acquisition of the direct property interests of Hallwood
Group. For accounting purposes, the Consolidation has been treated as a purchase
by HEP of the common stock of HCRC and the direct energy interests of Hallwood
Group. All information presented for periods prior to June 8, 1999 represents
the historical information of HEP because HEP is considered to be the acquiring
entity for accounting purposes.
Liquidity and Capital Resources
Cash Flow
HEC used $596,000 of cash flow in operating activities during the first six
months of 1999.
The primary cash inflows were:
o Proceeds from long-term debt of $6,000,000; and
o Distributions received from affiliate of $1,833,000;
Cash was used primarily for:
o Additions to property and development costs incurred of $4,750,000;
oCosts incurred in connection with the Consolidation of $2,634,000; and
o Dividends to shareholders of $2,893,000.
When combined with miscellaneous other cash activity during the period, the
result was a decrease of $3,298,000 in HEC's cash from $11,874,000 at December
31, 1998 to $8,576,000 at June 30, 1999.
<PAGE>
Exploration and Development Projects and Acquisitions
Since HEP is considered to be the acquiring entity for accounting purposes, the
expenditures discussed below represent the costs incurred by HEP prior to June
8, 1999 plus the costs incurred on a consolidated basis subsequent to June 8,
1999.
Through June 30, 1999, HEC incurred $4,750,000 in direct property additions,
development, exploitation, and exploration costs. The costs were comprised of
$1,182,000 for property acquisitions and approximately $3,568,000 for domestic
exploration and development. HEC's 1999 capital budget is currently set at
$13,540,000. This budget may be revised up or down due to a number of factors,
including future developments that impact availability of capital. The
significant capital expenditures for the first six months of 1999 are discussed
below.
Rocky Mountain Region
During the first six months of 1999, HEC expended approximately $1,301,000 of
its capital budget in the Rocky Mountain Region located in Colorado, Montana,
North Dakota, Northwest New Mexico and Wyoming. Of this amount, approximately
$676,500 was for the purchase of overriding royalty interests and working
interests in 18 coal bed methane properties already operated by HEC, located in
San Juan County, New Mexico. Most of the interests purchased qualify for tax
credits under Section 29 of the Internal Revenue Code. The majority of the
acquired interests were purchased by 44 Canyon LLC ("44 Canyon") a special
purpose entity owned by a large East Coast financial institution, from HEC in
exchange for cash, a production payment, and promissory notes. HEC's activity in
the area began in 1990. The acquisition increases HEC's net current average
daily production by 950 mcf per day.
In the second quarter of 1999, HEC installed an additional gas gathering
pipeline in LaPlata County, Colorado. HEC anticipates that the additional line
will help lower system pressures and will also increase production by 1,000
gross mcf per day. HEC's costs incurred in 1999 for the additional pipeline are
approximately $288,000. In the third quarter of 1999, additional facility work
to add water disposal capacity is scheduled for completion.
Gulf Coast Region
During 1999, HEC expended approximately $2,452,000 of its capital budget in the
Gulf Coast Region in Louisiana and South and East Texas. The following are major
projects within the Region.
Mirasoles Project. In 1998, HEC began drilling a 17,000-foot Frio Formation
exploration well located in Kenedy County, Texas. Eight potential zones were
identified by this exploration play. To date, the lower-most zone was abandoned
for mechanical reasons following encouraging, but extremely preliminary,
results. In the second zone, reserves were found but the formation was too tight
to flow. HEC is currently testing a third potential zone but has not achieved
production at a stable rate. As of June 30, 1999, HEC incurred approximately
$1,305,000 related to this project and owns a 35% working interest in the well.
The well is in a large structural prospect defined by 63 square miles of
proprietary 3-D seismic data.
Esperanza Project. During the first six months of 1999, HEC incurred
approximately $400,000 for costs associated with two non-operated directional
exploration wells testing the Wilcox formation in LaVaca County, Texas. One well
was completed in 1998 and is currently producing 10 mmcf per day, gross. HEC
also owns an interest in a development well currently being drilled by another
operator and in an exploratory well in an adjacent fault block is waiting on
completion. HEC owns a 15% working interest in the wells.
Boca Chica Project. In 1999, HEC expended approximately $311,000 participating
in a 10,000 foot exploration well in the Big Hum Formation. This exploration
well was directionally drilled from the shore to a bottom hole location under
the waters of the Gulf of Mexico. Even though the well tested wet, the
exploration results were sufficiently encouraging that working interest owners
agreed to shoot 3D seismic in the third quarter of 1999 to evaluate future
potential. During the first quarter of 2000, HEC anticipates that it will make a
second drilling attempt by either reentering the existing wellbore or using a
shallow water drilling rig. HEC owns a 25% working interest.
Other
The remaining $647,000 of HEC's capital expenditures incurred in 1999 relate
principally to technical general and administrative expenditures and numerous
other projects which are completed or underway and which are individually less
significant.
Due to the rebounding and restabilization of oil prices which occurred during
the second quarter of 1999, HEC is reevaluating the economics of the
oil-targeted projects which were postponed during the first quarter.
HEC is in the process of reviewing its properties to identify high cost,
non-strategic assets. After this process is complete, HEC may determine to sell
certain properties that are not integral to HEC's business, in order to reduce
the Company's lifting costs and to more effectively invest the proceeds of any
sale.
Dividends
On June 18, 1999, HEC declared a quarterly dividend of $.25 per Series A
Cumulative Preferred share, payable on August 13, 1999 to shareholders of record
on June 30, 1999.
The Series A Cumulative Preferred Stock has a dividend preference of $1.00 per
share per year. HEC may not declare or pay dividends to common shareholders
unless full cumulative dividends have been paid on the preferred stock.
Financing
On June 8, 1999, HEC and its lenders entered into an HEC's Amended and Restated
Credit Agreement (as amended, the "Credit Agreement") to extend the term date of
its line of credit to May 31, 2002. The lenders are Morgan Guaranty Trust
Company, First Union National Bank and Nationsbank of Texas. Under the Credit
Agreement, HEC has a borrowing base of $84,500,000. At June 30, 1999, HEC had
amounts outstanding of $82,200,000 and therefore, HEC's unused borrowing base
totaled $2,300,000.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 2.125%%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was 7.2%
at June 30, 1999. Interest is payable monthly, and quarterly principal payments
of $10,275,000 commence May 31, 2002.
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
HEC's oil and gas properties. Additionally, aggregate dividends paid by HEC 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 HEC is 50% or more of the borrowing base. Aggregate
distributions paid by HEC are limited to 65% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt is less than 50% of the borrowing base.
At the time of the Consolidation, HCRC had $25,000,000 of 10.32% Senior
Subordinated Notes ("Subordinated Notes") due December 23, 2007 and warrants to
purchase common stock which were held by The Prudential Insurance Company of
America ("Prudential"). On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase Agreement was amended to issue warrants to Prudential
to purchase 309,278 shares of HEC's common stock at an exercise price of $7.00
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 December 23, 2003 through December 23, 2007.
HEC recorded the Subordinated Notes and the warrants based upon the relative
fair values of the Subordinated Notes without the warrants and of the warrants
themselves at the time of Consolidation. The allocated value of the warrants of
$1,828,000 was recorded as additional 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.
<PAGE>
For 1999, the Company has established an initial capital budget of $13,540,000.
This budget is subject to revision to reflect future developments. It may be
impacted by oil and gas price levels, future redeterminations of the borrowing
base under the Credit Agreement, proceeds from asset sales and other factors.
Additionally, the Company is considering other financing alternatives. Although
this budget is not predicated on these other sources of capital, the Company may
choose to pursue these other sources of capital, in which case the Company's
capital expenditures in 1999 would likely increase.
As part of its risk management strategy, HEC enters into financial contracts to
hedge the interest rate payments under its Credit Agreement. HEC 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.
All contracts are interest rate swaps with fixed rates. As of June 30, 1999, HEC
was a party to eight contracts with three different counterparties.
The following table provides a summary of HEC's financial contracts.
Average
Amount of Contract
Period Debt Hedged Floor Rate
Last six months of 1999 $45,000,000 5.65%
2000 45,000,000 5.65
2001 36,000,000 5.23
2002 37,500,000 5.23
2003 37,500,000 5.23
2004 6,000,000 5.23
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 eighteen 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. Remediation, testing
and implementation are scheduled to be completed by August 31, 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
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 70% of the inquiries
made.
<PAGE>
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 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 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 $100,000. 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 in general 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, if necessary.
Cautionary Statement Regarding Forward-Looking Statements. 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.
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-Q 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-Q 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. Please refer to the Company's
Registration Statement dated May 4, 1999, SEC file #333-77409 for additional
statements concerning important factors that could cause actual results to
differ materially from the Company's expectations. These risks and uncertainties
include, among other things, volatility of oil and gas prices, competition,
risks inherent in the Company's oil and gas operations, the inexact nature of
interpretation of seismic and other geological and geophysical data, imprecision
of reserve estimates, the Company's ability to replace and expand oil and gas
reserves, and such other risks and uncertainties described from time to time in
the Company's periodic reports and filings with the Securities and Exchange
Commission. 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.
Inflation and Changing Prices
Prices
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEC, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas fluctuated significantly, with a distinct downward
trend in both oil and gas prices occurring in the calendar year 1998 and through
the first quarter of 1999. Prices began to rebound in April 1999. The following
table presents the weighted average prices received each quarter by HEC and the
effects of the hedging transactions discussed below.
<PAGE>
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding the (including the (excluding the (including the
effects of effects of effects of effects of
hedging hedging hedging hedging
transactions) transactions) transactions) transactions)
(per bbl) (per bbl) (per mcf) (per mcf)
<S> <C> <C> <C> <C>
First quarter - 1998 $14.80 $15.30 $2.11 $2.07
Second quarter - 1998 13.03 13.82 2.08 2.06
Third quarter - 1998 12.19 13.06 1.85 1.95
Fourth quarter - 1998 11.12 12.29 1.96 2.02
First quarter - 1999 11.33 11.41 1.65 1.81
Second quarter - 1999 15.99 15.70 1.93 1.91
</TABLE>
As part of its risk management strategy, HEC 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.
The financial contracts used by HEC to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HEC 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 July 26, 1999,
HEC was a party to 38 financial contracts with four different counterparties.
HEC's philosophy is to use derivatives to provide a measure of stability in the
volatile price environment of oil and gas, and to furnish an element of
predictability in the cash flow of the Company. In general, the Company will
hedge up to 50%, on a total equivalent volume basis, of its oil and gas
production for the next two forward years, and 30% for each of the three years
thereafter. The Company does not ordinarily intend to hedge more than 65% of any
one commodity. In addition, HEC will, in most cases, enter into transactions
with minimum fixed prices for the production subject to the contracts. This
philosophy may be modified as circumstances require.
The following tables provide a summary of HEC's outstanding financial contracts:
Oil Contract
Percent of Production Delivered
Period Hedged Floor Price
(per bbl)
Last six months of 1999 50% $15.30
Approximately 7% of the oil volumes hedged are subject to a participating hedge
under which HEC 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. Additionally, 7% of the
volumes hedged are subject to a collar agreement whereby HEC 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 delivered cap price. The cap prices range
from $16.50 to $18.35.
<PAGE>
Gas Contract
Percent of Production Delivered
Period Hedged Floor Price
(per mcf)
Last six months of 1999 78% $1.95
2000 42 2.04
2001 39 2.05
2002 30 2.04
Between 11% and 26% of the gas volumes hedged in each year are subject to a
collar agreement under which HEC 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 $2.16 per mcf to
$2.80 per mcf.
During the third quarter through July 26, 1999, the weighted average oil price
(for barrels not hedged) was approximately $17.95 per barrel. The weighted
average price of natural gas (for mcf not hedged) during that period was
approximately $2.10 per mcf.
Inflation
Inflation did not have a material impact on HEC in 1998 and is not anticipated
to have a material impact in 1999.
Results of Operations
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy interests of Hallwood Group.
Accordingly, all information presented for periods prior to June 8, 1999
represents the historical information of HEP because HEP is considered to be the
acquiring entity for accounting purposes.
Second Quarter of 1999 Compared to Second Quarter of 1998
The following table is presented to contrast HEC's oil and gas price and
production for discussion purposes. Significant fluctuations are discussed in
the accompanying narrative.
1999 1998
---- ----
Gas
Production (mcf) 3,960,000 3,396,000
Price (per mcf) $1.91 $2.06
Oil
Production (bbl) 193,000 191,000
Price (per bbl) $15.70 $13.82
<PAGE>
Gas Revenue
Gas revenue increased $552,000 during the second quarter of 1999 compared with
the second quarter of 1998. The increase is the result of an increase in
production from 3,396,000 mcf in 1998 to 3,960,000 mcf in 1999 partially offset
by a decrease in the average gas price from $2.06 per mcf in 1998 to $1.91 per
mcf in 1999. The increase in production is primarily due to the Consolidation
which caused an increase in gas production of 562,000 mcf.
The effect of HEC's hedging transactions as described under "Inflation and
Changing Prices," during the second quarter of 1999, was to decrease HEC's
average gas price from $1.93 per mcf to $1.91 per mcf, representing a $79,000
decrease in revenue from hedging transactions.
Oil Revenue
Oil revenue increased $391,000 during the second quarter of 1999 compared with
the second quarter of 1998. The increase is the result of an increase in the
average oil price from $13.82 per barrel in 1998 to $15.70 in 1999, and an
increase in production from 191,000 barrels in 1998 to 193,000 barrels in 1999.
The increase in oil production is primarily due to the Consolidation which
caused an increase in oil production of 32,000 barrels, which was largely offset
by normal production declines.
The effect of HEC's hedging transactions during the second quarter of 1999 was
to decrease HEC's average oil price from $15.99 per barrel to $15.70 per barrel,
resulting in a $56,000 decrease in revenue from hedging transactions.
Pipeline, Facilities and Other
Pipeline, facilities 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 and LaPlata County, Colorado. Pipeline, facilities and other
revenue increased $454,000 during the second quarter of 1999 compared with the
second quarter of 1998. The increase is primarily due to increased incentive
payment income from the acquisition of a volumetric production payment during
May 1998 and due to the Consolidation which caused a $161,000 increase.
Interest Income
Interest income decreased $125,000 during the second quarter of 1999 compared
with the second quarter of 1998 due to a lower average cash balance during 1999.
Production Operating
Production operating expense increased $432,000 during the second quarter of
1999 compared with the second quarter of 1998. The majority of the increase is
the result of the Consolidation.
General and Administrative
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 HEC.
These expenses increased $68,000 during the second quarter of 1999. The
Consolidation caused an increase in general and administrative expense of
$231,000, which was partially offset by decreases in bank commitment fees,
printing and mailing costs and legal fees during the second quarter of 1999.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $1,441,000 during the
second quarter of 1999 compared with the second quarter of 1998. The increase is
primarily the result of higher capitalized costs and a higher depletion rate in
1999 due to the increase in production primarily caused by the Consolidation.
<PAGE>
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during the second quarter of 1998
represents the impairment recorded because capitalized costs at June 30, 1998
exceeded the present value (discounted at 10%) of estimated future net revenues
from proved oil and gas reserves, based on prices of $13.00 per barrel of oil
and $2.00 per mcf of gas.
Interest
Interest expense increased $724,000 during the second quarter of 1999 compared
with the second quarter of 1998 due to a higher average outstanding debt balance
during 1999.
Equity in Income (Loss) of HCRC
Equity in income of HCRC increased $2,292,000 during the second quarter through
June 8, 1999, compared with the second quarter of 1998. The increase is
primarily due to a property impairment recorded by HCRC during the second
quarter of 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 $207,000
during the second quarter of 1999 compared with the second quarter of 1998 is
primarily due to the liquidation of three of the six May Partnerships.
Litigation
Litigation income during the second quarter of 1999 represents insurance
proceeds which reimbursed costs previously paid in connection with a property
related claim. Litigation expense during the second quarter of 1998 represents
the amount accrued for the settlement of Ellender lawsuit described in Note 7 of
the accompanying financial statements.
Provision (Benefit) for Income Taxes
On June 8, 1999, in connection with the Consolidation, HEC began operations as a
taxable entity. Prior to the Consolidation, HEP was a partnership and was not
subject to federal income tax. The net benefit for income taxes during the
second quarter of 1999 is comprised of a current tax provision and a deferred
tax benefit. The current tax provision is less than tax expense computed using
statutory tax rates, because HEC was not a taxable entity for the entire
quarter.
First Six Months 1999 Compared to the First Six Months 1998
The comparisons for the first six months 1999 and the first six months 1998 are
consistent with those discussed in the second quarter 1999 compared to the
second quarter of 1998 except as discussed below. The following table is
presented to contrast HEC's oil and gas price and production for discussion
purposes. Significant fluctuations are discussed in the accompanying narrative.
1999 1998
---- ----
Gas
Production (mcf) 7,540,000 6,661,000
Price (per mcf) $1.86 $2.06
Oil
Production (bbl) 383,000 393,000
Price (per bbl) $13.57 $14.58
<PAGE>
Gas Revenue
Gas revenue increased $298,000 during the first six months of 1999 as compared
to the first six months of 1998. The increase is the result of an increase in
production from 6,661,000 mcf in 1998 to 7,540,000 mcf in 1999 partially offset
by a decrease in price from $2.06 per mcf in 1998 to $1.86 per mcf in 1999.
Approximately 64% of the increase in production is due to the Consolidation and
the remainder is primarily due to the acquisition of a volumetric production
payment during May 1998.
The effect of HEC's hedging transactions during the first six months of 1999 was
to increase HEC's average gas price from $1.80 to $1.86 per mcf representing a
$452,000 increase in revenue from hedging transactions.
Oil Revenue
Oil revenue decreased $532,000 during the first six months of 1999 as compared
with the first six months of 1998. The decrease is the result of a decrease in
the average oil price from $14.58 per barrel in 1998 to $13.57 per barrel in
1999 and a decrease in production from 393,000 barrels in 1998 to 383,000
barrels in 1999. The decrease in oil production is comprised of normal
production declines which were partially offset by an increase in production of
32,000 barrels caused by the Consolidation.
The effect of HEC's hedging transactions during the first six months of 1999 was
to decrease HEC's average oil price from $13.68 per barrel to $13.57 per barrel,
representing a decrease in revenue from hedging transactions of $42,000.
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HEC's primary market risks relate to changes in interest rates and in the prices
received from sales of oil and natural gas. HEC'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, HEC 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, HEC 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 the
Company's estimated debt levels and deliverable volumes. HEC 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.
HEC does not use or hold derivative instruments for trading purposes nor does it
use derivative instruments with leveraged features. HEC's derivative instruments
are designated and effective as hedges against its identified risks, and do not
of themselves expose HEC 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.
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. HEC 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 HEC's market risk sensitive instruments by
major category. Investors and other readers are cautioned to avoid simplistic
use of these disclosures. Readers 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.
Commodity Price Risk (non-trading) - HEC 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 HEC'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. HEC's participating
hedges also enable HEC to receive 25% of any increase in prices over the fixed
prices specified in the contracts. As of July 26, 1999, HEC has entered into
derivative commodity hedges covering an aggregate of 265,000 barrels of oil and
30,119,000 mcf of gas that extend through 2002. Under the these contracts, HEC
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 June 30, 1999
would cause a loss in income and cash flows of $3,220,000 during the remaining
six months of 1999, assuming that oil and gas production, including production
from properties acquired in Consolidation, remain at current levels during the
last six months of 1999. This loss in income and cash flows would be offset by a
$1,966,000 increase in income and cash flows associated with the oil and natural
gas derivative contracts that are in effect for the remaining six months of
1999.
<PAGE>
Interest Rate Risks (non-trading) - HEC uses both fixed and variable rate debt
to partially finance operations and capital expenditures. As of June 30, 1999,
the majority of HEC's debt consists of borrowings under its Credit Agreement
which bear interest at a variable rate. HEC 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, HEC 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 HEC'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 $822,000 during the remaining six months of 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 $675,000 increase in income
and cash flows associated with the interest rate swap and collar agreements that
are in effect for the remaining six months of 1999.
<PAGE>
PART II -OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for
Hallwood Energy Partners, L.P. for the year ended December 31,
1998 and Notes 6 and 7 of this Form 10-Q.
ITEM 2 - CHANGES IN SECURITIES
During the second quarter, in connection with the Consolidation,
HEC authorized the issuance of 2,334,165 shares of Series A
Cumulative Preferred Stock and adopted a stockholders' rights
plan, as described in Note 5 of this Form 10-Q.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
4.1.1Executed Rights Agreement dated as of June 8, 1999, between the Company
and Registrar and Transfer Company
10.5 Registration Rights Agreement dated as of June 8, 1999, between the Company
and The Prudential Insurance Company of America
10.6*Change of Control Agreement between the Company and Certain Executives,
dated as of June 9, 1999.
10.7 Amended and Restated Credit Agreement dated as of June 8, 1999, among the
Company and certain of its subsidiaries and the Banks listed therein.
10.8 Agreement Regarding Initial Exercise Price dated June 9, 1999, between the
Company and The Prudential Insurance Company of America.
10.9*Phantom Working Interest Incentive Plan of Hallwood Energy Corporation
dated as of June 8, 1999.
10.10Amended and Restated Subordinated Note and Warrant Purchase Agreement
dated as of June 8, 1999, between Hallwood Consolidated Resources
Corporation and The Prudential Insurance Company of America.
10.11Common Stock Purchase Warrant dated June 8, 1999 between the Company and
The Prudential Insurance Company of America. 27 Financial Data Schedule
*Designates management contracts or compensatory plans or arrangements.
<PAGE>
b) Reports on Form 8-K
HEC filed a report on Form 8-K on June 14, 1999, reporting the
completion of the Consolidation.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLWOOD ENERGY CORPORATION
Date: August 11, 1999 By: /s/Thomas J. Jung
-------------------------- --------------------------------
----------------------------
Hallwood Energy Corporation
and
Registrar and Transfer Company, as Rights Agent
----------------------------
RIGHTS AGREEMENT
Dated as of June 8, 1999
----------------------------
CORPDAL:121602.3 18747-00028
<PAGE>
TABLE OF CONTENTS
Page No.
Section 1. Certain Definitions.................................................1
Section 2. Appointment of Rights Agent.........................................5
Section 3. Issue of Right Certificates.........................................5
Section 4. Form of Right Certificates..........................................7
Section 5. Countersignature and Registration...................................7
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates;
Mutilated, Destroyed, Lost or Stolen Right Certificates........................8
Section 7. Exercise of Rights, Purchase Price; Expiration Date of Rights.......8
Section 8. Cancellation and Destruction of Right Certificates.................10
Section 9. Availability of Shares of Preferred Stock..........................10
Section 10. Preferred Stock Record Date.......................................11
Section 11. Adjustment of Purchase Price; Number and Kind of Shares and
Number of Rights..............................................................11
Section 12. Certificate of Adjusted Purchase Price or Number of Shares........18
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power
..............................................................................19
Section 14. Fractional Rights and Fractional Shares...........................22
Section 15. Rights of Action..................................................23
Section 16. Agreement of Right Holders........................................23
Section 17. Right Certificate Holder Not Deemed a Stockholder.................24
CORPDAL:121602.3 18747-00028
i
<PAGE>
Section 18. Concerning the Rights Agent.......................................24
Section 19. Merger or Consolidation or Change of Name of Rights Agent.........24
Section 20. Duties of Rights Agent............................................25
Section 21. Change of Rights Agent............................................27
Section 22. Issuance of New Right Certificates................................28
Section 23. Redemption........................................................28
Section 24. Exchange..........................................................28
Section 25. Notice of Certain Events..........................................29
Section 26. Notices...........................................................30
Section 27. Supplements and Amendments........................................31
Section 28. Successors........................................................31
Section 29. Benefits of this Agreement........................................31
Section 30. Determinations and Actions by the Board of Directors..............31
Section 31. Severability......................................................32
Section 32. Governing Law.....................................................32
Section 33. Counterparts......................................................32
Section 34. Descriptive Headings..............................................32
CORPDAL:121602.3 18747-00028
ii
<PAGE>
RIGHTS AGREEMENT
Rights Agreement, dated as of June 8, 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 June 8, 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
CORPDAL:121602.3 18747-00028
1
<PAGE>
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 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)
CORPDAL:121602.3 18747-00028
2
<PAGE>
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., Denver,
Colorado 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 $.01 per share, of the Company. "Common
Stock" when used with
CORPDAL:121602.3 18747-00028
3
<PAGE>
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 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 that
term is hereinafter defined) of the Company and The Hallwood Group Incorporated,
a Delaware corporation ("HWG"), or any Subsidiary of HWG, 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 employee
benefit plan of HWG or any Subsidiary of HWG, 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 or for employees of HWG or any
Subsidiary of HWG.
(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 B Junior Participating
Preferred Stock, par value $.01 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.
CORPDAL:121602.3 18747-00028
4
<PAGE>
(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 23
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.
(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.
CORPDAL:121602.3 18747-00028
5
<PAGE>
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) 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 a copy
of the Summary of Rights in substantially the form of Exhibit C hereto (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:
CORPDAL:121602.3 18747-00028
6
<PAGE>
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 June 8, 1999, 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 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.
CORPDAL:121602.3 18747-00028
7
<PAGE>
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 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.
CORPDAL:121602.3 18747-00028
8
<PAGE>
(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 June 7,
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
CORPDAL:121602.3 18747-00028
9
<PAGE>
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 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
CORPDAL:121602.3 18747-00028
10
<PAGE>
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 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
CORPDAL:121602.3 18747-00028
11
<PAGE>
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 price 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
CORPDAL:121602.3 18747-00028
12
<PAGE>
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 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
CORPDAL:121602.3 18747-00028
13
<PAGE>
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).
(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 forty-five (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
CORPDAL:121602.3 18747-00028
14
<PAGE>
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 that 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.
CORPDAL:121602.3 18747-00028
15
<PAGE>
(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
thirty (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 thirty (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 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
CORPDAL:121602.3 18747-00028
16
<PAGE>
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 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
CORPDAL:121602.3 18747-00028
17
<PAGE>
or any day thereafter, but, if the Right Certificates have been issued, shall be
at least ten (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
CORPDAL:121602.3 18747-00028
18
<PAGE>
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 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
CORPDAL:121602.3 18747-00028
19
<PAGE>
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 Stock of
which have the greatest aggregate market value of shares outstanding
CORPDAL:121602.3 18747-00028
20
<PAGE>
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 NASDAQ or on another
national securities exchange, to list or admit to
CORPDAL:121602.3 18747-00028
21
<PAGE>
trading (or continue the listing of) the Rights and the securities purchasable
upon exercise of the Rights on NASDAQ or such securities exchange, or, if the
Common Stock of the Principal Party shall not be listed or admitted to trading
on NASDAQ or a national securities exchange, to cause the Rights and the
securities receivable upon exercise of the Rights to be authorized for quotation
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 articles or 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 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.
CORPDAL:121602.3 18747-00028
22
<PAGE>
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 shares 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 shares 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
CORPDAL:121602.3 18747-00028
23
<PAGE>
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 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.
CORPDAL:121602.3 18747-00028
24
<PAGE>
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.
(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,
CORPDAL:121602.3 18747-00028
25
<PAGE>
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.
CORPDAL:121602.3 18747-00028
26
<PAGE>
(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 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.
CORPDAL:121602.3 18747-00028
27
<PAGE>
(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 thirty (30) 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 thirty (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 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 Colorado 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
CORPDAL:121602.3 18747-00028
28
<PAGE>
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 ten (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.
CORPDAL:121602.3 18747-00028
29
<PAGE>
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 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.
CORPDAL:121602.3 18747-00028
30
<PAGE>
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 ten
(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 ten (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.
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
4610 Ulster Street, Suite 200
Denver, CO 80237
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
CORPDAL:121602.3 18747-00028
31
<PAGE>
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
10 Commerce Drive
Cranford, New Jersey 07016-3572
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
CORPDAL:121602.3 18747-00028
32
<PAGE>
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
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.
CORPDAL:121602.3 18747-00028
33
<PAGE>
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: /s/ Cathleen M. Osborn
Name: Cathleen M. Osborn
Title: Vice President
Registrar and Transfer Company,
as Rights Agent,
By:
Name:
Title:
CORPDAL:121602.3 18747-00028
34
<PAGE>
Exhibit A
FORM OF
CERTIFICATE OF DESIGNATION
of
SERIES B 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 June 8, 1999, adopted
the following resolution creating a series of shares of Preferred Stock
designated as "Series B 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 $.01 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 B Junior Participating Preferred Stock
1. Designation and Amount. There shall be a series of Preferred Stock
that shall be designated as "Series B Junior Participating Preferred Stock," and
the number of shares constituting such series shall be 150,000. 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
B 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.
CORPDAL:121602.3 18747-00028
A - 1
<PAGE>
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 B Junior Participating Preferred Stock with
respect to dividends, the holders of shares of Series B 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 B 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 B
Junior Participating Preferred Stock. The "Adjustment Number" shall initially be
1,000. If the Corporation shall at any time after June 7, 1999 (the "Rights
Declaration Date"), (i) declare and pay any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide 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 B 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 B 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 B Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series B 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.
CORPDAL:121602.3 18747-00028
A - 2
<PAGE>
(B) Except as required by law and by Section 10 hereof,
holders of Series B 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 B 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
B 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 B 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 B Junior
Participating Preferred Stock, except dividends paid ratably on the Series
B 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 B
Junior Participating Preferred Stock, or any shares of stock ranking on a parity
with the Series B 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 B 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 B 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 shall upon their retirement become authorized
CORPDAL:121602.3 18747-00028
A - 3
<PAGE>
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. Paragraph(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 B Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series B Junior Participating Preferred Stock
shall have received an amount per share (the "Series B 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 B 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 B Junior
Participating Preferred Stock in respect thereof, then the assets available for
such distribution shall be distributed ratably to the holders of the Series B
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 B 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 B Junior Participating Preferred
Stock shall not be subject to redemption by the Company.
9. Ranking. The Series B 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.
CORPDAL:121602.3 18747-00028
A - 4
<PAGE>
10. Amendment. At any time that any shares of Series B 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 B 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 B Junior Participating Preferred Stock, voting separately as a class.
11. Fractional Shares. Series B 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 B Junior Participating Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of __________ __, 1999.
Hallwood Energy Corporation
By:
Name: Cathleen M. Osborn
Title: Vice President
CORPDAL:121602.3 18747-00028
A - 5
<PAGE>
Exhibit B
Form of Right Certificate
Certificate No. R-__________ __________ Rights
NOT EXERCISABLE AFTER JUNE 7, 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 June 8, 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.,
Denver, Colorado time, on June 7, 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 B Junior
Participating Preferred Stock, par value $.01 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 June 8, 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.
CORPDAL:121602.3 18747-00028
B - 1
<PAGE>
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 $.01 per share, or shares of Preferred Stock.
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.
CORPDAL:121602.3 18747-00028
B - 2
<PAGE>
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of __________.
Hallwood Energy Corporation
By:
Name:
Title:
ATTEST:
[Title]
Countersigned:
Registrar and Transfer Company, as Rights Agent
By:
Name:
Title:
CORPDAL:121602.3 18747-00028
B - 3
<PAGE>
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
CORPDAL:121602.3 18747-00028
B - 4
<PAGE>
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.
CORPDAL:121602.3 18747-00028
B - 5
<PAGE>
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
- -------------------------------------------------------------------------------
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.
CORPDAL:121602.3 18747-00028
B - 6
<PAGE>
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
HALLWOOD ENERGY CORPORATION
On June 8, 1999, the Board of Directors of Hallwood Energy Corporation
(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 June 8, 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 B Junior Participating Preferred Stock, par value $.01 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 June 8, 1999, as the same may be amended from time to time
(the "Rights Agreement"), between the Company and Registrar and Transfer
Company, 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
CORPDAL:121602.3 18747-00028
C - 1
<PAGE>
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 June 7, 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).
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.
CORPDAL:121602.3 18747-00028
C - 2
<PAGE>
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.
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.
CORPDAL:121602.3 18747-00028
C - 3
<PAGE>
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
June 4, 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.
CORPDAL:121602.3 18747-00028
C - 4
<PAGE>
Thomas J. Jung, Vice President
(Chief Financial Officer)
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of June 8, 1999,
between HALLWOOD ENERGY CORPORATION, a Delaware corporation (the "Company"), and
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "Purchaser").
1. Background. The Company, Hallwood Consolidated Resources Corporation
("HCRC") and the Purchaser have entered into that certain Amended and Restated
Subordinated Note and Warrant Purchase Agreement (the "Purchase Agreement"),
dated as of the date hereof, pursuant to which the Company has agreed, among
other things, to issue and sell its Common Stock Purchase Warrants (the
"Warrants"), evidencing rights to purchase an aggregate of 309,278 shares
(subject to adjustment as provided therein) of the Company's common stock, par
value $0.01 per share (the "Common Stock"), in exchange for, among other things,
the delivery by the Purchaser, for cancellation, of common stock purchase
warrants evidencing rights of the Purchaser to purchase shares of the common
stock, par value $0.01 per share, of HCRC. This agreement shall become effective
upon the issuance of the Warrants.
2. Registration under Securities Act, etc.
2.1 Registration on Request.
(a) Request by Holders of Warrants or Registrable Securities.
At any time after the date hereof any holder or holders of Warrants or
Registrable Securities may request in writing that the Company effect the
registration under the Securities Act of all or part of such holders'
Registrable Securities. Such request shall specify the number of shares of
Registrable Securities proposed to be sold by such holder or holders and the
intended method of disposition thereof. Promptly after receiving such request,
the Company will give written notice of such requested registration to all other
holders of Warrants or Registrable Securities and thereupon the Company will use
its best efforts to effect the registration under the Securities Act of:
(i)the Registrable Securities which the Company has
been so requested to register by such holders, and
(ii) all other Registrable Securities which the
Company has been requested to register by such other holders of
Warrants or Registrable Securities by written request given to the
Company within 30 days after the giving of such written notice by the
Company (which request shall specify the number of shares of
Registrable Securities proposed to be
DAL02:230289.1
111111
1
<PAGE>
sold by such holder or holders and the intended method of disposition
of such Registrable Securities), all to the extent necessary to permit
the disposition (in accordance with the intended methods thereof as
aforesaid) of the Registrable Securities so to be registered.
(b) Registration of Other Securities. Whenever the Company
shall effect a registration pursuant to this Section 2.1 in connection with an
underwritten offering by one or more holders of Registrable Securities, no
securities other than Registrable Securities shall be included among the
securities covered by such registration unless (a) the managing underwriter of
such offering shall have advised each holder of Registrable Securities to be
covered by such registration (and each holder of Warrants therefor) in writing
that the inclusion of such other securities would not adversely affect such
offering or (b) the holders of all Registrable Securities to be covered by such
registration (and the holders of all Warrants therefor) shall have consented in
writing to the inclusion of such other securities.
(c) Registration Statement Form. Registrations under this
Section 2.1 shall be on such appropriate registration form of the Commission (i)
as shall be selected by the Company and as shall be reasonably acceptable to the
Requisite Holders and (ii) as shall permit the disposition of such Registrable
Securities in accordance with the intended method or methods of disposition
specified in their request for such registration. The Company agrees to include
in any such registration statement all information which holders of Registrable
Securities being registered (or holders of Warrants therefor) shall reasonably
request.
(d) Expenses. The Company will pay all Registration Expenses
in connection with any registration requested pursuant to this Section 2.1 if
such registration has been requested in relation to at least 66 2/3% (by number
of shares) of Registrable Securities; provided, however, that the Company shall
in all events and at all times be responsible for the fees and disbursements of
counsel for the Requisite Holders in connection with the rendering of opinions
requested by the Company or any underwriter. The Registration Expenses (and
underwriting discounts and commissions and transfer taxes, if any) in connection
with each other registration requested under this Section 2.1 shall be allocated
on a pro rata basis among all Persons on whose behalf securities of the Company
are included in such registration, in accordance with the amount of the
securities then being registered on behalf of each such Person.
(e) Effective Registration Statement. A registration requested
pursuant to this Section 2.1 shall not be deemed to have been effected (i)
unless a registration statement with respect thereto has become effective, (ii)
if after it has become effective, such effectiveness has been suspended for one
or more periods that equal or exceed ten (10) Business Days in the aggregate by
the issuance of any stop order, injunction or other order or requirement of the
Commission or other governmental agency or court for any reason, or (iii) if the
conditions to closing specified in the purchase agreement or underwriting
agreement entered into in connection with such registration are not satisfied.
DAL02:230289.1
111111
2
<PAGE>
(f) Selection of Underwriters. If a requested registration
pursuant to this Section 2.1 involves an underwritten offering, the underwriter
or underwriters thereof shall be selected by the Company and shall be reasonably
satisfactory to the Requisite Holders.
(g) Priority in Requested Registrations. If a requested
registration pursuant to this Section 2.1 involves an underwritten offering, and
the managing underwriter shall advise the Company in writing (with a copy to
each holder of Warrants or Registrable Securities requesting registration) that,
in its opinion, the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering within a
price range acceptable to the Requisite Holders, the Company will include in
such registration to the extent of the number which the Company is so advised
can be sold in such offering Registrable Securities requested to be included in
such registration, pro rata among the holders of Registrable Securities (or
Warrants therefor) requesting such registration on the basis of the percentage
of such Registrable Securities held by or issuable to such holders. In
connection with any registration as to which the provisions of this subdivision
(g) apply, no securities other than Registrable Securities shall be covered by
such registrations.
The holders of Warrants or Registrable Securities shall be
entitled to no more than two requested registrations pursuant to this Section
2.1.
2.2 Incidental Registration.
(a) Right to Include Registrable Securities. If the Company at
any time proposes to register any of its securities under the Securities Act
(other than by a registration on Form S-4 or S-8 or any successor or similar
form and other than pursuant to Section 2.1), whether or not for sale for its
own account, it will each such time give prompt written notice to all holders of
Warrants or Registrable Securities of its intention to do so and of such
holders' rights under this Section 2.2. Upon the written request of any such
holder made within 30 days after the receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by such
holder and the intended method of disposition thereof), the Company will use its
best efforts to effect the registration under the Securities Act of all
Registrable Securities which the Company has been so requested to register by
the holders thereof, provided that if, at any time after giving written notice
of its intention to register any securities and prior to the effective date of
the registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay registration
of such securities, the Company may, at its election, give written notice of
such determination to each holder of Warrants or Registrable Securities and,
thereupon, (i) in the case of a determination not to register, shall be relieved
of its obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), without prejudice, however, to the rights of any holder
or holders of Warrants or Registrable Securities entitled to do so to request
that such registration be effected as a registration under Section 2.1, and (ii)
in the case of a determination to delay registering, shall be permitted to delay
registering any Registrable Securities, for the same period as the delay in
registering such other securities. No registration effected under this Section
2.2 shall be deemed to
DAL02:230289.1
111111
3
<PAGE>
have been effected pursuant to Section 2.1 or shall relieve the Company of its
obligation to effect any registration upon request under Section 2.1. The
Company will pay all Registration Expenses in connection with each registration
of Registrable Securities requested pursuant to this Section 2.2.
(b) Priority in Incidental Registrations. If (i) a
registration pursuant to this Section 2.2 involves an underwritten offering of
the securities so being registered, whether or not for sale for the account of
the Company, to be distributed (on a firm commitment basis) by or through one or
more underwriters of recognized standing under underwriting terms appropriate
for such a transaction, and (ii) the managing underwriter of such underwritten
offering shall inform by letter the Company and the holders of Warrants or
Registrable Securities requesting such registration of its belief that the
number of securities requested to be included in such registration exceeds the
number which can be sold in (or during the time of) such offering, then the
Company may include all securities proposed by the Company to be sold for its
own account and may decrease the number of Registrable Securities and other
securities of the Company so proposed to be sold and so requested to be included
in such registration (pro rata among the holders thereof on the basis of the
number of such Registrable Securities and other securities held by such holders
and requested to be included therein) to the extent necessary to reduce the
number of securities to be included in the registration to the level recommended
by the managing underwriter.
2.3 Registration Procedures. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in Sections 2.1 and 2.2, the
Company will as expeditiously as possible:
(i) prepare and (as soon thereafter as possible or in any
event no later than 90 days after the end of the period within which
requests for registration may be given to the Company) file with the
Commission the requisite registration statement to effect such
registration and thereafter use its best efforts to cause such
registration statement to become effective, provided that the Company
may discontinue any registration of its securities which are not
Registrable Securities (and, under the circumstances specified in
Section 2.2(a), its securities which are Registrable Securities) at any
time prior to the effective date of the registration statement relating
thereto;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities
Act with respect to the disposition of all securities covered by such
registration statement until such time as all of such securities have
been disposed of in accordance with the intended methods of disposition
by the seller or sellers thereof set forth in such registration
statement (which period shall not exceed 270 days from the date the
registration statement is declared effective unless the effectiveness
thereof is suspended for any reason);
(iii) furnish to each seller of Registrable Securities covered
by such registration statement such number of conformed copies of such
registration statement and of each such
DAL02:230289.1
111111
4
<PAGE>
amendment and supplement thereto (in each case including all exhibits),
such number of copies of the prospectus contained in such registration
statement (including each preliminary prospectus and any summary
prospectus) and any other prospectus filed under Rule 424 under the
Securities Act, in conformity with the requirements of the Securities
Act, and such other documents, as such seller may reasonably request;
(iv) use its best efforts to register or qualify all
Registrable Securities covered by such registration statement under
such other securities or blue sky laws of such jurisdictions as each
seller thereof shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement
remains in effect, and take any other action which may be reasonably
necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities covered
by the registration statement, except that the Company shall not for
any such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not but for
the requirements of this subdivision (iv) be obligated to be so
qualified, to subject itself to taxation in any jurisdiction or to
consent to general service of process in any such jurisdiction where it
is not then so subject;
(v) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;
(vi) furnish to each seller of Registrable Securities and each
Requesting Holder a signed counterpart, addressed to such seller and
such Requesting Holder (and underwriters, if any) of:
(x) an opinion of counsel for the Company, dated the effective
date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), reasonably
satisfactory in form and substance to such seller and such
Requesting Holder, and
(y) a "comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing
under the underwriting agreement), signed by the independent
public accountants who have certified the Company's financial
statements included in such registration statement,
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) and, in
the case of the accountants' letter, with respect to events subsequent
to the date of such financial statements, as are customarily covered in
opinions of issuer's counsel and in accountants' letters delivered to
the underwriters in underwritten public offerings of securities and, in
the case of the accountants' letter, such other financial
DAL02:230289.1
111111
5
<PAGE>
matters, and, in the case of the legal opinion, such other legal
matters, as such seller or such Requesting Holder, if any, may
reasonably request;
(vii) notify each seller of Registrable Securities covered by
such registration statement and each Requesting Holder, at any time
when a prospectus relating thereto is required to be delivered under
the Securities Act, upon discovery that, or upon the happening of any
event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were
made, and at the request of any such seller or Requesting Holder
promptly prepare and furnish to such seller or Requesting Holder a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of Registrable Securities, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made;
(viii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more
than eighteen months, beginning with the end of the fiscal quarter
after the effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act, and will furnish to each such seller at least five
business days prior to the filing thereof a copy of any amendment or
supplement to such registration statement or prospectus and shall not
file any thereof to which any such seller shall have reasonably
objected on the grounds that such amendment or supplement does not
comply in all material respects with the requirements of the Securities
Act or of the rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement;
(x) use its best efforts to cause all Registrable Securities
covered by such registration statement to be listed on any securities
exchange on which any of the Registrable Securities are then listed or
to be quoted by the Nasdaq National Market (or any successor thereto or
any comparable system) on which any of the Registrable Securities are
then quoted; and
(xi) enter into such agreements and take such other actions as
the Requisite Holders shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities.
DAL02:230289.1
111111
6
<PAGE>
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in the subdivision (vii) of this
Section 2.3, such holder will forthwith discontinue such holder's disposition of
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (vii) of this
Section 2.3 or until it is advised in writing (the "Advice") by the Company that
the use of the prospectus may be resumed, and, if so directed by the Company,
such holders will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies then in such holders' possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice. In the event the Company shall give any such notice to suspend
the offering and disposition of the Registrable Securities (including, without
limitation, pursuant to the next paragraph hereof), the time periods regarding
the maintenance of the applicable registration statement shall be extended by
the number of days during the period from and including the date of the giving
of such notice pursuant to subdivision (vii) of this Section 2.3 and including
the date when such holders shall have received the copies of the supplemented or
amended prospectus contemplated by subdivision (vii) of this Section 2.3 or the
Advice.
Notwithstanding the foregoing, (a) the Company may delay the filing of
any registration statement, any amendment thereof or any supplement to the
related prospectus, and may withhold efforts to cause any registration statement
to become effective, and (b) in the case of an effective registration statement,
upon the written request of the Company the holders of Registrable Securities
participating in such registration shall refrain from selling any shares
pursuant to such registration statement, if (i) the Company determines in good
faith that such registration or sale would (A) materially interfere with or
adversely affect in any material respect the negotiation or completion of any
material transaction that is being contemplated by the Company at the time the
right to delay is exercised or a request is made or (B) involve initial or
continuing disclosure obligations not otherwise required by law or the rules and
regulations of the Commission, which disclosure would have a material adverse
effect on the Company or (ii) in the written opinion of a nationally recognized
investment bank, that the Company is unable to consummate an underwritten
offering due to then currently prevailing market conditions; provided however,
that the duration of any such delay or period in which shares of Registrable
Securities may not be sold pursuant to an effective registration statement shall
not exceed a period of 90 days.
2.4 Underwritten Offerings.
(a) Requested Underwritten Offerings. If requested by the
underwriters for any underwritten offering of Registrable Securities pursuant to
a registration requested under Section 2.1, the Company will enter into an
underwriting agreement with such underwriters for such offering, such agreement
to be reasonably satisfactory in substance and form to each holder of such
Registrable
DAL02:230289.1
111111
7
<PAGE>
Securities (or Warrants therefor) and the underwriters and to contain such
representations and warranties by the Company and such other terms as are
generally customary in agreements of this type, including, without limitation,
indemnities to the effect and to the extent provided in Section 2.7. The holders
of Registrable Securities to be distributed by such underwriters shall be
parties to such underwriting agreement and may, at their option, require that
any or all of the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters shall also
be made to and for the benefit of such holders of Registrable Securities and
that any or all of the conditions precedent to the obligations of such
underwriters under such underwriting agreement be conditions precedent to the
obligations of such holders of Registrable Securities. Any such holder of
Registrable Securities shall not be required to make any representations or
warranties to or agreements with the Company or the underwriters other than
representations, warranties or agreements regarding such holder, such holder's
Registrable Securities and such holder's intended method of distribution and any
other representation required by law.
(b) Incidental Underwritten Offerings. If the Company at any
time proposes to register any of its securities under the Securities Act as
contemplated by Section 2.2 and such securities are to be distributed by or
through one or more underwriters, the Company will, if requested by any holder
of Warrants or Registrable Securities as provided in Section 2.2 and subject to
the provisions of Section 2.2(b), arrange for such underwriters to include all
the Registrable Securities to be offered and sold by such holder among the
securities to be distributed by such underwriters. The holders of Registrable
Securities to be distributed by such underwriters shall be parties to the
underwriting agreement between the Company and such underwriters and may, at
their option, require that any or all of the representations and warranties by,
and the other agreements on the part of, the Company to and for the benefit of
such underwriters shall also be made to and for the benefit of such holders of
Registrable Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be conditions
precedent to the obligations of such holders of Registrable Securities. Any such
holder of Registrable Securities shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding such
holder, such holder's Registrable Securities and such holder's intended method
of distribution and any other representation required by law.
2.5 Preparation; Reasonable Investigation. In connection with
the preparation and filing of each registration statement under the Securities
Act pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such registration statement (or the holders of
Warrants therefor), their underwriters, if any, and their respective counsel and
accountants, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of such holders' and such underwriters' respective counsel, to
conduct a reasonable investigation within the meaning of the Securities Act;
provided, however, that such holder shall, if requested by the Company, cause
its
DAL02:230289.1
111111
8
<PAGE>
counsel and accountants to execute confidentiality agreements in customary form
and such holder shall, consistent with its customary practices, use its best
efforts to keep confidential any records, information or documents that are
designated by the Company in writing as confidential, except that such records,
information and documents may be disclosed by such holder to (i) such holder's
directors, officers, employees, agents and professional consultants, (ii) any
other holder of any Registrable Security, (iii) any Person to which such holder
offers to sell Registrable Securities or any part thereof, (iv) any Person from
which such holder offers to purchase any other security of the Company, (v) any
federal or state regulatory authority having jurisdiction over such holder, (vi)
the National Association of Insurance Commissioners or any similar organization,
or (vii) any other Person to which such delivery or disclosure may be necessary
or appropriate (a) in compliance with any law, rule, regulation or order
applicable to such holder, (b) in response to any subpoena or other legal
process or other investigative demand, or (c) in connection with any litigation
to which such holder is a party; provided, further that such holder shall cause
the agents and professional consultants referred to in clause (i) and the
Persons referred to in clauses (iii) and (iv) to enter into confidentiality
agreements which shall contain provisions substantially identical to those
applicable to such holders under this Section 2.5.
2.6 Rights of Requesting Holders. The Company will not file
any registration statement under the Securities Act, unless it shall first have
given to all holders of Warrants or Registrable Securities at least 30 days
prior written notice thereof and, if so requested by the Requisite Holders,
shall have consulted with such holders concerning the selection of underwriters,
counsel and independent accountants for the Company for such offering and
registration. If such holders shall so request within 30 days after such notice,
each of them shall be a "Requesting Holder" hereunder and shall have the rights
of a Requesting Holder provided in this section 2.6 and in sections 2.3, 2.5 and
2.7. The Company further covenants that a Requesting Holder shall have the right
(a) to participate in the preparation of any such registration or comparable
statement and to require the insertion therein of material furnished to the
Company in writing, which in such Requesting Holder's judgment, reasonable
exercised, should be included, and (b) at the Company's expense, to retain
counsel and/or independent public accountants to assist such Requesting Holder
in such participation. In addition, if any such registration statement refers to
any Requesting Holder by name or otherwise as the holder of any securities of
the Company, then such Requesting Holder shall have the right to require (a) the
insertion therein of language, in form and substance satisfactory to such
Requesting Holder, to the effect that the holding by such Requesting Holder of
such securities does not necessarily make such Requesting Holder a "controlling
person" of the Company within the meaning of the Securities Act and is not to be
construed as a recommendation by such Requesting Holder of the investment
quality of the Company's debt or equity securities covered thereby and that such
holding does not imply that such Requesting Holder will assist in meeting any
future financial requirements of the Company, or (b) in the event that such
reference to such Requesting Holder by name or otherwise is not required by the
Securities Act or any rules and regulations promulgated thereunder, the deletion
of the reference to such Requesting Holder.
DAL02:230289.1
111111
9
<PAGE>
2.7 Indemnification.
(a) Indemnification by the Company. The Company will, and
hereby does, in the case of any registration statement filed pursuant to Section
2.1 or 2.2 indemnify and hold harmless the seller of any Registrable Securities
covered by such registration statement, its directors and officers, each other
Person who participates as an underwriter in the offering or sale of such
securities and each other Person, if any, who controls such seller or any such
underwriter within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such seller or any
such director or officer or underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Registrable Securities were registered under the Securities
Act, any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any other
noncompliance or alleged noncompliance with the Securities Act or the applicable
underwriting agreement, and the Company will reimburse such seller and each such
director, officer, underwriter and controlling person for any legal or any other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus, final prospectus, summary prospectus, amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company through an instrument duly executed by such seller
specifically stating that it is for use in the preparation thereof and, provided
further that the Company shall not be liable to any Person who participates as
an underwriter, in the offering or sale of Registrable Securities or any other
Person, if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of such Person's failure to send or give a copy of the final prospectus, as
the same may be then supplemented or amended, to the Person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
Person if such statement or omission was corrected in such final prospectus.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any such director, officer,
underwriter or controlling person and shall survive the transfer of such
Registrable Securities by such seller.
(b) Indemnification by the Sellers. The Company may require,
as a condition to including any Registrable Securities in any registration
statement filed pursuant to Section 2.3, that the Company shall have received an
undertaking satisfactory to it from the prospective seller of such Registrable
Securities, to indemnify and hold harmless (in the same manner and to the same
extent as set forth in subdivision (a) of this Section 2.7) the Company, each
director of the Company, each
DAL02:230289.1
111111
10
<PAGE>
officer of the Company and each other Person, if any, who controls the Company
within the meaning of the Securities Act, with respect to any statement or
alleged statement in or omission or alleged omission from such registration
statement, any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, if such statement or
alleged statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company through an
instrument duly executed by such seller specifically stating that it is for use
in the preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement. Such indemnity shall
remain in full force and effect, regardless of any investigation made by or on
behalf of the Company or any such director, officer or controlling Person and
shall survive the transfer of such securities by such seller.
(c) Notices of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section 2.7,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action, provided that the failure of any indemnified party to give notice
as provided herein shall not relieve the indemnifying party of its obligations
under the preceding subdivisions of this Section 2.7, except to the extent that
the indemnifying party is actually prejudiced by such failure to give notice. In
case any such action is brought against an indemnified party, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnifying party shall be entitled to participate in and to assume the defense
thereof, jointly with any other indemnifying party similarly notified to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the consent of the indemnified party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
(d) Other Indemnification. Indemnification similar to that
specified in the preceding subdivisions of this Section 2.7 (with appropriate
modifications) shall be given by the Company and each seller of Registrable
Securities with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority other than the Securities Act.
(e) Indemnification Payments. The indemnification required by
this Section 2.7 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense as and when bills are received or
expense, loss, damage or liability is incurred.
2.8 Adjustments Affecting Registrable Securities. The
Company will not effect or permit to occur any combination or subdivision of
shares which would adversely affect the ability
DAL02:230289.1
111111
11
<PAGE>
of the holders of Registrable Securities or Warrants therefor to include such
Registrable Securities in any registration of its securities contemplated by
this Section 2 or the marketability of such Registrable Securities under any
such registration.
3. Definitions. As used herein, unless the context otherwise requires,
the following terms have the following respective meanings:
Commission: The Securities and Exchange Commission or any
other Federal agency at the time administering the Securities Act.
Common Stock: As defined in Section 1.
Company: As defined in the introductory paragraph of this
Agreement.
Exchange Act: The Securities Exchange Act of 1934, or any
similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
Reference to a particular section of the Securities Exchange Act of
1934 shall include a reference to the comparable section, if any, of
any such similar Federal statute.
Person: A corporation, an association, a partnership, a
business, a joint venture, a limited liability company, an individual,
a governmental or political subdivision thereof or a governmental
agency.
Purchase Agreement: As defined in Section 1.
Purchaser: As defined in the introductory paragraph of this
Agreement.
Registrable Securities: (a) Any shares of Common Stock issued
or issuable upon exercise of any of the Warrants and (b) any securities
issued or issuable with respect to any such Common Stock by way of
stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other reorganization
or otherwise. As to any particular Registrable Securities, once issued
such securities shall cease to be Registrable Securities when (a) a
registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such
registration statement, (b) they shall have been sold pursuant to Rule
144 (or any successor provision) under the Securities Act, (c) they
shall have been otherwise transferred, new certificates for them not
bearing a legend restricting further transfer shall have been delivered
by the Company and subsequent disposition of them shall not require
registration or qualification of them under the Securities Act or any
similar state law then in force, or (d) they shall have ceased to be
outstanding.
Registration Expenses: All expenses incident to the Company's
performance of or compliance with Section 2, including, without
limitation, all registration, filing and National
DAL02:230289.1
111111
12
<PAGE>
Association of Securities Dealers fees, all fees and expenses of
complying with securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the
fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special
audits or "cold comfort" letters required by or incident to such
performance and compliance, the fees and disbursements incurred by the
holders of Registrable Securities to be registered and the holders of
Warrants therefor (including the fees and disbursements of any counsel
and accountants retained by the Requisite Holders), premiums and other
costs of policies of insurance against liabilities arising out of the
public offering of the Registrable Securities being registered and any
fees and disbursements of underwriters customarily paid by issuers or
sellers of securities, but excluding underwriting discounts and
commissions and transfer taxes, if any, provided that, in any case
where Registration Expenses are not to be borne by the Company, such
expenses shall not include salaries of Company personnel or general
overhead expenses of the Company, auditing fees, premiums or other
expenses relating to liability insurance required by underwriters of
the Company or other expenses for the preparation of financial
statements or other data normally prepared by the Company in the
ordinary course of its business or which the Company would have
incurred in any event.
Requesting Holder: As defined in Section 2.6.
Requisite Holders: With respect to any registration of
Registrable Securities by the Company pursuant to Section 2, any holder
or holders of 66 2/3% (by number of shares) of the Registrable
Securities to be so registered or of Warrants for such Registrable
Securities.
Securities Act: The Securities Act of 1933, or any similar
Federal statute, and the rules and regulations of the Commission
thereunder, all as of the same shall be in effect at the time.
References to a particular section of the Securities Act of 1933 shall
include a reference to the comparable section, if any, of any such
similar Federal Statute.
4. Rule 144: If the Company shall have filed a registration statement
pursuant to the requirements of Section 12 of the Exchange Act or a registration
statement pursuant to the requirements of the Securities Act, the Company will
file the reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission thereunder
(or, if the Company is not required to file such reports, will, upon the request
of any holder of Warrants or Registrable Securities, make publicly available
other information) and will take such further action as any holder of Warrants
or Registrable Securities may reasonably request, all to the extent required
from time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time or (b) any similar rule or regulation hereafter adopted by the
Commission. Upon the request of any holder of Warrants or Registrable
Securities, the Company will deliver to such holder a written statement as to
whether it has complied with such requirements.
DAL02:230289.1
111111
13
<PAGE>
5. Amendments and Waivers. This Agreement may be amended and the
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the Requisite
Holders. Each holder of any Warrants or Registrable Securities at the time or
thereafter outstanding shall be bound by any consent authorized by this Section
5, whether or not such Registrable Securities shall have been marked to indicate
such consent.
6. Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the holder of such
Warrants or Registrable Securities for purposes of any request or other action
by any holder or holders of Warrants or Registrable Securities pursuant to this
Agreement or any determination of any number or percentage of shares of Warrants
or Registrable Securities held by any holder or holders of Warrants or
Registrable Securities contemplated by this Agreement. If the beneficial owner
of any Warrants or Registrable Securities so elects, the Company may require
assurances reasonably satisfactory to it of such owner's beneficial ownership of
such Warrants or Registrable Securities.
7. Notices. All communications provided for hereunder shall be sent by
first-class mail and (a) if addressed to a party other than the Company,
addressed to such party in the manner set forth in the Purchase Agreement, or at
such other address as such party shall have furnished to the Company in writing,
or (b) if addressed to the Company, at 4610 South Ulster Street, Suite 200,
Denver, Colorado 80237 Attention: Legal Department, or at such other address, or
to the attention of such other officer, as the Company shall have furnished to
each holder of Warrants or Registrable Securities at the time outstanding;
provided, however, that any such communication to the Company may also, at the
option of any of the parties hereunder, be either delivered to the Company at
its address set forth above or to any officer of the Company.
8. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the benefit
of the parties hereto other than the Company shall also be for the benefit of
and enforceable by any subsequent holder of any Warrants or Registrable
Securities, subject to the provisions respecting the minimum numbers or
percentages of shares of Warrants or Registrable Securities required in order to
be entitled to certain rights, or take certain actions contained herein.
9. Descriptive Headings. The descriptive headings of the several
sections and subdivisions of this Agreement are inserted for reference only and
shall not limit or otherwise affect the meaning hereof.
10. Specific Performance. The parties hereto recognize and agree that
money damages may be insufficient to compensate the holders of any Warrants or
Registrable Securities for breaches by the Company of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
DAL02:230289.1
111111
14
<PAGE>
11. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
12. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered by their respective officers thereunto duly authorized
as of the date first above written.
HALLWOOD ENERGY CORPORATION
By: /s/ Cathleen M. Osborn
Name: Cathleen M. Osborn
Title: Vice President
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: /s/ Ric Abel
Name: Ric Abel
Title: Vice President
DAL02:230289.1
111111
15
HALLWOOD ENERGY CORPORATION
CHANGE OF CONTROL AGREEMENT
This change of control agreement ("Agreement") is entered into
effective as of __________, 1999, by and between Hallwood Energy Corporation
("HEC") and _________ ("Executive").
WHEREAS, HEC desires to retain certain key employee personnel who are
employed by its wholly owned subsidiary, Hallwood Petroleum, Inc. ("HPI") and,
accordingly, the Board of Directors of HEC has approved HEC entering into a
change of control agreement with Executive in order to encourage Executive's
continued service to HPI and HEC;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, HEC and Executive agree as follows:
1. DEFINITIONS.
(a) "Change in Duties" shall mean the occurrence, within two years
after the date upon which a Change of Control occurs, of any
one or more of the following:
(i) a reduction in Executive's annual salary from the level in effect
immediately prior to the Change of Control:
(ii) failure of HEC or its successor to provide Executive
with an annual bonus, incentive compensation or other
employee benefits (including but not limited to
medical, dental, life insurance, accidental, death
and long-term disability plans) that are materially
consistent with such annual bonuses, incentive
compensation or other employee benefits provided by
HEC or its successor to executives with comparable
duties;
(iii) a significant adverse alteration in the nature or
status of Executive's duties, title,
responsibilities, or the conditions of Executive's
employment from those in effect immediately prior to
such Change in Control; or
(iv) a change in the location of Executive's principal
place of employment by HEC or its successor by more
than 25 miles from the location where Executive was
principally employed immediately prior to the date on
which a Change of Control occurs.
(b) "Change of Control" shall mean the occurrence after the effective date of
this Agreement of:
(i) An acquisition of any voting securities of HEC (the
"Voting Securities") 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 (the "Exchange
Act")), other than The Hallwood Group Incorporated
and its affiliates immediately after which such
Person has "Beneficial Ownership" (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of
thirty percent (30%) or more of the combined voting
power of HEC's then outstanding Voting Securities;
(ii) The individuals who, as of the effective date of this Agreement,
are members of the Board of Directors of HEC
(the "Incumbent Board"), cease for any reason to
constitute at least a majority of the members of the
Board of Directors of HEC (the "Board"); provided,
however, that if the election, or nomination for
election by HEC's common stockholders, of any new
director was approved by a vote of at least a
majority of the Incumbent Board, such new director
shall, for purposes of this Agreement, be considered
as a member of the Incumbent Board; provided
further, however, that no individual shall be
considered a member of the Incumbent Board if such
individual initially assumed office as a result of
either an actual or threatened "election contest"
(as described in Rule 14A-11 promulgated under
the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf
of a Person other than the Board (a "Proxy Contest")
including by reason of any agreement intended to
avoid or settle any Election Contest or Proxy
Contest; or
(iii) Approval by stockholders of HEC of:
(A) A merger, consolidation or reorganization involving HEC, unless:
(1) the stockholders of HEC, immediately
before such merger, consolidation or
reorganization, own directly or
indirectly immediately following
such merger, consolidation or
reorganization, at least fifty
percent (50%) of the combined voting
power of the outstanding voting
securities of the corporation
resulting from such merger or
consolidation or reorganization (the
"Surviving Corporation") in
substantially the same proportion as
their ownership of the Voting
Securities immediately before such
merger, consolidation or
reorganization, and
(2) the individuals who were members of
the Incumbent Board immediately
prior to the execution of the
agreement providing for such merger,
consolidation or reorganization
constitute at least a majority of
the members of the board of
directors of the Surviving
Corporation; or
(B) A complete liquidation or dissolution of HEC; or
(C) An agreement for the sale or other
disposition of all or substantially all of
the assets of HEC to any Person (other than
a transfer to a wholly owned subsidiary).
(iv) Notwithstanding the foregoing, a Change of Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired beneficial
ownership of more than the permitted percent of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by HEC
which, by reducing the number of Voting Securities outstanding, increases
the proportional number of shares beneficially owned by the Subject Person,
provided that if a Change of Control would occur (but for the operation of
this sentence) as a result of the acquisition of Voting Securities by HEC,
and after such share acquisition by HEC, the Subject Person becomes the
beneficial owner of any additional Voting Securities which increases the
percentage of the then outstanding Voting Securities beneficially owned by
the Subject Person, then a Change of Control shall occur; or
(v) Notwithstanding anything contained in this Agreement
to the contrary, if the Executive's employment is
terminated prior to a Change in Control and the
Executive reasonably demonstrates that such
termination (i) was at the request of a third party
who has indicated an intention or taken steps
reasonably calculated to effect a Change in Control
and who effectuates a Change in Control (a "Third
Party") or (ii) otherwise occurred in connection
with, or in anticipation of, a Change in Control
which actually occurs, then for all purposes of this
Agreement, the date of Change in Control with respect
to the Executive shall mean the date immediately
prior to the date of such termination of the
Executive's employment.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Compensation" shall mean the sum of:
(i) Executive's annual salary immediately prior to the date on which a Change
of Control occurs; and
(ii) An annual average bonus computed by dividing the
total cash bonuses received by Executive during the
three years immediately prior to the date on which a
Change of Control occurs by three or, in the event
Executive has been employed by HEC or its
predecessors for less than three years prior to the
date on which a Change of Control occurs, the annual
average bonus shall be computed by dividing the total
cash bonuses received by Executive during the period
of employment immediately prior to the date on which
a Change of Control occurs (the "Period") by the
number, carried to two decimal places, determined by
dividing the number of days in the Period by 365.
(e) "Involuntary Termination" shall mean any termination of
Executive's employment with HEC or its successor other than
(i) Termination for Cause, (ii) termination as a result of
death or disability under circumstances entitling Executive to
benefits under HEC's long-term disability plan, (iii)
Retirement, or (iv) resignation by Executive except
resignation on or before the date which is one hundred eighty
days after the date upon which Executive receives notice of a
Change in Duties.
(f) "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, a
limited liability company, an unincorporated organization and
a government or any department or agency thereof.
(f) "Retirement" shall mean Executive's resignation on or after the date
Executive reaches age sixty-five.
(g) "Severance Amount" shall mean an amount equal to ____ times Executive's
Compensation.
(h) Stock Options shall mean options granted to Executive by HEC or its
successor to purchase stock of HEC or its successor.
(i) "Termination for Cause" shall mean an Executive's termination of employment
with HEC or its successor because of:
(i) the continued failure by the Executive to
devote time and effort to the performance of
Executive's duties consistent with
Executive's performance prior to the
occurance of a Chance of Control, after
written demand for improved performance has
been delivered to the Executive by HEC which
specifically identifies how Executive has
not devoted such consitent time and effort
to the performance of Executive's duties; or
(ii) the willful engaging by Executive in misconduct which is materially
injurious to HEC, monetarily or otherwise.
2. SEVERANCE BENEFITS. If Executive's employment by HEC or its
successor is subject to an Involuntary Termination which occurs
within two years after the date upon which a Change of Control
occurs, then Executive shall be entitled to receive, as additional
compensation for services rendered to HEC or its successor,
(a) A lump sum cash payment in an amount equal to Executive's Severance Amount
and,
(b) Notwithstanding any provision to the contrary in any stock option
agreement, or other agreement relating to equity-type compensation that may
be outstanding between the Executive and HEC, all stock options, incentive
stock options, performance shares, and stock appreciation rights under the
1999 Long Term Incentive Plan or any other plan or arrangement then held by
the Executive shall immediately become 100% vested and exercisable, and the
Executive shall become 100% vested in all shares of restricted stock held
by or for the benefit of the Executive; provided, however, that to the
extent HEC is unable to provide for such acceleration of vesting, HEC shall
provide in lieu thereof a lump-sum cash payment equal to the difference
between the total value of such outstanding units, stock options, incentive
stock options, performance shares, stock appreciation rights and shares of
restricted stock (the "Stock Rights") as of the date of the Executive's
termination of employment and the total value of the stock rights in which
the Executive is vested as of the date of his termination of employment.
The value of such accelerated vesting in the Executive stock rights shall
be determined by the Board in good faith based on a valuation performed by
an independent consultant selected by the Board. Notwithstanding any
provision to the contrary in any stock option agreement that may be
outstanding between the Executive and HEC, the Executive's right to
exercise any previously unexercised options under any such stock option
agreement shall not terminate until the latest date on which the option
granted under such agreement would expire under the terms of such agreement
but for the Executive's termination of employment; provided, however, that
to the extent HEC is unable to provide for the extension of the expiration
date of such options, HEC shall provide in lieu thereof a lump-sum cash
payment equal to the value of such extension HEC is unable to provide. Such
values of such accelerated vesting and exercisability shall be determined
by the Board in good faith based on a valuation performed by an independent
consultant selected by the Board.
(c) For a period of eighteen (18) months subsequent to the Executive's
termination of employment, HEC shall at its expense continue on behalf of
the Executive and his dependents and beneficiaries, all medical, dental,
vision, and health benefits and insurance coverage which were being
provided to the Executive at the time of termination of employment. The
benefits provided in this Section 2(c) shall be no less favorable to the
Executive, in terms of amounts and deductibles and costs to him, than the
coverage provided the Executive under the plans providing such benefits at
the time Notice of Termination is given. HEC's obligation hereunder to
provide a benefit shall terminate if the Executive obtains comparable
coverage under a subsequent employer's benefit plan. For purposes of the
preceding sentence, benefits will not be comparable during any waiting
period for eligibility for such benefits or during any period during which
there is a preexisting condition limitation on such benefits. HEC also
shall pay to the Executive a lump sum equal to the amount of any additional
income tax payable by the Executive and attributable to the benefits
provided under this subparagraph (c) at the time such tax is imposed upon
the Executive. In the event that the Executive's participation in any such
coverage is barred under the general terms and provisions of the plans and
programs under which such coverage is provided, or any such coverage is
discontinued or the benefits thereunder are materially reduced, HEC shall
provide or arrange to provide the Executive with benefits substantially
similar to those which the Executive was entitled to receive under such
coverage immediately prior to the Termination Notice. At the end of the
period of coverage set forth above, the Executive shall have the option to
have assigned to him at no cost to the Executive and with no apportionment
of prepaid premiums, any assignable insurance owned by HEC and relating
specifically to the Executive, and the Executive shall be entitled to all
health and similar benefits that are or would have been made available to
the Executive under law.
The severance benefits payable under this Paragraph shall be paid to Executive
on or before the tenth day after the last day of Executive's employment with HEC
or its successor. Any severance benefits paid pursuant to this Paragraph will be
deemed to be a severance payment and not compensation for purposes of
determining benefits under HEC's qualified plans and shall be subject to any
required tax withholding.
3. NO MITIGATION. The Executive shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount
of any compensation or benefits provided to the Executive in any subsequent
employment.
4. ADDITIONAL PAYMENT BY HEC.
(a) GROSS-UP PAYMENT. In the event it shall be determined that any payment or
distribution of any type by HEC to or for the benefit of the Executive,
whether paid or payable or distributed or distributable pursuant to the
terms of this Plan or otherwise (the "Total Payments"), would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code") or any interest or penalties with respect to
such excise tax (such excise tax, together with any such interest and
penalties, are collectively referred to as the "Excise Tax", then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all
taxes (including additional excise taxes under said Section 4999 and any
interest, and penalties imposed with respect to any taxes) imposed upon the
Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Total Payments. HEC shall pay the
Gross-Up Payment to the Executive within twenty (20) business days after
the Termination Date.
(b) DETERMINATION BY ACCOUNTANT. All determinations required to be made under
this Section 4, including whether a Gross-Up Payment is required and the
amount of such Gross-Up Payment, shall be made, at HEC's expense, by the
independent accounting firm retained by HEC on the date of Change in
Control (the "Accounting Firm"), which shall provide detailed supporting
calculations both to HEC and the Executive within fifteen (15) business
days of the Termination Date, if applicable, or such earlier time as is
requested by HEC. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Executive with an opinion
that he has substantial authority not to report any Excise Tax on his
federal income tax return. Any determination by the Accounting Firm shall
be binding upon HEC and the Executive. As a result of the uncertainty in
the application of Section 4999 of the Code at the time of the initial
determination by the Accounting Firm hereunder, it is possible that a
Gross-Up Payment which will not have been made by HEC, should have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event that HEC exhausts its remedies pursuant to this
Section 4 and the Executive thereafter is required to made a payment of any
Excise Tax, the Accounting Firm shall determine, at HEC's expense, the
amount of the Underpayment that has occurred and any Underpayment shall be
promptly paid by HEC to or for the benefit of the Executive.
(c) NOTIFICATION REQUIRED. The Executive shall notify HEC in writing of any
claim by the Internal Revenue Service that, if successful, would require
the payment by HEC of the Gross-Up Payment. Such notification shall be
given as soon as practicable but not later than ten (10) business days
after the Executive knows of such claim and shall appraise HEC of the
nature of such claim and the date on which such claim is requested to be
paid. The Executive shall not pay such claim prior to the expiration of the
thirty (30) day period following the date on which it gives such notice to
HEC (or such shorter period ending on the date that any payment of taxes
with respect to such claim is due). If HEC notifies the Executive in
writing prior to the expiration of such period that it desires to contest
such claim, the Executive shall:
(i) give HEC any information reasonably requested by HEC relating to such
claim,
(ii) take such action in connection with contesting such
claim as HEC shall reasonably request in writing from
time to time, including, without limitation,
accepting legal representation with respect to such
claim by an attorney reasonably selected by HEC,
(iii) cooperate with HEC in good faith in order to effectively contest such
claim,
(iv) permit HEC to participate in any proceedings relating to such claim,
provided, however, that HEC shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax,
including interest and penalties with respect thereto, imposed as a result
of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 4(c), HEC shall
control all proceedings taken in connection with such contest and, at its
sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect
of such claim and may, at its sole option, either direct the Executive to
pay the tax claimed and sue for a refund, or contest the claim in any
permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as HEC shall determine;
provided, however, that if HEC directs the Executive to pay such claim and
sue for a refund, HEC shall advance the amount of such payment to the
Executive, on an interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any Excise Tax or income
tax, including interest or penalties with respect thereto, imposed with
respect to such advance or with respect to any imputed income with respect
to such advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the
Executive with respect to which such contested amount is claimed to be due
to limited solely to such contested amount. Furthermore, HEC's control of
the contest shall be limited to issues with respect to which a Gross-Up
Payment would be payable hereunder and the Executive shall be entitled to
settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(d) REPAYMENT. If, after the receipt by the Executive of an amount advanced by
HEC pursuant to Section 4(c), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to HEC's
complying with the requirements of Section 4(c) promptly pay to HEC the
amount of such refund (together with any interest paid or credited thereon
after applicable thereto). If, after the receipt by the Executive of an
amount advanced by HEC pursuant to Section 4(c), a determination is made
that the Executive shall not be entitled to any refund with respect to such
claim and HEC does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of thirty days after
such determination then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.
5. TERM. Within ninety days after June ____, 2002, and within ninety days
after each successive three-year period of time thereafter that this
Agreement is in effect, HEC shall have the right to review this Agreement,
and in its sole discretion either continue and extend this Agreement,
terminate this Agreement, and/or offer Executive a different agreement. HEC
will notify Executive of such action within said ninety-day period. This
Agreement shall remain in effect until so terminated and/or modified by
HEC. Failure of HEC to take any action within said ninety-day period shall
be considered as an extension of this Agreement for an additional
three-year period of time. If a Change of Control occurs while this
Agreement is in effect, then this Agreement shall not be subject to
termination or modification and shall remain in force for a period of three
years after such Change of Control, and if within said three years the
contingency factors occur which would entitle Executive to the benefits as
provided herein, this Agreement shall remain in effect in accordance with
its terms.
GENERAL.
(a) SUCCESSORS. This Agreement shall be binding upon and inure to
the benefit of HEC and any successor of HEC, by merger or
otherwise. This Agreement shall also be binding upon and inure
to the benefit of the Executive and Executive's estate. If
Executive shall die prior to full payment of amounts due
pursuant to this Agreement, such amounts shall be payable
pursuant to the terms of this Agreement, to Executive's
estate.
(b) SEVERABILITY. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction by reason of
applicable law shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability
without invalidating or affecting the remaining provisions
hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction.
(c) CONTROLLING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Colorado.
(d) RELEASE. As a condition to the receipt of any benefit under
Paragraph 2 hereof, Executive shall first execute a release,
in the form established by HEC, releasing HEC, its
shareholders, officers, directors, employees and agents from
any and all claims and from any and all causes of action of
any kind or character, including but not limited to all claims
or causes of action arising out of Executive's employment with
HEC or the termination of such employment.
(e) UNFUNDED OBLIGATION. The obligation to pay amounts under this
Agreement is an unfunded obligation of HEC and no such
obligation shall create a trust or be deemed to be secured by
any pledge or encumbrance on any property of HEC.
(f) NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be
deemed to constitute a contract of employment, nor shall any
provision hereof effect (i) the right to HEC of discharge
Executive at will or (ii) the terms and conditions of any
other agreement between HEC and Executive except as provided
herein. No severance compensation shall be payable hereunder
as a result of any termination of employment before a Change
of Control.
(g) NONALIENATION. No benefit payable hereunder may be assigned,
pledged or mortgaged and shall not be subject to legal process
or attachment for claims of creditors of Executive except to
the extent required by applicable law.
(h) OTHER SEVERANCE ARRANGEMENTS. If the Executive is entitled to
severance pay and benefits pursuant to this Agreement
following a Change in Control, the following shall apply:
(i) The severance pay and benefits provided for in
Section 2 shall be reduced by the amount of any other
severance or termination pay to which the Executive
may be entitled under any agreement with the Company
or any of its Affiliates
(iii) The Executive's entitlement to any other compensation
or benefits or any indemnification shall be
determined in accordance with the Company's employee
benefit plans and other applicable programs, policies
and practices or any indemnification agreement then
in effect.
(i) FEES AND EXPENSES. HEC shall pay all legal fees and related
expenses (including the costs of experts, evidence and
counsel) reasonably incurred by the Executive as they become
due as a result of the Executive seeking to obtain or enforce
any right or benefit provided by this Agreement.
(j) NOTICE. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement (including
the Notice of Termination) shall be in writing and shall be
deemed to have been duly given when personally delivered or
sent by certified mail, return receipt requested, postage
prepaid, or overnight courier or by facsimile, addresses to
the respective addresses and facsimile numbers last given by
each party to the other, provided that all notices to HEC
shall be directed to the attention of the Board with a copy to
the Secretary of HEC. All notices and communications shall be
deemed to have been received on the date of delivery thereof
or on the third business day after the mailing thereof, except
that notice of change of address shall be effective only upon
receipt.
(k) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future
participation in any benefit, bonus, incentive or other plan
or program provided by HEC (except for any severance or
termination policies, plans, programs or practices) and for
which the Executive may qualify, nor shall anything herein
limit or reduce such rights as the Executive may have under
any other agreements with HEC (except for any severance or
termination agreements). Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any
plan or program of HEC shall be payable in accordance with
such plan or program, except as explicitly modified by this
Agreement.
(l) SETTLEMENT OF CLAIMS. HEC's obligation to make the payments
provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any
circumstances, including, without limitations, any set-off,
counterclaim, recoupment, defense or other right which HEC may
have against the Executive or others.
(m) MUTUAL NON-DISPARAGEMENT. HEC, its affiliates and subsidiaries
agree and HEC shall use its best efforts to cause their
respective executive officers and directors to agree, that
they will not make or publish any statement critical of the
Executive or in any way adversely affecting or otherwise
maligning the Executive's reputation. The Executive agrees
that it will not make or publish any statement critical of
HEC, its affiliates and their respective executive officers
and directors, or in any way adversely affecting or otherwise
maligning the business reputation of any member of HEC, its
affiliates and subsidiaries and their respective officers,
directors and employees.
(n) MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by the Executive
and HEC. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreement or representations,
oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are
not expressly set forth in this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
______day of __________, 1999.
"EXECUTIVE"
----------------------------------
"HEC"
HALLWOOD ENERGY CORPORATION
-----------------------------------
Schedule for Change of Control Contracts
Signing Executives Effective Date Severance Amount
Anthony J. Gumbiner June 9, 1999 three times compensation
William L. Guzzetti June 9, 1999 three times compensation
Russell P. Meduna June 9, 1999 two and one-half times
compensation
Cathleen M. Osborn June 9, 1999 two and one-half times
compensation
George L. Brinkworth June 9, 1999 two times compensation
Betty J. Dieter June 9, 1999 two times compensation
William H. Marble June 9, 1999 two times compensation
Thomas J. Jung June 9, 1999 two times compensation
CONFORMED COPY
$105,000,000
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of
June 8, 1999
among
HALLWOOD ENERGY CORPORATION,
HALLWOOD ENERGY PARTNERS, L.P.,
and
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
as Borrowers,
THE BANKS LISTED HEREIN,
FIRST UNION NATIONAL BANK,
as Collateral Agent
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
J.P. Morgan Securities Inc.,
Arranger
First Union National Bank,
Syndication Agent
NationsBank, N.A.,
Documentation Agent
(NY) 27008/757/CA99/ca.99.conf.wpd
<PAGE>
TABLE OF CONTENTS
----------------------
PAGE
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions.....................................................2
SECTION 1.02. Accounting Terms and Determinations............................19
ARTICLE 2
AMOUNTS AND TERMS OF LOAN
SECTION 2.01. The Loans and Commitment.......................................19
SECTION 2.02. Principal Repayments...........................................20
SECTION 2.03. Borrowing Alternatives.........................................20
SECTION 2.04. Interest Rate..................................................20
SECTION 2.05. Computation of Interest........................................23
SECTION 2.06. Borrowing Procedure............................................23
SECTION 2.07. Continuation Options..........................................24
SECTION 2.08. Conversion Options.............................................25
SECTION 2.09. Optional Prepayments, Termination or Reduction of
Commitments..........................................................26
SECTION 2.10. Mandatory Prepayments..........................................26
SECTION 2.11. Payments.......................................................27
SECTION 2.12. Interest.......................................................27
SECTION 2.13. Reimbursement of Certain Funding Losses........................28
SECTION 2.14. Increased Costs................................................29
SECTION 2.15. Basis for Determining Fixed Rates Inadequate...................30
SECTION 2.16. Illegality.....................................................32
SECTION 2.17. Foreign Taxes..................................................32
SECTION 2.18. Substitution of Banks..........................................34
SECTION 2.19. Participants' Expenses.........................................34
SECTION 2.20. Commitment Fees................................................34
SECTION 2.21. Engineering Fee................................................34
SECTION 2.22. Agents' Fees...................................................34
SECTION 2.23. Participation Fee..............................................34
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Existence......................................................35
SECTION 3.02. Authorization..................................................36
(NY) 27008/757/CA99/ca.99.conf.wpd
<PAGE>
PAGE
SECTION 3.03. Binding Obligations............................................36
SECTION 3.04. No Legal Bar or Resultant Lien.................................36
SECTION 3.05. No Consent.....................................................36
SECTION 3.06. Financial Condition............................................37
SECTION 3.07. Investments and Guaranties.....................................37
SECTION 3.08. Liabilities; Litigation........................................37
SECTION 3.09. Taxes; Governmental Charges....................................37
SECTION 3.10. Titles, etc....................................................38
SECTION 3.11. Defaults.......................................................38
SECTION 3.12. Casualties; Taking of Property.................................38
SECTION 3.13. Use of Proceeds; Margin Stock..................................38
SECTION 3.14. Compliance with the Law........................................39
SECTION 3.15. Compliance with Erisa..........................................39
SECTION 3.16. No Material Misstatements......................................39
SECTION 3.17. Investment Company Act.........................................39
SECTION 3.18. Public Utility Holding Company Act.............................40
SECTION 3.19. Corporate Documents and HEP Partnership Agreement..............40
SECTION 3.20. Location of the Borrowers......................................40
SECTION 3.21. Gas Imbalances.................................................40
SECTION 3.22. Foreign Corporation............................................40
SECTION 3.23. Other Financing Documents......................................41
SECTION 3.24. Environmental Matters..........................................41
SECTION 3.25. Subsidiaries...................................................41
SECTION 3.26. Solvency, etc..................................................41
SECTION 3.27. Year 2000 Compliance...........................................41
SECTION 3.28. Reorganization.................................................42
ARTICLE 4
COVENANTS
SECTION 4.01. Financial Statements and Reports...............................43
SECTION 4.02. Annual Certificates of Compliance..............................44
SECTION 4.03. Quarterly Certificates of Compliance...........................44
SECTION 4.04. Taxes and Other Liens..........................................45
SECTION 4.05. Maintenance; Abandonment.......................................45
SECTION 4.06. Further Assurances.............................................45
SECTION 4.07. Performance of Obligations.....................................46
SECTION 4.08. Reimbursement of Expenses......................................46
SECTION 4.09. Insurance.....................................................46
SECTION 4.10. Right of Inspection............................................46
SECTION 4.11. Notice of Certain Events.......................................47
(NY) 27008/757/CA99/ca.99.conf.wpd
2
<PAGE>
PAGE
SECTION 4.12. ERISA Information and Compliance...............................47
SECTION 4.13. Collateral Security............................................48
SECTION 4.14. Performance of Partnership Agreement...........................49
SECTION 4.15. Notice to Purchasers of Oil and Gas............................49
SECTION 4.16. Engineering Reports...........................................49
SECTION 4.17. Debt...........................................................50
SECTION 4.18. Liens..........................................................52
SECTION 4.19. Investments, Loans and Advances................................52
SECTION 4.20. Subsidiaries...................................................54
SECTION 4.21. Distributions, Etc.............................................54
SECTION 4.22. Mergers, Etc...................................................55
SECTION 4.23. Nature of Business.............................................55
SECTION 4.24. ERISA Compliance...............................................55
SECTION 4.25. Sale or Discount of Receivables................................56
SECTION 4.26. Transactions with Affiliates...................................57
SECTION 4.27. Sale of Assets.................................................57
SECTION 4.28. Annual Coverage Ratio..........................................57
SECTION 4.29. Additional Information.........................................58
SECTION 4.30. Information Meetings...........................................58
SECTION 4.31. Compliance with Laws, etc......................................58
SECTION 4.32. Covenant to Secure Indebtedness Equally........................58
SECTION 4.33. Inconsistent Provisions........................................58
SECTION 4.34. Interest Coverage Ratio........................................58
SECTION 4.35. Hedging Transactions...........................................59
SECTION 4.36. Incorporation By Reference of Certain Covenants.................59
SECTION 4.37. Restrictions with Respect to Subordinated Debt..................59
SECTION 4.38. Additional Guarantors..........................................60
ARTICLE 5
DEFAULTS
SECTION 5.01. Events of Defaults.............................................60
SECTION 5.02. Notice of Default..............................................62
ARTICLE 6
CONDITIONS
SECTION 6.01. Effectiveness..................................................63
SECTION 6.02. Transitional Provisions........................................64
SECTION 6.03. All Loans......................................................65
(NY) 27008/757/CA99/ca.99.conf.wpd
3
<PAGE>
PAGE
ARTICLE 7
THE AGENT AND THE COLLATERAL AGENT
SECTION 7.01. Appointment and Authorization..................................66
SECTION 7.02. Agent and Collateral Agent and Affiliates......................66
SECTION 7.03. Action by Agent or Collateral Agent............................66
SECTION 7.04. Consultation with Experts......................................66
SECTION 7.05. Liability of Agent and Collateral Agent........................67
SECTION 7.06. Indemnification................................................67
SECTION 7.07. Credit Decision................................................67
SECTION 7.08. Successor Agent or Collateral Agent............................68
ARTICLE 8
MISCELLANEOUS
SECTION 8.01. Notices........................................................68
SECTION 8.02. No Waivers.....................................................69
SECTION 8.03. Expenses; Documentary Taxes....................................69
SECTION 8.04. Sharing of Set-offs............................................69
SECTION 8.05. Amendments and Waivers.........................................70
SECTION 8.06. Successors and Assigns.........................................70
SECTION 8.07. New York Law...................................................72
SECTION 8.08. Counterparts; Integration......................................72
SECTION 8.09. Collateral.....................................................72
SECTION 8.10. WAIVER OF JURY TRIAL...........................................72
SECTION 8.11. Joint and Several Obligations..................................72
(NY) 27008/757/CA99/ca.99.conf.wpd
4
<PAGE>
SCHEDULES
SCHEDULE A Compliance Certificate
SCHEDULE B Disclosure Schedule
SCHEDULE C Collateral Documents
EXHIBITS
EXHIBIT A Note
EXHIBOpinions of Cathleen Osborn, General Counsel of HEC and King & Spalding,
special New York counsel to the Obligors
EXHIBIT C Opinion of Davis Polk & Wardwell, special counsel to the Agent
EXHIBIT D Assignment and Assumption Agreement
EXHIBIT E Guaranty Agreement
(NY) 27008/757/CA99/ca.99.conf.wpd
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
AGREEMENT dated as of June 8, 1999 among HALLWOOD ENERGY CORPORATION,
HALLWOOD ENERGY PARTNERS, L.P. and HALLWOOD CONSOLIDATED RESOURCES CORPORATION,
as Borrowers, the BANKS listed on the signature pages hereof, FIRST UNION
NATIONAL BANK, as Collateral Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Agent.
WHEREAS, Hallwood Energy Partners, L.P., a Delaware limited partnership
(with its successors, "HEP"), HEP Operating Partners, L.P., a Delaware limited
partnership, EDP Operating, Ltd., a Colorado limited partnership, EM Nominee
Partnership Company, a Colorado general partnership, Concise Oil and Gas
Partnership, a Colorado general partnership, May Energy Partners Operating
Partnership LTD., a Texas limited partnership (together with HEP, the "HEP
Borrowers" and each, an "HEP Borrower"), the banks listed on the signature pages
thereof (the "HEP Banks"), Morgan Guaranty Trust Company of New York, as agent
and First Union National Bank, as collateral agent, are parties to a Third
Amended and Restated Credit Agreement dated as of May 31, 1997 (as in effect
immediately prior to the effectiveness of this Amended Agreement (as defined
below), the "Original HEP Agreement"); and
WHEREAS, Hallwood Consolidated Resources Corporation, a Delaware
corporation (with its successors, "HCRC"), Hallwood Consolidated Partners, L.P.,
a Colorado limited partnership (with its successors, "HCP" and, together with
HCRC, the "HCRC Borrowers" and each, an "HCRC Borrower"), the banks party
thereto (the "HCRC Banks"), First Union National Bank, as collateral agent and
Morgan Guaranty Trust Company of New York, as agent are parties to a Second
Amended and Restated Credit Agreement dated as of May 31, 1997 (as in effect
immediately prior to the effectiveness of this Amended Agreement, the "Original
HCRC Agreement"); and
WHEREAS, Hallwood Energy Corporation, a Delaware corporation (with its
successors, "HEC"), HEP and HCRC are planning to consummate a reorganization
(the "Reorganization"), the terms and conditions of which are set forth in the
definitive Proxy Statement prepared by HEC, HEP and HCRC, first mailed on May 4,
1999 and supplemented on May 17, 1999 (the "Proxy Statement"), a copy of which
HEP and HCRC have delivered to each of the HEP Banks and the HCRC Banks; and
(NY) 27008/757/CA99/ca.99.conf.wpd
<PAGE>
WHEREAS, in connection with the consummation of the Reorganization, the
HEP Borrowers have asked the HEP Banks , and the HEP Banks have agreed, on the
terms and conditions set forth below, to amend and restate the Original HEP
Agreement as set forth below;
WHEREAS, in connection with the consummation of the Reorganization, the
HCRC Borrowers have asked the HCRC Banks, and the HCRC Banks have agreed, on the
terms and conditions set forth below, to amend and restate the Original HCRC
Agreement as set forth below;
NOW, THEREFORE, the parties hereto hereby agree that, on and as of the
Effective Date (as defined below), each of the Original HEP Agreement and the
Original HCRC Agreement is hereby amended and restated in its entirety as
follows:
ARTICLE
DEFINITIONS
SECTION . Definitions. The following terms as used herein, have the
following meanings:
"Adjusted CD Rate" has the meaning set forth in Section .
"Adjusted Euro-Dollar Rate" has the meaning set forth in Section .
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrowers) duly completed by such Bank.
"Advance Notice" means written, telegraphic or telecopier notice (which
in each case shall be irrevocable except as otherwise provided in Section ) from
the Borrowers to be received by the Agent before 11:00 a.m., New York time, by
the number of Domestic Business Days or Euro-Dollar Business Days in advance of
any borrowing, conversion, continuation or prepayment of any Loan pursuant to
this Agreement as respectively indicated below:
(a) CD Loans -- 2 Domestic Business Days;
(b) Euro-Dollar Loans -- 3 Euro-Dollar Business Days; and
(c) Base Rate Loans -- Same Day Notice
(NY) 27008/757/CA99/ca.99.conf.wpd
2
<PAGE>
For the purpose of determining the respectively applicable Loan in the
case of the conversion from one type of Loan into another, the Loan with respect
to which the longer period applies shall control.
"Affiliate" means each Person, other than an Obligor, who controls, is
controlled by or is under common control with HEC. For purposes of this
definition, the term "control" means possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Agent" means Morgan Guaranty Trust Company of New York in its capacity
as agent for the Banks under the Financing Documents, and its successors in such
capacity.
"Agreement" means the Original HEP Agreement or the Original HCRC
Agreement, as the context may require, in each case as amended and restated by
this Amended Agreement and as the same may be further amended from time to time
in accordance with the terms hereof.
"Amended Agreement" means this Amended and Restated Credit Agreement
dated as of June 8, 1999 among the Borrowers, the Banks, the Collateral Agent
and the Agent.
"Applicable Lending Office" means, with respect to any Bank, (i) in the
case of its Domestic Loans, its Domestic Lending Office, and (ii) in the case of
its Euro-Dollar Loans, its Euro-Dollar Lending Office.
"Approved Petroleum Engineer" means Williamson Petroleum
Consultants, Inc. or any other independent petroleum engineers acceptable to the
Required Banks.
"Assessment Rate" has the meaning set forth in Section .
"Assignee" has the meaning set forth in Section .
"Authorized Person" means (a) for a corporation, the chief executive
officer, chief financial officer, chief accounting officer, controller, general
counsel or executive vice president of such corporation, and (b) for a
partnership, the chief executive officer, chief financial officer, chief
accounting officer, controller, general counsel or executive vice president of
each general partner of such partnership; provided that for the purposes of
certificates delivered pursuant to Article hereof, Authorized Person means (x)
for a corporation, the chief executive officer, chief financial officer or chief
accounting officer of such
(NY) 27008/757/CA99/ca.99.conf.wpd
3
<PAGE>
corporation, and (y) for a partnership, the chief executive officer, chief
financial officer or chief accounting officer of each general partner of such
partnership.
"Availability Limit" means, on any date, an amount equal to the lesser
of (i) the aggregate amount of the Commitments at such date and (ii)
$84,500,000. The Availability Limit may be increased only by an amendment in
accordance with Section 8.05, which the Banks may agree to or not agree to in
their sole discretion.
"Bank" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section , and their respective
successors and assigns.
"Base Rate" means, for any day, a rate per annum equal to the higher of
(a) the Prime Rate for such day and (b) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"Base Rate Loan" means a Loan made by a Bank under this Agreement at
such time as it is made or maintained at an interest rate based on the Base
Rate.
"Base Rate Margin" means, on any date, (i) 0.25%, if on such date Level
I Status exists, (ii) 0.50%, if on such date Level II Status exists, (iii)
0.75%, if on such date Level III Status exists and (iv) 1%, if on such date
Level IV Status exists.
"Benefit Arrangement" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan
and which is maintained or otherwise contributed to by any member of the
Controlled Group.
"Borrowing" means a borrowing hereunder consisting of Loans made to the
Borrowers at the same time by the Banks pursuant to Article or continued or
converted pursuant to Section or , respectively. A Borrowing is a "Domestic
Borrowing" if such Loans are Domestic Loans or a "Euro-Dollar Borrowing" if such
Loans are Euro-Dollar Loans. A Domestic Borrowing is a "CD Borrowing" if such
Domestic Loans are CD Loans or a "Base Rate Borrowing" if such Domestic Loans
are Base Rate Loans.
"CD Loan" means a Loan made by a Bank under this Agreement at such time
as it is made or maintained at an interest rate based on the Adjusted CD Rate.
"CD Margin" means, on any date, (i) 1.375%, if on such date Level I
Status exists, (ii) 1.625%, if on such date Level II Status exists, (iii)
1.875%, if on
(NY) 27008/757/CA99/ca.99.conf.wpd
4
<PAGE>
such date Level III Status exists and (iv) 2.125%, if on such date Level IV
Status exists.
"CD Rate" has the meaning set forth in Section .
"CFADS" means, for any period, gross cash operating revenues properly
allocable to Petroleum Property for such period less the following cash items:
royalties, operating costs, severance, windfall profits and other wellhead
taxes, general and administrative expenses and current income and other taxes
properly allocable to such period and cash capital expenditures made during such
period and properly allocable to Petroleum Property. CFADS shall be determined
by the Banks based on the most recent Reserve Report and financial statements
(and supplemental information), as the case may be, furnished to the Banks and
prepared on the same basis as those provided under Section , subject to approval
of such Reserve Report (and supplemental information) by the Required Banks. For
purposes of Section , "general and administrative expenses" shall mean for each
fiscal year the higher of (a) $2,000,000 or (b) the product of (i) CFADS for
such year without deduction for the general and administrative expenses
allocable to that fiscal year multiplied by (ii) the previous fiscal year's
general and administrative expenses and then divided by (iii) the previous
year's CFADS without deduction for the general and administrative expenses
allocable to that fiscal year.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute.
"Collateral" has the meaning set forth in Schedule C.
"Collateral Agent" means First Union National Bank in its capacity as
collateral agent for the Banks under the Financing Documents, and its successors
in such capacity.
"Collateral Documents" means, upon the execution and delivery thereof
pursuant to Section , each document set forth in Schedule C, and all
supplementary assignments, security agreements, pledge agreements,
acknowledgements or other documents delivered or to be delivered pursuant to the
Financing Documents. Until such time, "Collateral Documents" has the meaning set
forth in each of the Original HEP Agreement and the Original HCRC Agreement.
"Commitment" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages hereof, as such amount may
be reduced from time to time pursuant to Section hereof.
(NY) 27008/757/CA99/ca.99.conf.wpd
5
<PAGE>
"Commitment Fee Rate" means, on any date, (i) 0.375%, if on such date
Level I Status or Level II Status exists and (ii) 0.50%, if on such date Level
III Status or Level IV Status exists.
"Concise" means Concise Oil and Gas Partnership, a Colorado general
partnership, and its successors.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with HEC, are treated as a single employer under
Section 414 of the Code.
"Debt" of any Person means at any date, without duplication, (a) all
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instrument, (c)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of
business, (d) all obligations of such Person as lessee under capital leases, (e)
all Reimbursement Obligations, except to the extent (measured by collateral
value) such Reimbursement Obligations are (i) secured by cash, United States
Treasury obligations or time deposits or certificates of deposit issued by any
Bank or any other bank or savings and loan association rated "AA" or its
equivalent by S&P and Moody's and (ii) payable to a Bank, (f) all Debt of others
secured by a Lien on any asset of such Person, whether or not such Debt is
assumed by such Person, and (g) all Debt of others directly or indirectly
guaranteed by such Person or in respect of which such Person is otherwise
liable, contingently or otherwise.
"Debt Limit" has the meaning set forth in Section hereof.
"Default" means the occurrence of any of the events or conditions
specified in Section 5.01, whether or not any requirement for notice or lapse of
time or other condition precedent has been satisfied.
"Derivative Obligations" means all obligations of any Person with
respect to any Hedging Transaction to which such Person is a party.
"Dollars" and the sign "$" means lawful currencyof the United States of
America.
"Domestic Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized by law to
close.
(NY) 27008/757/CA99/ca.99.conf.wpd
6
<PAGE>
"Domestic Lending Office" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrowers and the Agent; provided that any Bank may so designate
separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and
its CD Loans, on the other hand, in which case all references herein to the
Domestic Lending Office of such Bank shall be deemed to refer to either or both
or such offices, as the context may require.
"Domestic Loans" means CD Loans or Base Rate Loans or both.
"Domestic Reserve Percentage" has the meaning set forth in Section
.
"Drawdown Termination Date" means the earlier to occur of May 31, 2002
or the date on which the Borrowers elect to commence the Term Period.
"Effective Date" means the date this Amended Agreement becomes
effective in accordance with Section .
"Enron Agreement" means the Loan Agreement dated as of December 29,
1994 between HSDC and Joint Energy Development Investments Limited
Partnership, as amended from time to time.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
the environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, petroleum or petroleum
products, chemicals or industrial, toxic or hazardous substances or wastes into
the environment including, without limitation, ambient air, surface water,
ground water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the clean-up or other
remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
(NY) 27008/757/CA99/ca.99.conf.wpd
7
<PAGE>
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch
or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice
to the Borrowers and the Agent.
"Euro-Dollar Loan" means a loan made by a Bank under this Agreement at
such time as it is made or maintained at an interest rate based on the Adjusted
Euro-Dollar Rate.
"Euro-Dollar Margin" means, on any date, (i) 1.25%, if on such date
Level I Status exists, (ii) 1.50%, if on such date Level II Status exists, (iii)
1.75%, if on such date Level III Status exists and (iv) 2%, if on such date
Level IV Status exists.
"Euro-Dollar Rate" has the meaning set forth in Section .
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
.
"Event of Default" has the meaning set forth in Section 5.01 hereof.
"Excepted Liens" means: (i) Liens for taxes, assessments or other
governmental charges or levies not yet due or which are being contested in good
faith by appropriate action and for which adequate reserves have been
established in accordance with generally accepted accounting principles; (ii)
Liens in connection with workmen's compensation, unemployment insurance or other
social security, old age pension or public liability obligations; (iii) legal or
equitable encumbrances deemed to exist by reason of negative pledge covenants
(such as those made in Section hereof); (iv) legal or equitable encumbrances
deemed to exist by reason of the existence of any litigation or other legal
proceeding or arising out of a judgment or award with respect to which an appeal
is being prosecuted, but only so long as execution of such judgment and
enforcement of such Lien is effectively stayed and the amount thereof (in excess
of applicable insurance coverage) does not exceed, individually or in the
aggregate, $1,000,000; (v) vendors', carriers', warehousemen's, repairmen's,
mechanics', workmen's, materialmen's, construction or other like Liens arising
by operation of law in the ordinary course of business incident to obligations
which are not yet due or which are being contested in good faith by appropriate
proceedings by or on behalf of HEC or any of its Subsidiaries; (vi) Liens
arising in the ordinary course of business under gas sales contracts, operating
agreements, unitization and pooling agreements, and such other documents as are
customarily found in connection with comparable drilling and producing
operations, incident to obligations which are not yet due or which are being
contested in good faith by
(NY) 27008/757/CA99/ca.99.conf.wpd
8
<PAGE>
appropriate proceedings by or on behalf of HEC or any of its Subsidiaries and
for which adequate reserves have been established in accordance with generally
accepted accounting principles; (vii) minor irregularities in title which do not
materially interfere with the occupation, use and enjoyment by HEC or any of its
Subsidiaries of their respective Property in the normal course of business as
presently conducted or materially impair the value thereof for such business;
(viii) Liens on cash, United States Treasury obligations or time deposits or
certificates of deposit issued by any Bank or any other bank or savings and loan
association rated "AA" or its equivalent by S&P and Moody's in an aggregate face
amount at any one time subject to such Liens not in excess of $3,000,000 to
secure Reimbursement Obligations and obligations incurred pursuant to interest
rate or commodities swap, or similar hedging, transactions; and (ix) Liens on
the Collateral securing Derivative Obligations of any Borrower in respect of any
Hedging Transaction between such Borrower and any Bank or affiliate of any Bank.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions as determined by the Agent.
"Financial Statements" means (i) the pro forma consolidated financial
statements of HEC and its consolidated Subsidiaries for the fiscal year ended
December 31, 1998, (ii) the audited consolidated financial statements of HEP and
its consolidated Subsidiaries for the fiscal year ended December 31, 1998, and
(iii) the audited consolidated financial statements of HCRC and its consolidated
Subsidiaries for the fiscal year ended December 31, 1998.
"Financing Documents" means this Agreement, the Notes, the Guaranty
Agreement and the Collateral Documents.
"Fixed Rate Borrowing" means a CD Borrowing or a Euro-Dollar
Borrowing.
"Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or both.
(NY) 27008/757/CA99/ca.99.conf.wpd
9
<PAGE>
"Foreign Taxes" has the meaning set forth in Section .
"Guaranty Agreement" means the Guaranty Agreement dated as of the
Effective Date substantially in the form of Exhibit E among the Obligors party
thereto and the Agent, as amended from time to time.
"Governmental Requirement" means any law, statute, code, ordinance,
order, rule, regulation, judgment, decree, injunction, franchise, permit,
certificate, license, authorization or other direction or requirement
(including, without limitation, any of the foregoing which relate to
environmental standards or controls, energy regulations and occupational, safety
and health standards or controls) of any (domestic or foreign) federal, state,
county, municipal or other government, department, commission, board, court,
agency or any other instrumentality of any of them, which exercises jurisdiction
over HEC or any of its Subsidiaries or any of their respective Property.
"Hallwood Group" has the meaning set forth in Section .
"HCP" has the meaning set forth in the second WHEREAS clause to this
Amended Agreement.
"HCRC" has the meaning set forth in the second WHEREAS clause to
this Amended Agreement.
"HCRC Banks" has the meaning set forth in the second WHEREAS clause to
this Amended Agreement.
"HCRC Borrowers" has the meaning set forth in the second WHEREAS clause
to this Amended Agreement.
"HEC" has the meaning set forth in the third WHEREAS clause to this
Amended Agreement.
"HEP" has the meaning set forth in the first WHEREAS clause to this
Amended Agreement.
"HEP Banks" has the meaning set forth in the first WHEREAS clause to
this Amended Agreement.
"HEP Borrowers" has the meaning set forth in the first WHEREAS clause
to this Amended Agreement.
(NY) 27008/757/CA99/ca.99.conf.wpd
10
<PAGE>
"HEP General Partner" means The Hallwood Group Incorporated, a Delaware
corporation, in its capacity as general partner of HEP, and its successors in
such capacity.
"HEP Partnership Agreement" means the Partnership Agreement dated as of
December 5, 1996, as amended from time to time.
"Hedging Transaction" means any rate swap transaction, basis swap,
forward rate transaction, commodity swap, commodity option, equity or equity
index swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap transaction, floor transaction, collar
transaction, currency swap transaction, cross-currency rate swap transaction,
currency option or any other similar transaction (including any option with
respect to any of the foregoing transactions) or any combination of the
foregoing transactions including, without limitation, any Swap Transaction (as
defined in the Master Exchange Agreement dated as of April 14, 1992 between HCRC
and Morgan Guaranty Trust Company of New York, as amended from time to time).
"Highest Lawful Rate" means, with respect to any Bank, the maximum
nonusurious interest rate, if any, that at any time or from time to time may be
contracted for, taken, reserved, charged or received on the Note of such Bank
under laws applicable to such Bank which are presently in effect or, to the
extent allowed by law, under such applicable laws which may hereafter be in
effect and which allow a higher maximum nonusurious interest rate than
applicable laws now allow.
"HLP" means Hallwood La Plata, LLC, a Colorado limited liability
company, and its successors.
"HSDC" means Hallwood Spraberry Drilling Company, L.L.C., a Colorado
limited liability company, and its successors.
"Hydrocarbon Property Base" means the Petroleum Properties that are
owned directly by the Borrowers or the Property Base Subsidiaries.
"Increased Costs" has the meaning set forth in Section .
"Indebtedness" means any and all amounts owing or to be owing by the
Borrowers to the Banks, the Agent and the Collateral Agent under this Agreement
and the other Financing Documents and all other liabilities of the Borrowers to
the Banks, the Agent and the Collateral Agent from time to time existing under
the Financing Documents and all Derivative Obligations of any Borrower in
respect of any Hedging Transaction between such Borrower and any Bank, and all
(NY) 27008/757/CA99/ca.99.conf.wpd
11
<PAGE>
renewals, extensions, rearrangements, amendments or supplements to any of the
foregoing.
"Indemnitee" has the meaning set forth in Section hereof.
"Interest Period" means:(1) with respect to each Euro-Dollar Borrowing,
the period commencing on the date of such Borrowing and ending 1, 2, 3 or 6
months thereafter, as the Borrowers may elect in the applicable Advance Notice;
provided that:
(a) any Interest Period which would otherwise end on a day which is not
a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar
Business Day unless such Euro-Dollar Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of
a calendar month; and
(c) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section but does not end on
such date, then (i) the principal amount (if any) of each Euro-Dollar Loan
required to be repaid on such date shall have an Interest Period ending on such
date and (ii) the remainder (if any) of each such Euro-Dollar Loan shall have an
Interest Period determined as set forth above; and (2) with respect to each CD
Borrowing, the period commencing on the date of such Borrowing and ending 30,
60, 90 or 180 days thereafter, as the Borrowers may elect in the applicable
Advance Notice; provided that:
(a) any Interest Period (other than an Interest Period determined
pursuant to clause (b)(i) below) which would otherwise end on a day which is not
a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar
Business Day; and
(b) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section but does not end on
such date, then (i) the principal amount (if any) of each CD Loan required to be
repaid on such date shall have an Interest Period ending on such date and (ii)
the remainder (if any) of each such CD Loan shall have an Interest Period
determined as set forth above.
(NY) 27008/757/CA99/ca.99.conf.wpd
12
<PAGE>
"Level I Status" exists on any date if on such date the aggregate
outstanding principal amount of the Loans is less than 50% of the Debt Limit.
"Level II Status" exists on any date if on such date (i) the aggregate
outstanding principal amount of the Loans is less than 85% of the Debt Limit and
(ii) Level I Status does not exist on such date.
"Level III Status" exists on any date if on such date (i) the aggregate
outstanding principal amount of the Loans is less than 95% of the Debt Limit and
(ii) neither Level I Status nor Level II Status exists on such date.
"Level IV Status" exists on any date if on such date none of Level I
Status, Level II Status or Level III Status exist.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset
(including without limitation any production payment, any obligation to deliver
hydrocarbons in the future in satisfaction of any advance payment previously
received or any similar arrangement with respect to minerals in place) or any
other arrangement the economic effect of which is to give a creditor
preferential access to such asset to satisfy its claim, whether or not filed,
recorded or otherwise perfected under applicable law. For the purpose of the
Financing Documents, a Person shall be deemed to own subject to a Lien (i) any
asset that it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset or any capitalized lease obligation
or (ii) any account receivable transferred by it with recourse (including any
such transfer subject to a holdback or similar arrangement which effectively
imposes the risk of collectibility upon the transferor).
"Loan" means a Domestic Loan or a Euro-Dollar Loan and "Loans" means
Domestic Loans or Euro-Dollar Loans or both.
"LPA" means La Plata Associates, LLC, a Colorado limited liability
company, and its successors.
"Material Adverse Effect" means any material and adverse effect on the
properties, business or financial condition of HEC and its consolidated
Subsidiaries, taken as a whole, determined at any time by reference to the
information disclosed to the Banks at the time of the then next preceding
determination of the Debt Limit.
"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $2,000,000.
(NY) 27008/757/CA99/ca.99.conf.wpd
13
<PAGE>
"Material Subsidiary" means at any time any Subsidiary of HEC that (i)
on a consolidated basis, together with its Subsidiaries, holds assets with an
aggregate fair market value of at least $2,500,000, (ii) on a consolidated
basis, together with its Subsidiaries, accounts for at least 2.5% of the
consolidated cash flows of HEC and its consolidated Subsidiaries or (iii) on a
consolidated basis, together with its Subsidiaries, holds Proved Reserves with a
present value of at least $2,500,000. The determinations in clauses (i) and (ii)
shall be made on the basis of the financial statements of HEC most recently
delivered by the Borrowers to the Banks pursuant to Section 3.06 or 4.01, as the
case may be. The determination in clause (iii) shall be made on the basis of the
Reserve Report most recently delivered by the Borrowers to the Banks pursuant to
Section 4.16.
"MEPO" means May Energy Partners Operating Partnership LTD., a Texas
limited partnership, and its successors.
"Mortgaged Property" means the Property owned by or in which HEC or any
of its Subsidiaries owns an undivided interest and which is subject to the
Liens, privileges, priorities and security interests existing under the terms of
the Collateral Documents.
"Moody's" means Moody's Investors Service, Inc., and its successors.
"Multiemployer Plan" means at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the Controlled Group is then making or accruing an obligation to make
contributions or has within the preceding five plan years made contributions,
including for these purposes any Person which ceased to be a member of the
Controlled Group during such five year period.
"Nominee" means EM Nominee Partnership Company, a Colorado general
partnership, and its successors.
"Notes" means promissory notes of the Borrowers, substantially in the
form of Exhibit A hereto, evidencing the obligation of the Borrowers to repay
the Loans, together with any and all renewals, extensions for any period,
increases or rearrangements thereof, and "Note" means any one of such promissory
notes issued hereunder.
"Obligor" means the Borrowers and each Subsidiary of HEC party from
time to time to the Guaranty Agreement.
"Original Agreement" means the Original HEC Agreement or the Original
HCRC Agreement, as the context may require, and "Original Agreements" means both
of them.
(NY) 27008/757/CA99/ca.99.conf.wpd
14
<PAGE>
"Original HCRC Agreement" has the meaning set forth in the second
WHEREAS clause to this Amended Agreement.
"Original HEP Agreement" has the meaning set forth in the first WHEREAS
clause to this Amended Agreement.
"Original HCRC Notes" and "Original HCRC Note" means, respectively (i)
the promissory notes of the HCRC Borrowers issued pursuant to the Original HCRC
Agreement to evidence loans made by the HCRC Banks thereunder and (ii) a single
such Original HCRC Note.
"Original HEP Notes" and "Original HEP Note" means, respectively (i)
the promissory notes of the HEP Borrowers issued pursuant to the Original HEP
Agreement to evidence loans made by the HEP Banks thereunder and (ii) a single
such Original HEP Note.
"Original Notes" means the Original HEC Notes or the Original HCRC
Notes, as the context may require, and "Original Notes" means all of them.
"Parent" means, with respect to any Bank, any Person controlling such
Bank.
"Participant" has the meaning set forth in Section .
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust, estate,
unincorporated organization, government or any agency or political subdivision
thereof, or any other form of entity.
"Petroleum Property" means any interest in oil and gas reserves
(including without limitation any production payment with respect to any such
reserves) which is, or is to be taken into account in the determination of the
Debt Limit pursuant to Section .
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Code and either (i) is
maintained, or contributed to, by any member of the Controlled Group for
employees of any member of the Controlled Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person which
(NY) 27008/757/CA99/ca.99.conf.wpd
15
<PAGE>
was at such time a member of the Controlled Group for employees of any Person
which was at such time a member of the Controlled Group.
"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"Principal Repayment" means the repayment of principal on the Notes
required in Section .
"Principal Repayment Dates" means the dates on which the principal of
the Loans is required to be repaid pursuant to Section .
"Property" means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
"Property Base Subsidiaries" means MEPO, Concise, Nominee and HCP, and
any other Subsidiary of any of the Borrowers agreed to from time to time by the
Borrowers and the Required Banks.
"Proved Developed Producing Reserves" has the meaning assigned to that
term by the Society of Petroleum Engineers, as such meaning may be amended from
time to time, but generally means the subcategory of "Proved Developed Reserves"
(as defined by the Society of Petroleum Engineers) which are recoverable by
natural reservoir energies from the completion intervals currently open and
producing to market. 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 will be
included as "Proved Developed Producing Reserves" only after testing by a pilot
project or after the operation of an installed program has confirmed through
production response through existing completions producing to market that
increased recovery will be achieved. Proved Developed Producing Reserves shall
not include any Proved Developed Non-Producing Reserves.
"Proved Developed Non-Producing Reserves" has the meaning assigned to
that term by the Society of Petroleum Engineers, as such meaning may be amended
from time to time, but generally means the subcategory of "Proved Developed
Reserves" (as defined by the Society of Petroleum Engineers) which will become
"Proved Developed Producing Reserves" upon minor capital expenditures being made
with respect to existing wells which will cause formerly non-producing
completions or intervals to become open and producing to market.
(NY) 27008/757/CA99/ca.99.conf.wpd
16
<PAGE>
"Proved Reserves" means and includes Proved Developed Producing
Reserves, Proved Developed Non-Producing Reserves and Proved Undeveloped
Reserves.
"Proved Undeveloped Reserves" has the meaning assigned to that term by
the Society of Petroleum Engineers, as such meaning may be amended from time to
time, but generally means those 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. Proved Undeveloped Reserves on
undrilled acreage shall be limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved Undeveloped
Reserves for other undrilled units can be claimed only where it can be
demonstrated with certainty that the undrilled units contain reserves that are a
continuation of those formations that are producing 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.
"Proxy Statement" has the meaning set forth in the third WHEREAS clause
to this Amended Agreement.
"Prudential" means The Prudential Insurance Company of America and
its successors and assigns.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
"Regulatory Change" means any change after the date of this Amended
Agreement in United States federal, state or foreign laws, rules or regulations
or the adoption or making after such date of any interpretations, directives or
requests of or under any United States federal, state or foreign laws, rules or
regulations (whether or not having the force of law) by any court or
governmental authority or reserve bank or comparable agency charged with the
interpretation or administration thereof.
"Reimbursement Obligations" of any Person means all obligations of such
Person (whether fixed or contingent) to reimburse any bank or other Person in
respect of amounts paid or payable under a letter of credit or similar
instrument.
"Reorganization" has the meaning set forth in the third WHEREAS
clause to this Amended Agreement.
(NY) 27008/757/CA99/ca.99.conf.wpd
17
<PAGE>
"Reorganization Agreement" has the meaning set forth in Section
.
"Reorganization Documents" has the meaning set forth in Section
.
"Reorganization Parties" has the meaning set forth in Section .
"Required Banks" means at any time Banks having at least 65% of the
aggregate amount of Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 65% of the aggregate unpaid amount
of the Loans.
"Reserve Report" means a report delivered by the Borrowers pursuant to
subsection (a), (b) or (c) of Section hereof.
"Revolving Credit Period" means the period from the Effective Date to
and including the Drawdown Termination Date.
"S&P" means Standard & Poor's Rating Services, a division of the
McGraw-Hill Companies, Inc., and its successors.
"Subordinated Guaranty" means the Subsidiary Guaranty by the Initial
Subsidiary Guarantors (as defined in the Subordinated Notes Agreement) and HCP
in favor of Prudential dated as of June 8, 1999, as amended from time to time in
accordance with Section 4.37(b).
"Subordinated Notes" means the 10.32% Senior Subordinated Notes Due
December 23, 2007 issued by HCRC pursuant to the Subordinated Notes Agreement.
"Subordinated Notes Agreement" means the Amended and Restated
Subordinated Note and Warrant Purchase Agreement dated as of June 8, 1999
between HCRC, HEC and Prudential, as amended from time to time in accordance
with Section 4.37(b).
"Subsidiary" means any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by HEC.
"Term Date" means the earlier to occur of May 31, 2002 or the last day
of May, August, November or February which first occurs after the date on which
the Borrowers elect to commence the Term Period.
(NY) 27008/757/CA99/ca.99.conf.wpd
18
<PAGE>
"Term Period" means the period commencing immediately after the
Drawdown Termination Date during which principal repayments are made pursuant to
Section .
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the actuarial present value of all the benefit
liabilities (as determined for purposes of Title IV of ERISA) under such Plan
exceeds (ii) the fair market value of all Plan assets (excluding any accrued but
unpaid contributions) allocable to such benefit liabilities (computed on a plan
termination basis in accordance with Title IV of ERISA) all determined as of the
then most recent valuation date for such Plan, but only to the extent that such
excess represents a potential liability of a member of the Controlled Group to
the PBGC or any other Person under Title IV of ERISA.
SECTION . Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used in this Agreement shall be
interpreted, all accounting determinations hereunder shall be made and all
financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles as in effect from time
to time, applied on a basis consistent (except for changes concurred in by HEC's
independent public accountants) with the most recent audited consolidated
financial statements of HEC delivered to the Banks from time to time pursuant to
Section or .
ARTICLE
AMOUNTS AND TERMS OF LOAN
SECTION . The Loans and Commitment. Subject to the terms and conditions
and relying on the representations and warranties contained in the Financing
Documents, the Banks severally agree to make during the Revolving Credit Period
revolving credit Loans to the Borrowers from time to time in such amounts as the
Borrowers may request up to the maximum amount hereinafter stated and the
Borrowers may make borrowings and prepayments (as permitted or required in
Sections and hereof) and reborrowings in respect thereof. Each Borrowing under
this Section shall be made from the several Banks ratably in proportion to their
respective Commitments.
To evidence the Loans made by each Bank pursuant to this Section, the
Borrowers will issue, execute and deliver to each Bank a Note in the principal
amount of the Commitment of such Bank and dated as of the Effective Date and
payable in installments as provided in Section .
(NY) 27008/757/CA99/ca.99.conf.wpd
19
<PAGE>
SECTION . Principal Repayments. Pursuant to Section , the Borrowers
will repay the principal amount outstanding on each Note in eight (8) equal
quarterly installments, commencing on the Term Date and thereafter on the last
day of each consecutive 3 month period. Any optional prepayments of principal
made during the Term Period shall be applied ratably to reduce the remaining
quarterly Principal Repayments. Any mandatory prepayments of principal made
during the Term Period as required by Section hereof shall be applied to reduce
the remaining quarterly Principal Repayments in the inverse order of their
maturity.
SECTION . Borrowing Alternatives.
During the Revolving Credit Period, Loans may be either
(i) CD Loans,(ii)Euro-Dollar Loans, (iii) Base Rate Loans or (iv) a combination
thereof, as elected by the Borrowers or otherwise applicable in accordance with
Sections , , or or subsection 2.04(e).
(b) During the Term Period, the Borrowers may have outstanding at any
time either (i) CD Loans, (ii) Euro-Dollar Loans, (iii) Base Rate Loans or (iv)
a combination thereof as elected by the Borrowers or otherwise applicable in
accordance with Sections , or or subsection 2.04(e), but no more than four (4)
Borrowings outstanding at any one time.
SECTION . Interest Rate.
Each Bank's CD Loans shall bear interest on the unpaid principal
amount thereof until payment in full thereof at a rate per annum equal to the
sum of (i) the Adjusted CD Rate for each Interest Period applicable thereto plus
(ii) the CD Margin, but in no event to exceed the Highest Lawful Rate of such
Bank; provided that if any CD Loan or any portion thereof shall, as a result of
clause (2) (b) (i) of the definition of Interest Period, have an Interest Period
of less than 30 days, such CD Loan or portion thereof shall bear interest during
such Interest Period at the rate applicable to Base Rate Loans during such
period.
The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum (rounded upwards, if necessary, to the next higher 1/100 of 1%)
determined according to the following formula:
[
]
ACDR =
[
CDR
]
+ AR
[
]
ACDR =
Adjusted CD Rate
CDR =
CD Rate
DRP =
Domestic Reserve Percentage
AR =
Assessment Rate
The "CD Rate" applicable to any Interest Period is the rate of interest
determined by the Agent to be the prevailing rate per annum bid at 10:00 AM (New
York City time) (or as soon thereafter as practicable) on the first day of such
Interest Period by two or more New York certificate of deposit dealers of
recognized standing for the purchase of face value from Morgan Guaranty Trust
Company of New York of its certificates of deposit in an amount comparable to
the unpaid principal amount of the CD Loan of such Bank to which such Interest
Period applies and having a maturity comparable to such Interest Period.
"Domestic Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including without limitation any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.
"Assessment Rate" means for any day the annual assessment rate in
effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. ss. 327.3(e) (or any successor provision) to the Federal Deposit
Insurance Corporation (or any successor) for such Corporation's (or such
successor's) insuring time deposits at offices of such institution in the United
States. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Assessment Rate.
Each Bank's Euro-Dollar Loans shall bear interest on the unpaid
principal amount thereof until payment in full thereof at a rate per annum equal
to the sum of (i) the Adjusted Euro-Dollar Rate for each Interest Period
applicable thereto plus (ii) the Euro-Dollar Margin, but in no event to exceed
the Highest Lawful Rate of such Bank.
The "Adjusted Euro-Dollar Rate" applicable to any Interest Period
means a rate per annum (rounded upwards, if necessary, to the next higher 1/100
of 1%) determined according to the following formula:
(NY) 27008/757/CA99/ca.99.conf.wpd
20
<PAGE>
AEDR =
Euro-Dollar Rate
(1.00 - Euro-Dollar Reserve Percentage)
AEDR =
Adjusted Euro-Dollar Rate
The "Euro-Dollar Rate" applicable to any Interest Period means the rate
per annum at which deposits in dollars are offered to Morgan Guaranty Trust
Company of New York in the London interbank market at approximately 11:00 AM
(London time) two Euro-Dollar Business Days before the first day of such
Interest Period in an amount approximately equal to the principal amount of the
Euro-Dollar Loan of such Bank to which such Interest Period is to apply for a
period of time comparable to such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions credit or other
assets which includes loans by a non-United States office of any Bank to United
States residents). The Adjusted Euro-Dollar Rate shall be adjusted automatically
on and as of the effective date of any change in the Euro-Dollar Reserve
Percentage.
Each Bank's Base Rate Loans shall bear interest on the unpaid
principal amount thereof until payment in full thereof at a varying rate per
annum at all times equal to the sum of (i) the Base Rate plus (ii) the Base Rate
Margin, but in no event to exceed the Highest Lawful Rate of such Bank.
Interest shall be payable (i) as to any Base Rate Loan on the last day
of each May, August, November and February, commencing on the first of such days
to occur after such Loan is made, and on the maturity of each Bank's Note and
(ii) as to any Fixed Rate Loan, on the last day of each Interest Period
applicable thereto; provided that if any Interest Period of more than three
months or 90 days, as applicable, is selected for any Fixed Rate Loan (if
permitted by other terms of this Agreement), interest shall also be payable with
respect to such Loan at intervals of three months or 90 days, as the case may
be, after the first day thereof.
On each day during which a Default shall occur and be continuing, all
outstanding Loans of each Bank, and all interest which is past due to such Bank
on such day, shall bear interest at a rate per annum equal to the sum of 2% plus
(NY) 27008/757/CA99/ca.99.conf.wpd
21
<PAGE>
the Base Rate for such day, but in no event to exceed the Highest Lawful Rate of
such Bank.
(f) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrowers and each
Bank of each rate of interest so determined, and its determination thereof shall
be conclusive in the absence of manifest error. In the absence of notice from
any Bank to the effect that the rate of interest otherwise payable for its
account hereunder (computed as provided herein) exceeds the Highest Lawful Rate
applicable to such Bank, which notice shall specify such Highest Lawful Rate and
the basis of computation thereof, the Agent may conclusively assume that the
rate of interest provided for herein does not exceed such Highest Lawful Rate
and shall incur no liability to any party by virtue thereof.
SECTION . Computation of Interest. Interest based on the Prime Rate
hereunder shall be computed on the basis of a year of 365 days (or 366 days in a
leap year) and paid for the actual number of days elapsed (including the first
day but excluding the last day). Commitment fees and all other interest on all
Loans and other Indebtedness shall be computed on the basis of a 360 day year
and paid for the actual number of days elapsed (including the first day but
excluding the last day), unless such computation would result in a usurious rate
for any Bank, in which case interest for the account of such Bank shall be
computed on the basis of a year of 365 or 366 days, as the case may be. The
Agent shall promptly notify the Borrowers of each determination of an Adjusted
CD Rate or an Adjusted Euro-Dollar Rate.
SECTION . Borrowing Procedure.
The Borrowers shall give Advance Notice to the Agent prior to the
proposed borrowing date. Such notice shall specify (i) the amount to be
borrowed; (ii) the borrowing date (which shall be a Euro-Dollar Business Day, in
the case of Euro-Dollar Loans, or a Domestic Business Day, in the case of CD
Rate Loans or Base Rate Loans); (iii) whether the Loans comprising such
Borrowing are to be Euro-Dollar Loans, Base Rate Loans, CD Loans or a
combination thereof (in which case the portions shall be specified in such
notice); and (iv) in the case of a Fixed Rate Borrowing, the duration of the
initial Interest Period applicable thereto, subject to the definition of
Interest Period. Each Borrowing shall be in the principal amount of $1,000,000
or any whole multiple of $1,000,000 in excess thereof or the amount of the total
remaining Commitment available for borrowing.
Upon receipt of an Advance Notice, the Agent shall promptly notify
each Bank of the contents thereof and of such Bank's ratable share of such
(NY) 27008/757/CA99/ca.99.conf.wpd
22
<PAGE>
Borrowing and such Advance Notice shall not thereafter be revocable by the
Borrowers.
Not later than (i) 12:00 Noon (New York City time) on the date of
each Fixed Rate Borrowing and (ii) 12:00 Noon (New York City time) on the date
of each Base Rate Borrowing, each Bank shall (except as provided in subsection
(d) of this Section) make available its ratable share of such Borrowing, in
Federal or other funds immediately available in New York City, to the Agent at
its address specified in or pursuant to Section . Unless the Agent determines
that any applicable condition specified in Article has not been satisfied, the
Agent will make the funds so received from the Banks available to the Borrowers
at the Agent's aforesaid address.
If any Bank makes a new Loan hereunder on a day on which the
Borrowers are to repay all or any part of an outstanding Loan from such Bank,
such Bank shall apply the proceeds of its new Loan to make such repayment and
only an amount equal to the difference (if any) between the amount being
borrowed and the amount being repaid shall be made available by such Bank to the
Agent as provided in subsection (c) of this Section, or remitted by the
Borrowers to the Agent as provided in Section , as the case may be.
Unless the Agent shall have received notice from a Bank prior to the
date of any Borrowing that such Bank will not make available to the Agent such
Bank's share of such Borrowing, the Agent may assume that such Bank has made
such share available to the Agent on the date of such Borrowing in accordance
with subsections (c) and (d) of this Section and the Agent may, in reliance upon
such assumption, make available to the Borrowers on such date a corresponding
amount. If and to the extent that such Bank shall not have so made such share
available to the Agent, such Bank, on the one hand, and the Borrowers, on the
other hand, each agree to repay to the Agent forthwith on demand such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrowers until the date such amount is
repaid to the Agent, at (i) in the case of the Borrowers, a rate per annum equal
to the higher of the Federal Funds Rate and the interest rate applicable thereto
pursuant to Section and (ii) in the case of such Bank, the Federal Funds Rate.
If such Bank shall repay to the Agent such corresponding amount, such amount so
repaid shall constitute such Bank's Loan included in such Borrowing for purposes
of this Agreement. The failure of any Bank to make such share available to the
Agent on the date specified therefor shall not relieve any other Bank of its
obligation to make its share available to the Agent on such date, but neither
any Bank nor the Agent shall be responsible for the failure of any other Bank to
make such share available to the Agent.
SECTION . Continuation Options.
(NY) 27008/757/CA99/ca.99.conf.wpd
23
<PAGE>
The Borrowers may elect to continue all or any part of any CD
Borrowing beyond the expiration of the then current Interest Period relating
thereto by giving Advance Notice to the Agent of such election, specifying the
CD Borrowing or portion thereof to be continued and the Interest Period
therefor. In the absence of such a timely and proper election, the Borrowers
shall be deemed to have elected to convert such CD Borrowing to a Base Rate
Borrowing pursuant to subsection .
The Borrowers may elect to continue all or any part of any
Euro-Dollar Borrowing beyond the expiration of the then current Interest Period
relating thereto by giving Advance Notice to the Agent of such election,
specifying the Euro-Dollar Borrowing or portion thereof to be continued. In the
absence of such a timely and proper election, the Borrowers shall be deemed to
have elected to convert such Euro-Dollar Borrowing to a Base Rate Borrowing
pursuant to subsection .
All or any part of any Fixed Rate Borrowing may be continued as
provided herein, provided that (i) any continuation of any such Borrowing shall
be (as to each Borrowing as continued for an applicable Interest Period) in the
principal amount of $1,000,000 or any whole multiple of $1,000,000 in excess
thereof and (ii) no Default shall have occurred and be continuing. If a Default
shall have occurred and be continuing, each Fixed Rate Borrowing shall be
converted to a Base Rate Borrowing on the last day of the Interest Period
applicable thereto.
SECTION . Conversion Options. The Borrowers may elect to convert any CD
Borrowing on the last day of the then current Interest Period relating thereto
to a Euro-Dollar Borrowing or Base Rate Borrowing, or a combination thereof, by
giving Advance Notice to the Agent of such election, specifying, if electing one
or more Euro-Dollar Borrowings, each Interest Period therefor.
The Borrowers may elect to convert any Euro-Dollar Borrowing on
the last day of the then current Interest Period relating thereto to a CD
Borrowing or Base Rate Borrowing, or a combination thereof, by giving Advance
Notice to the Agent of such election.
The Borrowers may elect to convert a Base Rate Borrowing at any
time or from time to time to a CD Borrowing or Euro-Dollar Borrowing or a
combination thereof by giving Advance Notice to the Agent of such election,
specifying each Interest Period therefor.
All or any part of any outstanding Borrowing may be converted as
provided herein, provided that any conversion of any such Borrowing into a Fixed
(NY) 27008/757/CA99/ca.99.conf.wpd
24
<PAGE>
Rate Borrowing shall be (as to each such Borrowing into which there is a
conversion for an applicable Interest Period) in the principal amount of
$1,000,000 or any whole multiple of $1,000,000 in excess thereof. If no Default
shall have occurred and be continuing, each Borrowing may be converted as
provided in this Section. If a Default shall have occurred and be continuing, no
Borrowing may be converted into a Fixed Rate Borrowing.
SECTION . Optional Prepayments, Termination or Reduction of
Commitments. The Borrowers may, at their option, as to any Base Rate Borrowing
at any time and from time to time and as to any Fixed Rate Borrowing only on the
last day of the Interest Period applicable thereto, prepay any Borrowing, in
whole or in part, without premium or penalty, upon giving Advance Notice to the
Agent. Such notice shall specify the date and amount of prepayment and the
Borrowing to which such prepayment is to be applicable.
Upon receipt of a notice of prepayment pursuant to this Section, the
Agent shall promptly notify each Bank of the contents thereof and of such Bank's
ratable share of such prepayment and such notice shall not thereafter be
revocable by the Borrowers. The payment amount specified in such notice shall be
due and payable on the date specified. Each prepayment shall be, in the case of
any Borrowing, in the principal amount of $1,000,000 or any whole multiple of
$1,000,000 in excess thereof or the balance outstanding of such Borrowing. Each
such optional prepayment shall be applied to prepay ratably the Loans of the
several Banks included in such Borrowing.
During the Revolving Credit Period, the Borrowers may, upon at least
three Domestic Business Days' notice to the Agent, terminate at any time, or
proportionately reduce from time to time by an aggregate amount of $1,000,000 or
any whole multiple of $1,000,000 in excess thereof, the unused portions of the
Commitments. If the Commitments are terminated in their entirety, all accrued
commitment fees shall be payable on the effective date of such termination.
SECTION . Mandatory Prepayments. In the event that the aggregate unpaid
principal amount of Debt of the Borrowers at any time exceeds the Debt Limit
then most recently determined, the Borrowers shall, on or before thirty (30)
days from the earlier of the Agent's notification to the Borrowers of such
excess or the Borrowers otherwise becoming aware of such excess, either (i)
cause additional Property to be added to the Hydrocarbon Property Base such that
the Debt Limit as redetermined by the Banks after giving effect thereto will be
increased by an amount at least equal to such excess, and the Borrowers will
deliver to the Agent within said period (a) such title opinions and other title
information that the Borrowers have access to showing that the Borrowers,
individually or jointly, have good and indefeasible title to such Property and
(b) such Collateral Documents as are necessary to comply with Section based
(NY) 27008/757/CA99/ca.99.conf.wpd
25
<PAGE>
on such increased Hydrocarbon Property Base; or (ii) prepay the Notes in an
aggregate principal amount which is at least equal to such excess; or (iii)
eliminate such excess by a combination of the actions contemplated by clauses
(i) and (ii); provided that the provisions of this Section shall not prevent an
Event of Default from arising under the provisions of Section or 5.01(b).
SECTION . Payments. All payments (including prepayments) to be made by
the Borrowers on account of principal, interest and fees under a Note or
Commitment or any other Indebtedness shall be made without setoff or
counterclaim not later than 12:00 Noon (New York City time) on the date when
due, in Federal or other funds immediately available in New York City, to the
Agent at its address specified in Section . The Agent will promptly distribute
to each Bank its ratable share of each such payment received by the Agent for
the account of the Banks. If any payment under a Note (other than any payment on
a Euro-Dollar Loan) becomes due and payable on a day other than a Domestic
Business Day, the maturity thereof shall be extended to the next succeeding
Domestic Business Day and with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension. If
any payment on a Euro-Dollar Loan becomes due and payable on a day other than a
Euro-Dollar Business Day, the maturity thereof shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls
on another calendar month, in which case the date for payment thereof shall be
the next preceding Euro-Dollar Business Day, and interest on the principal
outstanding thereon shall be payable at the then applicable rate during such
extension.
Unless the Agent shall have received notice from the Borrowers prior
to the date on which any payment is due to the Banks hereunder that the
Borrowers will not make such payment in full, the Agent may assume that the
Borrowers have made such payment in full to the Agent on such date and the Agent
may, in reliance upon such assumption, cause to be distributed to each Bank on
such due date an amount equal to the amount then due such Bank. If and to the
extent that the Borrowers shall not have so made such payment, each Bank shall
repay to the Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from the date such amount is
distributed to such Bank until the date such Bank repays such amount to the
Agent, at the Federal Funds Rate.
SECTION . Interest. It is the intention of the parties hereto that each
Bank shall conform strictly to usury laws applicable to it. Accordingly, if the
transactions contemplated hereby would be usurious as to a Bank under laws
applicable to it (including the laws of the United States of America or any
other jurisdiction whose laws may be mandatorily applicable notwithstanding the
other provisions of this Agreement), then, in that event, notwithstanding
anything to the
(NY) 27008/757/CA99/ca.99.conf.wpd
26
<PAGE>
contrary in a Note or any other Financing Document or other agreement entered
into in connection with or as security for a Note, it is agreed as follows: (i)
the aggregate of all consideration which constitutes interest under law
applicable to a Bank that is contracted for, taken, reserved, charged or
received by such Bank under a Note or any other Financing Document or other
agreements or otherwise in connection with a Note shall under no circumstances
exceed the maximum amount allowed by such applicable law, and any excess shall
be credited by such Bank on the principal amount of its Indebtedness as selected
by such Bank (or, if the principal amount of the Indebtedness shall have been
paid in full, refunded by such Bank to the Borrowers); and (ii) in the event
that the maturity of a Note is accelerated by reason of an election of the
holder or holders thereof resulting from any Event of Default under this
Agreement or otherwise, or in the event of any required or permitted prepayment,
then such consideration that constitutes interest under law applicable to such
Bank may never include more than the maximum amount allowed by such applicable
law, and excess interest, if any, provided for in this Agreement or otherwise
shall be canceled automatically by such Bank as of the date of such acceleration
or prepayment and if theretofore paid, shall be credited by such Bank on the
principal amount of its Indebtedness as selected by such Bank (or, if the
principal amount of the Indebtedness shall have been paid in full, refunded by
such Bank to the Borrowers). To the extent that any court of competent
jurisdiction determines, notwithstanding the provisions hereof, that any Bank
located in Texas may be subject to Texas law limiting the amount of interest
payable for its account, such Bank shall utilize the indicated (weekly) rate
ceiling from time to time in effect as provided in Chapter 1D of Article 5069
(Tex.Rev.Civ.Stat.Ann. art 5069-1D.001, et seq.), as amended. In no event shall
the provisions of Article 5069, Chapter 15 of the Revised Civil Statutes of
Texas (which regulates certain revolving credit loan accounts and revolving
tri-party accounts) apply to any Loan made hereunder.
SECTION . Reimbursement of Certain Funding Losses. Without prejudice to
any other provision of this Agreement, in the event that a Bank shall incur any
loss or expense after making reasonable efforts to minimize any such loss or
expense (including, without limitation, any loss or expense incurred by reason
of the liquidation or reemployment of deposits or other funds acquired by a Bank
to fund or maintain all or any portion of the outstanding principal amount of
any Fixed Rate Loan, but excluding loss of margin) as a result of
payment, prepayment or conversion of such principal amount of
such Fixed Rate Loan on a date other than the last day of any Interest Period
applicable thereto, whether pursuant to Section , or or otherwise, or
any failure by the Borrowers to borrow, continue or convert into,
such Fixed Rate Loan on the date or in the amount specified in an Advance Notice
given pursuant to this Agreement,
(NY) 27008/757/CA99/ca.99.conf.wpd
27
<PAGE>
then the Borrowers shall pay to the Agent, on demand, such amount as will
reimburse such Bank for such loss or expense. A certificate setting forth in
reasonable detail any additional amounts payable pursuant to the foregoing
submitted by such Bank shall be prima facie evidence of such amounts, absent
manifest error.
SECTION . Increased Costs. If, as the result of any Regulatory
Change:
a Bank (or its Applicable Lending Office) shall be subjected
to any tax of any kind whatsoever with respect to the Agreement, a Note or any
Fixed Rate Loan made by it, or the basis of taxation of payments to the Bank of
principal, interest, fees or any other amount payable under this Agreement or a
Note shall be changed (except for changes in the rate of tax on the overall net
income of such Bank or such Applicable Lending Office imposed by the
jurisdiction in which such Bank's principal office or such Applicable Lending
Office is located); or
any reserve, special deposit, compulsory loan, insurance
assessment or similar requirement is imposed, modified or deemed applicable
against assets held by, or deposits or other liabilities in or for the account
of, advances or loans by, or other credit extended by, or any other acquisition
of funds by, any office of a Bank (in excess, and without duplication, of those
taken into account in computing the Domestic Reserve Percentage, Euro-Dollar
Reserve Percentage and Assessment Rate); or
any other condition affecting this Agreement, a Note or any
of its Fixed Rate Loans is imposed on a Bank;
and the result of any of the foregoing is to increase the cost to such Bank of
making, maintaining or funding any of its Fixed Rate Loans or to reduce any
amount receivable in respect of such Fixed Rate Loans (such increases in cost
and reductions in amounts receivable being hereinafter called "Increased
Costs"), then, in any such case, the Borrowers shall promptly pay to such Bank,
within ten Domestic Business Days of its demand, such additional amount which
will compensate such Bank for such Increased Cost as determined by such Bank.
Upon receiving demand from a Bank pursuant to subsection (a) of this Section and
at any time thereafter (unless and until such Bank has rescinded such demand) at
the option of the Borrowers and upon giving Advance Notice to the Agent, the
Borrowers may (A) in any case where such Increased Costs are applicable to
Euro-Dollar Loans, convert to Base Rate Loans or CD Loans all outstanding
Euro-Dollar Loans made by such Bank or (B) in any case where such Increased
(NY) 27008/757/CA99/ca.99.conf.wpd
28
<PAGE>
Costs are applicable to CD Loans, convert to Base Rate Loans or Euro-Dollar
Loans all outstanding CD Rate Loans made by such Bank. Upon any such conversion
of the Fixed Rate Loans of any Bank, the Borrowers shall pay to such Bank, in
accordance with Section , such amounts as may be necessary to compensate such
Bank for any loss or expense sustained or incurred by such Bank in respect of
such Fixed Rate Loans as a result of such conversion.
It is understood that in compensating a Bank for taxes pursuant to the
preceding paragraph, the amount of compensation shall include such additional
amounts as may be necessary so that every net payment of principal, interest,
fees or other amount payable under this Agreement, after taxes (including taxes
levied on any additional interest paid pursuant to this subsection), will not be
less than the corresponding amount provided for in this Agreement.
If any Bank shall have determined that any Regulatory Change has
or would have the effect of reducing the rate of return on capital of such Bank
(or its Parent) as a consequence of such Bank's obligations hereunder to a level
below that which it or its Parent could have achieved but for such Regulatory
Change (taking into consideration its policies with respect to capital adequacy)
by an amount deemed by such Bank to be material, then from time to time, within
15 days after demand by such Bank (with a copy to the Agent), the Borrowers
shall pay to such Bank such additional amount or amounts as will compensate such
Bank (or its Parent) for such reduction.
Each Bank will promptly notify the Borrowers and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Bank to compensation pursuant to this Section and will designate a
different Applicable Lending Office if such designation will avoid the need for,
or reduce the amount of, such compensation and will not, in the judgment of such
Bank be otherwise disadvantageous to such Bank. A certificate of any Bank
claiming compensation under this Section and setting forth in reasonable detail
the calculation of the additional amount or amounts to be paid to it hereunder
shall be conclusive in the absence of manifest error. In determining such
amount, such Bank may use any reasonable averaging and attribution methods.
If a Bank receives a refund or credit in respect of such Increased
Costs from a Person other than the Borrowers, such Bank shall reimburse the
Borrowers for the amount of such refund or credit not to exceed the amount
actually paid by the Borrowers to such Bank in respect of such Increased Costs.
SECTION . Basis for Determining Fixed Rates Inadequate. In the
event that:
(NY) 27008/757/CA99/ca.99.conf.wpd
29
<PAGE>
the Agent shall have determined in good faith that by reason of
circumstances affecting the domestic market for certificates of deposit
generally, adequate and reasonable means do not exist for ascertaining the
Adjusted CD Rate applicable pursuant to subsection 2.04(a) for any Interest
Period elected by the Borrowers with respect to (1) a proposed Borrowing that
the Borrowers have requested be made as a CD Borrowing, (2) a CD Borrowing that
will result from the requested conversion of a Base Rate or Euro-Dollar
Borrowing into a CD Borrowing, or (3) the continuation of an outstanding CD
Borrowing beyond the expiration of the then current Interest Period applicable
thereto, or the Agent shall have determined in good faith that the Adjusted CD
Rate will not adequately and fairly reflect the cost to the Banks of making,
maintaining or funding a proposed Borrowing that the Borrowers have requested be
made or continued as or converted into a CD Borrowing, then the Agent shall
promptly give notice of such determination to the Borrowers on the borrowing
date for such CD Borrowing, the conversion date of such Base Rate Borrowing or
Euro-Dollar Borrowing or the last day of such Interest Period. If such notice is
given, and subject to the Borrowers' right (if the required Advance Notice can
then be given) pursuant to Section , or to request a Euro-Dollar Borrowing in
lieu of a requested CD Borrowing or to convert to or to continue a Euro-Dollar
Borrowing in lieu of converting to a CD Borrowing (for which limited purpose the
Advance Notice pertaining to such CD Borrowing shall be revocable), (i) any
requested CD Borrowing shall be made as a Base Rate Borrowing; (ii) any Base
Rate Borrowing that was to have been converted to a CD Borrowing shall be
continued as a Base Rate Borrowing; (iii) any Euro-Dollar Borrowing that was to
have been converted to a CD Borrowing shall be converted to a Base Rate
Borrowing and (iv) any outstanding CD Borrowing shall be converted, on the last
day of the then current Interest Period applicable thereto, to a Base Rate
Borrowing. Until such notice has been withdrawn by the Agent, no further CD
Loans shall be made nor shall the Borrowers have the right to convert Base Rate
Loans or Euro-Dollar Loans to CD Loans;
the Agent shall have determined in good faith that by reason of
circumstances affecting the interbank Euro-Dollar market generally adequate and
reasonable means do not exist for ascertaining the Adjusted Euro-Dollar Rate
applicable pursuant to subsection 2.04(b) for any Interest Period elected by the
Borrowers with respect to (1) a proposed Borrowing that the Borrowers have
requested be made as a Euro-Dollar Borrowing, (2) a Euro-Dollar Borrowing that
will result from the requested conversion of a Base Rate Borrowing or a CD
Borrowing into a Euro-Dollar Borrowing or (3) the continuation of an outstanding
Euro-Dollar Borrowing beyond the expiration of the then current Interest Period
applicable thereto, or the Agent shall have determined in good faith that the
Adjusted Euro-Dollar Rate will not adequately and fairly reflect the cost to the
Banks of making, maintaining or funding a proposed Borrowing that the Borrowers
have requested be made or continued as or converted into a
(NY) 27008/757/CA99/ca.99.conf.wpd
30
<PAGE>
Euro-Dollar Borrowing, then the Agent shall promptly give notice of such
determination to the Borrowers at least one Euro-Dollar Business Day prior to,
as the case may be, the borrowing date for such Euro-Dollar Borrowing, the
conversion date of such Base Rate Borrowing or CD Borrowing or the last day of
such Interest Period. If such notice is given, and subject to the Borrowers'
right (if the required Advance Notice can then be given) pursuant to Section ,
or to request a CD Borrowing in lieu of a requested Euro-Dollar Borrowing or to
convert to or to continue a CD Borrowing in lieu of converting to a Euro-Dollar
Borrowing (for which limited purpose the Advance Notice pertaining to such
Euro-Dollar Borrowing shall be revocable), (i) any requested Euro-Dollar
Borrowing shall be made as a Base Rate Borrowing, (ii) any Base Rate Borrowing
that was to have been converted to a Euro-Dollar Borrowing shall be continued as
a Base Rate Borrowing, (iii) any CD Borrowing that was to have been converted to
a Euro-Dollar Borrowing shall be converted to a Base Rate Borrowing and (iv) any
outstanding Euro-Dollar Borrowing shall be converted on the last day of the then
current Interest Period applicable thereto to a Base Rate Borrowing. Until such
notice has been withdrawn by the Agent, no further Euro-Dollar Loans shall be
made nor shall the Borrowers have the right to convert Base Rate Loans or CD
Rate Loans to Euro-Dollar Loans.
SECTION . Illegality. Notwithstanding any other provision in this
Agreement, if, as a result of any Regulatory Change, it shall be unlawful or
impossible for a Bank (or its Applicable Lending Office) to make, maintain or
fund any Fixed Rate Loans as contemplated by this Agreement, such Bank's
obligation hereunder to make the affected Fixed Rate Loans shall forthwith be
canceled provided that such Bank shall designate a different Applicable Lending
Office if such designation will avoid the need for such cancellation and will
not be otherwise disadvantageous to such Bank. Immediately upon any such
cancellation, if it shall be unlawful or impossible to maintain any Fixed Rate
Loans then outstanding, all such Fixed Rate Loans of such Bank then outstanding
shall be converted automatically to Base Rate Loans. Such Bank shall promptly
give written notice to the Borrowers and the Agent of any such conversion. If
any such conversion of a Fixed Rate Loan is made prior to the last day of the
then current Interest Period therefor, the Borrowers shall pay to such Bank in
accordance with Section , such amount or amounts as may be necessary to
compensate such Bank for any loss or expense sustained or incurred by such Bank
in respect of such Fixed Rate Loan as a result of such conversion. A certificate
setting forth in reasonable detail any additional amounts payable pursuant to
the foregoing sentence submitted by such Bank to the Borrowers shall be prima
facie evidence of such amounts, absent manifest error.
SECTION . Foreign Taxes. All payments made by the Borrowers
for the account of any Bank under its Note or this Agreement or any other
Financing Document shall be made free and clear of, and without reduction for or
(NY) 27008/757/CA99/ca.99.conf.wpd
31
<PAGE>
on account of, any present or future income, stamp or other taxes, levies,
imposts, duties, charges, fees, deductions, withholdings, restrictions or
conditions of any nature whatsoever now or hereafter imposed, levied, collected,
withheld or assessed by any country including the United States of America (or
by any political subdivision or taxing authority thereof or therein), excluding
net income and franchise taxes now or hereafter imposed by the United States of
America, by any state of the United States of America or by any political
subdivision or taxing authority thereof or therein, or by the country in which
such Bank's Applicable Lending Office is located or any political subdivision or
taxing authority thereof or therein (such non-excluded taxes being hereinafter
called "Foreign Taxes"). If any Foreign Taxes are required to be withheld from
any amounts payable to such Bank under its Note or this Agreement, the amounts
so payable to such Bank shall be increased to the extent necessary to yield to
such Bank (after payment of all Foreign Taxes) interest or any such other
amounts payable thereunder or hereunder at the rates or in the amounts specified
in its Note or this Agreement. Whenever any Foreign Tax is payable by the
Borrowers, as promptly as possible thereafter, the Borrowers shall send the
Agent an original official receipt showing payment thereof. If a Bank receives a
refund or credit in respect of such Foreign Taxes from a Person other than the
Borrowers, such Bank shall reimburse the Borrowers for the amount of such refund
or credit not to exceed the amount actually paid by the Borrowers to or for the
account of such Bank in respect of such Foreign Taxes.
At least five Domestic Business Days prior to the first date on which
interest or fees are payable hereunder for the account of any Bank, each Bank
that is not incorporated under the laws of the United States of America or a
state thereof agrees that it will deliver to the Borrowers and the Agent two
duly completed copies of United States Internal Revenue Service Form 1001 or
4224, certifying in either case that such Bank is entitled to receive payments
under this Agreement and the Notes without deduction or withholding of any
United States federal income taxes. Each Bank which so delivers a Form 1001 or
4224 further undertakes to deliver to the Borrowers and the Agent two additional
copies of such form (or a successor form) on or before the date that such form
expires or becomes obsolete or after the occurrence of any event requiring a
change in the most recent form so delivered by it, and such amendments thereto
or extensions or renewals thereof as may be reasonably requested by the
Borrowers or the Agent, in each case certifying that such Bank is entitled to
receive payments under this Agreement and the Notes without deduction or
withholding of any United States federal income taxes, unless an event
(including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Bank from duly completing and delivering any such form with respect to it and
such Bank advises the Borrowers and the Agent that it
(NY) 27008/757/CA99/ca.99.conf.wpd
32
<PAGE>
is not capable of receiving payments without any deduction or withholding of
United States federal income tax.
SECTION . Substitution of Banks. If (i) the obligation of any Bank to
make Euro-Dollar Loans has been canceled pursuant to Section or (ii) any Bank
has demanded compensation under Section or , the Borrowers shall have the right,
with the assistance of the Agent, to seek a mutually satisfactory substitute
bank or banks (which may be one or more of the Banks) to purchase the Note and
assume the Commitment of such Bank.
SECTION . Participants' Expenses. All costs, losses, expenses, or
liabilities of a Bank reimbursable pursuant to this Article by the Borrowers
shall also include all costs, losses, expenses, or liabilities of any lenders
participating through such Bank in this Agreement, a Note, or any Fixed Rate
Loan. A certificate setting forth in reasonable detail any additional amounts
payable pursuant to the foregoing sentence submitted by such Bank to the
Borrowers shall be prima facie evidence of such amounts, absent manifest error.
SECTION . Commitment Fees. During the Revolving Credit Period, the
Borrowers shall pay to the Agent for the account of each Bank (which payment
shall be distributed to each Bank ratably in accordance with each Bank's
Commitment) a commitment fee at the Commitment Fee Rate calculated for each day
on the daily average amount by which the Availability Limit exceeds the
aggregate outstanding principal amount of the Loans. Subject to Section 2.09(b)
hereof, such commitment fees shall accrue from and including the Effective Date
to but excluding the last day of the Revolving Credit Period and shall be
payable quarterly on each March 31, June 30, September 30 and December 31 during
the Revolving Credit Period and on the last day of the Revolving Credit Period.
SECTION . Engineering Fee. The Borrowers agree to pay to the Agent and
each of the Banks a non-refundable fee of $10,000 and $7,500, respectively, on
March 31, 2000 and on each anniversary thereof to reimburse them for certain
engineering and other costs. If the Petroleum Property changes substantially
after the date hereof, the Agent shall have the right, in its reasonable
discretion, to modify such fee to reflect increased engineering and other costs.
SECTION . Agents' Fees. The Borrowers agree to pay to each of the Agent
and the Collateral Agent $15,000 on March 31, 2000 and on each anniversary
thereof to reimburse the Agent and the Collateral Agent for certain
administrative costs in connection with the Financing Documents.
SECTION . Participation Fee. The Borrowers shall pay on the
Effective Date to the Agent for the account of the Banks ratably in accordance
with their respective Commitments as in effect of the Effective Date immediately
(NY) 27008/757/CA99/ca.99.conf.wpd
33
<PAGE>
after giving effect to this Amended Agreement a participation fee equal to 0.45%
of the Debt Limit then in effect.
ARTICLE
REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Amended Agreement, the
Borrowers represent and warrant to the Banks (which representations and
warranties will survive the delivery of the Notes and the making of the Loans)
that:
SECTION . Existence. HEC is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, and has
all corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
HCRC is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware, and has all corporate
powers and all material governmental licenses, authorizations, consents and
approvals required to carry on its business as now conducted.
HEP is a limited partnership duly formed pursuant to the Uniform
Limited Partnership Act of the State of Delaware and has all partnership powers
and all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
(d) HEP General Partner is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and has
all corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
(e) HLP and LPA are each a limited liability company duly formed,
validly existing and in good standing under the laws of the state of Colorado.
MEPO is a limited partnership duly formed pursuant to the Uniform Limited
Partnership Act of the State of Texas. Nominee and Concise are each a general
partnership duly formed pursuant to the Uniform Partnership Act of the State of
Colorado. HCP is a limited partnership duly formed pursuant to the Uniform
Limited Partnership Act of the State of Colorado. Each of HLP, LPA, MEPO,
Nominee, Concise and HCP has all partnership or limited liability company powers
and all material governmental licenses, authorizations, consents and approvals
required to carry on its business as now conducted.
(NY) 27008/757/CA99/ca.99.conf.wpd
34
<PAGE>
SECTION . Authorization. The execution, delivery and performance by
each Borrower of the Financing Documents to which it is a party and the creation
and issuance of the Notes are within such Borrower's corporate or partnership
powers, as the case may be, and have been duly authorized by all necessary
corporate or partnership action, as the case may be (including, in the case of
HEP, all corporate action on the part of the HEP General Partner). All necessary
action on the part of each Borrower (and on the part of the HEP General Partner
in its capacity as general partner of HEP) requisite for the due creation and
issuance of the Notes and for the due execution, delivery and performance by
such Borrower of the Financing Documents to which it is a party has been duly
and effectively taken. No action or consent is required of the limited partners
of HEP in connection with the due creation and issuance of the Notes by HEP and
for the due execution, delivery and performance by HEP of the Financing
Documents to which it is a party, including this Agreement.
SECTION . Binding Obligations. This Agreement and other Financing
Documents do, and the Notes, upon their creation, issuance, execution and
delivery in accordance with this Agreement will, constitute valid and binding
obligations of the Borrowers party thereto or which have created, issued,
executed and delivered such Notes, as the case may be, enforceable in accordance
with their terms except as (i) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights generally and
(ii) rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability.
SECTION . No Legal Bar or Resultant Lien. The Notes and the other
Financing Documents to which each Borrower is a party, including this Agreement,
and the compliance with and performance by such Borrower of the terms thereof do
not and will not violate any provisions of certificate of incorporation or
by-laws or partnership agreement of such Borrower, as the case may be, or any
material contract, agreement, instrument or Governmental Requirement presently
in effect to which such Borrower is subject, or result in the creation or
imposition of any Lien upon Property of such Borrower, other than those
permitted by the Financing Documents.
SECTION . No Consent. Each Borrower's execution, delivery and
performance of the Notes and the Financing Documents to which such Borrower is a
party, including this Agreement, do not require the consent or approval of any
Person which has not been obtained, including, without limitation, any
regulatory authority or governmental body of the United States of America or any
state thereof or any political subdivision of the United States of America or
any state thereof, except for approvals or consents required for the transfer of
interests in oil and gas leases by certain governmental bodies under the terms
of the oil and gas leases issued by such governmental bodies.
(NY) 27008/757/CA99/ca.99.conf.wpd
35
<PAGE>
SECTION . Financial Condition. The Financial Statements, which have
been delivered to the Banks, have been prepared in accordance with generally
accepted accounting principles, consistently applied, and present fairly (i) in
the case of the Financial Statements of HEC, the consolidated financial
condition, results of operations of HEC as at the date or dates and for the
period or periods stated giving effect to the Reorganization as if the
Reorganization has been consummated (x) on December 31, 1998, in the case of the
consolidated balance sheet of HEC and (y) January 1, 1998, in the case of the
consolidated statement of operations of HEC, (ii) in the case of the Financial
Statements of HEP, the consolidated financial condition, results of operations
and cash flows of HEP as at the date or dates and for the period or periods
stated and (iii) in the case of the Financial Statements of HCRC, the
consolidated financial condition, results of operations and cash flows of HCRC
as at the date or dates and for the period or periods stated. No change, either
individually or in the aggregate, has occurred since December 31, 1998 in the
condition, financial or otherwise, of HEC which would have a Material Adverse
Effect.
SECTION . Investments and Guaranties. At the date of this Amended
Agreement, neither HEC nor any of its Subsidiaries has made investments in,
advances to or guaranties of the obligations of any Person, except as reflected
in the Financial Statements or disclosed to the Banks in Schedule B hereto.
SECTION . Liabilities; Litigation. Except for liabilities incurred in
the normal course of business, neither HEC nor any of its Subsidiaries has at
the date of this Amended Agreement any material (individually or in the
aggregate) liabilities, direct or contingent, except as disclosed or referred to
in the Financial Statements or disclosed to the Banks in Schedule B hereto.
Except as disclosed in the Financial Statements or disclosed to the Banks in
Schedule B hereto, at the date of this Amended Agreement there is no litigation,
legal, administrative or arbitral proceeding, investigation or other action of
any nature pending or, to the knowledge of the Borrowers, threatened against or
affecting HEC or any of its Subsidiaries which involves the reasonable
possibility of any judgment or liability not fully covered by insurance, and
which would have a Material Adverse Effect. No unusual or unduly burdensome
restriction, restraint, or hazard exists by contract, law or governmental
regulation or otherwise relative to the business or Property of HEC and its
Subsidiaries, except as disclosed to the Banks in the Financial Statements or
disclosed in Schedule B hereto.
SECTION . Taxes; Governmental Charges. HEC and its Subsidiaries have
filed all Federal and, to the best of their knowledge, all material state and
local tax returns and reports required to be filed and have paid all taxes,
assessments, fees and other governmental charges levied upon each of them or
upon their respective Property or income which are due and payable, including
interest and penalties, except for any taxes, assessments, fees and other
(NY) 27008/757/CA99/ca.99.conf.wpd
36
<PAGE>
governmental charges with respect to which HEC and its Subsidiaries have set
aside on their books any reserve required by generally accepted accounting
principles.
SECTION . Titles, etc. Except as disclosed on Schedule B hereto, HEC
and its Subsidiaries, individually and collectively, have good title to their
material (individually or in the aggregate) Property (including, without
limitation, all Petroleum Property) and the Borrowers and the Property Base
Subsidiaries have record title to and beneficial ownership of all Petroleum
Property which the Borrowers have identified to the Banks for use in determining
the Debt Limit, in each case free and clear of all Liens except (i) Liens
referred to in the Financial Statements, (ii) Liens disclosed to the Banks in
Schedule B hereto, (iii) Excepted Liens, or (iv) Liens otherwise permitted by
this Agreement or the other Financing Documents. The Borrowers have delivered
(or have caused the Property Base Subsidiaries to deliver) to the Collateral
Agent copies of the most recent title opinions with respect to the Petroleum
Property included in the Hydrocarbon Property Base having a fair market value in
excess of $100,000; provided that the Collateral Agent shall not have any duty
to review such title opinions or determine the ownership of any such Petroleum
Property.
SECTION . Defaults. Neither HEC nor any of its Subsidiaries is in
default nor has any event or circumstance occurred which, but for the passage of
time or the giving of notice, or both, would constitute a default (in any
respect which would have a Material Adverse Effect) under any loan or credit
agreement, indenture, mortgage, deed of trust, security agreement or other
agreement or instrument evidencing or pertaining to any Debt, or under any
material agreement or instrument to which HEC or such Subsidiary is a party or
by which it is bound, except as disclosed to the Banks in Schedule B-2 hereto.
No Default has occurred and is continuing.
SECTION . Casualties; Taking of Property. Since the date of the
Financial Statements, neither the business nor the Property of HEC and its
Subsidiaries has been affected as a result of any fire, explosion, earthquake,
flood, drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of Property of HEC and its Subsidiaries or cancellation of
contracts, permits or concessions by any domestic or foreign government or any
agency thereof, riot, activities of armed forces or acts of God or of any public
enemy, the occurrence of which would have a Material Adverse Effect.
SECTION . Use of Proceeds; Margin Stock. The proceeds of the Loans
shall be used for working capital purposes and acquisitions. No proceeds of any
Loan will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying any "margin stock" within the
meaning of Regulation U. None of the Borrowers is engaged principally, or as
(NY) 27008/757/CA99/ca.99.conf.wpd
37
<PAGE>
one of such Borrower's important activities, in the business of extending credit
for the purpose of purchasing or carrying margin stocks. None of the Borrowers
nor any Person acting on behalf of the Borrowers has taken or will take any
action which might cause any of the Financing Documents to violate Regulation U
or any other regulation of the Board of Governors of the Federal Reserve System
or to violate Section of the Securities Exchange Act of 1934 or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereinafter be in effect.
SECTION . Compliance with the Law. Neither HEC nor any of its
Subsidiaries:
is in violation of any Governmental Requirement; or
has failed to obtain any license, permit, franchise or other
governmental authorization necessary to the ownership of any of its Property or
the conduct of its business;
which violation or failure would have (in the event such violation or failure
were asserted by any Person through appropriate action) a Material Adverse
Effect.
SECTION . Compliance with Erisa. Each member of the Controlled Group
has fulfilled its obligations under the minimum funding standards of ERISA and
the Code with respect to each Plan and is in compliance in all material respects
with the presently applicable provisions of ERISA and the Code with respect to
each Plan. No member of the Controlled Group has (i) sought a waiver of the
minimum funding standard under Section 412 of the Code in respect of any Plan,
(ii) failed to make any contribution or payment to any Plan or Multiemployer
Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan
or Benefit Arrangement, which in either case has resulted or could result in the
imposition of a Lien under ERISA or the Code or the posting of a bond or other
security under ERISA or the Code or (iii) incurred any liability under Title IV
of ERISA other than a liability to the PBGC for premiums under Section 4007 of
ERISA.
SECTION . No Material Misstatements. No information, exhibit or report
furnished to the Banks by the Borrowers in connection with the negotiation of
this Amended Agreement contained any material misstatement of fact or omitted to
state a material fact or any fact necessary to make the statements contained
therein not misleading.
SECTION . Investment Company Act. None of the Borrowers is an
"investment company" or a company "controlled" by an "investment
(NY) 27008/757/CA99/ca.99.conf.wpd
38
<PAGE>
company," within the meaning of the Investment Company Act of 1940, as
amended.
SECTION . Public Utility Holding Company Act. None of the Borrowers is
a "holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," or a "public utility" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
SECTION . Corporate Documents and HEP Partnership Agreement. Each of
HEC and HCRC has delivered to the Banks true and correct copies of its
certificate of incorporation and by-laws, and each such certificate of
incorporation and by-laws is in full force and effect as of the date hereof. HEP
has delivered to the Banks a true and correct copy of the HEP Partnership
Agreement and its certificate of limited partnership and such HEP Partnership
Agreement and certificate of limited partnership have not been modified or
terminated except for non-material changes to the names and addresses of the
limited partners, if any; and such HEP Partnership Agreement and such
certificate of limited partnership are in full force and effect as of the date
hereof. Neither HEP nor HEP General Partner nor, to the best knowledge of the
Borrowers, any other Person is in default under the HEP Partnership Agreement or
the certificate of limited partnership of HEP, except as disclosed to the Banks
in Schedule B hereto.
SECTION . Location of the Borrowers. Each Borrower's principal place of
business is Denver, Colorado and each Borrower's chief executive office is
located at 4610 South Ulster Street, Suite 200, Denver, Colorado 80237.
SECTION . Gas Imbalances. Except as set forth on Schedule B or
specifically disclosed in the consolidated financial statements of HEC and its
consolidated Subsidiaries or a Reserve Report, there are no gas imbalances, take
or pay or other prepayments with respect to the Borrowers' or the Property Base
Subsidiaries' oil and gas Property which would require the Borrowers or the
Property Base Subsidiaries to deliver hydrocarbons produced from any of the
Borrowers' or the Property Base Subsidiaries' oil and gas Property at some
future time without then or thereafter receiving full payment therefor which
would exceed $200,000 in the aggregate.
SECTION . Foreign Corporation. Each of the Borrowers and each
Subsidiary of HEC pledging Mortgaged Property is duly qualified as a foreign
corporation or partnership, as the case may be, in all jurisdictions where any
Mortgaged Property pledged by it is located.
(NY) 27008/757/CA99/ca.99.conf.wpd
39
<PAGE>
SECTION . Other Financing Documents. The representations and
warranties contained in the other Financing Documents are true and correct as of
the date of this Amended Agreement.
SECTION . Environmental Matters. In the ordinary course of its
business, HEC conduct an ongoing review of the effect of Environmental Laws on
the business, operations and properties of HEC and its Subsidiaries in the
course of which HEC identifies and evaluates associated liabilities and costs
(including, without limitation, any capital or operating expenditures required
for clean-up or closure of properties presently or previously owned, any capital
or operating expenditures required to achieve or maintain compliance with
environmental protection standards imposed by law or as a condition of any
license, permit or contract, any related constraints on operating activities,
including any periodic or permanent shutdown of any facility or reduction in the
level of or change in the nature of operations conducted thereat and any actual
or potential liabilities to third parties, including employees, and any related
costs and expenses). On the basis of this review, HEC has reasonably concluded
that such associated liabilities and costs, including the costs of compliance
with Environmental Laws are unlikely to have a material adverse effect on the
business (as it is being conducted on the date this representation is being
made), financial condition, results of operations or prospects of HEC and its
Subsidiaries, taken as a whole.
SECTION . Subsidiaries. The Subsidiaries party to the Guaranty
Agreement constitute all of the Material Subsidiaries of HEC.
Each Borrower (other than HEC) is a wholly-owned Subsidiary of HEC.
Each Material Subsidiary of HEC (other than any Borrower) is a
corporation or partnership duly incorporated or formed, validly existing and in
good standing under the laws of its jurisdiction of incorporation or formation,
and has all corporate or partnership powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as now conducted.
SECTION . Solvency, etc. [Intentionally deleted]
SECTION . Year 2000 Compliance. HEC has (i) initiated a review and
assessment of all areas within the business and operations of HEC and each of
its Subsidiaries (including those areas affected by suppliers and vendors) that
could suffer a Material Adverse Effect by the "Year 2000 Problem" (that is, the
risk that computer applications used by it or any of its Subsidiaries (or their
respective suppliers and vendors) may be unable to recognize and perform
properly date- sensitive functions involving certain dates prior to and any date
after December
(NY) 27008/757/CA99/ca.99.conf.wpd
40
<PAGE>
31, 1999), (ii) developed a plan and timeline for addressing the Year 2000
Problem on a timely basis and (iii) to date, implemented or is implementing such
plan in accordance with such timetable. HEC reasonably believes that all
computer applications (including those of suppliers and vendors) that are
material to the business or operations of HEC or any of its Subsidiaries will on
a timely basis be able to perform properly date-sensitive functions for all
dates before and from and after January 1, 2000 (that is, be "Year 2000
compliant"), except to the extent that a failure to do so could not reasonably
be expected to have a Material Adverse Effect.
SECTION . Reorganization. Each of HEC, HEC Acquisition Partnership,
L.P., HEC Acquisition Corp., HCRC, HCRC Acquisition Corp., HEP and HEPGP Ltd.
(collectively, the "Reorganization Parties") has all requisite partnership or
corporate power and authority, as the case may be, to execute, deliver and
perform the Merger and Asset Contribution Agreement as amended, (the
"Reorganization Agreement") entered into by them on December 15, 1998 and to
consummate the Reorganization and the other transactions contemplated thereby.
The execution, delivery and performance by each of the Reorganization
Parties of the Reorganization Agreement and the other documents delivered by
such Reorganization Party pursuant thereto or in connection therewith (with
respect to each Reorganization Party, the "Reorganization Documents") have been
duly authorized by all necessary corporate or partnership action, as the case
may be.
There is no action, suit or proceeding pending or threatened which
questions the validity or legality of, or seeks damages in connection with the
Reorganization Documents, the Reorganization or any actions contemplated
thereby.
The execution, delivery and performance by each of the
Reorganization Parties of the Reorganization Documents to which it is a party
and the consummation of the Reorganization do not and will not conflict with or
violate the constituent documents of such Reorganization Party or any law,
statute, or published rule or regulation, or any writ, order or decision of any
court or governmental instrumentality binding on HEC or any of its Subsidiaries
or any indenture, mortgage, contract, instrument or agreement to which HEC or
any of its Subsidiaries is a party or by which it or its assets is bound.
Neither the execution, delivery or performance by each of the
Reorganization Parties of the Reorganization Documents to which it is a party
nor the consummation of the Reorganization require the consent or approval or
other action of, or the making of any filing with, any governmental authority,
other than
(NY) 27008/757/CA99/ca.99.conf.wpd
41
<PAGE>
such consents and approvals that have been obtained, such other actions that
have been taken and such other filings that have been made and that, in each
case, are in full force and effect on the date hereof.
All conditions precedent set forth in Article VIII of the
Reorganization Agreement have been satisfied.
ARTICLE
COVENANTS
SECTION . Financial Statements and Reports. The Borrowers will promptly
furnish to each of the Banks from time to time upon request such information
regarding the business and affairs and financial condition of the Borrowers as
any Bank may reasonably request, and will furnish to each Bank:
Annual Financial Statements - as soon as available and in any event
within one hundred (100) days after the close of each fiscal year of HEC, two
(2) copies of the audited consolidated balance sheet of HEC and its consolidated
Subsidiaries as of the end of such fiscal year and two (2) copies of the audited
consolidated statements of operations, of cash flows and changes in
shareholders' equity of HEC and its consolidated Subsidiaries for such fiscal
year, which fairly present the information included therein (showing any
material change in the consistency of the application of accounting principles
from the prior period) accompanied by an opinion without material qualification
of independent certified public accountants of national repute;
Quarterly Statements - as soon as available and in any event within
sixty (60) days after the close of each of the first three fiscal quarters of
each fiscal year of HEC, two (2) copies of the consolidated balance sheet of HEC
and its consolidated Subsidiaries as at the close of such fiscal quarter, and
two (2) copies of the consolidated statements of operations and of cash flows of
HEC and its consolidated Subsidiaries for such fiscal quarter and for the
portion of HEC's fiscal year ended at the end of such fiscal quarter, all in
such detail as the Required Banks may reasonably request and certified by an
Authorized Person of HEC as complete and correct and that the quarterly
financial statements were prepared on the same accounting basis as the annual
financial statements;
Audit Reports - promptly upon receipt thereof, one copy of each
other report submitted to HEC by independent accountants in connection with any
annual, interim or special audit made by them of the books of HEC, including,
without limitation, any comment letter submitted by such accountants to
management in connection with such audit;
(NY) 27008/757/CA99/ca.99.conf.wpd
42
<PAGE>
Subordinated Notes Agreement - contemporaneously with the
delivery of any information (including without limitation financial
information), reports or notices to Prudential pursuant to Section 5A of the
Subordinated Notes Agreement, a copy thereof to each Bank (unless previously
delivered to such Bank under this Agreement);
SEC and Other Reports - promptly upon their becoming available,
one copy of each financial statement and proxy statement sent or made available
by HEC to its security holders, of each regular or periodic report and any
registration statement, prospectus or written communication (other than
transmittal letters) in respect thereof filed by HEC with any securities
exchange or the Securities and Exchange Commission or any successor agency, and
of all press releases and other statements made available generally by HEC and
its Subsidiaries to the public concerning material developments in the business
of HEC and its Subsidiaries; and
Hedging Transactions - concurrently with the furnishing of each set
of financial statements pursuant to Section 4.01(a) or 4.01(b) hereof, a report
setting forth in reasonable detail the terms of each Hedging Transaction between
HEC or any of its Subsidiaries and any Bank or affiliate of any Bank as of the
last day of the fiscal quarter or fiscal year to which such financial statements
relate, together with a calculation of the payment obligations of HEC or any of
its Subsidiaries thereunder (calculated on a marked-to market basis) as of such
day.
SECTION . Annual Certificates of Compliance. Concurrently with the
furnishing of the annual financial statements pursuant to Section hereof, HEC
will furnish or cause to be furnished to each of the Banks certificates of
compliance, as follows:
a certificate signed by an Authorized Person (i) in the form of
Schedule A hereto; and (ii) containing or accompanied by such financial or other
details, information, calculations and material as the Required Banks may
reasonably request to evidence such compliance; and
a certificate from the independent public accountants stating that
their audit has not disclosed the existence of any condition which constitutes a
Default, or if their audit has disclosed the existence of any such condition,
specifying the nature, period of existence and status thereof.
SECTION . Quarterly Certificates of Compliance.Concurrently with the
furnishing of the quarterly financial statements pursuant to subsection 4.01(b)
hereof, HEC will furnish or cause to be furnished to each of the Banks a
(NY) 27008/757/CA99/ca.99.conf.wpd
43
<PAGE>
certificate signed by an Authorized Person in the same form as the certificate
required by Section hereof.
SECTION . Taxes and Other Liens. HEC will, and will cause each of its
Subsidiaries to, pay and discharge promptly all taxes, assessments and
governmental charges or levies imposed upon it or upon its income or upon any of
its Property as well as all claims of any kind (including claims for labor,
materials, supplies and rent) which, if unpaid, might become a material Lien
upon any or all of its Property; provided, however, HEC shall not be required to
pay, or to cause any of its Subsidiaries to pay, any such tax, assessment,
charge, levy or claim if the amount, applicability or validity thereof shall
currently be contested in good faith by appropriate proceedings diligently
conducted by or on behalf of HEC or such Subsidiary and if HEC shall have set up
reserves therefor adequate under generally accepted accounting principles.
SECTION . Maintenance; Abandonment. HEC will, and will cause each of
its Subsidiaries to, (i) maintain its partnership, limited liability company or
corporate, as applicable, existence, rights and franchises; (ii) qualify to do
business as a partnership or a foreign corporation, as the case may be, in each
jurisdiction where the failure to do so would have a Material Adverse Effect;
(iii) observe and comply (to the extent necessary so that any failure would not
have a Material Adverse Effect) with all Governmental Requirements, and (iv) to
the extent it is within HEC's or such Subsidiary's direct control, maintain its
Property (and any Property leased by or consigned to it or held by it under
title retention or conditional sales contracts) in good and workable condition
at all times and make all repairs, replacements, additions, betterments and
improvements to its Property as are necessary so that the business carried on in
connection therewith may be conducted at all times in accordance with industry
standards. None of HEC or any of its Subsidiaries shall abandon or permit any
Petroleum Property to become abandoned, unless such Petroleum Property is
incapable of producing hydrocarbons such that the marginal revenue associated
with the production of each additional unit of such hydrocarbon is greater than
the marginal direct costs of such production, including royalties and taxes and
excluding non-cash charges.
SECTION . Further Assurances. HEC will, and will cause each other
Obligor to, promptly cure, any defects in the execution and delivery of the
Financing Documents. HEC at its expense will, and will cause each other Obligor
to, promptly execute and deliver to each of the Banks upon request of the
Required Banks all such other and further documents, agreements and instruments
in compliance with or accomplishment of the covenants and agreements of each
Obligor in the Financing Documents, or to further evidence and more fully
describe the collateral intended as security for the Indebtedness, or to correct
any omissions in the Collateral Documents, or more fully to state the security
obligations set out herein or in any of the Collateral Documents, or to perfect,
(NY) 27008/757/CA99/ca.99.conf.wpd
44
<PAGE>
protect or preserve any Liens created pursuant to any of the Collateral
Documents, or to make any recordings, to file any notices, or obtain any
consents, all as may be necessary or appropriate in connection therewith.
SECTION . Performance of Obligations. HEC will, and will cause other
Obligor to, do and perform every act and discharge all of the obligations
provided to be performed and discharged by HEC or such other Obligor under the
Financing Documents at the time or times and in the manner specified.
SECTION . Reimbursement of Expenses. The Borrowers will, upon request,
promptly reimburse each of the Banks for all reasonable amounts expended,
advanced or incurred by any Bank to satisfy any obligation of the Borrowers
under the Financing Documents, or to enforce the rights of any Bank under the
Financing Documents, which amounts will include all court costs, reasonable
attorneys' fees (including, without limitation, for trial, appeal or other
proceedings), fees of auditors and accountants, and investigation expenses
reasonably incurred by any Bank in connection with any such matters. The
Borrowers agree to pay, indemnify and hold each of the Banks and their
respective affiliates and the respective directors, officers, employees and
agents of the foregoing ("Indemnitees") harmless from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind or nature whatsoever (collectively
a "Claim") caused by any act or omission of the Borrowers or any Indemnitee
relating to the Financing Documents, except for a Claim caused by the gross
negligence or willful misconduct of the Indemnitee, but expressly including any
Claim based on ordinary negligence.
SECTION . Insurance. HEC and each of its Subsidiaries maintains, and
HEC will maintain, and will cause each of its Subsidiaries to maintain, with
financially sound and reputable insurers, insurance with respect to the Property
and business of HEC and its Subsidiaries against such liabilities, casualties,
risks and contingencies and in such types and amounts as is customary in the
case of Persons engaged in the same or similar businesses and similarly
situated. Upon request of any Bank, HEC will furnish or cause to be furnished to
such Bank from time to time a summary of such insurance in form and substance
satisfactory to the Required Banks. In the case of any fire, accident or other
casualty causing loss or damage to any Property of HEC or any of its
Subsidiaries, the proceeds of such policies shall be used (i) to repair or
replace the damaged Property, or (ii) to prepay the Indebtedness, which
prepayment shall be made ratably among all of the Banks in proportion to their
Commitments.
SECTION . Right of Inspection. HEC will permit, and will cause each
of its Subsidiaries to permit, any officer, employee or agent of any Bank to
visit and inspect any of its Property, examine its books of record and accounts,
take
(NY) 27008/757/CA99/ca.99.conf.wpd
45
<PAGE>
copies and extracts therefrom, and discuss its affairs, finances and accounts
with HEC's or such Subsidiary's officers, as the case may be, and with HEC's
independent public accountants and auditors in the presence of HEC's or such
Subsidiary's officers, all at such reasonable times and as often as such Bank
may reasonably desire.
SECTION . Notice of Certain Events. HEC shall promptly notify each of
the Banks in writing if HEC or any of its Subsidiaries learns of the occurrence
of (i) any event which constitutes a Default, together with a detailed statement
by an Authorized Person of HEC of the steps being taken to cure the effect of
such Default; or (ii) the receipt of any notice from or the taking of any other
action by, the holder of any promissory note, debenture or other evidence of
Debt of any Obligor, including the Notes and the Subordinated Notes, or of any
security (as defined in the Securities Act of 1933, as amended) of any Obligor
with respect to a claimed default, together with a detailed statement by an
Authorized Person of HEC specifying the notice given or other action taken by
such holder and the nature of the claimed default and what action HEC and its
Subsidiaries are taking or propose to take with respect thereto; or (iii) any
legal, judicial or regulatory proceedings affecting HEC or any of its
Subsidiaries or any of their respective Property in which the amount involved
exceeds $500,000 (individually or in the aggregate) or which, if adversely
determined, would have a Material Adverse Effect; or (iv) any dispute between
HEC or any of its Subsidiaries and any governmental or regulatory body or any
other Person which, if adversely determined, would have a Material Adverse
Effect; or (v) any dispute between HEC and any of its stockholders; or (vi) any
material default or noncompliance of any party to the HEP Partnership Agreement
with any of the terms and conditions thereof, or any notice of termination or
other material proceedings or actions which might materially adversely affect
the HEP Partnership Agreement; (vii) any amendment of the HEP Partnership
Agreement or the Certificate of Incorporation or Bylaws of HCRC or HEC, together
with a copy of such amendment except, in the case of the HEP Partnership
Agreement, for amendments which only change the names and addresses of the
limited partners of HEP; or (viii) any event or condition having a Material
Adverse Effect.
SECTION . ERISA Information and Compliance. HEC will promptly furnish
to each of the Banks, if and when any member of the Controlled Group (i) gives
or is required to give notice to the PBGC of any "reportable event" (as defined
in Section 4043 of ERISA) with respect to any Plan which might constitute
grounds for a termination of such Plan under Title IV of ERISA, or knows that
the plan administrator of any Plan has given or is required to give notice of
any such reportable event, a copy of the notice of such reportable event; (ii)
receives notice of complete or partial withdrawal liability under Title IV of
ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent
or has been terminated; (iii) receives notice from the PBGC under Title IV of
ERISA
(NY) 27008/757/CA99/ca.99.conf.wpd
46
<PAGE>
of an intent to terminate, impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or appoint a trustee to administer any
Plan; (iv) applies for a waiver of the minimum funding standard under Section
412 of the Code; (v) gives notice of intent to terminate any Plan under Section
4041(c) of ERISA; (vi) gives notice of withdrawal from any Plan pursuant to
Section 4063 of ERISA; or (vii) fails to make any payment or contribution to any
Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any
amendment to any Plan or Benefit Arrangement which in either case has resulted
or could result in the imposition of a Lien under ERISA or the Code or the
posting of a bond or other security under ERISA or the Code, a certificate or
notice as described in the last sentence of this Section . Promptly after the
occurrence of any event set forth in clauses (i) - (vii) above, HEC will furnish
to each of the Banks a certificate or written notice signed by an Authorized
Person of HEC setting forth details as to each such occurrence and action, if
any, which HEC or the applicable member of the Controlled Group is required or
proposes to take.
SECTION . Collateral Security. The Borrowers will at all times cause
(i) Petroleum Property representing in value, as determined by reference to the
most recent Reserve Report, not less than 60% of the Hydrocarbon Property Base
and (ii) all outstanding capital stock, limited liability company interests or
partnership interests directly or indirectly owned by HEC of each wholly-owned
and (to the extent not restricted by customary provisions in joint venture
agreements or similar agreements) non-wholly owned Material Subsidiary of HEC
(including without limitation any Person (including without limitation any
Subsidiary) which becomes a Material Subsidiary after the date hereof), to be
subject to valid first-priority Liens in favor of the Collateral Agent for the
benefit of the Banks pursuant to the Collateral Documents. In the event that the
daily average aggregate unpaid principal amount of Debt of the Borrowers exceeds
50% of the Debt Limit for a period of ninety (90) days, the Required Banks may
deliver to the Borrowers a written demand for additional collateral security
pursuant to this Section. Upon receipt of such demand, the Borrowers will, or
will cause its Subsidiaries to, grant to the Collateral Agent for the benefit of
the Banks, within sixty (60) days of receipt of such demand, as security for the
Indebtedness, a first-priority Lien on additional Petroleum Property such that
Petroleum Property representing in value, as determined by reference to the most
recent Reserve Report, not less than 80% of the Hydrocarbon Property Base shall
thereafter be subject to such first-priority Liens. The Liens will be created
and perfected by and in accordance with the provisions of security agreements
and financing statements, deeds of trust or other Collateral Documents, all in
form and substance satisfactory to the Required Banks in sufficient executed
(and acknowledged where necessary or appropriate) counterparts for recording
purposes. The Borrowers will furnish or cause to be furnished to each of the
Banks in connection therewith opinions satisfactory in form and substance to the
Required Banks from counsel satisfactory to the Required Banks as to such
(NY) 27008/757/CA99/ca.99.conf.wpd
47
<PAGE>
Collateral Documents and the validity and perfection of the Liens created
thereby. The Borrowers shall also furnish to each of the Banks a certificate,
within 30 days of any Reserve Report prepared pursuant to Section , signed by an
Authorized Person of each of the Borrowers, confirming compliance with the above
collateral security requirement and stating the percent of Petroleum Property
subject to valid first-priority Liens in favor of the Collateral Agent for the
benefit of the Banks pursuant to the Collateral Documents.
The Borrowers shall deliver to the Collateral Agent executed
counterparts of each Collateral Document set forth in Schedule C within two
Domestic Business Days of receipt by the Borrowers of such Collateral Document
in final form.
SECTION . Performance of Partnership Agreement. HEP will perform and
observe in all material respects the provisions of its Partnership Agreement on
its part to be performed or observed prior to the termination thereof, unless
and to the extent only that the same shall be contested in good faith by
appropriate action by or on behalf of HEP.
SECTION . Notice to Purchasers of Oil and Gas. Each Borrower will, and
will cause each Property Base Subsidiary to, upon request of the Required Banks,
join with the Banks in notifying the purchaser or purchasers of oil and gas of
the existence of the Collateral Documents, such notification to be in writing
and accompanied (if necessary) by certified copies of the Collateral Documents.
SECTION . Engineering Reports.
By April 1 and August 1 of each year, the Borrowers shall furnish to
each of the Banks a report in form and substance reasonably satisfactory to the
Required Banks which may be prepared by or under the supervision of a petroleum
engineer who may be an employee of any Borrower or an Affiliate, which shall
evaluate each Petroleum Property as of the preceding December 31 or June 30,
respectively, and which shall, together with any other information reasonably
requested by any Bank, set forth the information necessary to determine the
Hydrocarbon Property Base as of such date; provided that, if the Required Banks
so request by no later than November 1 of any year, such report as of December
31 of such year shall be prepared by Approved Petroleum Engineers and shall
evaluate a portion of Petroleum Property having a value at least equal to 80% of
the aggregate value of all Petroleum Property.
If the Required Banks have not requested a Reserve Report to be
prepared by Approved Petroleum Engineers as of December 31 of any year pursuant
to the proviso in subsection (a), the Borrowers shall furnish to each of the
Banks, together with the Reserve Report furnished pursuant to subsection (a)
(NY) 27008/757/CA99/ca.99.conf.wpd
48
<PAGE>
as of December 31 of such year, an audit report by April 1 of such year thereon
in form and substance reasonably satisfactory to the Required Banks by Approved
Petroleum Engineers. Such audit report shall state that such independent
petroleum engineers have reviewed at least 70% in value of the Petroleum
Property each year in detail to confirm the Borrowers' reserve figures and have
conducted a general review of the remaining properties. The reviews contained in
each audit report shall separately cover Proved Developed Producing Reserves,
Proved Developed Non-Producing Reserves and Proved Undeveloped Reserves.
At any time and upon request by the Required Banks, the Borrowers
shall furnish to each of the Banks, within 30 days of such written request, a
report which shall evaluate each Petroleum Property as of the date of the most
recent Reserve Report or as of such other date as the Required Banks specify, in
form and substance reasonably satisfactory to the Required Banks (a "Special
Engineering Report"), together with any other information reasonably requested
by any Bank. The Special Engineering Report shall use production and cost
profiles from the most recent Reserve Report, unless otherwise requested by the
Required Banks, with such other information as supplied by the Required Banks.
No more than two (2) Special Engineering Reports may be requested by the
Required Banks during the term of the Financing Documents.
The reports contemplated by this Section shall be prepared on
the basis of price and other economic assumptions specified by the Required
Banks to the Borrowers in accordance with their customary oil and gas lending
practices not less than thirty (30) days prior to the date the related report is
due.
SECTION . Debt. HEC will not, and will not permit any of its
Subsidiaries to, incur, create, assume or suffer to exist any Debt, except:
the Indebtedness;
Debt existing on the Effective Date and listed on
Schedule B, but not any renewals, extensions or increases thereof;
Debt of any Obligor owed to any other Obligor;
Debt in an aggregate principal amount at any time
outstanding not to exceed $1,000,000 secured by a Lien permitted under
clause (d) or (e) of Section ;
Reimbursement Obligations constituting Debt;
the Subordinated Notes and the Subordinated Guaranty;
(NY) 27008/757/CA99/ca.99.conf.wpd
49
<PAGE>
and additional Debt in an aggregate principal amount at any time
outstanding not to exceed $100,000;
provided that, the aggregate outstanding principal or face amount of Debt of HEC
and its Subsidiaries (other than Debt permitted by clauses (iii) and (vi)) shall
at no time exceed the Debt Limit (as defined below) in effect at such time.
"Debt Limit" means an amount which shall be determined by the
Required Banks as set forth on subsection (c) in accordance with their customary
oil and gas lending practices, provided that in making such determination, the
Required Banks shall consider only the Petroleum Property which is included in
the Hydrocarbon Property Base.
The Debt Limit will be determined and adjusted periodically as
follows:
Prior to a determination pursuant to subparagraph (iii) below
on the basis of the initial Reserve Report delivered subsequent to the Effective
Date, and subject to adjustment in accordance with subparagraphs (ii) and (iv)
below, the Debt Limit shall be $84,500,000.
Upon any sale by the Borrowers or the Property Base
Subsidiaries of Petroleum Property under circumstances when subparagraph (iv) is
not applicable, or, if subparagraph (iv) is applicable, until the Debt Limit is
redetermined pursuant to subparagraph (iv), the Debt Limit shall be reduced,
effective on the date of consummation of such sale, by an amount equal to 50% of
the net proceeds to the Borrowers and the Property Base Subsidiaries of such
sale.
Within 60 days of delivery of each Reserve Report pursuant
to Section , and within 60 days after the Borrowers have notified the Agent that
the Borrowers or the Property Base Subsidiaries have sold Petroleum Property
having an aggregate fair market value of greater than $5,000,000 since the date
of the most recent Reserve Report, the Agent shall determine a proposed Debt
Limit on the basis of such Reserve Report or such information, and promptly
notify the Borrowers and the Banks of such proposed Debt Limit. Such proposed
Debt Limit shall become the Debt Limit within 30 days of such notice, and
binding on all parties, unless Banks having more than 30% of the aggregate
amount of the Commitments reject such proposed Debt Limit by notice to the
Agent. In the event of such a rejection, the Banks shall consult with one
another with a view to agreement on the Debt Limit to be determined, and the
Debt Limit shall be determined by Banks having at least 70% of the aggregate
amount of the Commitments. Any Debt Limit so determined by the Banks
(NY) 27008/757/CA99/ca.99.conf.wpd
50
<PAGE>
shall be promptly communicated in writing to the Borrowers, and upon such
notification shall be binding on all parties. In no event shall the Debt Limit
increase pursuant to this subparagraph (iii), unless all the Banks agree.
The Borrowers may request that the Banks redetermine the
Debt Limit, provided that no more than one such request may be made by the
Borrowers in any one-year period. In the event of such a request by the
Borrowers, the Banks will consult with one another to determine the Debt Limit
in accordance with their customary oil and gas lending practices. Any Debt Limit
so determined by the Banks shall be promptly communicated in writing to the
Borrowers, and upon such notification shall be binding on all parties.
The Borrowers shall notify each Bank at the earliest
practicable time in advance of any transactions which entail a reasonable
likelihood of an adjustment to the Debt Limit pursuant to subparagraph (ii),
(iii) or (iv) above, and shall furnish each Bank with such information with
respect thereto as any Bank may reasonably request.
SECTION . Liens. HEC will not, and will not permit any of its
Subsidiaries to,incur, assume or suffer to exist any Lien on any of its Property
(now owned or hereafter acquired), except:
Liens created by the Collateral Documents;
Excepted Liens;
Liens existing on Property and disclosed to the Banks
in Schedule B hereto, but not any renewals and extensions thereof;
subject to Section 4.17(a)(iv), a Lien existing on any
asset prior to the acquisition thereof, but not created in contemplation of such
acquisition; and
subject to Section 4.17(a)(iv), a Lien on any asset securing Debt
incurred or assumed for the purpose of financing of any part of the cost of
acquiring such asset, provided that such Lien attaches to such asset
concurrently with or within 90 days after the acquisition thereof.
SECTION . Investments, Loans and Advances. HEC will not make or permit
to remain outstanding, or permit any Subsidiary to make or permit to remain
outstanding, any loans or advances to, or acquire (other than pursuant to
Section 4.21) or hold any capital stock, partnership interest or other security
of or in, any Person, except that the foregoing restriction shall not apply to:
(NY) 27008/757/CA99/ca.99.conf.wpd
51
<PAGE>
investments, loans or advances the material details of which have
been set forth in the Financial Statements or are disclosed to the Banks in
Schedule B hereto;
investments in direct obligations of the United States of America or
any agency thereof;
investments in certificates of deposit of maturities less than one year,
issued by commercial banks in the United States of America having capital and
surplus (net of loan loss reserves) in excess of $250,000,000;
investments in Euro-Dollar obligations of maturities less than one
year, issued by (and supported by the full faith and credit, and representing
direct obligations of) commercial banks in the United States of America having
capital and surplus (net of loan loss reserves) in excess of $250,000,000;
investments in commercial paper of maturities of ninety days or less
if at the time of purchase such paper is rated in either of the two highest
rating categories of S&P, Moody's, or any other rating agency selected by the
Borrowers and satisfactory to the Required Banks, or investments in commercial
paper of any Bank or of a holding company controlling any Bank;
notes received from purchasers of Property sold in the ordinary
course of business and not considered to represent a material portion of the
Borrowers' or Subsidiaries' Property; provided that in no event shall the
principal amount of such notes at any time outstanding exceed $2,000,000 in the
aggregate;
investments (other than investments pursuant to subparagraph (a)
above or subparagraph (h) or (j) below) in common stock of publicly traded
companies or in partnership interests and which companies or partnerships are
primarily engaged in the oil and gas business; provided that the historical
costs of such investments at any one time held shall not exceed $2,000,000 in
the aggregate, unless the Required Banks otherwise agree in writing in advance;
investments (other than investments pursuant to subparagraph (a) or
(g) above or subparagraph (j) below) in common stock, interests in a limited
liability company, joint venture interests, co-ownership interests or
partnership interests which provide the Borrowers the right to receive the
income from, control the operations of and direct the disposition of the oil and
gas assets of such company or partnership; provided that the historical costs of
such investments at any one time held shall not exceed $2,000,000 in the
aggregate, unless the Required Banks otherwise agree in writing in advance;
direct ownership in oil and gas properties and related assets;
(NY) 27008/757/CA99/ca.99.conf.wpd
52
<PAGE>
investments by any Obligor in any other Person that was an Obligor
immediately prior to the making of such investment, and loans and advances by
any Obligor to any other Obligor;
investments (other than investments permitted by clause (j)) by any
Obligor in any Subsidiary; provided that immediately after giving effect to such
investment, (i) no Default exists and (ii) the aggregate amount of all
investments in Subsidiaries made in reliance on this clause (k) does not exceed
$500,000 in fair market value.
other investments, loans or advances approved of, in writing in
advance, by the Required Banks.
SECTION . Subsidiaries. [Intentionally Deleted].
SECTION . Distributions, Etc. HEC will not make, pay or declare any
dividend or distribution on any class of its stock or any distribution of
profits or purchase, redeem or otherwise acquire for value any shares of any
class of its stock now or hereafter outstanding ("Distributions") (a) if an
Event of Default has occurred and is continuing and the Required Banks have
notified HEC in writing not to make such Distributions; (b) if the aggregate
Debt of HEC and its Subsidiaries exceeds, or would immediately after such
Distribution exceed, 100% of the Debt Limit; or (c) on any date (a "Measuring
Date") in any fiscal quarter of HEP if at such Measuring Date, after giving
effect to any such proposed Distribution to be made on such Measuring Date, the
aggregate amount of Distributions made in the period of twelve consecutive
calendar months ended on such Measuring Date would exceed the Distribution
Percentage of an amount equal to, subject to the last sentence of this Section
4.21, the sum of cash provided by operations before working capital changes plus
distributions received from Affiliates, as reported in the consolidated
statements of cash flows of HEC for the period of four consecutive fiscal
quarters most recently ended on or prior to such Measuring Date and with respect
to which the Borrowers have delivered to the Banks the financial statements
required to delivered by them pursuant to Section 4.01; provided, however, that
the provisions of subparagraphs (b) and (c) of this Section 4.21 shall not
prevent the payment of any Distribution within 60 days of the declaration
thereof, if at said date of declaration such payment would have complied with
the provisions hereof. In addition, for purposes of this Section 4.21:
"Distribution Percentage" means, at any date, (i) 65%, if on such date
Monthly Exposure is less than 50% of the Debt Limit on such date and (ii)
otherwise, 50%.
(NY) 27008/757/CA99/ca.99.conf.wpd
53
<PAGE>
"Monthly Exposure" means, on any date, the daily average outstanding
principal amount of Debt of HEC and its Subsidiaries (including without
limitation the loans under the Credit Agreement) during the 30-day period ending
on the date immediately preceding such date.
The amount described in clause (c) above for any period of four
consecutive fiscal quarters ended after the Effective Date and prior to June 30,
2000 shall be equal to the sum of cash provided by operations before working
capital changes plus distributions received from Affiliates, as reported in the
consolidated statements of cash flows of HEC for the period from and including
the date of consummation of the Reorganization to and including the last day of
such period, annualized on a simple arithmetic basis.
SECTION . Mergers, Etc. HEC will not, and will not permit any of its
Subsidiaries to, merge or consolidate with, or sell, assign, lease or otherwise
dispose of (whether in one transaction or in a series of transactions) all or
substantially all of its Property (whether now owned or hereafter acquired),
other than inventory in the ordinary course of business, to, any Person;
provided that (i) any Borrower may merge with another Person if (1) such Person
was an Obligor immediately prior to giving effect to such merger and (2)
immediately after giving effect to such merger, no Default shall have occurred
and be continuing and (ii) any Subsidiary of HEC (other than a Borrower) may
merge with another Person if after giving effect to such merger, (1) no Default
exists and (2) the surviving entity is or becomes an Obligor and satisfies the
requirements set forth in clauses (i) and (ii) of Section 4.38 hereof on or
prior to the consummation of such merger.
SECTION . Nature of Business. HEC will, and will cause each of its
Subsidiaries to, continue to engage in business of the same general character as
now conducted, as disclosed to the Banks in Schedule B hereto.
SECTION . ERISA Compliance. HEC will not, and will not permit any
of its Subsidiaries to:
Engage in, or permit any other member of the Controlled Group to
engage in, any transaction in connection with which any member of the Controlled
Group could be subjected to either a civil penalty assessed pursuant to
subsections (c), (i) or (l) of section 502 of ERISA or a tax imposed by section
4975 of the Code;
Terminate, or permit any other member of the Controlled Group to
terminate, any Plan in a manner, or take any other action with respect to any
Plan, which could result in any liability of a Borrower or any other member of
the Controlled Group to the PBGC;
(NY) 27008/757/CA99/ca.99.conf.wpd
54
<PAGE>
Fail to make, or permit any other member of the Controlled Group to
fail to make, full payment when due of all amounts which, under the provisions
of any Plan, agreement relating thereto or applicable law, any member of the
Controlled Group is required to pay as contributions thereto;
Permit to exist, or allow any other member of the Controlled Group
to permit to exist, any accumulated funding deficiency within the meaning of
section 302 of ERISA or section 412 of the Code, whether or not waived, with
respect to any Plan;
Fail to pay or cause to be paid, or permit any other member of the
Controlled Group to fail to pay or cause to be paid, to the PBGC in a timely
manner, without incurring any late payment or underpayment charge or penalty,
all premiums required pursuant to sections 4006 and 4007 of ERISA;
Acquire, or permit any other member of the Controlled Group to
acquire, an interest in any Person that causes such Person to become a member of
the Controlled Group if such Person sponsors, maintains or contributes to, or at
any time in the six-year period preceding such acquisition has sponsored,
maintained or contributed to, (1) any Multiemployer Plan, or (2) any Plan that
is subject to Title IV of ERISA under which the actuarial present value of the
benefit liabilities under such Plan exceeds the current value of the assets
(computed on a plan termination basis in accordance with Title IV of ERISA) of
such Plan allocable to such benefit liabilities;
Contribute to or assume an obligation to contribute to, or permit any
other member of the Controlled Group to contribute to or assume an obligation to
contribute to, any employee welfare benefit plan, as defined in Section 3(1) of
ERISA including, without limitation, any such plan maintained to provide
benefits to former employees of such entities, that may not be terminated by
such entities in their sole discretion at any time without any material
liability; or
Permit, or allow any other member of the Controlled Group to permit
the aggregate potential withdrawal liability with respect to all Multiemployer
Plans to exceed $1,000,000 in the event that all the members of the Controlled
Group, as the case may be, were to completely withdraw from such Multiemployer
Plans.
SECTION . Sale or Discount of Receivables. HEC will not, and will
permit any of its Subsidiaries to, discount or sell with recourse, or sell for
less than the greater of the face or market value thereof, any of its notes
receivable or accounts receivable, except, in any particular case, for a
discount or sale which HEC or such Subsidiary determines in good faith will
maximize the amount realized by HEC or such Subsidiary on such note receivable
or account receivable.
(NY) 27008/757/CA99/ca.99.conf.wpd
55
<PAGE>
SECTION . Transactions with Affiliates. HEC will not, and will not
permit any of its Subsidiaries to, directly or indirectly, pay any funds to or
for the account of, make any investment (whether by acquisition of stock or
indebtedness, by loan, advance, transfer of property, guarantee or other
agreement to pay, purchase or service, directly or indirectly, any Debt, or
otherwise) in, lease, sell, transfer or otherwise dispose of any assets,
tangible or intangible, to, or participate in, or effect any transaction in
connection with any joint enterprise or other joint arrangement with, any
Affiliate; provided, however, that the foregoing provisions of this Section
shall not prohibit (a) HEC or any such Subsidiary from participating in, or
effecting any transaction in connection with, any joint enterprise or other
joint arrangement with any Affiliate if HEC or such Subsidiary participates or
effects any such transaction in the ordinary course of its business and on a
basis no less advantageous than the basis on which HEC or such Subsidiary would
participate in a similar transaction with a Person not an Affiliate and (b) HEC
from making, paying or declaring any Distribution otherwise permitted under this
Agreement.
SECTION . Sale of Assets. HEC will not, and will not permit any of its
Subsidiaries to, sell, transfer or otherwise dispose of any of its Property;
provided, that (a) HEC and any Subsidiary may sell oil, gas and other
hydrocarbons after severance in the ordinary course of business; and (b) HEC and
any Subsidiary may sell Property not constituting, individually or in the
aggregate, all or substantially all of its Property for consideration not less
than the fair market value of such Property so long as the aggregate net
proceeds of all such sales by HEC and its Subsidiaries do not exceed $5,000,000
during any period of six consecutive calendar months. The provisions of this
Section apply to all sales of Petroleum Property and are not affected by any
reduction in the Debt Limit pursuant to Section . HEC shall promptly notify the
Agent of any sale of Property pursuant to clause (b) above.
SECTION . Annual Coverage Ratio. The annual projected CFADS from
Petroleum Property, determined on the basis of each Reserve Report delivered
pursuant to Section , will not be less than 120% of scheduled interest and
principal payments on all Debt of HEC and its Subsidiaries during each of (i)
the calendar year during which the related Reserve Report is delivered and (ii)
the two succeeding calendar years. HEC shall provide a certificate, signed by an
Authorized Person of HEC, 45 days after each Reserve Report is delivered,
certifying the coverage ratio and the method used to calculate such ratio. If
HEC or any of its Subsidiaries discover that they will fail to meet the annual
coverage ratio as described above, HEC shall, or shall cause its Subsidiaries
to, within 45 days of learning of such fact, reduce their Debt maturities in the
affected years or add Petroleum Property acceptable to the Banks so that the
above ratio will be met.
(NY) 27008/757/CA99/ca.99.conf.wpd
56
<PAGE>
SECTION . Additional Information. HEC will furnish to each of the
Banks, with reasonable promptness, such other information and data with respect
to HEC and its Subsidiaries as from time to time may be reasonably requested by
any Bank.
SECTION . Information Meetings. [Intentionally deleted]
SECTION . Compliance with Laws, etc. HEC will, and will cause each
of its Subsidiaries to, exercise all due diligence in order to assure that it
complies with the requirements of all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which would result in a
Material Adverse Effect.
SECTION . Covenant to Secure Indebtedness Equally. If HEC or any
Subsidiary shall create or assume any Lien upon any of its Property, whether now
owned or hereafter acquired, other than Liens permitted by the provisions of
Section , HEC shall make, or shall cause such Subsidiary to make, effective
provision whereby the Indebtedness will be concurrently secured by such Lien
equally and ratably with any and all other Debt thereby secured as long as any
such other Debt shall be so secured; provided that compliance with this Section
shall not prevent an Event of Default from occurring as a result of
noncompliance by HEC with Section hereof. The remedy provided in this Section
shall not be exclusive and shall have no effect on the availability or exercise
of any other remedy that may be available to any Bank under the Financing
Documents.
SECTION . Inconsistent Provisions. In the event of any inconsistency
between the representations, warranties, covenants and undertakings of the
Borrowers in the Collateral Documents, on the one hand, and those in this
Agreement on the other hand, the relevant provisions of this Agreement shall
control.
SECTION . Interest Coverage Ratio. At the end of each fiscal quarter of
HEC, the Historical CFADS from Petroleum Properties for the period of four
consecutive quarters then ending (subject to the last sentence of this Section
4.34), determined on the basis of the financial statements and reports furnished
pursuant to Section , will not be less than 200% of the interest expense of HEC
and its consolidated Subsidiaries for such period. HEC shall provide a
certificate, signed by an Authorized Person of HEC, within 60 days after the end
of each such quarter, certifying the ratio of Historical CFADS from Petroleum
Properties to HEC's and its consolidated Subsidiaries' interest expense for such
period as set forth above and the method used to calculate such ratio. For
purposes of this Section 4.34, "Historical CFADS" means, for any period, gross
cash operating revenues properly allocable to Petroleum Property for such period
less the following cash items: royalties, operating costs, severance, windfall
profits and
(NY) 27008/757/CA99/ca.99.conf.wpd
57
<PAGE>
other wellhead taxes, general and administrative expenses and current income and
other taxes properly allocable to such period and cash capital expenditures made
during such period and properly allocable to a Petroleum Property owned as of
the date of the most recent Reserve Report. "Historical CFADS" for any period of
four consecutive quarters ending prior to June 30, 2000 shall be equal to
"Historical CFADS" for the period from and including the date of consummation of
the Reorganization to and including the last day of such period, annualized on a
simple arithmetic basis.
SECTION . Hedging Transactions. HEC will not, and will not permit any
of its Subsidiaries to, at any time become a party to a Hedging Transaction for
any purpose except for bona fide hedging purposes. Without limiting the
generality of the foregoing, at any time during any calendar year, no Borrower
will enter into any Hedging Transaction with respect to natural gas or crude oil
if, immediately after giving effect to such Transaction, the aggregate reference
quantity of hydrocarbons with respect to all Hedging Transactions with respect
to natural gas or crude oil which such Borrower shall have entered into during
such year exceeds 65% of the aggregate natural gas and crude oil production of
such Borrower for such year (calculated on the basis of actual natural gas and
crude oil production for such year to date and a good faith estimate of the
aggregate amount of such production for the remainder of such year).
SECTION . Incorporation By Reference of Certain Covenants. The
provisions of Paragraph 6A of the Subordinated Notes Agreement and related
definitions are hereby incorporated by reference with the same effect as if such
provisions were fully set forth herein; provided that, for purposes of this
Agreement (i) the ratio set forth in Paragraph 6A(1) of the Subordinated Notes
Agreement shall be 3.75, (ii) the Dollar amount set forth in clause (i) of
Paragraph 6A(2) of the Subordinated Notes Agreement shall be $55,000,000 and
(iii) any amendments or waivers of any such provisions or related definitions
shall be effective hereunder solely if consented to in writing by the Required
Banks.
SECTION . Restrictions with Respect to Subordinated Debt. (a) HEC will
not, and shall not permit any of its Subsidiaries (including without limitation
HCRC) to, make any payments with respect to the Subordinated Notes (including
without limitation any payments under the Subordinated Guaranty), other than (i)
scheduled payments of interest, (ii) scheduled repayments of principal, each in
the amount of $5,000,000 on or about December 23 in each of the years 2003
through 2006, inclusive, and (iii) scheduled payments of principal in the amount
of $5,000,000 on or about December 23, 2007, in each case subject to the
subordination provisions set forth in the Subordinated Note Agreement.
(b) HEC will not, and will not permit any of its Subsidiaries to, enter
into any amendment or waiver of any term of the Subordinated Notes Agreement,
the
(NY) 27008/757/CA99/ca.99.conf.wpd
58
<PAGE>
Subordinated Guaranty or any Subordinated Notes without the prior written
consent of the Required Banks.
SECTION . Additional Guarantors. HEC shall cause (x) any Person
(including without limitation any Subsidiary) which becomes a Material
Subsidiary after the date hereof and (y) any Person other than a Material
Subsidiary that has entered into, or is proposing to enter into, a guarantee of
the Subordinated Notes (including without limitation the Subordinated Guaranty)
to (i) become bound by the Guaranty Agreement and (ii) deliver such
certificates, evidences of corporate or other organizational actions, opinions
of counsel and other documents relating thereto as the Agent may reasonably
request, all in form and substance reasonably satisfactory to the Agent, on or
prior to the tenth day after the date on which the relevant event described in
clause (x) or (y) occurs (or, if earlier, the date on which the relevant Person
enters into a guarantee of the Subordinated Notes (including without limitation
the Subordinated Guaranty)).
ARTICLE
DEFAULTS
SECTION . Events of Defaults. Events of Default. If one or more of
the following events ("Event of Default") not specifically waived in writing by
the Required Banks shall have occurred:
the Borrowers shall fail to pay when due any principal of or
premium on any Loan or shall fail to pay within five (5) days of the due date
thereof any interest, fees or other amount payable under the Financing
Documents;
any Borrower shall fail to observe or perform any covenant
contained in Sections , 4.17(a), to , inclusive, or , 4.36 or 4.38;
any Obligor shall fail to observe or perform any of its covenants or
agreements contained in any of the Financing Documents (other than those covered
by clause (a) or (b) above) for 30 days after it shall have become aware of such
failure;
any representation, warranty, certification or statement made by any
Obligor in any of the Financing Documents or in any certificate, financial
statement or other document delivered pursuant to any of the Financing Documents
shall prove to have been incorrect in any material respect when made (or deemed
made);
HEC or any of its Subsidiaries shall fail to make any payment or
payments in an aggregate amount exceeding $100,000 in respect of any Debt
(NY) 27008/757/CA99/ca.99.conf.wpd
59
<PAGE>
(other than Loans) or Derivative Obligations when due or within any applicable
grace period;
any event or condition shall occur which results in the acceleration of
the maturity of any Debt in an aggregate principal amount exceeding $100,000
(other than Loans) of HEC or any of its Subsidiaries or enables (or, with the
giving of notice or lapse of time or both, would enable) the holder of such Debt
or any Person acting on such holder's behalf to accelerate the maturity thereof;
HEC or any of its Subsidiaries shall commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts 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 of it or any
substantial part of its property, 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 to pay its debts as they
become due, or shall take any corporate action to authorize any of the
foregoing;
an involuntary case or other proceeding shall be commenced against
HEC or any of its Subsidiaries seeking liquidation, reorganization or other
relief with respect to it or its debts 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 of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against HEC or any of its Subsidiaries under the federal
bankruptcy laws as now or hereafter in effect;
the PBGC shall institute proceedings under Title IV of ERISA to
terminate, to impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or to cause a trustee to be appointed to administer any
Material Plan; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any Material Plan must be
terminated;
a judgment or order for the payment of money in excess of $400,000
shall be rendered against HEC or any of its Subsidiaries and such judgment or
order shall continue unsatisfied and unstayed for a period of 30 days;
any of the Collateral Documents after delivery thereof shall for any
reason cease to be in full force and effect and valid, binding and enforceable
(except as enforceability may be subject to any applicable bankruptcy,
insolvency or similar laws or equitable principles generally affecting the
enforcement of
(NY) 27008/757/CA99/ca.99.conf.wpd
60
<PAGE>
creditors' rights) in accordance with its terms, or cease to create a valid and
perfected first-priority Lien on any of the Collateral purported to be covered
thereby, or any Borrower (or any other Person who may have granted or purported
to grant such Lien) shall so state in writing;
at any time (i) any person or group of persons (within the meaning of
Section 13 or 14 of the Securities Exchange Act of 1934, as amended) other than
The Hallwood Group Incorporated, or any of its successors ("Hallwood Group"),
shall have acquired beneficial ownership (within the meaning of Rule 13d-3
promulgated by the Securities and Exchange Commission under said Act) of 20% or
more of the outstanding shares of common stock of HEC or (ii) Hallwood Group
shall have acquired beneficial ownership (within the meaning of said Rule 13d-3)
of 30% or more of the outstanding shares of common stock of HEC; or at any time
a majority of the board of directors of HEC is composed of individuals who were
not elected or appointed as directors by members of such board;
any Borrower (other than HEC) shall cease to be a wholly-owned
Subsidiary of HEC; or
the Guaranty Agreement shall for any reason cease to be in full force
and effect and valid, binding and enforceable (except as enforceability may be
subject to any applicable bankruptcy, insolvency or similar laws or equitable
principles generally affecting the enforcement of creditors' rights) in
accordance with its terms, or any Obligor shall so state in writing;
then, and in every such event, the Agent shall (i) if requested by the Required
Banks, by notice to the Borrowers terminate the Commitments and they shall
thereupon terminate, and (ii) if requested by the Required Banks, by notice to
the Borrowers declare the Notes (together with accrued interest thereon) to be,
and the Notes shall thereupon become, immediately due and payable without
presentment, demand, protest, notice of intent to accelerate or other notice of
any kind, all of which are hereby waived by the Borrowers; provided that in the
case of any of the Events of Default specified in clause (g) or (h) above with
respect to any Borrower, without any notice to any Borrower or any other act by
the Agent or the Banks, the Commitments shall thereupon terminate and the Notes
(together with accrued interest thereon) shall become immediately due and
payable without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or other notice of any kind, all of which are hereby
waived by the Borrowers.
SECTION . Notice of Default. The Agent shall give notice to the
Borrowers of a Default under Section 5.01(c) promptly upon being requested to do
so by any Bank and shall thereupon notify all the Banks thereof.
(NY) 27008/757/CA99/ca.99.conf.wpd
61
<PAGE>
ARTICLE
CONDITIONS
SECTION . Effectiveness. This Amended Agreement shall become effective
on the date that each of the following conditions shall have been satisfied (or
waived in accordance with Section ):
Amended Agreement -- the Agent shall have received counterparts
of this Amended Agreement signed by each of the parties hereto (or, in the case
of any party as to which an executed counterpart shall not have been received,
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party);
Guaranty Agreement -- the Agent shall have received counterparts
of the Guaranty Agreement signed by each of the parties thereto (or, in the case
of any party as to which an executed counterpart shall not have been received,
telegraphic, telex or other written confirmation from such party of execution of
a counterpart hereof by such party);
Note -- the Agent shall have received for the account of each Bank
an executed Note,duly and validly issued, dated on or before the Effective Date;
Certificates -- the Agent shall have received a signed copy of a
certificate of the Secretary or an Assistant Secretary or other appropriate
officer of each Obligor and of the general partner of each Obligor than is a
partnership (including without limitation the HEP General Partner) (each, a
"Transaction Party"), certifying (i) the names and true signatures of the
Authorized Persons authorized to sign any Financing Document which such
Transaction Party is a party and the other documents or certificates to be
delivered by such Transaction Party pursuant thereto, (ii) the resolutions of
the Board of Directors of such Transaction Party, authorizing the transactions
contemplated hereby, together with all documents evidencing other necessary
corporate or partnership action with respect to any thereof, and (iii) a true
copy of the certificate of incorporation and by-laws or partnership agreement of
such Transaction Party, as the case may be;
Opinion of Borrowers' Counsel -- the Agent shall have received (i)
from Cathleen Osborn, General Counsel of HEC and King & Spalding, special New
York counsel for the Obligors, an opinion substantially to the effect of Exhibit
B hereto, respectively, and each covering such additional matters as the
Required Banks may reasonably request and (ii) from counsel to the Borrowers in
each jurisdiction in which any Collateral pledged under any of the Collateral
Documents set forth in Schedule C is located, an opinion in form and substance
reasonably satisfactory to the Collateral Agent;
(NY) 27008/757/CA99/ca.99.conf.wpd
62
<PAGE>
Opinion of Agent's Counsel -- the Agent shall have received from
Davis Polk & Wardwell, special counsel for the Agent, an opinion in
substantially the form of Exhibit C hereto;
Participation Fees -- receipt by the Agent for the account of the
Banks of the full amount of the participation fee described in Section 2.23;
Subordinated Note Agreement -- the Agent shall have received
executed counterparts of the Subordinated Note Agreement and the Subordinated
Guaranty, each as in effect on the Effective Date, and all other documents
delivered pursuant thereto or in connection therewith, all in form and substance
satisfactory to the Banks;
Reorganization -- the Banks shall have received evidence
satisfactory to them in their good faith discretion that the Reorganization
shall have been consummated substantially on the terms described in the Proxy
Statement; and
Other -- the Agent shall have received such other documents as it
may reasonably have requested;
provided that this Amended Agreement shall not become effective or be binding on
any party hereto nor shall any representation or warranty contained in Article
hereof be deemed to be made unless and until all of the foregoing conditions are
satisfied not later than June 8, 1999. The Agent shall promptly notify the
Borrowers and the Banks of the Effective Date, and such notice shall be
conclusive and binding on all parties hereto.
On the Effective Date each Original Agreement will each be
automatically amended and restated in its entirety to read as set forth herein.
On and after the Effective Date the rights and obligations of the parties hereto
shall be governed by this Amended Agreement; provided that rights and
obligations of the parties hereto (and of any HEP Borrower or any HCRC Borrower
that is not a party to this Amended Agreement) with respect to the period prior
to the Effective Date shall continue to be governed by the provisions of the
relevant Original Agreement.
SECTION . Transitional Provisions. On the Effective Date but subject to
satisfaction of the conditions set forth in Section hereof, (i) the Euro- Dollar
Loans and Domestic Loans, as such terms are defined under each Original
Agreement, of the HEP Borrowers or the HCRC Borrowers, as applicable,
outstanding to each Bank thereunder shall be deemed to be Euro-Dollar Loans or
Domestic Loans, as the case may be, made by such Bank to the Borrowers under
this Amended Agreement, it being the intention of the parties hereto that (i)
all
(NY) 27008/757/CA99/ca.99.conf.wpd
63
<PAGE>
indebtedness evidenced by the Original Notes shall, on and after the Effective
Date, be solely evidenced by the Notes, (ii) the loans outstanding under each
Original Agreement on the Effective Date shall continue to be outstanding on
such date as Domestic Loans or Euro-Dollar Loans under this Amended Agreement,
as appropriate, having Interest Periods identical to the corresponding interest
periods under the relevant Original Agreement and bearing interest (x) in the
case of Domestic Loans that are Base Rate Loans, for each day from and including
the Effective Date, at the interest rate applicable to Base Rate Loans pursuant
to Section 2.04 of this Amended Agreement, (y) in the case of Domestic Loans
that are CD Loans, at the "Adjusted CD Rate" applicable to such Loans under the
Original Credit Agreement pursuant to which such Loans were originally made
plus, for each day from and including the Effective Date to but excluding the
last day of the Interest Period applicable to such Loans, the CD Margin under
this Amended Agreement and (z) in the case of Euro-Dollar Loans, at the
"Adjusted Euro-Dollar Rate" applicable to such Loans under the Original Credit
Agreement pursuant to which such Loans were originally made plus, for each day
from and including the Effective Date to but excluding the last day of the
Interest Period applicable to such Loans, the Euro-Dollar Margin under this
Amended Agreement and (iii) the Liens created by the Collateral Documents on the
properties and assets described therein shall be carried forward and continue in
full force and effect for the purpose of securing the Notes. Upon receipt of its
Note, each Bank will mark its Original Notes "Replaced" and in due course return
its Original Notes to HEC.
SECTION . All Loans. The obligation of each Bank to make its Loan
on the occasion of each Borrowing pursuant to this Agreement is subject to the
following conditions precedent:
Advance Notice -- the Agent shall have received Advance Notice in
accordance with Section which shall be true and correct and shall be duly
and properly executed and completed by the Borrowers;
No Default -- immediately before and after such Loan, no Default
shall have occurred and be continuing;
Representations and Warranties -- the representations and
warranties of the Obligors contained in the Financing Documents shall be true
and correct in all material respects on and as of the date of such Loan (other
than, solely with respect to any Borrowing to be made after the Effective Date,
the representations and warranties contained in Sections and );
No Material Adverse Change -- there shall have occurred no event
or condition having, in the sole opinion of the Required Banks, a Material
Adverse Effect; and
(NY) 27008/757/CA99/ca.99.conf.wpd
64
<PAGE>
the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Loans will not exceed the AvailabilityLimit.
Each Borrowing hereunder shall be deemed to be a representation and
warranty by the Borrowers on the date of such Borrowing as to the facts
specified in subsections (b) and (c) of this Section.
ARTICLE
THE AGENT AND THE COLLATERAL AGENT
SECTION . Appointment and Authorization. Each Bank irrevocably appoints
and authorizes each of the Agent and the Collateral Agent to take such action as
agent on its behalf and to exercise such powers under the Financing Documents as
are delegated to the Agent or the Collateral Agent, respectively, by the terms
thereof, together with all such powers as are reasonably incidental thereto. The
Collateral Agent is authorized to hold, on behalf of the Banks, all Liens
created by any of the Collateral Documents and to exercise, if directed by the
Required Banks, any and all rights and remedies available under the Collateral
Documents.
SECTION . Agent and Collateral Agent and Affiliates. Each of Morgan
Guaranty Trust Company of New York and First Union National Bank shall have the
same rights and powers under the Financing Documents as any other Bank and may
exercise or refrain from exercising the same as though it were not the Agent or
the Collateral Agent, as the case may be. Each of Morgan Guaranty Trust Company
of New York and First Union National Bank and their respective affiliates may
accept deposits from, lend money to, and generally engage in any kind of
business with any Obligor or any affiliate of any Obligor as if it were not the
Agent or the Collateral Agent, as the case may be, under the Financing
Documents.
SECTION . Action by Agent or Collateral Agent. The obligations of the
Agent and the Collateral Agent under the Financing Documents are only those
expressly set forth therein. Without limiting the generality of the foregoing,
the Agent and the Collateral Agent shall not be required to take any action with
respect to any Default, except as expressly provided therein or as directed by
the Required Banks.
SECTION . Consultation with Experts. Each of the Agent and the
Collateral Agent may consult with legal counsel (who may be counsel for any
Obligor), independent public accountants and other experts selected by the Agent
or the Collateral Agent, respectively, and neither the Agent nor the Collateral
(NY) 27008/757/CA99/ca.99.conf.wpd
65
<PAGE>
Agent shall be liable for any action taken or omitted to be taken by it in good
faith in accordance with the advice of such counsel, accountants or experts.
SECTION . Liability of Agent and Collateral Agent. Neither the Agent
nor the Collateral Agent nor any of their affiliates nor any of the directors,
officers, agents or employees of any of the foregoing shall be liable for any
action taken or not taken by the Agent or the Collateral Agent, as the case may
be, in connection with the Financing Documents (i) with the consent or at the
request of the Required Banks or (ii) in the absence of the Agent or the
Collateral Agent's own gross negligence or willful misconduct. Neither the Agent
nor the Collateral Agent nor any of their affiliates nor any of the directors,
officers, agents or employees of any of the foregoing shall be responsible for
or have any duty to ascertain, inquire into or verify (i) any statement,
warranty or representation made in connection with the Financing Documents or
any borrowing under this Agreement; (ii) the performance or observance of any of
the covenants or agreements of any Obligor; (iii) the satisfaction of any
condition specified in Article of this Agreement, except receipt of items
required to be delivered to the Agent; (iv) the validity, effectiveness or
genuineness of any of the Financing Documents or any other instrument or writing
furnished in connection therewith; or (v) the existence, title, value or
marketability of any of the Collateral. Neither the Agent nor the Collateral
Agent shall incur any liability by acting in reliance upon any notice, consent,
certificate, statement, or other writing (which may be a bank wire, telex,
facsimile or similar writing) believed by it to be genuine or to be signed by
the proper party or parties.
SECTION . Indemnification. Each Bank shall, ratably in accordance with
its Commitment (or, if the Commitments shall have terminated, ratably in
accordance with its Commitment as in effect immediately prior to such
termination), indemnify the Agent and the Collateral Agent, their affiliates and
the directors, officers, employees and agents of any of the foregoing (to the
extent not reimbursed by the Obligors) against any cost, expense (including
counsel fees and disbursements), claim, demand, action, loss or liability
(except such as result from such indemnitees' gross negligence or willful
misconduct) that the indemnitees may suffer or incur in connection with any of
the Financing Documents or any action taken or omitted by such indemnitees
thereunder, including such indemnitees' ordinary negligence.
SECTION . Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent, the Collateral Agent or any
other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into the
Financing Documents. Each Bank also acknowledges that it will, independently and
without reliance upon the Agent, the Collateral Agent or any other Bank, and
based on such documents and information as it shall deem appropriate at the
time, continue
(NY) 27008/757/CA99/ca.99.conf.wpd
66
<PAGE>
to make its own credit decisions in taking or not taking any action under the
Financing Documents. Each Bank further acknowledges that it has not relied on
the Collateral Agent to review the title of any Petroleum Property and that the
Collateral Agent does not have any duty to perform such a review.
SECTION . Successor Agent or Collateral Agent. The Agent or the
Collateral Agent may resign at any time by giving written notice thereof to the
Banks and the Borrowers. Upon any such resignation, the Required Banks shall
have the right to appoint a successor Agent or Collateral Agent, as the case may
be, with the consent of the Borrowers, which consent shall not be unreasonably
withheld. If no successor Agent or Collateral Agent shall have been so
appointed, and shall have accepted such appointment, within 30 days after the
retiring Agent or Collateral Agent gives notice of resignation, then the
retiring Agent or Collateral Agent may, on behalf of the Banks, appoint a
successor Agent or Collateral Agent, which shall be a commercial bank organized
or licensed under the laws of the United States of America or of any State
thereof and having a combined capital and surplus of at least $250,000,000. Upon
the acceptance of its appointment as Agent or Collateral Agent under the
Financing Documents by a successor Agent or Collateral Agent, such successor
Agent or Collateral Agent shall thereupon succeed to and become vested with all
the rights and duties of the retiring Agent or Collateral Agent, and the
retiring Agent or Collateral Agent shall be discharged from its duties and
obligations under the Financing Documents. After any retiring Agent or
Collateral Agent's resignation under the Financing Documents as Agent or
Collateral Agent, as the case may be, the provisions of this Article shall inure
to its benefit as to any actions taken or omitted to be taken by it while it was
Agent or Collateral Agent.
ARTICLE
MISCELLANEOUS
SECTION . Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including bank wire, telex, facsimile
transmission or similar writing) and shall be given to such party: (x) in the
case of the Borrowers or the Agent, at the address or telex or facsimile number
set forth on the signature pages hereof, (y) in the case of any Bank, at its
address or telex or facsimile number set forth in its Administrative
Questionnaire or (z) in the case of any party, such other address or telex or
facsimile number as such party may hereafter specify for the purpose by notice
to the Agent and the Borrowers. Each such notice, request or other communication
shall be effective (i) if given by telex, when such telex is transmitted to the
telex number specified in this Section and the appropriate answerback is
received, (ii) if given by mail, 72 hours after such communication is deposited
in the mails with first class postage prepaid,
(NY) 27008/757/CA99/ca.99.conf.wpd
67
<PAGE>
addressed as aforesaid or (iii) if given by any other means, when delivered at
the address specified in this Section; provided that notices to the Agent under
Article
shall not be effective until received.
SECTION . No Waivers. No failure or delay by the Agent or any Bank in
exercising any right, power or privilege under any Financing Document shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies therein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION . Expenses; Documentary Taxes. The Borrowers shall pay (i) all
out-of-pocket expenses of the Agent and the Collateral Agent, including fees and
disbursements of special counsel for the Agent and special counsel for the
Collateral Agent, in connection with the preparation and administration of the
Financing Documents, any waiver or consent thereunder or any amendment thereof
or any Default or alleged Default thereunder and (ii) if an Event of Default
occurs, all out-of-pocket expenses incurred by the Agent, the Collateral Agent
or any Bank, including fees and disbursements of counsel, in connection with
such Event of Default and collection, bankruptcy, insolvency and other
enforcement proceedings resulting therefrom. The Borrowers shall indemnify each
Bank against any transfer taxes, documentary taxes, assessments or charges made
by any governmental authority by reason of the execution and delivery of any
Financing Document.
SECTION . Sharing of Set-offs. Each Bank agrees that if it shall, by
exercising any right of set-off or counterclaim or otherwise, receive payment of
a proportion of the aggregate amount of principal and interest due with respect
to any Note held by it which is greater than the proportion received by any
other Bank in respect of the aggregate amount of principal and interest due with
respect to any Note held by such other Bank, the Bank receiving such
proportionately greater payment shall purchase such participations in the Notes
held by the other Banks, and such other adjustments shall be made, as may be
required so that all such payments of principal and interest with respect to the
Notes held by the Banks shall be shared by the Banks pro rata; provided that
nothing in this Section shall impair the right of any Bank to exercise any right
of set-off or counterclaim it may have and to apply the amount subject to such
exercise to the payment of obligations of the Borrowers other than obligations
under the Notes. The Borrowers agree, to the fullest extent they may effectively
do so under applicable law, that any holder of a participation in a Note,
whether or not acquired pursuant to the foregoing arrangements, may exercise
rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrowers in the amount of such participation.
(NY) 27008/757/CA99/ca.99.conf.wpd
68
<PAGE>
SECTION . Amendments and Waivers. Any provision of this Agreement or
the Notes may be amended or waived if, but only if, such amendment or waiver is
in writing and is signed by the Borrowers and the Required Banks (and, if the
rights or duties of the Agent are affected thereby, by the Agent); provided that
no such amendment or waiver shall, unless signed by all the Banks, (i) increase
or decrease the Commitment of any Bank or subject any Bank to any additional
obligation, (ii) increase the Debt Limit, (iii) reduce the principal of or rate
of interest on any Loan or any fees hereunder, (iv) postpone the date fixed for
any payment of principal of or interest on any Loan or any fees hereunder, (v)
change the percentage of the Commitments or of the aggregate unpaid principal
amount of the Notes, or the number of Banks, which shall be required for the
Banks or any of them to take any action under this Section or any other
provision of this Agreement or (vi) increase the amount set forth in the
definition of Availability Limit or change the provisions of Section 6.03(e).
Any provision of the Guaranty Agreement may be amended or waived if, but only
if, such amendment or waiver is in writing and is signed by each Obligor party
thereto and the Agent with the consent of the Required Banks; provided that no
such amendment or waiver shall, unless signed by each Obligor party thereto and
the Agent with the consent of all the Banks, release all or substantially all of
the Obligors from their obligations under the Guaranty Agreement or permit
termination of the Guaranty Agreement, except in each case as expressly
permitted by the terms thereof.
SECTION . Successors and Assigns.
The provisions of this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns,
except that no Borrower may assign or otherwise transfer any of its rights under
this Agreement without the prior written consent of all Banks.
Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment or
any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrowers and the Agent, such Bank shall remain responsible for the performance
of its obligations hereunder, and the Borrowers and the Agent shall continue to
deal solely and directly with such Bank in connection with such Bank's rights
and obligations under this Agreement. Any agreement pursuant to which any Bank
may grant such a participating interest shall provide that such Bank shall
retain the sole right and responsibility to enforce the obligations of the
Borrowers hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement; provided
that such participation agreement may provide that such Bank will not agree to
any modification, amendment or waiver of this Agreement described in clause (i),
(ii), (iii), (iv) or
(NY) 27008/757/CA99/ca.99.conf.wpd
69
<PAGE>
(vi) of Section without the consent of the Participant. An assignment or other
transfer which is not permitted by subsection (c) or (d) below shall be given
effect for purposes of this Agreement only to the extent of a participating
interest granted in accordance with this subsection (b).
Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit D hereto executed by
such Assignee and such transferor Bank, with (and subject to) the subscribed
consent of the Borrowers (which consent shall not be unreasonably withheld) and
the Agent; provided that if an Assignee is an affiliate of such transferor Bank
or if, at the time of such assignment, an Event of Default has occurred and is
continuing, no such consent shall be required; and provided further that if such
assignment is of a proportionate part of a Bank's rights and obligations, after
giving effect to such assignment the amount of the Commitment of the transferor
Bank (or, if the Commitments have terminated, the aggregate principal amount of
the Loans held by the transferor Bank) and the amount of the Commitment of the
Assignee (or, if the Commitments have terminated, the aggregate principal amount
of the Loans held by the Assignee) in each case shall be not less than
$5,000,000. Upon execution and delivery of such instrument and payment by such
Assignee to such transferor Bank of an amount equal to the purchase price agreed
between such transferor Bank and such Assignee, such Assignee shall be a Bank
party to this Agreement and shall have all the rights and obligations of a Bank
as set forth in such instrument of assumption, and the transferor Bank shall be
released from its obligations hereunder to a corresponding extent, and no
further consent or action by any party shall be required. Upon the consummation
of any assignment pursuant to this subsection (c), the transferor Bank, the
Agent and the Borrowers shall make appropriate arrangements so that, if
required, a new Note is issued to the Assignee. In connection with any such
assignment, the transferor Bank shall pay to the Agent an administrative fee for
processing such assignment in the amount of $2,500. If the Assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall, prior to the first date on which interest or fees are payable
hereunder for its account, deliver to the Borrowers and the Agent certification
as to exemption from deduction or withholding of any United States federal
income taxes in accordance with Section .
Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligation hereunder.
No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section than such
(NY) 27008/757/CA99/ca.99.conf.wpd
70
<PAGE>
Bank would have been entitled to receive with respect to the rights transferred,
unless such transfer is made with the Borrowers' prior written consent or by
reason of the provisions of Section requiring such Bank to designate a different
Applicable Lending Office under certain circumstances or at a time when the
circumstances giving rise to such greater payment did not exist.
SECTION . New York Law. THIS AGREEMENT AND EACH NOTE
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAW OF THE STATE OF NEW YORK. The Borrowers hereby submit to
the nonexclusive jurisdiction of the United States District Court for the
Southern District of New York and of any New York State court sitting in New
York City for purposes of all legal proceedings arising out of or relating to
this Agreement or the transactions contemplated hereby. The Borrowers
irrevocably waive, to the fullest extent permitted by law, any objection which
the Borrowers may now or hereafter have to the laying of the venue of any such
proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.
SECTION . Counterparts; Integration. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement and the other Financing Documents constitute the entire agreement
and understanding among the parties hereto and supersede any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
SECTION . Collateral. Each of the Banks represents to the Agent and
each of the other Banks that it in good faith is not relying upon any "margin
stock"(as defined in Regulation U) as collateral in the extension or maintenance
of the credit provided for in this Agreement.
SECTION . WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENT AND
THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION . Joint and Several Obligations. The obligations of the
Borrowers under the Financing Documents shall be joint and several. The
obligations of each Borrower under the Financing Documents shall be
unconditional and absolute and, without limiting the generality of the
foregoing, shall not be released, discharged or otherwise affected by:
(NY) 27008/757/CA99/ca.99.conf.wpd
71
<PAGE>
any extension, renewal, settlement, compromise, waiver or
release in respect of any obligation of any other Obligor under any
Financing Document, by operation of law or otherwise;
any release, impairment, non-perfection or invalidity of any
direct or indirect security for any obligation of any other Obligor under
any Financing Document;
any change in the existence, structure or ownership of any
other Obligor;
any insolvency, bankruptcy, reorganization or other similar
proceeding affecting any other Obligor or its assets or any resulting release or
discharge of any obligation of any other Obligor under any Financing Document;
any invalidity or unenforceability relating to or against any
other Obligor for any reason of any Financing Document, or any provision of
applicable law or regulation purporting to prohibit the payment by any other
Obligor of the principal of or interest on any Note or any other amount payable
by any other Obligor under any Financing Document; or
any other act or omission to act or delay of any kind by any
other Obligor or any other corporation or person or any other circumstance
whatsoever which might, but for the provisions of this paragraph, constitute a
legal or equitable discharge of the Borrowers' obligations hereunder.
(NY) 27008/757/CA99/ca.99.conf.wpd
72
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
HALLWOOD ENERGY CORPORATION
By: /s/ Cathleen Osborn
Title: Vice President & Secretary
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By: /s/ Cathleen Osborn
Title: Vice President & Secretary
HALLWOOD ENERGY PARTNERS, L.P.
By: HEC Acquisition Corp., its
General Partner
By:
/s/ Cathleen Osborn
Title: Vice President
Address: 4610 South Ulster Street
Suite 200
Denver, Colorado 80237
(NY) 27008/757/CA99/ca.99.conf.wpd
<PAGE>
Commitments
$ 35,000,000
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By:
- ---------------------------------------------------
/s/ John Kowalczuk
Title: Vice President
$ 35,000,000
FIRST UNION NATIONAL BANK
By:
- ---------------------------------------------------
/s/ Jay M. Chernosky
Title: Senior Vice President
$ 35,000,000
NATIONSBANK, N.A.
By:
- ---------------------------------------------------
/s/ James Allred
Title: Managing Director
Total Commitments
$105,000,000
---------------------
---------------------
FIRST UNION NATIONAL BANK, as
Collateral Agent
By:
- ---------------------------------------------------
/s/ Jay M. Chernosky
Title: Senior Vice President
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By:
- ---------------------------------------------------
/s/ John Kowalczuk
Title: Vice President
(NY) 27008/757/CA99/ca.99.conf.wpd
74
<PAGE>
CROSS-REFERENCE TARGET LIST
NOTE: Due to the number of targets some target names may not appear in the
target pull-down list. (This list is for the use of the wordprocessor only, is
not a part of this document and may be discarded.)
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
....................................................amounts&terms
..............................................principal.repayment
....................................................interest.rate
..................................................interest.rate.a
..................................................interest.rate.b
..............................................borrowing.procedure
.............................................continuation.options
...............................................conversion.options
.............................................conversion.options.a
.............................................conversion.options.b
..............................................optional.prepayment
............................................optional.prepayment.b
.................................................mandatory.prepay
.........................................................payments
.........................................................interest
....................................................reimbursement
..................................................increased.costs
............................................basis.for.determining
.......................................................illegality
....................................................foreign.taxes
..............................................financial.condition
.................................................investments&guar
3.28(a)..........................................consummate.reorg
3.28(b).................................................reorg.agt
........................................................covenants
.............................................financial.statements
.................................................annual.financial
..............................................annual.certificates
............................................annual.certificates.a
.................................................reimburse.of.exp
..................................................erisa.info.comp
...............................................engineering.report
.............................................................debt
...........................................................debt.a
.......................................................debt.a.iii
........................................................debt.a.iv
...........................................................debt.b
.............................................................lien
................................................investments.loans
..............................................investments.loans.j
..............................................investments.loans.k
..............................................investments.loans.l
..............................................investments.loans.m
..............................................investments.loans.o
......................................................subsidaries
.................................................distribution.etc
......................................................mergers.etc
............................................transactions.with.aff
...................................................sale.of.assets
..................................................annual.coverage
.................................................information.meet
..............................................compliance.with.law
..............................................covenants.to.secure
..............................................inconsistent.provis
................................................interest.coverage
................................................opinions.of.local
4.38........................................additional.guarantors
...............................................events.of.defaults
.............................................events.of.defaults.b
.......................................................conditions
....................................................effectiveness
..................................................effectiveness.e
.............................................events.of.defaults.l
(NY) 27008/757/CA99/ca.99.conf.wpd
<PAGE>
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
.......................................................................the.agent
.........................................................................notices
................................................................amendments&waive
...............................................................successors&assign
.............................................................successors&assign.a
.............................................................successors&assign.b
...............................................................successors&assign
4.13(a).......................................................coll.sec.borrowers
(NY) 27008/757/CA99/ca.99.conf.wpd
2
<PAGE>
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
ARTICLE/SECTION TARGET NAME ARTICLE/SECTION TARGET NAME
(NY) 27008/757/CA99/ca.99.conf.wpd
3
<PAGE>
AGREEMENT REGARDING INITIAL EXERCISE PRICE
Reference is hereby made to that certain Common Stock Purchase Warrant
dated June 8, 1999 (the "Warrant"), relating to the right to purchase shares of
the common stock, $0.01 par value, of Hallwood Energy Corporation, a Delaware
corporation (the "Company"), and issued to The Prudential Insurance Company of
America ("Prudential"). Pursuant to the provisions of section 1A of the Warrant,
the Company and Prudential agree that the Initial Exercise Price (as defined in
the Warrant) has been determined as provided in such section 1A and is
$__________.
June , 1999
HALLWOOD ENERGY CORPORATION
By: /s/ Cathleen M. Osborn
Name: Cathleen M. Osborn
Title: Vice President
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
By: /s/ Ric Abel
Name: Ric Abel
Title: Vice President
DAL02:230291
<PAGE>
PHANTOM WORKING INTEREST
INCENTIVE PLAN
OF
HALLWOOD ENERGY CORPORATION
Hallwood Energy Corporation, a Delaware corporation (the "Company"),
hereby establishes the following Incentive Plan, in order to provide greater
incentive and motivation to the Company's key personnel and consultants to
increase the total oil and gas reserves of the Company and to enhance the
Company's ability to attract, motivate and retain key employees and consultants
upon whom, in large measure, the success of the Company depends.
ARTICLE I
Definitions
The following words and phrases shall have the meaning set forth below
unless the context clearly indicates otherwise:
"Affiliates" means the affiliates of the Company which hold title, on
behalf, of the Company, to the Company oil and gas assets , including, but not
limited to, HEC Acquisition Corp., EM Nominee Partnership Company, HCRC
Acquisition Corp., Hallwood Consolidated Partners L.P., Hallwood San Juan I
Limited Partnership and La Plata Associates LLC.
"Beneficiary" means a Beneficiary designated pursuant to Section 2.2.
"Board" means the Board of Directors of the Company or any committee of
the Board of Directors to which the Board may delegate its authority to act in
connection with this Plan from time to time.
"Buy-Out Value" shall mean that percentage of the net present value of
the then remaining proven reserves of an Eligible Domestic Well, as determined
by the Board at the time any award is made under the Plan. The net present value
of the then remaining proven reserves of an Eligible Domestic Well shall be
determined based on the Reserve Report. If the net present value of the proven
reserves of an Eligible Domestic Well is less than zero, the Buy-Out Value shall
be zero.
"Cash Flow" means, as to an Eligible Domestic Well, with regard to
the period in question, (i) all revenues received by the Company or its
Affiliates from the sale of production or monetization of tax credits from the
Eligible Domestic Well, plus all proceeds received from the sale or transfer of
all or part of an interest in the Eligible Domestic Well to other than an
Affiliate, less in each case (A) all operating expenses paid by the Company or
its Affiliates and normally attributable to a working interest; (B) all amounts
paid by the Company or its Affiliates to improve, recomplete or maintain the
production from an Eligible Domestic Well (other than amounts spent in
connection with the initial spudding, drilling and first Completion of the
Eligible Domestic Well or recompletion of a Marginal Well); and (C) all
severance, production or other production related taxes paid by the Company and
its Affiliates and applicable to the Eligible Domestic Well; Cash Flow means, as
to a
CORPDAL:130590.1 18747-00028
<PAGE>
Non-Domestic Project, with regard to the period in question (i) revenues
received by the Company or its Affiliates in connection with services for the
operation of such Non-Domestic Project, including fees received for the lifting
of oil or gas, plus all cash received from the sale or transfer of all or part
of an interest in a Non-Domestic Project or, if the consideration for such sale
is not in cash, then a cash amount equal to the value received by the Company or
its Affiliates for such Non-Domestic Project (if no allocation of value for such
Non-Domestic Project is provided or if the consideration received by the Company
or its Affiliates cannot be readily valued, the Company and a majority of the
affected Participants may agree on an allocation, which allocation shall be
binding on all Participants, or a third party appraisal may be obtained, at the
Company's cost), less in each case (A) all operating expenses paid by the
Company or its Affiliates and normally attributable to an interest in a
Non-Domestic Project, (B) all amounts paid by the Company or its Affiliates to
improve, recomplete or maintain production from a Non-Domestic Project (other
than amounts spent in connection with the initial spudding, drilling and
completion of wells within a Non-Domestic Project or the signing bonuses and
costs typically associated with the acquisition of an interest in a Non-Domestic
Project) and (C) all severance, production, excise or other production related
taxes paid by the Company and its Affiliates and applicable to the Non-Domestic
Project. In the event that Eligible Domestic Wells or Non-Domestic Projects are
transferred in connection with an exchange of properties, then at the Board's
discretion, the new property or properties received in exchange for the
transferred Eligible Domestic Wells or the non-Domestic Projects may be
substituted into a Plan, rather than considering their value as cash received
from the transfer of such properties.
"Company" means Hallwood Energy Corporation and any successor thereto.
"Completion" of an Eligible Domestic Well or a "Completed" Eligible
Domestic Well means (i) with regard to an initial drilling, the date such well
is spud; (ii) with regard to the recompletion of a Marginal Well, the date when
a completion, workover or drilling rig is moved in and rigged up in preparation
of imminent work initiation or (iii) with regard to secondary or tertiary
recovery operations, the date of first injection of any fluids used for
secondary or tertiary recovery.
"Effective Date" means June 8, 1999.
"Eligible Domestic Well" means any well located in the continental
United States and Completed within the Plan Year, any recompleted Marginal Well
and any secondary or tertiary recovery operation (in which case the value to be
assigned to such secondary or tertiary recovery wells not already included in a
Plan, shall be calculated by holding constant the proven developed producing
reserve rate at the time of first injection, and only considering the cash flow
from production above that rate as Cash Flow to the Plan).
"Key Employee" means an employee or consultant of the Company who the
Board, in its sole discretion, determines has or may substantially benefit the
Company.
"Marginal Well" means any Eligible Domestic Well having a net present
value, in the Reserve Report of less than or equal to $25,000.
"Non-Domestic Project" means any project undertaken by the Company or
its Affiliates in which the properties owned, operated or serviced by the
Company or its Affiliates are outside of the continental United States. The
timing of inclusion of a Non-Domestic Project in the Plan and the
CORPDAL:130590.1 18747-00028
<PAGE>
properties and/or contracts which would be considered to constitute a
Non-Domestic Project shall be as determined and described by the Board at the
time of the annual determination of Participants and awards, and may include
Non-Domestic Projects which were commenced in prior years.
"Participant" means a Key Employee who is selected by the Board to
participate in the Plan for any Plan Year.
"Participation Point" means one percent of the Plan Cash Flow for any
Plan Year; 100 Participation Points shall be awarded to Participants in any Plan
Year during which any awards are made.
"Plan" means this Incentive Plan of Hallwood Energy Corporation.
"Plan Cash Flow" means the aggregate percentage of the Affiliates'
collective interest in the Cash Flow of the Eligible Domestic Wells and the
Non-Domestic Projects that the Board determines for any Plan Year to allocate to
the Plan, and which is to be divided among the Participants based on
Participation Points. In the Board's discretion, it may allocate different
percentages of Cash Flow for Eligible Domestic Wells and Non-Domestic Projects.
"Plan Distributions" attributable to any Participant's Participation
Points means (i) the Plan Cash Flow attributable to the Participation Points
(ii) the Buy-Out Value of Eligible Domestic Wells upon buy-out pursuant to
Section 3.2 and (iii) any payments made to a Participant because of termination
of employment as described in Article V herein, or termination of all of part of
the Plan as described in Article VII herein.
"Plan Year" means the twelve-month calendar year.
"Reserve Report" means the most recent regularly prepared reserve
report which applies the rules and regulations of the Securities and Exchange
Commission, except that the five-year average prices used by the Company for its
then current planning purposes, rather than year-end prices, shall be used.
"Termination for Cause" means termination which is initiated by the Company for
either serious misconduct or sub-standard performance.
ARTICLE II
Participation in the Plan
2.1 Eligibility. Any Key Employee of the Company shall be eligible to
be selected as a Participant in the Plan. A Key Employee shall become a
Participant upon receiving an award of Participation Points by the Board, which
may take into consideration, among other factors, the recommendation of the
Company's executive officers, the Key Employee's position, salary, and
individual contribution to the performance of the Company's Affiliates. Only Key
Employees who are employed by or engaged as consultants to the Company on the
date of the award by the Board shall be eligible to be awarded Participation
Points.
CORPDAL:130590.1 18747-00028
<PAGE>
2.2 Enrollment Procedure. Each Participant shall complete, sign, and
return to the Company's Human Resources department an enrollment form supplied
by the Company. The enrollment form shall state, among other information, the
Participant's address and date of birth and a designation of the names and
addresses of the Participant's beneficiaries. The Participant will not be
entitled to receive any payments with respect to the Plan until the Participant
has properly returned the enrollment form.
2.3 Determination of Participants and Awards. The Board may determine
annually the Key Employees who are to be Participants in the Plan with respect
to the Plan Year, the percentage of the total Plan Cash Flow to be allocated to
awards for the Plan Year, the Plan Buy-Out Value, the Non-Domestic Projects to
be included in the Plan and the Participation Points to be awarded to each
Participant. The Board may make these determinations in its sole discretion, and
may award all Participation Points for a Plan Year to one Participant. It is
anticipated that determinations of the Plan Cash Flow allocated for a Plan Year,
the Participants, the Plan Buy-Out Value and the Participation Points for a Plan
Year will be made in the first quarter of each year. The Board is not required
to allocate any Plan Cash Flow for a Plan Year.
ARTICLE III
Allocation and Distribution of Cash Flow from Eligible Domestic Wells
3.1 Distributions. On all outstanding awards, the Company shall
distribute to each Participant the portion of the Plan Cash Flow from Eligible
Domestic Wells attributable to the Participation Points then held by the
Participant for each Plan Year. The distributions shall be made quarterly to
each Participant or his Beneficiary in the amount of such person's allocable
share of the Plan Cash Flow from Eligible Domestic Wells for the preceding
quarter, less any applicable withholding of income taxes or other amounts.
Distributions shall be made within thirty days of the end of a quarter.
3.2 Buy-Out. Subject to Article V, in the sixth calendar year after the
award of Participation Points, a Participant shall receive the Buy-Out Value of
all Eligible Domestic Wells included in that Plan. All payments under this
section shall be made on or before the end of the first quarter of the sixth
year.
ARTICLE IV
Allocation and Distribution of Net Income from Non-Domestic Projects
4.1 Distribution of Cash Flow from Non-Domestic Projects. In order to
recognize that Non-Domestic Projects are by their nature longer lived than
Eligible Domestic Wells and that future exploitation of Non-Domestic Projects
needs to be encouraged, the revenues from a Non-Domestic Project shall be
allocated to successive Plan Years, commencing in the first year in which
revenues are received from a Non-Domestic Project. To the extent revenues from a
Non-Domestic Project are
CORPDAL:130590.1 18747-00028
<PAGE>
allocated to a Plan Year, such allocation will automatically terminate ten years
after the year in which net revenues were first received from such Non-Domestic
Project. It is anticipated that no more than five Plan Years will be associated
with any single Non-Domestic Project, and that once a Non-Domestic Project is
designated for a Plan Year, the next four Plans will also include such
Non-Domestic Project. However, at the Board's discretion, more or less than five
Plans may include the same Non-Domestic Project. The distributions shall be made
annually to each Participant or his Beneficiary in the amount of such person's
allocable share of the Plan Cash Flow from Non-Domestic Projects for the
preceding year, less any applicable withholding of income taxes or other
amounts. Distributions shall be made on or before the end of the first quarter
following the end of the year.
4.2 Allocation of Cash Flow from Non-Domestic Projects Among Plan
Years. To the extent Cash Flow from Non-Domestic Projects is allocated among
more than one Plan Year, such Cash Flow shall be allocated among the respective
Plan Years in accordance with a formula based on a fraction in which the
numerator is one, and the denominator is the number of Plan Years which
participate in Cash Flow from the Non-Domestic Project. For example, if a
Non-Domestic Project is included in three separate Plan Years, then the amount
of the total Plan Cash Flow (as determined by the Board pursuant to Section 2.3
herein) to be allocated among each Plan Year which includes such Non-Domestic
Project shall be determined based on a fraction, the numerator of which shall be
one, and the denominator of which shall be three (the number of Plan Years which
include such Non-Domestic Project). Further, if the total Plan Cash Flow
determined by the Board to be allocated to a Plan Year in the first year the
Non-Domestic Project is included is .04%, and there are subsequently two
additional Plan Years which include such Non-Domestic Project, then the Board in
its discretion may determine that the fraction used to allocate Cash Flow from
such Non-Domestic Project among the Plan Years should be 1/3; each Plan would be
allocated one-third of .04% of the Cash Flow from such Non-Domestic Project.
4.3 No Buy-out of Participant's Interest in Non-Domestic Projects.
There is no buy out of a Participant's interest in any Non-Domestic Project,
except as provided in Articles V and VII.
ARTICLE V
Vesting
5.1 Termination for Cause If a Participant's employment or consultancy
with the Company or its Affiliates is terminated or by the Company as a
Termination for Cause, the Participant shall cease, effective as of the
effective date of such termination, to be a Participant in this Plan and shall
have no further rights under the Plan, and all Participation Points of the
Participant under this Plan shall be canceled without payment of any
compensation and the former Participant shall not thereafter receive any Plan
Distributions. Any Participation Points canceled hereunder and the related Plan
Cash Flow shall revert to the Company, and shall not be available to any other
Participant.
5.2 Termination Other Than for Cause. If a Participant's employment or
consultancy with the Company or its Affiliates is terminated by the Company for
any reason other than a Termination for Cause, the Participant shall receive a
cash lump sum payment equal to the fair market value of
CORPDAL:130590.1 18747-00028
<PAGE>
such Participant's interest in the Plan as of such termination.
5.3 Determination of Fair Market Value of Participant=s Interest in
Plan. The fair market value of a Participant's interest in a Plan shall include
100% of the Buy-Out Value of Eligible Domestic Wells, based on the Reserve
Report and 100% of the fair market value of the Cash Flow from Non-Domestic
Projects allocated to the Plan, both taking into account the Participation
Points held by the Participant in the pertinent Plan Years at the date of
termination of employment or consultancy. In determining the fair market value
of Cash Flow from Non-Domestic Projects, the Participant and the Company shall
mutually agree on such value, or if they cannot, then an independent appraiser
shall be jointly selected by the Participant and the Company, and such
independent appraiser's valuation shall be binding on the Participant and the
Company. The Company shall bear the expense of any such appraiser. Payment of
the fair market value determined under this Section 5.3 shall be made as to
Eligible Domestic Wells within sixty days of the event triggering such
determination, and as to Non Domestic Projects, within thirty days of either the
mutual agreement of such value or the receipt of the independent appraisers
valuation, as the case may be.
5.4 Resignation If a Participant's employment or consultancy with the
Company or its Affiliates is terminated by the Participant as a result of the
Participant's voluntary resignation, the Participant shall cease, effective as
of the effective date of such resignation, to be a Participant in this Plan and
shall have no further rights under the Plan, and all Participation Points of the
Participant under this Plan shall be canceled without payment of any
compensation and the former Participant shall not thereafter receive any Plan
Distributions. Any Participant Points canceled hereunder and the related Plan
Cash Flow shall revert to the Company and shall not be available to any other
Participant.
5.5 Death or Disability If a Participant dies or is permanently and
totally disabled, the Participant (or the Participant's Beneficiary) shall, at
the option of the Company, (a) continue to receive Plan Distributions in the
same manner as though such Participant were still employed by the Company, or
(b) receive a cash lump sum payment equal to the fair market value of such
Participant's interest in the Plan or Plans in which he participates, as
determined pursuant to Section 5.3.
.
ARTICLE VI
Allocation of Administrative Responsibilities
6.1 The Company. The Company shall be responsible for keeping accurate
books and accounts with respect to all Eligible Domestic Wells, Non-Domestic
Projects, Plan Cash Flow and Plan Distributions and making the payments to Plan
Participants provided by the Plan.
6.2 The Board. The Board of the Company shall administer the Plan and
shall have all powers necessary for that purpose, including, but not limited to,
the power to interpret the Plan, to determine the eligibility, status and rights
of all persons under the Plan, and to make all determinations required to be
made under the Plan.
6.3 Others. The Board of the Company may designate one or more persons
whomay, but need not be, employees of the Company or Participants, to assist it
in the ministerial tasks
CORPDAL:130590.1 18747-00028
<PAGE>
required in administering the Plan. The Company hereby indemnifies each person
so designated by the Board against any and all claims, loss, damages, expense
and liability arising from any action or failure to act with respect to the
Plan, except when the same is judicially determined to be due to the fraud,
gross negligence or willful misconduct of such person.
ARTICLE VII
Termination and Amendment of Plan
7.1 Termination of Plan or Removal of Certain Assets from Plan and
Discontinuance of Contributions. The Company presently intends to continue the
Plan indefinitely, but the continuance of the Plan is not assumed as a
contractual obligation and the Company may terminate the Plan at any time by
delivering written notice of termination to each Participant and Beneficiary
then entitled to receive distributions pursuant to the Plan. Upon such
termination, all affected Participants shall receive a cash lump sum payment
equal to the fair market value of each such Participant's interest in the
terminated Plans, calculated as described in this section 5.3. In addition, the
sale or exchange of all or substantially all of the assets of the Company or any
of its Affiliates (to other than an Affiliate of the Company), the merger of the
Company or an Affiliate (if the Company or an Affiliate is not the surviving
entity) or any material change in the direct or indirect ownership or control of
the Company or an Affiliate (if the new owner is not an Affiliate) or the
liquidation of the Company or an Affiliate, shall automatically terminate the
Company's obligations under the Plan as such obligations relate to the Eligible
Domestic Wells and Non-Domestic Projects sold, exchanged, merged or owned by an
entity in which there has been a material change in the direct or indirect
ownership or control of such entity (such assets herein being referred to as the
"Affected Assets"), and each Participant in a Plan which includes Affected
Assets shall receive a cash lump sum payment equal to the fair market value of
such Participant's interest in the Plan, calculated as described in section 5.3.
7.2 Procedure Upon Termination of a Plan. Upon termination of the Plan,
the Company shall distribute to each Participant or Beneficiary then
participating in the Plan, in one lump sum or in three equal annual installments
with interest at the base rate required in order to avoid the imputation of
interest under section 483 of the Internal Revenue Code, or any successor
provision, the amount determined pursuant to section 7.1 and Section 5.3.
7.3 Amendment by the Company. The Company may at any time amend the
Plan in any respect by action of its Board, but no amendment shall be made that
would have the effect of materially and adversely affecting the economic
interest of any person under the Plan with respect to previously awarded
Participation Points.
ARTICLE VI
Miscellaneous
8.1 Right to Dismiss Employees and Consultants. The Company may
terminate the employment of any employee or consultant at any time for any
reason as freely as if this Plan were
CORPDAL:130590.1 18747-00028
<PAGE>
not in existence.
8.2 Source of Benefits. The obligations hereunder are undertaken by the
Company and the Affiliates, and all benefits payable under the Plan shall be
paid solely from the general assets of the Company and/or its Affiliates, and
shall be allocated among the Company and its Affiliates in proportion to their
ownership of Eligible Domestic Wells and Non-Domestic Projects included in the
Plan. No allocation of interests or income on the books of the Company or the
Affiliates shall be deemed to create a separate fund or any ownership interest
on the part of any Participant in any Eligible Domestic Wells being used to
measure Plan Distributions or in any production from properties.
8.3 No Ownership of Properties; Other Rights. Nothing contained in this
Plan shall in any way restrict the right of the Company or the Affiliates in
their discretion to operate, abandon, sell, transfer, mortgage, encumber or
otherwise deal with the Eligible Domestic Wells giving rise to the revenues used
to measure Plan Distributions. Any rights accruing to a Participant or other
person under the Plan are solely those of an unsecured general creditor of the
Company. Nothing contained in the Plan and no action taken pursuant to the
provisions of the Plan will create or be construed to create a trust of any
kind, or a pledge, or an economic interest in the Eligible Domestic Wells, or a
fiduciary relationship between the Company, an Affiliate, and a Participant or
any other person. Nothing in the Plan will be construed to require that any fund
be maintained or any amount be segregated for a Participant's benefit.
8.4 Sale of Eligible Domestic Wells or Non-Domestic Projects. If an
Eligible Domestic Well or Non-Domestic Project is sold or in any way transferred
to other than an Affiliate during the time that such Eligible Domestic Well or
Non-Domestic Project is subject to the Plan, the value of the consideration
received in connection with the transfer will be considered to be Cash Flow from
such Eligible Domestic Well or Non-Domestic Project and will be distributed as
Plan Cash Flow at the time and in the manner required by Section 3.1 or 4.1, as
the case may be.
8.5 Deductibility under Internal Revenue Code. If the Company believes
in good faith that a Participant may receive total compensation from the Company
in one calendar year in excess of the amount which may be deducted by the
Company under Internal Revenue Code section 162 (m), then the Company may defer
such excess payments until the first year when they would be deductible.
8.6 Beneficiaries. In the absence of an effective Beneficiary
designation as to any portion of a Participant's interest under the Plan (if
such Participant is a natural person), pursuant to Section 2.2 hereof, Plan
Distributions attributable to such interest shall be paid to the Participant's
personal representative, but if the Company believes that none had been
appointed within six months after the Participant's death, the Company may elect
not to pay such income until a personal representative has been appointed or may
pay such income to the Participant's surviving spouse, or if none, to his
surviving children and issue of deceased children by right of representation, or
if there be none, to his surviving parents.
8.7 Non-Transferability of Benefits. No Participant or other person
shall have any right to assign, alienate, transfer, hypothecate, encumber or
anticipate any interest in any benefits under
CORPDAL:130590.1 18747-00028
<PAGE>
this Plan, nor shall such benefits be subject to any legal process to levy upon
or attach the same for payment of any claim against any such Participant or
other person through any process whatsoever, and any attempt to cause such
rights to be so subjected will not be recognized except to such extent as may be
required by law.
8.8 Payment Due Minor or Incapacitated Persons. If any person entitled
to a payment under the Plan is a minor, or if the Company determines that any
such person is incapacitated by reason of physical or mental disability, whether
or not legally adjudicated as such, the Company shall have the power to cause
the payments becoming due to such person to be made to his personal
representative or to another for his benefit, without responsibility of the
Company to see to the application of such payments. The Company shall have no
responsibility to investigate the physical or mental condition of a Participant
and any determination of disability made by the Company shall be binding on the
Participant and all other persons. Payments made pursuant to such power shall
operate as a complete discharge of the Plan and the Company.
8.9 Disposition of Unclaimed Payments. Pursuant to Section 2.2, each
Participant who is a natural person must file with the Company from time to time
in writing his address and the address of each of his Beneficiaries and each
change of address. Any communication, statement or notice addressed to a
Participant or Beneficiary at his last post office address filed with the
Company, or if no address is filed with the Company then at his last post office
address as shown on the Company's records, will be binding on the Participant
and his Beneficiaries for all purposes of the Plan. The Company shall not be
required to search for or locate a Participant or Beneficiary. If the Company
notifies a Participant or Beneficiary that he is entitled to a distribution and
also notifies him of the provisions of this section, and the Participant or
Beneficiary fails to make his address known to the Company within three calendar
years after the notification, the Participation Points of the Participant
Beneficiary will be forfeited and canceled as of the end of the Plan Year
following the expiration of such three year period.
8.10 Use of Term "Key Employee". The use herein of the defined term
"Key Employee" is a matter of convenience only, and is not intended to create an
employer/employee relationship between the Company or its Affiliates and any
consultant who may be a Participant. Nothing herein shall be construed to make
any consultant who is a Participant the employee of the Company or its
Affiliates.
8.11 Governing Law. The construction and interpretation of this Plan
shall be governed by the laws of the State of Colorado.
8.12 Pronouns; Gender and Number. Unless the context clearly indicates
otherwise, words in any gender shall include the other genders and the singular
shall include the plural and vice versa.
Executed as of June 8, 1999.
CORPDAL:130590.1 18747-00028
<PAGE>
HALLWOOD ENERGY CORPORATION,
/s/ William L. Guzzetti
William L. Guzzetti
President
HEC ACQUISITION CORPORATION
/s/ William L. Guzzetti
William L. Guzzetti
President
EM NOMINEE PARTNERSHIP COMPANY
By HEC Acquisition Corp., general partner
/s/ William L. Guzzetti
William L. Guzzetti
President
HCRC ACQUISITION CORPORATION
/s/ William L. Guzzetti
William L. Guzzetti
President
HALLWOOD CONSOLIDATED PARTNERS, L.P.
By Hallwood Consolidated Resources Corporation,
general partner
/s/ William L. Guzzetti
William L. Guzzetti
President
CORPDAL:130590.1 18747-00028
<PAGE>
[Execution Copy]
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
$25,000,000
10.32% SENIOR SUBORDINATED NOTES DUE DECEMBER 23, 2007
HALLWOOD ENERGY CORPORATION
COMMON STOCK PURCHASE WARRANTS
AMENDED AND RESTATED
SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT
Dated as of June 8, 1999
DAL02:222894.12
002328
<PAGE>
TABLE OF CONTENTS
(Not Part of Agreement)
Page
1. PRIOR AUTHORIZATION OF ISSUE OF NOTES; AUTHORIZATION OF ISSUE OF
WARRANTS; AUTHORIZATION OF PARENT GUARANTEE.................................2
1A. Prior Authorization of Issue of Notes................................2
1B. Authorization of Issue of Warrants...................................2
1C. Authorization of the Parent Guarantee................................3
2. EXCHANGE OF WARRANTS........................................................3
3. CONDITIONS PRECEDENT........................................................3
3.Conditions Precedent......................................................3
3A. Certain Documents.....................................................3
3B. Effectiveness of the Merger...........................................5
3C. Opinion of Existing Holder's Special Counsel..........................5
3D. Representations and Warranties; No Default............................6
3E. Transactions Permitted By Applicable Laws.............................6
3F. Proceedings...........................................................6
3G. Structuring Fee; Legal Fees...........................................7
3H. Compliance With Outstanding Indebtedness Limitations..................7
3I. Private Placement Number..............................................7
3J. Opinion of Company's Tax Counsel......................................7
4. PREPAYMENTS.................................................................7
4.Prepayments...............................................................8
4A. Required Prepayments..................................................8
4B. Optional Prepayment of Notes With Yield-Maintenance Amount............8
4C. Change in Control.....................................................8
4D. Partial Payments Pro Rata.............................................9
4E. Retirement of Notes..................................................10
5. AFFIRMATIVE COVENANTS......................................................10
5. Affirmative Covenants...................................................10
5A. Financial Statements................................................10
5B. Information Required by Rule 144A...................................13
5C. Inspection of Property..............................................13
5D. Covenant to Secure Notes Equally....................................14
5E. Corporate Existence, Licenses and Permits; Maintenance of Properties14
5F. Maintenance of Insurance............................................14
DAL02:222894.12
002328
1
<PAGE>
5G. Payment of Taxes and Other Claims...................................14
5H. ERISA Compliance....................................................15
5I. Compliance with Laws................................................15
5J. Maintenance of Books of Record; Reserves............................15
5K. Guaranty of Notes by Certain Subsidiaries...........................15
5L. Tax Treatment.......................................................16
6. NEGATIVE COVENANTS.........................................................16
6. Negative Covenants......................................................16
6A. Financial Covenants.................................................16
6A(1). Total Debt to EBITDA Ratio.........................16
6A(2). Consolidated Net Worth.............................16
6B. Other Restrictions..................................................17
6B(1). Prohibition Against Layering Indebtedness.........17
6B(2). Liens..............................................17
6B(3). Consolidation, Merger or Transfer of Assets........18
6B(4). Limitation on Certain Asset Dispositions...........20
6B(5). Transactions With Affiliates.......................21
6B(6). Priority Debt......................................22
6B(7). Hedging Transactions...............................22
6B(8). Change of Business. ..............................22
7. SUBORDINATION OF NOTES.....................................................22
7A. Subordination..............................................22
7B. Obligation of the Company Unconditional....................24
7C. Subrogation................................................24
7D. Rights of Holders of Senior Debt...........................25
8. EVENTS OF DEFAULT..........................................................25
8. Events of Default....................................................25
8A. Acceleration................................................25
8B. Rescission of Acceleration..................................28
8C. Notice of Acceleration or Rescission........................29
8D. Other Remedies..............................................29
9. REPRESENTATIONS, COVENANTS AND WARRANTIES..................................29
9. Representations, Covenants and Warranties...............................29
9A. Organization................................................29
9B. Financial Statements........................................30
9C. Actions Pending.............................................31
9D. Outstanding Indebtedness....................................31
9E. Title to Properties.........................................31
9F. Taxes.......................................................32
DAL02:222894.12
002328
2
<PAGE>
9G. Conflicting Agreements and Other Matters..................32
9H. Authorized Capital Stock..................................32
9I. Offering of Warrants......................................33
9J. Use of Proceeds...........................................33
9K. ERISA.....................................................33
9L. Governmental Consent......................................34
9M. Environmental Compliance..................................34
9N. Disclosure................................................34
9O. Year 2000 Compliance......................................35
9P. Agreement of Merger Conditions Satisfied..................35
9Q. Reorganization............................................35
10. REPRESENTATIONS OF THE EXISTING HOLDER......................36
10. Representations of the Existing Holder.............36
10A. Nature of Acquisition of Securities.......36
10B. Source of Funds...........................36
11. GUARANTY OF PARENT..........................................36
11A. The Guaranty.......................................36
11B. Obligations Absolute...............................37
11C. Waiver.............................................38
11D. Obligations Unimpaired.............................38
11E. Subrogation........................................38
11F. Reinstatement of Guaranty..........................38
11G. Subordination of Guaranteed Obligations............39
11G(1). Subordination.............................39
11G(2) Obligation of the Parent Unconditional......41
11G(3) Subrogation................................41
11G(4) Rights of Holders of Senior Debt...........41
12. DEFINITIONS AND ACCOUNTING TERMS............................42
12. Definitions........................................42
12A. Yield-Maintenance Terms...................42
12B. Other Terms...............................43
12C. Accounting Principles, Terms and
Determinations...........................53
13. MISCELLANEOUS...............................................54
13. Miscellaneous......................................54
13A. Note Payments.............................54
13B. Expenses..................................54
13C. Consent to Amendments.....................55
13D. Form, Registration, Transfer and Exchange
of Notes; Lost Notes....................55
13E. Persons Deemed Owners; Participations.....55
DAL02:222894.12
002328
3
<PAGE>
13F. Survival of Representations and Warranties;
Entire Agreement........................56
13G. Successors and Assigns...................56
13H. Disclosure to Other Persons..............56
13I. Notices..................................56
13J. Payments Due on Non-Business Days........57
13K. Satisfaction Requirement.................57
13L. Governing Law............................57
13M. Waiver of Jury Trial; Consent to
Jurisdiction; Limitation of Remedies....57
13N. Severability.............................58
13O. Descriptive Headings.....................58
13P. Maximum Interest Payable.................58
13Q. Counterparts.............................59
DAL02:222894.12
002328
4
<PAGE>
INFORMATION SCHEDULE
SCHEDULE 9D -- EXISTING INDEBTEDNESS, NON-RECOURSE DEBT AND
LIENS
SCHEDULE 9G -- LIST OF AGREEMENTS RESTRICTING INDEBTEDNESS
EXHIBIT A -- FORM OF SENIOR SUBORDINATED NOTE
EXHIBIT B -- FORM OF PARENT COMMON STOCK PURCHASE WARRANT
EXHIBIT C -- FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT D -- FORM OF PARTICIPATION RIGHTS AGREEMENT
EXHIBIT E -- FORM OF SUBSIDIARY GUARANTY
EXHIBIT F -- FORM OF HCP CONSENT
EXHIBIT G-1 -- FORM OF OPINION OF COMPANY'S, PARENT'S
AND HEP'S GENERAL COUNSEL
EXHIBIT G-2 -- FORM OF OPINION OF COMPANY'S, PARENT'S
AND HEP'S SPECIAL COUNSEL
EXHIBIT H -- FORM OF ASSUMPTION OF SUBSIDIARY GUARANTY
EXHIBIT I -- FORM OF OPINION RELATING TO FUTURE GUARANTY
AND GUARANTOR
DAL02:222894.12
002328
5
<PAGE>
AMENDED AND RESTATED
SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT
This AMENDED AND RESTATED SUBORDINATED NOTE AND WARRANT
PURCHASE AGREEMENT (the "Agreement") is entered into as of June 8, 1999 among
Hallwood Energy Corporation, a Delaware corporation (the "Parent"), Hallwood
Consolidated Resources Corporation, a Delaware corporation (the "Company"), and
The Prudential Insurance Company of America (referred to herein as "Prudential"
or the "Existing Holder"). Capitalized terms used herein have the meanings
specified in paragraph 12. The parties hereto agree as follows:
WITNESSETH
WHEREAS, the Company and the Existing Holder entered into that
certain Subordinated Note and Warrant Purchase Agreement dated as of December
23, 1997 (the "Original Agreement") pursuant to which the Company issued and
sold to the Existing Holder (i) the Company's 10.32% Senior Subordinated Notes
due December 23, 2007 in the aggregate principal amount of $25,000,000, and (ii)
the right to purchase from the Company an aggregate of 98,599 shares of the
Company's common stock, par value $0.01 per share, at an initial exercise price
of $28.99 per share (collectively, the "Original Warrant"); and
WHEREAS, payment of such notes and performance and observance
of all other obligations of the Company arising under or in connection with the
Original Agreement were guaranteed by Hallwood Consolidated Partners, L.P., a
Colorado limited partnership that is a subsidiary of the Company ("HCP"),
pursuant to a Guaranty Agreement dated as of December 23, 1997 (as amended,
restated, supplemented or otherwise modified from time to time, the "HCP
Guaranty"); and
WHEREAS, the Company, the Parent, Hallwood Energy Partners,
L.P., a Delaware limited partnership ("HEP"), and certain of their affiliated
entities contemplate a restructuring of their organization pursuant to and in
connection with which: (i) in the manner described in the Proxy Statement dated
May 4, 1999, as supplemented by supplement dated May 17, 1999, distributed to
the stockholders of the Company (the "Proxy Statement"), the Company and HEP
will merge with Wholly Owned Subsidiaries of the Parent, as a result of which
the Company and HEP will be the surviving entities and will become Wholly Owned
Subsidiaries of the Parent, pursuant to a Merger and Asset Contribution
Agreement, dated as of December 15, 1998 (the "Merger" and, as heretofore
amended by amendments dated March 9, 1999, and April 29, 1999, the "Agreement of
Merger"); (ii) the Company will enter into this Agreement in order to amend and
restate the Original Agreement, and the Parent will join in and become a party
to this Agreement, in order, among other things, to (a) provide for the
Guarantee of the Parent set forth in paragraph 11 hereof with respect to payment
of the Notes (as defined herein) and performance and observance of all other
obligations of the Company arising under or in connection with this Agreement,
(b) provide for the issuance and delivery by the Parent to the Existing Holder,
in exchange for and in cancellation of the Original
DAL02:222894.12
002328
<PAGE>
Warrant, common stock purchase warrants evidencing the right to purchase from
the Parent shares of the Parent's Common Stock, par value $0.01 per share (the
"Parent Common Stock"), in substance of like terms as the Original Warrant so
surrendered and for a number of shares and at an exercise price determined in
accordance with the provisions of the Original Warrant, and (c) amend certain
provisions of the Original Agreement in the respects, but only in the respects,
hereinafter set forth; (iii) HEP and the other Initial Subsidiary Guarantors
will execute and deliver to the Existing Holder a Guaranty Agreement (as
amended, restated, supplemented or otherwise modified from time to time,
including by the addition of Guarantors thereto pursuant to the provisions of
paragraph 5K, the "Subsidiary Guaranty") with respect to payment of the Notes
(as defined herein) and performance and observance of all other obligations of
the Company arising under or in connection with this Agreement; and (iv) the
Parent and the Existing Holder will enter into a Registration Rights Agreement
and, together with The Hallwood Group Incorporated, will enter into a
Participation Rights Agreement, in respect of the Parent Common Stock purchase
warrants and the shares of Parent Common Stock issuable upon the exercise
thereof and in replacement of similar agreements relating to the Original
Warrant;
NOW, THEREFORE, in order to accomplish the matters
contemplated by the immediately preceding recital and in consideration of the
mutual premises herein contained and for other valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Original Agreement
is hereby amended and restated as follows:
PARAGRAPH PRIOR AUTHORIZATION OF ISSUE OF NOTES;
AUTHORIZATION OF ISSUE OF WARRANTS;
AUTHORIZATION OF PARENT GUARANTEE.
1A. Prior Authorization of Issue of Notes. Pursuant to and in
connection with the Original Agreement, the Company authorized the issue of its
senior subordinated promissory notes (the "Notes") in the aggregate principal
amount of $25,000,000, maturing December 23, 2007, and bearing interest on the
unpaid balance thereof from the date thereof until the principal thereof shall
have become due and payable at the rate of 10.32% per annum, and on overdue
principal, Yield- Maintenance Amount and interest at the rates specified in the
Notes. The term "Notes" as used herein shall include the Notes issued and sold
to the Existing Holder pursuant to the Original Agreement and each Note
delivered in substitution or exchange for any such Note pursuant to any
provision of the Original Agreement or this Agreement. The Notes originally
issued to the Existing Holder under the Original Agreement are substantially in
the form of Exhibit A attached to the Original Agreement, and any Notes
delivered in substitution or exchange therefor pursuant to this Agreement shall
be substantially in the form of Exhibit A attached hereto.
1B. Authorization of Issue of Warrants. To evidence the Parent's
obligation to issue its Parent Common Stock purchase warrants in exchange for
the Original Warrant pursuant to paragraph 2, the Parent has authorized the
issue of its Parent Common Stock purchase warrants (any such Parent Common Stock
purchase warrants which are issued pursuant to this Agreement, and any such
Parent Common Stock purchase warrants which may be issued in substitution or
exchange
DAL02:222894.12
002328
2
<PAGE>
therefor, herein collectively called the "Warrants"), all subject to the terms,
conditions and adjustments set forth in the Warrants; such Warrants shall be
substantially in the form of Exhibit B attached hereto.
1C. Authorization of the Parent Guarantee. The Parent will authorize
its Guarantee of the payment of the Notes and performance and observance of all
other obligations of the Company arising under or in connection with this
Agreement upon the terms and subject to the conditions set forth in paragraph
11.
PARAGRAPH EXCHANGE OF WARRANTS.
2. Exchange of Warrants. In connection with, and effective as of the
time of the Merger, the Parent hereby agrees to issue the Warrants and, subject
to the terms and conditions herein set forth, the Existing Holder agrees to
deliver the Original Warrant in exchange therefor to the Parent, for
cancellation by the Company. The Parent will deliver to the Existing Holder, at
the offices of Jenkens & Gilchrist, P.C., at 1445 Ross Avenue, Dallas, Texas
75202, one or more Warrants registered in the Existing Holder's name or (if so
specified) in the name of the Existing Holder's nominee, evidencing the right to
purchase an aggregate of 309,278 shares of Parent Common Stock and in the
denomination or denominations specified with respect to the Existing Holder in
the Information Schedule attached hereto against delivery by the Existing Holder
to the Company of the Original Warrant on the effective date of the Merger. If
the Parent shall fail to tender such Warrants to the Existing Holder as provided
in this paragraph 2, or any of the conditions specified in paragraph 3 shall not
have been fulfilled to the satisfaction of the Existing Holder, the Existing
Holder shall, at its election, be relieved of all further obligations under this
Agreement, without thereby waiving any rights the Existing Holder may have by
reason of such failure or such nonfulfillment. The exchange of the Original
Warrant for the Warrants shall be effective as of the effective time of the
Merger, regardless of the actual date of delivery of the Original Warrant or the
Warrants.
PARAGRAPH CONDITIONS PRECEDENT.
3. Conditions Precedent. This Agreement shall become effective as of
June 8, 1999 (the "Effective Date") subject to the satisfaction, on or before
the Effective Date, of the following conditions:
Certain Documents. The Existing Holder shall have received
the following, each dated the Effective Date unless otherwise indicated:
(i) the Warrants to be exchanged for the Original Warrant;
(ii) the Registration Rights Agreement, in the form of Exhibit
C attached hereto, duly executed and delivered by the Parent;
DAL02:222894.12
002328
3
<PAGE>
(iii) the Participation Rights Agreement, in the form of
Exhibit D attached hereto, duly executed and delivered by the Parent
and The Hallwood Group Incorporated;
(iv) the Subsidiary Guaranty, in the form of Exhibit E
attached hereto, duly executed and delivered by HEP and the other
Initial Subsidiary Guarantors;
(v) the HCP Consent, in the form of Exhibit F attached hereto,
duly executed and delivered by HCP;
(vi) certified copies of (a) the resolutions of the Board of
Directors of the Company approving this Agreement and the transactions
contemplated hereby and (b) all documents evidencing other necessary
corporate action and governmental approvals, if any, with respect to
this Agreement and the transactions contemplated hereby;
(vii) a certificate of the Secretary or an Assistant Secretary
of the Company certifying the names and true signatures of the officers
of the Company authorized to sign this Agreement and the other
documents to be delivered by the Company hereunder;
(viii)certified copies of the Certificate of Incorporation and
bylaws of the Company;
(ix) certified copies of (a) the resolutions of the Board of
Directors of the Parent approving this Agreement, the Warrants, the
Registration Rights Agreement, the Participation Rights Agreement and
the transactions contemplated hereby and thereby and (b) all documents
evidencing other necessary corporate action and governmental approvals,
if any, with respect to this Agreement, the Warrants, the Registration
Rights Agreement and the Participation Rights Agreement, and the
transactions contemplated hereby and thereby;
(x) a certificate of the Secretary or an Assistant Secretary
of the Parent certifying the names and true signatures of the officers
of the Parent authorized to sign this Agreement, the Warrants, the
Registration Rights Agreement and the Participation Rights Agreement
and the other documents to be delivered by the Parent hereunder and
thereunder;
(xi) certified copies of the Certificate of Incorporation and
bylaws of the Parent;
(xii) certified copies of (a) the resolutions of the Board of
Directors of HEC Acquisition Corp., a Delaware corporation (the "HEP
General Partner"), approving the Subsidiary Guaranty on behalf of HEP
and, in its capacity as a general partner thereof, the other Initial
Subsidiary Guarantors that are partnerships and (b) all documents
evidencing other necessary partnership, corporate or limited liability
company action and governmental approvals, if any, with respect to the
Subsidiary Guaranty;
(xiii) a certificate of the Secretary or an Assistant
Secretary of the HEP General Partner certifying the names and true
signatures of the officers of the HEP General Partner
DAL02:222894.12
002328
4
<PAGE>
authorized to sign the Subsidiary Guaranty on behalf of HEP and each
Initial Subsidiary Guarantor that is a partnership;
(xiv) certified copies of (a) the Certificate of Incorporation
and bylaws of the HEP General Partner and Hallwood Petroleum, Inc. and
(b) the partnership agreement and certificate of limited partnership,
or the limited liability company agreement and certificate of
formation, as applicable, of each Initial Subsidiary Guarantor other
than HEP;
(xv) certified copies of the Agreement of Limited Partnership
and Certificate of Limited Partnership of HEP;
(xvi) favorable opinions of Cathleen Osborn, Esq., General
Counsel of the Company, the Parent and HEP, and of King & Spalding,
special counsel to the Company, the Parent and HEP, each reasonably
satisfactory to the Existing Holder and substantially in the forms of
Exhibit G-1, and Exhibit G-2 attached hereto, respectively; and
(xvii) copies of the Credit Agreement and related Guarantees,
as in effect on the Effective Date, each of which shall be in form and
substance satisfactory to the Existing Holder.
Effectiveness of the Merger. The Existing Holder shall have
received evidence satisfactory to it in its good faith discretion that the
following conditions to the Merger have been met and that the Merger has been
consummated substantially on the terms described in the Proxy Statement:
(i) the approval of the Agreement of Merger by the holders of
a majority of each class of the HEP units and the Company's common
stock;
(ii) no court or other governmental entity shall have enacted
a law that is in effect and prohibits the Merger and related
transactions;
(iii) the transactions contemplated by the Agreement of Merger
to occur on the effective date of the Merger shall have occurred; and
(iv) the necessary consent of any lender or other third party
that is required shall have been obtained.
Opinion of Existing Holder's Special Counsel. The Existing
Holder shall have received from Baker & Botts, L.L.P., who are acting as special
counsel for the Existing Holder in connection with this transaction, a favorable
opinion reasonably satisfactory to the Existing Holder as to: (a) the due
incorporation, existence and good standing of the Company, the Parent and the
HEP General Partner; (b) the existence and good standing of HEP, May Energy
Partners Operating Partnership Ltd., LaPlata Associates, LLC and Hallwood
LaPlata, LLC; (c) the due authorization by
DAL02:222894.12
002328
5
<PAGE>
all requisite corporate action on the part of the Parent, the execution and
delivery by the Parent, and the validity, legally binding character and
enforceability of, this Agreement, the Warrants, the Registration Rights
Agreement and the Participation Rights Agreement; (d) the due authorization by
all requisite corporate action on the part of the Company, the execution and
delivery by the Company, and the validity, legally binding character and
enforceability of, this Agreement; (e) the due authorization by all requisite
corporate, limited partnership and limited liability company action on the part
of HEP, the other Initial Subsidiary Guarantors and the HEP General Partner, the
execution and delivery by HEP and the other Initial Subsidiary Guarantors, and
the validity, legally binding character and enforceability, of the Subsidiary
Guaranty; (f) the absence of any requirement to register the Warrants under the
Securities Act; and (g) such other matters incident to the matters herein
contemplated as the Existing Holder may reasonably request, including the form
of all papers and the validity of all proceedings. In rendering such opinion,
such counsel may rely, to the extent appropriate, upon the opinions referred to
in paragraph 3A(xvi). Such opinion shall also state that, based upon such
investigation and inquiry as is deemed relevant and appropriate by such counsel,
the opinions referred to in paragraph 3A(xvi) are satisfactory in form and scope
to such counsel and, while such investigation and inquiry into the matters
covered by such opinions (other than the matters specifically addressed above)
were not sufficient to enable such counsel independently to render such
opinions, nothing has come to the attention of such counsel that has caused them
to question the legal conclusions expressed in the opinions referred to in
paragraph 3A(xvi) and such counsel believes that the Existing Holder is
justified in relying on such opinions.
Representations and Warranties; No Default. The
representations and warranties contained in paragraph 9 hereof and in section 8
of each of the Subsidiary Guaranty and the HCP Guaranty shall be true on and as
of the Effective Date; there shall exist on the Effective Date no Event of
Default or Default; and each of the Parent and the Company shall have delivered
to the Existing Holder an Officer's Certificate, dated the Effective Date, to
both such effects.
Transactions Permitted By Applicable Laws. The consummation of
the transactions contemplated hereby on the terms and conditions herein provided
shall not violate any applicable law or governmental regulation (including,
without limitation, Section 5 of the Securities Act or Regulation U or X of the
Board of Governors of the Federal Reserve System) and shall not subject the
Existing Holder to any tax, penalty, liability or other adverse condition under
or pursuant to any applicable law or governmental regulation, and the Existing
Holder shall have received such certificates or other evidence as the Existing
Holder may request to establish compliance with this condition.
Proceedings. All corporate, partnership, limited liability
company and other proceedings taken or to be taken in connection with the
transactions contemplated hereby and all documents incident thereto shall be
reasonably satisfactory in substance and form to the Existing Holder, and the
Existing Holder shall have received all such counterpart originals or certified
or other copies of such documents as the Existing Holder may reasonably request.
DAL02:222894.12
002328
6
<PAGE>
Structuring Fee; Legal Fees. The Company or the Parent shall
have paid a structuring fee in the amount of $112,500 to the Existing Holder in
connection with the transactions herein contemplated. Without limiting the
generality of paragraph 13B, the Company shall have paid on or before the
Effective Date the fees, charges and disbursements of the Existing Holder's
special counsel referred to in paragraph 3C to the extent reflected in a
statement of such counsel rendered to the Company at least one Business Day
prior to the Effective Date.
Compliance With Outstanding Indebtedness Limitations. The
Parent shall have delivered to the Existing Holder an Officer's Certificate of
an authorized financial officer of the Parent describing any instrument or
agreement to which the Parent, the Company or any other Subsidiary is a party or
by which the Parent, the Company or any other Subsidiary of the Parent is bound
that limits the amount of, or otherwise imposes restrictions on the creation,
incurrence or maintenance of, Indebtedness of the Company of the type evidenced
by the Notes, Indebtedness of the Parent of the type evidenced by the Parent's
Guarantee contained in paragraph 11 hereof, Indebtedness of HEP or any other
Initial Subsidiary Guarantor that executes the Subsidiary Guaranty of the type
evidenced by the Subsidiary Guaranty or Indebtedness of HCP of the type
evidenced by the HCP Guaranty, together with such evidence as the Existing
Holder may reasonably request showing that the execution, delivery and
performance by the Company of this Agreement, by the Parent of this Agreement,
the Warrants, the Registration Rights Agreement and the Participation Rights
Agreement, and by HEP and the other Initial Subsidiary Guarantors of the
Subsidiary Guaranty, and HCP of the HCP Guaranty and the HCP Consent, will in
each case not conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default under, or result in the creation of any
Lien on any property owned by the Parent, the Company or any other Subsidiary of
the Parent pursuant to, or permit the holder of any Indebtedness of the Parent,
the Company or any other Subsidiary of the Parent to require the Parent, the
Company or any other Subsidiary of the Parent, as the case may be, to purchase
such Indebtedness under, or permit the holder of any Indebtedness of the Parent,
the Company or any other Subsidiary of the Parent to require the Parent, the
Company or any other Subsidiary of the Parent, as the case may be, to guarantee
or assume such Indebtedness under, or otherwise violate, any agreement or
instrument evidencing any Indebtedness of the Parent, the Company or any other
Subsidiary of the Parent or any agreement relating thereto.
Private Placement Number. A private placement number for the
Warrants shall have been obtained from the CUSIP Service Bureau of Standard &
Poor's Corporation.
Opinion of Company's Tax Counsel. The Existing Holder shall
have received an opinion of the Company's outside tax counsel to the effect that
the Merger should qualify as a reorganization within the meaning of Section
368(a) of the Code and that the Existing Holder should not recognize any gain as
the result of the receipt of the Warrants solely in exchange for the Original
Warrants.
PARAGRAPH PREPAYMENTS.
DAL02:222894.12
002328
7
<PAGE>
4. Prepayments. The Notes shall be subject to prepayment only with
respect to the prepayments specified in paragraphs 4A, 4B and 4C.
Required Prepayments. Until the Notes shall be paid in full,
the Company shall apply to the prepayment of the Notes, without premium, the sum
of $5,000,000 on December 23 in each of the years 2003 through 2006, inclusive,
and such principal amounts of the Notes, together with accrued and unpaid
interest thereon to such prepayment dates, shall become due on such prepayment
dates. The remaining outstanding principal amount of the Notes, together with
interest accrued and unpaid thereon, shall become due on the maturity date of
the Notes.
Optional Prepayment of Notes With Yield-Maintenance Amount.
The Notes shall be subject to prepayment, on any
Business Day, in whole at any time or from time to time in part (in
multiples of $1,000,000), at the option of the Company, at 100% of the
principal amount so prepaid plus unpaid accrued interest thereon to the
prepayment date plus the Yield-Maintenance Amount, if any, with respect
to each Note being so prepaid. Any partial prepayment of the Notes
pursuant to this paragraph 4B shall be applied in satisfaction of
required payments of principal in inverse order of their scheduled due
dates.
The Company shall give the holder of each Note
irrevocable written notice of any prepayment pursuant to this paragraph
4B not less than 25 days and not more than 45 days prior to the
prepayment date, specifying such prepayment date and the principal
amount of the Notes, and of the Notes, if any, held by such holder, to
be prepaid on such date and stating that such prepayment is to be made
pursuant to paragraph 4B. Notice of prepayment having been given as
aforesaid, the principal amount of the Notes specified in such notice,
together with interest thereon to the prepayment date and together with
the Yield Maintenance Amount, if any, with respect thereto, shall
become due and payable on such prepayment date.
Change in Control.
Notice of Occurrence of Change in Control. The Parent
will, within five Business Days after any Responsible Officer has
knowledge of the occurrence of any Change in Control, give written
notice of such Change in Control to each holder of Notes. If a Change
in Control has occurred, such notice shall contain and constitute an
offer to prepay Notes as described in clause (iii) of this paragraph 4C
and shall be accompanied by the certificate described in clause (vi)
hereof.
Notice of Impending Change in Control. The Parent will
not take any action that consummates or finalizes a Change in Control
unless at least 30 days prior to such action it shall have given to
each holder of Notes written notice of such impending Change in
Control.
DAL02:222894.12
002328
8
<PAGE>
Offer to Prepay Notes. The offer to prepay Notes
contemplated by the foregoing clause (i) shall be an offer to prepay,
in accordance with and subject to this paragraph 4C, all, but not less
than all, the Notes held by each holder (in this case only, "holder" in
respect of any Note registered in the name of a nominee for a disclosed
beneficial owner shall mean such beneficial owner) on a date specified
in such offer (the "Proposed Prepayment Date"). Such Proposed
Prepayment Date shall be not less than 50 days and not more than 60
days after the date of such offer (if the Proposed Prepayment Date
shall not be specified in such offer, the Proposed Prepayment Date
shall be the 50th day after the date of such offer).
Rejection; Acceptance. A holder of Notes may accept the
offer to prepay made pursuant to this paragraph 4C by causing a notice
of such acceptance to be delivered to the Company at least five days
prior to the Proposed Prepayment Date. A failure by a holder of Notes
to respond to an offer to prepay made pursuant to this paragraph 4C
shall be deemed to constitute an acceptance of such offer by such
holder.
Prepayment; Reduction of Required Prepayments.
Prepayment of the Notes to be prepaid pursuant to this paragraph 4C
shall be at 100% of the principal amount of such Notes, plus interest
on such Notes accrued to the date of prepayment plus Yield-Maintenance
Amount, if any, with respect to each Note being so prepaid. On the
Business Day preceding the date of prepayment under this paragraph 4C,
the Company shall deliver to each holder of Notes being so prepaid a
statement showing the Yield-Maintenance Amount due in connection with
such prepayment and setting forth the details of the computation of
such amount. Such prepayment shall be made on the Proposed Prepayment
Date. Upon any partial prepayment of Notes pursuant to this paragraph
4C, the principal amount of the required prepayment of Notes becoming
due under paragraph 4A on or after the date of such prepayment shall be
reduced in the same proportion as the aggregate unpaid principal amount
of Notes is reduced as a result of such prepayment.
Officer's Certificate. Each offer to prepay the Notes
pursuant to this paragraph 4C shall be accompanied by a certificate,
executed by a Responsible Officer of the Company and dated the date of
such offer, specifying: (a) the Proposed Prepayment Date; (b) that such
offer is made pursuant to this paragraph 4C; (c) the principal amount
of each Note offered to be prepaid; (d) the estimated Yield-Maintenance
Amount due in connection with such prepayment (calculated as if the
date of such notice were the date of the prepayment) and the details of
such calculation; (e) the interest that would be due on each Note
offered to be prepaid, accrued to the Proposed Prepayment Date; (f)
that the conditions of this paragraph 4C have been fulfilled; and (g)
in reasonable detail, the nature and date of the Change in Control.
Partial Payments Pro Rata. Upon any partial prepayment of
Notes pursuant to paragraph 4A or 4B, the principal amount so prepaid shall be
allocated to all Notes at the time outstanding (including, for the purpose of
this paragraph 4D only, all such Notes prepaid or
DAL02:222894.12
002328
9
<PAGE>
otherwise retired or purchased or otherwise acquired by the Company or any of
its Subsidiaries or Affiliates other than by prepayment pursuant to paragraphs
4A, 4B or 4C) in proportion to the respective outstanding principal amounts
thereof.
Retirement of Notes. The Parent and the Company shall not, and
shall not permit any of their respective Subsidiaries or Affiliates to, prepay
or otherwise retire in whole or in part prior to their stated final maturity
(other than by prepayment pursuant to paragraphs 4A, 4B or 4C or upon
acceleration of such final maturity pursuant to paragraph 8A), or purchase or
otherwise acquire, directly or indirectly, Notes held by any holder unless the
Parent, the Company or such Subsidiary or Affiliate shall have offered to prepay
or otherwise retire or purchase or otherwise acquire, as the case may be, the
same proportion of the aggregate principal amount of Notes held by each other
holder of Notes at the time outstanding upon the same terms and conditions. Any
Notes so prepaid or otherwise retired or purchased or otherwise acquired by the
Parent, the Company or any of their respective Subsidiaries or Affiliates shall
not be deemed to be outstanding for any purpose under this Agreement, except as
provided in paragraph 4D.
PARAGRAPH AFFIRMATIVE COVENANTS.
5. Affirmative Covenants. So long as any Note shall remain unpaid (or,
if no Note shall remain unpaid but any Warrant shall remain outstanding, (i) if
at the time in question the Parent Common Stock is listed or admitted to trading
on any national securities exchange or is traded in the over-the-counter market
and is subject to bid and asked prices with respect thereto being quoted in the
NASDAQ National Market, then only with respect to the covenants of the Parent
set forth in paragraphs 5A(i), (ii), (iii) and (vii) and 5B, or (ii) if the
Parent Common Stock is not so listed, admitted to trading or subject to such bid
and asked prices being so quoted, then only with respect to the covenants of the
Parent set forth in paragraphs 5A, 5B and 5C (other than the provisions thereof
that permit inspection of properties or require that the Parent bear the expense
of any inspection therein contemplated)), the Company and the Parent covenant
that:
Financial Statements. The Company or the Parent will deliver
to each holder in duplicate:
as soon as practicable and in any event within 50 days
after the end of each quarterly period (other than the last quarterly
period) in each fiscal year, consolidated and consolidating statements
of income and cash flows of the Parent and its Subsidiaries for such
quarterly period and for the period from the beginning of the current
fiscal year to the end of such quarterly period, and consolidated and
consolidating balance sheets of the Parent and its Subsidiaries as at
the end of such quarterly period, setting forth in each case in
comparative form figures for the corresponding periods in the preceding
fiscal year, all in reasonable detail and satisfactory in form to the
Required Holder(s) and certified by an authorized financial officer of
the Parent subject to changes resulting from year-end adjustments;
provided, that delivery pursuant to clause (iii) below of copies of the
Quarterly Report on Form 10-Q of the Parent for such quarterly period
filed with the Securities and
DAL02:222894.12
002328
10
<PAGE>
Exchange Commission shall be deemed to satisfy the requirements of this
clause (i) with respect to consolidated financial statements if such
financial statements are included in such report;
as soon as practicable and in any event within 100 days
after the end of each fiscal year, consolidated and consolidating
statements of income and cash flows of the Parent and its Subsidiaries
for such year, and consolidated and consolidating balance sheets and a
consolidated statement of stockholders' equity of the Parent and its
Subsidiaries as at the end of such year, setting forth in each case in
comparative form corresponding consolidated figures from the preceding
annual audit, all in reasonable detail and satisfactory in form to the
Required Holder(s) and reported on by independent public accountants of
recognized national standing selected by the Parent whose report shall
be without limitation as to the scope of the audit and satisfactory in
substance to the Required Holder(s); provided, that delivery pursuant
to clause (iii) below of copies of the Annual Report on Form 10-K of
the Parent for such fiscal year filed with the Securities and Exchange
Commission shall be deemed to satisfy the requirements of this clause
(ii) with respect to consolidated financial statements if such
financial statements are included in such report;
promptly upon transmission thereof, copies of all such
financial statements, proxy statements, notices and reports as the
Parent shall send to its public stockholders and copies of all
registration statements (without exhibits) and all reports which it
files with the Securities and Exchange Commission (or any governmental
body or agency succeeding to the functions of the Securities and
Exchange Commission);
promptly upon receipt thereof, a copy of each other
report submitted to the Parent or any Subsidiary by independent
accountants in connection with any annual, interim or special audit
made by them of the books of the Parent or any Subsidiary;
as soon as practicable and in any event within five
Business Days after any officer of the Parent or the Company obtaining
knowledge (a) of any condition or event which, in the opinion of
management of the Parent or the Company, could have a material adverse
effect on the business, condition (financial or other), assets,
properties, operations or prospects of the Parent and its Subsidiaries
taken as a whole, (b) that any Person has given any notice to the
Parent, the Company or any other Subsidiary of the Parent or taken any
other action with respect to a claimed default or event or condition of
the type referred to in paragraph 8A (iii), (c) of the institution of
any litigation involving claims against the Parent, the Company or any
other Subsidiary of the Parent equal to or greater than $200,000 with
respect to any single cause of action or of any adverse determination
in any court proceeding in any litigation involving a potential
liability to the Parent, the Company or any other Subsidiary of the
Parent equal to or greater than $200,000 with respect to any single
cause of action which makes the likelihood of an adverse determination
in such litigation against the Parent, the Company or such other
Subsidiary substantially more probable, (d) of any regulatory
proceeding which could have a material adverse effect on the business,
condition,
DAL02:222894.12
002328
11
<PAGE>
(financial or other), assets, properties, operations or prospects of
the Parent, the Company and the other Subsidiaries of the Parent taken
as a whole, an Officer's Certificate specifying the nature and period
of existence of any such condition or event, or specifying the notice
given or action taken by such Person and the nature of any such claimed
default, event or condition, or specifying the details of such
proceeding, litigation or dispute and what action the Parent, the
Company or any of the Parent's other Subsidiaries has taken, is taking
or proposes to take with respect thereto;
promptly after the filing or receiving thereof, copies
of all reports and notices which the Parent, the Company or any other
Subsidiary of the Parent files under ERISA with the Internal Revenue
Service or the PBGC or the U.S. Department of Labor or which the
Parent, the Company or any other Subsidiary of the Parent receives from
any of them;
(a) by April 1 and August 1 of each year, a report in
form and substance reasonably satisfactory to the Required Holders,
which may be prepared by or under the supervision of a petroleum
engineer who may be an employee of the Parent or an Affiliate, which
shall evaluate each interest in oil and gas reserves (including without
limitation any production payment with respect to any such reserves)
which is, or is to be, taken into account in the determination of the
"Debt Limit" pursuant to the Credit Agreement as of the preceding
December 31 or June 30, respectively; and (b) together with the report
furnished pursuant to the foregoing clause (a) as of December 31 of any
year, an audit report by April 1 of each year, which shall be in form
and substance reasonably satisfactory to the Required Holders and shall
be prepared by Williamson Petroleum Consultants, Inc. or other
independent petroleum engineers reasonably acceptable to the Required
Holders, which audit report shall state that such independent petroleum
engineers have reviewed at least 50% in value of the interests in oil
and gas reserves subject to such report in detail in order to confirm
the reserve figures and have conducted a general review of the
remaining properties of the Parent and its Subsidiaries, provided that
each year the detailed review of 50% of the interests in oil and gas
reserves contained in such audit report shall cover a different group
of such interests so that 100% of such interests will be covered over
each four-year period; and provided, further that each such review will
always include the two interests in oil and gas properties greatest in
value at the time of such review; and provided, further, that the
reviews contained in each audit report shall separately cover proved
developed producing reserves, proved developed non-producing reserves
and proved undeveloped reserves;
all other reports and information the Parent, the
Company or any other Subsidiary of the Parent is required to provide to
the banks under the Credit Agreement; and
with reasonable promptness, such other information
respecting the condition or operations, financial or otherwise, of the
Parent, the Company or any other Subsidiary of the Parent as such
holder may reasonably request.
DAL02:222894.12
002328
12
<PAGE>
Together with each delivery of financial statements required by clauses (i) and
(ii) above, the Parent will deliver to each holder an Officer's Certificate (a)
demonstrating (with computations in reasonable detail) compliance by the Parent
and its Subsidiaries with the provisions of paragraphs 6A(1), 6A(2), 6B(2)(iv)
and (v), 6B(3)(vii), 6B(4), 6B(6) and 6B(7) and stating that there exists no
Event of Default or Default, or, if any Event of Default or Default exists,
specifying the nature and period of existence thereof and what action the
Parent, the Company or any other Subsidiary of the Parent proposes to take with
respect thereto. Together with each delivery of financial statements required by
clause (ii) above, the Parent will deliver to each holder a certificate of such
accountants stating that, in making the audit necessary for their report on such
financial statements, they have obtained no knowledge of any Event of Default or
Default, or, if they have obtained knowledge of any Event of Default or Default,
specifying the nature and period of existence thereof. Such accountants,
however, shall not be liable to anyone by reason of their failure to obtain
knowledge of any Event of Default or Default which would not be disclosed in the
course of an audit conducted in accordance with generally accepted auditing
standards.
The Parent and the Company each also covenants that
immediately after any Responsible Officer obtains knowledge of an Event of
Default or Default, it will deliver to each holder an Officer's Certificate
specifying the nature and period of existence thereof and what action the
Parent, the Company or any other Subsidiary of the Parent proposes to take with
respect thereto.
Information Required by Rule 144A. The Parent and the Company
will, upon the request of the holder of any Security, provide such holder, and
any qualified institutional buyer designated by such holder, such financial and
other information as such holder may reasonably determine to be necessary in
order to permit compliance with the information requirements of Rule 144A under
the Securities Act in connection with the resale of the Securities, except at
such times as the Parent (in the case of a resale of the Warrants) or the
Company (in the case of a resale of the Notes) is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act. For the purpose of this
paragraph 5B, the term "qualified institutional buyer" shall have the meaning
specified in Rule 144A under the Securities Act.
Inspection of Property. The Parent and the Company will permit
any Person designated by the holder of any Security in writing, at the Company's
expense during the continuance of a Default or Event of Default if such
designation has been made by a Significant Holder and otherwise at the expense
of the holder making such designation, to visit and inspect any of the
properties of the Parent, the Company or any other Subsidiary of the Parent, to
examine the corporate books and financial records of the Parent, the Company and
the other Subsidiaries of the Parent and make copies thereof or extracts
therefrom and to discuss the affairs, finances and accounts of any of such
entities with the principal officers of the Parent, the Company and the other
Subsidiaries of the Parent and their independent public accountants (and by this
provision the Parent and the Company authorize such accountants to discuss the
affairs, finances and accounts of such corporations), all at such reasonable
times and as often as such holder may reasonably request.
DAL02:222894.12
002328
13
<PAGE>
Covenant to Secure Notes Equally. The Parent or the Company
will, if it or any Subsidiary of either of them shall create or assume any Lien
upon any of its property or assets, whether now owned or hereafter acquired to
secure Indebtedness other than Liens permitted by paragraph 6B(2) (unless prior
written consent to the creation or assumption thereof shall have been obtained
pursuant to paragraph 13C), make or cause to be made effective provision whereby
the Notes will be secured by such Lien equally and ratably with any and all
other Indebtedness thereby secured so long as any such other Indebtedness shall
be so secured pursuant to such agreements and instruments as shall be approved
by the Required Holder(s), and the Parent and the Company will cause to be
delivered to the holder of each Note an opinion of independent counsel to the
effect that such agreements and instruments are enforceable in accordance with
their terms and that the Notes are equally and ratably secured with such other
Indebtedness.
Corporate Existence, Licenses and Permits; Maintenance of
Properties. The Parent and the Company will at all times do or cause to be done
all things necessary to maintain, preserve and renew their existence as
corporations organized under the laws of a state of the United States of
America, will preserve and keep in force and effect, and cause each of their
respective Subsidiaries to preserve and keep in force and effect, all licenses
and permits necessary to the conduct of its and their respective businesses and
will maintain and keep, and will cause each of such Subsidiaries to maintain and
keep, its and their respective properties in good repair, working order and
condition, and from time to time make all necessary and proper repairs, renewals
and replacements, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times in the normal course of
business as conducted prior to the date of repair; provided, however, that
nothing contained in this paragraph 5E shall prevent the Parent, the Company or
any other Subsidiary of the Parent from ceasing or omitting to exercise any
right, license or permit or to make any repair, renewal or replacement that (i)
in the reasonable judgment of the Parent, the Company or such other Subsidiary
of the Parent is no longer in the best interests of the Parent, the Company or
such other Subsidiary of the Parent and (ii) such cessation or omission could
not result in a material adverse effect on the business, condition (financial or
other), assets, properties, operations or prospects of the Parent, the Company
and the other Subsidiaries of the Parent taken as a whole.
Maintenance of Insurance. The Parent and the Company will
carry and maintain, and cause each of their respective Subsidiaries to carry and
maintain, insurance (subject to customary deductibles and retentions) in at
least such amounts and against such liabilities and hazards and by such methods
as customarily maintained by other companies operating similar businesses.
Payment of Taxes and Other Claims. The Parent and the Company
will and will cause each of their respective Subsidiaries to file all income tax
or similar tax returns required to be filed in any jurisdiction and to pay and
discharge all taxes shown to be due and payable on such returns and all other
taxes, assessments, governmental charges, levies, trade accounts payable and
claims for work, labor or materials (all the foregoing being referred to
collectively as "Claims") payable by any of them, to the extent such Claims have
become due and payable and before they have become delinquent; provided that
neither the Parent, the Company nor any other Subsidiary of
DAL02:222894.12
002328
14
<PAGE>
the Parent need pay any Claim if (i) the amount, applicability or validity
thereof is contested by the Parent, the Company or such other Subsidiary on a
timely basis in good faith and in appropriate proceedings, and the Parent, the
Company or such other Subsidiary of the Parent has established adequate reserves
therefor in accordance with generally accepted accounting principles on the
books of the Parent, the Company or such other Subsidiary of the Parent or (ii)
the nonpayment of all such Claims in the aggregate could not result in a
material adverse change in the business, condition (financial or other), assets,
properties, operations or prospects of the Parent, the Company and the other
Subsidiaries of the Parent taken as a whole.
ERISA Compliance. The Parent and the Company will, and will
cause each ERISA Affiliate to, at all times:
with respect to each Plan, make timely payments of
contributions required to meet the minimum funding standard set forth
in ERISA or the Code with respect thereto and, with respect to any
Multiemployer Plan, make timely payment of contributions required to be
paid thereto as provided by Section 515 of ERISA, and
comply with all other provisions of ERISA applicable to
the Parent, the Company or such ERISA Affiliate, as the case may be,
except for such failures to make contributions and failures to comply as could
not have a material adverse effect on the business, condition (financial or
other), assets, properties, operations or prospects of the Parent, the Company
and the other Subsidiaries of the Parent taken as a whole.
Compliance with Laws. The Parent and the Company will comply,
and will cause each of their respective Subsidiaries to comply, with all
applicable laws, rules, regulations and orders (including those relating to
protection of the environment) except, in any such case, where failure to comply
could not have a material adverse effect on the business, condition (financial
or other), assets, properties, operations or prospects of the Parent, the
Company and the other Subsidiaries of the Parent taken as a whole.
Maintenance of Books of Record; Reserves. The Parent will, on
a consolidated and consolidating basis, keep proper books of record and account
and set aside appropriate reserves, all in accordance with GAAP.
Guaranty of Notes by Certain Subsidiaries. If any Subsidiary
of the Parent (whether in existence as of the date of this Agreement or
subsequently organized or acquired) delivers or is required to deliver a
Guarantee to, or grants or is required to grant a Lien to, or becomes liable as
a borrower from or an issuer of Indebtedness held by, any holder of Senior Debt
(or a trustee, collateral agent or similar Person on behalf of such holder), or
otherwise becomes obligated or is required to become obligated, directly or
indirectly, with respect to any Senior Debt, the Parent will cause such
Subsidiary to deliver to the holders of the Notes (i) an Assumption of
Subsidiary Guaranty in the form of Exhibit H attached hereto, duly executed by
such Subsidiary, (ii)
DAL02:222894.12
002328
15
<PAGE>
a copy of a resolution of the board of directors of such Subsidiary, or other
appropriate organizational action if such Subsidiary is not a corporation,
approving such Assumption of Subsidiary Guaranty and the execution and delivery
thereof, which copy shall be certified to be a true copy by the Secretary or an
Assistant Secretary of such Subsidiary or other appropriate person if such
Subsidiary is not a corporation, and (iii) an opinion, in the form of Exhibit I
attached hereto, from counsel to the Parent addressing such Subsidiary and
Guaranty.
Without limitation or duplication of the preceding paragraph,
the Parent in any event shall cause each Material Subsidiary to deliver to the
holders of the Notes (i) an Assumption of Subsidiary Guaranty in the form of
Exhibit H attached hereto, duly executed by such Subsidiary, (ii) a copy of a
resolution of the board of directors of such Subsidiary, or other appropriate
organizational action if such Subsidiary is not a corporation, approving such
Assumption of Subsidiary Guaranty and the execution and delivery thereof, which
copy shall be certified to be a true copy by the Secretary or an Assistant
Secretary of such Subsidiary or other appropriate person if such Subsidiary is
not a corporation, and (iii) an opinion, in the form of Exhibit I attached
hereto, from counsel to the Parent addressing such Subsidiary and such
Assumption of Subsidiary Guaranty.
Tax Treatment. The Company and the Parent acknowledge and
agree that, for tax purposes, they will treat the issuance of the Warrants as
being (a) solely in exchange for the Original Warrants in a transaction
qualifying as a reorganization within the meaning of Section 368(a) of the Code
(and within the meaning of any similar provision of state or local income tax
law) and (b) wholly tax-free to the Existing Holder under Section 354 of the
Code (and under any similar provision of state or local income tax law). The
Company and the Parent agree that they will file all tax returns in a manner
consistent with the foregoing treatment, and that they will not take any
position before any taxing authority or in any tax proceeding which is
inconsistent with the foregoing treatment.
PARAGRAPH NEGATIVE COVENANTS.
6. Negative Covenants. So long as any Note shall remain unpaid, the
Company and the Parent covenant that:
Financial Covenants. Neither the Parent nor the Company will
permit, at any time;
6A(1). Total Debt to EBITDA Ratio. The ratio of (i) Total Debt to (ii)
EBITDA for the most recently ended four consecutive fiscal quarters to be
greater than 4.25 to 1.00.
6A(2). Consolidated Net Worth. Consolidated Net Worth of the Parent on
the last day of any fiscal quarter, commencing with the fiscal quarter ended
March 31, 1999, to be less than the sum of (i) $45,000,000 plus (ii) 100% of any
Equity Proceeds plus (iii) the cumulative total of 50% of Consolidated Net
Income for each fiscal quarter (or portion thereof, in the case of the fiscal
quarter ending June 30, 1999) after the Effective Date in which Consolidated Net
Income is positive, to and including the fiscal quarter ended on such
measurement date.
DAL02:222894.12
002328
16
<PAGE>
Other Restrictions. The Parent and the Company will not and
will not permit any of their respective Subsidiaries to:
6B(1). Prohibition Against Layering Indebtedness. Incur, create, issue,
assume, guarantee or in any other manner become directly or indirectly liable
with respect to or responsible for, or permit to remaining outstanding, any
Indebtedness (including, without limitation, Indebtedness permitted pursuant to
paragraphs 6A(1) and 6B(6)) that is subordinate or junior in right of payment to
any Senior Debt or any Guarantee in respect thereof unless such Indebtedness is
subordinate in right of payment to the Notes or any Guarantee in respect thereof
(including, without limitation, the Guarantee of the Parent set forth in
paragraph 11, the HCP Guaranty and the Subsidiary Guaranty), as the case may be,
at least to the same extent as the Notes are subordinate in right of payment to
Senior Debt pursuant to the subordination provisions contained in paragraph 7 or
any such Guarantee in respect of the Notes is subordinate in right of payment to
Senior Debt pursuant to the subordination provisions contained in the applicable
guaranty agreement (including, without limitation, the Guarantee of the Parent
set forth in paragraph 11, the HCP Guaranty and the Subsidiary Guaranty), as the
case may be.
6B(2). Liens. Create, assume or suffer to exist any Lien upon any of
its properties or assets, whether now owned or hereafter acquired (whether or
not provision is made for the equal and ratable securing of the Notes in
accordance with the provisions of paragraph 5D), except:
Liens, on properties or assets of the Parent, the
Company and any party executing a Guarantee with respect to Senior Debt
and the Notes, securing Senior Debt and obligations in respect of
Hedging Transactions and Swaps of the Company, the Parent and HEP under
the Credit Agreement;
the Lien in favor of FAR Gas Acquisitions Corporation
described on Schedule 9D attached hereto;
statutory Liens incidental to the conduct of business
or the ownership of properties of the Parent, the Company and the other
Subsidiaries of the Parent (including Liens in connection with worker's
compensation, unemployment insurance and other like laws (other than
Liens imposed by ERISA), warehousemen's and mechanic's liens and
statutory landlord's liens) and Liens to secure statutory obligations,
property taxes and assessments of governmental charges or other Liens
of like general nature which in each case are incurred in the ordinary
course of business and not in connection with the borrowing of money,
the obtaining of advances or credit or the payment of the deferred
purchase price of property and which do not in any event materially
impair the value or use of the property encumbered thereby in the
operation of the business of the Parent, the Company and the other
Subsidiaries of the Parent; provided in each case, that the obligation
secured is not overdue or is being contested in good faith by
appropriate proceedings and reserves with respect thereto have been
established to the extent required by GAAP;
DAL02:222894.12
002328
17
<PAGE>
Liens, on properties of the Parent, the Company and
other Subsidiaries of the Parent, that secure Non-recourse Debt in an
aggregate amount not to exceed at any time 5% of Consolidated Net Worth
of the Parent, unless otherwise agreed to in writing by the Required
Holders; and
other Liens on properties of the Parent, the Company or
any other Subsidiary of the Parent, provided that the aggregate amount
of Indebtedness or other obligations secured by such Liens plus
(without duplication) the aggregate amount of Indebtedness of all
Subsidiaries of the Parent, other than the Company and other than
Indebtedness that constitutes Senior Debt, does not exceed at any time
the greater of $1,000,000 or 2% of Consolidated Net Worth of the
Parent.
6B(3). Consolidation, Merger or Transfer of Assets. Merge or
consolidate with or into any Person or convey, transfer, lease or otherwise
dispose of all or substantially all of its assets to any Person, except that:
(i) any Subsidiary of the Company may merge with the Company
(provided that the Company shall be the sole continuing or surviving
Person) or with any one or more other Person(s) (provided that each
surviving Person shall be a Wholly Owned Subsidiary of the Company that
has executed and delivered a guaranty agreement in respect of the Notes
pursuant to this Agreement);
(ii) any Subsidiary of the Company may convey, transfer, lease
or otherwise dispose of all or substantially all of its assets to the
Company or to a Wholly Owned Subsidiary of the Company that has
executed and delivered a guaranty agreement in respect of the Notes
pursuant to this Agreement;
(iii) the Company may merge or consolidate with or into any
other corporation or convey, transfer, lease or otherwise dispose of
all or substantially all of its assets to any other corporation;
provided, that: (a) there shall be a single successor formed by such
consolidation or a single survivor formed by such merger, as the case
may be, (b) the successor formed by such consolidation, the survivor of
such merger, or the corporation that acquires by conveyance, transfer,
lease or other disposition all or substantially all of the assets of
the Company, as the case may be, shall be organized and existing under
the laws of a state of the United States and shall have a majority of
its assets and business located in the United States, (c) if the
Company is not such successor or survivor, then either (1) the
successor, survivor or acquirer or (2) the corporation (which shall be
organized and existing under the laws of a state of the United States
and shall have a majority of its assets and business located in the
United States) that owns a majority of the Voting Stock of the
successor, survivor or acquirer shall have expressly assumed all
obligations of the Company under or with respect to the Notes, this
Agreement and any other agreement entered into in connection with the
transactions contemplated hereby, (d) the Person assuming such
obligations shall have caused to be delivered to each holder of
Securities an opinion of
DAL02:222894.12
002328
18
<PAGE>
independent counsel reasonably acceptable to the Required Holder(s), to
the effect that all agreements and instruments effecting such
assumption are enforceable in accordance with their terms (subject to
customary exceptions regarding bankruptcy and equitable principles and
such other exceptions and qualifications, if any, that are reasonably
approved by the Required Holders) and comply with the terms hereof, (e)
no Default or Event of Default shall exist, either prior to or
immediately after giving effect to such merger, consolidation or asset
conveyance, transfer, lease or other disposition, and (f) the
Consolidated Net Worth of the successor, survivor or acquirer
(including circumstances in which the Company is the successor or the
survivor) or, in the case of clause (c)(2) above, the parent
corporation of the successor, survivor or acquirer, shall be equal to
or greater than the Consolidated Net Worth of the Company immediately
prior to such merger, consolidation or asset transfer, lease or other
disposition;
(iv) any Subsidiary of the Parent other than the Company may
merge with the Parent (provided that the Parent shall be the sole
continuing or surviving Person) or with any one or more other Person(s)
(provided that each surviving Person shall be a Wholly Owned Subsidiary
of the Parent that has executed and delivered a guaranty agreement in
respect of the Notes pursuant to this Agreement);
(v) any Subsidiary of the Parent other than the Company may
convey, transfer, lease or otherwise dispose of all or substantially
all of its assets to the Parent or to a Wholly Owned Subsidiary of the
Parent that has executed and delivered a guaranty agreement in respect
of the Notes pursuant to this Agreement;
(vi) the Parent may merge or consolidate with or into any
other corporation or convey, transfer, lease or otherwise dispose of
all or substantially all of its assets to any other corporation;
provided, that: (a) there shall be a single successor formed by such
consolidation or a single survivor formed by such merger, as the case
may be, (b) the successor formed by such consolidation, the survivor of
such merger, or the corporation that acquires by conveyance, transfer,
lease or other disposition all or substantially all of the assets of
the Parent, as the case may be, shall be organized and existing under
the laws of a state of the United States and shall have a majority of
its assets and business located in the United States, (c) if the Parent
is not such successor or survivor, then either (1) the successor,
survivor or acquirer or (2) the corporation (which shall be organized
and existing under the laws of a state of the United States and shall
have a majority of its assets and business located in the United
States) that owns a majority of the Voting Stock of the successor,
survivor or acquirer shall have expressly assumed all obligations of
the Parent under or with respect to the Warrant, this Agreement, the
Registration Rights Agreement, the Participation Rights Agreement and
any other agreement entered into in connection with the transactions
contemplated hereby, (d) the Person assuming such obligations shall
have caused to be delivered to each holder of Securities an opinion of
independent counsel reasonably acceptable to the Required Holder(s), to
the effect that all agreements and instruments effecting such
assumption are enforceable in accordance with their terms (subject to
DAL02:222894.12
002328
19
<PAGE>
customary exceptions regarding bankruptcy and equitable principles and
such other exceptions and qualifications, if any, that are reasonably
approved by the Required Holders) and comply with the terms hereof, (e)
no Default or Event of Default shall exist, either prior to or
immediately after giving effect to such merger, consolidation or asset
conveyance, transfer, lease or other disposition, and (f) the
Consolidated Net Worth of the successor, survivor or acquirer
(including circumstances in which the Company is the successor or the
survivor) or, in the case of clause (c)(2) above, the parent
corporation of the successor, survivor or acquirer, shall be equal to
or greater than the Consolidated Net Worth of the Parent immediately
prior to such merger, consolidation or asset transfer, lease or other
disposition; and
(vii) any Subsidiary of the Parent other than the Company may
merge or consolidate with or into any other Person, or convey,
transfer, lease or otherwise dispose of all or substantially all of its
assets to any other Person, if such transaction is permitted by
paragraph 6B(4).
In the event of a merger or consolidation involving a
Subsidiary of the Parent pursuant to the foregoing clause (vii) in which such
Subsidiary is not the successor or survivor, the holders of the Notes agree to
release such Subsidiary from any Guarantee in respect of the Notes to which it
is a party, upon written request of the Parent, if (i) no Default or Event of
Default shall exist immediately after giving effect to such merger or
consolidation and the Parent shall deliver to the holder of each Note an
Officer's Certificate to such effect, and (ii) the holders of Senior Debt also
release such Subsidiary from any Guarantee in respect of Senior Debt to which it
is a party.
6B(4). Limitation on Certain Asset Dispositions. Make any Asset
Disposition unless:
(i) in the good faith opinion of the Parent, the Asset
Disposition is in exchange for consideration having a Fair Market Value
at least equal to that of the property exchanged and is in the best
interest of the Parent, the Company or another Subsidiary of the Parent
that is the transferor with respect to the Asset Disposition in
question, as applicable;
(ii) immediately after giving effect to the Asset Disposition,
no Default or Event of Default would exist; and
(iii) immediately after giving effect to the Asset
Disposition:
(a) the aggregate Disposition Value of all property
that was the subject of any Asset Disposition occurring (1) in
the period of 365 days then ending would not exceed 15% of
Consolidated Assets as of the end of the then most recently
ended fiscal quarter of the Parent, and (2) at any time after
December 31, 1998 would not exceed 40% of Consolidated Assets
as of the end of the then most recently ended fiscal quarter
of the Parent; and
DAL02:222894.12
002328
20
<PAGE>
(b) the aggregate Disposition Value of all property of
the Company and its Subsidiaries that was the subject of any
Asset Disposition occurring (1) in the period of 365 days then
ending would not exceed 15% of consolidated assets of the
Company and its Subsidiaries (determined in the same manner as
Consolidated Assets of the Parent and its Subsidiaries) as of
the end of the then most recently ended fiscal quarter of the
Company, and (2) at any time after December 31, 1998 would not
exceed 40% of consolidated assets of the Company and its
Subsidiaries (determined in the same manner as Consolidated
Assets of the Parent and its Subsidiaries) as of the end of
the then most recently ended fiscal quarter of the Company.
Notwithstanding anything contained in the foregoing to the
contrary, if the net proceeds for any Transfer are applied to a Property
Reinvestment Application within 180 days after such Transfer, then such
Transfer, only for the purpose of determining compliance with clause (iii) of
this paragraph 6B(4) as of any date, shall be deemed not to be an Asset
Disposition.
In the event of an Asset Disposition in the form of a
disposition of all of the capital stock of or other equity interests in any
Subsidiary, the holders of the Notes agree to release such Subsidiary from any
Guarantee in respect of the Notes to which it is a party, upon written request
of the Parent, if (i) no Default or Event of Default shall exist immediately
after giving effect to such Asset Disposition and the Parent shall deliver to
the holder of each Note an Officer's Certificate to such effect, and (ii) the
holders of Senior Debt also release such Subsidiary from any Guarantee in
respect of Senior Debt to which it is a party.
6B(5). Transactions With Affiliates. Other than in the case of
transactions between Wholly Owned Subsidiaries of the Parent (other than the
Company) that have executed guaranty agreements with respect to the Notes
pursuant to this Agreement, directly or indirectly purchase, acquire or lease
any property from, or sell, transfer or lease any property to, or otherwise deal
with, (i) any Affiliate, (ii) any Person owning, beneficially or of record,
directly or indirectly, either individually or together with all other Persons
to whom such Person is related by blood, adoption or marriage, stock of the
Parent (of any class having ordinary voting power for the election of directors)
aggregating 5% or more of such voting power or (iii) any Person related by
blood, adoption or marriage to any Person described or coming within the
provisions of clause (i) or (ii) of this paragraph 6B(5), except in the ordinary
course of business (as determined by reference to the ordinary course of
business in the oil and gas industry) and pursuant to the reasonable
requirements of the business of the Parent, the Company or the other Subsidiary
of the Parent involved in such transaction, as the case may be, and upon terms
and conditions at least as favorable to the Parent, the Company or such other
Subsidiary as the terms and conditions that would then be obtainable in a
comparable arm's-length transaction with a Person not an Affiliate; provided,
that the Parent may sell to, or purchase from, any such Person shares of the
Parent's stock so long as no Default or Event of Default exists immediately
prior to or immediately after giving effect to any such purchase by the Parent;
and provided, further, that the Parent, the Company or any of the other
Subsidiaries of the Parent may participate in, or effect any transaction in
connection with, any joint enterprise or other
DAL02:222894.12
002328
21
<PAGE>
joint arrangement with any Affiliate if the Parent, the Company or such other
Subsidiary participates in or effects such transaction in the ordinary course of
its business and on a basis no less advantageous than the basis on which the
Parent, the Company or such other Subsidiary would participate in a similar
transaction with a Person not an Affiliate.
6B(6). Priority Debt. Permit Indebtedness of Subsidiaries of the
Parent, other than the Company and other than Indebtedness that constitutes
Senior Debt, plus (without duplication) Indebtedness secured by Liens permitted
by clause (v) of paragraph 6B(2) to exceed, at any time, the greater of
$1,000,000 or 2% of Consolidated Net Worth of the Parent.
6B(7). Hedging Transactions. Be or become a party to any Swap or any
Hedging Transaction for any purpose except for bona fide hedging purposes.
Without limiting the generality of the foregoing, at no time during any calendar
year will the Parent be a party to or permit the Company or any other Subsidiary
to be a party to any Hedging Transaction with respect to natural gas or crude
oil if, immediately after giving effect to such Hedging Transaction, the
aggregate reference quantity of hydrocarbons with respect to Hedging
Transactions with respect to natural gas or crude oil that the Parent, the
Company and the other Subsidiaries of the Parent shall have entered into during
such year exceeds 65% of the aggregate natural gas and crude oil production of
the Parent, the Company and the other Subsidiaries of the Parent for such year
(calculated on the basis of actual natural gas and crude oil production for such
year to date and a good faith estimate of the aggregate amount of such
production for the remainder of such year).
6B(8). Change of Business. Change in any material respect the nature of
its respective business or operations from the exploration, development and
production, gathering, processing and marketing of oil and gas and activities
relating directly thereto, or engage, directly or indirectly, in any material
business activity, or purchase or otherwise acquire any material property, in
any case not directly related to the conduct of the above-described business or
operations.
PARAGRAPH SUBORDINATION OF NOTES.
Subordination. Anything in this Agreement to the contrary
notwithstanding, the Indebtedness evidenced by the Notes, including principal,
Yield-Maintenance Amount, if any, and interest, shall be subordinate and junior
to the extent set forth in subparagraphs (i) through (vi) inclusive, below, to
all Senior Debt.
If the Company shall default in the payment of any
principal of or interest on any Senior Debt in an amount in excess of
$100,000 owing under any single instrument when the same becomes due
and payable, whether at maturity or at a date fixed for prepayment or
at any other date on which the Company is required to prepay any Senior
Debt or by declaration of acceleration or otherwise, then, unless and
until such default shall have been remedied by payment in full or
waived, no holder of the Notes shall accept or receive any direct or
indirect payment of or on account of any Indebtedness in respect of the
Notes.
DAL02:222894.12
002328
22
<PAGE>
In the event of any insolvency, bankruptcy,
liquidation, reorganization or other similar proceedings, or any
receivership proceedings in connection therewith, relative to the
Company, and in the event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company, whether or not
involving insolvency or bankruptcy proceedings, then all Senior Debt
shall first be paid in full before any payment of or on account of
principal or Yield-Maintenance Amount, if any, or interest is made by
the Company in respect of the Notes.
In any of the proceedings referred to in subparagraph
(ii) above, any payment or distribution of any kind or character,
whether in cash, property, stock or obligations, which may be payable
or deliverable by the Company in respect of the Notes shall be paid or
delivered directly to the holders of Senior Debt (or to a banking
institution selected by the court or Person making the payment or
delivery or designated by any holder of Senior Debt) for application in
payment thereof in accordance with the priorities then existing among
such holders, unless and until all Senior Debt shall have been paid in
full; provided, however, that
if the payment or delivery by the Company of such
cash, property, stock or obligations to the holders of the
Notes is authorized by an order or decree giving effect, and
stating in such order or decree that effect is given, to the
subordination of the Notes to Senior Debt, and made in a
reorganization proceeding under any applicable bankruptcy or
reorganization law, no payment or delivery by the Company of
such cash, property, stock or obligations payable or
deliverable with respect to the Notes shall be made to the
holders of Senior Debt; and
no such delivery shall be made to holders of Senior
Debt of stock or obligations if the delivery thereof is
authorized by an order or decree giving effect, and stating in
such order or decree that effect is given, to the
subordination of the Notes to Senior Debt, and if such stock
or obligations are subordinate and junior (whether by law or
agreement) at least to the extent provided in this paragraph 7
to the payment of all Senior Debt then outstanding and to the
payment of any stock or obligations which are issued pursuant
to such reorganization proceedings in exchange or substitution
for any Senior Debt then outstanding.
A transaction permitted by paragraph 6B(3)(iii) shall not be deemed a
dissolution, winding-up, liquidation or reorganization for the purposes of this
paragraph 7.
Upon the occurrence and during the continuance of any
Default Subordination Event (other than under circumstances when the
terms of subparagraph (ii) above are applicable), no holder of Notes
shall accept or receive any direct or indirect payment by setoff or
otherwise of or on account of any indebtedness in respect of the Notes
during the Stand-Still Period, provided that in the case of any payment
on or in respect of any Note which would (in the absence of any such
Default Subordination Event) have been due and payable on any date
during such Stand-Still Period, the provisions of this subparagraph
DAL02:222894.12
002328
23
<PAGE>
(iv) shall not prevent such payment on or after the date immediately
following the termination of such Stand-Still Period. There shall be no
more than three Stand-Still Periods, in the aggregate, so long as the
Notes are outstanding, whether the Stand-Still Period arises in
connection with, or a notice under, this paragraph 7, the HCP Guaranty,
the Subsidiary Guaranty or the Parent Guarantee contained in paragraph
11 hereof.
If any payment or distribution of any character,
whether in cash, securities or other property, shall be received by any
holder of Notes in contravention of any of the terms of this paragraph
7 and before all the Senior Debt shall have been paid in full, such
payment or distribution shall be received in trust for the benefit of
the holders of the Senior Debt at the time outstanding and shall
forthwith be paid over or delivered and transferred to the holders of
Senior Debt.
If any payment by the Company in respect of Senior Debt
must be disgorged by any holder of Senior Debt as a result of any
action under the United States Bankruptcy Code or other debtor relief
law, the obligations in respect of which such payment was made shall
continue to constitute Senior Debt and shall remain entitled to the
benefit of the provisions of this provision. Without limitation of the
foregoing, in the event of any such disgorgement by a holder of Senior
Debt, all holders of Notes, if any, who have become subrogated to the
rights of such holder of Senior Debt pursuant to this Agreement and
have obtained payment from the Company through the exercise of such
subrogation rights shall disgorge and pay to such holder of Senior Debt
any payment so obtained, to the extent of the payment or payments
disgorged by such holders of Senior Debt.
Obligation of the Company Unconditional. The provisions of
this paragraph 7 are for the purpose of defining the relative rights of the
holders of Senior Debt on the one hand, and the holders of the Notes on the
other hand, against the Company and its property, and nothing herein shall
impair, as between the Company and the holders of the Notes, the obligation of
the Company, which is unconditional and absolute, to pay to the holders thereof
the principal thereof and Yield- Maintenance Amount, if any, and interest
thereon in accordance with their terms and the provisions hereof, nor shall
anything herein prevent the holders of the Notes from exercising all remedies
otherwise permitted by applicable law or hereunder upon default hereunder or
under the Notes (including, without limitation, the right to demand payment and
sue for performance hereof and of the Notes and to accelerate the maturity
thereof as provided in paragraph 8A), subject to the rights, if any, under this
paragraph 7 of holders of Senior Debt to receive cash, property, stock or
obligations otherwise payable or deliverable by the Company to the holders of
the Notes.
Subrogation. Upon payment in full of Senior Debt, the holders
of the Notes shall be subrogated to the rights of the holders of the Senior Debt
to receive payments or distributions of assets of the Company made on Senior
Debt until the principal of and Yield-Maintenance Amount, if any, and interest
on the Notes shall be paid in full, and, for the purposes of such subrogation,
no payments to the holders of Senior Debt of any cash, property, stock or
obligations to which the holders of the Notes would be entitled except for the
provisions of paragraph 7A(iii) shall, as
DAL02:222894.12
002328
24
<PAGE>
between the Company, its creditors (other than the holders of the Senior Debt)
and the holders of the Notes, be deemed to be a payment by the Company to or on
account of Senior Debt.
Rights of Holders of Senior Debt. The provisions of this
paragraph 7 shall be deemed a continuing offer to all holders of Senior Debt to
act in reliance on such provisions (but no such reliance shall be required to be
proven to receive the benefits hereof) and may be enforced by such holders and
no right of any present or future holder of any Senior Debt to enforce
subordination as provided in this paragraph 7 shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act by any such holder, or by any non-compliance by
the Company with the terms, provisions and covenants of this Agreement or the
Notes. Without in any way limiting the generality of the foregoing, the holders
of Senior Debt may, at any time and from time to time, without the consent of or
notice to the holders of the Notes, and without impairing or releasing the
subordination provided in this paragraph 7 or the obligations hereunder of the
holders of the Notes to the holders of Senior Debt, do any one or more of the
following, subject in all cases to the limitations contained in the definition
of Senior Debt: (i) change the manner, place or terms of payment or extend the
time of payment of, or renew or alter (including, without limitation, by
increasing or decreasing the "Availability Limit" and the "Debt Limit," in each
case as defined in the Credit Agreement pursuant to which Senior Debt is
incurred), or waive defaults under, Senior Debt, or otherwise amend or
supplement in any manner Senior Debt or any instrument evidencing the same or
any agreement under which Senior Debt is outstanding; (ii) sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing Senior Debt; (iii) release any Person liable in any manner for the
payment or collection of Senior Debt; and (iv) exercise or refrain from
exercising any rights against the Company and any other Person, including any
guarantor or surety.
PARAGRAPH EVENTS OF DEFAULT.
8. Events of Default.
Acceleration. If any of the following events shall occur and
be continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
the Company defaults in the payment of any principal of
or Yield- Maintenance Amount payable with respect to any Note, in any
case when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
the Company defaults in the payment of any interest on
any Note for more than five days after the date due; or
the Parent, the Company or any other Subsidiary of the
Parent defaults (whether as primary obligor or as guarantor or other
surety) in any payment of principal of or interest on or premium, if
any, with respect to any other Indebtedness beyond any period of grace
DAL02:222894.12
002328
25
<PAGE>
provided with respect thereto, or the Parent, the Company or any other
Subsidiary of the Parent fails to perform or observe any other
agreement, term or condition contained in any agreement under which any
such Indebtedness is created (or if any other event thereunder or under
any such agreement shall occur and be continuing) and the effect of
such failure or other event is to cause such obligation to become due
(or to be purchased by the Parent, the Company or any other Subsidiary
of the Parent) prior to any stated maturity; provided, that the
aggregate amount of all obligations as to which such a payment default
shall occur and be continuing or such a failure or other event causing
acceleration (or sale to the Parent, the Company or any other
Subsidiary of the Parent) shall occur and be continuing exceeds
$2,500,000; or
any representation or warranty made by the Parent or
the Company herein, by HEP or any other Subsidiary in the Subsidiary
Guaranty, by HCP in the HCP Guaranty, or by the Parent or the Company
or any of their respective officers in any writing furnished in
connection with or pursuant to this Agreement shall be false in any
material respect on the date as of which made; or
the Company or the Parent fails to perform or observe
any term, covenant or agreement contained in paragraphs 6A, 6B(1),
6B(2), 6B(3), 6B(4), 6B(6) or 6B(7); or
the Company or the Parent fails to perform or observe
any other agreement, covenant, term or condition contained herein and
such failure shall not be remedied within 30 days after (a) any
Responsible Officer obtains actual knowledge thereof or (b) the Company
or the Parent receives written notice of such failure from any holder;
or
the Parent, the Company or any other Subsidiary of the
Parent makes an assignment for the benefit of creditors or is generally
not paying its debts as such debts become due; or
any decree or order for relief in respect of the
Parent, the Company or any other Subsidiary of the Parent is entered
under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar
law, whether now or hereafter in effect (the "Bankruptcy Law"), of any
jurisdiction; or
the Parent, the Company or any other Subsidiary of the
Parent petitions or applies to any tribunal for, or consents to, the
appointment of, or taking possession by, a trustee, receiver,
custodian, liquidator or similar official of the Parent, the Company or
any other Subsidiary of the Parent, or of any substantial part of the
assets of the Parent, the Company or any other Subsidiary of the
Parent, or commences a voluntary case under the Bankruptcy Law of the
United States or any proceedings (other than proceedings for the
voluntary liquidation and dissolution of a Subsidiary of the Parent
other than the Company) relating to the Parent, the Company or any
other Subsidiary of the Parent under the Bankruptcy Law of any other
jurisdiction; or
DAL02:222894.12
002328
26
<PAGE>
any such petition or application is filed, or any such
proceedings are commenced, against the Parent, the Company or any other
Subsidiary of the Parent and the Parent, the Company or any such other
Subsidiary of the Parent by any act indicates its approval thereof,
consent thereto or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee, receiver, custodian,
liquidator or similar official, or approving the petition in any such
proceedings, and such order, judgment or decree remains unstayed and in
effect for more than 30 days; or
any order, judgment or decree is entered in any
proceedings against the Parent decreeing the dissolution of the Parent,
the Company or any other Subsidiary of the Parent and such order,
judgment or decree remains unstayed and in effect for more than 60
days; or
any order, judgment or decree is entered in any
proceedings against the Parent, the Company or any other Subsidiary of
the Parent decreeing a split-up of the Parent, the Company or such
other Subsidiary of the Parent which requires the divestiture of assets
representing a substantial part, or the divestiture of the stock of, or
other equity interests in, a Subsidiary whose assets represent a
substantial part, of the consolidated assets of the Parent and its
Subsidiaries (determined in accordance with generally accepted
accounting principles) or which requires the divestiture of assets, or
stock of a Subsidiary, which shall have contributed a substantial part
of Consolidated Net Income for any of the three fiscal years then most
recently ended, and such order, judgment or decree remains unstayed and
in effect for more than 60 days; or
one or more final judgments or final orders, in an
aggregate amount in excess of $1,000,000 is rendered against the
Parent, the Company or any other Subsidiary of the Parent and either
(a) enforcement proceedings have been commenced by any creditor upon
such judgment or order or (b) within 45 days after entry thereof, such
judgment is not discharged or execution thereof stayed pending appeal,
or within 45 days after the expiration of any such stay, such judgment
is not discharged; or
any Termination Event with respect to a Plan shall have
occurred and, within 30 days after the occurrence thereof, (a) such
Termination Event (if correctable) shall not have been corrected and
(b) the then present value of such Plan's vested benefits exceeds the
then current value of assets accumulated in such Plan by more than the
amount of $1,000,000 (or in the case of a Termination Event involving
the withdrawal of a "substantial employer" (as defined in Section
4001(a) (2) of ERISA), the withdrawing employer's proportionate share
of such excess shall exceed such amount); or
the Parent, the Company or any of their respective
ERISA Affiliates as employer under a Multiemployer Plan shall have made
a complete or partial withdrawal from such Multiemployer Plan and the
plan sponsor of such Multiemployer Plan shall have notified such
withdrawing employer that such employer has incurred a withdrawal
liability in an aggregate amount exceeding $1,000,000; or
DAL02:222894.12
002328
27
<PAGE>
(xvi) the Guarantee of the Parent set forth in paragraph 11,
the HCP Guaranty or the Subsidiary Guaranty shall for any reason cease
to be in full force and effect and valid, binding and enforceable
(except as enforceability may be subject to any applicable bankruptcy,
insolvency or similar laws or equitable principles generally affecting
the enforcement of creditors' rights) in accordance with its terms, or
the Parent or any Guarantor shall so state in writing;
then (a) if such event is an Event of Default specified in clause (i) or (ii) of
this paragraph 8A, the holder of any Note (other than the Parent, the Company or
any other Subsidiary or Affiliate of the Parent) may at its option, by notice in
writing to the Company, declare such Note to be, and such Note shall thereupon
be and become, immediately due and payable at par together with interest accrued
thereon, without presentment, demand, protest or other notice of any kind, all
of which are hereby waived by the Company and the Parent, (b) if such event is
an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 8A
with respect to the Company, the Parent or HEP, all of the Notes at the time
outstanding shall automatically become immediately due and payable together with
interest accrued thereon and together with the Yield-Maintenance Amount, if any,
with respect to each Note, without presentment, demand, protest or notice of any
kind, all of which are hereby waived by the Company and the Parent, and (c) if
such event is not an Event of Default specified in clause (viii), (ix) or (x) of
this paragraph 8A with respect to the Company, the Parent or HEP, the Required
Holder(s) may at its or their option, by notice in writing to the Company,
declare all of the Notes to be, and all of the Notes shall thereupon be and
become, immediately due and payable together with interest accrued thereon and
together with the Yield-Maintenance Amount, if any, with respect to each Note,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Company and the Parent.
The Parent and the Company acknowledge, and the parties hereto agree,
that each holder of a Note has the right to maintain its investment in the Notes
free from repayment (except as herein specifically provided for) and that the
provisions for payment of the Yield-Maintenance Amount in the event that the
Notes are prepaid or are accelerated as a result of an Event of Default are
intended to provide compensation for the deprivation of such right under such
circumstances.
Rescission of Acceleration. At any time after any or all of
the Notes shall have been declared immediately due and payable pursuant to
paragraph 8A, the Required Holder(s) may, by notice in writing to the Company,
rescind and annul such declaration and its consequences if (i) the Company shall
have paid all overdue interest on the Notes, the principal of and
Yield-Maintenance Amount, if any, payable with respect to any Notes which have
become due otherwise than by reason of such declaration, and interest on such
overdue interest and overdue principal and Yield- Maintenance Amount, if any, at
the rate specified in the Notes, (ii) neither the Company, the Parent, HCP, the
Initial Subsidiary Guarantors nor any other Subsidiary that has executed a
guaranty agreement in respect of the Notes pursuant to this Agreement shall have
paid any amounts which have become due solely by reason of such declaration,
(iii) all Events of Default and Defaults, other than non-payment of amounts
which have become due solely by reason of such declaration, shall have been
cured or waived pursuant to paragraph 13C, and (iv) no judgment or decree shall
have
DAL02:222894.12
002328
28
<PAGE>
been entered for the payment of any amounts due pursuant to the Notes or this
Agreement. No such rescission or annulment shall extend to or affect any
subsequent Event of Default or Default or impair any right arising therefrom.
Notice of Acceleration or Rescission. Whenever any Note shall
be declared immediately due and payable pursuant to paragraph 8A or any such
declaration shall be rescinded and annulled pursuant to paragraph 8B, the
Company shall forthwith give written notice thereof to the holder of each Note
at the time outstanding.
Other Remedies. If any Event of Default or Default shall occur
and be continuing, the holder of any Note may proceed to protect and enforce its
rights under this Agreement, such Note, the Subsidiary Guaranty and the HCP
Guaranty by exercising such remedies as are available to such holder in respect
thereof under applicable law, either by suit in equity or by action at law, or
both, whether for specific performance of any covenant or other agreement
contained in this Agreement, the Subsidiary Guaranty or the HCP Guaranty or in
aid of the exercise of any power granted herein or therein. No remedy conferred
in this Agreement upon the holder of any Note is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy conferred herein or therein or now or hereafter
existing at law or in equity or by statute or otherwise.
PARAGRAPH REPRESENTATIONS, COVENANTS AND WARRANTIES.
9. Representations, Covenants and Warranties. The Parent and the
Company each represents, covenants and warrants, both on the date hereof and on
the Effective Date after giving effect to the Merger, as follows:
Organization. The Parent is a corporation duly organized and
validly existing and in good standing under the laws of the State of Delaware.
Each Subsidiary is a corporation, limited partnership or limited liability
company, as the case may be, duly organized and validly existing in good
standing under the laws of its state of incorporation or formation. Each of the
Parent and its Subsidiaries is duly qualified as a foreign corporation, limited
partnership or limited liability company, as the case may be, in each
jurisdiction in which the nature of the business transacted or the property
owned or leased by it is such as to require such qualification, except where
such failure to be so qualified, whether individually or in the aggregate, would
not result in any material adverse effect upon the business, condition
(financial or other), assets, properties, operations or prospects of the Parent,
the Company and the other Subsidiaries of the Parent taken as a whole. The
execution, delivery and performance by the Parent and the Company of this
Agreement, the Notes, the Warrants, the Registration Rights Agreement and the
Participation Rights Agreement are within the corporate powers of the Company
and the Parent and have been duly authorized by all necessary corporate action.
The execution, delivery and performance of the Subsidiary Guaranty by HEP, the
HEP General Partner and the other Initial Subsidiary Guarantors are within such
Subsidiary's limited partnership, limited liability company or corporate powers,
as the case may be, and have been duly authorized by all necessary corporate,
limited partnership or limited liability company action on its
DAL02:222894.12
002328
29
<PAGE>
part. No Subsidiary of the Parent, other than the Company, HCP and the Initial
Subsidiary Guarantors, is a Material Subsidiary.
Financial Statements. The Parent has furnished the Existing
Holder with the following financial statements, identified by a principal
financial officer of the Parent: a pro forma consolidated balance sheet of the
Parent and its Subsidiaries as at December 31, 1998, and a pro forma
consolidated statement of income of the Parent and its Subsidiaries for the year
then ended, all prepared by the Parent, in each case after giving effect to the
Merger as if the Merger had been consummated (x) on December 31, 1998, in the
case of the consolidated balance sheet of the Parent and (y) January 1, 1998, in
the case of the consolidated statement of income of the Parent. Such financial
statements (including any related schedules and/or notes) are true and correct
in all material respects, have been prepared on a pro forma basis in accordance
with GAAP consistently followed throughout the periods involved and show all
liabilities, direct and contingent, of the Parent and its Subsidiaries required
to be shown in accordance with GAAP. The balance sheet fairly presents the pro
forma financial condition of the Parent and its Subsidiaries as at the date
thereof, and the statements of income, stockholders' equity and cash flows
fairly present the pro forma results of the operations of the Parent and its
Subsidiaries and their cash flows for the period indicated. There has been no
material adverse change in the business, condition (financial or other), assets,
properties, operations or prospects of the Parent and its Subsidiaries taken as
a whole since December 31, 1998.
The Company has furnished the Existing Holder with the
following financial statements, identified by a principal financial officer of
the Company: (i) a consolidated balance sheet of the Company and its
Subsidiaries as at December 31, 1998, and consolidated statements of income,
stockholders' equity and cash flows of the Company and its Subsidiaries for the
year then ended, all reported on by independent certified public accountants;
and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at
March 31, 1999, and consolidated statements of income and cash flows for the
fiscal quarter ended on such date, all prepared by the Company. Such financial
statements (including any related schedules and/or notes) are true and correct
in all material respects (subject, as to interim statements, to changes
resulting from audits and year-end adjustments, which in the aggregate will not
be material), have been prepared in accordance with GAAP consistently followed
throughout the periods involved and show all liabilities, direct and contingent,
of the Company and its Subsidiaries required to be shown in accordance with
GAAP. The balance sheets fairly present the condition of the Company and its
Subsidiaries as at the dates thereof, and the statements of income,
stockholders' equity and cash flows fairly present the results of the operations
of the Company and its Subsidiaries and their cash flows for the periods
indicated. There has been no material adverse change in the business, condition
(financial or other), assets, properties, operations or prospects of the Company
and its Subsidiaries taken as a whole since December 31, 1998.
HEP has furnished the Existing Holder with the following
financial statements, identified by a principal financial officer of HEP: (i) a
consolidated balance sheet of HEP and its Subsidiaries as at December 31, 1998,
and consolidated statements of income, stockholders' equity and cash flows of
HEP and its Subsidiaries for the year then ended, all reported on by independent
DAL02:222894.12
002328
30
<PAGE>
certified public accountants; and (ii) a consolidated balance sheet of HEP and
its Subsidiaries as at March 31, 1999 and consolidated statements of income and
cash flows for the fiscal quarter ended on such date, all prepared by HEP. Such
financial statements (including any related schedules and/or notes) are true and
correct in all material respects (subject, as to interim statements, to changes
resulting from audits and year-end adjustments, which in the aggregate will not
be material), have been prepared in accordance with GAAP consistently followed
throughout the periods involved and show all liabilities, direct and contingent,
of HEP and its Subsidiaries required to be shown in accordance with GAAP. The
balance sheets fairly present the condition of HEP and its Subsidiaries as at
the dates thereof, and the statements of income, stockholders' equity and cash
flows fairly present the results of the operations of HEP and its Subsidiaries
and their cash flows for the periods indicated. There has been no material
adverse change in the business, condition (financial or other), assets,
properties, operations or prospects of HEP and its Subsidiaries taken as a whole
since December 31, 1998.
Actions Pending. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Parent or the Company, threatened
against the Parent, the Company or any of the other Subsidiaries of the Parent,
or any properties or rights of the Parent, the Company or any of the other
Subsidiaries of the Parent, by or before any court, arbitrator or administrative
or governmental body which could reasonably be expected to result in any
material adverse change in the business, condition (financial or other), assets,
properties, operations or prospects of the Parent, the Company and the other
Subsidiaries of the Parent taken as a whole. There is no action, suit,
investigation or proceeding pending or threatened against the Parent, the
Company or any of the other Subsidiaries of the Parent which purports to affect
the validity or enforceability of this Agreement, any Note, the Subsidiary
Guaranty, the HCP Guaranty, any Warrant, the Registration Rights Agreement, the
Participation Rights Agreement or the Merger Agreement or the transactions
contemplated hereby or thereby.
Outstanding Indebtedness. Neither the Parent, the Company nor
any of the other Subsidiaries of the Parent has outstanding any Indebtedness or
Non-recourse Debt except as permitted by paragraphs 6A(1) and 6B(6) and all of
which is described in Schedule 9D attached hereto. There exists no default under
(and no waiver of default is currently in effect with respect to) the provisions
of any instrument evidencing such Indebtedness or of any agreement relating
thereto, and no event or condition exists with respect to any Indebtedness of
the Parent, the Company or any other Subsidiary of the Parent that would permit
(or that with notice or the lapse of time, or both, would permit) one or more
Persons to cause such Indebtedness to become due and payable before its stated
maturity or before its regularly scheduled dates of payment.
Title to Properties. The Parent, the Company and each of their
respective Subsidiaries has, (i) in the case of each property having a market
value of at least $100,000, good and marketable title to its respective real
properties (including, without limitation, oil and gas properties but excluding
office space that it leases), and (ii) in the case of all of its other
respective properties and assets, good title, including for purposes of both
clause (i) and clause (ii) the
DAL02:222894.12
002328
31
<PAGE>
properties and assets reflected in the balance sheets as at December 31, 1998
referred to in paragraph 9B (other than properties and assets disposed of in the
ordinary course of business). All leases necessary in any material respect for
the conduct of the respective businesses of the Parent, the Company and the
other Subsidiaries of the Parent are valid and subsisting and are in full force
and effect.
Taxes. The Parent, the Company and each of their respective
Subsidiaries has, filed all federal, state and other income tax returns which,
to the knowledge of the officers of the Parent and the Company, are required to
be filed, and each has paid all taxes as shown on such returns and on all
assessments received by it to the extent that such taxes have become due, except
such taxes as are being contested in good faith by appropriate proceedings and
for which adequate reserves have been established in accordance with GAAP.
Conflicting Agreements and Other Matters. Neither the Parent,
the Company nor any of the other Subsidiaries of the Parent is subject to any
charter, limited partnership agreement or other corporate or limited partnership
restriction which materially and adversely affects its business, property or
assets, or financial condition. Neither the Parent, the Company nor any of the
other Subsidiaries of the Parent is a party to any contract or agreement which
materially and adversely affects (after taking into consideration the benefits
reasonably expected to be obtained by the Parent, the Company or such other
Subsidiary thereunder) its business, property or assets, or financial condition.
Neither the execution nor delivery of this Agreement, the Subsidiary Guaranty,
the HCP Guaranty, the Warrants, the Registration Rights Agreement or the
Participation Rights Agreement nor the offering and delivery of the Securities,
nor fulfillment of nor compliance with the terms and provisions hereof and of
the Notes, the Subsidiary Guaranty, the HCP Guaranty, the Warrants, the
Registration Rights Agreement and the Participation Rights Agreement will
conflict with, or result in a breach of the terms, conditions or provisions of,
or constitute a default under, or result in any violation of, or result in the
creation of any Lien upon any of the properties or assets of the Parent, the
Company or any of the other Subsidiaries of the Parent pursuant to, the charter,
limited partnership agreement or by-laws of the Parent, the Company or any such
other Subsidiaries, any award of any arbitrator or any agreement (including any
agreement with stockholders), instrument, order, judgment, decree, statute, law,
rule or regulation to which the Parent, the Company or any of such other
Subsidiaries is subject. Neither the Parent, the Company nor any of such other
Subsidiaries is a party to, or otherwise subject to any provision contained in,
any instrument evidencing Indebtedness of the Parent, the Company or such other
Subsidiary, any agreement relating thereto or any other contract or agreement
(including its charter) which limits the amount of, or otherwise imposes
restrictions on the incurring of, Indebtedness of the Company of the type
evidenced by the Notes or of Indebtedness of HEP or any other Subsidiary of the
type to be evidenced by the Subsidiary Guaranty, except as set forth in the
agreements listed in Schedule 9G attached hereto.
Authorized Capital Stock. The authorized capital stock of the
Parent consists of 30,000,000 shares, of which (i) 25,000,000 shares are Parent
Common Stock of which 10,000,000 shares are issued and outstanding, and (ii)
5,000,000 shares are preferred stock (the "Parent
DAL02:222894.12
002328
32
<PAGE>
Preferred Stock"), of which 2,334,186 shares have been designated as Series A
Cumulative Preferred Stock, of which all such shares of such series of Parent
Preferred Stock are issued and outstanding. All the outstanding shares of Parent
Common Stock and Parent Preferred Stock are duly authorized, validly issued,
fully paid and nonassessable. The Parent does not have outstanding any warrants,
options, convertible securities or other rights for the purchase or acquisition
of shares of its capital stock other than the Warrants. Up to 1,200,000 shares
of Parent Common Stock and 180,000 shares of Parent Preferred Stock are issuable
under the Parent's 1999 Long-Term Incentive Plan. The Warrants and the shares of
Parent Common Stock issuable upon the exercise of the Warrants have been duly
and validly authorized, and such shares of Parent Common Stock have been duly
reserved for issuance upon exercise of the Warrants. No shareholder of the
Parent or any other Person is entitled to preemptive or similar rights with
respect to the Warrants or the shares of Parent Common Stock issuable upon
exercise of the Warrants and, if and when issued upon exercise of the Warrants
in accordance with the provisions thereof, such shares will be validly issued,
fully paid and nonassessable shares.
Offering of Warrants. Neither the Parent nor any agent acting
on its behalf has, directly or indirectly, offered the Warrants or any similar
security of the Parent for sale to, or solicited any offers to buy the Warrants
or any similar security of the Parent from, or otherwise approached or
negotiated with respect thereto with, any Person other than institutional
investors, and neither the Parent nor any agent acting on its behalf has taken
or will take any action which would subject the issuance or sale of the Warrants
to the provisions of Section 5 of the Securities Act or to the provisions of any
securities or Blue Sky law of any applicable jurisdiction.
Use of Proceeds. Neither the Parent nor any Subsidiary owns
any "margin stock" as defined in Regulation U (12 CFR Part 221) of the Board of
Governors of the Federal Reserve System ("margin stock"). The proceeds of sale
of the Notes and the Original Warrant originally issued and sold under the
Original Agreement were used by the Company to refinance Indebtedness existing
at the time of such sales, to acquire producing property and for general
corporate purposes. None of such proceeds were used, directly or indirectly, for
the purpose, whether immediate, incidental or ultimate, of purchasing or
carrying any margin stock or for the purpose of maintaining, reducing or
retiring any Indebtedness which was originally incurred to purchase or carry any
stock that is currently a margin stock or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning of such
Regulation U. Neither the Parent nor the Company nor any agent acting on behalf
of either of them has taken or will take any action which might cause this
Agreement, the Original Agreement, the Notes, the Original Warrant or the
Warrants to violate Regulation U or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Exchange Act, in each
case as in effect on the date of the Original Agreement, on the Effective Date
or thereafter.
ERISA. No accumulated funding deficiency (as defined in
section 302 of ERISA and section 412 of the Code), whether or not waived, exists
with respect to any Plan (other than a Multiemployer Plan). No liability to the
PBGC has been or is expected by the Parent, the Company or any ERISA Affiliate
to be incurred with respect to any Plan (other than a Multiemployer Plan) by
DAL02:222894.12
002328
33
<PAGE>
the Parent, the Company, any other Subsidiary of the Parent or any ERISA
Affiliate which is or would be materially adverse to the business, condition
(financial or other), assets, properties, operations or prospects of the Parent,
the Company and the other Subsidiaries of the Parent taken as a whole. Neither
the Parent, the Company, any other Subsidiary of the Parent nor any ERISA
Affiliate has incurred or presently expects to incur any withdrawal liability
under Title IV of ERISA with respect to any Multiemployer Plan which is or would
be materially adverse to the business, condition (financial or other), assets,
properties, operations or prospects of the Parent, the Company and the other
Subsidiaries of the Parent taken as a whole. The execution and delivery of the
Original Agreement and the issuance and sale of the Notes and Original Warrant
were exempt from, or did not involve any transaction which was subject to, the
prohibitions of section 406 of ERISA and did not involve any transaction in
connection with which a penalty could be imposed under section 502(i) of ERISA
or a tax could be imposed pursuant to section 4975 of the Code. The execution
and delivery of this Agreement and the issuance and sale of the Warrants will be
exempt from, or will not involve any transaction which is subject to, the
prohibitions of section 406 of ERISA and will not involve any transaction in
connection with which a penalty could be imposed under section 502(i) of ERISA
or a tax could be imposed pursuant to section 4975 of the Code. The
representations by the Parent and the Company in the two immediately preceding
sentences is made in reliance upon and subject to the accuracy of the Existing
Holder's representation in paragraph 10B.
Governmental Consent. Neither the nature of the Parent, the
Company or of any other Subsidiary of the Parent, nor any of their respective
businesses or properties, nor any relationship between the Parent, the Company
or any such other Subsidiary and any other Person, nor any circumstance in
connection with the offering, issuance, sale or delivery of the Warrants is such
as to require any authorization, consent, approval, exemption or other action by
or notice to or filing with any court or administrative or governmental or
regulatory body (other than routine filings after the Effective Date with the
Securities and Exchange Commission and/or state Blue Sky authorities) in
connection with the execution and delivery of this Agreement, the Subsidiary
Guaranty, the Registration Rights Agreement, the Participation Rights Agreement,
the offering, issuance, sale or delivery of the Securities or fulfillment of or
compliance with the terms and provisions of this Agreement, the Subsidiary
Guaranty, the HCP Guaranty, the Registration Rights Agreement, the Participation
Rights Agreement or the Securities.
Environmental Compliance. The Parent, the Company and the
other Subsidiaries of the Parent and all of their respective properties and
facilities have complied at all times and in all respects with all federal,
state, local and regional statutes, laws, ordinances and judicial or
administrative orders, judgments, rulings and regulations relating to protection
of the environment except, in all such cases considered in the aggregate, where
failure to comply would not reasonably be expected to result in a material
adverse effect on the business, condition (financial or other), assets,
properties, operations or prospects of the Parent, the Company and the other
Subsidiaries of the Parent taken as a whole.
Disclosure. Neither this Agreement nor any other document,
certificate or statement furnished to the Existing Holder by or on behalf of the
Parent, the Company or HEP in connection
DAL02:222894.12
002328
34
<PAGE>
herewith contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein not misleading. There is no fact peculiar to the Parent, the Company or
any of the other Subsidiaries of the Parent which materially adversely affects
or in the future may (so far as the Parent or the Company can now foresee)
materially adversely affect the business, property or assets, or financial
condition of the Parent, the Company or any of the other Subsidiaries of the
Parent and which has not been set forth in this Agreement or in the other
documents, certificates and statements furnished to the Existing Holder by or on
behalf of the Parent, the Company or HEP prior to the date hereof in connection
with the transactions contemplated hereby.
Year 2000 Compliance. The Parent has (i) initiated a review
and assessment of all areas within the business and operations of the Parent and
each of its Subsidiaries (including those affected by suppliers and vendors)
that could suffer a material adverse effect (determined by reference to the
business, condition (financial or otherwise), assets, properties or prospects of
the Parent and its Subsidiaries taken as a whole) as a result of the "Year 2000
Problem" (that is, the risk that computer applications used by it or any of its
Subsidiaries (or their respective suppliers and vendors) may be unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date on or after December 31, 1999), (ii) developed a plan and
timeline for addressing the Year 2000 Problem on a timely basis and (iii) to
date, implemented or is implementing such plan in accordance with such
timetable. The Parent reasonably believes that all computer applications
(including those of suppliers and vendors) that are material to the business or
operations of the Parent or any of its Subsidiaries will on a timely basis be
able to perform properly date-sensitive functions for all dates before and from
and after January 1, 2000, except to the extent that a failure to do so could
not reasonably be expected to have a material adverse effect on the business,
condition (financial or otherwise), assets, properties or prospects of the
Parent and its Subsidiaries taken as a whole.
Agreement of Merger Conditions Satisfied. All conditions
precedent set forth in Article VIII of the Agreement of Merger have been
satisfied as of the Effective Date.
Reorganization.
(i) Each of the Parent, HEC Acquisition Partnership, L.P., the HEP
General Partner, the Company, HCRC Acquisition Corp., HEP and HEPGP Ltd.
(collectively, the "Merger Parties") has all requisite partnership or corporate
power and authority, as the case may be, to execute, deliver and perform the
Merger Agreement and to consummate the Merger and the other transactions
contemplated thereby.
(ii) The execution, delivery and performance by each of the Merger
Parties of the Merger Agreement and the other documents delivered by such Merger
Party pursuant thereto or in connection therewith (with respect to each Merger
Party, the "Merger Documents") have been duly authorized by all necessary
corporate or partnership action, as the case may be.
DAL02:222894.12
002328
35
<PAGE>
(iii) There is no action, suit or proceeding pending or threatened
which questions the validity or legality of, or seeks damages in connection
with, the Merger Documents, the Merger or any actions contemplated thereby.
(iv) The execution, delivery and performance by each of the Merger
Parties of the Merger Documents to which it is a party and the consummation of
the Merger do not conflict with or violate the constituent documents of such
Merger Party or any law, statute or published rule or regulation, or any writ,
order or decision of any court or governmental instrumentality binding on the
Parent or any of its Subsidiaries or any indenture, mortgage, contract,
instrument or agreement to which the Parent or any of its Subsidiaries is a
party or by which it or its assets is bound.
(v) Neither the execution, delivery or performance by each of the
Merger Parties of the Merger Documents to which it is a party nor the
consummation of the Merger requires the consent or approval or other action of,
or the making of any filing, with, any governmental authority, other than such
consents and approvals that have been obtained, such other actions that have
been taken and such other filings that have been made and that, in each case,
are in full force and effect on the Effective Date.
PARAGRAPH REPRESENTATIONS OF THE EXISTING HOLDER.
10. Representations of the Existing Holder. The Existing Holder
represents as follows:
Nature of Acquisition of Securities. The Existing Holder is an
"insurance company" as defined in section 2(13) of the Securities Act and is not
acquiring the Warrants hereunder with a view to or for sale in connection with
any distribution thereof within the meaning of the Securities Act of 1933,
provided that the disposition of the property of the Existing Holder shall at
all times be and remain within its control.
Source of Funds. No part of the funds used by the Existing
Holder to pay the purchase price of the Notes or the Original Warrant originally
issued under the Original Agreement constituted assets allocated to a separate
account maintained by the Existing Holder. For the purpose of this paragraph
10B, the term "separate account" shall have the meaning specified in section 3
of ERISA.
PARAGRAPH GUARANTY OF PARENT.
The Guaranty. The Parent hereby irrevocably and
unconditionally guarantees to each holder from time to time of any of the Notes,
the due and punctual payment in full of (i) the principal of, Yield-Maintenance
Amount, if any, and interest on (including without limitation, interest accruing
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, relating to the Company, whether
or not a claim for post-filing or post-petition interest is allowed in such
proceeding) and any other amounts due under, the Notes when and as the same
shall become due and payable (whether at stated maturity or by
DAL02:222894.12
002328
36
<PAGE>
required or optional prepayment or by acceleration or otherwise) and (ii) any
other sums which may become due under the terms and provisions of the Notes (all
such obligations described in clauses (i) and (ii) above are herein called the
"Guaranteed Obligations"). The guaranty in the preceding sentence is an
absolute, present and continuing guaranty of payment and not of collectibility
and is in no way conditional or contingent upon any attempt to collect from the
Company or any other guarantor of the Notes or upon any other action, occurrence
or circumstance whatsoever. In the event that the Company shall fail so to pay
any of such Guaranteed Obligations, the Parent agrees to pay the same when due
to the holders of the Notes entitled thereto, without demand, presentment,
protest or notice of any kind, in lawful money of the United States of America,
at the place for payment specified in the Notes and this Agreement. Each default
in payment of principal of, Yield- Maintenance Amount, if any, or interest on
any Note shall give rise to a separate cause of action hereunder and separate
suits may be brought hereunder as each cause of action arises.
The Parent hereby agrees to pay and to indemnify and save the holders
of the Notes harmless from and against any damage, loss, cost or expense
(including attorneys' fees) which such holder may incur or be subject to as a
consequence, direct or indirect, of (i) any breach by the Parent of any
warranty, covenant, term or condition in, or the occurrence of any default
under, this paragraph 11, together with all expenses resulting from the
compromise or defense of any claims or liabilities arising as a result of any
such breach or default, and (ii) any legal action commenced to challenge the
validity of this paragraph 11.
Obligations Absolute. The obligations of the Parent under this
paragraph 11 shall be primary, absolute, irrevocable and unconditional,
irrespective of the validity, regularity or enforceability of the Notes or this
Agreement, shall not be subject to any counterclaim, set off, deduction or
defense based upon any claim the Parent may have against the Company or any
holder of the Notes or otherwise, and shall remain in full force and effect
without regard to, and shall not be released, discharged or in any way affected
by, any circumstance or condition whatsoever (whether or not the Parent shall
have any knowledge or notice thereof), including, without limitation: (i) any
amendment, modification of or supplement to the Notes or this Agreement or any
other instrument or agreement referred to herein (except that the obligations of
the Parent hereunder shall apply to the Notes or this Agreement or such other
instruments or agreements as so amended, modified or supplemented) or any
assignment or transfer of any thereof or of any interest therein, or any
furnishing, acceptance or release of any security for or other guaranty of the
Notes; (ii) any waiver, consent, extension, indulgence or other action or
inaction under or in respect of the Notes or this Agreement; (iii) any
bankruptcy, insolvency, readjustment, composition, liquidation or similar
proceeding with respect to the Company or its property; (iv) any merger,
amalgamation or consolidation of the Parent or of the Company into or with any
other corporation or any sale, lease or transfer of any or all of the assets of
the Parent or of the Company to any Person; (v) any failure on the part of the
Company for any reason to comply with or perform any of the terms of any other
agreement with the Parent; or (vi) any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of the Parent. The Parent
covenants that its obligations hereunder will not be discharged except by
payment in full of all of the Guaranteed Obligations.
DAL02:222894.12
002328
37
<PAGE>
Waiver. The Parent unconditionally waives: (i) notice of
acceptance hereof, of any action taken or omitted in reliance hereon and of any
defaults by the Company in the payment of any amounts due under the Notes or
this Agreement, and of any of the matters referred to in paragraph 11B hereof;
(ii) all notices which may be required by statute, rule of law or otherwise to
preserve any of the rights of each holder from time to time of the Notes against
the Parent, including, without limitation, presentment to or demand for payment
from the Company or the Parent with respect to any Note, notice to the Company
or to the Parent of default or protest for nonpayment or dishonor and the filing
of claims with a court in the event of the bankruptcy of the Company; (iii) any
right to the enforcement, assertion or exercise by any holder of the Notes of
any right, power or remedy conferred in this Agreement or the Notes; (iv) any
requirement or diligence on the part of any holder of the Notes; and (v) any
other act or omission or thing or delay to do any other act or thing which might
in any manner or to any extent vary the risk of the Parent or which might
otherwise operate as a discharge of the Parent.
Obligations Unimpaired. The Parent authorizes the holders of
the Notes, without notice or demand to the Parent and without affecting its
obligations hereunder, from time to time: (i) to renew, compromise, extend,
accelerate or otherwise change the time for payment of, or otherwise change the
terms of, all or any part of the Notes or this Agreement or any other instrument
referred to therein; (ii) to take and hold security for the payment of the
Notes, for the performance of this paragraph 11 or otherwise for the
indebtedness guaranteed hereby and to exchange, enforce, waive and release any
such security; (iii) to apply any such security and to direct the order or
manner of sale thereof as the holders of the Notes in their sole discretion may
determine; (iv) to obtain additional or substitute endorsers or guarantors; (v)
to exercise or refrain from exercising any rights against the Company and
others; and (vi) to apply any sums, by whomsoever paid or however realized, to
the payment of the principal of, Yield-Maintenance Amount, if any, and interest
on the Notes and any other Guaranteed Obligation hereunder. The Parent waives
any right to require the holders of the Notes to proceed against any additional
or substitute endorsers or guarantors or to pursue or exhaust any security
provided by the Company, the Parent or any other person or to pursue any other
remedy available to such holders.
Subrogation. The Parent will not exercise, and hereby
subordinates to the rights of the holders of the Notes, any rights which the
Parent may have acquired by way of subrogation under this Agreement by any
payment made hereunder or otherwise, or accept any payment on account of such
subrogation rights, or any rights of reimbursement, indemnity, exoneration or
contribution, any right to participate in any claim or any rights or recourse to
any security for the Notes or any Guarantee in respect of the Notes and this
Agreement, unless and until all of the obligations, undertakings or conditions
to be performed or observed by the Company pursuant to the Notes and this
Agreement shall have been performed, observed or paid in full at the time of the
Parent's exercise of any such right.
Reinstatement of Guaranty. The Guarantee by the Parent
contained in this paragraph 11 shall continue to be effective, or be reinstated,
as the case may be, if and to the extent at any time payment, in whole or in
part, of any of the sums due to any holder of the Notes for
DAL02:222894.12
002328
38
<PAGE>
principal, Yield-Maintenance Amount, if any, or interest on the Notes or any of
the other Guaranteed Obligations is rescinded or must otherwise be restored or
returned by such holder upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization of the Company, or upon or as a result of the
appointment of a custodian, receiver, trustee or other officer with similar
powers with respect to the Company or any substantial part of its property, or
otherwise, all as though such payments had not been made. If an event permitting
the acceleration of the maturity of the principal amount of the Notes shall at
any time have occurred and be continuing and such acceleration shall at such
time be prevented or the right of any holder of a Note to receive any payment
under any Note shall at such time be delayed or otherwise affected by reason of
the pendency against the Company of a case or proceeding under a bankruptcy or
insolvency law, the Parent agrees that, for purposes of this paragraph 11 and
its obligations hereunder, the maturity of such principal amount shall be deemed
to have been accelerated with the same effect as if the holders of the Notes had
accelerated the same in accordance with the terms of this Agreement, and the
Parent shall forthwith pay such accelerated principal amount, accrued interest
and Yield-Maintenance Amount, if any, thereon and any other amounts guaranteed
hereunder.
Subordination of Guaranteed Obligations.
11G(1). Subordination. Anything in this Agreement to the contrary
notwithstanding, the Guaranteed Obligations shall be subordinate and junior to
the extent set forth in subparagraphs (i) through (iv) inclusive, below, to all
Senior Debt.
(i) If the Parent shall default in the payment of any
principal of or interest on any Senior Debt in an amount in excess of
$100,000 owing under any single instrument when the same becomes due
and payable, whether at maturity or at a date fixed for prepayment or
at any other date on which the Parent is required to prepay any Senior
Debt or by declaration of acceleration or otherwise, then, unless and
until such default shall have been remedied by payment in full or
waived, the holders of Notes shall not accept or receive any direct or
indirect payment of or on account of the Guaranteed Obligations.
(ii) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership
proceedings in connection therewith, relative to the Parent, and in the
event of any proceedings for voluntary liquidation, dissolution or
other winding up of the Parent, whether or not involving insolvency or
bankruptcy proceedings, then all Senior Debt shall first be paid in
full before any payment of or on account of the Guaranteed Obligations
is made by the Parent.
(iii) In any of the proceedings referred to in subparagraph
(ii) above, any payment or distribution of any kind or character,
whether in cash, property, stock or obligations, which may be payable
or deliverable by the Parent in respect of the Guaranteed Obligations
shall be paid or delivered directly to the holders of Senior Debt (or
to a banking institution selected by the court or Person making the
payment or delivery or designated by any holder of Senior Debt) for
application in payment thereof in accordance with the priorities then
DAL02:222894.12
002328
39
<PAGE>
existing among such holders, unless and until all Senior Debt shall
have been paid in full; provided, however, that
(a) if the payment or delivery by the Parent of such
cash, property, stock or obligations to any holder of Notes is
authorized by an order or decree giving effect, and stating in
such order or decree that effect is given, to the
subordination of the Guaranteed Obligations to Senior Debt,
and made in a reorganization proceeding under any applicable
bankruptcy or reorganization law, no payment or delivery by
the Parent of such cash, property, stock or obligations
payable or deliverable with respect to the Guaranteed
Obligations shall be made to the holders of Senior Debt; and
(b) no such stock or shall be made to holders of
Senior Debt of
obligations if the delivery thereof
is authorized by an order or decree
giving effect, and stating in such
order or decree that effect is
given, to the subordination of the
Guaranteed Obligations to Senior
Debt, and if such stock or
obligations are subordinate and
junior (whether by law or agreement)
at least to the extent provided in
this paragraph 11G to the payment of
all Senior Debt then outstanding and
to the payment of any stock or
obligations which are issued
pursuant to such reorganization
proceedings in exchange or
substitution for any Senior Debt
then outstanding.
A transaction permitted by paragraph 6B(3)(vi) of this
Agreement shall not be deemed a dissolution, winding-up, liquidation or
reorganization for the purposes of this paragraph 11G.
(iv) Upon the occurrence and during the continuance of any
Default Subordination Event (other than under circumstances when the
terms of subparagraph (ii) above are applicable), the holders of Notes
shall not accept or receive any direct or indirect payment by setoff or
otherwise of or on account of the Guaranteed Obligations during the
Stand-Still Period, provided that in the case of any payment on or in
respect of the Guaranteed Obligations which would (in the absence of
any such Default Subordination Event) have been due and payable on any
date during such Stand-Still Period, the provisions of this
subparagraph (iv) shall not prevent such payment on or after the date
immediately following the termination of such Stand-Still Period. There
shall be no more than three Stand-Still Periods, in the aggregate, so
long as the Notes remain outstanding, whether the Stand-Still Period
arises in connection with, or results from a notice under, this
paragraph 11G, the HCP Guaranty, the Subsidiary Guaranty or paragraph
7.
(v) If any payment or distribution of any character,
whether in cash,
securities or other property, shall be
received by any holders of Notes in
contravention of any of the terms of this
paragraph 11G and before all the Senior Debt
shall have been paid in full, such payment
or distribution shall be received in trust
for the benefit of the holders of the Senior
Debt at the time outstanding and shall
forthwith be paid over or delivered and
transferred to the holders of Senior Debt.
DAL02:222894.12
002328
40
<PAGE>
(vi) If any payment by the Parent in respect of Senior
Debt must be
disgorged by any holder of Senior Debt as a
result of any action under the United States
Bankruptcy Code or other debtor relief law,
the obligations in respect of which such
payment was made shall continue to
constitute Senior Debt and shall remain
entitled to the benefit of the provisions of
this provision. Without limitation of the
foregoing, in the event of any such
disgorgement by a holder of Senior Debt,
each holder of Notes shall, if it has become
subrogated to the rights of such holder of
Senior Debt pursuant to this paragraph 11
and has obtained payment from the Parent
through the exercise of such subrogation
rights, disgorge and pay to such holder of
Senior Debt any payment so obtained, to the
extent of the payment or payments disgorged
by such holders of Senior Debt.
11G(2) Obligation of the Parent Unconditional. The provisions of this
paragraph 11G are for the purpose of defining the relative rights of the holders
of Senior Debt on the one hand, and the holders of Notes on the other hand,
against the Parent and its property, and nothing herein shall impair, as between
the Parent and the holders of the Notes, the obligation of the Parent, which is
unconditional and absolute, to pay the Guaranteed Obligations in accordance with
the terms and provisions hereof, nor shall anything herein prevent the holders
of the Notes from exercising all remedies otherwise permitted by applicable law
or hereunder upon default hereunder or under this Agreement, the Notes
(including, without limitation, the right to demand payment and sue for
performance hereof and of the Notes and to accelerate the maturity thereof as
provided in paragraph 8A), subject to the rights, if any, under this paragraph
11G of holders of Senior Debt to receive cash, property, stock or obligations
otherwise payable or deliverable by the Parent to such holders of Notes.
11G(3) Subrogation. Upon payment in full of Senior Debt, the holders of
the Notes shall be subrogated to the rights of the holders of the Senior Debt to
receive payments or distributions of assets of the Parent made on Senior Debt
until the Guaranteed Obligations shall be paid in full, and, for the purposes of
such subrogation, no payments to the holders of Senior Debt of any cash,
property, stock or obligations to which the holders of the Notes would be
entitled except for the provisions of paragraph 11G(1)(iii) shall, as between
the Parent, its creditors (other than the holders of the Senior Debt) and
Prudential, be deemed to be a payment by the Parent to or on account of Senior
Debt.
11G(4) Rights of Holders of Senior Debt. The provisions of this
paragraph 11G shall be deemed a continuing offer to all holders of Senior Debt
to act in reliance on such provisions (but no such reliance shall be required to
be proven to receive the benefits hereof) and may be enforced by such holders
and no right of any present or future holder of any Senior Debt to enforce
subordination as provided in this paragraph 11G shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Parent or
by any act or failure to act by any such holder, or by any non-compliance by the
Parent with the terms, provisions and covenants of this paragraph 11G. Without
in any way limiting the generality of the foregoing, the holders of Senior Debt
may, at any time and from time to time, without the consent of or notice to the
holders of the Notes, and without impairing or releasing the subordination
provided in this paragraph 11G or the obligations hereunder
DAL02:222894.12
002328
41
<PAGE>
of the holders of the Notes to the holders of Senior Debt, do any one or more of
the following, subject in all cases to the limitations contained in the
definition of Senior Debt: (i) change the manner, place or terms of payment or
extend the time of payment of, or renew or alter (including, without limitation,
by increasing or decreasing the "Availability Limit" and the "Debt Limit," in
each case as defined in the Credit Agreement pursuant to which Senior Debt is
incurred), or waive defaults under, Senior Debt, or otherwise amend or
supplement in any manner Senior Debt or any instrument evidencing the same or
any agreement under which Senior Debt is outstanding; (ii) sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing Senior Debt; (iii) release any Person liable in any manner for the
payment or collection of Senior Debt; and (iv) exercise or refrain from
exercising any rights against the Parent and any other Person, including any
guarantor or surety.
PARAGRAPH DEFINITIONS AND ACCOUNTING TERMS.
12. Definitions. For the purpose of this Agreement, the terms defined
in the introductory paragraph, in the recitals hereto, and in paragraphs 1 and 2
shall have the respective meanings specified therein, and the following terms
shall have the meanings specified with respect thereto below (such meanings to
be equally applicable to both the singular and plural forms of the terms
defined):
Yield-Maintenance Terms.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day on which commercial banks in New York City are required or authorized to be
closed.
"Called Principal" shall mean, with respect to any Note, the principal
of such Note that is to be prepaid pursuant to paragraph 4B or 4C or is declared
to be immediately due and payable pursuant to paragraph 8A, as the context
requires.
"Designated Spread" shall mean, (i) with respect to the Called
Principal of any Note that is prepaid pursuant to paragraph 4C, 2.50% (250 basis
points), and (ii) in all other cases 1.00% (100 basis points).
"Discounted Value" shall mean, with respect to the Called Principal of
any Note, the amount obtained by discounting all Remaining Scheduled Payments
with respect to such Called Principal from their respective scheduled due dates
to the Settlement Date with respect to such Called Principal, in accordance with
accepted financial practice and at a discount factor (applied on the same
periodic basis as that on which interest on the Notes is payable) equal to the
Reinvestment Yield with respect to such Called Principal.
"Reinvestment Yield" shall mean the sum of the Designated Spread plus
the yield to maturity implied by (i) the yields reported, as of 10:00 a.m. (New
York City time) on the Business Day next preceding the Settlement Date with
respect to such Called Principal, on the display
DAL02:222894.12
002328
42
<PAGE>
designated as "Page 678" on the Telerate Service (or such other display as may
replace Page 678 on the Telerate Service) for actively traded U.S. Treasury
securities having a maturity equal to the Remaining Average Life of such Called
Principal as of such Settlement Date, or if such yields shall not be reported as
of such time or the yields reported as of such time shall not be ascertainable,
(ii) the Treasury Constant Maturity Series yields reported, for the latest day
for which such yields shall have been so reported as of the Business Day next
preceding the Settlement Date with respect to such Called Principal, in Federal
Reserve Statistical Release H.15 (519) (or any comparable successor publication)
for actively traded U.S. Treasury securities having a constant maturity equal to
the Remaining Average Life of such Called Principal as of such Settlement Date.
Such implied yield shall be determined, (a) if necessary, by (x) converting U.S.
Treasury bill quotations to bond- equivalent yields in accordance with accepted
financial practice and (y) interpolating linearly between yields reported for
various maturities and (b) by converting all such implied yields to a quarterly
payment basis in accordance with accepted financial practice.
"Remaining Average Life" shall mean, with respect to the Called
Principal of any Note, the number of years (calculated to the nearest
one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the
sum of the products obtained by multiplying (a) each Remaining Scheduled Payment
of such Called Principal (but not of interest thereon) by (b) the number of
years (calculated to the nearest one-twelfth year) which will elapse between the
Settlement Date with respect to such Called Principal and the scheduled due date
of such Remaining Scheduled Payment.
"Remaining Scheduled Payments" shall mean, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due on or after the Settlement Date with respect to such
Called Principal if no payment of such Called Principal were made prior to its
scheduled due date.
"Settlement Date" shall mean, with respect to the Called Principal of
any Note, the date on which such Called Principal is to be prepaid pursuant to
paragraph 4B or 4C or is declared to be immediately due and payable pursuant to
paragraph 8A as the context requires.
"Yield-Maintenance Amount" shall mean, with respect to any Note, an
amount equal to the excess, if any, of the Discounted Value of the Called
Principal of such Note over the sum of (i) such Called Principal plus (ii)
interest accrued thereon as of and including the Settlement Date with respect to
such Called Principal. The Yield-Maintenance Amount shall in no event be less
than zero.
Other Terms.
"Affiliate" shall mean with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such first Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of such
corporation, whether
DAL02:222894.12
002328
43
<PAGE>
through the ownership of voting securities, by contract or otherwise. Unless the
context clearly requires otherwise, "Affiliate" shall mean an Affiliate of the
Parent.
"Agreement of Merger" shall have the meaning specified in the recitals
of this Agreement.
"Asset Disposition" shall mean, with respect to the Parent, the Company
or any other Subsidiary of the Parent, any transaction or series of related
transactions in which such Person sells, conveys, transfers, leases (as lessor)
or otherwise (including, without limitation, by merger or consolidation)
disposes of (collectively, for purposes of this definition, a "transfer"),
directly or indirectly, any of its property or assets, including, without
limitation, any Indebtedness of any Subsidiary or capital stock of or other
equity interests in any Subsidiary (including the issuance of such stock or
other equity interests by such Subsidiary), other than (i) transfers from (a) a
Subsidiary of the Company to the Company or a Wholly Owned Subsidiary of the
Company that has executed a guaranty agreement in respect of the Notes pursuant
to this Agreement, (b) a Subsidiary (other than the Company) of the Parent to
the Parent or a Wholly Owned Subsidiary of the Parent that has executed a
guaranty agreement in respect of the Notes pursuant to this Agreement, or (c)
the Parent to the Company, to any Subsidiary of the Parent that has executed the
Subsidiary Guaranty or to a Wholly Owned Subsidiary of the Parent that has
executed and delivered a guaranty agreement in respect of the Notes pursuant to
this Agreement, (ii) transactions permitted by clauses (i) through (vi),
inclusive, of paragraph 6B(3), and (iii) sales of oil and gas production in the
ordinary course of business of the Parent, the Company or another Subsidiary of
the Parent.
"Bankruptcy Law" shall have the meaning specified in clause (viii) of
paragraph 8A.
"Business Day" shall mean any day on which banks are open for business
in New York City (other than a Saturday, a Sunday or a legal holiday in the
States of New York or New Jersey).
"Capitalized Lease Obligation" shall mean, with respect to any Person,
any rental obligation which, under generally accepted accounting principles,
would be required to be capitalized on the books of such Person, taken at the
amount thereof accounted for as indebtedness (net of interest expense) in
accordance with such principles.
"Change in Control" shall mean if any Person or Persons acting in
concert, together with Affiliates thereof, shall in the aggregate, directly or
indirectly, control or own (beneficially or otherwise) more than 50% (by number
of shares) of the issued and outstanding Voting Stock of the Parent.
"Claims" shall have the meaning specified in paragraph 5G.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Consolidated Assets" shall mean, at any time, the total assets of the
Parent and its Subsidiaries which would be shown as assets on a consolidated
balance sheet of the Parent and its
DAL02:222894.12
002328
44
<PAGE>
Subsidiaries as of such time prepared in accordance with GAAP, after
eliminating, without duplication, (i) amounts properly attributable to minority
interests, if any, in the stock and surplus of Subsidiaries, and (ii) assets
subject to Non-recourse Debt.
"Consolidated Interest Expense" shall mean, with respect to any period,
the sum (without duplication) of the following (in each case, eliminating,
without duplication, all offsetting debits and credits between the Parent and
its Subsidiaries, all other items required to be eliminated in the course of the
preparation of consolidated financial statements of the Parent and its
Subsidiaries in accordance with GAAP, all amounts properly attributable to
minority interests, if any, in the stock and surplus of Subsidiaries, and all
items in respect of Non-recourse Debt): (i) all interest and prepayment charges
in respect of Indebtedness of the Parent and its Subsidiaries (including imputed
interest in respect of Capitalized Lease Obligations and net costs of Swaps)
deducted in determining Consolidated Net Income for such period, together with
all interest capitalized or deferred during such period and not deducted in
determining Consolidated Net Income for such period, and (ii) all debt discount
and expense amortized or required to be amortized in the determination of
Consolidated Net Income for such period.
"Consolidated Net Income" shall mean, with respect to any period, the
net income (or loss) of the Parent and its Subsidiaries for such period as
determined in accordance with GAAP, after eliminating, without duplication, (i)
all items required to be eliminated in the course of the preparation of
consolidated financial statements of the Parent and its Subsidiaries in
accordance with GAAP, (ii) all amounts properly attributable to minority
interests, if any, in the stock and surplus of Subsidiaries, and (iii) all items
in respect of Non-recourse Debt; provided that there shall also be excluded the
following: any gains (net of expenses and taxes applicable thereto) in excess of
losses resulting from the sale, conversion or other disposition of capital
assets (i.e., assets other than current assets), any gains resulting from the
write-up of assets, any earnings of any Person acquired by the Parent or any
Subsidiary through purchase, merger or consolidation or otherwise for any period
prior to the date of acquisition, any deferred credit representing the excess of
equity in any Subsidiary at the date of acquisition over the cost of the
investment in such Subsidiary, any gains from the acquisition of securities or
the retirement or extinguishment of Indebtedness, any gains on collections from
insurance policies or settlements, any restoration to income of any contingency
reserve, except to the extent that provision for such reserve was made out of
income accrued during such period, the cumulative effect of changes in
accounting principles included in income during the period, any income or gain
during such period from any discontinued operations or the disposition thereof,
from any extraordinary items or from any prior period adjustments, or, in the
case of a successor to the Parent or any Subsidiary by consolidation or merger
or as a transferee of its assets, any earnings of the successor corporation
prior to such consolidation, merger or transfer of assets or any equity of the
Parent or any Subsidiary in the undistributed earnings (but not losses) of any
Person which is not a Subsidiary.
"Consolidated Net Worth" shall mean, with respect to any Person, an
amount equal to consolidated stockholders' equity of such Person determined in
accordance with GAAP (less
DAL02:222894.12
002328
45
<PAGE>
amounts attributable to any preferred stock that is Redeemable) minus, the net
equity of such Person and its Subsidiaries in any assets subject to Non-recourse
Debt.
"Convertible Securities" shall mean any debt instrument that is by its
terms convertible into an equity interest in the Parent or a Subsidiary.
"Credit Agreement" shall mean the Credit Agreement dated as of June __,
1999, among the Parent, the Company, HEP and the banks listed therein, First
Union National Bank of North Carolina, as Collateral Agent, and Morgan Guaranty
Trust Company of New York, as Agent, as amended from time to time.
"Default Subordination Event" shall mean the existence of all of the
following: (i) a Subordination Event of Default shall have occurred and be
continuing in respect of any Senior Debt, (ii) the holders of the Notes shall
have received a notice from or on behalf of any holder of such Senior Debt
specifying that such Subordination Event of Default has occurred and is
continuing and that such notice constitutes a "Default Subordination Notice" and
(iii) no other Default Subordination Notice shall have been delivered by any
holder of Senior Debt within the 365 day period immediately preceding the giving
of such notice. The "Stand-Still Period" relating to any Default Subordination
Event shall be deemed to continue until the earliest of (a) the Subordination
Event of Default under the Senior Debt giving rise thereto shall have been cured
or waived; (b) a period of 120 days shall have elapsed from the giving of the
Default Subordination Notice relating thereto; and (c) the Senior Debt giving
rise thereto shall have been accelerated.
"Default Subordination Notice" shall have the meaning specified in the
definition of "Default Subordination Event."
"Disposition Value" shall mean, at any time, with respect to any
property
(i) in the case of property that does not constitute
Subsidiary Stock, the book value thereof at the time of such
disposition, and
(ii) in the case of property that constitutes Subsidiary
Stock, an amount equal to that percentage of book value of the assets
of the Subsidiary that issued such stock as is equal to the percentage
that the book value of such Subsidiary Stock represents of the book
value of all of the outstanding capital stock of such Subsidiary
(assuming, in making such calculations, that all securities convertible
into such capital stock are so converted and giving full effect to all
transactions that would occur or be required in connection with such
conversion) determined at the time of the disposition thereof, in good
faith by the Parent.
"EBITDA" shall mean, for any period, the sum of (i) Consolidated Net
Income plus (ii) to the extent deducted in the determination of Consolidated Net
Income (other than as a result of clauses (ii), (iii) and (iv) of the definition
thereof), (a) all provisions for federal, state and other
DAL02:222894.12
002328
46
<PAGE>
income tax, (b) Consolidated Interest Expense and (c) provisions for depletion,
depreciation and amortization and impairment of oil and gas properties.
"Effective Date" shall have the meaning specified in paragraph 3.
"Equity Proceeds" shall mean the aggregate sum of (i) the net proceeds
received after the Effective Date by the Parent or any Subsidiary upon the sale
of any equity interest in the Parent or any Subsidiary (other than in the case
of sales by a Subsidiary to the Parent or to a Wholly Owned Subsidiary), plus
(ii) the net proceeds received after the Effective Date by the Parent, the
Company or any other Subsidiary of the Parent upon (a) the exercise of the
Warrants, or any other warrants, options or similar instruments issued by the
Parent or any Subsidiary (other than in the case of warrants or similar
instruments issued to and held by the Parent or a Wholly Owned Subsidiary), and
(b) the conversion of any Convertible Securities into common stock or other
equity interest in the Parent or any Subsidiary (other than conversions by the
Parent or a Wholly Owned Subsidiary).
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" shall mean any corporation which is a member of the
same controlled group of corporations as the Company or the Parent within the
meaning of section 414(b) of the Code, or any trade or business which is under
common control with the Company or the Parent within the meaning of section
414(c) of the Code.
"Event of Default" shall mean any of the events specified in paragraph
8A, provided that there has been satisfied any requirement in connection with
such event for the giving of notice, or the lapse of time, or the happening of
any further condition, event or act, and "Default" shall mean any of such
events, whether or not any such requirement has been satisfied.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Existing Holder" shall have the meaning specified in the introduction
to this Agreement.
"Fair Market Value" shall mean, at any time and with respect to any
property, the sale value of such property that would be realized in an
arm's-length sale at such time between an informed and willing buyer and an
informed and willing seller (neither being under a compulsion to buy or sell).
"GAAP" shall have the meaning specified in paragraph 12C.
"Guarantee" shall mean, with respect to any Person, any direct or
indirect liability, contingent or otherwise, of such Person with respect to any
indebtedness, lease, dividend or other obligation of another, including, without
limitation, any such obligation directly or indirectly guaranteed, endorsed
(otherwise than for collection or deposit in the ordinary course of business) or
discounted or sold with recourse by such Person, or in respect of which such
Person is otherwise
DAL02:222894.12
002328
47
<PAGE>
directly or indirectly liable, including, without limitation, any such
obligation in effect guaranteed by such Person through any agreement (contingent
or otherwise) to purchase, repurchase or otherwise acquire such obligation or
any security therefor, or to provide funds for the payment or discharge of such
obligation (whether in the form of loans, advances, stock purchases, capital
contributions or otherwise), or to maintain the solvency or any balance sheet or
other financial condition of the obligor of such obligation, or to make payment
for any products, materials or supplies or for any transportation or services
regardless of the non-delivery or non-furnishing thereof, in any such case if
the purpose, intent or effect of such agreement is to provide assurance that
such obligation will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such obligation will be
protected against loss in respect thereof. The amount of any Guarantee shall be
equal to the outstanding principal amount of the obligation guaranteed or such
lesser amount to which the maximum exposure of the guarantor shall have been
specifically limited.
"Guarantor" shall mean HCP, HEP and each other Subsidiary of the Parent
that is a party to the Subsidiary Guaranty.
"HCP" shall mean Hallwood Consolidated Partners, L.P., a Colorado
limited partnership.
"HCP Consent" shall mean the Consent executed by HCP substantially in
the form of Exhibit F hereto.
"HCP Guaranty" shall mean that certain Senior Subordinated Guaranty
Agreement, dated as of December 23, 1997, executed by HCP in favor of the
holders of the Notes, as the same may be amended, restated, modified or
otherwise supplemented from time to time.
"Hedging Transaction" shall mean any commodity basis swap, forward
commodity transaction, commodity swap, commodity option, commodity index swap,
commodity cap transaction, commodity floor transaction, commodity collar
transaction, any other similar transaction that relates to commodities
(including any option with respect to any of the foregoing transactions) or any
combination of the foregoing transactions. For the purposes of this Agreement,
the amount of the obligation under any Hedging Transaction shall be the amount
determined in respect thereof as of the end of the then most recently ended
fiscal quarter of such Person, based on the assumption that such Hedging
Transaction had terminated at the end of such fiscal quarter, and in making such
determination, if any agreement relating to such Hedging Transaction provides
for the netting of amounts payable by and to such Person thereunder or if any
such agreement provides for the simultaneous payment of amounts by and to such
Person, then in each such case, the amount of such obligation shall be the net
amount so determined.
"HEP" shall have the meaning specified in the recitals to this
Agreement.
"HEP General Partner" shall have the meaning specified in paragraph
3A(xii).
DAL02:222894.12
002328
48
<PAGE>
"Indebtedness" shall mean, with respect to any Person and without
duplication: (i) all items (excluding items of contingency reserves or of
reserves for deferred income taxes) which under GAAP are shown on the balance
sheet as a liability (including, without limitation, Capitalized Lease
Obligations, but excluding accounts payable in the ordinary course of business
and accrued expenses shown as current liabilities; (ii) indebtedness secured by
any Lien existing on property owned subject to such Lien, whether or not the
indebtedness secured thereby shall have been assumed, provided, that the
obligations secured by any Liens permitted by paragraph 6B(2)(iv) shall not
constitute Indebtedness; (iii) redemption obligations in respect of mandatorily
redeemable preferred stock; (iv) all liabilities in respect of letters of credit
or instruments serving a similar function issued or accepted for its account by
banks and other financial institutions (whether or not representing obligations
for borrowed money); (v) Swaps and Hedging Transactions; and (vi) Guarantees of
Indebtedness of other Persons of the types described in the foregoing clauses
(i) through (v). Indebtedness of any Person shall include all obligations of
such Person of the character described in clauses (i) through (vi) to the extent
such Person remains legally liable in respect thereof notwithstanding that any
such obligation is deemed to be extinguished under GAAP.
"Initial Subsidiary Guarantors" shall mean HEP, EM Nominee Partnership
Company, a Colorado general partnership, Concise Oil & Gas Partnership, a
Colorado general partnership, May Energy Partners Operating Partnership Ltd., a
Texas limited partnership, LaPlata Associates, LLC, a Colorado limited liability
company, and Hallwood LaPlata, LLC, a Colorado limited liability company.
"Lien" shall mean any mortgage, pledge, priority, security interest,
encumbrance, contractual deposit arrangement, lien (statutory or otherwise) or
charge of any kind (including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in the nature
thereof, and the filing of or agreement to give any financing statement under
the Uniform Commercial Code of any jurisdiction) or any other type of
preferential arrangement for the purpose, or having the effect, of protecting a
creditor against loss or securing the payment or performance of an obligation.
"Material Subsidiary" shall mean at any time any Subsidiary of the
Parent that (i) on a consolidated basis, together with its Subsidiaries, holds
record or beneficial title to assets with an aggregate fair market value of at
least $2,500,000 or (ii) on a consolidated basis, together with its
Subsidiaries, accounts for at least 2.5% of the consolidated cash flows of the
Parent and its consolidated Subsidiaries. The determinations in clauses (i) and
(ii) shall be made on the basis of the financial statements of the Parent most
recently delivered by the Parent pursuant to paragraph 5A or 9B, as the case may
be.
"Merger" shall have the meaning specified in the recitals to this
Agreement.
"Merger Documents" shall have the meaning specified in paragraph
9Q(ii).
"Merger Parties" shall have the meaning specified in paragraph 9Q(i).
DAL02:222894.12
002328
49
<PAGE>
"Multiemployer Plan" shall mean any Plan which is a "multiemployer
plan" (as such term is defined in section 4001(a)(3) of ERISA).
"Non-recourse Debt" means Indebtedness which is secured by specific
assets and is issued pursuant to or evidenced or secured by an instrument which
limits the recourse against the obligor thereunder to such specific assets and
which, in the case of Indebtedness created, assumed, or incurred after the date
hereof, contains a provision to the effect that if the holder of such
Indebtedness should ever become entitled to recourse against the obligor
pursuant to ss.1111(b) of the Bankruptcy Reform Act of 1978 (11. U.S.C.
ss.111(b)) or any other provision of any bankruptcy insolvency, or other law of
any jurisdiction, then such holder's claim in respect of such Indebtedness shall
thereupon become and thereafter remain in all respects subordinate and junior to
all indebtedness evidenced by the Notes and such holder shall not be entitled to
receive any payment, under any condition, in respect of any such Indebtedness
until all Notes and all other amounts which may become due, or are stated in
this Agreement to become due, shall have been paid in full or funds for their
payment shall have been duly and sufficiently provided.
"Notes" shall have the meaning specified in paragraph 1A.
"Officer's Certificate" shall mean a certificate signed in the name of
the Parent or the Company, as applicable, by its President, one of its Vice
Presidents or its Treasurer.
"Original Agreement" shall have the meaning specified in the recitals
to this Agreement.
"Original Warrant" shall have the meaning specified in the recitals to
this Agreement.
"Parent Common Stock" shall have the meaning specified in the recitals
to this Agreement.
"Parent Preferred Stock" shall have the meaning specified in paragraph
9H.
"Participation Rights Agreement" shall mean the Participation Rights
Agreement, dated of even date herewith, by and among the Existing Holder, the
Parent and The Hallwood Group Incorporated; such Participation Rights Agreement
shall be substantially in the form of Exhibit D attached hereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor entity.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, a limited liability company, an unincorporated
organization and a government or any department or agency thereof.
"Plan" shall mean any "employee pension benefit plan" (as such term is
defined in section 3 of ERISA) which is or has been established or maintained,
or to which contributions are or have been made, by the Parent or any ERISA
Affiliate.
DAL02:222894.12
002328
50
<PAGE>
"Property Reinvestment Application" means, with respect to any Transfer
of property, the satisfaction of each of the following conditions:
(a) an amount equal to the proceeds with respect to such
Transfer shall have been applied, or irrevocably committed and then
actually applied within 30 days, to the acquisition by the Parent, or
any of its Subsidiaries making such Transfer, of oil and gas property
that is not encumbered by any Lien other than (i) Liens described in
paragraph 6B(2)(iv) and (ii) Liens described in paragraph 6B(2)(i) but
only if the proceeds result from a Transfer of oil and gas property
that also was subject to such a Lien; and
(b) the Parent shall have delivered an Officer's Certificate
to each holder referring to paragraph 6B(4) and identifying the
property that was the subject of such Transfer, the Disposition Value
of such property, and the nature, terms, amount and application of the
proceeds from the Transfer.
"Proxy Statement" shall have the meaning specified in the recitals to
this Agreement.
"Redeemable" shall mean, with respect to the capital stock of any
Person, each share of such Person's capital stock that is:
(a) redeemable, payable or required to be purchased or
otherwise retired or extinguished, or convertible into Indebtedness of
such Person (i) at a fixed or determinable date, whether by operation
of sinking fund or otherwise, other than at the option of such Person,
(ii) at the option of any Person other than such Person, or (iii) upon
the occurrence of a condition not solely within the control of such
Person; or
(b) convertible into other Redeemable capital stock.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated of even date herewith, by and between the Existing Holder and
the Parent and substantially in the form of Exhibit E attached hereto.
"Required Holder(s)" shall mean the holder or holders of at least
662/3% of the aggregate principal amount of the Notes from time to time
outstanding.
"Responsible Officer" shall mean the chief executive officer, chief
operating officer, chief financial officer or chief accounting officer of the
Parent or the Company, as applicable, or any other officer of the Parent or the
Company, as applicable, involved principally in its financial administration or
its controllership function.
"Securities" shall mean the Notes and the Warrants.
"Securities Act" shall mean the Securities Act of 1933, as amended.
DAL02:222894.12
002328
51
<PAGE>
"Senior Debt" shall mean the unpaid principal of, interest on premium,
if any, and commitment and other similar fees with respect to Indebtedness
pursuant to the Credit Agreement outstanding, from time to time, in accordance
with paragraph 6A(1).
"Significant Holder" shall mean each holder of at least 10% of the
Notes or 10% of the Warrants.
"Stand-Still Period" shall have the meaning specified in the
definition of "Default Subordination Event."
"Subordination Event of Default" shall mean (i) any default in the
payment of any principal of or interest on any Senior Debt in an amount less
than or equal to $100,000 owing under any single instrument when the same
becomes due and payable or (ii) any event of default under any agreement
evidencing Senior Debt that would entitle the holders of such Senior Debt to
accelerate the obligations under such Senior Debt (other than as a result of any
nonpayment of principal or interest on any Senior Debt).
"Subsidiary" shall mean, as to any Person, a corporation, trust,
association, partnership or other business entity of which, at the time such
determination is made, at least 50.1% of the total Voting Stock is owned by such
Person and/or one or more of its Subsidiaries. Unless the context otherwise
clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary
of the Parent, including the Company.
"Subsidiary Guaranty" shall have the meaning specified in the recitals
to this Agreement.
"Subsidiary Stock" means, with respect to any Person, the stock (or any
options or warrants to purchase stock or other securities exchangeable for or
convertible into stock) of any Subsidiary of such Person.
"Swaps" shall mean with respect to any Person, payment obligations with
respect to interest rate swaps, currency swaps and similar obligations (other
than Hedging Transactions), in each case obligating such Person to make
payments, whether periodically or upon the happening of a contingency. For the
purposes of this Agreement, the amount of the obligation under any Swap shall be
the amount determined in respect thereof as of the end of the then most recently
ended fiscal quarter of such Person, based on the assumption that such Swap had
terminated at the end of such fiscal quarter, and in making such determination,
if any agreement relating to such Swap provides for the netting of amounts
payable by and to such Person thereunder or if any such agreement provides for
the simultaneous payment of amounts by and to such Person, then in each such
case, the amount of such obligation shall be the net amount so determined.
"Termination Event" shall mean (i) a Reportable Event described in
section 4043 of ERISA and the regulations issued thereunder (other than a
Reportable Event not subject to the provision for 30-day notice to the Pension
Benefit Guaranty Corporation under such regulations),
DAL02:222894.12
002328
52
<PAGE>
or (ii) the withdrawal of the Parent or any of its ERISA Affiliates from a Plan
during a plan year in which it was a "substantial employer" as defined in
section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to
terminate a Plan or the treatment of a Plan amendment as a termination under
section 4041 of ERISA, or (iv) the institution of proceedings to terminate a
Plan by the Pension Benefit Guaranty Corporation, or (v) any other event or
condition that might constitute grounds under section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan.
"Total Debt" shall mean, at the time of determination, the then
outstanding aggregate principal amount of all Indebtedness, other than
Non-recourse Debt, of the Parent and its Subsidiaries on a consolidated basis.
"Transfer" means, with respect to any Person, any transaction in which
such Person sells, conveys, transfers or leases (as lessor) any of its property,
including, without limitation, Subsidiary Stock. For purposes of determining the
application of the proceeds in respect of any Transfer, the Parent may designate
any Transfer as one or more separate Transfers each yielding separate proceeds.
In any such case, (a) the Disposition Value of any property subject to each such
separate Transfer and (b) the amount of Consolidated Assets attributable to any
property subject to each such separate Transfer shall be determined by ratably
allocating the aggregate Disposition Value of, and the aggregate Consolidated
Assets attributable to, all property subject to all such separate Transfers to
each such separate Transfer on a proportionate basis.
"Transferee" shall mean any direct or indirect transferee of all or any
part of any Note or Warrant issued and/or delivered to the Existing Holder under
the Original Agreement or this Agreement.
"Voting Stock" shall mean, securities or other equity interest of any
class or classes, the holders of which are ordinarily, in the absence of
contingencies, entitled to vote for the election or removal of corporate
directors or persons (such as general partners or managers) performing similar
functions in the case of business entities other than corporations.
"Warrants" shall have the meaning specified in paragraph 1B.
"Wholly Owned Subsidiary" shall mean any Subsidiary all of the equity
interests (except directors' qualifying shares) of which are owned, directly or
indirectly, by the Parent or the Company (as the context requires) or other
Wholly Owned Subsidiaries of the Parent or the Company (as the context
requires).
Accounting Principles, Terms and Determinations. All
references in this Agreement to "generally accepted accounting principles" or to
"GAAP" shall be deemed to refer to generally accepted accounting principles in
effect in the United States at the time of application thereof. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all unaudited
DAL02:222894.12
002328
53
<PAGE>
financial statements and certificates and reports as to financial matters
required to be furnished hereunder shall be prepared, in accordance with
generally accepted accounting principles, applied on a basis consistent with the
most recent audited consolidated financial statements of the Parent and its
Subsidiaries delivered pursuant to clause (ii) of paragraph 5A or, if no such
statements have been so delivered, the most recent audited financial statements
referred to in clause (i) of the second grammatical paragraph of paragraph 9B.
PARAGRAPH MISCELLANEOUS.
13. Miscellaneous.
Note Payments. So long as the Existing Holder shall hold any
Note, the Company will make payments of principal of, interest on and any Yield
- - Maintenance Amount payable with respect to such Note, which comply with the
terms of this Agreement, by wire transfer of immediately available funds for
credit not later than 12:00 noon (New York City time) on the day when due to the
Existing Holder's account or accounts as specified in the Information Schedule
attached hereto, or such other account or accounts in the United States as the
Existing Holder may designate in writing, notwithstanding any contrary provision
herein or in any Note with respect to the place of payment. The Existing Holder
agrees that, before disposing of any Note, the Existing Holder will make a
notation thereon (or on a schedule attached thereto) of all principal payments
previously made thereon and of the date to which interest thereon has been paid.
The Company agrees to afford the benefits of this paragraph 13A to any
Transferee which shall have made the same agreement as the Existing Holder have
made in this paragraph 13A.
Expenses. The Company agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save the Existing Holder
and any such Transferee harmless against liability for the payment of, all
out-of-pocket expenses arising in connection with such transactions, including
(i) all costs and expenses of obtaining all necessary private placement numbers,
(ii) all document production and duplication charges and the fees and expenses
of any special counsel engaged by the Existing Holder or any such Transferee in
connection with this Agreement, the transactions contemplated hereby and any
subsequent proposed modification of, or proposed consent under, this Agreement,
whether or not such proposed modification shall be effected or proposed consent
granted, and (iii) the costs and expenses, including attorneys' fees, incurred
by the Existing Holder or any such Transferee in enforcing (or determining
whether or how to enforce) any rights under this Agreement, the Notes, the
Warrants, the Registration Rights Agreement or the Participation Rights
Agreement, or in responding to any subpoena or other legal process or
investigative demand issued in connection with this Agreement, such other
documents or the transactions contemplated hereby or thereby or by reason of the
Existing Holder's or such Transferee's having acquired any Note or Warrant,
including without limitation costs and expenses incurred in any bankruptcy case.
The obligations of the Company under this paragraph 13B shall survive the
transfer of any Note or Warrant or portion thereof or interest therein by the
Existing Holder or any Transferee and the payment of any Note or exercise of any
Warrant.
DAL02:222894.12
002328
54
<PAGE>
Consent to Amendments. This Agreement may be amended, and the
Company or the Parent may take any action herein prohibited, or omit to perform
any act herein required to be performed by it, if the Company or the Parent
shall obtain the written consent to such amendment, action or omission to act,
of the Required Holder(s) except that, without the written consent of the holder
or holders of all Notes at the time outstanding, no amendment to this Agreement
shall change the maturity of any Note, or change the principal of, or the rate
or time of payment of interest on or any Yield-Maintenance Amount payable with
respect to any Note, or affect the time, amount or allocation of any
prepayments, or change the proportion of the principal amount of the Notes
required with respect to any consent, amendment, waiver or declaration. Each
holder of any Securities at the time or thereafter outstanding shall be bound by
any consent authorized by this paragraph 13C, whether or not such Securities
shall have been marked to indicate such consent, but any Securities issued
thereafter may bear a notation referring to any such consent. No course of
dealing between the Company or the Parent and the holder of any Securities nor
any delay in exercising any rights hereunder or under any Securities shall
operate as a waiver of any rights of any holder of such Securities. As used
herein and in the Notes, the term "this Agreement" and references thereto shall
mean this Agreement as it may from time to time be amended or supplemented.
Form, Registration, Transfer and Exchange of Notes; Lost
Notes. The Notes are issuable as registered notes without coupons in
denominations of at least $100,000, except as may be necessary to reflect any
principal amount not evenly divisible by $100,000. The Company shall keep at its
principal office a register in which the Company shall provide for the
registration of Notes and of transfers of Notes. Upon surrender for registration
of transfer of any Note at the principal office of the Company, the Company
shall, at its expense, execute and deliver one or more new Notes of like tenor
and of a like aggregate principal amount, registered in the name of such
transferee or transferees. At the option of the holder of any Note, such Note
may be exchanged for other Notes of like tenor and of any authorized
denominations, of a like aggregate principal amount, upon surrender of the Note
to be exchanged at the principal office of the Company. Whenever any Notes are
so surrendered for exchange, the Company shall, at its expense, execute and
deliver the Notes which the holder making the exchange is entitled to receive.
Every Note surrendered for registration of transfer or exchange shall be duly
endorsed, or be accompanied by a written instrument of transfer duly executed,
by the holder of such Note or such holder's attorney duly authorized in writing.
Any Note or Notes issued in exchange for any Note or upon transfer thereof shall
carry the rights to unpaid interest and interest to accrue which were carried by
the Note so exchanged or transferred, so that neither gain nor loss of interest
shall result from any such transfer or exchange. Upon receipt of written notice
from the holder of any Note of the loss, theft, destruction or mutilation of
such Note and, in the case of any such loss, theft or destruction, upon receipt
of such holder's unsecured indemnity agreement, or in the case of any such
mutilation upon surrender and cancellation of such Note, the Company will make
and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or
mutilated Note.
Persons Deemed Owners; Participations. Prior to due
presentment for registration of transfer, the Company may treat the Person in
whose name any Note is registered as the owner
DAL02:222894.12
002328
55
<PAGE>
and holder of such Note for the purpose of receiving payment of principal of,
interest on and any Yield - Maintenance Amount payable with respect to such Note
and for all other purposes whatsoever, whether or not such Note shall be
overdue, and the Company shall not be affected by notice to the contrary.
Subject to the preceding sentence, the holder of any Note may from time to time
grant participations in such Note to any Person on such terms and conditions as
may be determined by such holder in its sole and absolute discretion, provided
that any such participation shall be in a principal amount of at least $100,000.
Survival of Representations and Warranties; Entire Agreement.
All representations and warranties contained herein or made in writing by or on
behalf of the Parent or the Company in connection herewith shall survive the
execution and delivery of this Agreement and the Notes, the transfer by the
Existing Holder of any Warrant or Note or portion thereof or interest therein
and the payment of any Note or exercise of any Warrant, and may be relied upon
by any Transferee, regardless of any investigation made at any time by or on
behalf of the Existing Holder or any Transferee. Subject to the preceding
sentence, this Agreement, the Notes, the Warrants, the Registration Rights
Agreement and the Participation Rights Agreement embody the entire agreement and
understanding among the Existing Holder, the Parent and the Company and
supersede all prior agreements and understandings relating to the subject matter
hereof.
Successors and Assigns. All covenants and other agreements in
this Agreement contained by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee), whether so expressed or
not.
Disclosure to Other Persons. The Parent and the Company
acknowledge that the holder of any Security may deliver copies of any financial
statements and other documents delivered to such holder, and disclose any other
information disclosed to such holder, by or on behalf of the Parent, the Company
or any other Subsidiary of the Parent in connection with or pursuant to this
Agreement, to (i) such holder's directors, officers, employees, agents and
professional consultants, (ii) any other holder of any Security, (iii) any
Person to which such holder offers to sell such Security or any part thereof,
(iv) any Person to which such holder sells or offers to sell a participation in
all or any part of a Note, (v) any Person from which such holder offers to
purchase any other security of the Parent, (vi) any federal or state regulatory
authority having jurisdiction over such holder, (vii) the National Association
of Insurance Commissioners or any similar organization or (viii) any other
Person to which such delivery or disclosure may be necessary or appropriate (a)
in compliance with any law, rule, regulation or order applicable to such holder,
(b) in response to any subpoena or other legal process or informal investigative
demand, or (c) in connection with any litigation to which such holder is a
party.
Notices. All notices or other communications provided for
hereunder shall be in writing and sent by first class mail or nationwide
overnight delivery service (with charges prepaid) and, (i) if to the Existing
Holder, addressed to the Existing Holder at the address specified for such
communications in the Information Schedule attached hereto, or at such other
address as such
DAL02:222894.12
002328
56
<PAGE>
Existing Holder shall have specified to the Parent and the Company in writing,
(ii) if to any other holder of any Security, addressed to such other holder at
such address as such other holder shall have specified to the Parent and the
Company in writing or, if any such other holder shall not have so specified an
address to the Parent and the Company, then addressed to such other holder in
care of the last holder of such Security which shall have so specified an
address to the Parent and the Company, and (iii) if to the Parent or the
Company, addressed to it at 4610 South Ulster Street, Suite 200, Denver,
Colorado 80237, Attention: Legal Department, or at such other address as the
Parent or the Company shall have specified to the holder of each Security in
writing; provided, that any such communication to the Parent or the Company may
also, at the option of the holder of any Security, be delivered by any other
means either to the Parent or the Company at its address specified above or to
any officer of the Parent or the Company, as applicable.
Payments Due on Non-Business Days. Anything in this Agreement
or the Notes to the contrary notwithstanding, any payment of principal of or
interest or Yield-Maintenance Amount on any Note that is due on a date other
than a Business Day shall be made on the next succeeding Business Day without
including the additional days elapsed in the computation of the interest payable
on such next succeeding Business Day.
Satisfaction Requirement. If any agreement, certificate or
other writing, or any action taken or to be taken, is by the terms of this
Agreement required to be satisfactory to the Existing Holder or to the Required
Holder(s), the determination of such satisfaction shall be made by the Existing
Holder or the Required Holder(s), as the case may be, in the sole and exclusive
judgment (exercised in good faith) of the Person or Persons making such
determination.
Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO
SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK. This Agreement
may not be changed orally, but (subject to the provisions of paragraph 13C) only
by an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought.
Waiver of Jury Trial; Consent to Jurisdiction; Limitation of
Remedies.
THE PARENT, THE COMPANY AND EACH HOLDER OF SECURITIES
HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT
MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION OF ANY CLAIM WHICH IS
BASED HEREON, OR ARISES OUT OF, UNDER, OR IN CONNECTION WITH THIS
AGREEMENT, THE NOTES, THE WARRANTS, THE REGISTRATION RIGHTS AGREEMENT
OR THE PARTICIPATION RIGHTS AGREEMENT, OR ANY TRANSACTIONS RELATING
HERETO OR THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE PARENT, THE
COMPANY OR SUCH HOLDERS. THE PARENT AND THE COMPANY EACH ACKNOWLEDGES
THAT THIS
DAL02:222894.12
002328
57
<PAGE>
PROVISION IS A MATERIAL INDUCEMENT FOR THE EXISTING HOLDER TO ENTER
INTO THIS AGREEMENT.
ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT, THE NOTES, THE WARRANTS, THE REGISTRATION RIGHTS AGREEMENT
OR THE PARTICIPATION RIGHTS AGREEMENT, OR ANY TRANSACTIONS RELATING
HERETO OR THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE PARENT, THE
COMPANY OR THE HOLDERS OF SECURITIES MAY BE BROUGHT IN THE COURTS OF
THE STATE OF NEW YORK OR THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND THE COMPANY AND THE PARENT EACH HEREBY
ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS.
THE COMPANY AND THE PARENT EACH HEREBY IRREVOCABLY WAIVES ANY
OBJECTIONS, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING
OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING
IN SUCH RESPECTIVE JURISDICTIONS.
Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Descriptive Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
Maximum Interest Payable. The Parent, the Company, the
Existing Holder and any other holders of the Notes specifically intend and agree
to limit contractually the amount of interest payable under this Agreement, the
Notes and all other instruments and agreements related hereto and thereto to the
maximum amount of interest lawfully permitted to be charged under applicable
law. Therefore, none of the terms of this Agreement, the Notes or any instrument
pertaining to or relating to this Agreement or the Notes shall ever be construed
to create a contract to pay interest at a rate in excess of the maximum rate
permitted to be charged under applicable law, and neither the Company, any
Parent nor any other party liable or to become liable hereunder, under the
Notes, any guaranty or under any other instruments and agreements related hereto
and thereto shall ever be liable for interest in excess of the amount determined
at such maximum rate, and the provisions of this paragraph 13P shall control
over all other provisions of this Agreement, any Notes, any guaranty or any
other instrument pertaining to or relating to the transactions herein
contemplated. If any amount of interest taken or received by the Existing Holder
or any holder of a Note shall be in excess
DAL02:222894.12
002328
58
<PAGE>
of said maximum amount of interest which, under applicable law, could lawfully
have been collected by the Existing Holder or such holder incident to such
transactions, then such excess shall be deemed to have been the result of a
mathematical error by all parties hereto and shall be refunded promptly by the
Person receiving such amount to the party paying such amount, or, at the option
of the recipient, credited ratably against the unpaid principal amount of the
Note or Notes held by the Existing Holder or such holder, respectively. All
amounts paid or agreed to be paid in connection with such transactions which
would under applicable law be deemed "interest" shall, to the extent permitted
by such applicable law, be amortized, prorated, allocated and spread throughout
the stated term of this Agreement and the Notes. "Applicable law" as used in
this paragraph means that law in effect from time to time which permits the
charging and collection of the highest permissible lawful, nonusers rate of
interest on the transactions herein contemplated including laws of the State of
New York and of the United States of America, and "maximum rate" as used in this
paragraph means, with respect to each of the Notes, the maximum lawful,
nonusurious rates of interest (if any) which under applicable law may be charged
to the Company from time to time with respect to such Notes.
Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
DAL02:222894.12
002328
59
<PAGE>
EXECUTED to be effective as of the date first above written.
HALLWOOD ENERGY CORPORATION
By:
Name: Cathleen M. Osborn
Title: Vice President
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By:
Name: Cathleen M. Osborn
Title: Vice President
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
By:
Name: Ric Abel
Title: Vice President
DAL02:222894.12
002328
60
<PAGE>
INFORMATION SCHEDULE
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
Aggregate Principal
Amount of Notes
to be Delivered
Note
Denomination
$25,000,000
$25,000,000
Aggregate Number of
Shares of Parent
Common Stock for
which
Warrant is Exercisable
Warrant Number
309,278
RW-1
(1) All payments on account of Notes held by such institution shall be made
by wire transfer of immediately available funds for credit to:
Account No. 890-0304-391
The Bank of New York
New York, New York
(ABA No.: 021-000-018)
Each such wire transfer shall set forth the name of the Company, a
reference to "10.32% Senior Subordinated Notes due December 23, 2007,
Security No. !INV5810!, and the due date and application (as among
principal, interest and Yield-Maintenance Amount) of the payment
being made.
(2) Address for all notices relating to payments:
The Prudential Insurance Company of America
c/o Prudential Capital Group
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
Attention: Investment Operations Group
(Attention: Manager)
(3) Address for all other communications and notices:
The Prudential Insurance Company of America
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, Texas 75201
Attention: Managing Director
(4) Tax Identification No.: 22-1211670
DAL02:222894.12
002328
1
<PAGE>
SCHEDULE 9D
EXISTING INDEBTEDNESS, NON-RECOURSE DEBT AND LIENS
[Company to prepare]
DAL02:222894.12
002328
<PAGE>
SCHEDULE 9G
LIST OF AGREEMENTS RESTRICTING DEBT
[Company to prepare]
DAL02:222894.12
002328
<PAGE>
EXHIBIT A
[FORM OF SENIOR SUBORDINATED NOTE]
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
10.32% SENIOR SUBORDINATED NOTE DUE DECEMBER 23, 2007
No. ____________, _____
$ PPN 40636V A* 0
FOR VALUE RECEIVED, the undersigned, HALLWOOD CONSOLIDATED RESOURCES
CORPORATION (the "Company"), a corporation organized and existing under the laws
of the State of Delaware, hereby promises to pay to
_____________________________, or registered assigns, the principal sum of
___________________________ DOLLARS ($______________) on December 23, 2007, with
interest (computed on the basis of a 360-day year -- 30-day month) payable
quarterly (or, upon the occurrence of a Default or an Event of Default and until
such Default or Event of Default has been cured or waived in writing (such
period constituting a "Default Interest Period"), at the option of the
registered holder hereof, on demand) on the 23rd day of March, June, September
and December in each year, commencing with the 23rd day of March, June,
September or December next succeeding the date hereof, until the principal
hereof shall have become due and payable (a) on the unpaid balance hereof at the
rate of 10.32% per annum from the date hereof, and (b) during a Default Interest
Period on the unpaid balance hereof and all other obligations of the Company
under the Agreement referred to below, including any payment or overdue payment
or prepayment of principal, interest and any Yield-Maintenance Amount (as such
term is defined in the Agreement referred to below), at a rate per annum from
time to time equal to the lesser of (i) the maximum rate permitted by applicable
law or (ii) the greater of (y) 12.32% or (z) 2.0% over the rate of interest
publicly announced by The Bank of New York from time to time in New York City as
its Prime Rate.
Payments of principal of, interest on and any Yield-Maintenance Amount
payable with respect to this Note are to be made at the main office of The Bank
of New York in New York City or at such other place as the holder hereof shall
designate to the Company in writing, in lawful money of the United States of
America.
This Note is one of a series of 10.32% Senior Subordinated Notes (the
"Notes") issued pursuant to an Amended and Restated Subordinated Note and
Warrant Purchase Agreement, dated as of June 8, 1999 (the "Agreement"), among
the Company, Hallwood Energy Corporation (the
DAL02:222894.12
002328
1
<PAGE>
"Parent") and The Prudential Insurance Company of America and is entitled to the
benefits thereof.
This Note is a registered Note and, as provided in the Agreement, upon
surrender of this Note for registration of transfer, duly endorsed, or
accompanied by a written instrument of transfer duly executed, by the registered
holder hereof or such holder's attorney duly authorized in writing, a new Note
of like tenor for a like principal amount will be issued to, and registered in
the name of, the transferee. Prior to due presentment for registration of
transfer, the Company may treat the person in whose name this Note is registered
as the owner hereof for the purpose of receiving payment and for all other
purposes, and the Company and the Parent shall not be affected by any notice to
the contrary.
This Note is subject to certain prepayments, as specified in the
Agreement.
This Note and the debt evidenced hereby, including the principal,
interest and Yield- Maintenance Amount, if any, shall at all times remain junior
and subordinate to any and all Senior Debt (as defined in the Agreement), all on
the terms and to the extent more fully set forth in the Agreement.
This Note and the holder hereof are entitled, equally and ratably with
the holders of all other Notes, to the benefits of (i) the guarantee hereof by
the Parent set forth in paragraph 11 of the Agreement, (ii) the HCP Guaranty and
the Subsidiary Guaranty, as such terms are defined in the Agreement, and (iii)
all other guaranty agreements which may from time to time be executed pursuant
to the Agreement by other Subsidiaries of the Parent for the benefit of the
holders of the Notes.
If an Event of Default, as defined in the Agreement, shall occur and be
continuing, the principal of this Note may be declared or otherwise become due
and payable in the manner and with the effect provided in the Agreement.
The Company and the purchaser and the registered holder of this Note
specifically intend and agree to limit contractually the amount of interest
payable under this Note to the maximum amount of interest lawfully permitted to
be charged under applicable law. Therefore, none of the terms of this Note shall
ever be construed to create a contract to pay interest at a rate in excess of
the maximum rate permitted to be charged under applicable law, and neither the
Company nor any other party liable or to become liable hereunder shall ever be
liable for interest in excess of the amount determined at such maximum rate, and
the provisions of paragraph 13P of the Agreement shall control over any contrary
provision of this Note.
DAL02:222894.12
002328
2
<PAGE>
THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW
OF SUCH STATE.
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By
[Vice] President
DAL02:222894.12
002328
3
<PAGE>
EXHIBIT B
[FORM OF PARENT COMMON STOCK PURCHASE WARRANT]
DAL02:222894.12
002328
1
<PAGE>
EXHIBIT C
[FORM OF REGISTRATION RIGHTS AGREEMENT]
DAL02:222894.12
002328
1
<PAGE>
EXHIBIT D
[FORM OF PARTICIPATION RIGHTS AGREEMENT]
DAL02:222894.12
002328
1
<PAGE>
EXHIBIT E
[FORM OF SUBSIDIARY GUARANTY]
DAL02:222894.12
002328
1
<PAGE>
EXHIBIT F
[FORM OF HCP CONSENT]
CONSENT TO AMENDMENT
The undersigned is the Guarantor ("Guarantor") under a Senior
Subordinated Guaranty Agreement, dated as of December 23, 1997 (the "Guaranty")
in favor of The Prudential Insurance Company of America (the "Existing Holder")
with respect to the obligations of Hallwood Consolidated Resources Corporation
(the "Company") under that certain Subordinated Note and Warrant Purchase
Agreement dated as of December 23, 1997 (the "Original Agreement"). The terms
used herein have the meanings specified in the Guaranty unless otherwise defined
herein. The Existing Holder, Hallwood Energy Corporation and the Company are
entering into that certain Amended and Restated Note and Warrant Purchase
Agreement dated as of June 8, 1999, which amends and restates the Original
Agreement in its entirety (the "Amended and Restated Agreement"). The
undersigned hereby consents to the Amended and Restated Agreement and hereby
confirms and agrees that the Guaranty is, and shall continue to be, in full
force and effect and is hereby confirmed and ratified in all respects except
that, upon the effectiveness of, and on and after the date of this consent, all
references in the Guaranty of the undersigned to the "Note Agreement,"
"thereunder," "thereof," or words of like import referring to the Original
Agreement shall mean the Original Agreement as amended by the Amended and
Restated Agreement, as the same may be amended or modified from time to time.
Dated as of June 8, 1999.
Hallwood Consolidated Partners, L.P.
By: Hallwood Consolidated Resources
Corporation, its general partner
By:
Name:
Title:
DAL02:222894.12
002328
1
<PAGE>
EXHIBIT G-1
[FORM OF OPINION OF COMPANY'S, PARENT'S
AND HEP'S GENERAL COUNSEL]
DAL02:222894.12
002328
1
<PAGE>
EXHIBIT G-2
[FORM OF OPINION OF COMPANY'S, PARENT'S AND HEP'S SPECIAL COUNSEL]
DAL02:222894.12
002328
1
<PAGE>
EXHIBIT H
[FORM OF ASSUMPTION OF SUBSIDIARY GUARANTY]
SENIOR SUBORDINATED GUARANTY
ASSUMPTION AGREEMENT
THIS SENIOR SUBORDINATED GUARANTY ASSUMPTION AGREEMENT (this
"Agreement"), dated as of _______, ___ is made by ________, a __________ (the
"Additional Guarantor"), in favor of THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
("Prudential").
WHEREAS, Hallwood Consolidated Resources Corporation, a Delaware
corporation (the "Company"), Hallwood Energy Corporation, a Delaware corporation
(the "Parent"), and Prudential are parties to an Amended and Restated
Subordinated Note and Warrant Purchase Agreement dated as of June 8, 1999 (as
the same may be further amended, restated or otherwise modified from time to
time, the "Note Agreement");
WHEREAS, the Company and the Parent are required to cause the
Additional Guarantor, pursuant to paragraph 5K of the Note Agreement, to deliver
to Prudential this Agreement pursuant to which the Additional Guarantor will
become a Guarantor under that certain Senior Subordinated Guaranty Agreement
dated as June 8, 1999 by and among the Guarantors listed therein in favor of
Prudential (as the same may be amended, restated or otherwise modified from time
to time, the "Guaranty");
WHEREAS, the Additional Guarantor has received and will receive
substantial direct and indirect benefits from the Company's and the Parent's
compliance with the terms and conditions of the Note Agreement and the Notes
issued thereunder;
NOW THEREFORE, in order to induce, and in consideration of, the
maintenance of the Note Agreement and to enable the Company and the Parent to
comply with paragraph 5K thereof, the Additional Guarantor hereby covenants,
represents and warrants to Prudential as follows:
The Additional Guarantor hereby becomes a Guarantor (as defined in the
Guaranty) for all purposes of the Guaranty. Without limiting the foregoing, the
Additional Guarantor hereby, jointly and severally with the other Guarantors
under the Guaranty, guarantees to Prudential and its successors and assigns the
prompt payment in full when due (whether at stated maturity, by acceleration or
otherwise) of all Guaranteed Obligations (as defined in Section 1 of the
Guaranty) in the same manner and to the same extent as is provided in the
Guaranty and, in addition, the Additional Guarantor hereby makes the
representations and warranties set forth in Section 8 of the Guaranty, other
than the representations and warranties contained in clause (a)(i) of such
DAL02:222894.12
002328
1
<PAGE>
Section 8, and also represents and warrants that it is a _____________ duly
organized, validly existing and in good standing under the laws of the State of
______________.
Notice of acceptance of this Agreement and of the Guaranty, as
supplemented hereby, is hereby waived by the Additional Guarantor.
IN WITNESS WHEREOF, the Additional Guarantor has caused this Guaranty
Assumption Agreement to be duly executed and delivered as of the day and year
first above written.
----------------,
a _______________
By:
Name:
Title:
DAL02:222894.12
002328
2
<PAGE>
EXHIBIT I
[FORM OF OPINION RELATING TO
SUBSIDIARY'S ASSUMPTION OF SUBSIDIARY GUARANTY]
[Letterhead of Law Firm Giving Opinion]
[Name(s) and address(es) of each Note holder] [Date]
Ladies and Gentlemen:
We have acted as counsel for _________________________, a ___________
(the "Company") in connection with the execution by the Company of the Senior
Subordinated Guaranty Assumption Agreement (the "Assumption Agreement") dated as
of __________, pursuant to which the Company becomes a Guarantor under that
certain Senior Subordinated Guaranty Agreement, dated as of June 8, 1999 (the
"Subsidiary Guaranty"), executed by certain Subsidiaries of Hallwood Energy
Corporation, a Delaware corporation (the "Parent"), pursuant to which the
signatories thereto guaranteed the obligations of Hallwood Consolidated
Resources Corporation, a Delaware corporation ("HCRC"), under that certain
Amended and Restated Subordinated Note and Warrant Purchase Agreement (the
"Agreement") dated as of June __, 1999 by and among HCRC, the Parent and The
Prudential Insurance Company of America. Capitalized terms used and not
otherwise defined herein that are defined in the Agreement have the respective
meanings specified in the Agreement. This opinion letter is being delivered to
you at the direction of the Company in satisfaction of the affirmative covenant
set forth in paragraph 5K of the Agreement and with the understanding that you
are relying upon the opinions expressed herein.
In this connection, we have examined such certificates of public
officials, certificates of officers of the Company and copies certified to our
satisfaction of corporate or other organizational documents, as the case may be,
and records of the Company and of other papers, and have made such other
investigations, as we have deemed relevant and necessary as a basis for our
opinion hereinafter set forth. We have relied upon such certificates of public
officials and of officers of the Company with respect to the accuracy of
material factual matters contained therein which were not independently
established.
Based upon the foregoing and upon such investigation as we have deemed
necessary, it is our opinion that:
1. The Company is a ____________ duly organized and validly
existing in good standing under the laws of the ______________. The Company has
the [corporate power/power under respective statute under which non-corporate
entity formed and charter documents] to carry on its business as now being
conducted. The Company has the
DAL02:222894.12
002328
1
<PAGE>
[corporate power/power under respective statute under which non-corporation
formed and charter documents] to enter into, and to perform its obligations
under, the Assumption Agreement and the Subsidiary Guaranty.
2. The Assumption Agreement and the Subsidiary Guaranty have
been duly authorized, executed and delivered by the Company and constitute valid
obligations of the Company, legally binding upon and enforceable against the
Company in accordance with their respective terms, except as such enforceability
may be limited by (a) bankruptcy, insolvency, reorganization or other similar
laws affecting the enforcement of creditors' rights generally, and (b) general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
3. The execution and delivery of the Assumption Agreement and
fulfillment of and compliance with the respective provisions of the Assumption
Agreement and the Subsidiary Guaranty do not conflict with, or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
or result in any violation of, or result in the creation of any Lien upon any of
the properties or assets of the Company pursuant to, or require any
authorization, consent, approval, exemption or other action by or notice to or
filing with any court, administrative or governmental body or other Person
pursuant to the [organizational documents] of the Company, any applicable law
(including any securities or Blue Sky law), statute, rule or regulation or
(insofar as is known to us) any agreement, instrument, order, judgment or decree
to which the Company is a party or otherwise subject.
4. To our knowledge, there are no actions, suits or
proceedings pending or threatened against the Company at law or in equity,
before any arbitrator or before or by any governmental department, commission,
board, bureau, agency or instrumentality (a) that question the validity of the
Assumption Agreement or the Subsidiary Guaranty, (b) that, if adversely
determined, could result in a material adverse effect on the business, condition
(financial or other), assets, properties, operations or prospects of the Company
or (c) that, if adversely determined, could otherwise adversely affect the
ability of the Company to perform its obligations under the Assumption Agreement
or the Subsidiary Guaranty.
The opinions expressed herein may also be relied upon by each
subsequent holder of the Notes.
Very truly yours,
DAL02:222894.12
002328
2
<PAGE>
EXHIBIT B
[FORM OF PARENT COMMON STOCK PURCHASE WARRANT]
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT
OR SUCH LAWS.
HALLWOOD ENERGY CORPORATION
Common Stock Purchase Warrant
PPN 40636X1138 New York, New York
No. RW-1 June 8, 1999
HALLWOOD ENERGY CORPORATION (the "Company"), a Delaware
corporation, for value received, hereby certifies that THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA or its registered assigns is entitled to purchase from the
Company 309,278 duly authorized, validly issued, fully paid and nonassessable
shares of the Company's common stock, par value $0.01 per share (the "Original
Common Stock"), at an initial exercise price per share determined in the manner
provided in section 1A, at any time or from time to time after the date hereof
and prior to 5:00 p.m., New York City time, on December 23, 2009 (the
"Expiration Date"), all subject to the terms, conditions and adjustments set
forth below in this Warrant.
This Warrant (the "Warrant", such term to include all Warrants
issued in substitution therefor) has been issued (i) pursuant to that certain
Amended and Restated Subordinated Note and Warrant Purchase Agreement dated as
of June 8, 1999 (the "Purchase Agreement") among the Company, Hallwood
Consolidated Resources Corporation ("HCRC") and The Prudential Insurance Company
of America (the "Purchaser") and (ii) in connection with the merger of HCRC
Acquisition Corp. with and into HCRC and as part of the overall plan of
reorganization (within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended, and the Treasury Regulations thereunder) of HCRC. The
applicable provisions of the Purchase Agreement are incorporated by reference,
and a conformed copy thereof will be furnished to the holder hereof by the
Company upon written request. Certain capitalized terms used in this Warrant are
defined in section 13.
DAL02:230679.1
002328
-1-
<PAGE>
1. Exercise of Warrant.
1A. Manner of Exercise. This Warrant may be exercised by the
holder hereof, in whole or in part, for the purchase of the Common Stock or
Other Securities which such holder is then entitled to purchase, during normal
business hours on any Business Day after the date hereof to and including the
Expiration Date by surrender of this Warrant, with the form of subscription at
the end hereof (or a reasonable facsimile thereof) duly executed by such holder,
to the Company at its principal office (or, if such exercise shall be in
connection with an underwritten public offering of shares of Common Stock (or
Other Securities) subject to this Warrant, at the location at which the
underwriters shall have agreed to accept delivery thereof), accompanied by
payment, in cash or by certified or official bank check payable to the order of
the Company, in the amount obtained by multiplying (a) the number of shares of
Original Common Stock (without giving effect to any adjustment therein)
designated in such form of subscription by (b) the Initial Exercise Price (as
hereinafter defined). The number of duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock which the holder of this Warrant shall
be entitled to receive upon each exercise hereof shall be determined by
multiplying the number of shares of Common Stock which would otherwise (but for
the provisions of section 2) be issuable upon such exercise, as designated by
the holder hereof pursuant to this section 1A, by a fraction of which (a) the
numerator is the Initial Exercise Price and (b) the denominator is the Exercise
Price in effect on the date of such exercise. The "Exercise Price" shall
initially be the last sale price of shares of Common Stock, regular way, on the
date hereof or, if there shall be no such last sale price, the last sale price
of shares of Common Stock, regular way, on the next Business Day after the date
hereof on which there shall be such a last sale price, in each case as published
by the National Quotation Bureau, Incorporated or any similar successor
organization, and in either case as reported by Prudential Securities
Incorporated (the "Initial Exercise Price"), and shall be adjusted and
readjusted from time to time as provided in section 2 and, as so adjusted and
readjusted, shall remain in effect until a further adjustment or readjustment
thereof is required by section 2. Promptly following the determination of the
Initial Exercise Price, the Company and the Purchaser shall execute an agreement
in the form of Exhibit A attached hereto, and made an integral part hereof, for
the purpose of documenting the Initial Exercise Price.
1B. When Exercise Effective. Each exercise of this Warrant
shall be deemed to have been effected and the Exercise Price shall be determined
immediately prior to the close of business on the Business Day on which this
Warrant shall have been surrendered to the Company as provided in section 1A,
and at such time the person or persons in whose name or names any certificate or
certificates for shares of Common Stock (or Other Securities) shall be issuable
upon such exercise as provided in section 1C shall be deemed to have become the
holder or holders of record thereof.
1C. Delivery of Stock Certificates, etc. Promptly after the
exercise of this Warrant, in whole or in part, and in any event within three (3)
Business Days thereafter (unless such exercise shall be in connection with an
underwritten public offering of shares of Common Stock (or Other Securities)
subject to this Warrant, in which event concurrently with such exercise), the
Company at
DAL02:230679.1
002328
-2-
<PAGE>
its expense will cause to be issued in the name of and delivered to the holder
hereof or, subject to section 8, as such holder may direct,
(a) a certificate or certificates for the number of
duly authorized, validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such holder shall be
entitled upon such exercise, and
(b) in case such exercise is in part only, a new
Warrant or Warrants of like tenor, specifying the aggregate on the face
or faces thereof the number of shares of Common Stock equal to the
number of such shares specified on the face of this Warrant minus the
number of such shares designated by the holder upon such exercise as
provided in section 1A.
1D. Company to Reaffirm Obligations. The Company will, at the
time of or at any time after each exercise of this Warrant, upon the request of
the holder hereof or of any shares of Common Stock (or Other Securities) issued
upon such exercise, acknowledge in writing its continuing obligation to afford
to such holder all rights to which such holder shall continue to be entitled
after such exercise in accordance with the terms of this Warrant, provided that
if any such holder shall fail to make any such request, the failure shall not
affect the continuing obligation of the Company to afford such rights to such
holder.
1E. Fractional Shares. No fractional shares shall be issued
upon exercise of this Warrant and no payment or adjustment shall be made upon
any exercise on account of any cash dividends (except as provided in section 2B)
on the Common Stock or Other Securities issued upon such exercise. If any
fractional interest in a share of Common Stock would, except for the provisions
of the first sentence of this section 1E, be deliverable upon the exercise of
this Warrant, the Company shall, in lieu of delivering the fractional share
therefor, pay to the holder exercising this Warrant an amount in cash equal to
the Market Price of such fractional interest.
1F. Cashless Exercise. As an alternative to exercise of this
Warrant by payment in cash (or by certified or official bank check), as provided
above in section 1A, the holder of this Warrant may exercise its right to
purchase some or all of the shares of Common Stock pursuant to this Warrant, on
a net basis without the exchange of any funds (a "Cashless Exercise"), such that
the holder hereof receives that number of shares of Common Stock subscribed for
pursuant to this Warrant less that number of shares of Common Stock, valued at
Market Price, at the time of exercise equal to the aggregate Exercise Price that
would otherwise have been paid by the holder of this Warrant for such shares of
Common Stock.
2. Protection Against Dilution or Other Impairment of Rights;
Adjustment of Exercise Price.
2A. Issuance of Additional Shares of Common Stock. In case the
Company, at any time or from time to time after the date hereof (the "Initial
Date"), shall issue or sell Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued
DAL02:230679.1
002328
-3-
<PAGE>
pursuant to section 2C or 2D) without consideration or for a consideration per
share (determined pursuant to section 2E) less than the greater of the Exercise
Price or the Market Price in effect, in each case, on the date of and
immediately prior to such issue or sale, then, and in each such case, subject to
section 2H, the Exercise Price shall be reduced, concurrently with such issue or
sale, to a price (calculated to the nearest .001 of a cent) determined by
multiplying such Exercise Price by a fraction,
(a) the numerator of which shall be the sum of (i) the number
of shares of Common Stock outstanding immediately prior to such issue
or sale and (ii) the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number of
such Additional Shares of Common Stock so issued or sold would purchase
at the greater of such Market Price or such Exercise Price, and
(b) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale,
provided that, for the purposes of this section 2A, (x) immediately after any
Additional Shares of Common Stock are deemed to have been issued pursuant to
section 2C or 2D, such Additional Shares shall be deemed to be outstanding, and
(y) treasury shares shall not be deemed to be outstanding.
2B. Extraordinary Dividends and Distributions. In case the
Company at any time or from time to time after the date hereof shall declare,
order, pay or make a dividend or other distribution (including, without
limitation, any distribution of other or additional stock or other securities or
property or Options by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement and any redemption or
acquisition of any such stock or Options on the Common Stock), other than (a) a
dividend payable in Additional Shares of Common Stock or in Options for Common
Stock or (b) a regular periodic dividend payable in cash then, and in each such
case, the Company shall pay over to the holder of this Warrant, on the date on
which such dividend or other distribution is paid to the holders of Common
Stock, the securities and other property (including cash) which such holder
would have received if such holder had exercised this Warrant immediately prior
to the record date fixed in connection with such dividend or other distribution.
2C. Treatment of Options and Convertible Securities. In case
the Company, at any time or from time to time after the date hereof, shall
issue, sell, grant or assume, or shall fix a record date for the determination
of holders of any class of securities entitled to receive, any Options or
Convertible Securities, whether or not such Options or the right to convert or
exchange any such Convertible Securities are immediately exercisable, then, and
in each such case, the maximum number of Additional Shares of Common Stock (as
set forth in the instrument relating thereto, without regard to any provisions
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, issuable upon the conversion or exchange of such Convertible
Securities (or the exercise of such Options for Convertible Securities and
subsequent conversion or exchange of the Convertible Securities issued), shall
be deemed to be Additional Shares of Common Stock issued as of the time of such
issue, sale,
DAL02:230679.1
002328
-4-
<PAGE>
grant or assumption or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided, that such Additional Shares
of Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to section 2E) of such shares would be less than
the greater of the Exercise Price or the Market Price in effect, in each case,
on the date of and immediately prior to such issue, sale, grant or assumption or
immediately prior to the close of business on such record date or, if the Common
Stock trades on an ex-dividend basis, on the date prior to the commencement of
ex-dividend trading, as the case may be, and provided, further, that in any such
case in which Additional Shares of Common Stock are deemed to be issued,
(a) if an adjustment of the Exercise Price shall be made upon
the fixing of a record date as referred to in the first sentence of
this section 2C, no further adjustment of the Exercise Price shall be
made as a result of the subsequent issue or sale of any Options or
Convertible Securities for the purpose of which such record date was
set;
(b) no further adjustment of the Exercise Price shall be made
upon the subsequent issue or sale of Additional Shares of Common Stock
or Convertible Securities upon the exercise of such Options or the
conversion or exchange of such Convertible Securities;
(c) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any change in the
consideration payable to the Company, or change in the number of
Additional Shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Exercise Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
upon any such change becoming effective, be recomputed to reflect such
change insofar as it affects such Options, or the rights of conversion
or exchange under such Convertible Securities, which are outstanding at
such time;
(d) upon the expiration of any such Options or of the rights
of conversion or exchange under any such Convertible Securities which
shall not have been exercised (or upon purchase by the Company and
cancellation or retirement of any such Options which shall not have
been exercised or of any such Convertible Securities the rights of
conversion or exchange under which shall not have been exercised), the
Exercise Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
upon such expiration (or such cancellation or retirement, as the case
may be), be recomputed as if:
(i) in the case of Options for Common Stock or in the
case of Convertible Securities, the only Additional Shares of
Common Stock issued or sold (or deemed issued or sold) were
the Additional Shares of Common Stock, if any, actually issued
or sold upon the exercise of such Options or the conversion or
exchange of such Convertible Securities and the consideration
received therefor was (x) an amount equal to (A) the
consideration actually received by the Company for the issue,
sale,
DAL02:230679.1
002328
-5-
<PAGE>
grant or assumption of all such Options, whether or not
exercised, plus (B) the consideration actually received by the
Company upon such exercise, minus (C) the consideration paid
by the Company for any purchase of such Options which were not
exercised, or (y) an amount equal to (A) the consideration
actually received by the Company for the issue, sale, grant or
assumption of all such Convertible Securities which were
actually converted or exchanged, plus (B) the additional
consideration, if any, actually received by the Company upon
such conversion or exchange, minus (C) the excess, if any, of
the consideration paid by the Company for any purchase of such
Convertible Securities, the rights of conversion or exchange
under which were not exercised, over an amount that would be
equal to the Fair Value of the Convertible Securities so
purchased if such Convertible Securities were not convertible
into or exchangeable for Additional Shares of Common Stock,
and
(ii) in the case of Options for Convertible
Securities, only the Convertible Securities, if any, actually
issued or sold upon the exercise of such Options were issued
at the time of the issue, sale, grant or assumption of such
Options, and the consideration received by the Company for the
Additional Shares of Common Stock deemed to have then been
issued was an amount equal to (x) the consideration actually
received by the Company for the issue, sale, grant or
assumption of all such Options, whether or not exercised, plus
(y) the consideration deemed to have been received by the
Company (pursuant to section 2E) upon the issue or sale of the
Convertible Securities with respect to which such Options were
actually exercised, minus (z) the consideration paid by the
Company for any purchase of such Options which were not
exercised; and
(e) no recomputation pursuant to subsection (c) or (d) above
shall have the effect of increasing the Exercise Price then in effect
by an amount in excess of the amount of the adjustment thereof
originally made in respect of the issue, sale, grant or assumption of
such Options or Convertible Securities.
2D. Treatment of Stock Dividends, Stock Splits, Etc. In case
the Company, at any time or from time to time after the date hereof, shall
declare or pay any dividend or other distribution on any class of securities of
the Company payable in shares of Common Stock, or shall effect a subdivision of
the outstanding shares of Common Stock into a greater number of shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in Common
Stock), then, and in each such case, Additional Shares of Common Stock shall be
deemed to have been issued (a) in the case of any such dividend or other
distribution, immediately after the close of business on the record date for the
determination of holders of any class of securities entitled to receive such
dividend or other distribution, or (b) in the case of any such subdivision, at
the close of business on the day immediately prior to the day upon which such
corporate action becomes effective.
DAL02:230679.1
002328
-6-
<PAGE>
2E. Computation of Consideration. For the purposes of
this Warrant:
(a) The consideration for the issue or sale of any Additional
Shares of Common Stock or for the issue, sale, grant or assumption of
any Options or Convertible Securities, irrespective of the accounting
treatment of such consideration,
(i) insofar as it consists of cash, shall be computed
as the amount of cash received by the Company, and insofar as
it consists of securities or other property, shall be computed
as of the date immediately preceding such issue, sale, grant
or assumption as the Fair Value of such consideration (or, if
such consideration is received for the issue or sale of
Additional Shares of Common Stock and the Market Price thereof
is less than the Fair Value of such consideration, then such
consideration shall be computed as the Market Price of such
Additional Shares of Common Stock), in each case without
deducting any expenses paid or incurred by the Company, any
commissions or compensation paid or concessions or discounts
allowed to underwriters, dealers or other performing similar
services and any accrued interest or dividends in connection
with such issue or sale, and
(ii) in case Additional Shares of Common Stock are
issued or sold or Options or Convertible Securities are
issued, sold, granted or assumed together with other stock or
securities or other assets of the Company for a consideration
which covers both, shall be the proportion of such
consideration so received, computed as provided in clause (i)
above, allocable to such Additional Shares of Common Stock or
Options or Convertible Securities, as the case may be, all as
determined in good faith by the Board of Directors of the
Company.
(b) All Additional Shares of Common Stock, Options or
Convertible Securities issued in payment of any dividend or other
distribution on any class of stock of the Company and all Additional
Shares of Common Stock issued to effect a subdivision of the
outstanding shares of Common Stock into a greater number of shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock) shall be deemed to have been issued without
consideration.
(c) Additional Shares of Common Stock deemed to have been
issued for consideration pursuant to section 2C, relating to Options
and Convertible Securities, shall be deemed to have been issued for a
consideration per share determined by dividing
(i) the total amount, if any, received and receivable
by the Company as consideration for the issue, sale, grant or
assumption of the Options or Convertible Securities in
question, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration) payable to the
Company upon the exercise in full of such Options or the
conversion or exchange of
DAL02:230679.1
002328
-7-
<PAGE>
such Convertible Securities or, in the case of Options for
Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such
Convertible Securities, in each case computing such
consideration as provided in the foregoing subsection (a), by
(ii) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment
of such number) issuable upon the exercise of such Options or
the conversion or exchange of such Convertible Securities.
2F. Adjustments for Combinations, Etc. In case the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Exercise Price in
effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
2G. Dilution in Case of Other Securities. In case any Other
Securities shall be issued or sold or shall become subject to issue or sale upon
the conversion or exchange of any stock (or Other Securities) of the Company (or
any issuer of Other Securities or any other Person referred to in section 2I) or
to subscription, purchase or other acquisition pursuant to any Options issued or
granted by the Company (or any such other issuer or Person) for a consideration
such as to dilute, in accordance with the standards established in this section
2, the exercise rights granted by this Warrant, then, and in each such case, the
computations do not apply, adjustments and readjustments provided for in this
Warrant with respect to the Exercise Price shall be made as nearly as possible
in the manner so provided and applied to determine the amount of Other
Securities from time to time receivable upon the exercise of this Warrant, so as
to protect the holder of this Warrant against the effect of such dilution.
2H. Minimum Adjustment of Exercise Price. If the amount of any
adjustment of the Exercise Price required hereunder would be less than one
percent of the Exercise Price in effect at the time such adjustment is otherwise
so required to be made, such amount shall be carried forward and adjustment with
respect thereto made at the time of and together with any subsequent adjustment
which, together with such amount and any other amount or amounts so carried
forward, shall aggregate at least one percent of such Exercise Price; provided,
that upon the exercise of this Warrant, all adjustments carried forward and not
theretofore made up to and including the date of such exercise shall be made to
the nearest .001 of a cent.
2I. Changes in Common Stock. In case at any time the Company
shall be a party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets,
liquidation or recapitalization of the Common Stock) in which the previously
outstanding Common Stock shall be changed into or exchanged for different
securities of the Company or common stock or other securities of another
corporation or interests in a noncorporate entity or other property (including
cash) or any combination of any of the foregoing
DAL02:230679.1
002328
-8-
<PAGE>
or in which the Common Stock ceases to be a publicly traded security either
listed on the New York Stock Exchange or the American Stock Exchange or quoted
by the Nasdaq National Market or any successor thereto or comparable system
(each such transaction being herein called the "Transaction", the date on which
the Transaction is first announced to the public being herein called the
"Announcement Date", the date of consummation of the Transaction being herein
called the "Consummation Date", the Company (in the case of a recapitalization
of the Common Stock or any other such transaction in which the Company retains
substantially all of its assets and survives as a corporation) or such other
corporation or entity (in each other case) being herein called the "Acquiring
Company", and the common stock (or equivalent equity interest) of the Acquiring
Company being herein called the "Acquirer's Common Stock"), then, as a condition
of the consummation of the Transaction, lawful and adequate provisions (in form
satisfactory to the Required Holders) shall be made so that the holder of this
Warrant, upon the exercise thereof at any time on or after the Consummation Date
(but subject, in the case of an election pursuant to subsection (b) or (c)
below, to the time limitation hereinafter provided for such election):
(a) shall be entitled to receive, and this Warrant shall
thereafter represent the right to receive, in lieu of the Common Stock
issuable upon such exercise prior to the Consummation Date, shares of
the Acquirer's Common Stock at an Exercise Price per share equal to the
lesser of (i) the Exercise Price in effect immediately prior to the
Consummation Date multiplied by a fraction the numerator of which is
the Market Price per share of the Acquirer's Common Stock determined as
of the Consummation Date and the denominator of which is the Market
Price per share of the Common Stock determined as of the Consummation
Date, or (ii) the Market Price per share of the Acquirer's Common Stock
determined as of the Consummation Date (subject in each case to
adjustments from and after the Consummation Date as nearly equivalent
as possible to the adjustments provided for in this Warrant), or at the
election of the holder of this Warrant pursuant to notice given to the
Company within six months after the Consummation Date; or
(b) shall be entitled to receive, and this Warrant shall
thereafter represent the right to receive, in lieu of each share of
Common Stock issuable upon such exercise prior to the Consummation
Date, either (i) the greatest amount of cash, securities or other
property given to any shareholder in consideration for any share of
Common Stock at any time during the period from and after the
Announcement Date to and including the Consummation Date by the
Acquiring Company, the Company or any Affiliate of either thereof, or
(ii) an amount in cash equal to the product obtained by multiplying (x)
the number of shares of the Acquirer's Common Stock purchasable upon
the exercise or conversion of such Warrant as shall result from
adjustments thereto that would have been required pursuant to
subsection (a) above times (y) the Market Price per share for the
Acquirer's Common Stock, determined as of the day within the period
from and after the Announcement Date to and including the Consummation
Date for which the amount determined as provided in the definition of
Market Price shall have been the greatest; or,
DAL02:230679.1
002328
-9-
<PAGE>
(c) shall be entitled to receive, within 30 days after such
election, in full satisfaction of the exercise rights afforded under
this Warrant to the holder thereof, an amount equal to the fair market
value of such exercise rights as determined by an independent
investment banker (with an established national reputation as a valuer
of equity securities) selected by the Required Holders with the
approval of the Company, such fair market value to be determined with
regard to all material relevant factors but without regard to any
negative effects on such value of the Transaction.
The Company agrees to obtain, and deliver to each holder of Warrants a copy of
the determination of an independent investment banker (selected by the Required
Holders with the approval of the Company) necessary to permit elections under
subsection (c) above within 15 days after the Consummation Date of any
Transaction to which subsection (c) is applicable.
Notwithstanding anything contained herein to the contrary, the Company shall not
effect any Transaction unless prior to the consummation thereof each corporation
or entity (other than the Company) which may be required to deliver any
securities or other property upon the exercise of Warrants shall assume, by
written instrument delivered to each holder of Warrants, the obligation to
deliver to such holder such securities or other property as to which, in
accordance with the foregoing provisions, such holder may be entitled, and such
corporation or entity shall have similarly delivered to each holder of Warrants
an opinion of counsel for such corporation or entity, satisfactory to each
holder of Warrants, which opinion shall state that all the outstanding Warrants,
shall thereafter continue in full force and effect and shall be enforceable
against such corporation or entity in accordance with the terms hereof and
thereof, together with such other matters as such holders may reasonably
request.
2J. Certain Issuances Excepted. Anything herein to the
contrary notwithstanding, the Company shall not be required to make any
adjustment of the Exercise Price in the case of (i) the issuance of the Warrants
and the issuance of shares of Common Stock issuable upon exercise of the
Warrants or (ii) the grant of Options that may be granted to non-management
employees of the Company or any of its Affiliates pursuant to the 1999 Long
- -Term Incentive Plan.
2K. Notice of Adjustment. Upon the occurrence of any event
requiring an adjustment of the Exercise Price, then and in each such case the
Company shall promptly deliver to the holder of this Warrant an Officer's
Certificate stating the Exercise Price resulting from such adjustment and the
increase or decrease, if any, in the number of shares of Common Stock issuable
upon the exercise of this Warrant, setting forth in reasonable detail the method
of calculation and the facts upon which such calculation is based. Within 90
days after each fiscal year in which any such adjustment shall have occurred, or
within 30 days after any request therefor by the holder of this Warrant stating
that such holder contemplates the exercise of such Warrant, the Company will
obtain and deliver to the holder of this Warrant the opinion of its regular
independent auditors or another firm of independent public accountants of
recognized national standing selected by the Company's Board of Directors, which
opinion shall confirm the statements in the most recent Officer's Certificate
delivered under this section 2K.
DAL02:230679.1
002328
-10-
<PAGE>
2L. Other Notices. In case at any time:
(a) the Company shall declare to the holders of Common Stock
any dividend other than a regular periodic cash dividend or any
periodic cash dividend in excess of 115% of the cash dividend for the
comparable fiscal period in the immediately preceding fiscal year;
(b) the Company shall declare or pay any dividend upon Common
Stock payable in stock or make any special dividend or other
distribution (other than regular cash dividends) to the holders of
Common Stock;
(c) the Company shall offer for subscription pro rata to the
holders of Common Stock any additional shares of stock of any class or
other rights;
(d) there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with, or sale of all or substantially all of
its assets to, another corporation or other entity;
(e) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company;
(f) there shall be made any tender offer for any shares of
capital stock of the Company; or
(g) there shall be any other Transaction;
then, in any one or more of such cases, the Company shall give to the holder of
this Warrant (i) at least 15 days prior to any event referred to in subsection
(a) or (b) above, at least 30 days prior to any event referred to in subsection
(c), (d) or (e) above, and within five days after it has knowledge of any
pending tender offer or other Transaction, written notice of the date on which
the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, winding-up or Transaction or the date by which
shareholders must tender shares in any tender offer and (ii) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or tender offer or Transaction known to the Company, at
least 30 days prior written notice of the date (or, if not then known, a
reasonable approximation thereof by the Company) when the same shall take place.
Such notice in accordance with the foregoing clause (i) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify the date (if known
to the Company) on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up, tender offer or Transaction, as the case may be. Such
notice shall also state that the action in question or the record date is
subject to the effectiveness
DAL02:230679.1
002328
-11-
<PAGE>
of a registration statement under the Securities Act or to a favorable vote of
security holders, if either is required.
2M. Certain Events. If any event occurs as to which, in the
good faith judgment of the Board of Directors of the Company, the other
provisions of this Warrant are not strictly applicable or if strictly applicable
would not fairly protect the exercise rights of the holders of the Warrants in
accordance with the essential intent and principles of such provisions, then the
Board of Directors of the Company shall appoint its regular independent auditors
or another firm of independent public accountants of recognized national
standing which shall give their opinion upon the adjustment, if any, on a basis
consistent with such essential intent and principles, necessary to preserve,
without dilution, the rights of the holders of the Warrants. Upon receipt of
such opinion, the Board of Directors of the Company shall forthwith make the
adjustments described therein; provided, that no such adjustment shall have the
effect of increasing the Exercise Price as otherwise determined pursuant to this
Warrant. The Company may make such reductions in the Exercise Price as it deems
advisable, including any reductions necessary to ensure that any event treated
for Federal income tax purposes as a distribution of stock or stock rights not
be taxable to recipients.
2N. Prohibition of Certain Actions. The Company will not, by
amendment of its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the holder of this Warrant in order to protect the
exercise privilege of the holder of this Warrant against dilution or other
impairment, consistent with the tenor and purpose of this Warrant. Without
limiting the generality of the foregoing, the Company (a) will not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Exercise Price then in effect, (b) will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of all Warrants from time to time outstanding, (c) will not take any
action which results in any adjustment of the Exercise Price if the total number
of shares of Common Stock or Other Securities issuable after the action upon the
exercise of all of the Warrants would exceed the total number of shares of
Common Stock or Other Securities then authorized by the Company's certificate of
incorporation and available for the purpose of issue upon such conversion, and
(d) will not issue any capital stock of any class which has the right to more
than one vote per share or any capital stock of any class which is preferred as
to dividends or as to the distribution of assets upon voluntary or involuntary
dissolution, liquidation or winding-up, unless the rights of the holders thereof
shall be limited to a fixed sum or percentage (or floating rate related to
market yields) of par value or stated value in respect of participation in
dividends and a fixed sum or percentage of par value or stated value in any such
distribution of assets.
3. Stock to be Reserved. The Company will at all times reserve and keep
available out of the authorized Common Stock, solely for the purpose of issue
upon the exercise of the Warrants
DAL02:230679.1
002328
-12-
<PAGE>
as herein provided, such number of shares of Common Stock as shall then be
issuable upon the exercise of all outstanding Warrants and the Company will
maintain at all times all other rights and privileges sufficient to enable it to
fulfill all its obligations hereunder. The Company covenants that all shares of
Common Stock which shall be so issuable shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, free from preemptive
or similar rights on the part of the holders of any shares of capital stock or
securities of the Company or any other Person, and free from all taxes, liens
and charges with respect to the issue thereof (not including any income taxes
payable by the holders of Warrants being exercised in respect of gains thereon),
and the Exercise Price will be credited to the capital and surplus of the
Company. The Company will take all such action as may be necessary to assure
that such shares of Common Stock may be so issued without violation of any
applicable law or regulation, or of any applicable requirements of the National
Association of Securities Dealers, Inc. and of any domestic securities exchange
upon which the Common Stock may be listed.
4. Registration of Common Stock. If any shares of Common Stock required
to be reserved for purposes of the exercise of Warrants require registration
with or approval of any governmental authority under any Federal or State law
(other than the Securities Act, registration under which is governed by the
Registration Rights Agreement), before such shares may be issued upon the
exercise thereof, the Company will, at its expense and as expeditiously as
possible, use its best efforts to cause such shares to be duly registered or
approved, as the case may be. Shares of Common Stock issuable upon exercise of
the Warrants shall be registered by the Company under the Securities Act or
similar statute then in force if required by the Registration Rights Agreement
and subject to the conditions stated in such agreement. At any such time as the
Common Stock is listed on any national securities exchange or quoted by the
Nasdaq National Market or any successor thereto or any comparable system, the
Company will, at its expense, obtain promptly and maintain the approval for
listing on each such exchange or quoting by the Nasdaq National Market or such
successor thereto or comparable system, upon official notice of issuance, the
shares of Common Stock issuable upon exercise of the then outstanding Warrants
and maintain the listing or quoting of such shares after their issuance so long
as the Common Stock is so listed or quoted; and the Company will also cause to
be so listed or quoted, will register under the Exchange Act and will maintain
such listing or quoting of, any Other Securities that at any time are issuable
upon exercise of the Warrants, if and at the time that any securities of the
same class shall be listed on such national securities exchange by the Company.
5. Issue Tax. The issuance of certificates for shares of Common Stock
upon exercise of this Warrant shall be made without charge to the holders hereof
for any issuance tax in respect thereto.
6. Closing of Books. The Company will at no time close its transfer
books against the transfer of any Warrant or of any share of Common Stock issued
or issuable upon the exercise of any Warrant in any manner which interferes with
the timely exercise of such Warrant.
DAL02:230679.1
002328
-13-
<PAGE>
7. No Rights or Liabilities as Stockholders. This Warrant shall not
entitle the holder thereof to any of the rights of a stockholder of the Company,
except as expressly contemplated herein. No provision of this Warrant, in the
absence of the actual exercise of such Warrant and receipt by the holder thereof
of Common Stock issuable upon such conversion, shall give rise to any liability
on the part of such holder as a stockholder of the Company, whether such
liability shall be asserted by the Company or by creditors of the Company.
8. Restrictive Legends. Except as otherwise permitted by this section
8, each Warrant originally issued and each Warrant issued upon direct or
indirect transfer or in substitution for any Warrant pursuant to this section 8
shall be stamped or otherwise imprinted with a legend in substantially the
following form:
"This Warrant and any shares acquired upon the exercise of this Warrant
have not been registered under the Securities Act of 1933, as amended,
or under state securities laws, and may not be transferred in the
absence of such registration or an exemption therefrom under such Act
or such laws."
Except as otherwise permitted by this section 8, (a) each certificate for Common
Stock (or Other Securities) issued upon the exercise of any Warrant, and (b)
each certificate issued upon the direct or indirect transfer of any such Common
Stock (or Other Securities) shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under state securities
laws, and may not be transferred in the absence of such registration or
an exemption therefrom under such Act or such laws."
The holder of any Restricted Securities shall be entitled to receive from the
Company, without expense, new securities of like tenor not bearing the
applicable legend set forth above in this section 8 when such securities shall
have been (a) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering such Restricted Securities,
(b) sold pursuant to Rule 144 or any comparable rule under the Securities Act,
(c) transferred to a limited number of institutional holders, each of which
shall have represented in writing that it is acquiring such Restricted
Securities for investment and not with a view to the disposition thereof, or (d)
when, in the opinion of counsel (which may include in-house counsel) for the
holder thereof experienced in Securities Act matters, such restrictions are no
longer required in order to insure compliance with the Securities Act.
9. Availability of Information. The Company will cooperate with each
holder of any Restricted Securities in supplying such information as may be
necessary for such holder to complete and file any information reporting forms
presently or hereafter required by the Commission as a condition to the
availability of an exemption from the Securities Act for the sale of any
Restricted Securities. The Company will furnish to each holder of any Warrants,
promptly upon their becoming
DAL02:230679.1
002328
-14-
<PAGE>
available, copies of all financial statements, reports, notices and proxy
statements sent or made available generally by the Company to its stockholders,
and copies of all regular and periodic reports and all registration statements
and prospectuses filed by the Company with any securities exchange or with the
Commission.
10. Information Required By Rule 144A. The Company will, upon the
request of the holder of this Warrant, provide such holder, and any qualified
institutional buyer designated by such holder, such financial and other
information as such holder may reasonably determine to be necessary in order to
permit compliance with the information requirements of Rule 144A under the
Securities Act in connection with the resale of Warrants, except at such times
as the Company is subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act. For the purpose of this section 10, the term "qualified
institutional buyer" shall have the meaning specified in Rule 144A under the
Securities Act.
11. Registration Rights Agreement; Participation Rights Agreement. The
holder of this Warrant and the holders of any securities issued or issuable upon
the exercise hereof are each entitled to the benefits of the Registration Rights
Agreement and the Participation Rights Agreement.
12. Ownership, Transfer and Substitution of Warrants.
12A. Ownership of Warrants. Except as otherwise required by
law, the Company may treat the Person in whose name any Warrant is registered on
the register kept at the principal office of the Company as the true and lawful
owner and holder thereof for all purposes, notwithstanding any notice to the
contrary except that, if and when any Warrant is properly assigned in blank, the
Company, in its discretion, may (but shall not be obligated to) treat the bearer
thereof as the owner of such Warrant for all purposes, notwithstanding any
notice to the Company to the contrary. Subject to section 8, a Warrant, if
properly assigned, may be exercised by a new holder without first having a new
Warrant issued.
12B. Transfer and Exchange of Warrants. Upon the surrender of
any Warrant, properly endorsed, for registration of transfer or for exchange at
the principal office of the Company, the Company at its expense will (subject to
compliance with section 8, if applicable) execute and deliver to or upon the
order of the holder thereof a new Warrant or Warrants of like tenor, in the name
of such holder or as such holder (upon payment by such holder of any applicable
transfer taxes) may direct, calling in the aggregate on the face or faces
thereof for the number of shares of Original Common Stock called for on the face
or faces of the Warrant or Warrants so surrendered.
12C. Replacement of Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Warrant and, in the case of any such loss, theft or
destruction of any Warrant held by a Person other than the Purchaser or any
institutional investor reasonably satisfactory to the Company, upon delivery of
its unsecured indemnity reasonably satisfactory to the Company in form and
amount or, in the case of any such
DAL02:230679.1
002328
-15-
<PAGE>
mutilation, upon surrender of such Warrant for cancellation at the principal
office of the Company, the Company at its expense will execute and deliver, in
lieu thereof, a new Warrant of like tenor.
13. Definitions. As used herein, unless the context otherwise requires,
the following terms have the following respective meanings:
"Additional Shares of Common Stock" shall mean all shares
(including treasury shares) of Common Stock issued or sold (or, pursuant to
section 2C or 2D) deemed to be issued) by the Company after the date hereof,
whether or not subsequently reacquired or retired by the Company, other than
shares of Common Stock issued upon the exercise or partial exercise of the
Warrants.
"Acquiring Company" shall have the meaning specified in
Section 2I.
"Acquirer's Common Stock" shall have the meaning specified in
Section 2I.
"Affiliate" shall have the meaning specified in the Purchase
Agreement.
"Announcement Date" shall have the meaning specified in
Section 2I.
"Business Day" shall mean any day on which banks are open for
business in New York City (other than a Saturday, a Sunday or a legal holiday in
the States of New York or New Jersey), provided, that any reference to "days"
(unless Business Days are specified) shall mean calendar days.
"Cashless Exercise" shall have the meaning specified in
section 1F.
"Commission" shall mean the Securities and Exchange Commission
or any successor federal agency having similar powers.
"Common Stock" shall mean the Original Common Stock, any stock
into which such stock shall have been converted or changed or any stock
resulting from any reclassification of such stock and all other stock of any
class or classes (however designated) of the Company the holders of which have
the right, without limitation as to amount, either to all or to a share of the
balance of current dividends and liquidating dividends after the payment of
dividends and distributions on any shares entitled to preference.
"Company" shall mean Hallwood Energy Corporation, a Delaware
corporation.
"Consummation Date" shall have the meaning specified in
section 2I.
DAL02:230679.1
002328
-16-
<PAGE>
"Convertible Securities" shall mean any evidences of
indebtedness, shares of stock (other than Common Stock) or other securities
directly or indirectly convertible into or exchangeable for Additional Shares of
Common Stock.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Exercise Price" shall have the meaning specified in
section 1A.
"Fair Value" shall mean with respect to any securities or
other property, the fair value thereof as of a date which is within 15 days of
the date as of which the determination is to be made (a) determined by agreement
between the Company and the Required Holders, or (b) if the Company and the
Required Holders fail to agree, determined jointly by an independent investment
banking firm retained by the Company and by an independent investment banking
firm retained by the Required Holders, either of which firms may be an
independent investment banking firm regularly retained by the Company, or (c) if
the Company or the Required Holders shall fail so to retain an independent
investment banking firm within ten Business Days of the retention of such a firm
by the Required Holders or the Company, as the case may be, determined solely by
the firm so retained, or (d) if the firms so retained by the Company and by such
holders shall be unable to reach a joint determination within 15 Business Days
of the retention of the last firm so retained, determined by another independent
investment banking firm which is not a regular investment banking firm of the
Company chosen by the first two such firms.
"Initial Date" shall have the meaning specified in section 2A.
"Initial Exercise Price" shall have the meaning specified in
section 1A.
"Market Price" shall mean on any date specified herein, (a)
with respect to Common Stock or to common stock (or equivalent equity interests)
of an Acquiring Person or its Parent, the amount per share equal to (i) the last
sale price of shares of Common Stock, regular way, or of shares of such common
stock (or equivalent equity interests) on such date or, if no such sale takes
place on such date, the average of the closing bid and asked prices thereof on
such date, in each case as officially reported on the principal national
securities exchange on which the same are then listed or admitted to trading, or
(ii) if no shares of Common Stock or no shares of such common stock (or
equivalent equity interests), as the case may be, are then listed or admitted to
trading on any national securities exchange, the last sale price of shares of
Common Stock, regular way, or of shares of such common stock (or equivalent
equity interests) on such date, in each case or, if no such sale takes place on
such date, the average of the reported closing bid and asked prices thereof on
such date as quoted in the Nasdaq National Market or, if no shares of Common
Stock or no shares of such common stock (or equivalent equity interest), as the
case may be, are then quoted in the Nasdaq National Market, as published by the
National Quotation Bureau, Incorporated or any similar successor organization,
and in either case as reported by any member firm of the New York Stock Exchange
selected by the Company, or (iii) if no shares of Common Stock or no shares of
such common stock (or equivalent equity interests), as the case may be, are then
listed or admitted to
DAL02:230679.1
002328
-17-
<PAGE>
trading on any national securities exchange or quoted or published in the
over-the-counter market, the higher of (x) the book value thereof as determined
by any firm of independent public accountants of recognized standing selected by
the Board of Directors of the Company, as of the last day of any month ending
within 60 days preceding the date as of which the determination is to be made or
(y) the Fair Value thereof; and (b) with respect to any other securities, the
Fair Value thereof.
"1999 Long-Term Incentive Plan" shall mean the 1999 Long-Term
Incentive Plan of the Company pursuant to which Options for up to 1,200,000
shares of Common Stock and 180,000 shares of preferred stock may be issued.
"Officer's Certificate" shall mean a certificate signed in the
name of the Company by its President, one of its Vice Presidents or its
Treasurer.
"Options" shall mean rights, options or warrants to subscribe
for, purchase or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities.
"Original Common Stock" shall have the meaning specified in
the opening paragraphs of this Warrant.
"Other Securities" shall mean any stock (other than Common
Stock) and any other securities of the Company or any other Person (corporate or
otherwise) which the holders of the Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to section 2I or otherwise.
"Participation Rights Agreement" shall mean that certain
Participation Rights Agreement dated of even date herewith by and among the
Purchaser, the Company and certain holders of the Company's Common Stock that
are parties thereto.
"Person" shall mean and include an individual, a partnership,
an association, a joint venture, a corporation, a trust, a limited liability
company, an unincorporated organization and a government or any department or
agency thereof.
"Purchase Agreement" shall have the meaning specified in the
opening paragraphs of this Warrant.
"Purchaser" shall have the meaning specified in the opening
paragraphs of this Warrant.
"Registration Rights Agreement" shall mean the Registration
Rights Agreement dated of even date herewith by and between the Company and the
Purchaser.
DAL02:230679.1
002328
-18-
<PAGE>
"Required Holders" shall mean the holders of at least 66 2/3%
of all the Warrants at the time outstanding, determined on the basis of the
number of shares of Common Stock then purchasable upon the exercise of all
Warrants then outstanding.
"Restricted Securities" shall mean (a) any Warrants bearing
the applicable legend set forth in section 8 and (b) any shares of Common Stock
(or Other Securities) which have been issued upon the exercise of Warrants and
which are evidenced by a certificate or certificates bearing the applicable
legend set forth in such section, and (c) unless the context otherwise requires,
any shares of Common Stock (or Other Securities) which are at the time issuable
upon the exercise of Warrants and which, when so issued, will be evidenced by a
certificate or certificates bearing the applicable legend set forth in such
section.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Transaction" shall have the meaning specified in section 2I.
"Warrant" shall have the meaning specified in the opening
paragraphs of this Warrant.
14. Remedies. The Company stipulates that the remedies at law of the
holder of this Warrant in the event of any default or threatened default by the
Company in the performance of or compliance with any of the terms of this
Warrant are not and will not be adequate and that, to the fullest extent
permitted by law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction
against a violation of any of the terms hereof or otherwise.
15. Notices. All notices and other communications under this Warrant
shall be in writing and shall be sent (a) by registered or certified mail,
return receipt requested, (b) by telecopy if the sender on the same day sends a
conforming copy of such notice by a recognized overnight delivery service, or
(c) by a recognized overnight delivery service, addressed (i) if to any holder
of any Warrant or any holder of any Common Stock (or Other Securities), at the
registered address of such holder as set forth in the applicable register kept
at the principal office of the Company, or (ii) if to the Company, to the
attention of the Legal Department at its principal office, provided that the
exercise of any Warrant shall be effected in the manner provided in section 1.
DAL02:230679.1
002328
-19-
<PAGE>
16. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. The agreements of the Company contained in this Warrant other than
those applicable solely to the Warrants and the holders thereof shall inure to
the benefit of and be enforceable by any holder or holders at the time of any
Common Stock (or Other Securities) issued upon the exercise of Warrants, whether
so expressed or not. This Warrant shall be construed and enforced in accordance
with and governed by the laws of the State of New York. The section headings in
this Warrant are for purposes of convenience only and shall not constitute a
part hereof.
HALLWOOD ENERGY CORPORATION
By: /s/ Cathleen M. Osborn
Name: Cathleen M. Osborn
Title: Vice President
DAL02:230679.1
002328
-20-
<PAGE>
FORM OF SUBSCRIPTION
(To be executed only upon exercise of Warrant)
To HALLWOOD ENERGY CORPORATION
The undersigned registered holder of the within Warrant hereby
irrevocably exercises such Warrant for, and purchases thereunder, _____1 shares
of Common Stock of HALLWOOD ENERGY CORPORATION, [and herewith makes payment of
$_______________ therefor]2 [in a Cashless Exercise pursuant to Section 1F of
the within Warrant]3, and requests that the certificates for such shares be
issued in the name of, and delivered to _________________________ whose address
is _________________________.
Dated:
(Signature must conform in all respects to
name of holder as specified on the face of this
Warrant)
(Street Address)
(City) (State) (Zip Code)
1 Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which
this Warrant is being exercised), in either case without making any
adjustment for additional Common Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment
provisions of this Warrant, may be delivered upon exercise. In the case
of a partial exercise, a new Warrant or Warrants will be issued and
delivered, representing the unexercised portion of this Warrant, to the
holder surrendering the same.
2 Use in connection with an exercise involving a delivery of funds to the
Company. 3 Use in connection with a Cashless Exercise.
DAL02:230679.1
002328
-21-
<PAGE>
FORM OF ASSIGNMENT
(To be executed only upon transfer of Warrant)
For value received, the undersigned registered holder of the within
Warrant hereby sells, assigns and transfers unto _________________________ the
right represented by such Warrant to purchase _________________________1 shares
of Common Stock of HALLWOOD ENERGY CORPORATION, to which such Warrant relates,
and appoints _________________________ Attorney to make such transfer on the
books of HALLWOOD ENERGY CORPORATION, maintained for such purpose, with full
power of substitution in the premises.
Dated:
(Signature must conform in all respects to
name of holder as specified on the face of this
Warrant)
(Street Address)
(City) (State) (Zip Code)
Signed in the presence of:
- --------
1 Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which
this Warrant is being exercised), in either case without making any
adjustment for additional Common Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment
provisions of this Warrant, may be delivered upon exercise. In the case
of a partial exercise, a new Warrant or Warrants will be issued and
delivered, representing the unexercised portion of this Warrant, to the
holder surrendering the same.
DAL02:230679.1
002328
-22-
<PAGE>
EXHIBIT A
AGREEMENT REGARDING INITIAL EXERCISE PRICE
Reference is hereby made to that certain Common Stock Purchase Warrant
dated June ____, 1999 (the "Warrant"), relating to the right to purchase shares
of the common stock, $0.01 par value, of Hallwood Energy Corporation, a Delaware
corporation (the "Company"), and issued to The Prudential Insurance Company of
America ("Prudential"). Pursuant to the provisions of section 1A of the Warrant,
the Company and Prudential agree that the Initial Exercise Price (as defined in
the Warrant) has been determined as provided in such section 1A and is
$__________.
June __, 1999
HALLWOOD ENERGY CORPORATION
By:
Name:_______________________________
Title:__________________________
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
By:
Vice President
DAL02:230679.1
002328
-23-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1999 for Hallwood Energy Corporation and
is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000319019
<NAME> Hallwood Energy Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,576
<SECURITIES> 0
<RECEIVABLES> 16,581
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,771
<PP&E> 748,816
<DEPRECIATION> 574,821
<TOTAL-ASSETS> 202,218
<CURRENT-LIABILITIES> 20,164
<BONDS> 0
0
21,386
<COMMON> 100
<OTHER-SE> 53,730
<TOTAL-LIABILITY-AND-EQUITY> 202,218
<SALES> 21,873
<TOTAL-REVENUES> 22,050
<CGS> 0
<TOTAL-COSTS> 6,817
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,091
<INCOME-PRETAX> 1,321
<INCOME-TAX> (74)
<INCOME-CONTINUING> 1,395
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,395
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
