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, 1997
|_| 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 of 84-1176750
incorporation or organization) (I.R.S. Employer
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 |_|
Shares of Common Stock outstanding at August 14, 1997 2,977,542
Page 1 of 21
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
June 30, December 31,
1997 1996
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 987 $ 628
Accrued oil and gas revenue 3,218 4,808
Due from affiliates 1,697 897
Prepaid and other assets 120 493
Current assets of affiliates 3,145 3,976
Total current assets 9,167 10,802
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved oil and gas properties 284,830 278,581
Unproved mineral interests - domestic 1,758 1,240
Total 286,588 279,821
Less - accumulated depreciation, depletion,
amortization and impairment (216,537) (212,536)
Net property, plant and equipment 70,051 67,285
OTHER ASSETS
Deferred tax asset 350 350
Noncurrent assets of affiliates 23 31
Total other assets 373 381
TOTAL ASSETS $ 79,591 $ 78,468
<FN>
(Continued on the following page)
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except Shares)
June 30, December 31,
1997 1996
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities $ 2,536 $ 2,273
Current portion of contract settlement obligation 992
Current portion of long-term debt 3,750
Current liabilities of affiliates 5,198 4,826
Total current liabilities 8,726 10,849
NONCURRENT LIABILITIES
Contract settlement obligation 948
Long-term debt 17,000 16,250
Long-term obligations of affiliates 6,596 7,243
Deferred liability 102 117
Total noncurrent liabilities 23,698 24,558
Total liabilities 32,424 35,407
STOCKHOLDERS' EQUITY
Common stock, par value $.01; 10,000,000 shares
authorized; 2,977,542 shares issued in 1997 and 1996 30 30
Additional paid-in capital 80,060 80,071
Accumulated deficit (29,049) (33,166)
Treasury stock - 259,278 shares in 1997 and 1996 (3,874) (3,874)
Stockholders' equity - net 47,167 43,061
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 79,591 $ 78,468
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Three Months Ended
June 30,
1997 1996
REVENUES:
<S> <C> <C>
Oil revenue $ 2,951 $ 4,380
Gas revenue 3,360 3,643
Pipeline and other 628 362
Contract settlement 8 11
Interest income 77 26
7,024 8,422
EXPENSES:
Production operating 2,432 2,556
General and administrative 884 797
Interest 566 604
Depreciation, depletion and amortization 1,934 2,350
Other 116
5,816 6,423
INCOME BEFORE INCOME TAXES 1,208 1,999
PROVISION FOR INCOME TAXES:
Current 56 36
NET INCOME $ 1,152 $ 1,963
NET INCOME PER SHARE $ .41 $ .72
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 2,790 2,712
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per Share data)
For the Six Months Ended
June 30,
1997 1996
REVENUES:
<S> <C> <C>
Oil revenue $ 6,865 $ 8,453
Gas revenue 8,134 7,774
Pipeline and other 1,028 708
Contract settlement 15 21
Interest income 117 43
16,159 16,999
EXPENSES:
Production operating 4,947 5,230
General and administrative 1,785 1,621
Interest 1,162 1,344
Depreciation, depletion and amortization 4,001 4,907
Other 116
11,895 13,218
INCOME BEFORE INCOME TAXES 4,264 3,781
PROVISION FOR INCOME TAXES:
Current 147 68
NET INCOME $ 4,117 $ 3,713
NET INCOME PER SHARE $ 1.47 $ 1.35
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING 2,793 2,748
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For the Six Months Ended
June 30,
1997 1996
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,117 $ 3,713
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation, depletion and amortization 4,001 4,907
Noncash interest expense 44 21
Undistributed earnings of affiliates (2,131) (3,123)
Recoupment of take-or-pay liability (15) (62)
Cash provided by operations before
working capital changes 6,016 5,456
Changes in assets and liabilities provided (used) cash net of noncash
activity:
Accrued oil and gas sales 1,590 (824)
Due from affiliates (870) (1,305)
Prepaid and other assets 373 (137)
Accounts payable and accrued liabilities 263 (1,790)
Net cash provided by operating activities 7,372 1,400
INVESTING ACTIVITIES:
Additions to oil and gas properties (1,498) (393)
Exploration and development costs incurred (3,102) (3,270)
Proceeds from oil and gas property sales 26 1,296
Refinance of Spraberry investment (6,338)
Distributions received from affiliates 572 572
Other (11)
Net cash used in investing activities (4,013) (8,133)
FINANCING ACTIVITIES:
Repurchase and retirement of common stock (1,752)
Proceeds from long-term debt 8,000
Payments on long-term debt (3,000)
Payments on contract settlement obligation (119)
Net cash provided by (used in) financing activities (3,000) 6,129
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 359 (604)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 628 1,139
END OF PERIOD $ 987 $ 535
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
-6-
<PAGE>
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 notes included in the Company's December 31, 1996 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
At June 30, 1997 and December 31, 1996 the Company owns approximately 19% of the
outstanding units of HEP which owns approximately 46% of the Company's common
stock; consequently, the Company has an interest in 259,278 of its own shares.
These shares are treated as treasury stock in the accompanying financial
statements.
Computation of Net Income Per Share
Net income per share is computed by dividing net income by the weighted average
number of common shares and common share equivalents outstanding during the
reporting period. All share and per share information has been restated to
reflect the three-for-one stock split described in Note 7. The stock options
granted during 1995 are considered to be common share equivalents since January
1, 1996 because the market price of the common stock has exceeded the exercise
price of the options since that date. The number of common share equivalents was
computed using the treasury stock method which assumes that the increase in the
number of common shares is reduced by the number of common shares which could
have been repurchased by the Company with the proceeds from the exercise of the
options (which were assumed to have been made at the average market price of the
common stock during the reporting period).
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 will require
restatement of all prior period EPS data presented; earlier application is not
permitted.
-7-
<PAGE>
A comparison of EPS shown in the accompany financial statements with the pro
forma amounts that would have been determined in accordance with SFAS 128 is as
follows:
<TABLE>
<CAPTION>
For the Quarter Ended June 30, For the Six Months Ended June 30,
1997 1996 1997 1996
Primary (Basic):
<S> <C> <C> <C> <C>
As reported $.41 $.72 $1.47 $1.35
Pro forma .42 .72 1.51 1.35
Fully Diluted (Diluted):
As reported .41 .72 1.47 1.35
Pro forma .41 .70 1.45 1.32
</TABLE>
Reclassifications
Certain reclassifications have been made to the prior period amounts to conform
to the classifications used in the current period.
NOTE 3 - DEBT
During the second quarter of 1997 the Company and its banks amended their Credit
Agreement to extend the maturity date to May 31, 1999. The borrowing base is
currently $25,000,000, and as of June 30, 1997, the Company has borrowed
$17,000,000 against the credit line. HCRC's borrowing base is further reduced by
an outstanding contract settlement obligation of $992,000; therefore, its unused
borrowing base totaled $7,008,000 at August 14, 1997.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus from 1.375% to 1.875%,
(ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the higher of the
prime rate of Morgan Guaranty Trust or the sum of one-half of 1% plus the
Federal funds rate, plus .75%. The applicable interest rate was 7.2% at June 30,
1997. Interest is payable at least quarterly, and quarterly principal payments
of $1,062,500 commence May 31, 1999. The credit facility is secured by a first
lien on approximately 80% in value of the Company's oil and gas properties.
HCRC has entered into contracts to hedge its interest rate payments on
$10,000,000 of its debt for each of 1997 and 1998 and $5,000,000 for each of
1999 and 2000. 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 the next two years and 25% for each year of the remaining term of the debt.
HCRC has entered into four hedges, of which one 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 4 - STATEMENTS OF CASH FLOWS
Cash paid for interest during the six months ended June 30, 1997 and 1996 was
$772,000 and $604,000, respectively.
-8-
<PAGE>
NOTE 5 - STOCK OPTION PLAN
During the second quarter of 1997, the Company adopted a stock option plan
covering 159,000 shares of Common Stock and granted options for all of the
shares under the plan. The terms of this plan are generally consistent with the
terms of the Company's existing 1995 Stock Option Plan. The options were granted
effective June 17, 1997 at an exercise price of $20.33 per share, which was
equal to the fair market value of the Common Stock on the day of grant. The
options expire on June 17, 2007, unless sooner terminated pursuant to the
provisions of the plan. The options are exercisable one-third on June 17, 1997,
an additional one-third June 17, 1998, and the remaining one-third on June 17,
1999.
NOTE 6 - LEGAL PROCEEDING
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 Hallwood Consolidated Partners, L.P.
("HCP") into the Company ("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 was
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.
NOTE 7 - SUBSEQUENT EVENT
During July 1997, the stockholders of HCRC approved an increase in the number of
authorized shares of its Common Stock from 2,000,000 to 10,000,000. HCRC also
declared a three-for-one split of its outstanding Common Stock. The stock split
was effected by issuing, as a stock dividend, two additional shares of Common
Stock for every share currently outstanding. The stock dividend record date was
August 4 and the payable date was August 11. The stock traded with Due Bills
from August 4 until August 11 and traded Ex-Dividend on August 12. After the
stock split, HCRC has 2,977,542 shares of Common Stock outstanding. All share
and per share information has been restated to reflect this three-for-one stock
split.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash Flow
The Company generated $7,372,000 of cash flow from operating activities during
the first six months of 1997. The other primary cash inflow was $572,000 in
distributions received from affiliates. Cash was primarily used for additions to
property and exploration and development costs of $4,600,000 and payments on
long-term debt of $3,000,000.
This resulted in an increase in the Company's cash of $359,000 for the six
months ended June 30, 1997 from $628,000 at December 31, 1996 to $987,000 at
June 30, 1997.
-9-
<PAGE>
Development Projects and Acquisitions
Through June 30, 1997, HCRC incurred approximately $4,600,000 for exploration,
development and acquisition costs toward the 1997 capital budget of $15,500,000.
The expenditures were comprised of approximately $3,102,000 for exploration and
development and approximately $1,498,000 for property acquisitions.
HCRC's 1997 capital budget is allocated to the following: Permian/Delaware
Basins, Gulf Coast Region, Rocky Mountain Region, and Mid-Continent Region. A
description of HCRC's significant exploration, exploitation, and development
projects to date in 1997 follows.
Permian/Delaware Basins
HCRC has allocated 44% (approximately $6,800,000) of its 1997 capital budget to
the Permian/Delaware Basins located in Texas and Southeastern New Mexico. Thus
far in 1997, HCRC spent approximately $1,900,000 drilling 22 exploitation and
development wells plus five exploration wells, and on the acquisition of
undeveloped acreage and geological and geophysical data. Of the wells that were
drilled, 22 (82%) are a success. During the remainder of 1997, HCRC plans to
drill 36 additional exploitation and development wells and nine exploration
wells. In July, HCRC acquired additional interests in 34 of its existing wells
with potential net volumes of approximately 127,500 equivalent barrels of oil. A
discussion of several of the larger projects within the Basins follows.
In 1996, HCRC became active in the Garden City/Mills project in Glasscock
County, Texas. This project included the acquisition and processing of 66 square
miles of nonproprietary 3-D seismic data and the drilling of one successful
exploratory well prior to the end of 1996. In 1997, HCRC drilled a second
successful 10,000 foot delineation well which is currently producing at a gross
rate of 230 equivalent barrels of oil per day. HCRC's working interest in this
well is 25%. A third well in this area recently failed. HCRC's 1997 costs
incurred in this area to date are approximately $220,000. HCRC will attempt to
drill one additional exploitation well during the remainder of 1997.
The nonoperated Merkel Project consists of 10 square miles of proprietary 3-D
seismic data in Jones, Taylor and Nolan Counties, Texas. HCRC began its
involvement in this area in 1995 with the successful completion of one well. In
1996, HCRC participated in the drilling of eight additional wells, seven of
which were successful. In 1997, HCRC continued its participation with the
drilling of two more successful wells, and four additional wells are currently
underway. HCRC's 1997 costs for these wells to date total approximately
$130,000. HCRC owns an average 12.5% working interest in this area.
Based on the success in the nonoperated Merkel area, HCRC acquired 74 additional
miles of proprietary 3-D seismic data adjacent to the nonoperated area. HCRC
owns an average 30% working interest in these wells, and HPI is the operator.
HCRC has drilled three successful wells and two unsuccessful wells in the area.
Ten additional wells are scheduled to be drilled during the remainder of 1997.
HCRC's 1997 costs to date for drilling and acreage in the area are approximately
$315,000.
HCRC purchased an interest in a 3-D seismic shoot covering 85 square miles of
acreage for the Griffin Project in Gaines County, Texas for $455,000. HCRC has
developed a number of prospects incorporating different geologic ideas which it
plans to pursue in 1997 and future years. The first prospect, a 12,800 foot
Devonian/Silurian well was drilled and subsequently plugged at a cost of
approximately $165,000. HCRC plans to drill 3 additional exploratory wells in
the area in 1997.
In 1996, HCRC acquired 106 square miles of 3-D seismic data on the Cowden Ranch
in Crane County, Texas. In early 1997, an exploratory well was drilled at a
total cost of approximately $230,000. This well was dry, and HCRC does not plan
to continue exploration in this area.
HCRC drilled three successful development and exploitation wells in the
Spraberry area of Texas and plans to drill an additional 10 wells during 1997.
In 1997, HCRC has spent approximately $225,000 in this area.
-10-
<PAGE>
Rocky Mountain Region
At the current date, HCRC has allocated approximately 14% (approximately
$2,100,000) of its 1997 capital budget to the Rocky Mountain Region located in
Colorado, Montana, North Dakota, Northwest New Mexico and Wyoming. To date, HCRC
spent approximately $650,000 on drilling and recompletion of 12 development and
exploitation wells, one exploration well, and acquiring geological and
geophysical data. Seven of these wells are a success, and HCRC plans to drill an
additional 16 wells in this region in 1997. A discussion of major projects
within the region follows.
In the Lone Tree area of Montana, HCRC drilled one exploitation well and
performed two recompletions; one well was a success. Work on a fourth well in
the area increased production on a gross basis by 50 barrels per day. Total 1997
costs for these Montana projects were approximately $95,000.
HCRC also purchased a 12.5% interest in the Hudson Ranch project. This
multi-objective exploration project focuses on several formations. HCRC's 1997
costs to date for the project are approximately $315,000. The first well in the
project is scheduled to be drilled in 1998.
Gulf Coast Region
HCRC's 1997 capital budget allocation for the Gulf Coast Region in Louisiana and
South and East Texas is approximately 13% (approximately $2,000,000). In 1997,
HCRC spent approximately $200,000 to drill two exploration wells. Both wells
were dry. HCRC plans to drill four additional wells within the region during the
remainder of 1997.
In 1997, HCRC spent approximately $110,000 for tubing repairs, additional
perforations and miscellaneous maintenance costs. In addition, HCRC spent
approximately $170,000 in 1997 for a 14,500 foot exploration well in the South
Scott Field of Louisiana, which was unsuccessful.
Other
HCRC's 1997 capital budget allocation for all other areas is approximately 29%
(approximately $4,600,000). To date, HCRC successfully recompleted four wells.
HCRC plans to drill 15 wells in the remainder of 1997.
HCRC is currently participating in the Stealth Exploration Prospect in Garter
County, Oklahoma. This structural test of two reservoirs will be 19,000 feet
deep and will take nearly nine months to drill. HCRC has the right of first
refusal on five additional prospects developed by the same operator in the area.
In 1997, HCRC's cost is approximately $80,000 for its 5% interest in the well.
Projects begun in the fourth quarter of 1996 have cost HCRC approximately
$525,000 through the second quarter of 1997. These additional costs are
comprised primarily of approximately $200,000 for two unsuccessful exploratory
wells in the Gulf Coast Region and in the Permian/Delaware Basins.
Financing
During the second quarter of 1997, the Company and its banks amended their
Credit Agreement to extend the maturity date to May 31, 1999. The borrowing base
is currently $25,000,000, and as of June 30, 1997, the Company has borrowed
$17,000,000 against the credit line. HCRC's borrowing base is further reduced by
an outstanding contract settlement obligation of $992,000; therefore, its unused
borrowing base totaled $7,008,000 at August 14, 1997.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus from 1.375% to 1.875%,
(ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the higher of the
prime rate of Morgan Guaranty Trust or the sum of one-half of 1% plus the
Federal funds rate, plus .75%. The applicable interest rate was 7.2% at June 30,
1997. Interest is payable at least quarterly, and quarterly principal payments
of $1,062,500 commence May 31, 1999. The credit facility is secured by a first
lien on approximately 80% in value of the Company's oil and gas properties.
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<PAGE>
HCRC has entered into contracts to hedge its interest rate payments on
$10,000,000 of its debt for each of 1997 and 1998 and $5,000,000 for each of
1999 and 2000. 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 the next two years and 25% for each year of the remaining term of the debt.
HCRC has entered into four hedges, of which one 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 Company's stockholders and potential investors
with certain information regarding the Company's future plans and operations,
certain statements set forth in this Form 10-Q relate to management's future
plans and objectives. Such statements are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Although any
forward-looking statements contained in this Form 10-Q or otherwise expressed by
or on behalf of the Company are, to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual performance and financial results in future
periods to differ materially from any projection, estimate or forecasted result.
These risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas operations,
the inexact nature of interpretation of seismic and other geological and
geophysical data, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, and such other risks and uncertainties
described from time to time in the Company's periodic reports and filings with
the Securities and Exchange Commission. Accordingly, stockholders and potential
investors are cautioned that certain events or circumstances could cause actual
results to differ materially from those projected, estimated or predicted.
-12-
<PAGE>
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 1996 and through
the second quarter of 1997. The following table sets forth the weighted average
price received each quarter by the Company and the effects of the hedging
transactions described below:
<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 1996 $17.92 $17.86 $2.00 $1.94
Second quarter 1996 21.00 20.56 1.80 1.80
Third quarter 1996 21.39 20.43 1.99 1.94
Fourth quarter 1996 24.00 22.00 2.66 2.27
First quarter 1997 23.56 20.49 2.64 2.41
Second quarter 1997 17.85 17.88 1.91 1.87
</TABLE>
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 decreases 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:
Oil
Percent of Direct Contract
Period Production Hedged Floor Price
(per bbl)
Last six months of 1997 44% $17.88
1998 16% 15.07
1999 5% 15.88
Between 16% 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 35% 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 $17.00 to $19.35 per
barrel.
-13-
<PAGE>
Gas
Percent of Direct Contract
Period Production Hedged Floor Price
(per mcf)
Last six months of 1997 44% $1.89
1998 40% 1.91
1999 24% 1.67
2000 12% 1.86
Between 0% and 37% 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 $2.78 to $2.93 per mcf.
During the third quarter through July 24, 1997, the weighted average oil price
(for barrels not hedged) was approximately $18.50 per barrel and the weighted
average price of natural gas (for mcf not hedged) was approximately $2.10 per
mcf.
Inflation
Inflation did not have a material impact on the Company in 1996 and is not
anticipated to have a material impact on the Company in 1997.
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 interests
in oil and gas properties. The "HEP" column represents HCRC's share of the
results of operations of HEP; HCRC owned approximately 19% of the outstanding
limited partner units of HEP during 1996 and 1997.
-14-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Quarter Ended June 30, 1997 For the Quarter Ended June 30, 1996
Direct Direct
Owned HEP Total Owned HEP Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 134 31 165 169 44 213
Gas production (mcf) 1,365 433 1,798 1,477 546 2,023
Average oil price (per bbl) $17.96 $17.58 $17.88 $20.73 $19.91 $20.56
Average gas price (per mcf) $ 1.84 $ 1.96 $ 1.87 $ 1.76 $ 1.92 $ 1.80
Oil revenue $ 2,406 $ 545 $ 2,951 $ 3,504 $ 876 $ 4,380
Gas revenue 2,513 847 3,360 2,597 1,046 3,643
Pipeline and other 434 194 628 235 127 362
Contract settlement 8 8 11 11
Interest income 53 24 77 2 24 26
------- ------ ------ ------ ----- ------
Total revenue 5,414 1,610 7,024 6,349 2,073 8,422
------- ------ ------ ------ ----- ------
Production operating 1,941 491 2,432 2,055 501 2,556
General and administrative 696 188 884 674 123 797
Interest 414 152 566 418 186 604
Depreciation, depletion and amortization 1,661 273 1,934 1,772 578 2,350
Other 70 46 116
------ ----- ----- ------ ------ ------
Total expense 4,712 1,104 5,816 4,989 1,434 6,423
------ ----- ------ ------ ------ ------
Income before income taxes 702 506 1,208 1,360 639 1,999
------ ----- ----- ------ ------ ------
Provision for income taxes:
Current 56 56 36 36
------ ----- ------ ------ ----- -----
Net income $ 646 $ 506 $ 1,152 $ 1,324 $ 639 $ 1,963
====== ====== ====== ======= ===== ======
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Six Months Ended June 30, 1997 For the Six Months Ended June 30, 1996
Direct Direct
Owned HEP Total Owned HEP Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 287 69 356 348 93 441
Gas production (mcf) 2,835 942 3,777 3,037 1,114 4,151
Average oil price (per bbl) $19.29 $19.26 $19.28 $19.24 $18.88 $19.17
Average gas price (per mcf) $ 2.13 $ 2.22 $ 2.15 $ 1.81 $ 2.05 $ 1.87
Oil revenue $ 5,536 $ 1,329 $ 6,865 $ 6,697 $ 1,756 $ 8,453
Gas revenue 6,044 2,090 8,134 5,491 2,283 7,774
Pipeline and other 694 334 1,028 446 262 708
Contract settlement 15 15 21 21
Interest income 71 46 117 6 37 43
------ ----- ------ ------ ------ -------
Total revenue 12,360 3,799 16,159 12,661 4,338 16,999
------ ----- ------ ------ ------ -------
Production operating 3,918 1,029 4,947 4,135 1,095 5,230
General and administrative 1,375 410 1,785 1,287 334 1,621
Interest 860 302 1,162 947 397 1,344
Depreciation, depletion and amortization 3,240 761 4,001 3,700 1,207 4,907
Other 70 46 116
------ ----- ------- ------- ------ -------
Total expense 9,393 2,502 11,895 10,139 3,079 13,218
------ ------ ------- ------- ------ -------
Income before income taxes 2,967 1,297 4,264 2,522 1,259 3,781
----- ------ ------ ------- ------ -------
Provision for income taxes:
Current 147 147 68 68
------ ------ ------ ----- ----- -------
Net income $ 2,820 $ 1,297 $ 4,117 $ 2,454 $ 1,259 $ 3,713
====== ===== ===== ====== ====== =======
</TABLE>
-16-
<PAGE>
Second Quarter of 1997 Compared to Second Quarter of 1996
Oil Revenue
Oil revenue decreased $1,429,000 during the second quarter of 1997 as compared
with the second quarter of 1996. The decrease in revenue is comprised of a
decrease in oil production from 213,000 barrels in 1996 to 165,000 barrels in
1997, combined with a decrease in the average oil price from $20.56 per barrel
in 1996 to $17.88 per barrel in 1997. Approximately 10% of the decrease in
production is due to the temporary shut-in of two wells in Louisiana while
workover procedures are performed, and the remainder of the decrease in
production is due to normal production declines. Because the Company's hedged
oil prices were higher than average posted prices in the second quarter of 1997,
the effect of hedging transactions, as described above, was to increase the
Company's average oil price from $17.85 per barrel to $17.88 per barrel,
resulting in a $5,000 increase in revenue.
Gas Revenue
Gas revenue decreased $283,000 during the second quarter of 1997 as compared
with the second quarter of 1996. The decrease is comprised of a decrease in gas
production from 2,023,000 mcf in 1996 to 1,798,000 mcf in 1997, partially offset
by an increase in price from $1.80 per mcf in 1996 to $1.87 per mcf in 1997.
Approximately 72% of the decrease in production is due to the temporary shut-in
of two wells in Louisiana while workover procedures are performed and the
remainder of the decrease in production is due to normal production declines.
The effect of the Company's hedging activity during the second quarter of 1997
was to decrease the Company's average gas price from $1.91 per mcf to $1.87 per
mcf, resulting in a $72,000 decrease in revenue.
Pipeline and Other
Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive and tax credit payments from certain coal bed methane wells and other
miscellaneous items. Pipeline and other revenue increased $266,000 during the
second quarter of 1997 as compared with the second quarter of 1996. The increase
is due to the receipt of insurance proceeds during the second quarter of 1997,
which reimbursed a portion of expense incurred in a prior period to settle
certain litigation.
Interest Income
Interest income increased $51,000 during the second quarter of 1997 as compared
with the second quarter of 1996 due to a higher average cash balance during
1997.
Production Operating Expense
Production operating expense decreased $124,000 during the second quarter of
1997 as compared with the second quarter of 1996, primarily as a result of
decreased production taxes and operating expenses due to the decreased oil and
gas production 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 increased $87,000 during the second quarter
of 1997 as compared with the second quarter of 1996, due to a timing difference
in the payment of consulting expenses.
-17-
<PAGE>
Interest Expense
Interest expense decreased $38,000 during the second quarter of 1997 as compared
with the second quarter of 1996 due to lower outstanding debt during 1997.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization expense decreased $416,000 during the
second quarter of 1997 as compared with the second quarter of 1996, due to a
lower depletion rate caused by the decrease in production as previously
discussed.
Other
Other expense during the second quarter of 1996 is comprised of numerous
miscellaneous items, none of which is individually significant.
Provision for Income Taxes
Income taxes for the second quarter of 1997 are less than would be expected
using the federal statutory rate due to the change in the valuation allowance
resulting from the utilization of net operating loss carryforwards.
First Six Months 1997 compared to the First Six Months 1996
The comparisons for the first six months of 1997 and the first six months of
1996 are consistent with those discussed in the second quarter 1997 compared to
the second quarter 1996 except for the following:
Oil Revenue
Oil revenue decreased $1,588,000 during the first six months of 1997 as compared
with the first six months of 1996. The decrease is comprised of a decrease in
production from 441,000 barrels in 1996 to 356,000 barrels in 1997, partially
offset by an increase in the average oil price from $19.17 per barrel in 1996 to
$19.28 per barrel in 1997. Approximately 8% of the production decrease is due to
the temporary shut-in of two wells in Louisiana while workover procedures are
performed, and the remainder of the decrease in production is due to normal
production declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average oil
price from $19.86 per barrel to $19.28 per barrel, representing a $206,000
decrease in revenues.
Gas Revenue
Gas revenue increased $360,000 during the first six months of 1997 as compared
with the first six months of 1996. The increase is comprised of an increase in
the average price from $1.87 per mcf in 1996 to $2.15 per mcf in 1997, partially
offset by a decrease production from 4,151,000 mcf in 1996 to 3,777,000 mcf in
1997. Approximately 64% of the production decrease is due to the temporary
shut-in of two wells in Louisiana while workover procedures are performed and
the remainder of the decrease in production is due to normal production
declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average gas
price from $2.36 per mcf to $2.15 per mcf, representing a $793,000 reduction in
revenue from hedging transactions.
-18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to Item 8 - Note 14 of Form 10-K for the year
ended December 31, 1996, 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
On May 5, 1997, HCRC held its Annual Meeting of Shareholders at
which Anthony J. Gumbiner, William L. Guzzetti, Brian M. Troup,
John R. Isaac, Jr., Jerry A. Lubliner, Bill M. Van Meter and
Hamilton P. Schrauff were elected directors. Following is the
number of votes cast for and votes withheld for each of the
directors:
Name Votes For Votes Withheld
Anthony J. Gumbiner 788,786 35,984
William L. Guzzetti 788,865 36,085
Brian M. Troup 761,016 63,754
John R. Isaac, Jr. 788,796 35,974
Jerry A. Lubliner 788,812 35,958
Bill M. Van Meter 788,830 35,940
Hamilton P. Schrauff 788,851 35,919
There were no abstentions or broker non-votes.
The 1997 Stock Option Plan was also approved, and votes were cast
as follows:
For 599,030
Against 51,925
Abstain 213,816
148,134 broker non-votes and 7,317 actual abstentions are included
in the abstain number above.
-19-
<PAGE>
On July 31, 1997, HCRC held a Special Meeting of Stockholders at
which the stockholders approved an increase in the number of
authorized shares of common stock from 2,000,000 to 10,000,000.
The voting on this matter, as well as the number of abstentions
and broker non-votes, is set forth below.
For 883,266
Against 38,007
Abstain 15,368
Broker non-votes -0-
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
3.2 Certificate of Amendment of Restated Certificate of
Incorporation, effective August 1, 1997
10.13 Second Amended and Restated Credit Agreement dated as
of May 31, 1997
10.14 1997 Stock Option Plan
-20-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
Date: August 14, 1997 By: /s/Robert S. Pfeiffer
--------------- ------------------------------------
Robert S. Pfeiffer, Vice President
(Chief Financial Officer)
-21-
<PAGE>
INDEX TO EXHIBITS
3.2 Certificate of Amendment of Restated Certificate of Incorporation,
effective August 1, 1997
10.13 Second Amended and Restated Credit Agreement dated as of May 31, 1997
10.14 1997 Stock Option Plan
-22-
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
Hallwood Consolidated Resources Corporation (the "Corporation"),
organized and existing under and by virtue of the General Corporation Law of
Delaware (the "DGCL") does hereby certify:
FIRST: That the Board of Directors of the Corporation duly adopted
resolutions setting forth an amendment to the Restated Certificate of
Incorporation of the Corporation (the "Amendment"), declaring the Amendment to
be advisable and calling for the submission of the proposed Amendment to the
stockholders of the Corporation for consideration thereof. The resolution
setting forth the proposed Amendment is as follows:
ARTICLE IV of the Restated Certificate of Incorporation of Hallwood
Consolidated Resources Corporation, a Delaware corporation, is hereby amended by
deleting Section 1 in its entirety and replacing it in its entirety to read as
follows:
SECTION 1. The total number of shares of all classes of stock that the
Corporation shall have authority to issue is 10,500,000, consisting of
10,000,000 shares of Common Stock, par value $0.01 per share ("Common Stock")
and 500,000 shares of Preferred Stock, par value $0.01 per share ("Preferred
Stock"). The consideration for the issuance of the shares shall be paid to or
received by the Corporation in full before the issuance and shall not be less
than the par value per share. The consideration shall be as permitted by the
laws of the State of Delaware in the absence of actual fraud in the transaction,
the judgment of the Board of Directors as to the value of such consideration
shall be conclusive. Upon payment of such consideration, such shares shall be
deemed to be fully paid and nonassessable. In the case of a stock dividend, that
part of the surplus of the Corporation that is transferred to stated capital
upon the issuance of shares as a stock dividend shall be deemed to be
consideration for such issuance.
SECOND: That thereafter pursuant to a resolution of the Board of
Directors, a special meeting of the stockholders of the Corporation was duly
called and held, upon notice in accordance with Section 222 of the DGCL at which
meeting the necessary number of shares as required by statute were voted in
favor of the Amendment.
THIRD: That the Amendment was duly adopted in accordance with the
provisions of Section 242 of the DGCL.
1
<PAGE>
FOURTH: That the Amendment shall be effective on the date this Certificate
of Amendment is filed and accepted by the Secretary of State of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by William L. Guzzetti, its President, and attested by Cathleen M.
Osborn, its Secretary, this 31st day of July 1997.
HALLWOOD CONSOLIDATED
RESOURCES CORPORATION
By:
William L. Guzzetti
President
ATTEST:
Cathleen M. Osborn
Secretary
2
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of May 31, 1997 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, as
collateral agent (the "Collateral Agent"), 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 are
party to an Amended and Restated Credit Agreement dated as of March 31, 1995 (as
amended prior to the Effective Date (as defined below), the "Original Credit
Agreement" and as amended and restated by this Amendment and Restatement, the
"Credit Agreement"); and
WHEREAS, pursuant to the Original Credit Agreement, the Borrowers have
issued to the order of each Bank promissory notes (the "Original Notes")
substantially in the form of Exhibit A to the Original Credit Agreement; and
WHEREAS, the Borrowers, the Banks, the Collateral Agent and the Agent
desire to amend the Original Credit Agreement as set forth herein and to restate
the Original Credit Agreement in its entirety to read as set forth in the
Original Credit Agreement with the amendments specified below;
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
SECTION 1. Definitions; References; Amendment and Restatement of the
Original Credit Agreement. Unless otherwise specifically defined herein, each
term used herein which is defined in the Original Credit Agreement shall have
the meaning assigned to such term therein. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each other similar reference contained in the
Original Credit Agreement shall, from and after the Effective Date, refer to the
Original Credit Agreement as amended and restated hereby. Effective on and as of
the Effective Date, the Original Credit Agreement shall be amended and restated
in its entirety to read as set forth in the Original Credit Agreement with the
amendments specified below.
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. Amendments to the Definitions Contained in the Original Credit
Agreement. (a) The definitions of "Drawdown Termination Date" and "Term Date"
contained in Section 1.01 of the Original Credit Agreement are amended to read
in their entirety as follows:
"Drawdown Termination Date" means the earlier to occur of
May 31, 1999 or the date on which the Borrowers elect to commence
The Term Period.
"Term Date" means the earlier to occur of May 31, 1999 or
the last day of May, August, November or February which first
occurs after the date on which the Borrowers elect to commence
the Term Period.
(b) Definitions of "Availability Limit", "CD Margin", "Commitment Fee
Rate", "Euro-Dollar Margin", "Level I Status", "Level II Status" and "Level
III Status" are added in alphabetical order in Section 1.01 of the Original
Credit Agreement, to read in their entirety as follows:
"Availability Limit" means, on any date, an amount equal to
the lesser of (i) the aggregate amount of the Commitments at such
date and (ii) $25,000,000. The Availability Limit may be
increased only by an amendment in accordance with Section 8.05,
which the Banks may agree to or not agree to in their sole
discretion.
"CD Margin" means, on any date, (i) 1.375%, if on such date
Level I Status exists, (ii) 1.625%, if on such date Level II
Status exists and (iii) 1.875%, if on such date Level III Status
exists.
"Commitment Fee Rate" means, on any date, (i) .375%, if on
such date Level I Status or Level II Status exists and (ii) .50%,
if on such date Level III Status exists.
<PAGE>
"Euro-Dollar Margin" means, on any date, (i) 1.25%, if on
such date Level I Status exists, (ii) 1.50%, if on such date
Level II Status exists and (iii) 1.75%, if on such date Level III
Status exists.
"Level I Status" exists on any date if on such date the
aggregate outstanding principal amount of the Loans is less than
50% of the Availability Limit.
"Level II Status" exists on any date if on such date (i) the
aggregate outstanding principal amount of the Loans is less than
or equal to 85% of the Availability Limit and (ii) Level I Status
does not exist on such date.
"Level III Status" exists on any date if on such date
neither Level I Status nor Level II Status exists.
SECTION 4. Change in the Interest Rate Applicable to the Loans. (a) The
first sentence of Section 2.04(a) of the Original Credit Agreement is amended to
read in its entirety as follows:
Each Bank's CD Loans shall bear interest on the unpaid principal
amount thereof until payment in full thereof at a rate per annum
equal to the sum of (i) the Adjusted CD Rate for each Interest
Period applicable thereto plus (ii) the CD Margin, but in no
event to exceed the Highest Lawful Rate of such Bank; provided
that if any CD Loan or any portion thereof shall, as a result of
clause (2) (b) (i) of the definition of Interest Period, have an
Interest Period of less than 30 days, such CD Loan or portion
thereof shall bear interest during such Interest Period at the
rate applicable to Base Rate Loans during such period.
(b) The first sentence of Section 2.04(b) of the Original Credit
Agreement is amended to read in its entirety as follows:
Each Bank's Euro-Dollar Loans shall bear interest on the unpaid
principal amount thereof until payment in full thereof at a rate
per annum equal to the sum of (i) the Adjusted Euro-Dollar Rate
for each Interest Period applicable thereto plus (ii) the
Euro-Dollar Margin, but in no event to exceed the Highest Lawful
Rate of such Bank.
(c) Section 2.04(f) of the Original Credit Agreement is deleted in its
entirety.
(d) Section 2.04(g) of the Original Credit Agreement is renumbered as
Section 2.04(f).
<PAGE>
SECTION 5. Change in Calculation of Commitment Fee. Section 2.20 of the
Original Credit Agreement is amended to read in its entirety as follows:
SECTION 2.20. Commitment Fees. During the Revolving Credit
Period, the Borrowers shall pay to the Agent for the account of
each Bank (which payment shall be distributed to each Bank
ratably in accordance with each Bank's Commitment) a commitment
fee at the Commitment Fee Rate calculated for each day on the
daily average amount by which the Availability Limit exceeds the
aggregate outstanding principal amount of the Loans. Subject to
Section 2.09(b) hereof, such commitment fees shall accrue from
and including the Effective Date to but excluding the last day of
the Revolving Credit Period and shall be payable quarterly on
each March 31, June 30, September 30 and December 31 during the
Revolving Credit Period and on the last day of the Revolving
Credit Period.
SECTION 6. Amendments to Distribution Covenant. Section 4.21 of the
Original Credit Agreement is amended to read in its entirety as follows:
<PAGE>
Section 4.21. Distributions, Etc. HCRC will not make, pay or
declare any dividend or distribution on any class of its stock or
any distribution of profits or purchase, redeem or otherwise
acquire for value any shares of any class of its stock now or
hereafter outstanding ("Distributions") (a) if an Event of
Default has occurred and is continuing and the Required Banks
have notified HCRC in writing not to make such Distributions;
provided that no such notice shall be required for an Event of
Default pursuant to subsections (a) (g), (h) or (l) of Section
5.01; (b) if the aggregate Debt of the Borrowers exceeds, or
would immediately after such Distribution exceed, 100% of the
Debt Limit; or (c) on any date (a "Measuring Date") in any fiscal
quarter of HCRC if at such Measuring Date, after giving effect to
any such proposed Distribution to be made on such Measuring Date,
the aggregate amount of Distributions made in the period of
twelve consecutive calendar months ended on such Measuring Date
would exceed the Distribution Percentage of an amount equal to
(A) the sum of the amounts which are set forth opposite the
captions "Cash provided by operations before working capital
changes" and "Distributions received from affiliates" on
consolidated statements of cash flows of HCRC for the period of
four consecutive fiscal quarters most recently ended on or prior
to such Measuring Date and with respect to which the Borrowers
have delivered to the Lenders the financial statements required
to delivered by them pursuant to Section 1 (it being understood
that such financial statements are prepared in accordance with
generally accepted accounting principles consistent with those
utilized in preparing the consolidated statements of cash flows
of HCRC as filed in HCRC's annual report on Form 10-K for the
fiscal year ended December 31, 1994 with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of
1934) minus (B) the aggregate amount of payments made by HCRC in
such period to make purchases permitted by Sections 4.19(m) or
(n); provided, however, that the provisions of subparagraphs (b)
and (c) of this Section 4.21 shall not prevent the payment of any
Distribution within 60 days of the declaration thereof, if at
said date of declaration such payment would have complied with
the provisions hereof. In addition, for purposes of this Section
20:
"Distribution Percentage" means, at any date, (i) 65%, if on
such date Monthly Exposure is less than 50% of the Debt Limit on
such date and (ii) otherwise, 50%.
"Monthly Exposure" means, on any date, the daily average
outstanding principal amount of Debt of the Borrowers and their
Subsidiaries (including without limitation the Loans) during the
30-day period ending on the date immediately preceding such date.
SECTION 7. Additional Condition to Borrowing. Section 6.03 of the Original
Credit Agreement is amended by adding the following new subsection (f)
immediately after subsection (e) thereof, to read in its entirety as follows:
(f) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Loans will not exceed the Availability
Limit.
SECTION 8. Change in Amendments Section. Section 8.05 of the Original
Credit Agreement is amended as follows:
(a) by deleting the "or" at the end of clause (iii) thereof and
replacing it with a comma;
(b) by deleting the period at the end of clause (iv) thereof and
replacing it with an "or"; and
(c) by adding a new clause (v) immediately after clause (iv) thereof,
to read it its entirety as follows:
(v) increase the amount set forth in the definition of
Availability Limit or change the provisions of Section
6.03(f).
SECTION 9. Amendment to Exhibit A. Exhibit A to the Original Credit
Agreement is amended to read in its entirety as set forth on Exhibit A hereto.
SECTION 10. Amendments to Schedule D. Schedule D to the Original Credit
Agreement is amended to read in its entirety as set forth on Schedule D hereto.
<PAGE>
SECTION 11 . Transitional Provisions. On the Effective Date but subject to
the conditions set forth in Section 14 hereof, the Euro-Dollar Loans and
Domestic Loans outstanding to each Bank under the Original Credit Agreement
shall be deemed to be the initial Euro-Dollar Loans or Domestic Loans, as the
case may be, made by such Bank under the Credit Agreement, it being the
intention of the parties hereto that (i) all indebtedness evidenced by the
Original Notes shall, on and after the Effective Date, be solely evidenced by
the Notes (as defined in the Credit Agreement), (ii) the Loans outstanding under
the Original Agreement on the Effective Date shall continue to be outstanding on
such date as Domestic Loans or Euro-Dollar Loans, as appropriate, having
Interest Periods determined in accordance with the Original Credit Agreement and
bearing interest as provided with respect to Loans in Article II of the Credit
Agreement and (iii) the liens created by the Collateral Documents on the
properties and assets described therein shall be carried forward and continue in
full force and effect for the purpose of securing the Notes. Upon receipt of its
Note, each Bank will mark its Original Note "Replaced" and in due course return
its Original Note to HEP.
SECTION 12. Governing Law. This Amendment and Restatement shall be governed
by and construed in accordance with the laws of the State of New York.
SECTION 13. Counterparts. This Amendment and Restatement 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.
SECTION 14. Effectiveness. This Amendment and Restatement shall become
effective on the date (the "Effective Date") when each of the following
conditions shall have been satisfied:
(a) this Amendment and Restatement shall have been duly executed and
delivered by the Borrowers, the Banks, the Collateral Agent and the Agent
(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);
(b) the Agent shall have received for the account of each Bank an
executed Note substantially in the form of Exhibit A, duly and validly
issued 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;
<PAGE>
(c) the Agent shall have received a signed copy of a certificate of
the Secretary or an Assistant Secretary or other appropriate officer of
each of HCRC certifying (i) the names and true signatures of the Authorized
Persons authorized to sign the Notes, and the Collateral Documents to which
HCRC is or will be a party, on behalf of itself or as general partner of
HCP (including without limitation any Collateral Documents Amendments
referred to in subsection (f)) and the other documents or certificates to
be delivered pursuant thereto, (ii) the resolutions of the Board of
Directors (or equivalent body) of HCRC authorizing the transactions
contemplated hereby to which is or will be a party (on behalf of itself or
as general partner of HCP), together with all documents evidencing other
necessary partnership or corporate action with respect to any thereof,
(iii) no amendments to the true copies of the Partnership Agreement of HCP
delivered to the Agent prior to the Effective Date, and (iv) no amendments
to the true copy of the Articles of Incorporation and By-Laws of HCRC
delivered to the Agent prior to the Effective Date;
(d) the Agent shall have received from King & Spalding, counsel for
the Borrowers, an opinion substantially to the effect of Exhibit B hereto
and covering such additional matters as the Required Banks may reasonably
request;
(e) the Agent shall have received from Davis Polk & Wardwell, special
counsel for the Agent, an opinion in substantially the form of Exhibit C
hereto;
(f) the Collateral Agent shall have received duly executed
counterparts of the documents numbered (C)(1)(f), (C)(2)(e),
C(3)(d),(D)(4)(h), (D)(5)(d), (D)(5)(d), (D)(6)(d), (D)(7)(c),(E)(2)(e),
(E)(5)(e) listed on Schedule D hereto (the "Collateral Documents
Amendments"); and
(g) the Collateral Agent shall have received from counsel satisfactory
to it in each jurisdiction in which any Collateral Documents Amendments are
to be recorded or filed a favorable written opinion as to the validity and
binding effect of the Collateral Documents and the perfection of the Liens
created thereunder under the law of such jurisdiction and as to such other
matters incident to the transactions herein contemplated as the Required
Banks may reasonably request.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement 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
$11,666,667 MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ John Kowalczuk
Title: Vice President
<PAGE>
$11,666,667 FIRST UNION NATIONAL BANK
By: /s/ Michael J. Kolosowsky
Title: Vice President
$11,666,666 NATIONSBANK OF TEXAS, N.A.
By: /s/ Richard P. Stults
Title: Vice President
================
Total Commitment:
$35,000,000
================
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By: /s/ John Kowalczuk
Title: Vice President
FIRST UNION NATIONAL BANK,
as Collateral Agent
By: /s/ Michael J. Kolosowsky
Title: Vice President
1997 STOCK OPTION PLAN
FOR
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
Section 1. Purpose. The purpose of this 1997 Stock Option Plan for Hallwood
Consolidated Resources Corporation is to advance the interests of Hallwood
Consolidated Resources Corporation, a Delaware corporation (the "Corporation"),
by providing an additional incentive to attract and retain qualified and
competent directors, employees and consultants for the Corporation and its
subsidiaries, upon whose efforts and judgment the success of the Corporation is
largely dependent, through the encouragement of ownership in the Corporation 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) "Affiliate" shall mean any entity that directly or indirectly controls, is
controlled by, or is under common control with another entity. As used
herein, the term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies
of an entity, whether through ownership of voting securities, by contract
or otherwise.
(c) "Board" shall mean the Board of Directors of the Corporation.
(d) "Business Day" shall mean (i) if the Shares trade on a national securities
exchange, any day that the national securities exchange on which the Shares
trade is open or (ii) if the Shares do not trade on a national securities
exchange, any day that commercial banks in the City of New York are open.
(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) "Corporation" shall mean Hallwood Consolidated Resources Corporation, a
Delaware corporation.
(h) "Date of Grant" shall mean the date specified by the Committee as the
effective date of the grant of 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.
<PAGE>
(i) "Director" shall mean a member of the Board.
(j) "Eligible Person(s)" shall mean those persons who are Directors or officers
or are employees of, consultants to, the Corporation, any Subsidiary or an
Affiliate.
(k) "Effective Date" shall mean March 3, 1997.
(l) "Fair Market Value" of a Share on any date of reference shall mean the
Closing Price on the business day immediately preceding such date, unless
the Committee in its sole discretion shall determine otherwise in a fair
and uniform manner. For this purpose, the Closing Price of the Shares on
any business day shall be: (i) if the Shares 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 Shares on such exchange or system, as reported in any newspaper of
general circulation; (ii) if Shares 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 Shares on such system; (iii) if neither clause (i) nor (ii)
is applicable, the mean between the high bid and low asked quotations for
Shares as reported by the National Quotation Bureau, Incorporated, if at
least two securities dealers have inserted both bid and asked quotations
for Shares on at least five of the ten preceding days; or, (iv) in lieu of
the above, if actual transactions in the Shares are reported on a
consolidated transaction reporting system, the last sale price of the
Shares for such day and on such system.
(m) "Nonqualified Option" shall mean an option that is not an incentive stock
option as defined in Section 422 of the Internal Revenue Code.
(n) "Option" (when capitalized) shall mean any option granted under this Plan.
(o) "Optionee" shall mean a person to whom an Option is granted or any
successor to the rights of such Option under this Plan.
(p) "Person shall mean any individual, corporation, limited liability company,
partnership, joint venture or other legal entity.
(q) "Plan" shall mean this 1997 Stock Option Plan for Hallwood Consolidated
Resources Corporation.
(r) "SAR" shall mean a stock appreciation right as defined in Section 9 hereof.
(s) "Share(s)" shall mean shares of the common stock, par value $.01 per share,
of the Corporation.
(t) "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
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contingency, is at the time, directly or indirectly, owned or controlled by
the Corporation or by one or more Subsidiaries, or by the Corporation and
one or more Subsidiaries or (ii) any partnership, joint venture or limited
liability company of which at least a 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 Corporation or by one or more Subsidiaries or by the Corporation and
one or more Subsidiaries.
Section 3. Shares and Options. The Corporation may grant to Eligible
Persons from time to time Options to purchase an aggregate of up to Fifty-three
Thousand (53,000) Shares. If any Option granted under the Plan shall terminate,
expire, or be cancelled or surrendered as to any Shares, new Options may
thereafter be granted covering such Shares. An Option granted hereunder shall be
a Nonqualified 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
Corporation 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
Corporation and any 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 Share 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 Corporation 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 Shares 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 Corporation of the amount, if any,
3
<PAGE>
that the Committee determines to be necessary for the employer of the Optionee
to withhold in accordance with applicable federal or state income tax
withholding requirements. Unless further limited by the Committee in any Option,
the option price of any Shares purchased shall be paid in cash, by certified or
cashier's check, by money order, with Shares (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 Shares) 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 Shares. If the exercise price
is paid in whole or in part with Shares, the value of the Shares surrendered
shall be their Fair Market Value. The Corporation 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 stockholders of the
Corporation immediately before such transaction would cease to own at
least 662/3% of the voting ownership interests of the Corporation or
of any entity that results from the participation of the Corporation
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
stockholders of the Corporation of a plan of reorganization,
consolidation, merger, liquidation, dissolution or other comparable
form of transaction in which the Corporation does not survive or as a
result of which the stockholders of the Corporation immediately before
such transaction would cease to own at least 662/3% of the voting
ownership interests of the Corporation;
4
<PAGE>
(iii)ten (10) days preceding the record date for the approval by the
stockholders of the Corporation of a plan for the sale, lease,
exchange or other disposition of 50% or more of the property and
assets of the Corporation;
(iv) ten (10) days preceding the record date for the approval by the
stockholders of the Corporation of the removal of or a change in a
majority of the members of the Board; or
(v) 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 Corporation's outstanding
Shares or interests in the Corporation having 331/3% or more of the
combined voting power of the Corporation'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 Shares that the Optionee would not be entitled
to acquire but for such acceleration (the "Acceleration Shares"), is
limited to that number of Acceleration Shares 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 Shares, then the Acceleration Shares that the
Optionee may acquire shall be the last Shares 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 Corporation, a
Subsidiary or an Affiliate 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;
(ii) three (3) months after the date on which the Optionee's employment by
the Corporation, a Subsidiary, or an Affiliate is terminated by reason
of retirement;
(iii)twelve (12) months after the date on which the Optionee's employment
by the Corporation, a Subsidiary or an Affiliate is terminated by
5
<PAGE>
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 Corporation, a Subsidiary or an Affiliate 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 Corporation, a Subsidiary or an Affiliate 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 Shares 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 Shares 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 Shares of the
Corporation, other than one made by the Corporation; provided that the
corporation, person or other entity making the Offer acquires Shares
pursuant to such Offer.
(ii) The term "Offer Price Per Share" shall mean the highest price per
Share 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 Shares in the Offer shall be
valued in determining the Offer Price Per Share 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.
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<PAGE>
(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 Share immediately preceding the date of
exercise over (B) the exercise price per Share of the Related Option
multiplied by (2) the number of Shares 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 Share on the date of exercise over (B) the exercise price per
Share of the Related Option multiplied by (2) the number of Shares
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 Corporation, specifying the SAR or
Limited SAR being exercised and the number of Shares with respect to
which such SAR or Limited SAR is being exercised, and
(ii) If requested by the Corporation, 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 Corporation 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
Corporation 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, Shares, or (iii) a combination of cash and Shares,
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 Corporation may, in
its sole discretion, withhold from such payment any amount necessary to
satisfy the Corporation's, a Subsidiary's or an Affiliate'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.
(f) Upon the exercise of an SAR or Limited SAR, the Shares under the Related
Option to that such exercised SAR or Limited SAR relate shall be released,
but such released Shares shall never again be Shares 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.
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<PAGE>
(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 stockholder with respect to the
related Shares as a result of the grant of an SAR or Limited SAR.
Section 10. Adjustment of Shares.
(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 Shares through the declaration of a stock dividend
or through any recapitalization resulting in a stock split-up, combination
or exchange of Shares, then and in such event.
(i) appropriate adjustment shall be made in the maximum number of Shares
then subject to being optioned under the Plan, so that the same
proportion of the Corporation's issued and outstanding Shares shall
continue to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the number of Shares and the
exercise price per Share thereof then subject to outstanding Options,
so that the same proportion of the Corporation's issued and
outstanding Shares 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 Shares 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
Corporation 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 Corporation 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 Shares reserved
for issuance under the Plan or the number of or exercise price of Shares
then subject to outstanding Options granted under the Plan.
(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 Corporation to make, authorize or consummate (1)
any or all adjustments, recapitalizations, reorganizations or other changes
in the Corporation's capital structure or its business; (2) any merger or
consolidation of the Corporation; (3) any issue by the Corporation of debt
securities, or partnership interests that would rank above the Shares
subject to outstanding Options; (4) the dissolution or liquidation of the
Corporation; (5) any sale, transfer or assignment of all or any part of the
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assets or business of the Corporation; or (6) any other 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 Shares. No person shall be, or have any of the
rights or privileges of, a stockholder of the Corporation with respect to any of
the Shares subject to an Option unless and until certificates representing such
Shares shall have been issued and delivered to such person. As a condition of
any transfer of the certificate for Shares, 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
Corporation at the time any Option is exercised that he or she is
acquiring the Shares 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 Shares; 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 Shares and that are
endorsed upon the Share 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.
(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
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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 Shares 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.
Section 14. Government Regulations.
This Plan, Options and the obligations of the Corporation to sell and
deliver Shares 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 Corporation, a
Subsidiary or an Affiliate or other benefits with respect to Optionee's
position with the Corporation, a Subsidiary or an Affiliate. 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
Corporation in respect of any claim, loss, damage, or expense (including
attorneys' fees, the costs of settling any suit, provided such settlement
is approved by independent legal counsel selected by the Corporation, and
amounts paid in satisfaction of a judgment, except a judgment based on a
finding of bad faith) arising from such claim, loss, damage, or expense to
the full extent permitted by law and under any directors' and officers'
liability or similar insurance coverage that may from time to time be in
effect.
(c) Any issuance or transfer of Shares 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 Shares, to execute a release and receipt for
such payment or issuance or transfer of Shares in such form as it shall
determine.
(d) Neither the Committee nor the Corporation guarantees Shares from loss or
depreciation.
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(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 Corporation; provided, however, the
Corporation may recover any and all damages, fees, expenses and costs
arising out of any actions taken by the Corporation to enforce its rights
under this Plan or any Option.
(f) Records of the Corporation shall be conclusive for all purposes under this
Plan or any Option, unless determined by the Committee to be incorrect.
(g) The Corporation 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 Corporation assumes no liability to any Optionee or his legal
representatives, heirs, legatees or distributees for any act of, or failure
to act on the part of, the Committee.
(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 Corporation or
the Optionee may change, at any time and from time to time, by written
notice to the other, the address that it or he had previously specified for
receiving notices. Until changed in accordance with this Plan, the address
of the Corporation is 4582 South Ulster St. Pkwy., 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 Corporation, 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.
11
<PAGE>
(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
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 March 3, 1997, which is the date the Board adopted this Plan. The Plan
shall terminate on the tenth anniversary of the effective date of the first
grant of Options under the Plan..
Executed to evidence the 1997 Stock Option Plan of Hallwood Consolidated
Resources Corporation adopted by the Board on March 3, 1997.
Hallwood Consolidated Resources Corporation
By: William L. Guzzetti
Name: William L. Guzzetti
Title: President
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended June 30, 1997 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> 6-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Jun-30-1997
<CASH> 987
<SECURITIES> 0
<RECEIVABLES> 4,915
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,167
<PP&E> 286,588
<DEPRECIATION> 216,537
<TOTAL-ASSETS> 79,591
<CURRENT-LIABILITIES> 8,726
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 47,137
<TOTAL-LIABILITY-AND-EQUITY> 79,591
<SALES> 16,027
<TOTAL-REVENUES> 16,159
<CGS> 0
<TOTAL-COSTS> 10,733
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,162
<INCOME-PRETAX> 4,264
<INCOME-TAX> 147
<INCOME-CONTINUING> 4,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,117
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.47
</TABLE>
