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, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-8921
HALLWOOD ENERGY PARTNERS, L. P.
(Exact name of registrant as specified in its charter)
Delaware 84-0987088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
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 [ ]
The registrant is a limited partnership and issues Units (representing ownership
of limited partner interests).
Number of Units outstanding as of August 14, 1998
Class A 10,011,854
Class B 143,773
Class C 2,464,063
Page 1 of 24
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, December 31,
1998 1997
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 7,866 $ 6,622
Accounts receivable:
Oil and gas revenues 6,347 8,772
Trade 4,781 4,609
Due from affiliates 362 588
Prepaid expenses and other current assets 1,522 1,551
Net working capital of affiliate 168
----------
Total 21,046 22,142
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 649,284 624,621
Unproved mineral interests - domestic 2,591 2,315
Furniture, fixtures and other 3,390 3,513
--------- ---------
Total 655,265 630,449
Less accumulated depreciation, depletion,
amortization and property impairment (545,273) (536,118)
------- -------
Total 109,992 94,331
------- --------
OTHER ASSETS
Investment in common stock of HCRC 12,725 15,048
Deferred expenses and other assets 32 82
----------- -----------
Total 12,757 15,130
-------- --------
TOTAL ASSETS $143,795 $131,603
======= =======
<FN>
(Continued on the following page)
</FN>
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Units)
June 30, December 31,
1998 1997
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 21,112 $ 19,915
Current portion of long-term debt 2,388
Net working capital deficit of affiliate 448
Current portion of contract settlement 2,752
------------- ---------
Total 23,500 23,115
-------- --------
NONCURRENT LIABILITIES
Long-term debt 35,812 34,986
Deferred liability 1,114 1,180
--------- ---------
Total 36,926 36,166
-------- --------
Total Liabilities 60,426 59,281
-------- --------
MINORITY INTEREST IN AFFILIATES 2,969 3,258
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
PARTNERS' CAPITAL
Class A Units - 10,011,854 and 9,977,254 Units issued in 1998 and 1997,
respectively; 9,121,612 and 9,077,949
outstanding in 1998 and 1997, respectively 60,984 66,184
Class B Subordinated Units - 143,773 Units outstanding
in 1998 and 1997 1,367 1,411
Class C Units - 2,464,063 and 664,063 Units outstanding
in 1998 and 1997, respectively 21,385 4,868
General partner 3,573 3,580
Treasury Units - 890,242 and 899,305 Units in 1998 and
1997, respectively (6,909) (6,979)
-------- ---------
Partners' Capital - Net 80,400 69,064
-------- --------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $143,795 $131,603
======= =======
<FN>
The accompanying notes are an
integral part of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Three Months Ended
June 30,
1998 1997
REVENUES:
<S> <C> <C>
Gas revenue $ 6,994 $ 4,961
Oil revenue 2,640 3,082
Pipeline, facilities and other 976 786
Interest 186 136
-------- ---------
10,796 8,965
------ -------
EXPENSES:
Production operating 3,093 2,728
General and administrative 1,084 1,030
Depreciation, depletion and amortization 3,078 2,540
Impairment of oil and gas properties 2,600
Interest 549 748
-------- --------
10,404 7,046
------ -------
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of HCRC (2,229) 266
Minority interest in net income of affiliates (271) (332)
Litigation settlement (600) 273
-------- --------
(3,100) 207
-------- --------
NET INCOME (LOSS) (2,708) 2,126
CLASS C UNIT DISTRIBUTIONS ($.25 PER UNIT) 616 166
--------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL
PARTNER, CLASS A AND CLASS B LIMITED
PARTNERS $ (3,324) $ 1,960
======= =======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 340 $ 249
========= ========
Class A and Class B Limited partners $ (3,664) $ 1,711
======== =======
Per Class A Unit and Class B Unit - basic $ (.40) $ .18
========== =========
Per Class A Unit and Class B Unit - diluted $ (.40) $ .18
========== =========
Weighted average Class A Units and Class B Units
outstanding 9,265 9,222
======= =======
<FN>
The accompanying notes are an
integral part of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Unit data)
For the Six Months Ended
June 30,
1998 1997
REVENUES:
<S> <C> <C>
Gas revenue $13,738 $12,434
Oil revenue 5,730 7,593
Pipeline, facilities and other 1,676 1,549
Interest 326 259
-------- --------
21,470 21,835
------ ------
EXPENSES:
Production operating 6,306 5,695
General and administrative 2,249 2,254
Depreciation, depletion and amortization 6,617 5,492
Impairment of oil and gas properties 2,600
Interest 1,193 1,599
------- -------
18,965 15,040
------ ------
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of HCRC (2,323) 1,246
Minority interest in net income of affiliates (584) (892)
Litigation settlement (555) 273
-------- --------
(3,462) 627
------- --------
NET INCOME (LOSS) (957) 7,422
CLASS C UNIT DISTRIBUTIONS ($.50 PER UNIT) 1,232 332
------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO GENERAL
PARTNER, CLASS A AND CLASS B LIMITED PARTNERS
$ (2,189) $ 7,090
======= =======
ALLOCATION OF NET INCOME (LOSS):
General partner $ 650 $ 876
========= ========
Class A and Class B Limited partners $ (2,839) $ 6,214
======= =======
Per Class A Unit and Class B Unit - basic $ (.31) $ .67
========= =========
Per Class A Unit and Class B Unit - diluted $ (.31) $ .67
========= =========
Weighted average Class A Units and Class B Units
outstanding 9,251 9,222
======= =======
<FN>
The accompanying notes are an
integral part of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD ENERGY PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
June 30,
1998 1997
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (957) $ 7,422
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization 6,617 5,492
Impairment of oil and gas properties 2,600
Depreciation charged to affiliates 126 110
Asset disposals (188)
Amortization of deferred loan costs and other assets 50 41
Noncash interest expense 15 116
Equity in (earnings) loss of HCRC 2,323 (1,246)
Minority interest in net income 584 892
Undistributed (earnings) loss of affiliates 282 (73)
Recoupment of take-or-pay liability (67) (296)
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable 2,425 3,395
Trade receivables (172) 1,300
Due from affiliates (725)
Prepaid expenses and other current assets 29 (263)
Accounts payable and accrued liabilities 1,197 484
Due to affiliates (489)
----------- --------
Net cash provided by operating activities 14,139 16,885
------ ------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (18,563) (1,759)
Exploration and development costs incurred (6,221) (4,920)
Proceeds from sales of property, plant and equipment 91 85
Other investing activities (70)
----------- ----------
Net cash used in investing activities (24,693) (6,664)
------ --------
FINANCING ACTIVITIES:
Proceeds from long-term debt 21,500
Proceeds from the issuance of Class C Units net of syndication 16,517
costs
Payments of long-term debt (18,285) (5,285)
Distributions paid (4,664) (3,612)
Payment of contract settlement (2,767)
Distribution paid by consolidated affiliates to minority interest (873) (1,188)
Exercise of Unit Options 199
Capital contribution from the general partner 171
Other (114)
----------- ----------
Net cash provided by (used in) financing activities 11,798 (10,199)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,244 22
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 6,622 5,540
------- -------
END OF PERIOD $ 7,866 $ 5,562
======= =======
<FN>
The accompanying notes are an
integral part of the financial statements.
</FN>
</TABLE>
HALLWOOD ENERGY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Hallwood Energy Partners, L. P. ("HEP") is a publicly traded Delaware limited
partnership engaged in the development, exploration, acquisition and production
of oil and gas properties in the continental United States. HEP's objective is
to provide its partners with an attractive return through a combination of cash
distributions and capital appreciation. To achieve its objective, HEP utilizes
operating cash flow, first, to reinvest in operations to maintain its reserve
base and production; second, to make stable cash distributions to Unitholders;
and third, to grow HEP's reserve base over time. HEP's future growth will be
driven by a combination of development of existing projects, exploration for new
reserves and select acquisitions. The general partner of HEP is HEPGP Ltd.
The activities of HEP are conducted through HEP Operating Partners, L. P.
("HEPO") and EDP Operating, Ltd. ("EDPO"). HEP is the sole limited partner and
HEPGP Ltd. is the sole general partner of HEPO and of EDPO. Solely for purposes
of simplicity herein, unless otherwise indicated, all references to HEP in
connection with the ownership, exploration, development or production of oil and
gas properties include HEPO and EDPO.
The interim financial data are unaudited; however, in the opinion of the general
partner, 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 December 31,
1997 Annual Report on Form 10-K.
Accounting Policies
Consolidation
HEP fully consolidates entities in which it owns a greater than 50% equity
interest and reflects a minority interest in the consolidated financial
statements. HEP accounts for its interest in 50% or less owned affiliated oil
and gas partnerships and limited liability companies using the proportionate
consolidation method of accounting. HEP's investment in approximately 46% of the
common stock of its affiliate, Hallwood Consolidated Resources Corporation
("HCRC"), is accounted for under the equity method.
The accompanying financial statements include the activities of HEP, its
subsidiaries Hallwood Petroleum, Inc. ("HPI") and Hallwood Oil and Gas, Inc.
("Hallwood Oil"), and majority owned affiliates, the May Limited Partnerships
1983-1, 1983-2, 1983-3, 1984-1, 1984-2 and 1984-3 ("Mays").
Computation of Net Income (Loss) Per Unit
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related interpretations. It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution, and requires dual presentation of basic and diluted EPS for all
entities with complex capital structures. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending after December 15, 1997, including interim periods, and requires
restatement of all prior period EPS data presented. HEP adopted SFAS 128
effective December 31, 1997, and has restated all prior period EPS data
presented to give retroactive effect to the new accounting standard.
<PAGE>
Basic income (loss) per Class A and Class B Unit is computed by dividing net
income (loss) attributable to the Class A and Class B limited partners' interest
(net income excluding income (loss) attributable to the general partner and
Class C Units) by the weighted average number of Class A Units and Class B Units
outstanding during the periods. Diluted income per Class A and Class B Unit
includes the potential dilution that could occur upon exercise of options to
acquire Class A Units, computed using the treasury stock method which assumes
that the increase in the number of Units is reduced by the number of Units which
could have been repurchased by the Partnership with the proceeds from the
exercise of the options (which were assumed to have been made at the average
market price of the Class A Units during the reporting period).
The following table reconciles the number of Units outstanding used in the
calculation of basic and diluted income (loss) per Class A and Class B Unit. The
Unit options have been ignored in the computation of diluted loss per Class A
and Class B Unit in 1998 and for the six months ended June 30, 1997 because
their inclusion would be antidilutive.
<TABLE>
<CAPTION>
Income Units Per Unit
(In thousands except per Unit)
For the Three Months Ended June 30, 1998
<S> <C> <C> <C>
Net loss per Class A Unit and Class B Unit - basic $(3,664) 9,265 $(.40)
------- ----- ====
Net Loss per Class A Unit and Class B Unit - diluted $(3,664) 9,265 $(.40)
====== ===== ====
For the Six Months Ended June 30, 1998
Net loss per Class A Unit and Class B Unit - basic $(2,839) 9,251 $(.31)
------ ----- ====
Net Loss per Class A Unit and Class B Unit - diluted $(2,839) 9,251 $(.31)
====== ===== ====
For the Three Months Ended June 30, 1997
Net income per Class A Unit and Class B Unit - basic $1,711 9,222 $ .18
====
Effect of Unit Options 113
--------- -------
Net Income per Class A Unit and Class B Unit - diluted $1,711 9,335 $ .18
===== ===== ====
For the Six Months Ended June 30, 1997
Net income per Class A Unit and Class B Unit -basic $6,214 9,222 $ .67
----- ----- ====
Net Income per Class A Unit and Class B Unit - diluted $6,214 9,222 $ .67
===== ===== ====
</TABLE>
Treasury Units
HEP owns approximately 46% of the outstanding common stock of HCRC, while HCRC
owns approximately 19% of HEP's Class A Units. Consequently, HEP has an interest
in 890,242 and 899,305 of its own Units at June 30, 1998 and December 31, 1997,
respectively. These Units are treated as treasury Units in the accompanying
financial statements.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Partnership adopted SFAS 130 on January 1, 1998. The Partnership does not
have any items of other comprehensive income for the three and six month periods
ended June 30, 1998 and 1997. Therefore, total comprehensive income was the same
as net income for those periods.
During June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Partnership is required to
adopt SFAS 133 on January 1, 2000. The Partnership has not completed the process
of evaluating the impact that will result from adopting SFAS 133.
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
NOTE 2 - DEBT
During the first quarter of 1997, HEP and its lenders amended and restated HEP's
Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement, HEP has a borrowing base of $61,000,000. HEP had amounts
outstanding at June 30, 1998 of $38,200,000. HEP's unused borrowing base totaled
$22,800,000 at August 14, 1998.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at June 30, 1998. Interest is payable monthly, and quarterly principal payments
of $2,387,500 commence May 31, 1999.
The borrowing base for the Credit Agreement is redetermined semiannually. The
Credit Agreement is secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. Additionally, aggregate distributions paid by HEP
in any 12 month period are limited to 50% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt of HEP is 50% or more of the borrowing base. Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations before
working capital changes and 65% of distributions received from affiliates, if
the principal amount of debt is less than 50% of the borrowing base.
HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for 1998 and $10,000,000 for each of 1999 and 2000. HEP does not use
the hedges for trading purposes, but rather for the purpose of providing a
measure of predictability for a portion of HEP's interest payments under its
Credit Agreement, which has a floating interest rate. In general, it is HEP's
goal to hedge 50% of the principal amount of its debt for the next two years and
25% for each year of the remaining term of the debt. HEP has entered into four
hedges, one of which is an interest rate collar pursuant to which it pays a
floor rate of 7.55% and a ceiling rate of 9.85%, and the others are interest
rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts received or
paid upon settlement of these transactions are recognized as interest expense at
the time the interest payments are due.
NOTE 3 - STATEMENTS OF CASH FLOWS
Cash paid for interest during the six months ended June 30, 1998 and 1997 was
$1,129,000 and $1,443,000, respectively.
<PAGE>
NOTE 4 - CLASS C UNIT ISSUANCE
On February 17, 1998, HEP closed its public offering of 1.8 million Class C
Units, priced at $10.00 per Unit. Proceeds to HEP, net of underwriting expenses,
were approximately $16,517,000. HEP used $14,000,000 of the net proceeds to
repay borrowings under its Credit Agreement and applied the remaining proceeds
toward the repayment of HEP's outstanding contract settlement obligation at
December 31, 1997 of $2,752,000.
NOTE 5 - ACQUISITION
In July 1996, HEP and its affiliate, HCRC acquired interests in 38 wells located
primarily in LaPlata County, Colorado. An unaffiliated large East Coast
financial institution formed an entity to utilize the tax credits generated from
the wells. The project was financed by an affiliate of Enron Corp. through a
volumetric production payment. During May 1998, a limited liability company
owned equally by HEP and HCRC purchased the volumetric production payment from
Enron. HEP funded its $17,257,000 share of the acquisition price from operating
cash flow and borrowings under its Credit Agreement.
NOTE 6 - IMPAIRMENT OF OIL AND GAS PROPERTIES
During the second quarter of 1998, HEP recorded an impairment of its oil and gas
properties 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 at that date of $13.00 per barrel of oil and $1.90 per
mcf of gas.
NOTE 7 - UNIT OPTION PLAN
During the second quarter of 1998, HEP adopted a Class C Unit Option Plan
covering 120,000 Class C Units. The options were granted effective May 5, 1998
at an exercise price of $10.00 per Unit. One-half of the options vested on the
date of grant, and the remainder vest on the first anniversary of the date of
grant.
On May 5, 1998, HEP also granted 25,500 Class A Unit options at an exercise
price of $6.625 per Unit. These options were not granted pursuant to a
previously existing plan but are subject to terms and conditions identical to
those in HEP's 1995 Unit Option Plan. One-third of the options vested on the
date of grant, and the remainder vest one-half on the first anniversary of the
date of grant and one-half on the second anniversary of the date of grant.
NOTE 8 - LEGAL PROCEEDINGS
On December 3, 1997, Arcadia Exploration and Production Company ("Arcadia")
filed a Demand for Arbitration 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 herein as "Hallwood"), claiming that Hallwood breached
a Purchase and Sale Agreement dated August 25, 1997, between Arcadia and HEP and
HCRC. Arcadia's Demand for Arbitration seeks specific performance of the
agreement which Arcadia claims requires Hallwood to purchase oil and gas
properties from Arcadia for approximately $27 million. HEP and HCRC terminated
the agreement because of environmental and title problems with the properties.
Additionally, Arcadia seeks incidental and special damages, prejudgment interest
and attorneys' fees and costs. Hallwood filed its Answering Statement and
Counterclaim asserting that it properly terminated and/or rescinded the
Agreement and seeking refund of Hallwood's earnest money deposit, prejudgment
interest, attorneys' fees and costs. The matter was heard by the arbitrators
during May and July 1998. The arbitrators have not yet rendered a decision.
Concise Oil and Gas Partnership ("Concise"), a wholly owned subsidiary of the
Partnership, is 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 approximately
150 plaintiffs in this proceeding are seeking unspecified damages for alleged
breaches of certain oil, gas and mineral leases in the Northeast Montegut Field,
Terrebonne Parrish, Louisiana. In addition, they are asking for an accounting
from Concise for production of natural gas for the period of time from 1983
through November 1987. Specifically, as to the claims against Concise, the suit
alleges that Concise failed to obtain the prices to which it was allegedly
entitled for natural gas sold in this field in the 1980s under a long-term
natural gas sales contract. The plaintiffs, royalty and overriding royalty
owners, allege that as a result of the alleged imprudent marketing practices,
they are entitled to their share of the prices which Concise should have
obtained. Plaintiffs have also sued approximately 35 other companies and
individuals, and allege that Concise is jointly and severally liable with the
rest of the defendants for the claims raised by the plaintiffs. Concise and
counsel for the plaintiffs have reached an agreement in principle to settle the
portion of the case against Concise in consideration of the payment by Concise
of $600,000. This amount has been accrued as litigation settlement expense in
the accompanying financial statements. Upon execution of the settlement
agreement, Concise will be dismissed with prejudice from the lawsuit.
In addition to the litigation noted above, the Partnership and its subsidiaries
are from time to time subject to routine litigation and claims incidental to
their business, which the Partnership believes will be resolved without material
effect on the Partnership's financial condition, cash flows or operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
Cash Flow
HEP generated $14,139,000 of cash flow from operating activities during the
first six months of 1998.
The other primary cash inflows were:
o Proceeds from long-term debt of $21,500,000;
o Proceeds from the issuance of Class C Units, net of syndication
costs, of $16,517,000;
o Exercise of Unit Options of $199,000; and
o Capital contribution from the general partner of $171,000.
Cash was used primarily for:
Payments of long-term debt of $18,285,000;
Additions to property and development costs incurred of $24,784,000;
Payment of contract settlement of $2,767,000 and
Distributions to Unitholders of $4,664,000.
When combined with miscellaneous other cash activity during the period, the
result was an increase of $1,244,000 in HEP's cash from $6,622,000 at December
31, 1997 to $7,866,000 at June 30, 1998.
<PAGE>
Exploration and Development Projects and Acquisitions
Through June 30, 1998, HEP incurred $24,784,000 in direct property additions,
development, exploitation, and exploration costs. The costs were comprised of
$18,563,000 for property acquisitions and approximately $6,221,000 for domestic
exploration and development expenditures. The expenditures resulted in the
drilling, recompletion, or workover of 29 development wells and 23 exploration
wells. Twenty-six development wells (90%) and 14 exploration wells (61%) were
successfully completed as producers, for an overall success rate of 77%. HEP's
1998 capital budget was initially set at $25,000,000 but was increased to
$37,000,000 to allow for the purchase of the volumetric production payment
discussed below. The remaining budget for 1998 includes 39 future projects in
more than 21 areas. Significant acquisition, exploration, exploitation, and
development projects for 1998 are discussed below.
Rocky Mountain Region
HEP expended approximately $19,510,000 of its capital budget in the Rocky
Mountain Region located in Colorado, Montana, North Dakota, Northwest New Mexico
and Wyoming. Of this amount, approximately $17,257,000 was for the purchase of
the volumetric production payment discussed below. In 1998, HEP spent
approximately $922,000 successfully recompleting five operated development
wells, drilling one unsuccessful operated exploration well, and drilling three
additional operated wells which are still underway. A discussion of the major
projects in the Region follows.
San Juan Basin Project - Colorado. In July 1996, HEP and its affiliate HCRC
acquired interests in 38 wells located primarily in LaPlata County, Colorado. An
unaffiliated large East Coast financial institution formed an entity to utilize
tax credits generated from the wells. The project was financed by an affiliate
of Enron Corp. through a volumetric production payment. During May 1998, a
limited liability company, owned equally by HEP and HCRC, purchased from Enron
the volumetric production payment. HEP funded its $17,257,000 share of the
acquisition price from operating cash flow and borrowings under its Credit
Agreement. At the time of the purchase, HEP entered into a financial contract to
hedge the volumes subject to the production payment at an average price of $2.11
per mmbtu. Under the terms of the original 1996 transaction, HEP was already
responsible for all costs associated with the wells. HPI has managed and
operated the wells since July 1996, and has increased the wells' production from
14 to 26 mmcf per day through successful workover and gas gathering facilities
improvement programs. The acquisition has increased HEP's current average daily
production by 6.75 mmcf per day.
San Juan Basin Project - New Mexico. Costs associated with a gathering system
for HEP's New Mexico coalbed methane properties totaled approximately $938,000
during 1998. HEP expects the gathering system to significantly increase gas
gathering, processing and compression capacity for the associated properties.
Work should be completed in third quarter of 1998.
Colorado Western Slope Project. HEP is in the process of drilling two 5,500 foot
Dakota Formation wells in the Piceance Basin in Colorado and Utah. Currently,
HEP owns an average 29% working interest in the wells. Both wells are presently
being completed, and HEP expects to begin sales of production in the third
quarter of 1998. In 1998, HEP also successfully recompleted one well in the
Basin. Total costs for the three wells through June 30, 1998 are approximately
$331,000. HEP plans to drill two more wells in 1998 depending upon drilling rig
availability. Increased natural gas prices and improved stimulation technology
make the Basin an attractive area for HEP.
West Sioux Pass Prospect. In the West Sioux area of Richland County, Montana,
HEP drilled one unsuccessful 12,405 foot operated Red River Formation
exploration well for a cost of approximately $252,000. HEP continues to evaluate
the project using the additional data obtained from the exploratory well.
East Kevin Field Project. Drilling is currently underway for one operated
development well in the Horizontal Nisku Formation in Toole County, Montana. HEP
has a 50% working interest in the project and has spent approximately $170,000
in 1998. HEP plans to drill two additional wells in the third quarter of 1998.
HEP will consider drilling additional locations after it evaluates the results
of the first three wells.
<PAGE>
Greater Permian Region
During the first six months of 1998, HEP expended approximately $2,675,000 of
its capital budget in the Greater Permian Region located in Texas and Southeast
New Mexico. HEP spent approximately $2,010,000 for drilling, recompletion, or
workover of 18 development wells, drilling 17 exploration wells, and acquiring
undeveloped acreage and geological and geophysical data. Twenty-seven (77%) of
the wells drilled or recompleted were successful. The major projects within the
Region are discussed below.
Catclaw Draw/Carlsbad Area Projects. HEP spent approximately $401,000
successfully recompleting seven operated wells in the Carlsbad/Catclaw Draw
areas in Lea, Eddy and Chaves Counties, New Mexico. HEP incurred an additional
$250,000 in 1998 for drilling costs associated with an operated 8,300 foot
Delaware development well which is currently being tested. Several additional
drilling locations exist in the area. HEP plans to apply for drilling permits in
1998 and to drill the wells in 1999.
Merkle Project. In 1997, HEP acquired 74 square miles of proprietary 3-D seismic
data in Jones, Taylor and Nolan Counties, Texas, in a project area originated in
1995. Target zones in this area include the Canyon Reef, Strawn, Flippan,
Tannehill, and Ellenberger Formations ranging in depth from 2,500 feet to 6,000
feet. In 1998, HEP drilled 11 exploration wells, nine of which were successful.
Costs incurred by HEP in 1998 for the 11 wells drilled were approximately
$835,000. HEP owns an average 28.5% working interest in the wells. Four wells
are currently underway, and HEP has 33 potential locations for future drilling.
HEP anticipates drilling only four additional wells in the remainder of 1998
because of present low crude oil prices.
Griffin Project. In 1998, HEP purchased land for $95,000 and incurred
approximately $410,000 to drill three exploration wells and one development well
in Gaines County, Texas. None of the four nonoperated 7,500 foot Leonardian Sand
wells were successful. HEP is still evaluating five prospects within this
project. HEP owns an average 22% working interest in the wells.
Gulf Coast Region
During the first six months of 1998, HEP expended approximately $1,985,000 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, HEP incurred approximately $430,000 for land costs
related to the Mirasoles project in Kenedy County, Texas. In the third quarter
of 1998, HEP plans to test the Frio Formation by drilling a 17,000 foot
exploration well. HEP has a 17.5% working interest in this large structural
prospect defined by 63 square miles of proprietary 3-D seismic data.
Bell Project. HEP has a 30% working interest in an operated project to evaluate
the Buda, Carrizo, Woodbine, and Dexter sands in Houston County, Texas. HEP's
drilling costs in 1998 for a 9,200 foot horizontal well were approximately
$350,000. The well found the shallower reservoirs to be non-productive, and HEP
is presently drilling in the Buda section. In 1998, HEP incurred an additional
$70,000 for the purchase of land.
Mercy Field Project. HEP participated in a successful 10,450 foot nonoperated
development well in the Wilcox formation located in San Jacinto County, Texas.
Costs incurred in 1998 are approximately $180,000. No additional Mercy fieldwork
is anticipated in the remainder of 1998.
Whitewater Field. HEP's share of 1998 costs associated with plugging two
nonoperated near shore platform wells were approximately $600,000. This field is
now abandoned, and no additional work is anticipated.
Mid-Continent Region
HEP expended approximately $360,000 of its capital budget in the Mid-Continent
Region located in Oklahoma and Kansas. Major projects within the Region are
discussed below.
<PAGE>
Stealth Project. HEP is participating in an Arkoma Basin exploration prospect in
Carter County, Oklahoma. This nonoperated project is a 19,000 feet deep
multi-formation structural test of the Hunton, Viola, Sycamore, and Springer
Formations and is currently in the completion phase. The operator was unable to
test the targeted Hunton and Viola Formation objectives and found that the
Sycamore produced at subcommercial gas rates. The operator is evaluating a
Springer recompletion. 1998 year to date drilling costs were approximately
$165,000 for HEP's 5% working interest.
El Reno Project. HEP incurred approximately $135,000 in 1998 to complete one
successful exploration well in Canadian County, Oklahoma. The well was completed
in the Red Fork Formation, and HEP has a 35% working interest.
Kansas Area. HEP successfully recompleted two development wells in Kansas at a
cost of $28,000 during 1998. Due to sustained weak crude oil prices, however,
eight development projects have been deferred.
Other
The remaining $254,000 of HEP's 1998 capital expenditures was devoted
principally to drilling one unsuccessful exploration well in Yolo County,
California and to other miscellaneous projects. HEP is also participating in two
nonoperated 3-D projects underway in nearby Solano and Colusa Counties,
California.
Peru Block Z-3 Project. HEP's partner on the Peruvian offshore Z-3 Block
completed 1,200 miles of seismic data acquisition to supplement existing seismic
data. Data processing is currently underway. HEP has a 7.5% working interest in
this project, but will not incur capital costs until actual drilling operations
begin. The production-sharing contract calls for drilling operations to begin no
later than January 2001.
Class C Unit Issuance
On February 17, 1998, HEP closed its public offering of 1.8 million Class C
Units, priced at $10.00 per Unit. Proceeds to HEP, net of underwriting expenses,
were approximately $16,517,000. HEP used $14,000,000 of the net proceeds to
repay borrowings under its Credit Agreement and applied the remaining proceeds
toward the repayment of HEP's outstanding contract settlement obligation at
December 31, 1997 of $2,752,000.
Distributions
HEP declared distributions of $.13 per Class A Unit and $.25 per Class C Unit,
payable on August 14, 1998 to Unitholders of record on June 30, 1998.
Distributions on the Class B Units are suspended if the Class A Units receive a
distribution of less than $.20 per Class A Unit per calendar quarter. In any
quarter for which distributions of $.20 or more per unit are made on the Class A
Units, the Class B Units are entitled to be paid, in whole or in part, suspended
distributions.
Financing
During the first quarter of 1997, HEP and its lenders amended and restated HEP's
Second Amended and Restated Credit Agreement (as amended, the "Credit
Agreement") to extend the term date of its line of credit to May 31, 1999. Under
the Credit Agreement, HEP has a borrowing base of $61,000,000. HEP had amounts
outstanding at June 30, 1998 of $38,200,000. HEP's unused borrowing base totaled
$22,800,000 at August 14, 1998.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 1.875%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 1.75%. The applicable interest rate was 7.2%
at June 30, 1998. Interest is payable monthly, and quarterly principal payments
of $2,387,500, commence May 31, 1999.
<PAGE>
The borrowing base for the Credit Agreement is redetermined semiannually. The
Credit Agreement is secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. Additionally, aggregate distributions paid by HEP
in any 12 month period are limited to 50% of cash flow from operations before
working capital changes and distributions received from affiliates, if the
principal amount of debt of HEP is 50% or more of the borrowing base. Aggregate
distributions paid by HEP are limited to 65% of cash flow from operations before
working capital changes and 65% of distributions received from affiliates, if
the principal amount of debt is less than 50% of the borrowing base.
HEP entered into contracts to hedge its interest rate payments on $15,000,000 of
its debt for 1998 and $10,000,000 for each of 1999 and 2000. HEP does not use
the hedges for trading purposes, but rather for the purpose of providing a
measure of predictability for a portion of HEP's interest payments under its
Credit Agreement, which has a floating interest rate. In general, it is HEP's
goal to hedge 50% of the principal amount of its debt for the next two years and
25% for each year of the remaining term of the debt. HEP has entered into four
hedges, one of which is an interest rate collar pursuant to which it pays a
floor rate of 7.55% and a ceiling rate of 9.85%, and the others are interest
rate swaps with fixed rates ranging from 5.75% to 6.57%. The amounts received or
paid upon settlement of these transactions are recognized as interest expense at
the time the interest payments are due.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the Partnership's Unitholders and potential
investors with certain information regarding the Partnership'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. Although any forward-looking statements contained in this Form 10-Q
or otherwise expressed by or on behalf of the Partnership are, to the knowledge
and in the judgment of the officers and directors of the General Partner,
expected to prove true and come to pass, management is not able to predict the
future with absolute certainty. Forward-looking statements involve known and
unknown risks and uncertainties which may cause the Partnership's actual
performance and financial results in future periods to differ materially from
any projection, estimate or forecasted result. These risks and uncertainties
include, among other things, volatility of oil and gas prices, competition,
risks inherent in the Partnership's oil and gas operations, the inexact nature
of interpretation of seismic and other geological and geophysical data,
imprecision of reserve estimates, the Partnership's ability to replace and
expand oil and gas reserves, and such other risks and uncertainties described
from time to time in the Partnership's periodic reports and filings with the
Securities and Exchange Commission. Accordingly, Unitholders 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 HEP, 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 throughout 1997 and 1998.
The following table presents the weighted average prices received each quarter
by HEP 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 - 1997 $22.10 $21.08 $2.89 $2.52
Second quarter - 1997 17.71 17.71 2.02 1.98
Third quarter - 1997 18.40 18.47 2.25 2.13
Fourth quarter - 1997 18.72 18.69 2.92 2.56
First quarter - 1998 14.80 15.30 2.11 2.07
Second quarter - 1998 13.03 13.82 2.08 2.06
</TABLE>
HEP has entered into numerous financial contracts to hedge the price of its oil
and natural gas. The purpose of the hedges is to provide protection against
price decreases and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The amounts received or paid
upon settlement of these contracts are recognized as oil or gas revenue at the
time the hedged volumes are sold.
The following table provides a summary of HEP's outstanding financial contracts:
<TABLE>
<CAPTION>
Oil
Percent of Production Contract
Period Hedged Floor Price
(per bbl)
<S> <C> <C>
Last six months of 1998 23% $16.62
1999 2% 15.38
</TABLE>
Between 9% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HEP will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus 25% of the difference between the contract price and the posted
futures price if the posted futures price is greater than the contract price.
Between 59% and 100% of the volumes hedged in each year are subject to a collar
agreement whereby HEP will receive the contract price if the spot price is lower
than the contract price, the cap price if the spot price is higher than the cap
price, and the spot price if that price is between the contract price and the
cap price. The cap prices range from $17.00 to $18.85.
<PAGE>
<TABLE>
<CAPTION>
Gas
Percent of Production Contract
Period Hedged Floor Price
(per mcf)
<S> <C> <C>
Last six months of 1998 60% $2.07
1999 48% 2.05
2000 47% 2.10
2001 42% 2.08
2002 35% 2.14
</TABLE>
Between 15% and 100% of the gas volumes hedged in each year are subject to a
collar agreement whereby HEP will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price, and the spot price if that price is between the contract price
and the cap price. The cap prices range from $2.59 to $2.93.
During the third quarter through August 2, 1998 the weighted average oil price
(for barrels not hedged) was approximately $12.50 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 HEP in 1997 and is not anticipated
to have a material impact in 1998.
Results of Operations
The following tables are presented to contrast HEP's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative. The "direct owned" column represents HEP's direct
royalty and working interests in oil and gas properties. The "Mays" column
represents the results of operations of six May Limited Partnerships which are
consolidated with HEP. In 1998 and 1997, HEP owned interests which ranged from
57.5% to 68.2% of the Mays.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarter Ended June 30, 1998 For the Quarter Ended June 30, 1997
----------------------------------- -----------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
<S> <C> <C> <C> <C> <C> <C>
Gas production (mcf) 3,099 297 3,396 2,220 286 2,506
Oil production (bbl) 178 13 191 158 16 174
Average gas price (per mcf) $ 2.01 $ 2.53 $ 2.06 $ 1.93 $ 2.36 $ 1.98
Average oil price (per bbl) $ 13.88 $ 13.00 $ 13.82 $ 17.52 $ 19.63 $ 17.71
Gas revenue $ 6,244 $ 750 $ 6,994 $ 4,285 $ 676 $ 4,961
Oil revenue 2,471 169 2,640 2,768 314 3,082
Pipeline, facilities and other revenue 976 976 786 786
Interest income 169 17 186 113 23 136
------- -------- ------- ------- -------- --------
Total revenue 9,860 936 10,796 7,952 1,013 8,965
------ ------- ------ ------ ------ ------
Production operating expense 2,975 118 3,093 2,602 126 2,728
General and administrative expense 993 91 1,084 941 89 1,030
Depreciation, depletion, and amortization 2,825 253 3,078 2,267 273 2,540
Impairment of oil and gas properties 2,600 2,600
Interest expense 549 549 748 748
Equity in (income) loss of HCRC 2,229 2,229 (266) (266)
Minority interest 271 271 332 332
Litigation settlement 600 600 (243) (30) (273)
--------- ------------ --------- ------- ------ --------
Total expense 12,771 733 13,504 6,049 790 6,839
------ --------- ------ ------ ------ ------
Net income (loss) $ (2,911) $ 203 $ (2,708) $ 1,903 $ 223 $ 2,126
======= ========= ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
TABLE OF HEP EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Six Months Ended June 30, 1998 For the Six Months Ended June 30, 1997
-------------------------------------- --------------------------------------
Direct Direct
Owned Mays Total Owned Mays Total
<S> <C> <C> <C> <C> <C> <C>
Gas production (mcf) 6,044 617 6,661 4,829 645 5,474
Oil production (bbl) 365 28 393 350 38 388
Average gas price (per mcf) $ 2.02 $ 2.50 $ 2.06 $ 2.19 $ 2.87 $ 2.27
Average oil price (per bbl) $ 14.61 $ 14.21 $ 14.58 $ 19.37 $ 21.39 $ 19.57
Gas revenue $12,196 $ 1,542 $13,738 $10,580 $ 1,854 $12,434
Oil revenue 5,332 398 5,730 6,780 813 7,593
Pipeline, facilities and other revenue 1,676 1,676 1,549 1,549
Interest income 291 35 326 219 40 259
-------- -------- -------- -------- --------- --------
Total revenue 19,495 1,975 21,470 19,128 2,707 21,835
------ ------ ------ ------ ------ ------
Production operating expense 6,067 239 6,306 5,412 283 5,695
General and administrative expense 2,059 190 2,249 2,056 198 2,254
Depreciation, depletion, and amortization 6,042 575 6,617 4,878 614 5,492
Impairment of oil and gas properties 2,600 2,600
Interest expense 1,193 1,193 1,599 1,599
Equity in (income) loss of HCRC 2,323 2,323 (1,246) (1,246)
Minority interest 584 584 892 892
Litigation settlement 555 555 (243) (30) (273)
------- ---------- -------- -------- -------- --------
Total expense 20,839 1,588 22,427 12,456 1,957 14,413
------ ------ ------ ------ ------ ------
Net income (loss) $ (1,344) $ 387 $ (957) $ 6,672 $ 750 $ 7,422
======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
Second Quarter of 1998 Compared to Second Quarter of 1997
Gas Revenue
Gas revenue increased $2,033,000 during the second quarter of 1998 as compared
with the second quarter of 1997. The increase is the result of an increase in
the average gas price from $1.98 per mcf in 1997 to $2.06 per mcf in 1998 and an
increase in production from 2,506,000 mcf in 1997 to 3,396,000 mcf in 1998. The
increase in production is primarily due to the temporary shut-in of two wells
during the second quarter of 1997 while workover procedures were performed.
The effect of HEP's hedging transactions as described under "Inflation and
Changing Prices," during the second quarter of 1998, was to decrease HEP's
average gas price from $2.08 per mcf to $2.06 per mcf, representing a $68,000
reduction in revenue from hedging transactions.
Oil Revenue
Oil revenue decreased $442,000 during the second quarter of 1998 as compared
with the second quarter of 1997. The decrease is the result of a decrease in the
average oil price from $17.71 per barrel in 1997 to $13.82 in 1998, partially
offset by an increase in production from 174,000 barrels in 1997 to 191,000
barrels in 1998. The increase in oil production is primarily due to the
temporary shut-in of two wells during the second quarter of 1997 while workover
procedures were performed.
The effect of HEP's hedging transactions during the second quarter of 1998, was
to increase HEP's average oil price from $13.03 per barrel to $13.82 per barrel,
resulting in a $151,000 increase 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. Pipeline, facilities and other revenue increased $190,000
during the second quarter of 1998 as compared with the second quarter of 1997
primarily due to an increase in saltwater disposal income resulting from the
increased production discussed above.
Interest Income
Interest income increased $50,000 during the second quarter of 1998 as compared
with the second quarter of 1997 due to a higher average cash balance during
1998.
Production Operating Expense
Production operating expense increased $365,000 during the second quarter of
1998 as compared with the second quarter of 1997, primarily due to increased
maintenance activity and increased production taxes resulting from the increase
in gas production discussed above.
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 HEP.
These expenses increased $54,000 during the second quarter of 1998 primarily due
to a net increase in numerous miscellaneous items, none of which are
individually significant.
- 20 -
<PAGE>
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $538,000 during the
second quarter of 1998 as compared with the second quarter of 1997. The increase
is primarily the result of a higher depletion rate in 1998 due to the increase
in production previously discussed.
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 at that date of $13.00 per bbl
of oil and $2.00 per mcf of gas.
Interest Expense
Interest expense decreased $199,000 during the second quarter of 1998 as
compared with the second quarter of 1997, primarily as a result of lower
outstanding debt during 1998.
Equity in Earnings (Loss) of HCRC
Equity in earnings (loss) of HCRC decreased $2,495,000 during the second quarter
of 1998 as compared with the second quarter of 1997. The decrease 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 $61,000 is
due to a decrease in the net income of the May Partnerships resulting primarily
from lower oil prices received on their properties.
Litigation Settlement
Litigation settlement expense during the second quarter of 1998 represents the
amount accrued for the settlement of the Ellender lawsuit described in Note 8 of
the accompanying financial statements. Litigation settlement income during the
second quarter of 1997 represents the settlement of a take-or-pay contract
claim.
First Six Months of 1998 Compared to the First Six Months of 1997
The comparisons for the first six months of 1998 and the first six months of
1997 are consistent with those discussed in the second quarter of 1998 compared
to the second quarter 1997 except for the following:
Gas Revenue
Gas revenue increased $1,304,000 during the first six months of 1998 as compared
with the first six months of 1997. The increase is the result of an increase in
production from 5,474,000 mcf in 1997 to 6,661,000 mcf in 1998 partially offset
by a decrease in price from $2.27 per mcf in 1997 to $2.06 per mcf in 1998. The
increase in production is due to the temporary shut-in of two wells during the
second quarter of 1997 while workover procedures were performed.
The effect of HEP's hedging transactions during the first six months of 1998 was
to decrease HEP's average gas price from $2.10 per mcf to $2.06 per mcf
representing a $266,000 reduction in revenue from hedging transactions.
<PAGE>
Oil Revenue
Oil revenue decreased $1,863,000 during the first six months of 1998 as compared
with the first six months of 1997. The decrease is the result of a decrease in
the average oil price from $19.57 per barrel in 1997 to $14.58 per barrel in
1998 partially offset by an increase in production from 388,000 barrels in 1997
to 393,000 barrels in 1998. The increase in oil production is due to the
temporary shut-in of two wells during the second quarter of 1997 while workover
procedures were performed.
The effect of HEP's hedging transactions during the first six months of 1998 was
to increase HEP's average oil price from $13.94 per barrel to $14.58 per barrel,
representing an in increase in revenue from hedging transactions of $252,000.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Notes 12 and 13 of Form 10-K for the
year ended December 31, 1997 and Note 8 of this Form 10-Q.
ITEM 2 - CHANGES IN SECURITIES
None.
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) Exhibit
10.17 1998 Class C Unit Option Plan dated May 5, 1998
10.18 1998 Class C UnitOption Loan Program dated May 5, 1998
10.19 Class A Unit Option letter to Thomas Jung dated
May 5, 1998
10.20 Extension of Management Agreement between Hallwood
Petroleum, Inc. and HEP dated May 5, 1998
27 Financial Data Schedule
b) Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Partnership has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HALLWOOD ENERGY PARTNERS, L. P.
By: HEPGP LTD.
General Partner
By: HALLWOOD G. P., INC.
General Partner
Date: August 14, 1998 By: /s/Thomas J. Jung
Thomas J. Jung, Vice President
(Chief Financial Officer)
1998 CLASS C UNIT OPTION PLAN
FOR
HALLWOOD ENERGY PARTNERS, L.P.
Section 1. Purpose. The purpose of this 1998 Class C Unit Option Plan (this
"Plan") for Hallwood Energy Partners, L.P., a Delaware limited partnership (the
"Partnership"), is to advance the interests of the Partnership by providing an
additional incentive to attract and retain qualified and competent directors,
employees and consultants for the Partnership, its general partner, and the
subsidiaries of each of them, upon whose efforts and judgment the success of the
Partnership is largely dependent, through the encouragement of ownership in the
Partnership by such persons.
Section 2. Definitions. As used herein, the following terms shall have the
meaning indicated:
(a) "Act" shall mean the Securities Exchange Act of 1934, as amended
(b) "Board" shall mean the Board of Directors of the General Partner.
(c) "Business Day" shall mean (i) if the Class C Units trade on a
national securities exchange, any day that the national securities exchange
on which the Class C Units trade is open or (ii) if the Class C Units do
not trade on a national securities exchange, any day that commercial banks
in the City of New York are open.
(d) "Class C Unit(s)" shall mean Class C Units representing limited
partner interests in the Partnership.
(e) "Committee" shall mean the Compensation Committee of the Board or
other committee, if any, appointed by the Board pursuant to Section 13
hereof.
(f) "Continuing Director" shall mean (i) any member of the Board on
the effective date of this Plan and (ii) any person who subsequently
becomes a member of the Board if such person's nomination for election or
election to the Board is recommended or approved by a majority of the
Continuing Directors.
(g) "Date of Grant" shall mean the date on which the Committee takes
formal action to grant an Option to an Eligible Person, provided it is
followed, as soon as reasonably possible, by written notice to the Eligible
Person of the grant.
(h) "Director" shall mean a member of the Board.
(i) "Eligible Person(s)" shall mean those persons who are Directors or
are employees of, or consultants to, the Partnership, the General Partner
or any Subsidiary.
(j) "Fair Market Value" of a Class C Unit on any date of reference
shall mean the Closing Price on the business day immediately preceding such
date, unless the Committee in its sole discretion shall determine otherwise
1
<PAGE>
in a fair and uniform manner. For this purpose, the Closing Price of the
Class C Units on any business day shall be: (i) if the Class C Units are
listed or admitted for trading on any United States national securities
exchange or included in the National Market System of the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"),
the last reported sale price of Class C Units on such exchange or system,
as reported in any newspaper of general circulation; (ii) if Class C Units
are quoted on NASDAQ, or any similar system of automated dissemination of
quotations of securities prices in common use, the mean between the closing
high bid and low asked quotations for such day of Class C Units on such
system; (iii) if neither clause (i) nor (ii) is applicable, the mean
between the high bid and low asked quotations for Class C Units as reported
by the National Quotation Bureau, Incorporated if at least two securities
dealers have inserted both bid and asked quotations for Class C Units on at
least five of the ten preceding days; or, (iv) in lieu of the above, if
actual transactions in the Class C Units are reported on a consolidated
transaction reporting system, the last sale price of the Class C Units for
such day and on such system.
(k) "General Partner" shall mean Hallwood GP, Inc., a Delaware
corporation, and HEPGP, Ltd., a Delaware corporation, or any successor
thereof, as appropriate.
(l) "Nonqualified Class C Unit Option" shall mean an option that is
not an incentive stock option as defined in Section 422 of the Internal
Revenue Code.
(m) "Option" (when capitalized) shall mean any option granted under
this Plan.
(n) "Optionee" shall mean a person to whom an Option is granted or any
successor to the rights of such Option under this Plan.
(o) "Partnership" shall mean Hallwood Energy Partners, L.P., a
Delaware limited partnership.
(p) "Person" shall mean any individual, corporation, limited liability
company, partnership, joint venture or other legal entity.
(q) "Plan" shall mean this 1998 Class C Unit Option Plan for Hallwood
Energy Partners, L.P.
(r) "SAR" shall mean a stock appreciation right as defined in Section
9 hereof.
(s) "Subsidiary" shall mean (i) any corporation of which a majority of
the outstanding stock having by the terms thereof ordinary voting power to
elect a majority of the directors of such corporation, irrespective of
whether at the time stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency, is at the time, directly or indirectly, owned or controlled by
the Partnership, General Partner or by one or more Subsidiaries, or by the
Partnership, the General Partner and one or more Subsidiaries or (ii) any
partnership, joint venture or limited liability company of which at least a
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<PAGE>
majority of the equity ownership, whether in the form of membership,
general, special or limited partnership interests or otherwise, is directly
or indirectly owned or controlled by the Partnership, the General Partner
or by one or more Subsidiaries or by the Partnership, the General Partner
and one or more Subsidiaries.
Section 3. Class C Units and Options. The Partnership may grant to Eligible
Persons from time to time Options to purchase an aggregate of up to One Hundred
Twenty Thousand (120,000) Class C Units. If any Option granted under the Plan
shall terminate, expire, or be canceled or surrendered as to any Class C Units,
new Options may thereafter be granted covering such Class C Units. An Option
granted hereunder shall be a Nonqualified Unit Option.
Section 4. Conditions for Grant of Options.
(a) Each Option shall be evidenced by an option agreement that may
contain any term deemed necessary or desirable by the Committee, provided
such terms are not inconsistent with this Plan or any applicable law.
Optionees shall be those persons selected by the Committee from Eligible
Persons. Any Person who files with the Committee, in a form satisfactory to
the Committee, a written waiver of eligibility to receive any Option under
this Plan shall not be eligible to receive any Option under this Plan for
the duration of such waiver.
(b) In granting Options, the Committee shall take into consideration
the contribution the Person has made or may make to the success of the
Partnership or its Subsidiaries and such other factors as the Committee
shall determine. The Committee shall also have the authority to consult
with and receive recommendations from officers and other personnel of the
General Partner, the Partnership and a Subsidiary with regard to these
matters. The Committee may from time to time in granting Options under the
Plan prescribe such other terms and conditions concerning such Options as
it deems appropriate, including, without limitation, relating an Option to
achievement of specific goals established by the Committee or the continued
employment of the Optionee for a specified period of time, provided that
such terms and conditions are not more favorable to an Optionee than those
expressly permitted herein.
(c) The Committee in its sole discretion shall determine in each case
whether periods of military or government service shall constitute a
continuation of employment for the purposes of this Plan or any Option.
Section 5. Exercise Price. The exercise price per Unit of any Option shall
be any price determined by the Committee.
Section 6. Exercise of Options. An Option shall be deemed exercised when
(i) the Partnership has received written notice of such exercise in accordance
with the terms of the Option, (ii) full payment of the aggregate exercise price
of the Class C Units as to which the Option is exercised has been made, and
(iii) arrangements that are satisfactory to the Committee in its sole discretion
have been made for the Optionee's payment to the Partnership of the amount, if
any, that the Committee determines to be necessary for the employer of the
Optionee to withhold in accordance with applicable federal or state income tax
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<PAGE>
withholding requirements. Unless further limited by the Committee in any Option,
the option price of any Class C Units purchased shall be paid in cash, by
certified or cashier's check, by money order, with Class C Units owned by the
Optionee for at least six months (provided that at the time of exercise the
Committee in its sole discretion does not prohibit the exercise of Options
through the delivery of already-owned Class C Units) or by a combination of the
above; provided, however, that the Committee in its sole discretion may accept a
personal check in full or partial payment of any Class C Units. If the exercise
price is paid in whole or in part with Class C Units, the value of the Class C
Units surrendered shall be their Fair Market Value. The Partnership in its sole
discretion, and on such terms as it may determine, may lend money to an
Optionee, guarantee a loan to an Optionee, or otherwise assist an Optionee to
obtain the cash necessary to exercise all or a portion of an Option granted
hereunder or to pay any tax liability of the Optionee attributable to such
exercise.
Section 7. Exercisability of Options.
(a) Any Option shall become exercisable in such amounts and at such
intervals as the Committee shall provide in any Option, except as otherwise
provided in this Section 7; provided in each case that the Option has not
expired on the date of exercise.
(b) The expiration date of an Option shall be determined by the
Committee at the Date of Grant, but in no event shall an Option be
exercisable after the expiration of ten (10) years from the Date of Grant.
(c) The Committee may in its sole discretion accelerate the date on
which any Option may be exercised.
(d) Unless otherwise provided in any Option, each outstanding Option
shall become fully exercisable immediately upon any of the following dates
unless, in each case, the applicable transaction is approved in advance by
Continuing Directors:
(i) ten (10) days prior to the date of any transaction (which
shall include a series of transactions occurring within 60 days or
occurring pursuant to a plan), which has the result that unitholders
of the Partnership immediately before such transaction would cease to
own at least 662/3% of the voting ownership interests of the
Partnership or of any entity that results from the participation of
the Partnership in a reorganization, consolidation, merger,
liquidation, dissolution or any other comparable form of transaction;
(ii) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of a plan of reorganization,
consolidation, merger, liquidation, dissolution or other comparable
form of transaction in which the Partnership does not survive or as a
result of which the unitholders of the Partnership immediately before
such transaction would cease to own at least 662/3% of the voting
ownership interests of the Partnership;
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(iii) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of a plan for the sale, lease,
exchange or other disposition of 50% or more of the property and
assets of the Partnership;
(iv) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of the removal of the General
Partner as general partner of the Partnership;
(v) ten (10) days preceding the record date for the approval by
the unitholders of the Partnership of the amendment of the
Partnership's or any operating partnership's agreement of limited
partnership; or
(vi) the date any tender offer or exchange offer is made by any
person, which, if successfully completed, would result in such person
beneficially owning (within the meaning of Rule 13d-3 promulgated
under the Act) either 331/3% or more of the Partnership's outstanding
Class C Units or interests in the Partnership having 331/3% or more of
the combined voting power of the Partnership's then outstanding voting
interests.
(e) Notwithstanding any provisions hereof to the contrary, if any
Option is accelerated under Subsection 7(c) or (d), the portion of such
Option that may be exercised to acquire Class C Units that the Optionee
would not be entitled to acquire but for such acceleration (the
"Acceleration Class C Units"), is limited to that number of Acceleration
Class C Units that can be acquired without causing the Optionee to have an
"excess parachute payment" under Section 280G of the Internal Revenue Code,
determined by taking into account all of the Optionee's "parachute
payments" determined under Section 280G of the Code. If as a result of this
Subsection 7(e), the Optionee may not acquire all of the Acceleration Class
C Units, then the Acceleration Class C Units that the Optionee may acquire
shall be the last Class C Units that the Optionee would have been entitled
to acquire had this Option not been accelerated.
Section 8. Termination of Option Period.
(a) Unless otherwise provided in any Option, the unexercised portion
of an Option shall automatically and without notice terminate and become
null and void at the time of the earliest to occur of the following:
(i) the date on which the Optionee's employment by the General
Partner or a Subsidiary is terminated for any reason other than by
reason of: (A) retirement (which, for purposes of this Plan, shall
mean any termination of employment after an Optionee has reached the
age of sixty-five (65)); (B) a mental or physical disability as
determined by a medical doctor satisfactory to the Committee; (C)
death; or (D) termination resulting from any transaction described in
Section 7(d) hereof;
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<PAGE>
(ii) three (3) months after the date on which the Optionee's
employment by the General Partner or a Subsidiary is terminated by
reason of retirement;
(iii) twelve (12) months after the date on which the Optionee's
employment by the General Partner or a Subsidiary is terminated by
reason of a mental or physical disability as determined by a medical
doctor satisfactory to the Committee;
(iv) ten (10) years after the date of grant of such Option;
(v) (A) twelve (12) months after the date of termination of the
Optionee's employment by the General Partner or a Subsidiary by reason
of death of the Optionee; (B) three (3) months after the date on which
the Optionee shall die if such death shall occur during the
three-month period specified in Section 8(a)(ii) hereof or the
twelve-month period specified in Section 8(a)(iii) hereof; or (C)
three (3) years after the termination of the employee's employment by
the General Partner or a Subsidiary by reason of a transaction
specified in Section 7(d) hereof.
(b) If provided in an Option, the Committee in its sole
discretion shall have the power to cancel, effective upon the date
determined by the Committee in its sole discretion, all or any portion
of any Option that is then exercisable (whether or not accelerated by
the Committee) upon payment to the Optionee of cash in an amount that,
in the absolute discretion of the Committee, is determined to be equal
to the excess of (i) the aggregate Fair Market Value of the Class C
Units subject to such Option on the effective date of the cancellation
over (ii) the aggregate exercise price of such Option.
9. Stock Appreciation Rights and Limited Stock Appreciation Rights.
(a) The Board shall have authority to grant an SAR or a Limited
SAR with respect to all or some of the Class C Units covered by any
Option ("Related Option"). An SAR or Limited SAR may be granted on or
after the Date of Grant of such Related Option.
(b) For the purposes of this Section 9, the following definitions
shall apply:
(i) The term "Offer" shall mean any tender offer or exchange
offer for twenty- five percent (25%) or more of the outstanding
Class C Units of the Partnership, other than one made by the
Partnership; provided that the corporation, person or other
entity making the Offer acquires Class C Units pursuant to such
Offer.
(ii) The term "Offer Price Per Unit" shall mean the highest
price per Unit paid in any Offer that is in effect at any time
during the period beginning on the 60th day prior to the date
that a Limited SAR is exercised and ending on the date that the
Limited SAR is exercised. Any securities or properties that are a
part or all of the consideration paid or to be paid for Class C
Units in the Offer shall be valued in determining the Offer Price
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<PAGE>
Per Unit at the higher of (1) the valuation placed on such
securities or properties by the person making such Offer, or (2)
the valuation placed on such securities or properties by the
Board.
(iii) The term "Limited SAR" shall mean a right granted
under this Plan that shall entitle the Holder to an amount in
cash equal to the Offer Spread in the event an Offer is made.
(iv) The term "Offer Spread" shall mean, with respect to
each Limited SAR, an amount equal to the product obtained by
multiplying (1) the excess of (A) the Offer Price Per Unit
immediately preceding the date of exercise over (B) the Option
Price per Unit of the Related Option multiplied by (2) the number
of Class C Units with respect to which such Limited SAR is being
exercised.
(v) The term "SAR" shall mean a right granted under this
Plan that shall entitle the Holder thereof to an amount in cash
equal to the SAR Spread.
(vi) The term "SAR Spread" shall mean with respect to each
SAR an amount equal to the product of (1) the excess of (A) the
Fair Market Value per Unit on the date of exercise over (B) the
Option Price per Unit of the Related Option multiplied by (2) the
number of Class C Units with respect to which such SAR is being
exercised.
(c) To exercise the SAR or Limited SAR, the Holder shall:
(i) Give written notice thereof to the Partnership,
specifying the SAR or Limited SAR being exercised and the number
or Class C Units with respect to which such SAR or Limited SAR is
being exercised, and
(ii) If requested by the Partnership, deliver within a
reasonable time the agreement evidencing the SAR or Limited SAR
being exercised, and the Related Option agreement to the
Secretary of the General Partner who shall endorse or cause to be
endorsed thereon a notation of such exercise and return all
agreements to the Holder.
(d) As soon as practicable after the exercise of an SAR or Limited
SAR, the Partnership shall pay to the Holder (i) cash, (ii) at the request
of the Holder and the approval of the Board, or in accordance with the
terms of the Related Option, Class C Units, or (iii) a combination of cash
and Class C Units, having a Fair Market Value equal to either the SAR
Spread, or to the Offer Spread, as the case may be; provided, however, that
the Partnership may, in its sole discretion, withhold from such payment any
amount necessary to satisfy the Partnership's or a Subsidiary's obligation
for federal and state withholding taxes with respect to such exercise.
(e) An SAR or Limited SAR may be exercised only if and to the extent
that the Related Option is eligible to be exercised; provided, however, a
Limited SAR may be exercised only during the period beginning on the first
day following the date of expiration of the Offer and ending on the 30th
day following such date.
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(f) Upon the exercise of an SAR or Limited SAR, the Class C Units
under the Related Option to that such exercised SAR or Limited SAR relate
shall be released, but such released Class C Units shall never again be
Class C Units available for grant.
(g) Upon the exercise or termination of a Related Option, the SAR or
Limited SAR with respect to such Related Option likewise shall terminate.
(h) An SAR or Limited SAR shall be transferable only to the extent, if
any, that the Related Option is transferable, and under the same
conditions.
(i) Each SAR or Limited SAR shall be on such terms and conditions not
inconsistent with this Plan as the Board may determine and shall be
evidenced by a written agreement.
(j) The Holder shall have no rights as a unitholder with respect to
the related Class C Units as a result of the grant of an SAR or Limited
SAR.
Section 10. Adjustment of Class C Units.
(a) If at any time while the Plan is in effect or unexercised Options
are outstanding, there shall be any increase or decrease in the number of
issued and outstanding Class C Units through the declaration of a unit
dividend or through any recapitalization resulting in a unit split- up,
combination or exchange of Class C Units, then and in such event.
(i) appropriate adjustment shall be made in the maximum number of
Class C Units then subject to being optioned under the Plan, so that
the same proportion of the Partnership's issued and outstanding Class
C Units shall continue to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Class
C Units and the exercise price per Class C Unit thereof then subject
to outstanding Options, so that the same proportion of the
Partnership's issued and outstanding Class C Units shall remain
subject to purchase at the same aggregate exercise price.
(b) The Committee may change the terms of Options outstanding under
this Plan, with respect to the exercise price or the number of Class C
Units subject to the Options, or both, when, in the Committee's sole
discretion, such adjustments become appropriate by reason of any
transaction.
(c) Except as otherwise expressly provided herein, the issuance by the
Partnership of any class, or securities convertible into ownership
interests of any class, either in connection with direct sale or upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Partnership convertible into such ownership
interests or other securities, shall not affect, and no adjustment by
reason thereof shall be made with respect to the number of Class C Units
reserved for issuance under the Plan or the number of or exercise price of
Class C Units then subject to outstanding Options granted under the Plan.
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<PAGE>
(d) Without limiting the generality of the foregoing, the existence of
outstanding Options granted under the Plan shall not affect in any manner
the right or power of the Partnership to make, authorize or consummate (1)
any or all adjustments, recapitalizations, reorganizations or other changes
in the Partnership's capital structure or its business; (2) any merger or
consolidation of the Partnership; (3) any issue by the Partnership of debt
securities, or partnership interests that would rank above the Class C
Units subject to outstanding Options; (4) the dissolution or liquidation of
the Partnership; (5) any sale, transfer or assignment of all or any part of
the assets or business of the Partnership; or (6) any other partnership act
or proceeding, whether of a similar character or otherwise.
Section 11. Transferability of Options. Each Option may provide that such
Option may be transferrable by the Optionee in the Optionee's discretion.
Section 12. Issuance of Class C Units. No person shall be, or have any of
the rights or privileges of, a unitholder of the Partnership with respect to any
of the Class C Units subject to an Option unless and until certificates
representing such Class C Units shall have been issued and delivered to such
person. As a condition of any transfer of the certificate for Class C Units, the
Committee may obtain such agreements or undertakings, if any, as it may deem
necessary or advisable to assure compliance with any provision of the Plan, the
agreement evidencing the Option or any law or regulation including, but not
limited to, the following:
(i) A representation, warranty or agreement by the Optionee to
the Partnership at the time any Option is exercised that he or she is
acquiring the Class C Units to be issued to him or her for investment
and not with a view to, or for sale in connection with, the
distribution of any such Class C Units; and
(ii) A representation, warranty or agreement to be bound by any
legends that are, in the opinion of the Committee, necessary or
appropriate to comply with the provisions of any securities laws
deemed by the Committee to be applicable to the issuance of the Class
C Units and that are endorsed upon the Class C Unit certificates.
Section 13. Administration of the Plan.
(a) The Plan may be administered by the Compensation Committee of the
Board or other committee thereof as appointed by the Board (herein called
the "Committee"); or, if the Board so determines, by the Board and in such
case all references to the Committee shall be deemed to be references to
the Board. Except for the powers set forth in Section 16, the Committee
shall have all of the powers of the Board with respect to the Plan. Any
member of the Committee may be removed at any time, with or without cause,
by resolution of the Board and any vacancy occurring in the membership of
the Committee may be filled by appointment by the Board.
(b) The Committee, from time to time, may adopt rules and regulations
for carrying out the purposes of the Plan. The determinations and the
interpretation and construction of any provision of the Plan by the
Committee shall be final and conclusive.
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(c) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a
meeting or (ii) without a meeting by the written approval of a majority of
the members of the Committee.
(d) Subject to the express provisions of this Plan, the Committee
shall have the authority, in its sole and absolute discretion (i) to adopt,
amend, and rescind administrative and interpretive rules and regulations
relating to this Plan or any Option; (ii) to construe the terms of this
Plan or any Option; (iii) as provided in Subsection 10(a), upon certain
events to make appropriate adjustments to the exercise price and number of
Class C Units subject to this Plan and Option; and (iv) to make all other
determinations and perform all other acts necessary or advisable for
administering this Plan, including the delegation of such ministerial acts
and responsibilities as the Committee deems appropriate. The Committee may
correct any defect or supply any omission or reconcile any inconsistency in
this Plan or any Option in the manner and to the extent it shall deem
expedient to carry it into effect, and it shall be the sole and final judge
of such expediency. The Committee shall have full discretion to make all
determinations on the matters referred to in this Subsection 13(d), and
such determinations shall be final, binding and conclusive.
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Section 14. Government Regulations.
This Plan, Options and the obligations of the Partnership to sell and
deliver Class C Units under any Options, shall be subject to all applicable
laws, rules and regulations, and to such approvals by any governmental agencies
or national securities exchanges as may be required.
Section 15. Miscellaneous.
(a) The grant of an Option shall be in addition to any other
compensation paid to the Optionee or other employee benefit plans of the
General Partner or a Subsidiary or other benefits with respect to
Optionee's position with the General Partner or a Subsidiary. The grant of
an Option shall not confer upon the Optionee the right to continue in the
Optionee's employment position, or interfere in any way with the rights of
the Optionee's employer to terminate his or her status as an employee.
(b) Neither the members of the Board nor any member of the Committee
shall be liable for any act, omission, or determination taken or made in
good faith with respect to this Plan or any Option, and members of the
Board and the Committee shall, in addition to all other rights of
indemnification and reimbursement, be entitled to indemnification and
reimbursement by the Partnership in respect of any claim, loss, damage, or
expense (including attorneys' fees, the costs of settling any suit,
provided such settlement is approved by independent legal counsel selected
by the Partnership, and amounts paid in satisfaction of a judgment, except
a judgment based on a finding of bad faith) arising from such claim, loss,
damage, or expense to the full extent permitted by law and under any
directors' and officers' liability or similar insurance coverage that may
from time to time be in effect.
(c) Any issuance or transfer of Class C Units to an Optionee, or to
his legal representative, heir, legatee, distributee or assignee, in
accordance with the provisions of this Plan or the applicable Option,
shall, to the extent thereof, be in full satisfaction of all claims of such
persons under the Plan. The Committee may require any Optionee, legal
representative, heir, legatee, distributee or assignee as a condition
precedent to such payment or issuance or transfer of Class C Units, to
execute a release and receipt for such payment or issuance or transfer of
Class C Units in such form as it shall determine.
(d) Neither the Committee nor the Partnership guarantees Class C Units
from loss or depreciation.
(e) All expenses incident to the administration, termination, or
protection of this Plan or any Option, including, but not limited to, legal
and accounting fees, shall be paid by the Partnership; provided, however,
the Partnership may recover any and all damages, fees, expenses and costs
arising out of any actions taken by the Partnership to enforce its rights
under this Plan or any Option.
(f) Records of the Partnership shall be conclusive for all purposes
under this Plan or any Option, unless determined by the Committee to be
incorrect.
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(g) The Partnership shall, upon request or as may be specifically
required under this Plan or any Option, furnish or cause to be furnished
all of the information or documentation that is necessary or required by
the Committee to perform its duties and functions under this Plan or any
Option.
(h) The Partnership assumes no liability to any Optionee or his legal
representatives, heirs, legatees or distributees for any act of, or failure
to act on the part of, the Committee.
(i) If any provision of this Plan or any Option is held to be illegal
or invalid for any reason, the illegality or invalidity shall not affect
the remaining provisions of this Plan or any Option, but such provision
shall be fully severable, and the Plan or Option, as applicable, shall be
construed and enforced as if the illegal or invalid provision had never
been included in the Plan or Option, as applicable.
(j) Whenever any notice is required or permitted under this Plan, such
notice must be in writing and personally delivered or sent by mail or
delivery by a nationally recognized courier service. Any notice required or
permitted to be delivered under this Plan shall be deemed to be delivered
on the date on which it is personally delivered, or, if mailed, whether
actually received or not, on the third Business Day after it is deposited
in the United States mail, certified or registered, postage prepaid,
addressed to the person who is to receive it at the address that such
person has previously specified by written notice delivered in accordance
with this Subsection 15(j) or, if by courier, seventy-two (72) hours after
it is sent, addressed as described in this Subsection 15(j). The
Partnership or the Optionee may change, at any time and from time to time,
by written notice to the other, the address that it or he had previously
specified for receiving notices. Until changed in accordance with this
Plan, the address of the Partnership is 4582 South Ulster Street Parkway,
Suite 1700, Denver, Colorado 80237 and the address of the Optionee is the
Optionee's address in the records of the Optionee's employer.
(k) Any person entitled to notice under this Plan may waive such
notice.
(l) Each Option shall be binding upon the Optionee, his legal
representatives, heirs, legatees and distributees and upon the Partnership,
its successors, and assigns, and upon the Board, the Committee and its
successors.
(m) The titles and headings of Sections are included for convenience
of reference only and are not to be considered in construction of this
Plan's provisions.
(n) Words used in the masculine shall apply to the feminine where
applicable, and wherever the context of this Plan dictates, the plural
shall be read as the singular and the singular as the plural.
Section 16. Amendment and Discontinuation of the Plan. The Committee may
from time to time amend the Plan or any Option; provided, however, that, except
to the extent provided in Section 8, no amendment or suspension of the Plan or
any Option issued hereunder shall, except as specifically permitted in any
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Option, substantially impair any Option previously granted to any Optionee
without the consent of such Optionee.
Section 17. Effective Date and Termination Date. The effective date of the
Plan is May 5, 1998, which is the date the Board adopted this Plan. The Plan
shall terminate on the tenth anniversary of the effective date.
Executed to evidence the 1998 Unit Option Plan of Hallwood Energy Partners,
L.P. adopted by the Board on May 5, 1998.
HALLWOOD ENERGY PARTNERS, L.P.
By: HEPGP, Ltd., its general partner
By: Hallwood GP, Inc., its general partner
By:
Name:
Title:
13
1998 CLASS C UNIT OPTION PLAN LOAN PROGRAM
FOR
HALLWOOD ENERGY PARTNERS, L.P.
Section 1. Purpose. This 1998 Class C Unit Option Plan Loan Program (this
"Loan Program") for Hallwood Energy Partners, L.P. (the "Partnership") has been
established in connection with the adoption of the 1998 Class C Unit Option Plan
for the Partnership (the "Option Plan"). This Loan Program provides for the
making of loans by the Partnership, upon the terms and conditions hereinafter
set forth, to the recipients of options to purchase Class C Units representing
limited partnership interests in the Partnership granted pursuant to the Option
Plan. The purpose of this Loan Program is to provide such optionees with funds
to pay the exercise price of such options and any additional amounts to be paid
to the Partnership in order to comply with applicable federal or state income
tax withholding requirements.
Section 2. Definitions. As used herein, the following terms shall have the
meanings indicated:
(a) "Accelerated Option" shall mean any Option the exercisability of
which has been accelerated pursuant to Section 7 of the Option Plan.
(b) "Fair Market Value" shall mean:
(i) with respect to any Traded Securities on any date of
reference, the Closing Price on the business day immediately preceding
such date, unless the Committee in its sole discretion shall determine
otherwise in a fair and uniform manner. For this purpose, the closing
price of the Traded Securities on any business day shall be: (A) if
the Traded Securities are listed or admitted for trading on any United
States national or international securities exchange or included in
the National Market System of the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the last reported sale
price of the Traded Securities on such exchange or system, as reported
in any newspaper of general circulation; (B) if the Traded Securities
are quoted on NASDAQ, or any similar system of automated dissemination
of quotations of securities prices in common use, the mean between the
closing high bid and low asked quotations for such day of the Traded
Securities on such system; (C) if neither clause (A) nor (B) is
applicable, the mean between the high bid and low asked quotations for
the Traded Securities as reported by the National Quotation Bureau,
Incorporated if at least two securities dealers have inserted both bid
and asked quotations for the Traded Securities on at least five of the
ten preceding days; or, (D) in lieu of the above, if actual
transactions in the Traded Securities are reported on a consolidated
transaction reporting system, the last sale price of the Traded
Securities for such day and on such system;
(ii) with respect to any U.S. Government Obligations on any date
of reference, the mean between the bid and asked quotations for such
U.S. Government Obligations for the business day immediately preceding
such date as set forth in any newspaper of general circulation; and
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(iii) with respect to any foreign or domestic real or personal
property other than Traded Securities or U.S. Government Obligations,
the fair market value of such property as determined by an appraiser
of recognized standing duly qualified in the jurisdiction in which
such appraiser practices.
(c) "Fully Secured" shall mean that the Optionee shall have created in
favor of the Partnership a perfected security interest in (i) the Class C
Units acquired upon exercise of the Related Option as security for such
portion of the Loan equal to the Margin Loan Amount and (ii) Other
Collateral that has a Fair Market Value equal to the amount of the
remaining portion of the Loan (including any portion attributable to Tax
Payments).
(d) "Loan" shall mean any loan extended to an Optionee pursuant to
this Loan Program.
(e) "Loan Date" shall mean, with respect to any Loan, the date on
which such Loan is made by the Partnership.
(f) "Margin Loan Amount" shall mean, with respect to any Loan, an
amount equal to fifty percent (50%) of the Fair Market Value as of the Loan
Date of the Class C Units acquired upon exercise of the Related Option.
(g) "Other Collateral" shall mean any property of an Optionee other
than Class C Units acquired upon exercise of a Related Option that is
pledged to secure any portion of a Loan.
(h) "Partnership Interest Rate" shall mean the rate of interest
payable by the Partnership with respect to its revolving line of credit
with its primary lender or, if the Partnership has no revolving line of
credit, the rate of interest payable by any affiliate of the Partnership
selected by the Committee with respect to such affiliate's revolving line
of credit with its primary lender.
(i) "Related Option" shall mean the Option with respect to which the
proceeds of a particular Loan shall be used for payment of the exercise
price thereunder.
(j) "Required Loan Documents" shall mean (i) the Optionee Loan
Application Form, in substantially the form of Exhibit A attached hereto,
(ii) the Promissory Note, in substantially the form of Exhibit B attached
hereto, (iii) in the case of a Loan pursuant to Section 3(a) hereof, the
Pledge Agreement, in substantially the form of Exhibit C attached hereto,
covering the Class C Units acquired upon the exercise of a Related Option
and any Traded Securities or U.S. Government Obligations included as Other
Collateral, (iv) in the case of a Loan pursuant to Section 3(a) that is
secured by Other Collateral consisting of real or personal property located
in a foreign jurisdiction, the Standard Form All-Monies Legal Charge, in
substantially the form of Exhibit D attached hereto, and (v) in the case of
a Loan pursuant to Section 3(a) that is secured by Other Collateral
consisting of real or personal property located within the United States,
any other documentation required by the Committee, in its sole discretion,
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to create in favor of the Partnership a perfected security interest in such
property.
(k) "Tax Payments" shall mean payments to the Partnership in
compliance with applicable federal or state income tax withholding
requirements.
(l) "Traded Securities" shall mean any securities that are listed or
admitted for trading on any United States national or international
securities exchange or included in the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") or any similar system of automated dissemination of quotations
of securities prices in common use.
(m) "U.S. Government Obligations" shall mean securities that are (i)
direct obligations of the United States of America for the payment of which
its full faith and credit is pledged or (ii) the obligations of an entity
controlled or supervised by and acting as an agency or instrumentality of
the United States of America the timely payment of which is unconditionally
guaranteed as a full faith and credit obligation of the United States of
America.
All capitalized terms not otherwise defined herein shall have the meanings
assigned to them in the Option Plan.
Section 3. Loans.
(a) The Partnership, upon the receipt of each of the Required Loan
Documents, properly completed and signed by an Optionee, shall extend to
such Optionee a Loan in the amount indicated on such form (subject to the
terms of this Section 3). The Required Loan Documents must be provided to
the Partnership prior to or concurrently with such Optionee's written
notice of exercise of the Related Option. Subject to Section 3(b) below,
the Loan shall be made on the following terms and conditions:
(i) the amount of the Loan may not exceed the aggregate exercise
price for the Related Option plus the amount of any Tax Payments;
(ii) the amount of the Loan must be Fully Secured;
(iii) the principal balance of the Loan shall become due and
payable on the fifth anniversary of the Loan Date;
(iv) the principal balance of the Loan shall accrue interest at a
rate equal to the Partnership Interest Rate in effect as of the Loan
Date; and
(v) accrued interest shall be payable on the last day of each of
the Partnership's fiscal quarters during which the Loan remains
outstanding.
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(b) In the event that (i) any portion of the Related Option is an
Accelerated Option and (ii) the Optionee was not a member of the Board at
the time the Related Option was granted, then the Loan may be made, at the
discretion of the Optionee, on the following terms and conditions:
(i) the amount of the Loan may not exceed the aggregate exercise
price for the Related Option plus the amount of any Tax Payments;
(ii) the Loan may be unsecured;
(iii) the principal balance of the Loan shall become due and
payable on the first anniversary of the Loan Date;
(iv) the principal balance of the Loan shall accrue interest at a
rate equal to the Partnership Interest Rate in effect as of the Loan
Date plus two percent (2%); and
(v) accrued interest shall be payable on the last day of each of
the Partnership's fiscal quarters during which the Loan remains
outstanding.
(c) The proceeds of the Loan may be used by the Optionee solely for
(i) the payment, whether full or partial, of the aggregate exercise price
of the Related Option and (ii) the payment of any funds by the Optionee to
the Partnership in order to comply with applicable federal or state income
tax withholding requirements.
(d) The principal balance of the Loan may be repaid by the Optionee
either in cash or by the surrender of Class C Units, owned by the Optionee
for at least six months, having a Fair Market Value as of the date of such
repayment equal to such principal balance.
(e) The Partnership shall not be obligated to make any Loan if the
amount of such Loan is less than $25,000.
(f) In no event shall the Partnership be required to make a Loan if,
as reflected on the Partnership's latest regularly prepared books and
records, the Partnership does not have available sufficient cash or the
availability of additional borrowings under its revolving line of credit in
a sufficient amount to make the Loan after taking into account all of the
Partnership's commitments for cash expenditures and budgeted receipts for
at least a one year period after the Loan Date.
Section 4. Compliance with Applicable Laws. It is the intent of the
Partnership that this Loan Program and the Loans made hereunder comply with all
applicable laws, including without limitation Regulation G issued by the Board
of Governors of the Federal Reserve System. Accordingly, the Partnership shall
register on Federal Reserve Form FR G-1 within 30 days after the end of any
calendar quarter during which (i) the aggregate amount of the Loans extended
during such quarter equals $200,000 or more or (ii) the aggregate amount of the
Loans outstanding at any time during that calendar quarter equals $500,000 or
more. Furthermore, if the Partnership has registered on Form FR G-1, then the
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Partnership shall, within 30 days following June 30 of every year, file Federal
Reserve Form FR G-4.
Section 5. Administration of Loan Program; Amendments.
(a) This Loan Program may be administered by the Compensation
Committee of the Board or other committee thereof as appointed by the Board
(the "Committee"); or, if the Board so determines, by the Board and in such
case all references to the Committee shall be deemed to be references to
the Board. The Committee may from time to time amend this Loan Program;
provided, however, that no such amendment shall apply to any Loans
outstanding prior to the adoption of such amendment.
(b) The Committee, from time to time, may adopt rules and regulations
for carrying out the purposes of this Loan Program. The determinations and
the interpretation and construction of any provision of this Loan Program
by the Committee shall be final and conclusive.
(c) Any and all decisions or determinations of the Committee shall be
made either (i) by a majority vote of the members of the Committee at a
meeting or (ii) without a meeting by the written approval of a majority of
the members of the Committee.
Section 6. Miscellaneous.
(a) The provision of a Loan shall be in addition to any other
compensation paid to the Optionee or other employee benefit plans of the
Partnership or other benefits with respect to Optionee's position with the
Partnership or its Subsidiaries. The provision of a Loan shall not confer
upon the Optionee the right to continue as an Employee, or interfere in any
way with the rights of the Partnership to terminate his or her status as an
Employee.
(b) Neither the members of the Board nor any member of the Committee
shall be liable for any act, omission, or determination taken or made in
good faith with respect to this Loan Program or any Loan, and members of
the Board and the Committee shall, in addition to all other rights of
indemnification and reimbursement, be entitled to indemnification and
reimbursement by the Partnership in respect of any claim, loss, damage, or
expense (including attorneys' fees, the costs of settling any suit,
provided such settlement is approved by independent legal counsel selected
by the Partnership, and amounts paid in satisfaction of a judgment, except
a judgment based on a finding of bad faith) arising from such claim, loss,
damage, or expense to the full extent permitted by law and under any
directors' and officers' liability or similar insurance coverage that may
from time to time be in effect.
(c) The provision of a Loan to an Optionee in accordance with the
provisions of this Loan Program shall, to the extent thereof, be in full
satisfaction of all claims of such Optionee under this Loan Program. The
Committee may require any Optionee, legal representative, heir, legatee,
distributee or assignee as a condition precedent to the provision of such
Loan, to execute a release and receipt for such Loan in such form as it
shall determine.
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(d) All expenses incident to the administration, termination, or
protection of this Loan Program, including, but not limited to, legal and
accounting fees, shall be paid by the Partnership; provided, however, the
Partnership may recover any and all damages, fees, expenses and costs
arising out of any actions taken by the Partnership to enforce its rights
under this Loan Program or any Required Loan Document.
(e) Records of the Partnership shall be conclusive for all purposes
under this Loan Program or any Loan, unless determined by the Committee to
be incorrect.
(f) The Partnership shall, upon request or as may be specifically
required under this Loan Program or any Required Loan Document, furnish or
cause to be furnished all of the information or documentation that is
necessary or required by the Committee to perform its duties and functions
under this Loan Program or any Required Loan Document.
(g) The Partnership assumes no liability to any Optionee or his legal
representatives, heirs, legatees or distributees for any act of, or failure
to act on the part of, the Committee.
(h) If any provision of this Loan Program or any Required Loan
Document is held to be illegal or invalid for any reason, the illegality or
invalidity shall not affect the remaining provisions of this Loan Program
or such Required Loan Document, but such provision shall be fully
severable, and the Loan Program or Required Loan Document, as applicable,
shall be construed and enforced as if the illegal or invalid provision had
never been included in the Loan Program or Required Loan Document, as
applicable.
(i) Whenever any notice is required or permitted under this Loan
Program, such notice must be in writing and personally delivered or sent by
mail or delivery by a nationally recognized courier service. Any notice
required or permitted to be delivered under any Required Loan Document
shall be deemed to be delivered on the date on which it is personally
delivered, or, if mailed, whether actually received or not, on the third
Business Day after it is deposited in the United States mail, certified or
registered, postage prepaid, addressed to the person who is to receive it
at the address that such person has previously specified by written notice
delivered in accordance with this Section 6(i) or, if by courier,
seventy-two (72) hours after it is sent, addressed as described in this
Section 6(i). The Partnership or the Optionee may change, at any time and
from time to time, by written notice to the other, the address that it or
he had previously specified for receiving notices. Until changed in
accordance with this Loan Program, the Partnership and the Optionee shall
specify as its and his address for receiving notices the address set forth
in this Loan Program or any Required Loan Document to which such notice
relates.
(j) Any person entitled to notice under this Loan Program or any
Required Loan Document may waive such notice.
(k) This Loan Program shall be binding upon the Optionee, his legal
representatives, heirs, legatees and distributees, upon the Partnership,
its successors, and assigns, and upon the Board, the Committee and its
successors.
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(l) The titles and headings of Sections are included for convenience
of reference only and are not to be considered in construction of this Loan
Program's provisions.
Effective Date: May 5, 1998.
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EXHIBIT A
OPTIONEE LOAN APPLICATION FORM
1. Name of Optionee:
2. Number of Class C Units Subject to Option:
3. Number of Class C Units being acquired pursuant to exercise of such Option:
4. Exercise price per Class C Unit for such Option:
5. Amount of Loan requested:
6. Is the above-referenced Option an Accelerated Option? Yes No
7. If the above-referenced Option is an Accelerated Option, then the Loan shall
be made pursuant to which section of the Loan Program (designate one):
Section 3(a) Section 3(b)
OPTIONEE:
Date:
Print Name:
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EXHIBIT B
PROMISSORY NOTE
$_________ _____________, 199__
____________________________________ ("Maker"), for value received,
promises and agrees to pay, as herein provided, to the order of Hallwood Energy
Partners, L.P., a Delaware limited partnership ("Payee"), at such address or to
such bank account as Payee may direct, in lawful money of the United States of
America, the principal sum of _______________________________________ Dollars
($_________). This note ("Note") is issued under the terms of that certain 1998
Class C Unit Option Plan Loan Program for Hallwood Energy Partners, L.P. as in
effect on the date hereof (the "Loan Program").
1. Payment of Principal and Interest. (a) The principal balance of this
Note and all accrued and unpaid interest thereon shall be due and payable on
______________, _____ (the "Maturity Date"); provided, however, that if such day
is not a day on which banks are open for business in the State of ___________ (a
"Business Day"), then such payment shall be due on the Business Day next
succeeding the Principal Payment Date. The principal balance of this Note may be
repaid either in cash or by the surrender of certificates representing Class C
Units of limited partnership interest in Payee owned by the Maker for at least
six months having a fair market value equal to such principal balance (as
determined in accordance with the Loan Program).
(b) The principal balance outstanding from time to time under this Note
(after giving effect to all adjustments thereto made pursuant to the terms of
this Note) shall bear interest at a rate of __________ percent (____%) per
annum. In no event shall the interest rate payable hereunder exceed the maximum
rate of nonusurious interest allowed from time to time by applicable law (the
"Highest Lawful Rate"). Maker shall pay to Payee, commencing on
_________________ and on the last day of each succeeding three-month period
until the Maturity Date, all accrued and unpaid interest on the outstanding
principal balance as of such date, unless such day is not a Business Day in
which case such payment shall be due on the Business Day next succeeding such
day.
2. Maximum Interest Rate. (a) It is the intention of Maker and Payee to
conform strictly to applicable usury laws. Accordingly, if the interest payable
on this Note would be usurious under applicable law, in that event,
notwithstanding anything to the contrary herein, it is agreed as follows: (i)
the aggregate of all consideration that constitutes interest under applicable
law that is taken, reserved, contracted for, charged or received under this Note
shall under no circumstances exceed the maximum amount of interest allowed by
applicable law, and any excess shall be canceled automatically and, if
theretofore paid, shall be credited on this Note by the holder hereof (or, to
the extent that this Note shall have been or would thereby be paid in full,
refunded to Maker); and (ii) in the event that maturity of this Note is
accelerated for any reason, or in the event of any required or permitted
prepayment, then such consideration that constitutes interest may never include
more than the maximum amount allowed by applicable law, and excess interest, if
any, provided for in this Note or otherwise shall be canceled automatically as
of the date of such acceleration or prepayment and, if theretofore paid, shall
be credited on this Note (or, to the extent
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that this Note shall have been or would thereby be paid in full, refunded to
Maker). All sums paid or agreed to be paid to the holder hereof for the use,
forbearance or detention of sums included in the amounts owing to such holder by
Maker shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of this Note until payment in full
so that the rate or amount of interest on account of indebtedness does not
exceed the applicable usury ceiling, if any. As used in this Note, the term
"applicable law" shall mean the law of the State of Delaware.
(b) If at maturity or final payment of this Note the total amount of
interest paid or accrued under the foregoing provisions is less than the total
amount of interest which would have accrued if an interest rate per annum equal
to the Interest Rate had at all times been in effect, then Maker agrees to pay
to Payee, to the extent allowed by applicable law, an amount equal to the
difference between (a) the lesser of (i) the amount of interest that would have
accrued on this Note if the Highest Lawful Rate had at all times been in effect
or (ii) the amount of interest which would have accrued if an interest rate per
annum equal to the Interest Rate had at all times been in effect, and (b) the
amount of interest accrued in accordance with the other provisions of this Note.
3. Waiver. Maker expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor, notice of
intent to accelerate the maturity hereof, notice of the acceleration of the
maturity hereof, bringing of suit and diligence in taking any action to collect
amounts called for hereunder and in the handling of securities at any time
existing in connection herewith.
4. Amendments. Any term or provision of this Note and any obligation of
Maker hereunder or with respect hereto, may be changed or modified, partially or
completely, or noncompliance may be consented to or authorized, by written
agreement between Maker and Payee.
5. Events of Default. The occurrence and continuance of any of the
following events shall be considered an "Event of Default" for purposes of this
Note: (a) if Maker uses the proceeds of this Note for any purpose other than in
accordance with the terms of the Loan Program; (b) default is made (and not
cured within 10 calendar days) in the payment of principal or interest hereon,
(c) any involuntary case or other proceeding shall be commenced against Maker
that seeks liquidation, reorganization or other relief with respect to it or its
debts or other liabilities under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator or custodian unless dismissed or stayed within 90 days after the
institution thereof (provided that upon ineffectiveness of any stays, an Event
of Default shall exist); and (d) Maker shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts or other liabilities under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official with respect
to the Maker, or shall consent to any such relief or to the appointment of, or
taking possession by, any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors or shall fail generally or shall admit in writing its
inability to pay its debts generally as they become due or shall take any
corporate action to authorize or effect any of the foregoing.
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6. Remedy. Upon the occurrence of any Event of Default, the entire
principal amount of the Note then outstanding together with interest accrued
thereon shall become immediately due and payable, all without written notice and
without presentment, demand, protest, notice of protest or dishonor or any other
notice of default of any kind, all of which are hereby expressly waived by the
Maker.
7. Costs and Attorneys' Fees. If default is made in the payment of this
Note at maturity (regardless of how its maturity may be brought about) and the
same is placed in the hands of an attorney for collection, or suit is filed
hereon, or proceedings are had in bankruptcy, probate, receivership,
reorganization, arrangement, or other judicial proceedings for the establishment
or collection of any amount called for hereunder, or any amount payable or to be
payable hereunder is collected through any such proceedings, Maker agrees to pay
to the owner and holder of this Note reasonable attorneys' fees and costs,
including the fees and costs incurred in any appeals, and any collection fees
incurred in collection of this Note.
8. Security. The payment and performance of this Note is secured by the
security interest described by that certain Pledge Agreement by and between
Maker and Payee.
9. Governing Law. This Note and the rights and obligations hereunder shall
be governed by and construed and enforced in accordance with the laws of the
State of Delaware.
[Name of Maker]
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EXHIBIT C
PLEDGE AGREEMENT
This PLEDGE AGREEMENT (this "Agreement"), dated as of _______________,
19___, is entered into by and between ______________________________ ("Pledgor")
and Hallwood Energy Partners, L.P., a Delaware limited partnership (the
"Partnership"), in order to secure the payment of the indebtedness hereinafter
referred to of Pledgor to the Partnership.
R E C I T A L S
As a condition to the Partnership providing a loan to Pledgor in the amount
of $_________, which loan is evidenced by a Promissory Note dated of even date
herewith, Pledgor has agreed to pledge to the Partnership all of the securities
that are described on Exhibit A hereto (the "Pledged Securities").
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
Section 1. Definitions. Capitalized terms used herein shall have the
meaning specified herein.
Section 2. Pledge. Pledgor hereby pledges, assigns, transfers and delivers
to the Partnership, and hereby grants a security interest (the "Security
Interest") in, the following (the "Collateral"): the Pledged Securities, the
certificates representing such Pledged Securities and all dividends, cash,
securities, instruments and other property from time to time paid, payable or
otherwise distributed in respect of or in exchange for any or all of such
Pledged Securities.
Section 3. Secured Obligations. The Security Interest shall secure, under
the circumstances set forth herein, the Secured Obligations. For purposes of
this Agreement, the term "Secured Obligations" shall mean the following (i) the
due and punctual payment and performance of the Promissory Note, dated as of
_______________, made by Pledgor and payable to the order of the Partnership in
the principal amount of $_______________ (the "Note") and (ii) the reimbursement
of all costs incurred by the Partnership to obtain, preserve and enforce this
Agreement, collect the Secured Obligations and maintain and preserve the
Collateral, including without limitation the Partnership's reasonable attorneys'
fees, disbursements and legal expenses.
Section 4. Delivery of Collateral. Upon the execution hereof, Pledgor shall
deliver to the Partnership the certificates representing or evidencing the
Collateral, in suitable form for transfer by delivery, or accompanied by duly
executed instruments of transfer or assignment in blank, all in form and
substance reasonably satisfactory to the Partnership. Upon the occurrence and
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during the continuance of an Event of Default, the Partnership shall have the
right, at any time in its discretion and without notice to Pledgor, to transfer
to or to register in the name of the Partnership any or all of the Collateral.
Section 5. Representations and Warranties.
Pledgor represents and warrants as follows:
(i) The Security Interest constitutes a valid and, upon delivery
of the certificates evidencing the Pledged Securities, first perfected
security interest in all of the Collateral for payment and performance
of the Secured Obligations.
(ii) The Collateral is owned by Pledgor free and clear of any
lien, claim or encumbrance except for the Security Interest.
All representations and warranties of Pledgor contained herein shall survive the
execution, delivery and performance of this Agreement until termination of this
Agreement under Section 16.
Section 6. Further Assurances. Pledgor agrees that at any time and from
time to time, at Pledgor's expense, Pledgor will promptly execute and deliver
all further instruments and documents, and take all further action that the
Partnership may reasonably request, in order to perfect and protect the Security
Interest granted or purported to be granted hereby or to enable the Partnership
to exercise and enforce the rights and remedies hereunder with respect to any
Collateral.
Section 7. Releases of Collateral. Pledgor shall not sell or otherwise
dispose of the Collateral, or any part thereof or any interest therein. If the
Collateral, or any part thereof, is sold or otherwise disposed of in violation
of these provisions, the Security Interest of the Partnership shall continue in
such Collateral or any part thereof notwithstanding such sale or other
disposition, and Pledgor will deliver any proceeds thereof to the Partnership to
be held as Collateral hereunder.
Section 8. Partnership Appointed Attorney-in-Fact. Pledgor hereby
irrevocably appoints the Partnership as Pledgor's attorney-in-fact, with full
authority in the place and stead of Pledgor and in its name or otherwise, from
time to time in the Partnership's discretion, to take any action and to execute
any instrument that the Partnership may deem reasonably necessary or advisable
to accomplish the purposes of this Agreement, including, without limitation, to
receive, endorse and collect all instruments made payable to Pledgor
representing any dividend, interest payment or other distribution in respect of
the Collateral or any part thereof and to give full discharge for the same, when
and to the extent permitted by this Agreement.
Section 9. Partnership May Perform. Upon the occurrence and during the
continuance of an Event of Default (including an Event of Default resulting from
a failure to perform any agreement contained herein), if Pledgor fails to
perform any agreement contained herein, the Partnership may itself perform, or
cause performance of, such agreement, and the expenses of the Partnership
incurred in connection therewith shall be payable by Pledgor under Section 12.
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Section 10. Reasonable Care. The Partnership shall have an obligation to
exercise reasonable care with respect to Collateral in its possession; provided,
however, that the Partnership shall be deemed to have exercised reasonable care
if the Collateral is accorded treatment substantially comparable to that which
the Partnership accords its own property or treatment substantially in
accordance with actions requested by Pledgor in writing (although the
Partnership shall not be obligated to comply with any such requests and no
failure to do so shall be deemed to be a failure to exercise reasonable care).
Section 11. Events of Default: Remedies Upon Default. An "Event of Default"
hereunder occurs if Pledgor fails to pay any amount when due under the Note and
the Partnership accelerates the payment of the principal and interest thereunder
such that such Secured Obligations shall become immediately due and payable
(herein called an "Event of Default").
If upon or after the occurrence of any Event of Default, the Partnership
elects to exercise remedies under this Agreement (the occurrence of any such
event shall be referred to as an "Acceleration"), then upon thirty (30) days'
advance notice to the Pledgor:
(a) The Partnership may exercise (in compliance with all
applicable securities laws) in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party after
default under the Uniform Commercial Code in effect in the State of
____________ at that time, and the Partnership may also, without
notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any
exchange, over the counter or at the Partnership's offices or
elsewhere, for cash, on credit or for future delivery, and at such
price or prices and upon such other terms as the Partnership may deem
commercially reasonable or otherwise in such manner as necessary to
comply with applicable federal and state securities laws. Upon
consummation of any such sale, the Partnership shall have the right to
assign, transfer and deliver to the purchaser or purchasers at any
such sale and such purchasers shall hold the property sold absolutely,
free from any claim or right on the part of Pledgor, and Pledgor
hereby waives (to the extent permitted by law) all rights of
redemption, stay or appraisal that it now has or may at any time in
the future have under any rule of law or statute now existing or
hereafter enacted.
Pledgor agrees that the Partnership shall not be required to register or
qualify any of the Collateral under applicable state or federal securities laws
in connection with any such sale if the sale is effected in a manner that
complies with all applicable federal and state securities laws or exemptions
therefrom. The Partnership shall be authorized at any such sale (if it deems it
advisable to do so) to restrict the prospective bidders or purchasers to persons
who will represent and agree that they are purchasing the Collateral for their
own account for investment and not with a view to the distribution or sale
thereof. In the event that any such Collateral is sold at private sale, Pledgor
agrees that if such Collateral is sold for a price that the Partnership in good
faith believes to be reasonable under the circumstances then existing, then (a)
the sale shall be deemed to be commercially reasonable in all respects, (b)
Pledgor shall not be entitled to a credit against the Secured Obligations in an
amount in excess of the purchase price, and (c) the Partnership shall not incur
any liability or responsibility to Pledgor in connection therewith,
notwithstanding the possibility that a substantially higher price might have
been realized at a public sale. Pledgor hereby waives any claims against the
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Partnership arising by reason of the fact that the price at that the Collateral
may have been sold at such private sale was less than the price that might have
been obtained at a public sale or was less than the Secured Obligations, even if
the Partnership accepts the first offer received and does not offer the
Collateral to more than one offeree (other than the Partnership or an affiliate
of the Partnership), unless such sale was not commercially reasonable under the
circumstances.
To the extent notice of sale shall be required by law, the Partnership
shall give Pledgor at least ten (10) days' (or such longer period as shall be
specified by applicable laws) notice of the time and place of any public sale or
the time after which any private sale is to be made, which Pledgor agrees shall
constitute commercially reasonable notification. At any such sale, the
Partnership, to the extent permitted by law, may bid (which bid may be, in whole
or in part, in the form of cancellation of Secured Obligations) for and purchase
for the account of the Partnership the whole or any part of the Collateral. The
Partnership shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Partnership may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. If sale of all or any part of the Collateral
is made on credit or for future delivery, the Collateral so sold may be retained
by the Partnership until the sale price is paid by the purchaser or purchasers
thereof, but the Partnership shall not incur any liability in case any such
purchaser or purchasers shall fail to take up and pay for the Collateral so sold
and, in case of any such failure, such Collateral may be sold again upon like
notice. Pledgor agrees that any sale of the Collateral conducted by the
Partnership in accordance with the foregoing provisions of this Section 11(a)
shall be deemed to be a commercially reasonable sale under the Uniform
Commercial Code as in effect in the State of ____________ from time to time.
As an alternative to exercising the power of sale herein conferred upon it,
the Partnership may proceed by a suit or suits at law or in equity to foreclose
the security interest granted under this Agreement and to sell the Collateral,
or any portion thereof, pursuant to a judgment or decree of a court or courts of
competent jurisdiction.
(b) Any cash held by the Partnership as Collateral and all cash
proceeds received by the Partnership in respect of any sale of,
collection from, or other realization upon all or any part of the
Collateral (i) prior to the occurrence of an Acceleration shall be
held by the Partnership as collateral for the Note, and (ii) following
the occurrence of an Acceleration may be held by the Partnership as
Collateral and/or then or at any time thereafter applied as follows:
(x) first, to the payment to the Partnership of the costs and expenses
of retaking, holding and preparing for sale of the Collateral and any
other fees, expenses, claims, demands, losses, judgments, damages and
liabilities arising out of or related to any loan document which are
payable to the Partnership pursuant to Section 12, and (y) second, to
the Partnership for application against or on account of all or any
part of the Notes.
(c) Any surplus of such cash or cash proceeds held by the
Partnership and remaining after payment in full of all the Notes shall
be reassigned and redelivered as provided in Section 16 hereof.
4
<PAGE>
Section 12. Expenses. The Partnership shall be entitled to receive from any
proceeds of the Collateral, the amount of any and all reasonable expenses,
including the fees and expenses of its counsel and of any experts and agents
that the Partnership may incur in connection with (i) the administration of this
Agreement, (ii) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, (iii) the exercise or
enforcement of any of the rights of the Partnership hereunder, or (iv) the
failure by Pledgor to perform or observe any of the provisions hereof.
Section 13. Security Interest Absolute. All rights of the Partnership
hereunder, the interest, and all obligations of Pledgor hereunder, shall be
absolute and unconditional irrespective of:
(i) any lack of validity or enforceability of the Note or the
Secured Obligations or any other agreement or instrument relating to
the Note or the Secured Obligations;
(ii) any change in the time, manner or place of payment of, or in
any other term of, the Note or the Secured Obligations, or any renewal
or extension of the Note or the Secured Obligations or any other
amendment or waiver of or any consent to any departure from this
Agreement or any other agreement or instrument;
(iii) any sale, exchange, release or nonperfection of any other
collateral, or any release of any guarantor or any person liable in
any manner for the collection of the Note or the Secured Obligations,
or any amendment or waiver of or consent to or departure from any
guaranty, for the Note or the Secured Obligations; or
(iv) any other circumstance that might otherwise constitute a
defense available to, or a discharge of, Pledgor in respect of the
Note or the Secured Obligations or in respect of this Agreement.
Section 14. Amendments and Waivers. No amendment or waiver of any provision
of this Agreement nor consent to any departure by Pledgor herefrom shall in any
event be effective unless the same shall be in writing and signed by the
Partnership and Pledgor, and then such waiver or consent shall be effective only
for the specific purpose for which given.
Section 15. Time is of the Essence; No Waiver: Cumulative Remedies. Time
and exactitude of each of the terms, obligations, covenants and conditions of
this Agreement are hereby declared to be of the essence. No failure on the part
of the Partnership to exercise, and no delay in exercising, any right, power or
remedy hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or remedy by the Partnership preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy. All remedies hereunder are cumulative and are not exclusive of any
other remedies provided by law.
Section 16. Termination. This Agreement shall terminate upon the payment in
full of the Secured Obligations. Upon such termination, the Partnership shall
reassign and redeliver (or cause to be reassigned and redelivered) to Pledgor,
5
<PAGE>
or to such person or persons as Pledgor shall designate or to whomever may be
lawfully entitled to receive such surplus, against receipt, such of the
Collateral (if any) as shall not have been sold or otherwise applied by the
Partnership pursuant to the terms hereof and shall still be held by it
hereunder, together with appropriate instruments of reassignment and release.
Any such reassignment shall be without recourse upon or warranty by the
Partnership and at the expense of Pledgor.
Section 17. Addresses for Notices. Any notice or communication to be given
or made hereunder shall be in writing (including facsimile communication) and
may be given or made personally or by first class letter, telecopy, courier
telex or tested telex, telegram or cable (confirmed, in the case of a telecopy,
telex, telegram or cable, by a letter delivered personally within, or dispatched
by first class mall within, twenty-four hours of the dispatch of such telecopy,
telex, telegram or cable) and shall be effective when actually received. For the
purposes hereof, the address of the Pledgor shall be address maintained in the
records of the Partnership (until notice of a change thereof is given as
provided in this Section 17), and the address of the Partnership (until notice
of a change thereof is given as provided in this Section 17) shall be as
follows:
Section 18. Continuing Security Interest; Assignments. This Agreement shall
create a continuing security interest in the Collateral and shall (i) remain in
full force and effect until termination as provided in Section 16, (ii) be
binding upon Pledgor, the Partnership and their respective successors and
assigns, and (iii) inure, together with the rights, powers and remedies of
Pledgor and the Partnership hereunder, to the benefit of Pledgor, the
Partnership and their respective successors, transferees and assigns, as the
case may be.
Section 19. Governing Law. This Agreement and the rights and obligations of
the parties hereto shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware.
Section 20. Severability. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective. If any
provisions of this Agreement or any lien, security interest or other right of
the Partnership hereunder shall be held to be invalid, illegal or unenforceable
under applicable law, such invalidity, illegality or unenforceability shall not
affect any other provision herein or any lien, security interest or other right
granted hereby.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of
the date first above written.
PARTNERSHIP:
HALLWOOD ENERGY PARTNERS, L.P.
By: HEPGP Ltd., its general partner
By: Hallwood GP, Inc., its general partner
By:
Name:
Title:___
PLEDGOR:
-
Print Name:
7
<PAGE>
Exhibit A
Pledged Securities
Record Owner Number of
Title of Securities and Address Shares or Units Certificate No.
<PAGE>
May 5, 1998
Mr. Thomas J. Jung
7644 S. Madison Circle
Littleton, Colorado 80112
Re: Class A Unit Option
Dear Mr. Jung:
As we discussed, in connection with your recent employment by Hallwood
Petroleum, Inc., Hallwood Energy Partners, L.P. (the "Partnership") hereby
grants you, effective as of the date of this letter, an option (the "Option") to
acquire Twenty Five Thousand Five Hundred (25,500) Class A Units ("Units") of
the Partnership.
Although your Option has not been granted pursuant to a previously existing
option plan, your Option will be subject to terms and conditions identical to
those in the Partnership's 1995 Unit Option Plan (the "Option Plan"), and the
associated 1995 Unit Option Plan Loan Program (the "Loan Program"). We have
enclosed copies of the Option Plan and the Loan Program for your reference and
review. The following is a description of the Option. Terms not otherwise
defined in this letter have the same meanings ascribed to them in the Option
Plan. You are referred to as the Optionee in the following description.
1. Option Price. The Option price is $6 5/8 for each Unit.
2. Date of Grant. The Option is granted as of May 5, 1998 (the "Date
of Grant").
3. Exercise of Option. The Option shall be exercisable in whole or in
part in accordance with the provisions of the Option Plan as follows:
(i) Schedule of Rights to Exercise.
(a) 8500 Units upon the Date of Grant.
(b) 8500 Units after May 5, 1999.
(c) 8500 Units after May 5, 2000.
or on such earlier date as the Option may vest in accordance with Section
7(d) of the Option Plan, but subject always to the limits set forth in
Section 7(e) of the Option Plan.
(ii) Method of Exercise. The Option shall be exercisable by a
written notice delivered to the Partnership that shall:
(a) state the election to exercise the Option and the number
of Units in respect of which it is being exercised; and
(b) be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or
persons other than the Optionee, be accompanied by proof,
satisfactory to the Partnership, of the right of such person or
persons to exercise the Option.
(iii) Payment. The exercise price of any Units purchased shall be
paid solely in cash, by certified or cashier's check, by money order,
with Units (provided that at the time of exercise the Committee in its
sole discretion does not prohibit the exercise of Options through the
delivery of Units owned by the Optionee for at least six months) or by
a combination of the above; provided, however, that the Committee in
its sole discretion may accept a personal check in full or partial
payment of any Units. If the exercise price is paid in whole or in
part with Units, the value of the Units surrendered shall be their
Fair Market Value on the date received by the Company. Any Units
delivered in satisfaction of all or a portion of the exercise price
shall be appropriately endorsed for transfer and assignment to the
Partnership.
(iv) Withholding. The Optionee shall make arrangements
satisfactory to the Company for the withholding of any amounts
necessary for withholding in accordance with applicable Federal or
state income tax laws.
(v) Issuance of Units. No person shall be, or have any of the
rights or privileges of, a Unitholder of the Partnership with respect
to any of the Units subject to an Option unless and until certificates
representing such Units shall have been issued and delivered to such
person. As a condition of any issuance of a certificate for Units, the
Committee may obtain such agreements or undertakings, if any, as it
may deem necessary or advisable to assure compliance with any
provision of the Plan, the agreement evidencing the Option or any law
or regulation including, but not limited to, the following:
(a) A representation, warranty or agreement by the Optionee
to the Partnership at the time any Option is exercised that he is
acquiring the Units to be issued to him for investment and not
with a view to, or for sale in connection with, the distribution
of any such Units; and
(b) A representation, warranty or agreement to be bound by
any legends that are, in the opinion of the Committee, necessary
or appropriate to comply with the provisions of any securities
laws deemed by the Committee to be applicable to the issuance of
the Units and are endorsed upon the Unit certificates.
(vi) Surrender of Option. Upon exercise of Option in part, if
requested by the Partnership, the Optionee shall deliver Option and
any other written agreements executed by the Partnership and the
Optionee with respect to Option to the Partnership who shall endorse
or cause to be endorsed thereon a notation of such exercise and return
all agreements to the Optionee.
4. Transferability of Option. In the Optionee's discretion, The Option may
be transferred by the Optionee by gift or by contribution to (a) any member of
Optionee's immediate family; (b) any entity of which Optionee or members of
Optionee's family are the sole equity owners or beneficiaries or, if there are
discretionary beneficiaries, among the class of discretionary beneficiaries; or
(c) any combination of the foregoing.
5. Term of Option. The Option may not be exercised after the expiration of
ten (10) years from the Date of Grant of the Option and is subject to earlier
termination as provided in Section 8 of the Plan. The Option may be exercised
during such term only in accordance with the Plan and the terms of the Option.
6. Administration. The Option shall be administered by the Committee
provided for and described in Section 13 of the Plan.
If this letter agreement correctly sets forth your understanding regarding
the Options, please acknowledge and accept the award by signing in the space
provided below.
Sincerely,
HALLWOOD ENERGY PARTNERS, L.P.
By: HEPGP, Ltd., General Partner
By: Hallwood GP, Inc., General Partner
/s/Russell P. Meduna
Russell P. Meduna
President
<PAGE>
I acknowledge receipt of the letter dated May 5, 1998 regarding the award
of a Class A Unit Option, a copy of the Option Plan and the Loan Program, and
represent that I am familiar with the terms and provisions thereof, and hereby
accept the Option subject to all the terms and provisions of this letter, the
Option Plan and the Loan Program. I hereby agree to accept as binding,
conclusive and final all decisions or interpretations of the Committee (as
defined in the Option Plan) upon any questions arising under my Option.
Date Thomas J. Jung
- ------------------ ---------------------------
EXTENSION OF MANAGEMENT AGREEMENT
This Extension of Management Agreement dated May 5, 1998 is between
Hallwood Petroleum, Inc. ("HPI") and Hallwood Energy Partners, L.P. ("HEP").
Whereas, HPI and HEP are parties to a Management Agreement dated May 5,
1997, and
Whereas, the Management Agreement provided that it may be extended for
successive one year terms by written agreement of the parties, and
Whereas, the parties desire to extend the Management Agreement until May 5,
1999,
Now, therefore, in consideration of the mutual agreements contained herein,
the parties agree that the term of the Management Agreement is extended to May
5, 1999.
HALLWOOD PETROLEUM, INC.
By: /s/Russell P. Meduna
Russell P. Meduna
Executive Vice President
HALLWOOD ENERGY PARTNERS, L.P.
By: HEPGP Ltd., general partner
By: Hallwood G.P., Inc.
By: /s/William L. Guzzetti
William L. Guzzetti
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1998 for Hallwood Energy Partners, L.P. and is
qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000768172
<NAME> Hallwood Energy Partners, L.P.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 7,866
<SECURITIES> 0
<RECEIVABLES> 11,490
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,046
<PP&E> 655,265
<DEPRECIATION> 545,273
<TOTAL-ASSETS> 143,795
<CURRENT-LIABILITIES> 23,500
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 80,400
<TOTAL-LIABILITY-AND-EQUITY> 143,795
<SALES> 19,468
<TOTAL-REVENUES> 21,470
<CGS> 0
<TOTAL-COSTS> 17,772
<OTHER-EXPENSES> 3,462
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,193
<INCOME-PRETAX> (957)
<INCOME-TAX> 0
<INCOME-CONTINUING> (957)
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<CHANGES> 0
<NET-INCOME> (957)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
