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 MARCH 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-19931
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction 84-1176750
ofincorporation or (I.R.S. Employer
organization) Identification Number)
4582 SOUTH ULSTER STREET
PARKWAY, SUITE 1700
DENVER, COLORADO 80237
(Address of principal (Zip Code)
executive offices)
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
Shares of Common Stock outstanding at May 10, 1996 1,004,847
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
March 31, December 31,
1996 1995
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 91 $ 1,139
Accrued oil and gas sales 2,899 2,674
Due from affiliates 350 381
Prepaid and other assets 69 111
Current assets of affiliates 4,935 4,007
------- -------
Total current assets 8,344 8,312
------- -------
PROPERTY, PLANT AND EQUIPMENT, at
cost
Oil and gas properties (full cost
method)
Proved oil and gas properties 270,146 268,152
Unproved mineral interests -
domestic 693 571
------- -------
Total 270,839 268,723
Less - accumulated depreciation,
depletion, amortization and
property impairment (205,847) (203,290)
--------- ---------
Net property, plant and equipment 64,992 65,433
------- -------
OTHER ASSETS
Noncurrent assets of
affiliates 197 194
------- -------
TOTAL ASSETS $ 73,533 $ 73,939
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
March 31, December 31,
1996 1995
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 2,290 $ 3,675
Current portion of contract
settlement obligation 143
Current liabilities of affiliates 4,182 11,696
------- -------
Total current liabilities 6,472 15,514
------- -------
NONCURRENT LIABILITIES
Contract settlement obligation 901 904
Long-term debt 13,000 12,000
Long-term obligations of
affiliates 15,985 8,740
Deferred liability 137 146
------- -------
Total noncurrent liabilities 30,023 21,790
------- -------
Total liabilities 36,495 37,304
------- -------
STOCKHOLDERS' EQUITY
Common stock par value $.01;
2,000,000 shares authorized;
1,004,847 and 1,087,763 shares
issued at 1996 and 1995,
respectively 111 111
Additional paid in capital 80,414 81,730
Accumulated deficit (39,626) (41,376)
Treasury stock - 85,191 and
83,980 shares at 1996 and 1995,
respectively (3,861) (3,830)
------- -------
Stockholders' equity - Net 37,038 36,635
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 73,533 $ 73,939
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share)
For the Three Months
Ended March 31,
1996 1995
<S> <C> <C>
REVENUES:
Oil revenue $ 4,073 $ 2,368
Gas revenue 4,131 2,442
Pipeline and other 346 674
Contract settlement 10 9
Interest income 17 43
-------- --------
8,577 5,536
------- -------
EXPENSES:
Production operating expense 2,674 1,862
General and administrative 824 922
Interest expense 740 306
Depreciation, depletion and
amortization 2,557 1,805
Impairment of oil and gas
properties 4,423
Other 35
-------- -------
6,795 9,353
------- -------
INCOME (LOSS) BEFORE INCOME TAXES 1,782 (3,817)
------- -------
PROVISION (BENEFIT) FOR INCOME
TAXES:
Current 32 44
Deferred (1,571)
------- -------
32 (1,527)
------- -------
NET INCOME (LOSS) $ 1,750 $ (2,290)
======= =======
NET INCOME (LOSS) PER SHARE $ 1.85 $ (2.14)
======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING 945 1,068
======= =======
</TABLE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Three Months
Ended March 31,
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,750 $ (2,290)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation, depletion,
amortization and impairment 2,557 6,228
Deferred income tax benefit (1,571)
Noncash interest expense 21 32
Equity in earnings of affiliates (1,926) (422)
Recoupment of take-or-pay
liability (58) (7)
------- -------
Cash provided by operations
before working capital changes 2,344 1,970
Changes in assets and liabilities
provided (used) cash net of
noncash activity:
Accrued oil and gas sales (225) 729
Due from affiliates 31 (817)
Prepaid and other assets 41 16
Accounts payable and accrued
liabilities (1,385) 602
Payable to affiliate (247)
-------- -------
Net cash provided by operating
activities 806 2,253
------- -------
INVESTING ACTIVITIES:
Additions to oil and gas
properties (287) (263)
Exploration and development costs
incurred (1,593) (2,965)
Proceeds from oil and gas
property sales 174 381
Distributions received from
affiliates 286 158
------- -------
Net cash used in investing
activities (1,420) (2,689)
------- -------
FINANCING ACTIVITIES:
Repurchase and retirement of
common stock (1,316)
Proceeds from long-term debt 1,000
Payments on contract settlement
obligation (118) (126)
------- -------
Net cash used in financing
activities (434) (126)
------- -------
Net decrease in cash and cash
equivalents (1,048) (562)
CASH AND CASH EQUIVALENTS:
Balance, beginning of period 1,139 2,779
------- ------
Balance, end of period $ 91 $ 2,217
======= ======
<F1>
The accompanying notes are an integral part
of the financial statements.
</TABLE>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a
Delaware corporation engaged in the development, production, sale and
transportation of oil and gas, and in the acquisition, exploration, development
and operation of oil and gas properties. The Company's properties are primarily
located in the Rocky Mountain, Mid-Continent, Texas and Gulf Coast regions of
the United States.
The interim financial data in the accompanying financial statements are
unaudited; however, in the opinion of management, the interim data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods. These financial
statements should be read in conjunction with the financial statements and
accompanying footnotes included in the Company's December 31, 1995 Annual Report
on Form 10-K.
NOTE 2 - ACCOUNTING POLICIES
CONSOLIDATION
The Company accounts for its interest in affiliated oil and gas partnerships and
limited liability companies using the proportionate consolidation method of
accounting. The accompanying financial statements include the activities of the
Company and its pro rata share of the activities of Hallwood Energy Partners, L.
P. ("HEP").
TREASURY STOCK
As the Company owned approximately 19% of the outstanding units of HEP which
owns approximately 44% and 40% of the Company's common stock, the Company had an
interest in 85,191 and 83,980 of its own shares at March 31, 1996 and December
31, 1995, respectively. These shares are treated as treasury stock in the
accompanying financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period. The share and per share
amounts for all periods presented have been restated to give effect to a one for
ten share reverse split which was effective November 9, 1995.
NOTE 3 - DEBT
During the first quarter of 1995, the Company and its banks amended their credit
agreement to extend the maturity date to May 31, 1997. As of March 31, 1996,
the Company has borrowed $13,000,000 against the credit line under which the
borrowing base is currently $22,000,000. Effective April 1, 1996, HCRC paid off
its proportional share of the bank debt of Hallwood Spraberry Drilling Company,
L.L.C. ("HSD"). The ownership of HSD's properties was transferred directly to
HCRC, HEP and Hallwood Energy Corporation ("HEC") (the general partner of HEP).
HCRC mortgaged its share of the HSD properties to its lenders and borrowed an
additional $7,000,000 under its Credit Agreement to fund the repayment of the
debt. HCRC's borrowing base is further reduced by an outstanding contract
settlement obligation of $901,000; therefore, unused borrowing base totaled
$1,099,000 at May 10, 1996.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus 1.875%, (ii) the Euro-
Dollar rate plus 1.75% or (iii) the higher of the prime rate of Morgan Guaranty
Trust or the sum of one-half of 1% plus the Federal funds rate, plus .75% (7.06%
at March 31, 1996). Interest is payable at least quarterly, and quarterly
principal payments, as adjusted for the additional borrowing in April 1996 of
$1,250,000, commence May 31, 1997. The credit facility is secured by a first
lien on approximately 60% in value of the Company's oil and gas properties.
HCRC has entered into contracts to hedge its interest rate payments on
$7,000,000 of its debt for 1996 and 1997 and $5,000,000 for 1998. HCRC does
not use the hedges for trading purposes, but rather for the purpose of providing
a measure of predictability for a portion of HCRC's interest payments under its
debt agreement which has a floating interest rate. In general, it is HCRC's
goal to hedge 50% of the principal amount of its debt for each year of the
remaining term of the debt. HCRC has entered into two 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 other of which is an interest rate swap with a
fixed rate of 5.75%. The amounts received or paid upon settlement of these
transactions are recognized as interest expense at the time the interest
payments are due.
NOTE 4 - ODD LOT REPURCHASE
The Company initiated an offer to repurchase odd lot holdings of 99 or fewer
shares from its shareholders of record as of November 30, 1995. The offer was
initially for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 98,869 shares through the January 26, 1996 closing date. The repurchase
price was $24.09 per share.
On April 1, 1996, HCRC initiated another offer to purchase holdings of 99 shares
or fewer from its shareholders of record as of March 25, 1996. The offer was
for the period from April 1, 1996 through May 3, 1996. The Company repurchased
a total of 25,891 shares at a purchase price of $34.00 per share. HCRC intends
to resell half of these shares to HEP at the price paid by HCRC for such shares.
NOTE 5 - STATEMENT OF CASH FLOWS
Cash paid for interest during the three months ended March 31, 1996 and March
31, 1995 was $231,000 and $134,000, respectively.
NOTE 6 - LEGAL PROCEEDINGS
On April 23, 1992, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Tappe v. Hallwood Consolidated Resources Corporation,
Hallwood Consolidated Partners, L. P., Hallwood Oil and Gas, Inc., Hallwood
Energy Partners, L.P., and Hallwood Petroleum, Inc. (C.A. No. 12536). The
lawsuit seeks to rescind the conversion of the limited partnership into a
corporation ("Conversion") and to recover damages in unspecified amounts. The
plaintiff also seeks class certification to represent similarly situated HCP
unitholders. In general, the suit alleges that the defendants breached
fiduciary duties to HCP unitholders by, among other things, proposing allocation
of common stock in the Conversion on a basis that the plaintiff alleges is
unfair, failing to require that the allocation be approved by an independent
third party, causing the costs of proposing the Conversion to be borne
indirectly by the partners of HCP whether or not the Conversion is completed and
failing to disclose certain matters in the Consent Statement/Prospectus
soliciting consents to the Conversion. The defendants believe that they fully
considered and disclosed all material information in connection with the
Conversion, and they believe that the suit is without merit. HCRC plans to
vigorously defend this case, but because of its early stages, cannot predict the
outcome of this matter or any possible effect an adverse outcome might have.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The Company generated $806,000 of cash flow from operating activities during the
first three months of 1996.
The other primary cash inflows were:
. $1,000,000 in proceeds from long-term borrowings
. $286,000 from distributions received from affiliates
. $174,000 from oil and gas property sales
Cash was used for:
. $1,880,000 for additions to property and exploration and development costs
. $1,316,000 for the repurchase and retirement of common stock
. $118,000 for payments of contract settlement obligation
This resulted in a decrease in the Company's cash of $1,048,000 for the three
months ended March 31, 1996 from $1,139,000 at December 31, 1995 to $91,000 at
March 31, 1996.
DEVELOPMENT PROJECTS AND ACQUISITIONS
Through March 31, 1996, HCRC has incurred approximately $1,300,000 for an odd
lot share repurchase, discussed below, $1,880,000 directly and $249,000
indirectly through its investment in Hallwood Spraberry Drilling Company, L.L.C.
("HSD") for exploration, development and acquisition costs toward the 1996
capital budget of $12,500,000. The direct expenditures were comprised of
approximately $1,593,000 for domestic exploration and development expenditures
and approximately $287,000 for property acquisitions and land. The indirect
expenditures were comprised of drilling costs. A description of significant
exploration and development projects to date in 1996 follows.
HCRC has incurred approximately $249,000 in the first quarter, net to HCRC's
interest, for four recompletions and one drilled well in the Rocker "b" Ranch in
Reagan County, Texas. This activity increased HCRC's share of production by 115
equivalent barrels of oil per day. Effective April 1, 1996, HCRC repaid its
share of HSD's third party loan through additional borrowings on its bank credit
agreement and assumed direct ownership of its share of HSD's properties. There
are still 10 undrilled locations which were recorded as proved reserves at
December 31, 1995 which HCRC plans to drill at some date in the future. During
the first quarter, HCRC also acquired interests in five additional producing
leases on the Rocker "b" Ranch for a total of $93,000. HCRC plans to recomplete
at least seven wells from this acquisition by year end. The results of the
first two recompletions, which are in progress, appear favorable.
HCRC has had continued success in the West Texas Kermit area in 1996, drilling
or participating in the drilling of six successful wells in the first quarter
for approximately $295,000. These new wells are capable of producing
approximately 800 gross equivalent barrels of oil per day but are currently
limited to approximately 350 gross equivalent barrels of oil per day due to
limitations on production imposed by state laws and regulations. HCRC's
interest in these wells averages 18%. HCRC is committed to drilling at least
seven more wells in the second quarter and has plans for several more
recompletions in the second half of 1996.
HCRC also continues to participate in a nonoperated development program in the
Southeastern New Mexico area which began in late 1994, with two more successful
wells being drilled for a net cost of approximately $69,000. HCRC has a 5%
interest in these wells which are currently producing at a gross rate of 750
equivalent barrels of oil per day. HCRC is committed to further participation
in this program and currently plans to drill at least one well in the second
quarter.
Under a farmout agreement completed in 1995, HCRC is participating in several
multiple lateral, horizontal wells in the Giddings Austin Chalk play in Lee
County, Texas. Two successful wells have been drilled thus far, and a third
well is currently being drilled. HCRC's interests in the area range from 7% to
10%, with average gross initial production rates of 750 barrels of oil per day
on the first two wells. HCRC's cost for both wells was approximately $50,000.
HCRC has also participated in the drilling of two nonoperated wells in Williams
County, North Dakota in the latter part of 1995 and the first quarter of 1996,
one of which was dry and the other only marginally successful, for a total cost
of approximately $200,000. HCRC also drilled an exploratory dry hole in
Richland County, Montana at a cost of $120,000. HCRC is evaluating an Interlake
Formation development well drilled in April.
In the San Juan Basin of New Mexico, HCRC successfully recompleted a well in the
first quarter of 1996 for approximately $75,000. Current production on this
well is approximately 1,200 mcf of gas per day which equals the initial
production rates experienced when the well was drilled in 1990. Rates prior to
this workover were approximately 400 mcf of gas per day. HCRC owns
approximately 45% of this well.
HCRC acquired three dimensional (3-D) seismic data in several different areas in
the latter part of 1995 and early 1996. Expenditures thus far in 1996 total
approximately $300,000, and HCRC plans to expend at least another $200,000 in
the second quarter of 1996. Drilling of resulting prospects will commence in
the second quarter of 1996.
HCRC is also actively evaluating acquisitions in strategic areas. Such
acquisitions would be financed using the capital budget, supplemented by
external financing when appropriate.
PROPERTY SALES
During the first quarter of 1996, HCRC received approximately $175,000 for the
sale of its interests in the Hoople Field in Crosby County, Texas. HCRC also
received another $21,000 in early April for the sale of various nonstrategic
properties at auction. HCRC is evaluating offers on various properties it owns.
ODD LOT REPURCHASE
The Company made an offer to repurchase odd lot holdings of 99 or fewer shares
from its shareholders of record as of November 30, 1995. The offer was
initially for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 98,869 shares through the January 26, 1996 closing date for $2,382,000 at a
purchase price of $24.09 per share of which $1,316,000 was expended during 1996.
On April 1, 1996, HCRC made another offer to purchase holdings of 99 shares or
fewer from its shareholders of record as of March 25, 1996. The offer was for
the period from April 1, 1996 through May 3, 1996. The Company repurchased a
total of 25,891 shares at a purchase price of $34.00 per share. HCRC intends to
resell half of these shares to HEP at the price paid by HCRC for such shares.
FINANCING
During the first quarter of 1995, the Company and its banks amended their credit
agreement to extend the maturity date of the line of credit to May 31, 1997. As
of March 31, 1996, the Company has borrowed $13,000,000 against the credit line
under which the borrowing base is currently $22,000,000. Effective April 1,
1996, HCRC paid off its proportional share of the bank debt of Hallwood
Spraberry Drilling Company, L.L.C. ("HSD"). The ownership of HSD's properties
was transferred directly to HCRC, HEP and Hallwood Energy Corporation ("HEC")
(the general partner of HEP). HCRC mortgaged its share of the HSD properties to
its lenders and borrowed an additional $7,000,000 under its Credit Agreement to
fund the repayment of the debt. HCRC's borrowing base is further reduced by
an outstanding contract settlement obligation of $901,000; therefore, unused
borrowing base totaled $1,099,000 at May 10, 1996.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus 1.875%, (ii) the Euro-
Dollar rate plus 1.75% or (iii) the higher of the prime rate of Morgan Guaranty
Trust or the sum of one-half of 1% plus the Federal funds rate, plus .75% (7.06%
at March 31, 1996). Interest is payable at least quarterly, and quarterly
principal payments, as adjusted for the additional borrowing during April 1996
of $1,250,000, commence May 31, 1997. The credit facility is secured by a first
lien on approximately 60% in value of the Company's oil and gas properties.
HCRC has entered into contracts to hedge its interest rate payments on
$7,000,000 of its debt for 1996 and 1997 and $5,000,000 for 1998. HCRC does
not use the hedges for trading purposes, but rather for the purpose of providing
a measure of predictability for a portion of HCRC's interest payments under its
debt agreement which has a floating interest rate. In general, it is HCRC's
goal to hedge 50% of the principal amount of its debt for each year of the
remaining term of the debt. HCRC has entered into two 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 other is an interest rate swap with a fixed rate
of 7.50%. The amounts received or paid upon settlement of these transactions
are recognized as interest expense at the time the interest payments are due.
INFLATION AND CHANGING PRICES
PRICES
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of the Company, 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 1995 and through
the first quarter of 1996. The following table sets forth the average price
received each quarter by the Company and the effects of the hedging transactions
described below:
<TABLE>
<CAPTION>
Oil Oil
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(bbl) (bbl)
<S> <C> <C>
First quarter 1995 $17.08 $17.54
Second quarter 1995 17.01 17.15
Third quarter 1995 16.17 16.60
Fourth quarter 1995 16.93 17.29
First quarter 1996 17.92 17.86
</TABLE>
<TABLE>
<CAPTION>
Gas Gas
(excluding the (including the
effects of effects of
hedging hedging
transactions) transactions)
(mcf) (mcf)
<S> <C> <C>
First quarter 1995 $1.43 $1.63
Second quarter 1995 1.37 1.53
Third quarter 1995 1.26 1.45
Fourth quarter 1995 1.76 1.86
First quarter 1996 2.00 1.94
The Company 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 drops and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The revenue associated with
these contracts is recognized as oil or gas revenue at the time the hedged
volumes are sold.
The following table provides a summary of the Company's outstanding financial
contracts:
</TABLE>
<TABLE>
<CAPTION>
Oil
Percent of Direct Contract
Period Production Hedged Floor Price
(per bbl)
<S> <C> <C>
Last nine months of
1996 17% $14.71
1997 15% 14.38
1998 15% 14.32
1999 5% 14.13
</TABLE>
Between 30% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HCRC will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus between 25% and 75% of the difference between the contract price and
the posted futures price if the posted futures price is greater than the
contract price. Between 92% and 100% of the volumes hedged in each year are
subject to a collar agreement whereby HCRC will receive the contract price if
the spot price is lower than the contract price, the cap price if the spot price
is higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap prices range from $16.25 to $18.60
per barrel.
<TABLE>
<CAPTION>
Gas
Percent of Direct
Production Contract
Period Hedged Floor Price
(per mcf)
<S> <C> <C>
Last nine months of
1996 40% $1.98
1997 34% 2.00
1998 32% 2.07
1999 12% 1.85
2000 14% 1.86
</TABLE>
Between 0% and 57% of the gas volumes hedged in each year are subject to a
collar agreement whereby HCRC will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price, and the spot price if that price is between the contract price
and the cap price. The cap prices range from $2.65 to $2.93 per mcf.
During the second quarter through April 20, 1996, the oil price (for barrels not
hedged) is averaging between $20.00 and $23.00 per barrel and the weighted
average price of natural gas (for mcf not hedged) is averaging between $1.15 and
$3.00 per mcf.
INFLATION
Inflation is not anticipated to have a material impact on the Company in 1996.
RESULTS OF OPERATIONS
The following tables are presented to contrast HCRC's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative.
The "direct owned" column represents HCRC's direct royalty and working interest
shares interest in oil and gas properties. The "HEP" column represents HCRC's
share of the results of operations of HEP; HCRC owned approximately 9% of the
outstanding limited partner units of HEP during 1995 and 19% during 1996.
<TABLE>
<CAPTION>
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
FOR THE QUARTERS ENDED MARCH 31, 1996 AND 1995
For the Quarter Ended March 31, 1996
Direct
Owned HEP Total
<S> <C> <C> <C>
Oil production (bbl) 179 49 228
Gas production (mcf) 1,566 568 2,134
Average oil price $17.84 $17.96 $17.86
Average gas price $ 1.85 $ 2.18 $ 1.94
Oil revenue $ 3,193 $ 880 $ 4,073
Gas revenue 2,894 1,237 4,131
Pipeline and other 211 135 346
Contract settlement 10 10
Interest income 4 13 17
------- ------- -------
Total revenue 6,312 2,265 8,577
------ ------ ------
Production operating expense 2,080 594 2,674
General and administrative
expense 613 211 824
Interest expense 529 211 740
Depreciation, depletion, and
amortization 1,928 629 2,557
-------- ------- -------
Total expense 5,150 1,645 6,795
------- ------ -------
Income (Loss) before Income
Taxes 1,162 620 1,782
------ ------ ------
Provision (Benefit) for
Income Taxes:
Current 32 32
Deferred
------- ------- -------
32 32
------- ------- -------
Net income (loss) $ 1,130 $ 620 $ 1,750
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended March 31, 1995
Direct
Owned HEP Total
<S> <C> <C> <C>
Oil production (bbl) 117 18 135
Gas production (mcf) 1,256 238 1,494
Average oil price $17.39 $18.50 $17.54
Average gas price $ 1.57 $ 1.95 $ 1.63
Oil revenue $ 2,035 $ 333 $ 2,368
Gas revenue 1,978 464 2,442
Pipeline and other 627 47 674
Contract settlement 9 9
Interest income 35 8 43
------- ------- -------
Total revenue 4,684 852 5,536
------ ------ ------
Production operating expense 1,608 254 1,862
General and administrative
expense 791 131 922
Interest expense 219 87 306
Depreciation, depletion, and
amortization 691 1,114 1,805
Impairment of oil and gas
properties 4,066 357 4,423
Other 35 35
------- ------ -------
Total expense 7,375 1,978 9,353
------ ------ ------
Income (Loss) before Income
Taxes (2,691) (1,126) (3,817)
------ ------ ------
Provision (Benefit) for
Income Taxes:
Current 44 44
Deferred (1,571) (1,571)
------ ------- ------
(1,527) (1,527)
------ ------- ------
Net income (loss) $(1,164) $(1,126) $(2,290)
====== ====== ======
</TABLE>
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
OIL REVENUE
Oil revenue increased $1,705,000, during the first quarter of 1996 as compared
with the first quarter of 1995. The increase in revenue is comprised of an
increase in oil production from 135,000 barrels in 1995 to 228,000 barrels in
1996 combined with an increase in the average oil price from $17.54 per barrel
in 1995 to $17.86 per barrel in 1996. The increase in production is due to
increased production from exploratory and developmental drilling projects in
Montana, Wyoming and West Texas, partially offset by normal production declines.
Because the Company's hedged oil prices were lower than average posted prices in
1996, the effect of hedging transactions, as described above, was to decrease
the Company's average oil price from $17.92 per barrel to $17.86 per barrel,
resulting in a $14,000 decrease in revenue.
GAS REVENUE
Gas revenue increased $1,689,000 during the first quarter of 1996 as compared
with the first quarter of 1995. The increase is comprised of an increase in gas
production from 1,494,000 mcf in 1995 to 2,134,000 mcf in 1996, combined with an
increase in price from $1.63 per mcf in 1995 to $1.94 per mcf in 1996. The
increase in production is due to increased production from exploratory and
developmental drilling projects in Montana, Wyoming and West Texas, partially
offset by normal production declines. The effect of the Company's hedging
activity was to decrease the Company's average gas price from $2.00 per mcf to
$1.94 per mcf, resulting in a $128,000 decrease in revenue.
PIPELINE AND OTHER
Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive payments from certain wells in San Juan County and other miscellaneous
items. Pipeline and other revenue decreased $328,000 during the first quarter
of 1996 as compared with the first quarter of 1995. The decrease is primarily
due to the receipt of a take-or-pay settlement during 1995.
INTEREST INCOME
Interest income decreased $26,000 during the first quarter of 1996 as compared
with the first quarter of 1995 primarily due to a lower average cash balance
during 1996.
PRODUCTION OPERATING EXPENSE
Production operating expense increased $812,000 during the first quarter of 1996
as compared with the first quarter of 1995, primarily as a result of increased
production taxes due to the increased oil and gas revenue as discussed
previously.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports as well as
allocated internal overhead incurred by Hallwood Petroleum, Inc. ("HPI"), an
affiliate of HCRC, which manages and operates certain oil and gas properties on
behalf of the Company. These costs decreased $98,000 during the first quarter
of 1996 as compared with the first quarter of 1995, because of a decrease in
allocated internal overhead expenses.
INTEREST EXPENSE
Interest expense increased $434,000 during the first quarter of 1996 as compared
with the first quarter of 1995. The increase is primarily the result of a
higher outstanding debt balance during 1996.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization expense increased $752,000 during the
first quarter of 1996 as compared with the first quarter of 1995. The increase
is due to a higher depletion rate caused by the increase in production as
previously discussed.
IMPAIRMENT OF OIL AND GAS PROPERTIES
Impairment of oil and gas properties represents the write-off of the Company's
Indonesian operations.
PROVISION (BENEFIT) FOR INCOME TAXES
Income taxes for the first quarter of 1996 are less than would be expected using
the statutory rate due to the change in the valuation allowance due to the
utilization of net operating loss carryforwards.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 16 of Form 10-K for the year
ended December 31, 1995, and Item 1 - Note 6 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
10.12 - Amendment No. 2 to Amended and Restated Credit Agreement
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
Date: May 10, 1996 By: /s/Robert S. Pfeiffer
Robert S. Pfeiffer,
Vice President
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended March 31, 1996 for Hallwood Consolidated Resources
Corporation and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<CIK> 0000883953
<NAME> HALLWOOD CONSOLIDATED RESOURCES CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 91
<SECURITIES> 0
<RECEIVABLES> 3,249
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,344
<PP&E> 270,839
<DEPRECIATION> 205,847
<TOTAL-ASSETS> 73,533
<CURRENT-LIABILITIES> 6,472
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 36,927
<TOTAL-LIABILITY-AND-EQUITY> 73,533
<SALES> 8,550
<TOTAL-REVENUES> 8,577
<CGS> 0
<TOTAL-COSTS> 6,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 740
<INCOME-PRETAX> 1,782
<INCOME-TAX> 32
<INCOME-CONTINUING> 1,750
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,750
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
</TABLE>
EXHIBIT 10.12 [EXECUTION COPY]
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT dated as of April 1, 1996 among HALLWOOD CONSOLIDATED
RESOURCES CORPORATION, a Delaware corporation ("HCRC") and HALLWOOD CONSOLIDATED
PARTNERS, L.P., a Colorado limited partnership (individually a "Borrower" and
collectively the "Borrowers"), the BANKS listed on the signature pages hereof
(the "Banks"), First Union National Bank of North Carolina as collateral agent
(the "Collateral Agent") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent
(the "Agent").
W I T N E S S E T H :
WHEREAS, the Borrowers, the Banks, the Collateral Agent and the Agent
have entered into an Amended and Restated Credit Agreement dated as of March 31,
1995 (as amended, the "Credit Agreement"); and
WHEREAS, the parties hereto have agreed to increase the respective
amounts of the Commitments of the Banks under the Agreement and to delete a
certain covenant set forth in the Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically
defined herein, each term used herein which is defined in Credit Agreement shall
have the meaning assigned to such term in the Credit Agreement. Each reference
to "hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Credit Agreement" and each other similar reference
contained in the Credit Agreement shall from and after the Effective Date (as
defined in Section 9) refer to the Credit Agreement as amended hereby.
SECTION 2. Increase in Commitments. With effect from and including
the Effective Date, the Commitment of each Bank shall be the amount set forth
opposite the name of such Bank on the signature pages hereof, as such amount may
be reduced from time to time pursuant to Section 2.09 of the Credit Agreement.
SECTION 3. Amendment of the Definition of Notes. The definition of
"Notes" contained in Section 1.01 of the Credit Agreement is amended to read in
its entirety as follows: "'Notes' means promissory notes of the Borrowers,
substantially in the form of Exhibit A hereto, evidencing the obligation of the
Borrowers to repay the Loans (including without limitation all such promissory
notes dated as of March 29, 1996), together with any and all renewals,
extensions for any period, increases or rearrangements thereof, and 'Note' means
any one of such promissory notes issued hereunder."
SECTION 4. Additional Permitted Investments. Section 4.19(o) of the
Credit Agreement is amended to read in its entirety as follows: "(o) purchases
by HCRC (in addition to any such purchases permitted pursuant to clause (m)) of
shares of its common stock pursuant to an odd lot repurchase program in an
amount not to exceed $2,930,000; provided that such purchases are made on or
prior to September 30, 1996; and".
SECTION 5. Deletion of the Available Cash Covenant. Section 4.37 of
the Credit Agreement is deleted in its entirety.
SECTION 6. Additional Opinions of Counsel. On or prior to 30 days
after the Effective Date, the Borrowers shall deliver to the Collateral Agent
from counsel satisfactory to it in Colorado, Kansas, Louisiana, New Mexico,
Texas and Montana a favorable written opinion as to (i) the validity and binding
effect of (a) the New Texas Mortgage (as defined in Section 9(v)), (b) the
Mortgages as modified by the Modification of Mortgages (as defined in Section
9(v))and (c) all other Collateral Documents (in each case as amended by the
amendments contemplated by Section 9(iv) below), (ii) the perfection of the Lien
created under the Mortgages as modified by the Modification of Mortgages, the
New Texas Mortgage and all other Collateral Documents under the law of such
jurisdiction after giving effect to the transactions contemplated by this
Amendment, and (iii) such other matters incident to the transactions herein
contemplated as the Required Banks may reasonably request. Failure by the
Borrowers to deliver any such opinion shall constitute an "Event of Default"
under the Credit Agreement and shall entitle the Banks and the Collateral Agent
to exercise any remedies granted to the Banks and the Collateral Agent under the
Credit Agreement and the Collateral Documents.
SECTION 7. New Schedule C to the Credit Agreement. Schedule C to the
Credit Agreement is replaced in its entirety by Schedule C to this Amendment.
SECTION 8. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 9. Counterparts; Effectiveness. This Amendment may be signed
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Amendment shall become effective on the date (the "Effective Date") upon
which the Agent shall have received:
(i) duly executed counterparts hereof signed by each of the parties
hereto (or, in the case of any party as to which an executed counterpart
shall not have been received, the Agent shall have received telegraphic,
telex or other written confirmation from such party of execution of a
counterpart hereof by such party),
(ii) a duly executed promissory note for the account of each Bank,
substantially in the form of Exhibit A to the Credit Agreement and in the
amount of such Bank's Commitment as set forth on the signature pages
hereof, dated on or prior to the Effective Date;
(iii) an opinion of Andrews & Kurth L.L.P. substantially in the form
of Exhibit A hereto and covering such additional matters as the Required
Banks may reasonably request;
(iv) evidence satisfactory to the Banks in their sole discretion that
each Collateral Document in existence prior to the Effective Date shall
have been amended in a manner satisfactory to the Banks in their sole
discretion to ensure that, immediately after giving effect to this
Amendment, the Lien created under each such Collateral Document shall
continue to constitute a perfected first priority Lien in favor of the
Collateral Agent securing all obligations of the Borrowers under the Credit
Agreement as amended by this Amendment;
(v) evidence satisfactory to the Banks in their sole discretion that
(w) the Liens created under the mortgage described in Exhibit C with
respect to the properties listed therein (collectively, the "Enron
Properties") shall have been released, (x) HSDC shall have conveyed each
Enron Property to HCRC or Hallwood Energy Partners, L.P., as beneficial
owners, (y) the Borrowers shall have duly executed (a) a Supplement and
Modification of Mortgages substantially in the form of Exhibit B (the
"Modification of Mortgages") with respect to each Mortgage and (b) a
Mortgage substantially in the form of Exhibit D (the "New Texas Mortgage")
and (z) the Lien created under each Mortgage as amended through the
Modification of Mortgages and the New Texas Mortgage shall constitute a
perfected first priority Lien in favor of the Collateral Agent; provided
that the conditions set forth in each clause of this subsection (v) shall
be deemed to have been satisfied if the Banks shall have received evidence
satisfactory to them in their sole discretion that such conditions shall be
satisfied immediately after the making of the Loans to be made by the Banks
on the Effective Date pursuant to the Advance Notice delivered by the
Borrowers to the Agent on March 26, 1996 (the "Enron Loans"); and
(vi) evidence satisfactory to the Banks in their sole discretion that
(x) the Enron Agreement and all commitments under the Enron Agreement shall
have been terminated and (y) all loans outstanding thereunder (together
with accrued interest thereon) and all fees and other amounts due and
payable thereunder shall have been paid in full; provided that the
conditions set forth in each clause of this subsection (vi) shall be deemed
to have been satisfied if the Banks shall have received evidence
satisfactory to them in their sole discretion that such conditions shall be
satisfied immediately after the making of the Enron Loans.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first above written.
BORROWERS:
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By /s/Robert S. Pfeiffer
--------------------------
Title: Vice President
HALLWOOD CONSOLIDATED PARTNERS,
L.P.
By: HALLWOOD CONSOLIDATED
RESOURCES CORPORATION
By /s/Robert S. Pfeiffer
--------------------------
Title: Vice President
The General Partner of Hallwood
Consolidated Partners, L.P.
BANKS:
Commitment:
$7,333,334 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By /s/Vernon M. Ford, Jr.
--------------------------
Name: Vernon M. Ford, Jr.
Title: Vice President
$7,333,333 FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By /s/Michael J. Kolosowsky
--------------------------
Name: Michael J. Kolosowsky
Title: Vice President
$7,333,333 NATIONSBANK OF TEXAS, N.A.
By /s/Richard P. Stults
--------------------------
Title: Vice President
