UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
MARK ONE
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 84-1176750
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
None on which registered
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 27, 1998 was approximately $24,581,000.
Shares of Common Stock outstanding at February 27, 1998: 3,001,352 Shares.
Page 1 of 51
<PAGE>
PART I
ITEM 1 - BUSINESS
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a
Delaware corporation engaged in the development, production and sale of oil and
gas, and in the acquisition, exploration, development and operation of oil and
gas properties. The principal objective of HCRC is to maximize shareholder value
by increasing its reserves, production and cash flow through a balanced program
of development and high potential exploration drilling, as well as selective
acquisitions. The Company's properties are primarily located in West Texas,
South Louisiana, New Mexico and Kansas. HCRC does not engage in any other line
of business.
Officers and Key Employees
HCRC does not have any employees. Hallwood Petroleum, Inc. ("HPI"), an affiliate
of HCRC, operates the properties and administers the day to day activities of
HCRC and its affiliates. On February 27, 1998, HPI had 123 employees. Following
are brief biographies of the officers and key employees of HCRC and HPI.
William L. Guzzetti, 54, has been President and a director of HCRC since May
1991 and of HPI since October 1989, and a director of HPI since August 1989. Mr.
Guzzetti is also an Executive Vice President of Hallwood Group and in that
capacity may devote a portion of his time to the activities of Hallwood Group,
including the management of real estate investments, acquisitions and
restructurings of entities controlled by Hallwood Group. He is a director and
President of Hallwood Realty and in that capacity may devote a portion of his
time to the activities of Hallwood Realty.
Russell P. Meduna, 43, has served as Executive Vice President of HCRC since June
1992 and of HPI since October 1989. Mr. Meduna was Vice President of HPI from
April 1989 to October 1989 and Manager of Operations from January 1989 to April
1989. He joined HPI in 1984 as Production Manager. Prior to joining HPI, he was
employed by both major and independent oil companies. Mr. Meduna is a registered
professional engineer in the States of Colorado and Texas.
Cathleen M. Osborn, 45, has served as Secretary and General Counsel of HCRC
since May 1992 and as Vice President since June 1992. She has been Vice
President, Secretary and General Counsel of HPI since September 1986. She joined
HPI in 1985 as senior staff attorney. Ms. Osborn is a member of the Colorado Bar
Association.
Robert S. Pfeiffer, 41, has served as Vice President of HCRC since June 1992 and
of HPI since August 1986. Mr. Pfeiffer became Chief Financial Officer of HCRC
and HPI in June 1994. He joined and HPI in 1984. From July 1979 to May 1984, he
was employed by Price Waterhouse as a senior accountant. Mr. Pfeiffer is a
member of the American Institute of Certified Public Accountants and the
Colorado Society of Certified Public Accountants. Mr. Pfeiffer resigned his
positions with HCRC and its affiliates effective March 6, 1998.
Betty J. Dieter, 50, has been Vice President of HPI responsible for domestic
operations since January 1995. Her previous positions with HPI have included
Operations Manager, Rocky Mountain and Mid-Continent District Manager and
Manager for Operations Accounting and Administration. She joined HPI in 1985,
and has 25 years experience in accounting and operations, 18 of which are in the
oil and gas industry. Ms. Dieter is a Certified Public Accountant.
George Brinkworth, 56 has been Vice President-Exploration of HPI since August
1994. He became associated with HPI in 1987 when he was President of a joint
venture program funded by HPI and two other domestic oil companies. Mr.
Brinkworth has 33 years experience with various exploration and production
companies, including previous responsibility for operations in the United
Kingdom, Spain, Morocco, Egypt and Indonesia. He is a registered geophysicist in
the State of California.
<PAGE>
William H. Marble, 47, has served as Vice President of HPI since December 1990.
His previous positions with HPI have included Texas/Gulf Coast District Manager,
Manager of Nonoperated Properties and Chief Engineer. He joined a predecessor
general partner of the Partnership in 1984. Mr. Marble is a registered engineer
in the State of Colorado and has 23 years oil and gas engineering experience.
Marketing
The oil and gas produced from the properties owned by HCRC has typically been
marketed through normal channels for such products. Oil is generally sold to
purchasers at field prices posted by the principal purchasers of crude oil in
the areas where the producing properties are located. In response to the
volatility in the oil markets, HCRC entered into financial contracts for hedging
the price of 14% of its estimated oil production for 1998 and 5% for 1999.
The majority of HCRC's gas production is sold on the spot market and is
transported in intrastate and interstate pipelines. HCRC has entered into
financial contracts for hedging the price of between 5% and 31% of its estimated
gas production for 1998 through 2001.
The purpose of the hedges is to provide protection against price decreases and
to provide a measure of stability in the volatile environment of oil and natural
gas spot pricing. The amounts received or paid upon settlement of these
contracts are recognized as revenue at the time the hedged volumes are sold.
Both oil and natural gas are purchased by refineries, major oil companies,
public utilities, industrial customers and other users and processors of
petroleum products. HCRC is not confined to, nor dependent upon, any one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser, or a few purchasers, would not materially affect HCRC's business
because there are numerous purchasers in the areas in which HCRC sells it
production. However, for the years ended December 31, 1997, 1996 and 1995,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of HCRC:
1997 1996 1995
El Paso Field Services 17% 11%
Williams Gas Marketing 13%
Koch Oil Company 23% 27%
Conoco Inc. 13% 14%
Scurlock Permian Corporation 14%
Factors, if they were to occur, which might adversely affect HCRC include
decreases in oil and gas prices, the reduced availability of a market for
production, rising operating costs of producing oil and gas, compliance with and
changes in environmental control statutes and increasing costs and difficulties
of transportation.
Competition
HCRC encounters competition from other oil and gas companies in all areas of its
operations, including the acquisition of exploratory prospects and proven
properties. The Company's competitors include major integrated oil and gas
companies and numerous independent oil and gas companies, individuals and
drilling income programs. As described under "Marketing," production is sold on
the spot market, thereby reducing sales competition. Moreover, oil and gas must
compete with coal, atomic energy, hydro-electric power and other forms of
energy.
Regulation
Production and sale of oil and gas are subject to federal and state governmental
regulations in a variety of ways including environmental regulations, labor
laws, interstate sales, excise taxes and federal and Indian lands royalty
payments. Failure to comply with these regulations may result in fines,
cancellation of licenses to do business and cancellation of federal, state or
Indian leases. The production of oil and gas is subject to regulation by the
state regulatory agencies in the states in which HCRC does business. These
agencies make and enforce regulations to prevent waste of oil and gas and to
protect the rights of owners to produce oil and gas from a common reservoir. The
regulatory agencies regulate the amount of oil and gas produced by assigning
allowable production rates to wells capable of producing oil and gas.
Environmental Considerations
The exploration for, and development of, oil and gas involves the extraction,
production and transportation of materials which, under certain conditions, can
be hazardous or can cause environmental pollution problems. In light of the
current interest in environmental matters, HCRC cannot predict the effect of
possible future public or private action on its business. HCRC is continually
taking actions it believes are necessary in its operations to ensure conformity
with applicable federal, state and local environmental regulations. As of
December 31, 1997, HCRC has not been fined or cited for any environmental
violations which would have a material adverse effect upon capital expenditures,
earnings or the competitive position of HCRC in the oil and gas industry.
Insurance Coverage
HCRC is subject to all the risks inherent in the exploration for, and
development of, oil and gas, including blowouts, fires and other casualties.
HCRC maintains insurance coverage as is customary for entities of a similar size
engaged in operations similar to that of HCRC, but losses can occur from
uninsurable risks or in amounts in excess of existing insurance coverage. The
occurrence of an event which is not insured or not fully insured could have an
adverse impact upon HCRC's earnings, cash flows and financial position.
Issues Related to the Year 2000
As the year 2000 approaches, there are uncertainties concerning whether computer
systems will properly recognize date-sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or fail.
Because of the nature of the oil and gas industry and the necessity for the
Company to make reserve estimates and other plans well beyond the year 2000, the
Company's computer systems and software were already configured to accommodate
dates beyond the year 2000. The Company believes that the year 2000 will not
pose significant operational problems for the Company's computer systems. The
Company has not yet completed its assessment of all of its systems, or the
computer systems of third parties with which it deals, and while it is not
possible at this time to assess the effect of a third party's inability to
adequately address year 2000 issues the Company does not believe the potential
problems associated with the year 2000 will have a material effect on its
financial position.
ITEM 2 - PROPERTIES
Exploration and Development Projects
In 1997, HCRC incurred $12,106,000 in direct property additions and exploration
and development costs. The costs were comprised of approximately $9,284,000 for
domestic exploration and development expenditures and approximately $2,822,000
for property acquisitions. In 1997, HCRC participated in approximately 98
drilling or recompletion projects, the highlights of which are discussed below.
HCRC's 1997 capital program led to the replacement, including revisions to prior
year reserves, of 107% of 1997 production. Sales of reserves in place in 1997,
which were approximately 1% of 1997 production, were excluded from this
calculation. Approximately $2,061,000 of the 1997 capital expenditures were for
land and seismic data anticipated to yield prospects for 1998 and subsequent
years.
Property Sales
During 1997, HCRC received approximately $40,000 for the sale of 50 nonstrategic
properties located in eight states. Capital Projects
Greater Permian Region
HCRC expended approximately $5,535,000 of its capital budget on the Greater
Permian Region located in Texas and Southeast New Mexico. During 1997, HCRC
spent approximately $3,755,000 drilling 29 development wells and 26 exploration
wells and acquiring undeveloped acreage and geological and geophysical data. Of
the wells drilled, 39 (71%) were successful. A discussion of several of the
larger projects within the Region follows.
HCRC spent approximately $275,000 successfully recompleting two wells, drilling
one successful development well, and drilling two unsuccessful exploration wells
in the Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico.
HCRC spent approximately $260,000 to drill six exploration and three development
wells in the nonoperated Merkle Project in Jones, Taylor, and Nolan Counties,
Texas. Five wells were successful.
Based on the success in the nonoperated Merkle area, HCRC acquired 74 additional
square miles of proprietary 3-D seismic data adjacent to the non-operated area.
In 1997, HCRC incurred approximately $730,000 acquiring acreage and drilling 10
exploration wells, seven of which were successful.
HCRC purchased an interest in proprietary 3-D seismic data and selected acreage
within an 85 square mile area, referred to as the Griffin Project, for
approximately $495,000. In 1997, HCRC drilled one successful and one
unsuccessful exploratory well in the area for approximately $425,000. HCRC is
currently participating in the drilling of one exploration well and incurred
approximately $120,000 through December 31, 1997.
HCRC spent approximately $850,000 drilling two exploration wells and nine
development wells in the Spraberry area of West Texas. Of the wells drilled,
eight (73%) are successful. In July, HCRC acquired additional interests in 34 of
its existing wells in the area for approximately $510,000.
In 1997, HCRC continued to devote capital resources to the East Keystone area in
Winkler County, Texas. HCRC spent approximately $380,000 drilling 14 development
wells with a success rate of 100%.
Rocky Mountain Region
HCRC expended approximately $2,205,000 of its capital budget in the Rocky
Mountain Region located in Colorado, Montana, North Dakota, Northwest New Mexico
and Wyoming. During 1997, HCRC drilled or participated in the drilling or
recompletion of 17 wells, seven which were successful. A description of the
Region's major projects follows. In the San Juan Basin in LaPlata County,
Colorado and Rio Arriba County, New Mexico, HCRC has an interest in 34 wells
owned by a special purpose entity owned by a large east coast financial
institution. During 1997, seven successful recompletions were performed and one
successful exploration well. This work and other activity in the San Juan region
have yielded significant upward revisions to HCRC's reserve base. HCRC incurred
approximately $205,000 on four recompletion attempts in San Juan County, New
Mexico, two of which were successful. In addition, HCRC purchased additional
interests in existing wells in the area for $70,000.
In the Lone Tree area of Montana, HCRC drilled two exploration wells and three
development wells for a cost of approximately $85,000. Two of the development
wells and one of the exploration wells were successful.
The Hudson Ranch project is a multi-objective exploration project generated from
120 miles of 2-D proprietary seismic data. HCRC's 1997 costs for the project are
approximately $340,000. A 3-D seismic data acquisition program is underway, and
exploratory drilling is anticipated to begin in 1998.
HCRC also participated in the drilling of an 11,500 feet exploration well in the
Beach Field of North Dakota. HCRC incurred approximately $215,000 for
participation in this successful well. Expenditures in various other areas of
the region were approximately $455,000 for drilling two unsuccessful exploration
wells and one successful development well.
Gulf Coast Region
HCRC expended approximately $1,480,000 of its capital budget in the Gulf Coast
Region in Louisiana and South and East Texas. During 1997, HCRC spent
approximately $945,000 on two unsuccessful exploration attempts, one
unsuccessful development well, and one successful development well. Repairs and
successful workovers on wells in the Scott Field cost HCRC approximately
$230,000.
HCRC also incurred approximately $145,000 on miscellaneous projects within the
Region for land and geological data.
Mid-Continent and Other Areas
The remaining $2,886,000 of HCRC's 1997 capital budget was devoted to projects
in Kansas, Oklahoma and all other areas. In 1997, HCRC incurred $890,000 for
land, geological data and drilling costs for 15 development wells and six
exploration wells. Of the wells drilled, 17 (81%) were successful. A description
of the major projects follow.
HCRC is participating in an exploration prospect in Carter County, Oklahoma.
This project is a 19,000 feet deep multi-formation structural test and is
currently in the completion phase. The drilling and land costs to HCRC are
approximately $355,000.
In 1997, HCRC entered into an agreement with another operator to participate in
an 8,500 feet deep Spiro/Foster test well in LeFlore County, Oklahoma. The well
was a success and cost HCRC approximately $265,000.
HCRC also purchased additional interests in eight existing Kansas properties for
approximately $110,000.
Projects begun in the fourth quarter of 1996 have cost HCRC approximately
$525,000 in 1997. These costs are primarily for work in the Gulf Coast Region
and in the Greater Permian Region. Miscellaneous land and geological and
geophysical data acquired in 1997 cost HCRC approximately $690,000.
In September 1997, HCRC and an unaffiliated partner were awarded a deep-water
exploration block offshore of northern Peru. Its partner is proceeding with a
1,200 mile seismic program to further evaluate the project. HCRC's partner, a
major oil company, is the operator, and HCRC has a carried interest until
drilling begins.
For 1998, HCRC's capital budget, which will be paid from cash generated from
operations, cash on hand and borrowings under HCRC's line of credit, has been
set at $21,400,000. HCRC's plans include projects in Texas, New Mexico,
Colorado, North Dakota, and Montana.
<PAGE>
Company Reserves, Production and Discussion by Significant Regions
The following table presents the December 31, 1997 reserve data by significant
regions.
<TABLE>
<CAPTION>
Present Value of
Proved Reserve Quantities Estimated Future Net Cash Flows
Proved Proved
Mcf of Gas Bbls of Oil Undeveloped Developed Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Greater Permian Region 31,812 2,527 $ 810 $ 27,751 $ 28,561
Gulf Coast Region 9,986 223 118 20,662 20,780
Rocky Mountain Region 32,172 724 377 29,600 29,977
Mid-Continent Region 1,074 2,029 397 6,642 7,039
Other 531 22 59 1,584 1,643
------ ----- ------ ------- -------
75,575 5,525 $1,761 $86,239 $88,000
====== ===== ====== ======= =======
</TABLE>
The present value of estimated future net cash flows is calculated using year
end average oil and gas prices. At December 31, 1997, oil and gas prices
averaged $16.77 per bbl of oil and $2.20 per mcf of gas. If average oil and gas
prices as of February 27, 1998 of $15.57 per bbl and $2.00 per mcf of gas had
been used in this calculation, the present value of estimated future net cash
flows would have been approximately 16% lower.
The following table presents the oil and gas production for significant regions.
<TABLE>
<CAPTION>
Production for the Production for the
Year Ended 1997 Year Ended 1996
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
(In thousands)
<S> <C> <C> <C> <C>
Greater Permian Region 1,719 308 1,712 376
Gulf Coast Region 1,875 64 2,269 73
Rocky Mountain Region 3,977 107 3,899 153
Mid-Continent Region 234 214 270 223
Other 158 18 130 12
----- --- ----- ----
7,963 711 8,280 837
===== === ===== ====
</TABLE>
The following table presents the Company's extensions and discoveries by
significant regions.
<TABLE>
<CAPTION>
For the Year Ended 1997 For the Year Ended 1996
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
(In thousands)
<S> <C> <C> <C> <C>
Greater Permian Region 529 238 710 424
Gulf Coast Region 295 21 33 3
Rocky Mountain Region 1,756 234 792 34
Mid-Continent Region 43 237
Other 314 26 175 30
----- --- ----- ----
2,894 562 1,947 491
===== === ===== ====
</TABLE>
<PAGE>
A description of the Company's properties by region follows.
Greater Permian Region
HCRC has significant interests in the Greater Permian Region, which includes
West Texas and Southeast New Mexico. In this Region, HCRC has interests in 444
(376 of which are operated) productive oil and gas wells, 38 operated shut-in
oil and gas wells and 15 (14 operated) salt water disposal wells or injection
wells. During 1997, HCRC drilled or recompleted 55 wells, 39 of which were
successful. The following is a description of the significant areas within the
Greater Permian Region.
Carlsbad/Catclaw Area. HCRC's interests in the Carlsbad/Catclaw Area as of
December 31, 1997 consisted of 61 producing wells that produce primarily natural
gas and are located on the northwestern edge of the Delaware Basin in Lea, Eddy
and Chaves Counties, New Mexico. HPI operates 40 of these wells. The wells
produce at depths ranging from approximately 2,500 feet to 14,000 feet from the
Delaware, Atoka, Bone Springs and Morrow formations. During 1997, HCRC
participated in the drilling or recompletion of five wells, three of which were
successful. HCRC has future plans for six additional projects in this area.
East Keystone Area. HCRC's interest in the East Keystone Area as of December 31,
1997 consisted of 54 producing wells, 38 of which are operated by HPI, in
Winkler County, Texas. The primary focus of this area is the development of the
Holt and San Andreas formations at a depth of 5,100 feet. During 1997, HCRC had
14 development projects, all of which were successful. HCRC's future development
plans include five projects in this area.
Merkle Area. HCRC's nonoperated interest in the Merkle Area includes 10 square
miles of proprietary seismic data in Jones, Nolan and Taylor Counties, Texas,
which was acquired in 1995. HCRC's focus in this area is exploration of the
Canyon, Strawn and Ellenberger formations at depths of 3,500 to 6,500 feet. In
1997, HCRC participated in the drilling and recompletion of six exploration and
three development wells, five of which were successful.
Based on its success in the nonoperated Merkle Area, HCRC acquired 74 additional
miles of proprietary 3-D seismic data adjacent to the nonoperated area. In 1997,
HCRC drilled ten exploration wells in the area, seven of which were successful.
All of these wells are operated by HPI. Future plans for this area include
drilling 22 exploration wells, with possible additional locations contingent
upon continued exploration success.
Spraberry Area
HCRC's interests in the Spraberry Area consist of 345 producing wells, 11 salt
water disposal wells and 29 shut-in wells in Dawson, Upton, Reagan and Irion
Counties, Texas. HPI operates 385 of these wells. Most of the current production
from the wells is from the Upper and Lower Spraberry, Clearfork Canyon, Dean and
Fusselman formations at depths ranging from 5,000 feet to 9,000 feet. During
1997, HCRC drilled or recompleted 11 wells, eight of which were successful.
Future plans for this area include 20 development wells and workovers and
additional projects contingent upon future evaluation.
Gulf Coast Region
HCRC has significant interests in the Gulf Coast Region in Louisiana and South
and East Texas. HCRC's most significant interest in the Gulf Coast Region
consists of 10 producing gas wells, one shut-in gas well and six salt water
disposal wells located in Lafayette Parish, Louisiana. The wells produce
principally from the Bol Mex formations at 13,500 to 14,500 feet and are
operated by HPI. The two most significant wells in the area are the A.L.
Boudreaux #1 and the G.S. Boudreaux Estate #1. During 1997, HCRC drilled one
successful development well, one unsuccessful development well, and two
unsuccessful exploration wells.
<PAGE>
Rocky Mountain Region
HCRC has significant interests in the Rocky Mountain Region, which includes
producing properties in Colorado, Montana, North Dakota and Northwest New
Mexico. HCRC has interests in 203 producing oil and gas wells, 172 of which are
operated by HPI, 44 shut-in wells, 35 of which are operated by HPI, and five
salt water disposal wells. The following is a description of the significant
areas within the Rocky Mountain Region.
San Juan Basin. HCRC's interest in the San Juan Basin consists of 82 producing
gas wells located in San Juan County, New Mexico and LaPlata County, Colorado.
HPI operates 51 wells in New Mexico, 31 of which produce from the Fruitland Coal
formation at approximately 2,200 feet and 20 of which produce from the Pictured
Cliffs, Mesa Verde and Dakota formations at 1,200 to 7,000 feet. During 1997,
HCRC drilled or recompleted four wells, two which were successful.
In 1996, HCRC participated in the acquisition of interests in 38 producing gas
wells in LaPlata County, Colorado and Rio Arriba County, New Mexico from a
subsidiary of Public Service Company of Colorado. Thirty-four of the wells were
assigned to a special purpose entity owned by a large East Coast financial
institution. The wells produce from the Fruitland Coal formation at
approximately 3,200 feet. In connection with the acquisition, HCRC monetized the
Section 29 tax credits generated by the wells. The project was financed through
a third party lender using a production payment structure. In 1997, HCRC
successfully recompleted seven of the wells, and drilled one successful
exploration well. HCRC has future plans for eight projects in this area.
Toole County Area. HCRC's interests in the Toole County Area consist of 67
wells, 58 of which are operated by HPI. The oil wells produce from the Nisku
formation at depths of approximately 3,000 feet, and the gas wells produce from
the Bow Island formation at depths of 900 to 1,200 feet. During 1997, HCRC
drilled one successful well. HCRC has plans for future development wells and
workovers in this area.
Lone Tree, Richland County Area. HCRC's interest in the Lone Tree, Richland
County area consist of 13 producing wells operated by HPI in Richland County,
Montana. The oil wells produce principally from the Mission Canyon, Interlake
and Red River formations at depths of 9,000 feet to 12,000 feet. In 1997, HCRC
drilled two exploration and three development wells. Two of the development and
one of the exploration wells were successful.
Mid-Continent Region and Other
The Mid-Continent Region and Other is comprised of wells located in Kansas,
Oklahoma, California and South Central Texas. HCRC's most significant interests
are in Kansas and consist of 224 producing wells, of which 219 are operated by
HPI and five are operated by unaffiliated entities. The wells are located in 15
counties primarily in the Central Kansas Uplift and produce principally from the
Arbuckle and numerous Lansing-Kansas City formation zones from 3,000 feet to
6,500 feet. HCRC has several projects planned for this area in the future.
<PAGE>
Average Sales Prices and Production Costs
The following table presents the average oil and gas sales price and average
production costs per equivalent barrel computed at the ratio of six mcf of gas
to one barrel of oil.
<TABLE>
<CAPTION>
1997 1996 1995
Average sales prices (including effects of hedging):
<S> <C> <C> <C>
Oil and condensate (per bbl) $18.87 $20.13 $17.10
Natural gas (per mcf) 2.17 1.99 1.62
Production costs (per equivalent bbl) 5.01 4.68 4.49
</TABLE>
Productive Oil and Gas Wells
The following table summarizes the productive oil and gas wells as of December
31, 1997 attributable to HCRC's direct interests. Productive wells are producing
wells and wells capable of production. Gross wells are the total number of wells
in which HCRC has an interest. Net wells are the sum of HCRC's fractional
interests owned in the gross wells.
Gross Net
Productive Wells
Oil 564 204
Gas 278 100
--- ---
842 304
=== ===
Oil and Gas Acreage
The following table sets forth the developed and undeveloped leasehold acreage
held directly by HCRC as of December 31, 1997. Developed acres are acres which
are spaced or assignable to productive wells. Undeveloped acres are acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of acres
in which HCRC has a working interest. Net acres are the sum of HCRC's fractional
interests owned in the gross acres.
Gross Net
Developed acreage 88,450 28,950
Undeveloped acreage 267,420 67,100
------- ------
Total 355,870 96,050
======= ======
States in which HCRC holds undeveloped acreage include Texas, Louisiana,
Montana, Wyoming, New Mexico, Kansas, Colorado, North Dakota, California and
Michigan.
<PAGE>
Drilling Activity
The following table sets forth the number of wells attributable to HCRC's direct
interest drilled in the most recent three years.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
Gross Net Gross Net Gross Net
Development Wells:
<S> <C> <C> <C> <C> <C> <C>
Productive 23 4.0 29 6.2 66 14.4
Dry 4 1.0 4 1.0 2 .5
-- --- -- --- -- ----
Total 27 5.0 33 7.2 68 14.9
== === == === == ====
Exploratory Wells:
Productive 14 2.7 1 .1 6 .6
Dry 22 4.2 4 .6 5 .9
-- --- -- -- --- ---
Total 36 6.9 5 .7 11 1.5
== === == == == ===
</TABLE>
Office Space
HCRC is guarantor of 40% of the obligation under the Denver, Colorado office
lease which is in the name of HPI. Hallwood Energy Partners, L.P. ("HEP") is
guarantor of the remaining 60% of the obligation. HPI leases 41,000 square feet
for approximately $600,000 per year.
ITEM 3 - LEGAL PROCEEDINGS
See Note 14 to the financial statements included in Item 8 - Financial
Statements and Supplementary Data.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HCRC's common stock has traded over the counter on the NASDAQ National Market
System under the symbol "HCRC," since June 4, 1992. As of February 27, 1998,
there were 1,495 holders of record of HCRC's common stock. The following table
sets forth, for the periods indicated, the high and low closing bid quotations
for the common stock as reported by the National Quotation Bureau. HCRC did not
pay a dividend during the periods shown. During the third quarter of 1997, the
stockholders of HCRC approved a three-for-one split of HCRC's common stock. The
stock split was effected by issuing, as a stock dividend, two additional shares
of Common Stock for each share outstanding. The stock dividend was paid on
August 11, 1997 to shareholders of record on August 4, 1997. The stockholders
also approved an increase in the number of authorized shares of common stock
from 2,000,000 to 10,000,000 shares.
<PAGE>
HCRC Common Stock High Low
First quarter 1996 12 3/8 7 3/4
Second quarter 1996 20 1/3 10 2/3
Third quarter 1996 19 1/3 15 1/12
Fourth quarter 1996 26 2/3 16 1/3
First quarter 1997 30 1/6 22 3/4
Second quarter 1997 25 15
Third quarter 1997 30 1/2 20
Fourth quarter 1997 26 21 1/4
All share and per share information has been retroactively restated for the
three-for-one stock split effective August 11, 1997.
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding HCRC's
financial position and results of operations as of the dates indicated. All per
share information has been restated to reflect the three-for-one stock split,
which was effective August 11, 1997.
<TABLE>
<CAPTION>
Hallwood Consolidated Resources Corporation
As of and for the Years Ended December 31,
1997 1996 1995 1994 1993
(In thousands except per share)
Summary of Operations
Oil and gas revenues and
<S> <C> <C> <C> <C> <C>
pipeline operations $32,258 $34,308 $25,349 $20,459 $19,792
Total revenue 32,411 34,445 25,484 20,644 21,007
Production operating expense 10,218 10,383 8,514 8,367 7,750
Depreciation, depletion and
amortization 8,605 9,246 8,206 7,340 6,414
Impairment 9,277 4,721
General and administrative
expense 4,884 4,011 4,630 3,842 3,935
Net income (loss) 5,585 8,210 (4,670) (2,974) 809
Net income (loss) per share - basic* 2.05 3.00 (1.48) (.93) .25
Net income (loss) per share - diluted* 1.97 2.91 (1.48) (.93) (.25)
Dividends per share 2.40
Balance Sheet
Working capital (deficit) $ 4,867 $ (47) $(7,202) $ 430 $ 5,973
Property, plant and
equipment, net 76,031 67,285 65,433 55,011 57,993
Total assets 92,371 78,468 73,939 62,125 70,986
Noncurrent liabilities 32,678 24,558 21,790 11,890 17,430
Stockholders' equity 48,686 43,061 36,635 43,589 46,596
<FN>
*Amounts have been restated to reflect the adoption of Statement of Financial
Accounting Standards No. 128 "Earnings per Share," during December 1997.
</FN>
</TABLE>
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
Cash Flow
HCRC generated $9,746,000 of cash flow from operating activities during 1997.
The other primary cash inflows were:
$29,000,000 from borrowings under long-term debt;
$1,144,000 from distributions received from affiliates.
Cash was primarily used for:
$12,106,000 for property additions, exploration and development costs;
$24,000,000 for payments of long-term debt;
When combined with miscellaneous other cash activity during the year, the result
was an increase in HCRC's cash and cash equivalents of $3,864,000 for the year,
from $628,000 at December 31, 1996 to $4,492,000 at December 31, 1997.
Property Purchases, Sales and Capital Budget
In 1997, HCRC incurred $12,106,000 in direct property additions and exploration
and development costs. The costs were comprised of approximately $9,284,000 for
domestic exploration and development expenditures and approximately $2,822,000
for property acquisitions. HCRC's 1997 capital program led to the replacement,
including revisions to prior year reserves, of 107% of 1997 production using
year-end pricing.
HCRC's significant direct exploration and development expenditures in the
Greater Permian Region in 1997 included approximately $275,000 for successfully
recompleting or drilling three development wells, and for drilling two
unsuccessful exploration wells in the Carlsbad/Catclaw Draw areas in Lea, Eddy
and Chaves Counties, New Mexico; approximately $730,000 for acquiring acreage
and drilling 10 exploration wells, seven of which were successful, in the
operated Merkle area; approximately $850,000 for drilling two exploration wells
and nine development wells in the Spraberry area of West Texas, eight of which
were successful; approximately $510,000 to purchase additional interests in the
Spraberry area; and approximately $380,000 for drilling 14 development wells in
the Keystone area, all of which were successful.
In the Hudson Ranch project within the Rocky Mountain Region, HCRC incurred
$340,000 on costs associated with a multi-objective exploration project
generated from 120 miles of 2-D proprietary seismic data. In the Gulf Coast
Region, HCRC spent approximately $945,000 on two unsuccessful exploration
attempts, one unsuccessful development well, and one successful development
well.
Projects begun in the fourth quarter of 1996 have cost HCRC approximately
$525,000 in 1997. These costs are primarily for work in the Gulf Coast Region
and in the Greater Permian Region. HCRC also incurred approximately $690,000 for
miscellaneous land and geological and geophysical data.
For 1998, HCRC's capital budget, which will be paid from cash generated from
operations, cash on hand and borrowings under HCRC's line of credit has been set
at $21,400,000. HCRC's plans include projects in Texas, New Mexico, Colorado,
North Dakota, and Montana.
<PAGE>
See Item 2 - Properties, for further discussion of HCRC's exploration and
development projects.
Long lived assets, other than oil and gas properties, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. To date, the Company has not recognized
any impairment losses.
The Company made an offer to repurchase odd lot holdings of 99 or fewer shares
from its stockholders of record as of November 30, 1995. The offer was initially
for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 296,607 shares through the January 26, 1996 closing date for $2,382,000 at a
purchase price of $8.03 per share, of which $1,312,000 was expended during 1996.
On April 1, 1996, HCRC made another offer to purchase holdings of 99 or fewer
shares from its stockholders of record as of March 25, 1996. The offer was for
the period from April 1, 1996 through May 3, 1996. The Company repurchased a
total of 77,790 shares at a purchase price of $11.33 per share. HCRC resold
38,895 of these shares to HEP at the price paid by HCRC for such shares,
resulting in a net repurchase cost to HCRC of $438,000.
Financing
On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes
("Subordinated Notes") due December 23, 2007 to a financial institution. HCRC
also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an
exercise price of $28.99 per share. The Subordinated Notes bear interest at the
rate of 10.32% per annum on the unpaid balance, payable quarterly. Annual
principal payments of $5,000,000 are due on each of December 23, 2003 through
December 23, 2007.
During 1997, the Company and its banks amended their credit agreement to extend
the term date of the line of credit to May 31, 1999 and to reduce the Company's
borrowing base to $10,000,000. As of December 31, 1997, the Company has no
borrowings against the credit line. Subsequent to December 31, 1997, HCRC repaid
its contract settlement obligation of $1,039,000; therefore, HCRC's unused
borrowing base totaled $10,000,000 at February 27, 1998.
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% and the Federal
funds rate, plus .75%. Interest is payable at least quarterly. 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 swap its interest rate payments on
$10,000,000 of its debt for 1998 and $5,000,000 for each of 1999 and 2000. 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 swaps, 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%. Under the
swap contracts, HCRC makes interest payments on its line of credit as scheduled
and receives or makes payments based on the differential between the fixed rate
of the swap and a floating rate based on the three-month London Interbank
Offered Rate plus a defined spread.
Historically, HCRC has not used the swaps for trading purposes, but rather for
the purpose of providing a measure of predictability for a portion of HCRC's
interest payments under its line of credit, which has a floating rate of
interest. The swaps have been accounted for as hedges, and the amounts received
or paid upon settlement of the swaps were recognized as interest expense at the
time the interest payments were due. HCRC intends to continue this policy in the
future. In December 1997, HCRC used a portion of the proceeds from the issuance
of the Subordinated Notes mentioned above to repay its line of credit in full,
which resulted in the notional amount of HCRC's interest rate swaps being
unmatched by outstanding indebtedness at year end. As a result, the swaps did
not qualify for hedge accounting as of December 31, 1997. The market value of
the swaps as of December 31, 1997 was approximately $93,000.
<PAGE>
Stock Split
During July 1997, the stockholders of HCRC approved an increase in the number of
authorized shares of its Common Stock from 2,000,000 to 10,000,000 shares. HCRC
also declared a three-for-one split of its outstanding Common Stock. The stock
split was effected by issuing, as a stock dividend, two additional shares of
Common Stock for each share outstanding. The stock dividend was paid on August
11 to shareholders of record on August 4. All share and per share information
has been restated to reflect the three-for-one stock split.
Stock Option Plans
During 1995, the Company adopted a stock option plan covering 159,000 shares of
Common Stock and granted options for all of the shares under the plan. The
options were granted effective July 1, 1995 at an exercise price of $6.67 per
share, which was equal to the fair market value of the Common Stock on the day
preceding the date of grant. The options expire on July 1, 2005, unless sooner
terminated pursuant to the provisions of the plan. During December 1996, options
to purchase 1,500 shares were exercised. During 1997, options to purchase 9,270
shares were exercised.
During the second quarter of 1997, the Company adopted a stock option plan
covering 159,000 shares of Common Stock and granted options for all of the
shares under the plan. The terms of this plan are generally consistent with the
terms of the Company's existing 1995 Stock Option Plan. The options were granted
effective June 17, 1997 at an exercise price of $20.33 per share, which was
equal to the fair market value of the Common Stock on the 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. In addition, the plan provides that vesting of the options may be
accelerated under certain conditions.
Gas Balancing
HCRC uses the sales method to account for gas balancing. Under this method, HCRC
recognizes revenue on all of its sales of production, and any over-production or
under-production is recovered at a future date.
As of December 31, 1997, HCRC had a net over-produced position of 360,000 mcf
($781,000 valued at average annual prices). The management of HCRC believes that
all future imbalances can be made up with production from existing wells or from
wells which will be drilled as offsets to current producing wells and that this
imbalance will not have a material effect on HCRC's results of operations,
liquidity and capital resources. The reserves discussed in Item 2 and Item 8
have been reduced by 360,000 mcf in order to reflect HCRC's gas balancing
position.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SAFS
130"). SAFS 130 established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company is required to adopt SFAS 130 on January 1, 1998. The Company has
not completed the process of evaluating the impact that will result from
adopting SFAS 130 or the manner that will be used to disclose the required
information in its financial statements.
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-K 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-K or otherwise expressed by
or on behalf of the Company are, to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and 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.
Inflation and Changing Prices
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HCRC, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and world-wide
economic and political conditions, and government regulations and tax laws.
Prices for both oil and gas have fluctuated from 1995 through 1997. The
following table sets forth the average price received by HCRC for each of the
last three years and the effects of the hedging transactions described below:
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding the effects (including the effects (excluding the effects (including the effects
of hedging of hedging of hedging of hedging
transactions) transactions) transactions) transactions)
(Bbl) (Bbl) (Mcf) (Mcf)
<S> <C> <C> <C> <C>
1997 $19.13 $18.87 $2.39 $2.17
1996 20.96 20.13 2.11 1.99
1995 16.71 17.10 1.42 1.62
</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 following table provides a summary of the Company's financial contracts:
<TABLE>
<CAPTION>
Oil
Percent of Direct Production Contract
Period Hedged Floor Price
(per bbl)
<S> <C> <C>
1998 14% $14.57
1999 5% 15.38
</TABLE>
Between 30% and 100% of the oil volumes hedged in each year are subject to a
participating hedge whereby HCRC will receive the contract price if the posted
futures price is lower than the contract price, and will receive the contract
price plus 25% of the difference between the contract price and the posted
futures price if the posted futures price is greater than the contract price.
All of the volumes hedged in 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 $18.85 per barrel.
<PAGE>
<TABLE>
<CAPTION>
Gas
Percent of Direct Production Contract
Period Hedged Floor Price
(per mcf)
<S> <C> <C>
1998 31% $1.91
1999 18% 1.67
2000 9% 1.86
2001 5% 1.53
</TABLE>
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 price is $2.93 per mcf.
During the first quarter through February 27, 1998, the weighted average oil
price (for barrels not hedged) was approximately $15.57 per barrel, and the
weighted average price of natural gas (for mcfs not hedged) was approximately
$2.00 per mcf.
Inflation
Inflation did not have a material impact on the Company in 1997 and is not
anticipated to have a material impact in 1998.
Results of Operations
The following tables are presented to contrast HCRC's revenue, expense and
earnings for discussion purposes. Significant fluctuations are discussed in the
accompanying narrative.
The "direct owned" column represents HCRC's direct royalty and working share
interests in oil and gas properties. The "HEP" column represents HCRC's share of
the results of operations of HEP. HCRC owned approximately 9% of the outstanding
limited partner units of HEP through the third quarter of 1995, when HCRC's
ownership increased to approximately 19%.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Year Ended December 31, 1997 For the Year Ended December 31, 1996
Direct Direct
Owned HEP Total Owned HEP Total
<S> <C> <C> <C> <C> <C> <C>
Oil production (bbl) 576 135 711 668 169 837
Gas production (mcf) 5,951 2,012 7,963 6,134 2,146 8,280
Average oil price $18.84 $19.00 $18.87 $20.17 $19.98 $20.13
Average gas price $ 2.14 $ 2.25 $ 2.17 $ 1.93 $ 2.15 $ 1.99
Oil revenue $10,851 $2,565 $13,416 $13,476 $ 3,376 $16,852
Gas revenue 12,719 4,532 17,251 11,826 4,620 16,446
Pipeline and other revenue 1,035 556 1,591 510 500 1,010
Interest income 84 69 153 28 109 137
----- ----- ------ ------ ----- ------
Total revenue 24,689 7,722 32,411 25,840 8,605 34,445
Production operating expense 8,108 2,110 10,218 8,203 2,180 10,383
General and administrative expense 3,908 976 4,884 3,186 825 4,011
Interest expense 1,675 583 2,258 1,800 730 2,530
Depreciation, depletion, and amortization 6,621 1,984 8,605 7,050 2,196 9,246
Other 24 90 114
------ ----- ------ ------ ----- ------
20,312 5,653 25,965 20,263 6,021 26,284
INCOME BEFORE INCOME TAXES 4,377 2,069 6,446 5,577 2,584 8,161
------ ----- ------ ----- ----- ------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 961 961 301 301
Deferred (100) (100) (350) (350)
------- ------ ----- ------
861 861 (49) (49)
------ ------ ----- ------
NET INCOME $ 3,516 $2,069 $ 5,585 $ 5,626 $ 2,584 $ 8,210
====== ====== ===== ===== ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION
(In thousands except price)
For the Year Ended December 31, 1995
Direct
Owned HEP Total
<S> <C> <C> <C>
Oil production (bbl) 611 108 719
Gas production (mcf) 5,725 1,346 7,071
Average oil price $17.14 $16.84 $17.10
Average gas price $ 1.57 $ 1.87 $ 1.62
Oil revenue $10,475 $ 1,819 $12,294
Gas revenue 8,972 2,517 11,489
Pipeline and other revenue 1,299 267 1,566
Interest income 100 35 135
------ ----- ------
Total revenue 20,846 4,638 25,484
Production operating expense 7,191 1,323 8,514
General and administrative expense 3,975 655 4,630
Interest expense 1,316 482 1,798
Depreciation, depletion, and amortization 6,767 1,439 8,206
Impairment of oil and gas properties 8,943 334 9,277
Other 168 78 246
------ ----- ------
28,360 4,311 32,671
INCOME (LOSS) BEFORE INCOME TAXES (7,514) 327 (7,187)
------- ----- -------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 71 71
Deferred (2,588) (2,588)
------- ------
(2,517) (2,517)
------- ------
NET INCOME (LOSS) $(4,997) $ 327 $ (4,670)
======= ====== ========
</TABLE>
<PAGE>
1997 Compared to 1996
Oil Revenue
Oil revenue decreased $3,436,000 during 1997 as compared with 1996. The decrease
in revenue is comprised of a decrease in price from $20.13 per barrel in 1996 to
$18.87 per barrel in 1997 and a 15% decrease in oil production from 837,000
barrels in 1996 to 711,000 barrels in 1997. The decrease in production is due to
the temporary shut-in of two wells in Louisiana during the second quarter of
1997 while workover procedures were performed and to normal production declines.
The effect of HCRC's hedging transactions described under "Inflation and
Changing Prices" was to decrease HCRC's average oil price from $19.13 per barrel
to $18.87 per barrel, resulting in a $185,000 decrease in revenue.
Gas Revenue
Gas revenue increased $805,000 during 1997 as compared with 1996. The increase
is comprised of an increase in the average gas price from $1.99 per mcf in 1996
to $2.17 per mcf in 1997, partially offset by a decrease in production from
8,280,000 mcf in 1996 to 7,963,000 mcf in 1997. The decrease in production is
due to the temporary shut-in of two wells in Louisiana during the second quarter
of 1997 while workover procedures were performed and to normal production
declines.
The effect of HCRC's hedging activity was to decrease HCRC's average gas price
from $2.39 per mcf to $2.17 per mcf, resulting in a $1,752,000 decrease in
revenue.
Pipeline and Other
Pipeline and other revenue consists of revenue derived from salt water disposal,
incentive and tax credit payments from certain coalbed methane wells, and other
miscellaneous revenue. Pipeline and other revenue increased by $581,000 during
1997 as compared with 1996, primarily due to the receipt of insurance proceeds
during 1997, which reimbursed a portion of expense incurred in a prior period to
settle certain litigation.
Production Operating Expense
Production operating expense decreased $165,000 during 1997 as compared to 1996.
The decrease is the result of lower production taxes due to the decrease in
production discussed above.
General and Administrative Expense
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports as well as
allocated internal overhead incurred by HPI on behalf of the Company. These
costs increased $873,000 during 1997 as compared to 1996, primarily as a result
of increased performance based compensation during 1997.
Interest Expense
Interest expense represents interest expense on the Company's outstanding debt,
interest incurred on the contract settlement liability related to a recoupable
take-or-pay settlement received in the third quarter of 1989, and the Company's
pro rata share of HEP's interest expense. The Company does not pay any of HEP's
interest expense. Interest expense decreased $272,000 in 1997 as compared to
1996, primarily as a result of a lower average debt balance during 1997.
<PAGE>
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense associated with proved oil and
gas properties decreased $641,000 during 1997 as compared with 1996. This
decrease is due to a lower depletion rate resulting from the decreased
production discussed above.
Other
Other expense for 1996 is comprised of numerous miscellaneous items, none of
which is individually significant.
1996 Compared to 1995
Oil Revenue
Oil revenue increased $4,558,000 during 1996 as compared with 1995. The increase
in revenue is comprised of an 18% increase in price from $17.10 per barrel in
1995 to $20.13 per barrel in 1996 and a 16% increase in oil production from
719,000 barrels in 1995 to 837,000 barrels in 1996. The increase in production
is due to increased production from developmental drilling projects in West
Texas, Montana and Wyoming, partially offset by normal production declines.
The effect of HCRC's hedging transactions was to decrease HCRC's average oil
price from $20.96 per barrel to $20.13 per barrel, resulting in a $695,000
decrease in revenue.
Gas Revenue
Gas revenue increased $4,957,000 during 1996 as compared with 1995. The increase
is comprised of a 23% increase in the average gas price from $1.62 per mcf in
1995 to $1.99 per mcf in 1996 and a 17% increase in production, from 7,071,000
mcf in 1995 to 8,280,000 mcf in 1996. The increase in production is due to
increased production from developmental drilling projects in West Texas, Montana
and Wyoming, partially offset by normal production declines.
The effect of HCRC's hedging activity was to decrease HCRC's average gas price
from $2.11 per mcf to $1.99 per mcf, resulting in a $994,000 decrease in
revenue.
Pipeline and Other
Pipeline and other revenue decreased by $556,000 during 1996 as compared with
1995, primarily due to a payout adjustment on one of HCRC's wells which occurred
during 1995.
Production Operating Expense
Production operating expense increased $1,869,000 during 1996 as compared to
1995. The increase was the result of higher taxes due to higher production, as
well as increased operating expenses in the West Texas area.
General and Administrative Expense
General and administrative expense decreased by $619,000 during 1996 as compared
to 1995, primarily as a result of decreased performance based compensation and a
decrease in salaries expense and employee benefits expense due to personnel
reductions during 1995.
<PAGE>
Interest Expense
Interest expense increased $732,000 in 1996 as compared to 1995, primarily as a
result of increased borrowings against the Company's credit line.
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense associated with proved oil and
gas properties increased $1,040,000 during 1996 as compared with 1995. This
increase is primarily due to a higher depletion rate due to the increased
production discussed above as well as higher capitalized costs during 1996 as a
result of capital expenditures incurred during the year.
Other
Other expense for 1996 and 1995 is comprised of numerous miscellaneous items,
none of which is individually significant.
<PAGE>
<TABLE>
<CAPTION>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
FINANCIAL STATEMENTS:
<S> <C>
Independent Auditors' Report 25
Consolidated Balance Sheets at December 31, 1997 and 1996 26-27
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 28
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 29
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 30
Notes to Consolidated Financial Statements 31-43
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 44-47
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Hallwood Consolidated Resources Corporation:
We have audited the consolidated financial statements of Hallwood Consolidated
Resources Corporation as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997, listed in the accompanying index at
Item 8. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hallwood Consolidated Resources
Corporation at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 27, 1998
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
December 31,
1997 1996
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 4,492 $ 628
Accrued oil and gas revenues 4,266 4,808
Due from affiliates 2,418 897
Prepaid and other assets 844 493
Current assets of affiliates 3,854 3,976
------ ------
Total current assets 15,874 10,802
------ ------
PROPERTY, PLANT AND EQUIPMENT, at cost
Oil and gas properties (full cost method)
Proved oil and gas properties 294,922 278,581
Unproved mineral interests - domestic 2,250 1,240
------- -------
Total 297,172 279,821
Less - accumulated depreciation,
depletion, amortization and impairment (221,141) (212,536)
-------- --------
Net property, plant and equipment 76,031 67,285
-------- --------
OTHER ASSETS
Deferred tax asset 450 350
Noncurrent assets of affiliate 16 31
------ -----
Total other assets 466 381
------ ---
TOTAL ASSETS $ 92,371 $ 78,468
====== ======
<FN>
(Continued on the following page)
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except shares)
December 31,
1997 1996
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued liabilities 3,087 $ 2,273
Current portion of contract settlement obligation 1,039
Current portion of long-term debt 3,750
Current liabilities of affiliates 6,881 4,826
------ ------
Total current liabilities 11,007 10,849
------ ------
NONCURRENT LIABILITIES
Contract settlement obligation 948
Long-term debt 25,000 16,250
Long-term obligations of affiliates 7,589 7,243
Deferred liability 89 117
------- ------
Total noncurrent liabilities 32,678 24,558
------- ------
Total liabilities 43,685 35,407
------ ------
COMMITMENTS AND CONTINGENCIES (NOTES 11 AND 14)
STOCKHOLDERS' EQUITY
Common stock par value $.01; 10,000,000 shares
authorized; 2,986,812 shares issued in 1997 and
2,977,542 in 1996 30 30
Additional paid in capital 80,111 80,071
Accumulated deficit (27,581) (33,166)
Treasury stock - 259,278 shares in 1997 and 1996 (3,874) (3,874)
------ -------
Stockholders' Equity - net 48,686 43,061
------ -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,371 $ 78,468
======= ======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share)
For the Years Ended December 31,
1997 1996 1995
REVENUES:
<S> <C> <C> <C>
Oil revenue $ 13,416 $ 16,852 $ 12,294
Gas revenue 17,251 16,446 11,489
Pipeline and other 1,591 1,010 1,566
Interest 153 137 135
------ ------ ------
32,411 34,445 25,484
----- ------ ------
EXPENSES:
Production operating 10,218 10,383 8,514
General and administrative 4,884 4,011 4,630
Interest 2,258 2,530 1,798
Depreciation, depletion and amortization 8,605 9,246 8,206
Impairment of oil and gas properties 9,277
Other 114 246
------ ------ ------
25,965 26,284 32,671
------ ------ -------
INCOME (LOSS) BEFORE INCOME TAXES 6,446 8,161 (7,187)
------ ------ -------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 961 301 71
Deferred (100) (350) (2,588)
------ ------ -------
861 (49) (2,517)
------ ------ -------
NET INCOME (LOSS) $ 5,585 $ 8,210 $ (4,670)
====== ===== =======
NET INCOME (LOSS) PER SHARE - BASIC $ 2.05 $ 3.00 $ (1.48)
====== ===== =======
NET INCOME (LOSS) PER SHARE - DILUTED $ 1.97 $ 2.91 $ (1.48)
====== ===== =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,719 2,733 3,165
====== ===== =======
<FN>
The accompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Additional
Common Paid in Accumulated Treasury
Stock Capital Deficit Stock Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 30 $ 82,927 $(36,706) $ (2,662) $ 43,589
Increase in treasury shares (1,168) (1,168)
Repurchase and retirement of
common stock (1,116) (1,116)
Net loss (4,670) (4,670)
--- ------- -------- -------- -------
Balance, December 31, 1995 30 81,811 (41,376) (3,830) 36,635
Increase in treasury shares (44) (44)
Repurchase and retirement of
common stock (1,750) (1,750)
Exercise of common stock
options 10 10
Net income 8,210 8,210
--- ------- -------- -------- -------
Balance, December 31, 1996 30 80,071 (33,166) (3,874) 43,061
Other (21) (21)
Exercise of common stock
options 61 61
Net income 5,585 5,585
--- ------- -------- -------- -------
Balance, December 31, 1997 $ 30 $ 80,111 $(27,581) $ (3,874) $ 48,686
=== ====== ======== ======= ======
<FN>
Theaccompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31,
1997 1996 1995
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 5,585 $ 8,210 $ (4,670)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion, amortization and impairment 8,605 9,246 17,483
Deferred income tax benefit (100) (350) (2,588)
Noncash interest expense 91 83 109
Recoupment of take-or-pay liability (28) (110) (168)
Undistributed earnings of affiliates (3,843) (5,173) (3,469)
Changes in operating assets and liabilities provided
(used)cash net of noncash activity:
Accrued oil and gas revenues 542 (2,134) 22
Due from affiliates (1,569) (1,071) (381)
Prepaid and other assets (351) (382) 91
Accounts payable and accrued liabilities 814 (1,402) 1,877
Payable to affiliates (247)
----- ----- ------
Net cash provided by operating activities 9,746 6,917 8,059
----- ----- ------
INVESTING ACTIVITIES:
Proceeds from oil and gas property sales 40 1,368 726
Additions to oil and gas properties (2,822) (2,182) (2,188)
Exploration and development costs incurred (9,284) (7,578) (7,379)
Refinance of Spraberry investment (6,338)
Distributions received from affiliates 1,144 1,144 1,096
Investment in affiliates (5,330)
------- ------- -------
Net cash used in investing activities (10,922) (13,586) (13,075)
------- ------- --------
FINANCING ACTIVITIES:
Payments of long-term debt (24,000) (2,000)
Proceeds from long-term debt 29,000 10,000 5,000
Repurchase and retirement of common stock (1,750) (1,116)
Payments on contract settlement obligation (118) (518)
Exercise of stock options 61 10
Other financing activities (21) 16 10
----- ----- ------
Net cash provided by financing activities 5,040 6,158 3,376
----- ----- ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,864 (511) (1,640)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 628 1,139 2,779
----- ----- ------
END OF YEAR $ 4,492 $ 628 $ 1,139
===== ====== ======
<FN>
Theaccompanying notes are an integral
part of the financial statements.
</FN>
</TABLE>
<PAGE>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a
Delaware corporation engaged in the development, production, sale of oil and
gas, and in the acquisition, exploration, development and operation of oil and
gas properties. The Company's properties are primarily located in the Rocky
Mountain, Mid-Continent, Greater Permian and Gulf Coast regions of the United
States. The principal objective of the Company is to maximize shareholder value
by increasing its reserves, production and cash flow through a balanced program
of development and high potential exploration drilling, as well as selective
acquisitions.
Accounting Policies
Consolidation
HCRC accounts for its interest in affiliated oil and gas Companies and limited
liability companies using the proportionate consolidation method of accounting.
The accompanying financial statements include the activities of HCRC and its pro
rata share of the activities of Hallwood Energy Partners, L. P. ("HEP").
Property, Plant and Equipment
The Company follows the full cost method of accounting whereby all costs related
to the acquisition and development of oil and gas properties are capitalized in
a single cost center ("full cost pool") and are amortized over the productive
life of the underlying proved reserves using the units of production method.
Proceeds from property sales are generally credited to the full cost pool.
Capitalized costs of oil and gas properties may not exceed an amount equal to
the present value discounted at 10% of estimated future net revenues from proved
oil and gas reserves plus the cost, or estimated fair market value, if lower, of
unproved properties. Should capitalized costs exceed this ceiling, an impairment
is recognized. The present value of estimated future net revenues is computed by
applying year-end prices of oil and gas to estimated future production of proved
oil and gas reserves as of year end, less estimated future expenditures to be
incurred in developing and producing the proved reserves and assuming
continuation of existing economic conditions.
The Company does not accrue costs for future site restoration, dismantlement and
abandonment costs related to proved oil and gas properties because the Company
estimates that such costs will be offset by the salvage value of the equipment
sold upon abandonment of such properties. The Company's estimates are based upon
its historical experience and upon review of current properties and restoration
obligations.
Unproved properties are withheld from the amortization base until such time as
they are either developed or abandoned. These properties are evaluated
periodically for impairment.
Long lived assets other than oil and gas properties which are evaluated for
impariment as described above, are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. To date, the Company has not recognized any impairment losses
<PAGE>
Derivatives
HCRC has entered into numerous financial contracts to hedge the price of its oil
and natural gas. The purpose of the hedges is to provide protection against
price decreases and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The amounts received or paid
upon settlement of these contracts are recognized as oil or gas revenue at the
time the hedged volumes are sold.
Gas Balancing
HCRC uses the sales method to account for gas balancing. Under this method, HCRC
recognizes revenue on all of its sales of production and any over-production or
under-production is recovered or repaid at a future date.
As of December 31, 1997, HCRC had a net over-produced position of 360,000 mcf
($781,000 valued at average annual prices). Current imbalances can be made up
with production from existing wells or from wells which will be drilled as
offsets to current producing wells. HCRC's oil and gas reserves as of December
31, 1997 have been reduced by 360,000 mcf in order to reflect HCRC's gas
balancing position.
Stock Split
During July 1997, the stockholders of HCRC approved an increase in the number of
authorized shares of its Common Stock from 2,000,000 to 10,000,000 shares. HCRC
also declared a three-for-one split of its outstanding Common Stock. The stock
split was effected by issuing, as a stock dividend, two additional shares of
Common Stock for each share outstanding. The stock dividend was paid on August
11 to shareholders of record on August 4. All share and per share information
has been restated to reflect the three-for-one stock split.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
Use of Estimates
The preparation of the financial statements for the Company in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Computation of Net Income (Loss) Per Share
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share (EPS),
and supersedes APB Opinion No. 15 and its related interpretations. It replaces
the presentation of primary EPS with a presentation of basic EPS, which excludes
dilution, and requires dual presentation of basic and diluted EPS for all
entities with complex capital structures. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods
ending after December 15, 1997, including interim periods, and requires
restatement of all prior period EPS data presented. HCRC adopted SFAS 128
effective December 31, 1997, and has restated all prior periods. EPS data
presented to give retroactive effect to the new accounting standard.
<PAGE>
Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares. Diluted income (loss) per share
includes the potential dilution that could occur upon exercise of the options to
acquire common stock described in Note 10, and the effects of the warrants
described in Note 6, computed using the treasury stock method which assumes that
the increase in the number of shares is reduced by the number of shares which
could have been repurchased by the Company with the proceeds from the exercise
of the options (which were assumed to have been made at the average market price
of the common shares during the reporting period). All share and per share
information has been restated to reflect the three-for-one stock split.
The following table reconciles the number of shares outstanding used in the
calculation of basic and diluted income (loss) per share.
The warrants have been ignored in the computation of diluted net income (loss)
per share in all periods and the stock options have been ignored in the
computation of diluted loss per share in 1995 because their inclusion would be
anti-dilutive.
<TABLE>
<CAPTION>
Income Shares Per Share
(In thousands except per Share)
For the Year Ended December 31, 1997
<S> <C> <C> <C>
Net income per share - basic $ 5,585 2,719 $ 2.05
Effect of Options 116
----- ----- ----
Net Income per share - diluted $ 5,585 2,835 $ 1.97
====== ===== =======
For the Year Ended December 31, 1996
Net income per share - basic $ 8,210 2,733 $ 3.00
Effect of Options 87
----- ----- ----
Net Income per share - diluted $ 8,210 2,820 $ 2.91
====== ===== =======
For the Year Ended December 31, 1995
Net loss per share - basic $ (4,670) 3,165 $(1.48)
----- ----- ----
Net loss per share - diluted $ (4,670) 3,165 $(1.48)
====== ===== =======
</TABLE>
Treasury Stock
At December 31, 1997 and 1996, the Company owns approximately 19% of the
outstanding units of HEP, which owns approximately 46% of the Company's shares;
consequently, the Company has an interest in 259,278 of its own shares at
December 31, 1997 and 1996. These shares are treated as treasury stock in the
accompanying financial statements.
Significant Customers
Both oil and natural gas are purchased by refineries, major oil companies,
public utilities, industrial customers and other users and processors of
petroleum products. HCRC is not confined to, nor dependent upon, any one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser, or a few purchasers, would not materially affect HCRC's business
because there are numerous purchasers in the areas in which HCRC sells its
production. However, for the years ended December 31, 1997, 1996 and 1995,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Company:
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
El Paso Field Services 17% 11%
Williams Gas Marketing 13%
Koch Oil Company 23% 27%
Conoco Inc. 13% 14%
Scurlock Permian Corporation 14%
</TABLE>
Environmental Concerns
The Company is continually taking actions it believes are necessary in its
operations to ensure conformity with applicable federal, state and local
environmental regulations. As of December 31, 1997, the Company has not been
fined or cited for any environmental violations which would have a material
adverse effect upon capital expenditures, earnings, cash flows or the
competitive position of the Company in the oil and gas industry.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SAFS
130"). SAFS 130 established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Company is required to adopt SFAS 130 on January 1, 1998. The Company has
not completed the process of evaluating the impact that will result from
adopting SFAS 130 or the manner that will be used to disclose the required
information in its financial statements.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
NOTE 2 - OIL AND GAS PROPERTIES
The following table summarizes certain cost information related to the Company's
oil and gas activities, including its pro rata share of HEP's oil and gas
activities. The Company has no material long-term supply agreements, and all
reserves are located within the United States.
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Property acquisition costs $ 3,350 $ 2,830 $10,912
Development costs 6,531 8,617 14,766
Exploration costs 8,064 2,206 2,885
------ ----- ------
Total $17,945 $13,653 $28,563
====== ====== ======
</TABLE>
Depreciation, depletion, amortization and property impairment related to proved
oil and gas properties per equivalent barrel of production for the years ended
December 31, 1997, 1996 and 1995 was $4.22, $4.17 and $6.96, respectively.
At December 31, unproved properties consist of the following:
1997 1996
(In thousands)
Texas $ 935 $1,069
California 447
North Dakota 314
Other 554 171
----- -----
$2,250 $1,240
===== =====
NOTE 3 - PRINCIPAL ACQUISITIONS AND SALES
1997
During 1997, HCRC had no individually significant property acquisitions or
sales.
1996
On July 1, 1996, HCRC and HEP completed a transaction involving the acquisition
from Fuel Resources Development Co., a wholly owned subsidiary of Public Service
Company of Colorado, and other interest owners of their interests in 38 coal bed
methane wells located in LaPlata County, Colorado and Rio Arriba County, New
Mexico. Thirty-four of the wells, were assigned to 44 Canyon LLC ("44 Canyon"),
a special purpose entity owned by a large east coast financial institution. The
wells qualify for tax credits under Section 29 of the Internal Revenue Code.
Hallwood Petroleum, Inc. ("HPI") manages and operates the properties on behalf
of 44 Canyon. The $28.4 million purchase price was funded by 44 Canyon through
the sale of a volumetric production payment to an affiliate of Enron Capital &
Trade Resources Corp., a subsidiary of Enron Corp., the sale of a subordinated
production payment and certain other property interests for $3.45 million to an
affiliate of HCRC and HEP, and additional cash contributed by the owners of 44
Canyon. The affiliate of HCRC and HEP which purchased the subordinated
production payment and other property interests is owned equally by HCRC and
HEP. The interests in the four wells in Rio Arriba County were acquired directly
by HCRC and HEP.
1995
On September 29, 1995, HCRC purchased 1,158,696 Class A Units of HEP having a
market value of $5,330,000 from a nominee acting on behalf of the plaintiff
class members in a class action lawsuit against HEP pursuant to the terms of an
option in the settlement of the lawsuit. The purchase of these Class A Units
represents the indirect acquisition of approximately 1.9 million equivalent
barrels of reserves.
NOTE 4 - DERIVATIVES
HCRC has entered into numerous financial contracts to hedge the price of its oil
and natural gas. HCRC does not use these hedges for trading purposes, but rather
for the purpose of providing a protection against price decreases and to provide
a measure of stability in the volatile environment of oil and natural gas spot
pricing. The amounts received or paid upon settlement of these contracts is
recognized as oil or gas revenue at the time the hedged volumes are sold.
The financial contracts used by HCRC to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HCRC sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices.
<PAGE>
The following table provides a summary of HCRC's financial contracts:
<TABLE>
<CAPTION>
Oil
Quantity of Production Contract
Period Hedged Floor Price
(bbls) (per bbl)
<S> <C> <C> <C>
1995 220,000 $16.93
1996 219,000 18.47
1997 262,000 17.88
1998 82,000 14.57
1999 23,000 15.38
</TABLE>
From 1998 forward, between 30% and 100% of the oil volumes hedged in each year
are subject to a participating hedge whereby HCRC will receive the contract
price if the posted futures price is lower than the contract price, and will
receive the contract price plus 25% of the difference between the contract price
and the posted futures price if the posted futures price is greater than the
contract price. From 1998 forward, all 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 $18.85 per
barrel.
<TABLE>
<CAPTION>
Gas
Quantity of Production Contract
Period Hedged Floor Price
(mcf) (mcf)
<S> <C> <C> <C>
1995 1,792,000 $1.84
1996 2,429,000 1.77
1997 2,413,000 1.89
1998 1,979,000 1.91
1999 1,062,000 1.67
2000 450,000 1.86
2001 203,000 1.53
</TABLE>
From 1998 forward, 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 price is $2.93 per mcf.
In the event of nonperformance by the counterparties to the financial contracts,
HCRC is exposed to credit loss, but has no off-balance sheet risk of accounting
loss. The Company anticipates that the counterparties will be able to satisfy
their obligations under the contracts because the counterparties consist of
well-established banking and financial institutions which have been in operation
for many years. Certain of HCRC's hedges are secured by the lien on HCRC's oil
and gas properties which also secures HCRC's Credit Agreement described in Note
6.
<PAGE>
NOTE 5 - RELATED PARTY TRANSACTIONS
Hallwood Petroleum, Inc. ("HPI"), an affiliated entity, manages and operates
certain oil and gas properties on behalf of other joint interest owners and the
Company. In such capacity, HPI pays all costs and expenses of operations and
distributes all revenues associated with such properties. The Company had
receivables from HPI of $2,418,000 and $897,000 as of December 31, 1997 and
1996, respectively. These amounts represent revenues net of operating costs and
expenses.
The Company reimburses HPI for actual costs and expenses, which include office
rent, salaries and associated overhead for personnel of HPI engaged in the
acquisition and evaluation of oil and gas properties (technical expenditures
which are capitalized as costs of oil and gas properties) and general and
administrative and lease operating expenditures necessary to conduct the
business of the Company (nontechnical expenditures which are expensed as general
and administrative or production operating expense). Reimbursements during 1997,
1996 and 1995 were as follows (in thousands):
Technical Nontechnical
Expenditures Expenditures
1997 $ 856 $1,225
1996 823 1,293
1995 912 1,627
Included in the nontechnical allocation from HPI attributable to the Company's
direct interest is approximately $241,000, $115,000 and $111,000 of consulting
fees under a contract with The Hallwood Group Incorporated ("Hallwood"), an
affiliated company, during the years ended December 31, 1997, 1996 and 1995,
respectively. Also included in the nontechnical allocation is $232,000, $234,000
and $263,000 in 1997, 1996 and 1995, respectively, representing costs incurred
by Hallwood and its affiliates on behalf of the Company.
During the third quarter of 1994, HPI entered into a consulting agreement with
its Chairman of the Board to provide advisory services regarding the
international activities of its affiliates. The amount of consulting fees
allocated to the Company under this agreement is $125,000 in both 1996 and 1995.
The agreement terminated effective December 31, 1996.
NOTE 6 - DEBT
On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes
("Subordinated Notes") due December 23, 2007 to a financial institution. HCRC
also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an
exercise price of $28.99 per share. The Subordinated Notes bear interest at the
rate of 10.32% per annum on the unpaid balance, payable quarterly. Annual
principal payments of $5,000,000 are due on each of December 23, 2003 through
December 23, 2007.
During 1997, the Company and its banks amended their credit agreement to extend
the term date of the line of credit to May 31, 1999 and to reduce its borrowing
base to $10,000,000. As of December 31, 1997, the Company has no borrowings
against the credit line. Subsequent to December 31, 1997, HCRC repaid its
contract settlement obligation of $1,039,000; therefore, its unused borrowing
base totaled $10,000,000 at February 27, 1998.
Borrowings against the credit line bear interest, at the option of the Company,
at either (i) the banks' Certificate of Deposit rate plus from 1.35% to 1.875%,
(ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the higher of the
prime rate of Morgan Guaranty Trust or the sum of one-half of 1% and the Federal
funds rate, plus .75%. Interest is payable at least quarterly. The credit
facility is secured by a first lien on approximately 80% in value of the
Company's oil and gas properties. HCRC has no debt maturing within the next five
years. Principal payments for the Subordinated Notes commence in 2003.
HCRC has entered into contracts to swap its interest rate payments on
$10,000,000 of its debt for 1998 and $5,000,000 for each of 1999 and 2000. In
general, it is HCRC's goal to hedge 50% of its debt 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 swaps, 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%. Under the swap contracts, HCRC makes interest payments on its line of
credit as scheduled and receives or makes payments based on the differential
between the fixed rate of the swap and a floating rate based on the three-month
London Interbank Offered Rate plus a defined spread.
Historically, HCRC has not used the swaps for trading purposes, but rather for
the purpose of providing a measure of predictability for a portion of HCRC's
interest payments under its line of credit, which has a floating rate of
interest. The swaps have been accounted for as hedges, and the amounts received
or paid upon settlement of the swaps were recognized as interest expense at the
time the interest payments were due. HCRC intends to continue this policy in the
future. In December 1997, HCRC used a portion of the proceeds from the issuance
of the Subordinated Notes mentioned above to repay its line of credit in full,
which resulted in the notional amount of HCRC's interest rate swaps being
unmatched by outstanding indebtedness at year end. As a result, the swaps did
not qualify for hedge accounting as of December 31, 1997. The market value of
the swaps as of December 31, 1997 was approximately $93,000.
NOTE 7 - CONTRACT SETTLEMENT OBLIGATION
In March 1989, the Company received $2,877,000 as a recoupable take-or-pay
settlement on a contract with a gas pipeline. The settlement was recoupable
monthly in cash or gas volumes, from April 1992 through March 1996 with a
balloon payment due during the first quarter of 1998. A liability has been
recorded equal to the present value of the settlement discounted at 10.68%,
HCRC's estimated borrowing cost in 1989. The Company also repaid $640,000 which
represented the balance of suspended payments to the pipeline for previous
years, in equal monthly installments of $13,329 through March 1996. This amount
was previously recorded as an offset to the full cost pool at the time the
contract was initially abrogated by the pipeline. As payment of this obligation
was made, it was charged to the full cost pool.
At December 31, 1997, the current portion of contract settlement balance
consists of a payment of $1,044,000 due in February 1998, net of unaccreted
discount of $5,000.
NOTE 8 - STATEMENT OF CASH FLOWS
Cash paid for interest during 1997, 1996 and 1995 was $1,434,000, $1,374,000 and
$625,000, respectively. Cash paid for income taxes during 1997, 1996 and 1995
was $1,416,000, $185,000 and $122,000, respectively.
<PAGE>
NOTE 9 - INCOME TAXES
The following is a summary of the income tax provision (benefit):
<TABLE>
<CAPTION>
For the Years
Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
State $ 369 $ 236 $ 62
Federal - Current 592 65 9
Deferred (100) (350) (2,588)
----- ----- -------
Total $ 861 $ (49) $(2,517)
==== ===== ======
</TABLE>
Reconciliation's of the expected tax at the statutory tax rate to the effective
tax are as follows:
<TABLE>
<CAPTION>
For the Years
Ended December 31,
1997 1996 1995
(In thousands)
Expected tax expense (benefit) at the
<S> <C> <C> <C>
statutory rate $ 2,192 $ 2,775 $(2,443)
State taxes net of federal benefit 243 156 41
Change in valuation allowance (1,444) (3,739)
Other (130) 759 (115)
------ ----- ------
Effective tax expense (benefit) $ 861 $ (49) $(2,517)
====== ===== =======
</TABLE>
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 2,835 $3,606
Capital loss carryforward 1,889 1,688
Temporary differences between
book and tax basis of property 461 1,235
Other
----- ------
Total 5,185 6,529
Valuation allowance (4,735) (6,179)
------ ------
Net deferred tax asset $ 450 $ 350
===== ======
</TABLE>
The Company's net operating loss carryforwards expire between 2008 and 2010.
<PAGE>
NOTE 10 - EMPLOYEE INCENTIVE PLANS
Every year beginning in 1992, the Company's Board of Directors has adopted an
incentive plan. Each year the Board of Directors determines the percentage of
HCRC's interest in the cash flow from certain wells drilled, recompleted or
enhanced during the year allocated to the incentive plan for that year. The
specified percentage was 2.4% for 1997 and 1996 and 1.4% for domestic wells for
1995. In 1995, HCRC also had an international incentive plan and the percentage
interest in cash flow for that plan was 3%. Beginning in 1996, the domestic and
international plans were combined. The specified percentage of cash flow is then
allocated among certain key employees who are participants in the plan for that
year. Each award under the plan (with regard to domestic properties) represents
the right to receive for five years a portion of the specified share of the cash
flow attributable to qualifying wells included in the plan for that year. In the
sixth year after the award, the participants are each paid a share of an amount
equal to a specified percentage (80% for 1997, 1996 and 1995) of the remaining
net present value of the qualifying wells, and the award for that year
terminates. The expenses attributable to the plans were $400,000 in 1997,
$119,000 in 1996 and $147,000 in 1995 and are included in general and
administrative expense in the accompanying financial statements.
During 1995, the Company adopted a stock option plan covering 159,000 shares of
Common Stock and granted options for all of the shares under the plan. The
options were granted effective July 1, 1995 at an exercise price of $6.67 per
share, which was equal to the fair market value of the Common Stock on the day
preceding the date of grant. The options expire on July 1, 2005, unless sooner
terminated pursuant to the provisions of the plan. During December 1996, options
to purchase 1,500 shares were exercised. During 1997, options to purchase 9,270
shares were exercised.
During the second quarter of 1997, the Company adopted a stock option plan
covering 159,000 shares of Common Stock and granted options for all of the
shares under the plan. The terms of this plan are generally consistent with the
terms of the Company's existing 1995 Stock Option Plan. The options were granted
effective June 17, 1997 at an exercise price of $20.33 per share, which was
equal to the fair market value of the Common Stock on the 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. In addition, the Plan provides that vesting of the options may accelerate
under certain conditions.
A summary of HCRC's Option Plans and the changes therein for the years ended
December 31, 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
<S> <C> <C> <C> <C> <C> <C>
beginning of year 157,500 $ 6.67 159,000 $6.67
Granted 159,000 20.33 159,000 $6.67
Exercised 9,270 6.67 1,500 6.67
------- ------ -------- ----- -------- ------
Outstanding at year end 307,230 $13.74 157,500 $6.67 159,000 $6.67
======= ====== ======= ==== ======== =====
Options exercisable at
year end 201,230 $10.26 104,500 $6.67 53,000 $6.67
======= ====== ======== =====
</TABLE>
<PAGE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation cost has been recognized for the Option
Plan. Had compensation expense for the option plans been determined based on the
fair value at the grant dates, consistent with the provisions of SFAS 123,
HCRC's net income (loss) and net income (loss) per share would have been changed
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income (loss): as reported $5,585,000 $8,210,000 $(4,670,000)
pro forma 5,488,000 7,975,000 (5,078,000)
Net income (loss)
per share - basic: as reported $2.05 $3.00 $(1.48)
pro forma 2.02 2.92 (1.60)
Net income (loss)
per share - diluted as reported $1.97 $2.91 $(1.48)
pro forma 1.94 2.83 (1.60)
</TABLE>
The fair value of the options for disclosure purposes was estimated on the date
of the grant using the Black-Scholes Model with the following assumptions:
<TABLE>
<CAPTION>
1995 Options 1997 Options
<S> <C> <C>
Expected dividend yield 0% 0%
Expected price volatility 40% 33%
Risk-free interest rate 6.2% 6.35%
Expected life of options 10 years 6 years
</TABLE>
NOTE 11 - COMMITMENTS
The Company is guarantor of 40% of the obligation under the Denver, Colorado
office lease which is in the name of HPI. HEP is guarantor of the remaining 60%
of the obligation. HPI leases 41,000 square feet for approximately $600,000 per
year. The lease expires in 1999.
NOTE 12 - ODD LOT REPURCHASE
The Company made an offer to repurchase odd lot holdings of 99 or fewer shares
from its stockholders of record as of November 30, 1995. The offer was initially
for the period from November 30, 1995 through January 5, 1996 and was
subsequently extended through January 26, 1996. The Company repurchased a total
of 296,607 shares through the January 26, 1996 closing date. The repurchase
price was $8.03 per share.
On April 1, 1996, HCRC made another offer to purchase holdings of 99 or fewer
shares from its stockholders of record as of March 25, 1996. The offer was for
the period from April 1, 1996 through May 3, 1996. The Company repurchased a
total of 77,790 shares at a purchase price of $11.33 per share. HCRC resold
38,895 of these shares to HEP at the price paid by HCRC for such shares.
<PAGE>
NOTE 13 - INVESTMENT IN AFFILIATED ENTITIES
HCRC accounts for its 19% investment in HEP and, in 1995, its 60% investment in
Hallwood Spraberry Drilling Company, L.L.C. ("HSD") using the pro rata method of
accounting. The following presents summarized financial information for HEP as
of and for the years ended December 31, 1997, 1996 and 1995, and for HSD as of
and for the year ended December 31, 1995. HCRC assumed direct ownership of the
properties previously held by HSD effective April 1, 1996.
<PAGE>
<TABLE>
<CAPTION>
HEP 1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Current assets $ 22,142 $ 20,380 $ 18,503
Noncurrent assets 109,461 102,412 106,649
Current liabilities 23,115 21,735 22,866
Noncurrent liabilities 33,166 33,506 41,672
Minority interest 3,258 3,336 3,042
Revenue 45,103 51,066 43,780
Net income (loss) 12,803 15,726 (9,031)
HSD 1995
(In thousands)
Current assets $ 629
Noncurrent assets 14,243
Current liabilities 1,900
Noncurrent liabilities 11,000
Revenue 4,194
Net income 1,631
</TABLE>
No other individual entity in which HCRC owns an interest comprises in excess of
10% of the revenues, net income or assets of HCRC.
NOTE 14 - LEGAL PROCEEDINGS
On December 3, 1997, Arcadia Exploration and Production Company ("Arcadia")
filed a Demand for Arbitration with the American Arbitration Association against
Hallwood Consolidated Resources Corporation, Hallwood Energy Partners, L.P.,
E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P.
(collectively referred to herein as "Hallwood"), claiming that Hallwood breached
a Purchase and Sale Agreement dated August 25, 1997, between Arcadia and HCRC
and HEP. Arcadia's Demand for Arbitration seeks specific performance of the
agreement which Arcadia claims requires Hallwood to purchase oil and gas
properties from Arcadia for approximately $27 million. HCRC and HEP terminated
the agreement because of environmental and title problems with the properties.
Additionally, Arcadia seeks incidental and special damages, prejudgment
interests and attorneys' fees and costs. Hallwood filed its Answering Statement
and Counterclaim asserting that it properly terminated and/or rescinded the
Agreement and seeking refund of Hallwood's earnest money deposit, prejudgment
interest, attorneys' fees and costs. HCRC's management intends to vigorously
defend the claims asserted by Arcadia and intends to vigorously pursue the
counterclaim against Arcadia. This matter is currently in its preliminary stages
as pre-hearing discovery has only just commenced. Thus, it is too early to
predict the ultimate outcome of this arbitration proceeding.
<PAGE>
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.
The Company is involved in other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
The Company believes that its liability, if any, as a result of such proceedings
and claims will not materially affect its financial condition or operations.
NOTE 15 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
Carrying Estimated Fair
Amount Value
(In thousands)
Liabilities:
<S> <C> <C>
Oil and gas hedge contracts $ -0- $ 1,060
Long-term debt 25,000 25,000
</TABLE>
The estimated fair value of the oil and gas hedge contracts is determined by
multiplying the difference between contract termination prices for oil and gas
and the hedge contract price by the quantities under contract. This amount has
been discounted using an interest rate that could be available to the Company.
Long-term debt is carried in the accompanying balance sheet at an amount which
is a reasonable estimate of its fair value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
<PAGE>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
(Unaudited)
The following reserve quantity and future net cash flow information for the
Company represents proved reserves which are located in the United States. The
reserve estimates presented have been prepared by in-house petroleum engineers,
and a majority of these reserves has been reviewed by independent petroleum
engineers. The determination of oil and gas reserves is based on estimates which
are highly complex and interpretive. The estimates are subject to continuing
change as additional information becomes available.
The standardized measure of discounted future net cash flows provides a
comparison of the Company's proved oil and gas reserves from year to year. Under
the guidelines set forth by the Securities and Exchange Commission, the
calculation is performed using year end prices. At December 31, 1997, oil and
gas prices averaged $16.77 per bbl of oil and $2.20 per mcf of gas for the
Company, including its interest in HEP. Future production costs are based on
year end costs and include severance taxes. The present value of future cash
inflows is based on a 10% discount rate. The reserve calculations using these
December 31, 1997 prices result in 5.5 million bbls of oil, 76 billion cubic
feet of gas and a standardized measure of $88,000,000. This standardized measure
is not necessarily representative of the market value of the Company's
properties.
HCRC's standardized measure of future net cash flows has been decreased by
$1,935,000 at December 31, 1997 for the effect of its hedge contracts. This
amount represents the difference between year end oil and gas prices and the
hedge contract prices multiplied by the quantities subject to contract,
discounted at 10%.
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
RESERVE QUANTITIES
(Unaudited)
(In thousands)
Gas Oil
(Mcf) (Bbls)
Proved Reserves:
<S> <C> <C>
Balance, December 31, 1994 42,924 4,959
Extensions and discoveries 7,548 2,761
Revisions of previous estimates 2,790 131
Sales of reserves in place (52) (151)
Purchases of reserves in place 7,533 664
Production (7,071) (719)
------- -----
Balance, December 31, 1995 53,672 7,645
Extensions and discoveries 1,947 491
Revisions of previous estimates 7,701 (28)
Sales of reserves in place (1,627) (160)
Purchases of reserves in place 11,488 70
Production (8,280) (837)
------- -----
Balance, December 31, 1996 64,901 7,181
Extensions and discoveries 2,894 562
Revisions of previous estimates 15,261 (1,672)
Sales of reserves in place (163) (3)
Purchases of reserves in place 645 168
Production (7,963) (711)
------- -----
Balance, December 31, 1997 75,575 5,525
====== =====
Proved Developed Reserves:
Balance, December 31, 1995 49,854 6,657
====== =====
Balance, December 31, 1996 63,044 6,431
====== =====
Balance, December 31, 1997 73,250 5,080
====== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(Unaudited)
(In thousands)
December 31,
1997 1996 1995
<S> <C> <C> <C>
Future sales $227,000 $413,000 $243,000
Future production and development costs (100,000) (158,000) (106,000)
Provision for income tax (8,000) (30,000) (4,000)
-------- ------- --------
Future cash flows 119,000 225,000 133,000
10% discount to present value (31,000) (91,000) (48,000)
-------- ------- --------
Standardized measure of discounted future
net cash flows $ 88,000 $134,000 $ 85,000
======= ======= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(Unaudited)
(In thousands)
For the Years Ended December 31,
1997 1996 1995
Standardized measure of discounted future net cash flows
<S> <C> <C> <C>
at beginning of year $134,000 $ 85,000 $ 52,000
Sales of oil and gas produced, net of
production costs (20,449) (22,915) (15,268)
Net changes in prices and production costs (71,933) 46,516 11,325
Extensions and discoveries net of future
production and development costs 5,616 7,011 22,133
Changes in estimated future development costs (6,480) (7,292) (15,738)
Development costs incurred 6,531 8,617 14,766
Revisions of previous quantity estimates 4,688 10,802 3,280
Purchase of reserves in place 1,482 17,061 10,571
Sale of reserves in place (162) (3,707) (879)
Accretion of discount 13,439 8,513 5,200
Net change in income taxes 16,206 (15,332) (2,121)
Changes in production rates and other 5,062 (274) (269)
Standardized measure of discounted ------ ------- -------
future net cash flows at end of year $88,000 $134,000 $ 85,000
====== ======= =======
</TABLE>
The standardized measure of discounted future net cash flows is calculated using
year end average oil and gas prices. At December 31, 1997, oil and gas prices
averaged $16.77 per bbl of oil and $2.20 per mcf of gas. If average oil and gas
prices as of February 27, 1998 of $15.57 per bbl of oil and $2.00 per mcf of gas
had been used in this calculation, the standardized measure of discounted future
net cash flows would have been approximately 16% lower.
<PAGE>
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in the
definitive proxy statement of HCRC relating to HCRC's 1998 Annual
Meeting of Shareholders to be filed with the SEC pursuant to
Regulation 14A, which information is incorporated herein by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be included in the
definitive proxy statement of HCRC relating to HCRC's 1998 Annual
Meeting of Shareholders, to be filed with the SEC pursuant to
Regulation 14A, which information is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the
definitive proxy statement of HCRC relating to HCRC's 1998 Annual
Meeting of Shareholders, to be filed with the SEC pursuant to
Regulation 14A, which information is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the
definitive proxy statement of HCRC relating to HCRC's 1998 Annual
Meeting of Shareholders, to be filed with the SEC pursuant to
Regulation 14A, which information is incorporated herein by
reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
See Index at Item 8
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1997.
<PAGE>
Exhibits
(1) 3.1 Restated Certificate of Incorporation of HCRC, as
amended through January 21, 1992
(1) 3.2 Bylaws of HCRC
(2) 3.3 Amendment to Bylaws of HCRC
(3) 3.4 Certificate of Amendment of Restated Certificate of
Incorporation dated November 9, 1995.
(7) 3.5 Certificate of Amendment of Restated Certificate of
Incorporation, effective August 1, 1997.
4.1 Common Stock Purchase Warrant dated December 23, 1997.
4.2 Registration Rights Agreement dated as of December 23, 1997.
(1) 10.1 Agreement of Limited Partnership of Hallwood
Consolidated Partners, L.P. (originally, agreement of HCP
Acquisition, L. P.)
(1) 10.5 Management Agreement between Hallwood Petroleum, Inc. and HCRC
(4) 10.7 Amended and Restated Credit Agreement dated as of March 31,
1995 among HCRC and the Banks listed therein.
10.8 Extension of Management Agreement between HCRC and Hallwood
Petroleum, Inc. dated May 1, 1997.
* (4) 10.9 Domestic Incentive Plan between HCRC and Hallwood Petroleum,
Inc. dated January 14, 1993.
* (5) 10.10 1995 Stock Option Plan
* (5) 10.11 1995 Stock Option Loan Program
(7) 10.13 Second Amended and Restated Credit Agreement dated as of May
31, 1997.
* (7) 10.14 1997 Stock Option Plan
* (8) 10.15 1997 Stock Option Plan Loan Program
(8) 10.16 Amendment No. 1 to Second Amended and Restated Credit
Agreement dated as of October 31, 1997.
10.17 Subordinated Note and Warrant Purchase Agreement dated as of
December 23, 1997.
10.18 Amendment No. 2 to Second Amended and Restated Credit Agreement
dated as of December 23, 1997.
(6) 21 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP
- -------------------------------------
(1) Incorporated by reference to the Registrant's Registration
Statement No. 33-45729 on Form S-4 filed on February 14, 1992.
(2) Incorporated by reference to the Annual Report on Form 10-K
for the year ended December 31, 1992.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(4) Incorporated by reference to the Quarterly Report on Form
10-Q for the quarter ended March 31, 1995.
(5) Incorporated by reference to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.
(6) Incorporated by reference to the Annual Report on Form 10-K
for the year ended December 31, 1995.
(7) Incorporated by reference to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(8) Incorporated by reference to the Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
* Designates management contract or compensatory plan
or arrangement.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
Date: February 27, 1998 By: /s/William L. Guzzetti
William L. Guzzetti
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/Anthony J. Gumbiner Chairman of the Board and February 27, 1998
Anthony J. Gumbiner Director
/s/Brian M. Troup Director February 27, 1998
Brian M. Troup
/s/John R. Isaac,Jr. Director February 27, 1998
John R. Isaac, Jr.
/s/Jerry A. Lubliner Director February 27, 1998
Jerry A. Lubliner
/s/Hamilton P. Schrauff Director February 27, 1998
Hamilton P. Schrauff
Bill M. Van Meter Director February 27, 1998
/s/Robert S. Pfeiffer Vice President - February 27, 1998
Robert S. Pfeiffer Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SUCH ACT.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
Common Stock Purchase Warrant
PPN 40636V 2* 9 New York, New York
No. RW-1 December 23, 1997
HALLWOOD CONSOLIDATED RESOURCES CORPORATION (the "Company"), a Delaware
corporation, for value received, hereby certifies that THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA or its registered assigns is entitled to purchase from the
Company 98,599 duly authorized, validly issued, fully paid and nonassessable
shares of the Company's common stock, par value $0.01 per share (the "Original
Common Stock"), at an initial exercise price per share of $28.99, at any time or
from time to time after the date hereof and prior to 5:00 p.m., New York City
time, on December 23, 2009 (the "Expiration Date"), all subject to the terms,
conditions and adjustments set forth below in this Warrant.
This Warrant (the "Warrant", such term to include all Warrants issued in
substitution therefor) has been issued pursuant to that certain Subordinated
Note and Warrant Purchase Agreement dated of even date herewith (the "Purchase
Agreement") between the Company and The Prudential Insurance Company of America
(the "Purchaser"). The applicable provisions of the Purchase Agreement are
incorporated by reference, and a conformed copy thereof will be furnished to the
holder hereof by the Company upon written request. Certain capitalized terms
used in this Warrant are defined in section 13.
1. Exercise of Warrant.
1A. Manner of Exercise. This Warrant may be exercised by the holder
hereof, in whole or in part, for the purchase of the Common Stock or Other
Securities which such holder is then entitled to purchase, during normal
business hours on any Business Day on or after the date hereof to and
including the Expiration Date by surrender of this Warrant, with the form
of subscription at the end hereof (or a reasonable facsimile thereof) duly
executed by such holder, to the Company at its principal office (or, if
-1-
<PAGE>
such exercise shall be in connection with an underwritten public offering
of shares of Common Stock (or Other Securities) subject to this Warrant, at
the location at which the underwriters shall have agreed to accept delivery
thereof), accompanied by payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount obtained by
multiplying (a) the number of shares of Original Common Stock (without
giving effect to any adjustment therein) designated in such form of
subscription by (b) $28.99. The number of duly authorized, validly issued,
fully paid and nonassessable shares of Common Stock which the holder of
this Warrant shall be entitled to receive upon each exercise hereof shall
be determined by multiplying the number of shares of Common Stock which
would otherwise (but for the provisions of section 2) be issuable upon such
exercise, as designated by the holder hereof pursuant to this section 1A,
by a fraction of which (a) the numerator is $28.99 and (b) the denominator
is the Exercise Price in effect on the date of such exercise. The "Exercise
Price" shall initially be $28.99 per share, shall be adjusted and
readjusted from time to time as provided in section 2 and, as so adjusted
and readjusted, shall remain in effect until a further adjustment or
readjustment thereof is required by section 2.
1B. When Exercise Effective. Each exercise of this Warrant shall be
deemed to have been effected and the Exercise Price shall be determined
immediately prior to the close of business on the Business Day on which
this Warrant shall have been surrendered to the Company as provided in
section 1A, and at such time the person or persons in whose name or names
any certificate or certificates for shares of Common Stock (or Other
Securities) shall be issuable upon such exercise as provided in section 1C
shall be deemed to have become the holder or holders of record thereof.
1C. Delivery of Stock Certificates, etc. Promptly after the exercise
of this Warrant, in whole or in part, and in any event within three (3)
Business Days thereafter (unless such exercise shall be in connection with
an underwritten public offering of shares of Common Stock (or Other
Securities) subject to this Warrant, in which event concurrently with such
exercise), the Company at its expense will cause to be issued in the name
of and delivered to the holder hereof or, subject to section 8, as such
holder may direct,
(a) a certificate or certificates for the number of duly
authorized, validly issued, fully paid and nonassessable shares of
Common Stock (or Other Securities) to which such holder shall be
entitled upon such exercise, and
(b) in case such exercise is in part only, a new Warrant or
Warrants of like tenor, specifying the aggregate on the face or faces
thereof the number of shares of Common Stock equal to the number of
such shares specified on the face of this Warrant minus the number of
such shares designated by the holder upon such exercise as provided in
section 1A.
1D. Company to Reaffirm Obligations. The Company will, at the
time of or at any time after each exercise of this Warrant, upon the
request of the holder hereof or of any shares of Common Stock (or
-2-
<PAGE>
Other Securities) issued upon such exercise, acknowledge in writing
its continuing obligation to afford to such holder all rights to which
such holder shall continue to be entitled after such exercise in
accordance with the terms of this Warrant, provided that if any such
holder shall fail to make any such request, the failure shall not
affect the continuing obligation of the Company to afford such rights
to such holder.
1E. Fractional Shares. No fractional shares shall be issued upon
exercise of this Warrant and no payment or adjustment shall be made
upon any exercise on account of any cash dividends (except as provided
in section 2B) on the Common Stock or Other Securities issued upon
such conversion. If any fractional interest in a share of Common Stock
would, except for the provisions of the first sentence of this section
1E, be deliverable upon the exercise of this Warrant, the Company
shall, in lieu of delivering the fractional share therefor, pay to the
holder exercising this Warrant an amount in cash equal to the Market
Price of such fractional interest.
1F. Cashless Exercise. As an alternative to exercise of this
Warrant by payment in cash (or by certified or official bank check),
as provided above in section 1A, the holder of this Warrant may
exercise its right to purchase some or all of the shares of Common
Stock pursuant to this Warrant, on a net basis without the exchange of
any funds (a "Cashless Exercise"), such that the holder hereof
receives that number of shares of Common Stock subscribed to pursuant
to this Warrant less that number of shares of Common Stock, valued at
Market Price, at the time of exercise equal to the aggregate Exercise
Price that would otherwise have been paid by the holder of this
Warrant for such shares of Common Stock.
2. Protection Against Dilution or Other Impairment of Rights; Adjustment of
Exercise Price.
2A. Issuance of Additional Shares of Common Stock. In case the Company, at
any time or from time to time after the date hereof (the "Initial Date"), shall
issue or sell Additional Shares of Common Stock (including Additional Shares of
Common Stock deemed to be issued pursuant to section 2C or 2D) without
consideration or for a consideration per share (determined pursuant to section
2E) less than the greater of the Exercise Price or the Market Price in effect,
in each case, on the date of and immediately prior to such issue or sale, then,
and in each such case, subject to section 2H, the Exercise Price shall be
reduced, concurrently with such issue or sale, to a price (calculated to the
nearest .001 of a cent) determined by multiplying such Exercise Price by a
fraction,
(a) the numerator of which shall be the sum of (i) the number of
shares of Common Stock outstanding immediately prior to such issue or
sale and (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of such
Additional Shares of Common Stock so issued or sold would purchase at
the greater of such Market Price or such Exercise Price, and
-3-
<PAGE>
(b) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale,
provided that, for the purposes of this section 2A, (x) immediately after any
Additional Shares of Common Stock are deemed to have been issued pursuant to
section 2C or 2D, such Additional Shares shall be deemed to be outstanding, and
(y) treasury shares shall not be deemed to be outstanding.
2B. Extraordinary Dividends and Distributions. In case the Company at any
time or from time to time after the date hereof shall declare, order, pay or
make a dividend or other distribution (including, without limitation, any
distribution of other or additional stock or other securities or property or
Options by way of dividend or spin-off, reclassification, recapitalization or
similar corporate rearrangement and any redemption or acquisition of any such
stock or Options on the Common Stock), other than (a) a dividend payable in
Additional Shares of Common Stock or in Options for Common Stock or (b) a
regular periodic dividend payable in cash then, and in each such case, the
Company shall pay over to the holder of this Warrant, on the date on which such
dividend or other distribution is paid to the holders of Common Stock, the
securities and other property (including cash) which such holder would have
received if such holder had exercised this Warrant immediately prior to the
record date fixed in connection with such dividend or other distribution.
2C. Treatment of Options and Convertible Securities. In case the Company,
at any time or from time to time after the date hereof, shall issue, sell, grant
(which term, for purposes of this section 2C, all related provisions of this
Warrant and all definitions used in this section 2C or in such related
provisions, shall also include the vesting after the date hereof of Options
granted under the 1997 Stock Option Plan) or assume, or shall fix a record date
for the determination of holders of any class of securities entitled to receive,
any Options or Convertible Securities, whether or not such Options or the right
to convert or exchange any such Convertible Securities are immediately
exercisable, then, and in each such case, the maximum number of Additional
Shares of Common Stock (as set forth in the instrument relating thereto, without
regard to any provisions contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, issuable upon the conversion or
exchange of such Convertible Securities (or the exercise of such Options for
Convertible Securities and subsequent conversion or exchange of the Convertible
Securities issued), shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue, sale, grant or assumption or, in case such
a record date shall have been fixed, as of the close of business on such record
date, provided, that such Additional Shares of Common Stock shall not be deemed
to have been issued unless the consideration per share (determined pursuant to
section 2E) of such shares would be less than the greater of the Exercise Price
or the Market Price in effect, in each case, on the date of and immediately
prior to such issue, sale, grant or assumption or immediately prior to the close
of business on such record date or, if the Common Stock trades on an ex-dividend
basis, on the date prior to the commencement of ex-dividend trading, as the case
may be, and provided, further, that in any such case in which Additional Shares
of Common Stock are deemed to be issued,
-4-
<PAGE>
(a) if an adjustment of the Exercise Price shall be made upon the
fixing of a record date as referred to in the first sentence of this
section 2C, no further adjustment of the Exercise Price shall be made
as a result of the subsequent issue or sale of any Options or
Convertible Securities for the purpose of which such record date was
set;
(b) no further adjustment of the Exercise Price shall be made
upon the subsequent issue or sale of Additional Shares of Common Stock
or Convertible Securities upon the exercise of such Options or the
conversion or exchange of such Convertible Securities;
(c) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any change in the
consideration payable to the Company, or change in the number of
Additional Shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof (by change of rate or otherwise), the
Exercise Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
upon any such change becoming effective, be recomputed to reflect such
change insofar as it affects such Options, or the rights of conversion
or exchange under such Convertible Securities, which are outstanding
at such time;
(d) upon the expiration of any such Options or of the rights of
conversion or exchange under any such Convertible Securities which
shall not have been exercised (or upon purchase by the Company and
cancellation or retirement of any such Options which shall not have
been exercised or of any such Convertible Securities the rights of
conversion or exchange under which shall not have been exercised), the
Exercise Price computed upon the original issue, sale, grant or
assumption thereof (or upon the occurrence of the record date with
respect thereto), and any subsequent adjustments based thereon, shall,
upon such expiration (or such cancellation or retirement, as the case
may be), be recomputed as if:
(i) in the case of Options for Common Stock or in the case
of Convertible Securities, the only Additional Shares of Common
Stock issued or sold (or deemed issued or sold) were the
Additional Shares of Common Stock, if any, actually issued or
sold upon the exercise of such Options or the conversion or
exchange of such Convertible Securities and the consideration
received therefor was (x) an amount equal to (A) the
consideration actually received by the Company for the issue,
sale, grant or assumption of all such Options, whether or not
exercised, plus (B) the consideration actually received by the
Company upon such exercise, minus (C) the consideration paid by
the Company for any purchase of such Options which were not
exercised, or (y) an amount equal to (A) the consideration
actually received by the Company for the issue, sale, grant or
assumption of all such Convertible Securities which were actually
converted or exchanged, plus (B) the additional consideration, if
any, actually received by the Company upon such conversion or
exchange, minus (C) the excess, if any, of the consideration paid
by the Company for any purchase of such Convertible Securities,
the rights of conversion or exchange under which were not
-5-
<PAGE>
not exercised, over an amount that would be equal to the Fair
Value of the Convertible Securities so purchased if such
Convertible Securities were not convertible into or exchangeable
for Additional Shares of Common Stock, and
(ii) in the case of Options for Convertible Securities, only
the Convertible Securities, if any, actually issued or sold upon
the exercise of such Options were issued at the time of the
issue, sale, grant or assumption of such Options, and the
consideration received by the Company for the Additional Shares
of Common Stock deemed to have then been issued was an amount
equal to (x) the consideration actually received by the Company
for the issue, sale, grant or assumption of all such Options,
whether or not exercised, plus (y) the consideration deemed to
have been received by the Company (pursuant to section 2E) upon
the issue or sale of the Convertible Securities with respect to
which such Options were actually exercised, minus (z) the
consideration paid by the Company for any purchase of such
Options which were not exercised; and
(e) no recomputation pursuant to subsection (c) or (d) above shall
have the effect of increasing the Exercise Price then in effect by an
amount in excess of the amount of the adjustment thereof originally made in
respect of the issue, sale, grant or assumption of such Options or
Convertible Securities.
2D. Treatment of Stock Dividends, Stock Splits, Etc. In case the Company,
at any time or from time to time after the date hereof, shall declare or pay any
dividend or other distribution on any class of securities of the Company payable
in shares of Common Stock, or shall effect a subdivision of the outstanding
shares of Common Stock into a greater number of shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in Common Stock),
then, and in each such case, Additional Shares of Common Stock shall be deemed
to have been issued (a) in the case of any such dividend or other distribution,
immediately after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such dividend or other
distribution, or (b) in the case of any such subdivision, at the close of
business on the day immediately prior to the day upon which such corporate
action becomes effective.
2E. Computation of Consideration. For the purposes of this Warrant:
(a) The consideration for the issue or sale of any Additional Shares
of Common Stock or for the issue, sale, grant or assumption of any Options
or Convertible Securities, irrespective of the accounting treatment of such
consideration,
(i) insofar as it consists of cash, shall be computed as the
amount of cash received by the Company, and insofar as it consists of
securities or other property, shall be computed as of the date
immediately preceding such issue, sale, grant or assumption as the
Fair Value of such consideration (or, if such consideration is
received for the issue or sale of Additional Shares of Common Stock
and the Market Price thereof is less than the Fair Value of such
-6-
<PAGE>
consideration, then such consideration shall be computed as the Market
Price of such Additional Shares of Common Stock), in each case without
deducting any expenses paid or incurred by the Company, any
commissions or compensation paid or concessions or discounts allowed
to underwriters, dealers or other performing similar services and any
accrued interest or dividends in connection with such issue or sale,
and
(ii) in case Additional Shares of Common Stock are issued or sold
or Options or Convertible Securities are issued, sold, granted or
assumed together with other stock or securities or other assets of the
Company for a consideration which covers both, shall be the proportion
of such consideration so received, computed as provided in clause (i)
above, allocable to such Additional Shares of Common Stock or Options
or Convertible Securities, as the case may be, all as determined in
good faith by the Board of Directors of the Company.
(b) All Additional Shares of Common Stock, Options or Convertible
Securities issued in payment of any dividend or other distribution on any
class of stock of the Company and all Additional Shares of Common Stock
issued to effect a subdivision of the outstanding shares of Common Stock
into a greater number of shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock) shall be deemed to
have been issued without consideration.
(c) Additional Shares of Common Stock deemed to have been issued for
consideration pursuant to section 2C, relating to Options and Convertible
Securities, shall be deemed to have been issued for a consideration per
share determined by dividing
(i) the total amount, if any, received and receivable by the
Company as consideration for the issue, sale, grant or assumption of
the Options or Convertible Securities in question, plus the minimum
aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration)
payable to the Company upon the exercise in full of such Options or
the conversion or exchange of such Convertible Securities or, in the
case of Options for Convertible Securities, the exercise of such
Options for Convertible Securities and the conversion or exchange of
such Convertible Securities, in each case computing such consideration
as provided in the foregoing subsection (a), by
(ii) the maximum number of shares of Common Stock (as set forth
in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of
such Convertible Securities.
-7-
<PAGE>
2F. Adjustments for Combinations, Etc. In case the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Exercise Price in
effect immediately prior to such combination or consolidation shall,
concurrently with the effectiveness of such combination or consolidation, be
proportionately increased.
2G. Dilution in Case of Other Securities. In case any Other Securities
shall be issued or sold or shall become subject to issue or sale upon the
conversion or exchange of any stock (or Other Securities) of the Company (or any
issuer of Other Securities or any other Person referred to in section 2I) or to
subscription, purchase or other acquisition pursuant to any Options issued or
granted by the Company (or any such other issuer or Person) for a consideration
such as to dilute, in accordance with the standards established in this section
2, the exercise rights granted by this Warrant, then, and in each such case, the
computations do not apply, adjustments and readjustments provided for in this
Warrant with respect to the Exercise Price shall be made as nearly as possible
in the manner so provided and applied to determine the amount of Other
Securities from time to time receivable upon the exercise of this Warrant, so as
to protect the holder of this Warrant against the effect of such dilution.
2H. Minimum Adjustment of Exercise Price. If the amount of any adjustment
of the Exercise Price required hereunder would be less than one percent of the
Exercise Price in effect at the time such adjustment is otherwise so required to
be made, such amount shall be carried forward and adjustment with respect
thereto made at the time of and together with any subsequent adjustment which,
together with such amount and any other amount or amounts so carried forward,
shall aggregate at least one percent of such Exercise Price; provided, that upon
the exercise of this Warrant, all adjustments carried forward and not
theretofore made up to and including the date of such exercise shall be made to
the nearest .001 of a cent.
2I. Changes in Common Stock. In case at any time the Company shall be a
party to any transaction (including, without limitation, a merger,
consolidation, sale of all or substantially all of the Company's assets,
liquidation or recapitalization of the Common Stock) in which the previously
outstanding Common Stock shall be changed into or exchanged for different
securities of the Company or common stock or other securities of another
corporation or interests in a noncorporate entity or other property (including
cash) or any combination of any of the foregoing or in which the Common Stock
ceases to be a publicly traded security either listed on the New York Stock
Exchange or the American Stock Exchange or quoted by the Nasdaq National Market
or any successor thereto or comparable system (each such transaction being
herein called the "Transaction", the date on which the Transaction is first
announced to the public being herein called the "Announcement Date", the date of
consummation of the Transaction being herein called the "Consummation Date", the
Company (in the case of a recapitalization of the Common Stock or any other such
transaction in which the Company retains substantially all of its assets and
survives as a corporation) or such other corporation or entity (in each other
case) being herein called the "Acquiring Company", and the common stock (or
equivalent equity interest) of the Acquiring Company being herein called the
"Acquirer's Common Stock", except that if the Acquiring Company shall not meet
-8-
<PAGE>
the requirements set forth in subsections (d), (e) and (f) below and a
corporation which directly or indirectly controls the Acquiring Company (a
"Parent") meets such requirements, "Acquiring Company" shall refer to such
Parent and "Acquirer's Common Stock" shall refer to such Parent's common stock
(or equivalent equity interests)) then, as a condition of the consummation of
the Transaction, lawful and adequate provisions (in form satisfactory to the
Required Holders) shall be made so that the holder of this Warrant, upon the
exercise thereof at any time on or after the Consummation Date (but subject, in
the case of an election pursuant to subsection (b) or (c) below, to the time
limitation hereinafter provided for such election),
(a) shall be entitled to receive, and this Warrant shall thereafter
represent the right to receive, in lieu of the Common Stock issuable upon
such exercise prior to the Consummation Date, shares of the Acquirer's
Common Stock at an Exercise Price per share equal to the lesser of (i) the
Exercise Price in effect immediately prior to the Consummation Date
multiplied by a fraction the numerator of which is the Market Price per
share of the Acquirer's Common Stock determined as of the Consummation Date
and the denominator of which is the Market Price per share of the Common
Stock determined as of the Consummation Date, or (ii) the Market Price per
share of the Acquirer's Common Stock determined as of the Consummation Date
(subject in each case to adjustments from and after the Consummation Date
as nearly equivalent as possible to the adjustments provided for in this
Warrant), or at the election of the holder of this Warrant pursuant to
notice given to the Company within six months after the Consummation Date,
(b) shall be entitled to receive, and this Warrant shall thereafter
represent the right to receive, in lieu of each share of Common Stock
issuable upon such exercise prior to the Consummation Date, either (i) the
greatest amount of cash, securities or other property given to any
shareholder in consideration for any share of Common Stock at any time
during the period from and after the Announcement Date to and including the
Consummation Date by the Acquiring Company, the Company or any Affiliate of
either thereof, or (ii) an amount in cash equal to the product obtained by
multiplying (x) the number of shares of the Acquirer's Common Stock
purchasable upon the exercise or conversion of such Warrant as shall result
from adjustments thereto that would have been required pursuant to
subsection (a) above times (y) the Market Price per share for the
Acquirer's Common Stock, determined as of the day within the period from
and after the Announcement Date to and including the Consummation Date for
which the amount determined as provided in the definition of Market Price
shall have been the greatest, or, if neither the Acquiring Company nor the
Parent meets the requirements set forth in subsections (d), (e) and (f)
below, at the election of the holder of this Warrant pursuant to notice
given to the Company within six months after the Consummation Date; or,
(c) shall be entitled to receive, within 30 days after such election,
in full satisfaction of the exercise rights afforded under this Warrant to
the holder thereof, an amount equal to the fair market value of such
exercise rights as determined by an independent investment banker (with an
established national reputation as a valuer of equity securities) selected
-9-
<PAGE>
by the Required Holders with the approval of the Company, such fair market
value to be determined with regard to all material relevant factors but
without regard to any negative effects on such value of the Transaction.
The Company agrees to obtain, and deliver to each holder of Warrants a copy of
the determination of an independent investment banker (selected by the Required
Holders with the approval of the Company) necessary to permit elections under
subsection (c) above within 15 days after the Consummation Date of any
Transaction to which subsection (c) is applicable.
Notwithstanding anything contained herein to the contrary, the Company shall not
effect any Transaction unless prior to the consummation thereof each corporation
or entity (other than the Company) which may be required to deliver any
securities or other property upon the exercise of Warrants shall assume, by
written instrument delivered to each holder of Warrants, the obligation to
deliver to such holder such securities or other property as to which, in
accordance with the foregoing provisions, such holder may be entitled, and such
corporation or entity shall have similarly delivered to each holder of Warrants
an opinion of counsel for such corporation or entity, satisfactory to each
holder of Warrants, which opinion shall state that all the outstanding Warrants,
shall thereafter continue in full force and effect and shall be enforceable
against such corporation or entity in accordance with the terms hereof and
thereof, together with such other matters as such holders may reasonably
request.
2J. Certain Issues Excepted. Anything herein to the contrary
notwithstanding, the Company shall not be required to make any adjustment of the
Exercise Price in the case of (i) the issuance of the Warrants and the issuance
of shares of Common Stock issuable upon exercise of the Warrants (ii) the
issuance or sale of Common Stock upon the exercise of Options granted by the
Company pursuant to the 1995 Stock Option Plan or the Options to purchase 53,000
shares of Common Stock that have vested as of the date hereof pursuant to the
1997 Stock Option Plan, or (iii) the grant of Options that may be granted after
the date hereof to non-management employees of the Company or any of its
Affiliates pursuant to any benefit plans of the Company or such Affiliates.
2K. Notice of Adjustment. Upon the occurrence of any event requiring an
adjustment of the Exercise Price, then and in each such case the Company shall
promptly deliver to the holder of this Warrant an Officer's Certificate stating
the Exercise Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares of Common Stock issuable upon the exercise of
this Warrant, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based. Within 90 days after each fiscal
year in which any such adjustment shall have occurred, or within 30 days after
any request therefor by the holder of this Warrant stating that such holder
contemplates the exercise of such Warrant, the Company will obtain and deliver
to the holder of this Warrant the opinion of its regular independent auditors or
another firm of independent public accountants of recognized national standing
selected by the Company's Board of Directors, which opinion shall confirm the
statements in the most recent Officer's Certificate delivered under this section
2K.
-10-
<PAGE>
2L. Other Notices. In case at any time:
(a) the Company shall declare to the holders of Common Stock any
dividend other than a regular periodic cash dividend or any periodic cash
dividend in excess of 115% of the cash dividend for the comparable fiscal
period in the immediately preceding fiscal year;
(b) the Company shall declare or pay any dividend upon Common Stock
payable in stock or make any special dividend or other distribution (other
than regular cash dividends) to the holders of Common Stock;
(c) the Company shall offer for subscription pro rata to the holders
of Common Stock any additional shares of stock of any class or other
rights;
(d) there shall be any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another
corporation or other entity;
(e) there shall be a voluntary or involuntary dissolution, liquidation
or winding- up of the Company;
(f) there shall be made any tender offer for any shares of capital
stock of the Company; or
(g) there shall be any other Transaction;
then, in any one or more of such cases, the Company shall give to the holder of
this Warrant (i) at least 15 days prior to any event referred to in subsection
(a) or (b) above, at least 30 days prior to any event referred to in subsection
(c), (d) or (e) above, and within five days after it has knowledge of any
pending tender offer or other Transaction, written notice of the date on which
the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation, winding-up or Transaction or the date by which
shareholders must tender shares in any tender offer and (ii) in the case of any
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up or tender offer or Transaction known to the Company, at
least 30 days prior written notice of the date (or, if not then known, a
reasonable approximation thereof by the Company) when the same shall take place.
Such notice in accordance with the foregoing clause (i) shall also specify, in
the case of any such dividend, distribution or subscription rights, the date on
which the holders of Common Stock shall be entitled thereto, and such notice in
accordance with the foregoing clause (ii) shall also specify the date (if known
to the Company) on which the holders of Common Stock shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, winding-up, tender offer or Transaction, as the case may be. Such
-11-
<PAGE>
notice shall also state that the action in question or the record date is
subject to the effectiveness of a registration statement under the Securities
Act or to a favorable vote of security holders, if either is required.
2M. Certain Events. If any event occurs as to which, in the good faith
judgment of the Board of Directors of the Company, the other provisions of this
Warrant are not strictly applicable or if strictly applicable would not fairly
protect the exercise rights of the holders of the Warrants in accordance with
the essential intent and principles of such provisions, then the Board of
Directors of the Company shall appoint its regular independent auditors or
another firm of independent public accountants of recognized national standing
which shall give their opinion upon the adjustment, if any, on a basis
consistent with such essential intent and principles, necessary to preserve,
without dilution, the rights of the holders of the Warrants. Upon receipt of
such opinion, the Board of Directors of the Company shall forthwith make the
adjustments described therein; provided, that no such adjustment shall have the
effect of increasing the Exercise Price as otherwise determined pursuant to this
Warrant. The Company may make such reductions in the Exercise Price as it deems
advisable, including any reductions necessary to ensure that any event treated
for Federal income tax purposes as a distribution of stock or stock rights not
be taxable to recipients.
2N. Prohibition of Certain Actions. The Company will not, by amendment of
its certificate of incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions of
this Warrant and in the taking of all such action as may reasonably be requested
by the holder of this Warrant in order to protect the exercise privilege of the
holder of this Warrant against dilution or other impairment, consistent with the
tenor and purpose of this Warrant. Without limiting the generality of the
foregoing, the Company (a) will not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above the Exercise
Price then in effect, (b) will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable shares of Common Stock upon the exercise of all Warrants from
time to time outstanding, (c) will not take any action which results in any
adjustment of the Exercise Price if the total number of shares of Common Stock
or Other Securities issuable after the action upon the exercise of all of the
Warrants would exceed the total number of shares of Common Stock or Other
Securities then authorized by the Company's certificate of incorporation and
available for the purpose of issue upon such conversion, and (d) will not issue
any capital stock of any class which has the right to more than one vote per
share or any capital stock of any class which is preferred as to dividends or as
to the distribution of assets upon voluntary or involuntary dissolution,
liquidation or winding-up, unless the rights of the holders thereof shall be
limited to a fixed sum or percentage (or floating rate related to market yields)
of par value or stated value in respect of participation in dividends and a
fixed sum or percentage of par value or stated value in any such distribution of
assets.
-12-
<PAGE>
3. Stock to be Reserved. The Company will at all times reserve and keep
available out of the authorized Common Stock, solely for the purpose of issue
upon the exercise of the Warrants as herein provided, such number of shares of
Common Stock as shall then be issuable upon the exercise of all outstanding
Warrants and the Company will maintain at all times all other rights and
privileges sufficient to enable it to fulfill all its obligations hereunder. The
Company covenants that all shares of Common Stock which shall be so issuable
shall, upon issuance, be duly authorized, validly issued, fully paid and
nonassessable, free from preemptive or similar rights on the part of the holders
of any shares of capital stock or securities of the Company or any other Person,
and free from all taxes, liens and charges with respect to the issue thereof
(not including any income taxes payable by the holders of Warrants being
exercised in respect of gains thereon), and the Exercise Price will be credited
to the capital and surplus of the Company. The Company will take all such action
as may be necessary to assure that such shares of Common Stock may be so issued
without violation of any applicable law or regulation, or of any applicable
requirements of the National Association of Securities Dealers, Inc. and of any
domestic securities exchange upon which the Common Stock may be listed.
4. Registration of Common Stock. If any shares of Common Stock required to
be reserved for purposes of the exercise of Warrants require registration with
or approval of any governmental authority under any Federal or State law (other
than the Securities Act, registration under which is governed by the
Registration Rights Agreement), before such shares may be issued upon the
exercise thereof, the Company will, at its expense and as expeditiously as
possible, use its best efforts to cause such shares to be duly registered or
approved, as the case may be. Shares of Common Stock issuable upon exercise of
the Warrants shall be registered by the Company under the Securities Act or
similar statute then in force if required by the Registration Rights Agreement
and subject to the conditions stated in such agreement. At any such time as the
Common Stock is listed on any national securities exchange or quoted by the
Nasdaq National Market or any successor thereto or any comparable system, the
Company will, at its expense, obtain promptly and maintain the approval for
listing on each such exchange or quoting by the Nasdaq National Market or such
successor thereto or comparable system, upon official notice of issuance, the
shares of Common Stock issuable upon exercise of the then outstanding Warrants
and maintain the listing or quoting of such shares after their issuance so long
as the Common Stock is so listed or quoted; and the Company will also cause to
be so listed or quoted, will register under the Exchange Act and will maintain
such listing or quoting of, any Other Securities that at any time are issuable
upon exercise of the Warrants, if and at the time that any securities of the
same class shall be listed on such national securities exchange by the Company.
5. Issue Tax. The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the holders hereof for
any issuance tax in respect thereto.
6. Closing of Books. The Company will at no time close its transfer books
against the transfer of any Warrant or of any share of Common Stock issued or
issuable upon the exercise of any Warrant in any manner which interferes with
the timely exercise of such Warrant.
-13-
<PAGE>
7. No Rights or Liabilities as Stockholders. This Warrant shall not entitle
the holder thereof to any of the rights of a stockholder of the Company, except
as expressly contemplated herein. No provision of this Warrant, in the absence
of the actual exercise of such Warrant and receipt by the holder thereof of
Common Stock issuable upon such conversion, shall give rise to any liability on
the part of such holder as a stockholder of the Company, whether such liability
shall be asserted by the Company or by creditors of the Company.
8. Restrictive Legends. Except as otherwise permitted by this section 8,
each Warrant originally issued and each Warrant issued upon direct or indirect
transfer or in substitution for any Warrant pursuant to this section 8 shall be
stamped or otherwise imprinted with a legend in substantially the following
form:
"This Warrant and any shares acquired upon the exercise of this
Warrant have not been registered under the Securities Act of 1933, as
amended, or under state securities laws, and may not be transferred in
the absence of such registration or an exemption therefrom under such
Act or such laws."
Except as otherwise permitted by this section 8, (a) each certificate for Common
Stock (or Other Securities) issued upon the exercise of any Warrant, and (b)
each certificate issued upon the direct or indirect transfer of any such Common
Stock (or Other Securities) shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or under state
securities laws, and may not be transferred in the absence of such
registration or an exemption therefrom under such Act or such laws."
The holder of any Restricted Securities shall be entitled to receive from the
Company, without expense, new securities of like tenor not bearing the
applicable legend set forth above in this section 8 when such securities shall
have been (a) effectively registered under the Securities Act and disposed of in
accordance with the registration statement covering such Restricted Securities,
(b) sold pursuant to Rule 144 or any comparable rule under the Securities Act,
(c) transferred to a limited number of institutional holders, each of which
shall have represented in writing that it is acquiring such Restricted
Securities for investment and not with a view to the disposition thereof, or (d)
when, in the opinion of counsel (which may include in-house counsel) for the
holder thereof experienced in Securities Act matters, such restrictions are no
longer required in order to insure compliance with the Securities Act.
9. Availability of Information. The Company will cooperate with each holder
of any Restricted Securities in supplying such information as may be necessary
for such holder to complete and file any information reporting forms presently
or hereafter required by the Commission as a condition to the availability of an
exemption from the Securities Act for the sale of any Restricted Securities. The
Company will furnish to each holder of any Warrants, promptly upon their
-14-
<PAGE>
becoming available, copies of all financial statements, reports, notices and
proxy statements sent or made available generally by the Company to its
stockholders, and copies of all regular and periodic reports and all
registration statements and prospectuses filed by the Company with any
securities exchange or with the Commission.
10. Information Required By Rule 144A. The Company will, upon the request
of the holder of this Warrant, provide such holder, and any qualified
institutional buyer designated by such holder, such financial and other
information as such holder may reasonably determine to be necessary in order to
permit compliance with the information requirements of Rule 144A under the
Securities Act in connection with the resale of Warrants, except at such times
as the Company is subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act. For the purpose of this section 10, the term "qualified
institutional buyer" shall have the meaning specified in Rule 144A under the
Securities Act.
11. Registration Rights Agreement; Participation Rights Agreement. The
holder of this Warrant and the holders of any securities issued or issuable upon
the exercise hereof are each entitled to the benefits of the Registration Rights
Agreement and the Participation Rights Agreement.
12. Ownership, Transfer and Substitution of Warrants.
12A. Ownership of Warrants. Except as otherwise required by law, the
Company may treat the Person in whose name any Warrant is registered on the
register kept at the principal office of the Company as the true and lawful
owner and holder thereof for all purposes, notwithstanding any notice to the
contrary except that, if and when any Warrant is properly assigned in blank, the
Company, in its discretion, may (but shall not be obligated to) treat the bearer
thereof as the owner of such Warrant for all purposes, notwithstanding any
notice to the Company to the contrary. Subject to section 8, a Warrant, if
properly assigned, may be exercised by a new holder without first having a new
Warrant issued.
12B. Transfer and Exchange of Warrants. Upon the surrender of any Warrant,
properly endorsed, for registration of transfer or for exchange at the principal
office of the Company, the Company at its expense will (subject to compliance
with section 8, if applicable) execute and deliver to or upon the order of the
holder thereof a new Warrant or Warrants of like tenor, in the name of such
holder or as such holder (upon payment by such holder of any applicable transfer
taxes) may direct, calling in the aggregate on the face or faces thereof for the
number of shares of Original Common Stock called for on the face or faces of the
Warrant or Warrants so surrendered.
12C. Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Warrant and, in the case of any such loss, theft or destruction of any Warrant
held by a Person other than the Purchaser or any institutional investor
reasonably satisfactory to the Company, upon delivery of its unsecured indemnity
reasonably satisfactory to the Company in form and amount or, in the case of any
such mutilation, upon surrender of such Warrant for cancellation at the
-15-
<PAGE>
principal office of the Company, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
13. Definitions. As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:
"Additional Shares of Common Stock" shall mean all shares (including
treasury shares) of Common Stock issued or sold (or, pursuant to section 2C
or 2D) deemed to be issued) by the Company after the date hereof, whether
or not subsequently reacquired or retired by the Company, other than shares
of Common Stock issued upon the exercise or partial exercise of the
Warrants.
"Acquiring Company" shall have the meaning specified in Section 2I.
"Acquirer's Common Stock" shall have the meaning specified in Section
2I.
"Affiliate" shall have the meaning specified in the Purchase
Agreement.
"Announcement Date" shall have the meaning specified in Section 2I.
"Business Day" shall mean any day on which banks are open for business
in New York City (other than a Saturday, a Sunday or a legal holiday in the
States of New York or New Jersey), provided, that any reference to "days"
(unless Business Days are specified) shall mean calendar days.
"Cashless Exercise" shall have the meaning specified in section 1F.
"Commission" shall mean the Securities and Exchange Commission or any
successor federal agency having similar powers.
"Common Stock" shall mean the Original Common Stock, any stock into
which such stock shall have been converted or changed or any stock
resulting from any reclassification of such stock and all other stock of
any class or classes (however designated) of the Company the holders of
which have the right, without limitation as to amount, either to all or to
a share of the balance of current dividends and liquidating dividends after
the payment of dividends and distributions on any shares entitled to
preference.
"Company" shall mean Hallwood Consolidated Resources Corporation, a
Delaware corporation.
"Consummation Date" shall have the meaning specified in section 2I.
-16-
<PAGE>
"Convertible Securities" shall mean any evidences of indebtedness,
shares of stock (other than Common Stock) or other securities directly or
indirectly convertible into or exchangeable for Additional Shares of Common
Stock.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exercise Price" shall have the meaning specified in section 1A.
"Fair Value" shall mean with respect to any securities or other
property, the fair value thereof as of a date which is within 15 days of
the date as of which the determination is to be made (a) determined by
agreement between the Company and the Required Holders, or (b) if the
Company and the Required Holders fail to agree, determined jointly by an
independent investment banking firm retained by the Company and by an
independent investment banking firm retained by the Required Holders,
either of which firms may be an independent investment banking firm
regularly retained by the Company, or (c) if the Company or the Required
Holders shall fail so to retain an independent investment banking firm
within ten Business Days of the retention of such a firm by the Required
Holders or the Company, as the case may be, determined solely by the firm
so retained, or (d) if the firms so retained by the Company and by such
holders shall be unable to reach a joint determination within 15 Business
Days of the retention of the last firm so retained, determined by another
independent investment banking firm which is not a regular investment
banking firm of the Company chosen by the first two such firms.
"Initial Date" shall have the meaning specified in section 2A.
"Market Price" shall mean on any date specified herein, (a) with
respect to Common Stock or to common stock (or equivalent equity interests)
of an Acquiring Person or its Parent, the amount per share equal to (i) the
last sale price of shares of Common Stock, regular way, or of shares of
such common stock (or equivalent equity interests) on such date or, if no
such sale takes place on such date, the average of the closing bid and
asked prices thereof on such date, in each case as officially reported on
the principal national securities exchange on which the same are then
listed or admitted to trading, or (ii) if no shares of Common Stock or no
shares of such common stock (or equivalent equity interests), as the case
may be, are then listed or admitted to trading on any national securities
exchange, the last sale price of shares of Common Stock, regular way, or of
shares of such common stock (or equivalent equity interests) on such date,
in each case or, if no such sale takes place on such date, the average of
the reported closing bid and asked prices thereof on such date as quoted in
the Nasdaq National Market or, if no shares of Common Stock or no shares of
such common stock (or equivalent equity interest), as the case may be, are
then quoted in the Nasdaq National Market, as published by the National
Quotation Bureau, Incorporated or any similar successor organization, and
in either case as reported by any member firm of the New York Stock
Exchange selected by the Company, or (iii) if no shares of Common Stock or
no shares of such common stock (or equivalent equity interests), as the
case may be, are then listed or admitted to trading on any national
securities exchange or quoted or published in the over-the-counter market,
the higher of (x) the book value thereof as determined by any firm of
independent public accountants of recognized standing selected by the Board
-17-
<PAGE>
of Directors of the Company, as of the last day of any month ending within
60 days preceding the date as of which the determination is to be made or
(y) the Fair Value thereof; and (b) with respect to any other securities,
the Fair Value thereof.
"1995 Stock Option Plan" shall mean the 1995 Stock Option Plan for
Hallwood Consolidated Resources Corporation pursuant to which Options for
159,000 shares of Common Stock have been granted and have become vested and
of which 10,770 have been exercised as of the date hereof.
"1997 Stock Option Plan" shall mean the 1997 Stock Option Plan for
Hallwood Consolidated Resources Corporation pursuant to which Options for
159,000 shares of Common Stock have been granted and of which Options for
53,000 shares have become vested (with no Options having been exercised) as
of the date hereof.
"Officer's Certificate" shall mean a certificate signed in the name of
the Company by its President, one of its Vice Presidents or its Treasurer.
"Options" shall mean rights, options or warrants to subscribe for,
purchase or otherwise acquire either Additional Shares of Common Stock or
Convertible Securities.
"Original Common Stock" shall have the meaning specified in the
opening paragraphs of this Warrant.
"Other Securities" shall mean any stock (other than Common Stock) and
any other securities of the Company or any other Person (corporate or
otherwise) which the holders of the Warrants at any time shall be entitled
to receive, or shall have received, upon the exercise of the Warrants, in
lieu of or in addition to Common Stock, or which at any time shall be
issuable or shall have been issued in exchange for or in replacement of
Common Stock or Other Securities pursuant to section 2I or otherwise.
"Parent" shall have the meaning specified in section 2I.
"Participation Rights Agreement" shall mean that certain Participation
Rights Agreement dated of even date herewith by and among the Purchaser,
the Company and certain holders of the Company's Common Stock that are
parties thereto.
"Person" shall mean and include an individual, a partnership, an
association, a joint venture, a corporation, a trust, a limited liability
company, an unincorporated organization and a government or any department
or agency thereof.
"Purchase Agreement" shall have the meaning specified in the opening
paragraphs of this Warrant.
-18-
<PAGE>
"Purchaser" shall have the meaning specified in the opening paragraphs
of this Warrant.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement dated of even date herewith by and between the Company and the
Purchaser.
"Required Holders" shall mean the holders of at least 66 2/3% of all
the Warrants at the time outstanding, determined on the basis of the number
of shares of Common Stock then purchasable upon the exercise of all
Warrants then outstanding.
"Restricted Securities" shall mean (a) any Warrants bearing the
applicable legend set forth in section 8 and (b) any shares of Common Stock
(or Other Securities) which have been issued upon the exercise of Warrants
and which are evidenced by a certificate or certificates bearing the
applicable legend set forth in such section, and (c) unless the context
otherwise requires, any shares of Common Stock (or Other Securities) which
are at the time issuable upon the exercise of Warrants and which, when so
issued, will be evidenced by a certificate or certificates bearing the
applicable legend set forth in such section.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Transaction" shall have the meaning specified in section 2I.
"Warrant" shall have the meaning specified in the opening paragraphs
of this Warrant.
14. Remedies. The Company stipulates that the remedies at law of the holder
of this Warrant in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate and that, to the fullest extent permitted by law,
such terms may be specifically enforced by a decree for the specific performance
of any agreement contained herein or by an injunction against a violation of any
of the terms hereof or otherwise.
15. Notices. All notices and other communications under this Warrant shall
be in writing and shall be sent (a) by registered or certified mail, return
receipt requested, (b) by telecopy if the sender on the same day sends a
conforming copy of such notice by a recognized overnight delivery service, or
(c) by a recognized overnight delivery service, addressed (i) if to any holder
of any Warrant or any holder of any Common Stock (or Other Securities), at the
registered address of such holder as set forth in the applicable register kept
at the principal office of the Company, or (ii) if to the Company, to the
attention of the Legal Department at its principal office, provided that the
exercise of any Warrant shall be effected in the manner provided in section 1.
-19-
<PAGE>
16. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. The agreements of the Company contained in this Warrant other than those
applicable solely to the Warrants and the holders thereof shall inure to the
benefit of and be enforceable by any holder or holders at the time of any Common
Stock (or Other Securities) issued upon the exercise of Warrants, whether so
expressed or not. This Warrant shall be construed and enforced in accordance
with and governed by the laws of the State of New York. The section headings in
this Warrant are for purposes of convenience only and shall not constitute a
part hereof.
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By: /s/ Cathleen M. Osborn
Name: Cathleen M. Osborn
Title: Vice President
-20-
<PAGE>
FORM OF SUBSCRIPTION
(To be executed only upon exercise of Warrant)
To HALLWOOD CONSOLIDATED RESOURCES CORPORATION
The undersigned registered holder of the within Warrant hereby irrevocably
exercises such Warrant for, and purchases thereunder, _____1 shares of Common
Stock of HALLWOOD CONSOLIDATED RESOURCES CORPORATION, [and herewith makes
payment of $_______________ therefor]2 [in a Cashless Exercise pursuant to
Section 1F of the within Warrant]3, and requests that the certificates for such
shares be issued in the name of, and delivered to _________________________
whose address is _________________________.
Dated:
(Signature must conform in all respects to
name of holder as specified on the face of this
Warrant)
(Street Address)
(City) (State) (Zip Code)
- --------
1 Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which
this Warrant is being exercised), in either case without making any
adjustment for additional Common Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment provisions
of this Warrant, may be delivered upon exercise. In the case of a partial
exercise, a new Warrant or Warrants will be issued and delivered,
representing the unexercised portion of this Warrant, to the holder
surrendering the same. 2 Use in connection with an exercise involving a
delivery of funds to the Company. 3 Use in connection with a Cashless
Exercise.
-21-
<PAGE>
FORM OF ASSIGNMENT
(To be executed only upon transfer of Warrant)
For value received, the undersigned registered holder of the within Warrant
hereby sells, assigns and transfers unto _________________________ the right
represented by such Warrant to purchase _________________________1 shares of
Common Stock of HALLWOOD CONSOLIDATED RESOURCES CORPORATION, to which such
Warrant relates, and; appoints _________________________ Attorney to make such
transfer on the books of HALLWOOD CONSOLIDATED RESOURCES CORPORATION, maintained
for such purpose, with full power of substitution in the premises.
Dated:
(Signature must conform in all respects to
name of holder as specified on the face of this
Warrant)
- -------------------------------------------------------------------------------
(Street Address)
- -------------------------------------------------------------------------------
(City) (State) (Zip Code)
Signed in the presence of:
- --------
1 Insert here the number of shares called for on the face of this Warrant
(or, in the case of a partial exercise, the portion thereof as to which
this Warrant is being exercised), in either case without making any
adjustment for additional Common Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment provisions
of this Warrant, may be delivered upon exercise. In the case of a partial
exercise, a new Warrant or Warrants will be issued and delivered,
representing the unexercised portion of this Warrant, to the holder
surrendering the same.
-22-
<PAGE>
EXHIBIT F
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of December 23, 1997, between
HALLWOOD CONSOLIDATED RESOURCES CORPORATION, a Delaware corporation (the
"Company"), and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "Purchaser").
1. Background. The Company and the Purchaser have entered into that certain
Subordinated Note and Warrant Purchase Agreement (the "Purchase Agreement"),
dated as of the date hereof, pursuant to which the Company has agreed, among
other things, to issue and sell its Common Stock Purchase Warrants (the
"Warrants"), evidencing rights to purchase an aggregate of 98,599 shares
(subject to adjustment as provided therein) of the Company's common stock, par
value $0.01 per share (the "Common Stock"). This agreement shall become
effective upon the issuance of such Warrants.
2. Registration under Securities Act, etc.
2.1. Registration on Request.
(a) Request by Holders of Warrants or Registrable Securities. At
any time after the date hereof any holder or holders of Warrants or
Registrable Securities may request in writing that the Company effect
the registration under the Securities Act of all or part of such
holders' Registrable Securities. Such request shall specify the number
of shares of Registrable Securities proposed to be sold by such holder
or holders and the intended method of disposition thereof. Promptly
after receiving such request, the Company will give written notice of
such requested registration to all other holders of Warrants or
Registrable Securities and thereupon the Company will use its best
efforts to effect the registration under the Securities Act of:
(i) the Registrable Securities which the Company has been so
requested to register by such holders, and
(ii) all other Registrable Securities which the Company has
been requested to register by such other holders of Warrants or
Registrable Securities by written request given to the Company
within 30 days after the giving of such written notice by the
Company (which request shall specify the number of shares of
1
<PAGE>
Registrable Securities proposed to be sold by such holder or
holders and the intended method of disposition of such
Registrable Securities), all to the extent necessary to permit
the disposition (in accordance with the intended methods thereof
as aforesaid) of the Registrable Securities so to be registered.
(b) Registration of Other Securities. Whenever the Company shall
effect a registration pursuant to this Section 2.1 in connection with
an underwritten offering by one or more holders of Registrable
Securities, no securities other than Registrable Securities shall be
included among the securities covered by such registration unless (a)
the managing underwriter of such offering shall have advised each
holder of Registrable Securities to be covered by such registration
(and each holder of Warrants therefor) in writing that the inclusion
of such other securities would not adversely affect such offering or
(b) the holders of all Registrable Securities to be covered by such
registration (and the holders of all Warrants therefor) shall have
consented in writing to the inclusion of such other securities.
(c) Registration Statement Form. Registrations under this Section
2.1 shall be on such appropriate registration form of the Commission
(i) as shall be selected by the Company and as shall be reasonably
acceptable to the Requisite Holders and (ii) as shall permit the
disposition of such Registrable Securities in accordance with the
intended method or methods of disposition specified in their request
for such registration. The Company agrees to include in any such
registration statement all information which holders of Registrable
Securities being registered (or holders of Warrants therefor) shall
reasonably request.
(d) Expenses. The Company will pay all Registration Expenses in
connection with any registration requested pursuant to this Section
2.1 if such registration has been requested in relation to at least 66
2/3% (by number of shares) of Registrable Securities; provided,
however, that the Company shall in all events and at all times be
responsible for the fees and disbursements of counsel for the
Requisite Holders in connection with the rendering of opinions
requested by the Company or any underwriter. The Registration Expenses
(and underwriting discounts and commissions and transfer taxes, if
any) in connection with each other registration requested under this
Section 2.1 shall be allocated on a pro rata basis among all Persons
on whose behalf securities of the Company are included in such
registration, in accordance with the amount of the securities then
being registered on behalf of each such Person.
(e) Effective Registration Statement. A registration requested
pursuant to this Section 2.1 shall not be deemed to have been effected
(i) unless a registration statement with respect thereto has become
effective, (ii) if after it has become effective, such effectiveness
has been suspended for one or more periods that equal or exceed ten
(10) Business Days in the aggregate by the issuance of any stop order,
injunction or other order or requirement of the Commission or other
governmental agency or court for any reason, or (iii) if the
conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such
registration are not satisfied.
2
<PAGE>
(f) Selection of Underwriters. If a requested registration
pursuant to this Section 2.1 involves an underwritten offering, the
underwriter or underwriters thereof shall be selected by the Company
and shall be reasonably satisfactory to the Requisite Holders.
(g) Priority in Requested Registrations. If a requested
registration pursuant to this Section 2.1 involves an underwritten
offering, and the managing underwriter shall advise the Company in
writing (with a copy to each holder of Warrants or Registrable
Securities requesting registration) that, in its opinion, the number
of securities requested to be included in such registration exceeds
the number which can be sold in such offering within a price range
acceptable to the Requisite Holders, the Company will include in such
registration to the extent of the number which the Company is so
advised can be sold in such offering Registrable Securities requested
to be included in such registration, pro rata among the holders of
Registrable Securities (or Warrants therefor) requesting such
registration on the basis of the percentage of such Registrable
Securities held by or issuable to such holders. In connection with any
registration as to which the provisions of this subdivision (g) apply,
no securities other than Registrable Securities shall be covered by
such registrations.
The holders of Warrants or Registrable Securities shall be entitled to no
more than two requested registrations pursuant to this Section 2.1.
2.2. Incidental Registration.
(a) Right to Include Registrable Securities. If the Company at
any time proposes to register any of its securities under the
Securities Act (other than by a registration on Form S-4 or S-8 or any
successor or similar form and other than pursuant to Section 2.1),
whether or not for sale for its own account, it will each such time
give prompt written notice to all holders of Warrants or Registrable
Securities of its intention to do so and of such holders' rights under
this Section 2.2. Upon the written request of any such holder made
within 30 days after the receipt of any such notice (which request
shall specify the Registrable Securities intended to be disposed of by
such holder and the intended method of disposition thereof), the
Company will use its best efforts to effect the registration under the
Securities Act of all Registrable Securities which the Company has
been so requested to register by the holders thereof, provided that
if, at any time after giving written notice of its intention to
register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay
registration of such securities, the Company may, at its election,
give written notice of such determination to each holder of Warrants
or Registrable Securities and, thereupon, (i) in the case of a
determination not to register, shall be relieved of its obligation to
register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration
Expenses in connection therewith), without prejudice, however, to the
rights of any holder or holders of Warrants or Registrable Securities
entitled to do so to request that such registration be effected as a
registration under Section 2.1, and (ii) in the case of a
determination to delay registering, shall be permitted to delay
registering any Registrable Securities, for the same period as the
delay in registering such other securities. No registration effected
3
<PAGE>
under this Section 2.2 shall be deemed to have been effected pursuant
to Section 2.1 or shall relieve the Company of its obligation to
effect any registration upon request under Section 2.1. The Company
will pay all Registration Expenses in connection with each
registration of Registrable Securities requested pursuant to this
Section 2.2.
(b) Priority in Incidental Registrations. If (i) a registration
pursuant to this Section 2.2 involves an underwritten offering of the
securities so being registered, whether or not for sale for the
account of the Company, to be distributed (on a firm commitment basis)
by or through one or more underwriters of recognized standing under
underwriting terms appropriate for such a transaction, and (ii) the
managing underwriter of such underwritten offering shall inform by
letter the Company and the holders of Warrants or Registrable
Securities requesting such registration of its belief that the number
of securities requested to be included in such registration exceeds
the number which can be sold in (or during the time of) such offering,
then the Company may include all securities proposed by the Company to
be sold for its own account and may decrease the number of Registrable
Securities and other securities of the Company so proposed to be sold
and so requested to be included in such registration (pro rata among
the holders thereof on the basis of the number of such Registrable
Securities and other securities held by such holders and requested to
be included therein) to the extent necessary to reduce the number of
securities to be included in the registration to the level recommended
by the managing underwriter.
2.3. Registration Procedures. If and whenever the Company is required to
use its best efforts to effect the registration of any Registrable Securities
under the Securities Act as provided in Sections 2.1 and 2.2, the Company will
as expeditiously as possible:
(i) prepare and (as soon thereafter as possible or in any event
no later than 90 days after the end of the period within which
requests for registration may be given to the Company) file with the
Commission the requisite registration statement to effect such
registration and thereafter use its best efforts to cause such
registration statement to become effective, provided that the Company
may discontinue any registration of its securities which are not
Registrable Securities (and, under the circumstances specified in
Section 2.2(a), its securities which are Registrable Securities) at
any time prior to the effective date of the registration statement
relating thereto;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all securities
covered by such registration statement until such time as all of such
securities have been disposed of in accordance with the intended
methods of disposition by the seller or sellers thereof set forth in
such registration statement (which period shall not exceed 270 days
from the date the registration statement is declared effective unless
the effectiveness thereof is suspended for any reason);
4
<PAGE>
(iii) furnish to each seller of Registrable Securities covered by
such registration statement such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of copies
of the prospectus contained in such registration statement (including
each preliminary prospectus and any summary prospectus) and any other
prospectus filed under Rule 424 under the Securities Act, in
conformity with the requirements of the Securities Act, and such other
documents, as such seller may reasonably request;
(iv) use its best efforts to register or qualify all Registrable
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as each seller
thereof shall reasonably request, to keep such registration or
qualification in effect for so long as such registration statement
remains in effect, and take any other action which may be reasonably
necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities
covered by the registration statement, except that the Company shall
not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would
not but for the requirements of this subdivision (iv) be obligated to
be so qualified, to subject itself to taxation in any jurisdiction or
to consent to general service of process in any such jurisdiction
where it is not then so subject;
(v) use its best efforts to cause all Registrable Securities
covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary to enable the seller or sellers thereof to consummate the
disposition of such Registrable Securities;
(vi) furnish to each seller of Registrable Securities and each
Requesting Holder a signed counterpart, addressed to such seller and
such Requesting Holder (and underwriters, if any) of:
(x) an opinion of counsel for the Company, dated the effective
date of such registration statement (and, if such registration
includes an underwritten public offering, dated the date of the
closing under the underwriting agreement), reasonably satisfactory in
form and substance to such seller and such Requesting Holder, and
(y) a "comfort" letter, dated the effective date of such
registration statement (and, if such registration includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), signed by the independent public accountants
who have certified the Company's financial statements included in such
registration statement,
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of the
accountants' letter, with respect to events subsequent to the date of such
5
<PAGE>
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to the underwriters in underwritten public
offerings of securities and, in the case of the accountants' letter, such other
financial matters, and, in the case of the legal opinion, such other legal
matters, as such seller or such Requesting Holder, if any, may reasonably
request;
(vii) notify each seller of Registrable Securities covered by
such registration statement and each Requesting Holder, at any time
when a prospectus relating thereto is required to be delivered under
the Securities Act, upon discovery that, or upon the happening of any
event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made, and at the request of any such seller or Requesting
Holder promptly prepare and furnish to such seller or Requesting
Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light
of the circumstances under which they were made;
(viii) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available
to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but
not more than eighteen months, beginning with the end of the fiscal
quarter after the effective date of such registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of
the Securities Act, and will furnish to each such seller at least five
business days prior to the filing thereof a copy of any amendment or
supplement to such registration statement or prospectus and shall not
file any thereof to which any such seller shall have reasonably
objected on the grounds that such amendment or supplement does not
comply in all material respects with the requirements of the
Securities Act or of the rules or regulations thereunder;
(ix) provide and cause to be maintained a transfer agent and
registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of
such registration statement;
(x) use its best efforts to cause all Registrable Securities
covered by such registration statement to be listed on any securities
exchange on which any of the Registrable Securities are then listed or
to be quoted by the Nasdaq National Market (or any successor thereto
or any comparable system) on which any of the Registrable Securities
are then quoted; and
6
<PAGE>
(xi) enter into such agreements and take such other actions as
the Requisite Holders shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities.
The Company may require each seller of Registrable Securities as to which any
registration is being effected to furnish the Company such information regarding
such seller and the distribution of such securities as the Company may from time
to time reasonably request in writing.
Each holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in the subdivision (vii) of this
Section 2.3, such holder will forthwith discontinue such holder's disposition of
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (vii) of this
Section 2.3 or until it is advised in writing (the "Advice") by the Company that
the use of the prospectus may be resumed, and, if so directed by the Company,
such holders will deliver to the Company (at the Company's expense) all copies,
other than permanent file copies then in such holders' possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice. In the event the Company shall give any such notice to suspend
the offering and disposition of the Registrable Securities (including, without
limitation, pursuant to the next paragraph hereof), the time periods regarding
the maintenance of the applicable registration statement shall be extended by
the number of days during the period from and including the date of the giving
of such notice pursuant to subdivision (vii) of this Section 2.3 and including
the date when such holders shall have received the copies of the supplemented or
amended prospectus contemplated by subdivision (vii) of this Section 2.3 or the
Advice.
Notwithstanding the foregoing, (a) the Company may delay the filing of any
registration statement, any amendment thereof or any supplement to the related
prospectus, and may withhold efforts to cause any registration statement to
become effective, and (b) in the case of an effective registration statement,
upon the written request of the Company the holders of Registrable Securities
participating in such registration shall refrain from selling any shares
pursuant to such registration statement, if (i) the Company determines in good
faith that such registration or sale would (A) materially interfere with or
adversely affect in any material respect the negotiation or completion of any
material transaction that is being contemplated by the Company at the time the
right to delay is exercised or a request is made or (B) involve initial or
continuing disclosure obligations not otherwise required by law or the rules and
regulations of the Commission, which disclosure would have a material adverse
effect on the Company or (ii) in the written opinion of a nationally recognized
investment bank, that the Company is unable to consummate an underwritten
offering due to then currently prevailing market conditions; provided however,
that the duration of any such delay or period in which shares of Registrable
Securities may not be sold pursuant to an effective registration statement shall
not exceed a period of 90 days.
7
<PAGE>
2.4 Underwritten Offerings.
(a) Requested Underwritten Offerings. If requested by the
underwriters for any underwritten offering of Registrable Securities
pursuant to a registration requested under Section 2.1, the Company
will enter into an underwriting agreement with such underwriters for
such offering, such agreement to be reasonably satisfactory in
substance and form to each holder of such Registrable Securities (or
Warrants therefor) and the underwriters and to contain such
representations and warranties by the Company and such other terms as
are generally customary in agreements of this type, including, without
limitation, indemnities to the effect and to the extent provided in
Section 2.7. The holders of Registrable Securities to be distributed
by such underwriters shall be parties to such underwriting agreement
and may, at their option, require that any or all of the
representations and warranties by, and the other agreements on the
part of, the Company to and for the benefit of such underwriters shall
also be made to and for the benefit of such holders of Registrable
Securities and that any or all of the conditions precedent to the
obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of such holders of Registrable
Securities. Any such holder of Registrable Securities shall not be
required to make any representations or warranties to or agreements
with the Company or the underwriters other than representations,
warranties or agreements regarding such holder, such holder's
Registrable Securities and such holder's intended method of
distribution and any other representation required by law.
(b) Incidental Underwritten Offerings. If the Company at any time
proposes to register any of its securities under the Securities Act as
contemplated by Section 2.2 and such securities are to be distributed
by or through one or more underwriters, the Company will, if requested
by any holder of Warrants or Registrable Securities as provided in
Section 2.2 and subject to the provisions of Section 2.2(b), arrange
for such underwriters to include all the Registrable Securities to be
offered and sold by such holder among the securities to be distributed
by such underwriters. The holders of Registrable Securities to be
distributed by such underwriters shall be parties to the underwriting
agreement between the Company and such underwriters and may, at their
option, require that any or all of the representations and warranties
by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the
benefit of such holders of Registrable Securities and that any or all
of the conditions precedent to the obligations of such underwriters
under such underwriting agreement be conditions precedent to the
obligations of such holders of Registrable Securities. Any such holder
of Registrable Securities shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements
regarding such holder, such holder's Registrable Securities and such
holder's intended method of distribution and any other representation
required by law.
2.5. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the holders of Registrable
Securities registered under such registration statement (or the holders of
8
<PAGE>
Warrants therefor), their underwriters, if any, and their respective counsel and
accountants, the opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
in the opinion of such holders' and such underwriters' respective counsel, to
conduct a reasonable investigation within the meaning of the Securities Act;
provided, however, that such holder shall, if requested by the Company, cause
its counsel and accountants to execute confidentiality agreements in customary
form and such holder shall, consistent with its customary practices, use its
best efforts to keep confidential any records, information or documents that are
designated by the Company in writing as confidential, except that such records,
information and documents may be disclosed by such holder to (i) such holder's
directors, officers, employees, agents and professional consultants, (ii) any
other holder of any Registrable Security, (iii) any Person to which such holder
offers to sell Registrable Securities or any part thereof, (iv) any Person from
which such holder offers to purchase any other security of the Company, (v) any
federal or state regulatory authority having jurisdiction over such holder, (vi)
the National Association of Insurance Commissioners or any similar organization,
or (vii) any other Person to which such delivery or disclosure may be necessary
or appropriate (a) in compliance with any law, rule, regulation or order
applicable to such holder, (b) in response to any subpoena or other legal
process or other investigative demand, or (c) in connection with any litigation
to which such holder is a party; provided, further that such holder shall cause
the agents and professional consultants referred to in clause (i) and the
Persons referred to in clauses (iii) and (iv) to enter into confidentiality
agreements which shall contain provisions substantially identical to those
applicable to such holders under this Section 2.5.
2.6. Rights of Requesting Holders. The Company will not file any
registration statement under the Securities Act, unless it shall first have
given to all holders of Warrants or Registrable Securities at least 30 days
prior written notice thereof and, if so requested by the Requisite Holders,
shall have consulted with such holders concerning the selection of underwriters,
counsel and independent accountants for the Company for such offering and
registration. If such holders shall so request within 30 days after such notice,
each of them shall be a "Requesting Holder" hereunder and shall have the rights
of a Requesting Holder provided in this section 2.6 and in sections 2.3, 2.5 and
2.7. The Company further covenants that a Requesting Holder shall have the right
(a) to participate in the preparation of any such registration or comparable
statement and to require the insertion therein of material furnished to the
Company in writing, which in such Requesting Holder's judgment, reasonable
exercised, should be included, and (b) at the Company's expense, to retain
counsel and/or independent public accountants to assist such Requesting Holder
in such participation. In addition, if any such registration statement refers to
any Requesting Holder by name or otherwise as the holder of any securities of
the Company, then such Requesting Holder shall have the right to require (a) the
insertion therein of language, in form and substance satisfactory to such
Requesting Holder, to the effect that the holding by such Requesting Holder of
such securities does not necessarily make such Requesting Holder a "controlling
person" of the Company within the meaning of the Securities Act and is not to be
9
<PAGE>
construed as a recommendation by such Requesting Holder of the investment
quality of the Company's debt or equity securities covered thereby and that such
holding does not imply that such Requesting Holder will assist in meeting any
future financial requirements of the Company, or (b) in the event that such
reference to such Requesting Holder by name or otherwise is not required by the
Securities Act or any rules and regulations promulgated thereunder, the deletion
of the reference to such Requesting Holder.
2.7. Indemnification.
(a) Indemnification by the Company. The Company will, and hereby
does, in the case of any registration statement filed pursuant to
Section 2.1 or 2.2 indemnify and hold harmless the seller of any
Registrable Securities covered by such registration statement, its
directors and officers, each other Person who participates as an
underwriter in the offering or sale of such securities and each other
Person, if any, who controls such seller or any such underwriter
within the meaning of the Securities Act, against any losses, claims,
damages or liabilities, joint or several, to which such seller or any
such director or officer or underwriter or controlling person may
become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
Registrable Securities were registered under the Securities Act, any
preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, or any other noncompliance or alleged noncompliance with
the Securities Act or the applicable underwriting agreement, and the
Company will reimburse such seller and each such director, officer,
underwriter and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or
defending any such loss, claim, liability, action or proceeding;
provided that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense arises out of or is based
upon an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement in reliance upon and in conformity with
written information furnished to the Company through an instrument
duly executed by such seller specifically stating that it is for use
in the preparation thereof and, provided further that the Company
shall not be liable to any Person who participates as an underwriter,
in the offering or sale of Registrable Securities or any other Person,
if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that any such loss,
claim, damage, liability (or action or proceeding in respect thereof)
or expense arises out of such Person's failure to send or give a copy
of the final prospectus, as the same may be then supplemented or
amended, to the Person asserting an untrue statement or alleged untrue
statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Securities to such Person if
such statement or omission was corrected in such final prospectus.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such seller or any such
10
<PAGE>
director, officer, underwriter or controlling person and shall survive
the transfer of such Registrable Securities by such seller.
(b) Indemnification by the Sellers. The Company may require, as a
condition to including any Registrable Securities in any registration
statement filed pursuant to Section 2.3, that the Company shall have
received an undertaking satisfactory to it from the prospective seller
of such Registrable Securities, to indemnify and hold harmless (in the
same manner and to the same extent as set forth in subdivision (a) of
this Section 2.7) the Company, each director of the Company, each
officer of the Company and each other Person, if any, who controls the
Company within the meaning of the Securities Act, with respect to any
statement or alleged statement in or omission or alleged omission from
such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment
or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company through
an instrument duly executed by such seller specifically stating that
it is for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement. Such indemnity shall remain in full force and
effect, regardless of any investigation made by or on behalf of the
Company or any such director, officer or controlling Person and shall
survive the transfer of such securities by such seller.
(c) Notices of Claims, etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or
proceeding involving a claim referred to in the preceding subdivisions
of this Section 2.7, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give
written notice to the latter of the commencement of such action,
provided that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its
obligations under the preceding subdivisions of this Section 2.7,
except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In case any such action is
brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such
claim, the indemnifying party shall be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying
party similarly notified to the extent that it may wish, with counsel
reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with the defense
thereof other than reasonable costs of investigation. No indemnifying
party shall, without the consent of the indemnified party, consent to
entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in
respect to such claim or litigation.
(d) Other Indemnification. Indemnification similar to that
specified in the preceding subdivisions of this Section 2.7 (with
appropriate modifications) shall be given by the Company and each
11
<PAGE>
seller of Registrable Securities with respect to any required
registration or other qualification of securities under any Federal or
state law or regulation of any governmental authority other than the
Securities Act.
(e) Indemnification Payments. The indemnification required by
this Section 2.7 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense as and when
bills are received or expense, loss, damage or liability is incurred.
2.8. Adjustments Affecting Registrable Securities. The Company will not
effect or permit to occur any combination or subdivision of shares which would
adversely affect the ability of the holders of Registrable Securities or
Warrants therefor to include such Registrable Securities in any registration of
its securities contemplated by this Section 2 or the marketability of such
Registrable Securities under any such registration.
3. Definitions. As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:
Commission: The Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act.
Common Stock: As defined in Section 1.
Company: As defined in the introductory paragraph of this
Agreement.
Exchange Act: The Securities Exchange Act of 1934, or any similar
Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference
to a particular section of the Securities Exchange Act of 1934 shall
include a reference to the comparable section, if any, of any such
similar Federal statute.
Person: A corporation, an association, a partnership, a business,
a joint venture, a limited liability company, an individual, a
governmental or political subdivision thereof or a governmental
agency.
Purchase Agreement: As defined in Section 1.
Purchaser: As defined in the introductory paragraph of this
Agreement.
Registrable Securities: (a) Any shares of Common Stock issued or
issuable upon exercise of any of the Warrants and (b) any securities
issued or issuable with respect to any such Common Stock by way of
stock dividend or stock split or in connection with a combination of
shares, recapitalization, merger, consolidation or other
reorganization or otherwise. As to any particular Registrable
12
<PAGE>
Securities, once issued such securities shall cease to be Registrable
Securities when (a) a registration statement with respect to the sale
of such securities shall have become effective under the Securities
Act and such securities shall have been disposed of in accordance with
such registration statement, (b) they shall have been sold pursuant to
Rule 144 (or any successor provision) under the Securities Act, (c)
they shall have been otherwise transferred, new certificates for them
not bearing a legend restricting further transfer shall have been
delivered by the Company and subsequent disposition of them shall not
require registration or qualification of them under the Securities Act
or any similar state law then in force, or (d) they shall have ceased
to be outstanding.
Registration Expenses: All expenses incident to the Company's
performance of or compliance with Section 2, including, without
limitation, all registration, filing and National Association of
Securities Dealers fees, all fees and expenses of complying with
securities or blue sky laws, all word processing, duplicating and
printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold
comfort" letters required by or incident to such performance and
compliance, the fees and disbursements incurred by the holders of
Registrable Securities to be registered and the holders of Warrants
therefor (including the fees and disbursements of any counsel and
accountants retained by the Requisite Holders), premiums and other
costs of policies of insurance against liabilities arising out of the
public offering of the Registrable Securities being registered and any
fees and disbursements of underwriters customarily paid by issuers or
sellers of securities, but excluding underwriting discounts and
commissions and transfer taxes, if any, provided that, in any case
where Registration Expenses are not to be borne by the Company, such
expenses shall not include salaries of Company personnel or general
overhead expenses of the Company, auditing fees, premiums or other
expenses relating to liability insurance required by underwriters of
the Company or other expenses for the preparation of financial
statements or other data normally prepared by the Company in the
ordinary course of its business or which the Company would have
incurred in any event.
Requesting Holder: As defined in Section 2.6.
Requisite Holders: With respect to any registration of
Registrable Securities by the Company pursuant to Section 2, any
holder or holders of 66 2/3% (by number of shares) of the Registrable
Securities to be so registered or of Warrants for such Registrable
Securities.
Securities Act: The Securities Act of 1933, or any similar
Federal statute, and the rules and regulations of the Commission
thereunder, all as of the same shall be in effect at the time.
13
<PAGE>
References to a particular section of the Securities Act of 1933 shall
include a reference to the comparable section, if any, of any such
similar Federal Statute.
4. Rule 144: If the Company shall have filed a registration statement
pursuant to the requirements of Section 12 of the Exchange Act or a registration
statement pursuant to the requirements of the Securities Act, the Company will
file the reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the Commission thereunder
(or, if the Company is not required to file such reports, will, upon the request
of any holder of Warrants or Registrable Securities, make publicly available
other information) and will take such further action as any holder of Warrants
or Registrable Securities may reasonably request, all to the extent required
from time to time to enable such holder to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by (a) Rule 144 under the Securities Act, as such Rule may be amended
from time to time or (b) any similar rule or regulation hereafter adopted by the
Commission. Upon the request of any holder of Warrants or Registrable
Securities, the Company will deliver to such holder a written statement as to
whether it has complied with such requirements.
5. Amendments and Waivers. This Agreement may be amended and the Company
may take any action herein prohibited or omit to perform any act herein required
to be performed by it, only if the Company shall have obtained the written
consent to such amendment, action or omission to act, of the Requisite Holders.
Each holder of any Warrants or Registrable Securities at the time or thereafter
outstanding shall be bound by any consent authorized by this Section 5, whether
or not such Registrable Securities shall have been marked to indicate such
consent.
6. Nominees for Beneficial Owners. In the event that any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the holder of such
Warrants or Registrable Securities for purposes of any request or other action
by any holder or holders of Warrants or Registrable Securities pursuant to this
Agreement or any determination of any number or percentage of shares of Warrants
or Registrable Securities held by any holder or holders of Warrants or
Registrable Securities contemplated by this Agreement. If the beneficial owner
of any Warrants or Registrable Securities so elects, the Company may require
assurances reasonably satisfactory to it of such owner's beneficial ownership of
such Warrants or Registrable Securities.
7. Notices. All communications provided for hereunder shall be sent by
first-class mail and (a) if addressed to a party other than the Company,
addressed to such party in the manner set forth in the Purchase Agreement, or at
such other address as such party shall have furnished to the Company in writing,
or (b) if addressed to the Company, at 4582 South Ulster Street Parkway, Suite
1700, Denver, Colorado 80237 Attention: Legal Department, or at such other
address, or to the attention of such other officer, as the Company shall have
furnished to each holder of Warrants or Registrable Securities at the time
outstanding; provided, however, that any such communication to the Company may
14
<PAGE>
also, at the option of any of the parties hereunder, be either delivered to the
Company at its address set forth above or to any officer of the Company.
8. Assignment. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. In addition, and whether or not any express assignment
shall have been made, the provisions of this Agreement which are for the benefit
of the parties hereto other than the Company shall also be for the benefit of
and enforceable by any subsequent holder of any Warrants or Registrable
Securities, subject to the provisions respecting the minimum numbers or
percentages of shares of Warrants or Registrable Securities required in order to
be entitled to certain rights, or take certain actions contained herein.
9. Descriptive Headings. The descriptive headings of the several sections
and subdivisions of this Agreement are inserted for reference only and shall not
limit or otherwise affect the meaning hereof.
10. Specific Performance. The parties hereto recognize and agree that money
damages may be insufficient to compensate the holders of any Warrants or
Registrable Securities for breaches by the Company of the terms hereof and,
consequently, that the equitable remedy of specific performance of the terms
hereof will be available in the event of any such breach.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of New York.
12. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By: /s/ Cathleen M. Osborn
Title: Vice President
THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA
By: /s/
Title:
16
<PAGE>
EXTENSION OF MANAGEMENT AGREEMENT
This Extension of Management Agreement dated May 18, 1997 is between
Hallwood Petroleum, Inc. ("HPI") and Hallwood Consolidated Resources Corporation
("HCRC").
Whereas, HPI and HCRC are parties to a Management Agreement dated May
18, 1992, and
Whereas, the Management Agreement provided that it may be extended for
successive one year terms by written agreement of the parties, and
Whereas, the parties desire to extend the Management Agreement until
May 18, 1998,
Now, therefore, in consideration of the mutual agreements contained
herein, the parties agree that the term of the Management Agreement is extended
to May 18, 1998.
HALLWOOD PETROLEUM, INC.
By______________________________
Russell P. Meduna
Vice President
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
By_______________________________
William L. Guzzetti
President
=================================================================
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
$25,000,000
10.32% SENIOR SUBORDINATED NOTES DUE DECEMBER 23, 2007
and
COMMON STOCK PURCHASE WARRANTS
---------------
SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT
---------------
Dated as of December 23, 1997
=================================================================
<PAGE>
TABLE OF CONTENTS
(Not Part of Agreement)
Page
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF SECURITIES.............................1
1A. Authorization of Issue of Notes.................................1
1B. Authorization of Issue of Warrants..............................1
PARAGRAPH 2. PURCHASE AND SALE OF SECURITIES..................................2
2. Purchase and Sale of Securities.................................2
PARAGRAPH 3. CONDITIONS PRECEDENT.............................................2
3. Conditions to Closing...........................................2
3A. Certain Documents.........................................2
3B. Opinion of Purchaser's Special Counsel....................4
3C. Representations and Warranties; No Default................4
3D. Purchase Permitted By Applicable Laws.....................4
3E. Proceedings...............................................4
3F. Private Placement Numbers.................................4
3G. Fees......................................................4
PARAGRAPH 4. PREPAYMENTS......................................................5
4. Prepayments.....................................................5
4A. Required Prepayments......................................5
4B. Optional Prepayment of Notes with Yield-Maintenance
Amount...................................................5
4C. Change in Control.........................................5
4D. Partial Payments Pro Rata.................................7
4E. Retirement of Notes.......................................7
PARAGRAPH 5. AFFIRMATIVE COVENANTS............................................7
5. Affirmative Covenants...........................................7
5A. Financial Statements......................................7
5B. Information Required by Rule 144A........................10
5C. Inspection of Property...................................10
5D. Covenant to Secure Notes Equally.........................10
5E. Corporate Existence, Licenses and Permits; Maintenance
of Properties...........................................11
5F. Maintenance of Insurance.................................11
5G. Payment of Taxes and Other Claims........................11
5H. ERISA Compliance.........................................12
(i)
<PAGE>
5I. Compliance with Laws.....................................12
5J. Maintenance of Books of Record; Reserves.................12
5K. Assumption of the Subsidiary Guaranty by After-Acquired
Subsidiaries............................................12
PARAGRAPH 6. NEGATIVE COVENANTS..............................................13
6. Negative Covenants.............................................13
6A. Financial Covenants......................................13
6B. Other Restrictions.......................................13
6C. Change of Business.......................................17
6D. New Subsidiaries.........................................17
PARAGRAPH 7. SUBORDINATION OF NOTES..........................................17
7A. Subordination...........................................17
7B. Obligation of the Company Unconditional.................19
7C. Subrogation.............................................19
7D. Rights of Holders of Senior Debt........................19
PARAGRAPH 8. EVENTS OF DEFAULT...............................................20
8. Events of Default..............................................20
8A. Acceleration............................................20
8B. Rescission of Acceleration..............................23
8C. Notice of Acceleration or Rescission....................23
8D. Other Remedies..........................................23
PARAGRAPH 9. REPRESENTATIONS, COVENANTS AND WARRANTIES.......................24
9. Representations, Covenants and Warranties......................24
9A. Organization............................................24
9B. Financial Statements....................................24
9C. Actions Pending.........................................24
9D. Outstanding Indebtedness................................25
9E. Title to Properties.....................................25
9F. Taxes...................................................25
9G. Conflicting Agreements and Other Matters................25
9H. Authorized Capital Stock................................26
9I. Offering of Securities..................................26
9J. Use of Proceeds.........................................27
9K. ERISA...................................................27
9L. Governmental Consent....................................27
9M. Environmental Compliance................................28
9N. Disclosure..............................................28
(ii)
<PAGE>
PARAGRAPH 10. REPRESENTATIONS OF THE PURCHASER...............................28
10. Representations of the Purchaser..............................28
10A. Nature of Purchase......................................28
10B. Source of Funds.........................................28
PARAGRAPH 11. DEFINITIONS....................................................29
11. Definitions...................................................29
11A. Yield-Maintenance Terms.................................29
11B. Other Terms.............................................30
11C. Accounting Principles, Terms and Determinations.........39
PARAGRAPH 12. MISCELLANEOUS..................................................39
12. Miscellaneous.................................................39
12A. Note Payments...........................................40
12B. Expenses................................................40
12C. Consent to Amendments...................................40
12D. Form, Registration, Transfer and Exchange of Notes;
Lost Notes.............................................41
12E. Persons Deemed Owners; Participations...................41
12F. Survival of Representations and Warranties;
Entire Agreement.......................................41
12G. Successors and Assigns..................................42
12H. Disclosure to Other Persons.............................42
12I. Notices.................................................42
12J. Payments Due on Non-Business Days.......................42
12K. Satisfaction Requirement................................43
12L. Governing Law...........................................43
12M. Waiver of Jury Trial; Consent to Jurisdiction;
Limitation of Remedies.................................43
12N. Severability............................................44
12O. Descriptive Headings....................................44
12P. Maximum Interest Payable................................44
12Q. Counterparts............................................45
(iii)
<PAGE>
PURCHASER SCHEDULE
SCHEDULE 9D -- EXISTING INDEBTEDNESS, NON-RECOURSE DEBT AND
LIENS
SCHEDULE 9G -- LIST OF AGREEMENTS RESTRICTING INDEBTEDNESS
EXHIBIT A -- FORM OF SENIOR SUBORDINATED NOTE
EXHIBIT B -- FORM OF COMMON STOCK PURCHASE WARRANT
EXHIBIT C-1 -- FORM OF OPINION OF COMPANY'S GENERAL COUNSEL
EXHIBIT C-2 -- FORM OF OPINION OF COMPANY'S SPECIAL COUNSEL
EXHIBIT D -- FORM OF SUBSIDIARY GUARANTY
EXHIBIT E -- FORM OF PARTICIPATION RIGHTS AGREEMENT
EXHIBIT F -- FORM OF REGISTRATION RIGHTS AGREEMENT
EXHIBIT G -- FORM OF ASSUMPTION OF SUBSIDIARY GUARANTY
EXHIBIT H -- FORM OF OPINION RELATING TO FUTURE SUBSIDIARY'S
ASSUMPTION OF SUBSIDIARY GUARANTY
(iv)
<PAGE>
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
4582 South Ulster Street Parkway, Suite 1700
Denver, Colorado 80237
As of December 23, 1997
The Prudential Insurance Company of America
c/o Prudential Capital Group
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
$25,000,000 10.32% Senior Subordinated Notes due 2007
Common Stock Purchase Warrants
Ladies and Gentlemen:
The undersigned, Hallwood Consolidated Resources Corporation, a Delaware
corporation (the "Company"), hereby agrees with you as follows:
PARAGRAPH 1. AUTHORIZATION OF ISSUE OF SECURITIES.
1A. Authorization of Issue of Notes. The Company will authorize the issue
of its senior subordinated promissory notes (any such promissory notes which
have been issued pursuant to this Agreement, and any such notes which may be
issued in substitution or exchange therefor, herein collectively called the
"Notes") in the aggregate principal amount of $25,000,000, to be dated the date
of issue thereof, to mature December 23, 2007 and to bear interest on the unpaid
balance thereof from the date thereof until the principal thereof shall have
become due and payable at the rate of 10.32% per annum and on overdue payments
at the rate specified therein; such Notes shall be substantially in the form of
Exhibit A attached hereto.
1B. Authorization of Issue of Warrants. The Company will also authorize the
issue of its Common Stock Purchase Warrants (any such Common Stock Purchase
Warrants which have been issued pursuant to this Agreement, and any such Common
Stock Purchase Warrants which may be issued in substitution or exchange
therefor, herein collectively called the "Warrants") evidencing rights to
purchase from the Company an aggregate of 98,599 shares of the Company's common
stock, par value $.01 per share (the "Common Stock"), at an initial exercise
price per share of $28.99, at any time or from time to time after the Date of
1
<PAGE>
Closing, all subject to the terms, conditions and adjustments set forth in the
Warrants; such Warrants shall be substantially in the form of Exhibit B attached
hereto.
Capitalized terms used herein have the meanings specified in paragraph 11.
PARAGRAPH 2. PURCHASE AND SALE OF SECURITIES.
2. Purchase and Sale of Securities. The Company hereby agrees to sell to
you and, subject to the terms and conditions herein set forth, you agree to
purchase from the Company the following:
(i) Notes in the aggregate principal amount of $25,000,000; and
(ii) Warrants evidencing rights to purchase an aggregate of 98,599
shares of Common Stock.
The aggregate purchase price for the Notes shall be 100% of the principal amount
of the Notes. The aggregate purchase price for the Warrants shall be $10.00.
The Company will deliver to you, at the offices of Baker & Botts, L.L.P. at 2001
Ross Avenue, Dallas, Texas 75201, (a) one or more Notes registered in your name,
evidencing the aggregate principal amount of Notes to be purchased by you and in
the denomination or denominations specified in the Purchaser Schedule attached
hereto, and (b) one or more Warrants registered in your name, evidencing rights
to purchase an aggregate of 98,599 shares of Common Stock, such Warrant or
Warrants to evidence rights to purchase the number of shares of Common Stock
specified in the Purchaser Schedule attached hereto, against payment of the
purchase price for the Securities by transfer of immediately available funds for
credit to account # 4159-672336 at Wells Fargo Bank, Denver, Colorado,
ABA#121000248, on the date of closing, which shall be December 23, 1997 or any
other date on or before December 31, 1997 upon which the Company and you may
mutually agree (the "Closing" or the "Date of Closing").
PARAGRAPH 3. CONDITIONS PRECEDENT.
3. Conditions to Closing. Your obligation to purchase and pay for the
Securities to be purchased by you hereunder is subject to the satisfaction, on
or before the Date of Closing, of the following conditions:
3A. Certain Documents. You shall have received the following, each dated
the Date of Closing unless otherwise indicated:
(i) The Notes to be purchased by you.
(ii) The Warrants to be purchased by you.
2
<PAGE>
(iii) Certified copies of the resolutions of the Board of Directors of
the Company approving this Agreement, the Notes, the Subsidiary Guaranty,
the Warrants, the Registration Rights Agreement and the Participation
Rights Agreement and of all documents evidencing other necessary corporate
or limited partnership action and governmental approvals, if any, with
respect to this Agreement, the Notes, the Subsidiary Guaranty, the
Warrants, the Registration Rights Agreement and the Participation Rights
Agreement.
(iv) A certificate of the Secretary or an Assistant Secretary of the
Company certifying the names and true signatures of the officers of the
Company authorized to sign this Agreement, the Notes, the Subsidiary
Guaranty, the Warrants, the Registration Rights Agreement, the
Participation Rights Agreement and the other documents to be delivered
hereunder.
(v) Certified copies of the Certificate of Incorporation and bylaws of
the Company and of the Limited Partnership Agreement, as amended, and the
Certificate of Limited Partnership, as amended, of HCP.
(vi) Favorable opinions of Cathleen Osborn, Esq., General Counsel of
the Company, and of King & Spalding, special counsel to the Company and
HCP, satisfactory to you and substantially in the respective forms of
Exhibits C-1 and C-2 attached hereto and as to such other matters as you
may reasonably request.
(vii) Certified copies of Requests for Information or Copies (Form
UCC-11), or equivalent reports, dated within 30 days prior to the Date of
Closing, listing all effective financing statements which name the Company
or HCP (under its or their present name or any previous name) as debtor and
which are filed in the States of Colorado, Louisiana and Texas.
(viii) A letter satisfactory to you from Prudential Securities, Inc.,
placement agent for the Company, regarding the private offering of the
Securities.
(ix) The Registration Rights Agreement, duly executed and delivered by
the Company.
(x) The Participation Rights Agreement, duly executed and delivered by
the Company and HEP.
(xi) The Subsidiary Guaranty, in the form of Exhibit D attached
hereto, duly executed and delivered by HCP.
(xii) An amendment to the Credit Agreement to permit the issuance of
the Notes and the execution, delivery and performance of this Agreement and
the Subsidiary Guaranty.
3
<PAGE>
(xiii) Additional documents or certificates with respect to legal
matters or corporate or other proceedings related to the transactions
contemplated hereby as you may reasonably request.
3B. Opinion of Purchaser's Special Counsel. You shall have received from
Baker & Botts, L.L.P., who are acting as special counsel for you in connection
with this transaction, a favorable opinion satisfactory to you as to such
matters incident to the matters herein contemplated as you may reasonably
request.
3C. Representations and Warranties; No Default. The representations and
warranties contained in paragraph 9 hereof and in section 8 of the Subsidiary
Guaranty shall be true on and as of the Date of Closing, except to the extent of
changes caused by the transactions herein contemplated; there shall exist on the
Date of Closing no Event of Default or Default; and the Company shall have
delivered to you an Officer's Certificate, dated the Date of Closing, to both
such effects.
3D. Purchase Permitted By Applicable Laws. The offer by the Company of, and
the purchase of and payment for, the Securities to be purchased by you on the
Date of Closing on the terms and conditions herein provided (including the use
of the proceeds of such Securities by the Company) shall not violate any
applicable law or governmental regulation (including, without limitation,
Section 5 of the Securities Act or Regulation G or X of the Board of Governors
of the Federal Reserve System) and shall not subject you to any tax, penalty,
liability or other onerous condition under or pursuant to any applicable law or
governmental regulation, and you shall have received such certificates or other
evidence as you may request to establish compliance with this condition.
3E. Proceedings. All corporate and other proceedings taken or to be taken
in connection with the transactions contemplated hereby and all documents
incident hereto shall be satisfactory in substance and form to you, and you
shall have received all such counterpart originals or certified or other copies
of such documents as you may reasonably request.
3F. Private Placement Numbers. Private Placement numbers issued by Standard
& Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation
Office of the National Association of Insurance Commissioners) shall have been
obtained for the Notes and the Warrants.
3G. Fees. Without limiting the provisions of paragraph 12B, your special
counsel and your petroleum engineering consultant shall have received their
respective fees, charges and disbursements to the extent reflected in statements
rendered to the Company at least one Business Day prior to the Closing.
4
<PAGE>
PARAGRAPH 4. PREPAYMENTS.
4. Prepayments. The Notes shall be subject to prepayment only with respect
to the prepayments specified in paragraphs 4A, 4B and 4C.
4A. Required Prepayments. Until the Notes shall be paid in full, the
Company shall apply to the prepayment of the Notes, without premium, the sum of
$5,000,000 on December 23 in each of the years 2003 through 2006, inclusive, and
such principal amounts of the Notes, together with accrued and unpaid interest
thereon to such prepayment dates, shall become due on such prepayment dates. The
remaining outstanding principal amount of the Notes, together with interest
accrued and unpaid thereon, shall become due on the maturity date of the Notes.
4B. Optional Prepayment of Notes with Yield-Maintenance Amount.
(i) The Notes shall be subject to prepayment, on any Business Day, in
whole at any time or from time to time in part (in multiples of
$1,000,000), at the option of the Company, at 100% of the principal amount
so prepaid plus unpaid accrued interest thereon to the prepayment date plus
the Yield-Maintenance Amount, if any, with respect to each Note being so
prepaid. Any partial prepayment of the Notes pursuant to this paragraph 4B
shall be applied in satisfaction of required payments of principal in
inverse order of their scheduled due dates.
(ii) The Company shall give the holder of each Note irrevocable
written notice of any prepayment pursuant to this paragraph 4B not less
than 25 days and not more than 45 days prior to the prepayment date,
specifying such prepayment date and the principal amount of the Notes, and
of the Notes held by such holder, to be prepaid on such date and stating
that such prepayment is to be made pursuant to this paragraph 4B. Notice of
prepayment having been given as aforesaid, the principal amount of the
Notes specified in such notice, together with interest thereon to the
prepayment date and together with the Yield-Maintenance Amount, if any,
with respect thereto, shall become due and payable on such prepayment date.
4C. Change in Control.
(i) Notice of Occurrence of Change in Control. The Company will,
within five Business Days after any Responsible Officer has knowledge of
the occurrence of any Change in Control, give written notice of such Change
in Control to each holder of Notes. If a Change in Control has occurred,
such notice shall contain and constitute an offer to prepay Notes as
described in clause (iii) of this paragraph 4C and shall be accompanied by
the certificate described in clause (vi) hereof.
(ii) Notice of Impending Change in Control. The Company will not take
any action that consummates or finalizes a Change in Control unless at
least 30 days prior to such action it shall have given to each holder of
5
<PAGE>
Notes written notice of such impending Change in Control.
(iii) Offer to Prepay Notes. The offer to prepay Notes contemplated by
the foregoing clause (i) shall be an offer to prepay, in accordance with
and subject to this paragraph 4C, all, but not less than all, the Notes
held by each holder (in this case only, "holder" in respect of any Note
registered in the name of a nominee for a disclosed beneficial owner shall
mean such beneficial owner) on a date specified in such offer (the
"Proposed Prepayment Date"). Such Proposed Prepayment Date shall be not
less than 50 days and not more than 60 days after the date of such offer
(if the Proposed Prepayment Date shall not be specified in such offer, the
Proposed Prepayment Date shall be the 50th day after the date of such
offer).
(iv) Rejection; Acceptance. A holder of Notes may accept the offer to
prepay made pursuant to this paragraph 4C by causing a notice of such
acceptance to be delivered to the Company at least five days prior to the
Proposed Prepayment Date. A failure by a holder of Notes to respond to an
offer to prepay made pursuant to this paragraph 4C shall be deemed to
constitute an acceptance of such offer by such holder.
(v) Prepayment; Reduction of Required Prepayments. Prepayment of the
Notes to be prepaid pursuant to this paragraph 4C shall be at 100% of the
principal amount of such Notes, plus interest on such Notes accrued to the
date of prepayment plus Yield-Maintenance Amount, if any, with respect to
each Note being so prepaid. On the Business Day preceding the date of
prepayment under this paragraph 4C, the Company shall deliver to each
holder of Notes being so prepaid a statement showing the Yield-Maintenance
Amount due in connection with such prepayment and setting forth the details
of the computation of such amount. Such prepayment shall be made on the
Proposed Prepayment Date. Upon any partial prepayment of Notes pursuant to
this paragraph 4C, the principal amount of the required prepayment of Notes
becoming due under paragraph 4A on or after the date of such prepayment
shall be reduced in the same proportion as the aggregate unpaid principal
amount of Notes is reduced as a result of such prepayment.
(vi) Officer's Certificate. Each offer to prepay the Notes pursuant to
this paragraph 4C shall be accompanied by a certificate, executed by a
Responsible Officer of the Company and dated the date of such offer,
specifying: (a) the Proposed Prepayment Date; (b) that such offer is made
pursuant to this paragraph 4C; (c) the principal amount of each Note
offered to be prepaid; (d) the estimated Yield-Maintenance Amount due in
connection with such prepayment (calculated as if the date of such notice
were the date of the prepayment) and the details of such calculation; (e)
the interest that would be due on each Note offered to be prepaid, accrued
to the Proposed Prepayment Date; (f) that the conditions of this paragraph
4C have been fulfilled; and (g) in reasonable detail, the nature and date
of the Change in Control.
6
<PAGE>
4D. Partial Payments Pro Rata. Upon any partial prepayment of Notes
pursuant to paragraph 4A or 4B the principal amount so prepaid shall be
allocated to all Notes at the time outstanding (including, for the purpose of
this paragraph 4D only, all such Notes prepaid or otherwise retired or purchased
or otherwise acquired by the Company or any of its Subsidiaries or Affiliates
other than by prepayment pursuant to paragraph 4A, 4B or 4C) in proportion to
the respective outstanding principal amounts thereof.
4E. Retirement of Notes. The Company shall not, and shall not permit any of
its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in
part prior to their stated final maturity (other than by prepayment pursuant to
paragraph 4A, 4B or 4C or upon acceleration of such final maturity pursuant to
paragraph 8A), or purchase or otherwise acquire, directly or indirectly, Notes
held by any holder unless the Company or such Subsidiary or Affiliate shall have
offered to prepay or otherwise retire or purchase or otherwise acquire, as the
case may be, the same proportion of the aggregate principal amount of Notes held
by each other holder of Notes at the time outstanding upon the same terms and
conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise
acquired by the Company or any of its Subsidiaries or Affiliates shall not be
deemed to be outstanding for any purpose under this Agreement, except as
provided in paragraph 4D.
PARAGRAPH 5. AFFIRMATIVE COVENANTS.
5. Affirmative Covenants.
So long as any Note shall remain unpaid (or, if no Note shall remain unpaid
but any Warrant shall remain outstanding, (i) if at the time in question the
Common Stock is listed or admitted to trading on any national securities
exchange or is traded in the over-the-counter market and is subject to bid and
asked prices with respect thereto being quoted in the NASDAQ National Market,
then only with respect to the covenants of the Company set forth in paragraphs
5A(i), (ii), (iii) and (vii) and 5B, or (ii) if the Common Stock is not so
listed, admitted to trading or subject to such bid and asked prices being so
quoted, then only with respect to the covenants of the Company set forth in
paragraphs 5A, 5B and 5C (other than the provisions thereof that permit
inspection of properties or require that the Company bear the expense of any
inspection therein contemplated)), the Company covenants that:
5A. Financial Statements. The Company will deliver to each holder in
duplicate:
(i) as soon as practicable and in any event within 50 days after the
end of each quarterly period (other than the last quarterly period) in each
fiscal year, consolidated statements of income and cash flows and a
consolidated statement of stockholders' equity of the Company and its
Subsidiaries for the period from the beginning of the current fiscal year
to the end of such quarterly period, and a consolidated balance sheet of
the Company and its Subsidiaries as at the end of such quarterly period,
setting forth in each case in comparative form figures for the
corresponding period in the preceding fiscal year, all in reasonable detail
7
<PAGE>
and satisfactory in form to the Required Holder(s) and certified by an
authorized financial officer of the Company, subject to changes resulting
from year-end adjustments; provided, that delivery pursuant to clause (iii)
below of copies of the Quarterly Report on Form 10-Q of the Company for
such quarterly period filed with the Securities and Exchange Commission
shall be deemed to satisfy the requirements of this clause (i) with respect
to consolidated financial statements if such financial statements are
included in such report;
(ii) as soon as practicable and in any event within 100 days after the
end of each fiscal year, consolidated statements of income and cash flows
and a consolidated statement of stockholders' equity of the Company and its
Subsidiaries for such year, and a consolidated balance sheet of the Company
and its Subsidiaries as at the end of such year, setting forth in each case
in comparative form corresponding consolidated figures from the preceding
annual audit, all in reasonable detail and satisfactory in form to the
Required Holder(s) and reported on by independent public accountants of
recognized national standing selected by the Company whose report shall be
without limitation as to the scope of the audit and satisfactory in
substance to the Required Holder(s); provided, that delivery pursuant to
clause (iii) below of copies of the Annual Report on Form 10-K of the
Company for such fiscal year filed with the Securities and Exchange
Commission shall be deemed to satisfy the requirements of this clause (ii)
with respect to consolidated financial statements if such financial
statements are included in such report;
(iii) promptly upon transmission thereof, copies of all such financial
statements, proxy statements, notices and reports as it shall send to its
public stockholders and copies of all registration statements (without
exhibits) and all reports which it files with the Securities and Exchange
Commission (or any governmental body or agency succeeding to the functions
of the Securities and Exchange Commission);
(iv) promptly upon receipt thereof, a copy of each other report
submitted to the Company or any Subsidiary by independent accountants in
connection with any annual, interim or special audit made by them of the
books of the Company or any Subsidiary;
(v) as soon as practicable and in any event within five Business Days
after any officer of the Company obtaining knowledge (a) of any condition
or event which, in the opinion of management of the Company, could have a
material adverse effect on the business, condition (financial or other),
assets, properties, operations or prospects of the Company and its
Subsidiaries taken as a whole, (b) that any Person has given any notice to
the Company or any of its Subsidiaries or taken any other action with
respect to a claimed default or event or condition of the type referred to
in paragraph 8A(iii), (c) of the institution of any litigation involving
claims against the Company or any of its Subsidiaries equal to or greater
than $200,000 with respect to any single cause of action or of any adverse
determination in any court proceeding in any litigation involving a
potential liability to the Company or any of its Subsidiaries equal to or
greater than $200,000 with respect to any single cause of action which
makes the likelihood of an adverse determination in such litigation against
8
<PAGE>
the Company or such Subsidiary substantially more probable, (d) of any
regulatory proceeding which could have a material adverse effect on the
business, condition, (financial or other), assets, properties, operations
or prospects of the Company and its Subsidiaries taken as a whole, an
Officer's Certificate specifying the nature and period of existence of any
such condition or event, or specifying the notice given or action taken by
such Person and the nature of any such claimed default, event or condition,
or specifying the details of such proceeding, litigation or dispute and
what action the Company or any of its Subsidiaries has taken, is taking or
proposes to take with respect thereto;
(vi) promptly after the filing or receiving thereof, copies of all
reports and notices which the Company or any Subsidiary files under ERISA
with the Internal Revenue Service or the PBGC or the U.S. Department of
Labor or which the Company or any Subsidiary receives from any of them;
(vii) (a) by April 1 and August 1 of each year, a report in form and
substance reasonably satisfactory to the Required Holders, which may be
prepared by or under the supervision of a petroleum engineer who may be an
employee of the Company or an Affiliate, which shall evaluate each interest
in oil and gas reserves (including without limitation any production
payment with respect to any such reserves) which is, or is to be, taken
into account in the determination of the "Debt Limit" pursuant to the
Credit Agreement as of the preceding December 31 or June 30, respectively;
and (b) together with the report furnished pursuant to the foregoing clause
(a) as of December 31 of any year, an audit report by April 1 of each year,
which shall be in form and substance reasonably satisfactory to the
Required Holders and shall be prepared by Williamson Petroleum Consultants,
Inc. or other independent petroleum engineers reasonably acceptable to the
Required Holders, which audit report shall state that such independent
petroleum engineers have reviewed at least 50% in value of the interests in
oil and gas reserves subject to such report in detail in order to confirm
the reserve figures and have conducted a general review of the remaining
properties of the Company and its Subsidiaries, provided that each year the
detailed review of 50% of the interests in oil and gas reserves contained
in such audit report shall cover a different group of such interests so
that 100% of such interests will be covered over each four-year period; and
provided, further that each such review will always include the two
interests in oil and gas properties greatest in value at the time of such
review; and provided, further, that the reviews contained in each audit
report shall separately cover proved developed producing reserves, proved
developed non- producing reserves and proved undeveloped reserves;
(viii) all other reports and information the Company is required to
provide to the banks under the Credit Agreement; and
(ix) with reasonable promptness, such other information respecting the
condition or operations, financial or otherwise, of the Company or any of
its Subsidiaries as such holder may reasonably request.
9
<PAGE>
Together with each delivery of financial statements required by clauses (i) and
(ii) above, the Company will deliver to each holder an Officer's Certificate
demonstrating (with computations in reasonable detail) compliance by the Company
and its Subsidiaries with the provisions of paragraphs 6A(1), 6A(2), 6B(2),
6B(4), 6B(6) and 6B(7) and stating that there exists no Event of Default or
Default, or, if any Event of Default or Default exists, specifying the nature
and period of existence thereof and what action the Company proposes to take
with respect thereto. Together with each delivery of financial statements
required by clause (ii) above, the Company will deliver to each holder a
certificate of such accountants stating that, in making the audit necessary for
their report on such financial statements, they have obtained no knowledge of
any Event of Default or Default, or, if they have obtained knowledge of any
Event of Default or Default, specifying the nature and period of existence
thereof. Such accountants, however, shall not be liable to anyone by reason of
their failure to obtain knowledge of any Event of Default or Default which would
not be disclosed in the course of an audit conducted in accordance with
generally accepted auditing standards.
The Company also covenants that immediately after any Responsible Officer
obtains knowledge of an Event of Default or Default, it will deliver to each
holder an Officer's Certificate specifying the nature and period of existence
thereof and what action the Company proposes to take with respect thereto.
5B. Information Required by Rule 144A. The Company will, upon the request
of the holder of any Security provide such holder, and any qualified
institutional buyer designated by such holder, such financial and other
information as such holder may reasonably determine to be necessary in order to
permit compliance with the information requirements of Rule 144A under the
Securities Act in connection with the resale of the Securities, except at such
times as the Company is subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act. For the purpose of this paragraph 5B, the term
"qualified institutional buyer" shall have the meaning specified in Rule 144A
under the Securities Act.
5C. Inspection of Property. The Company will permit any Person designated
by the holder of any Security in writing, at the Company's expense during the
continuance of a Default or Event of Default if such designation has been made
by a Significant Holder and otherwise at the expense of the holder making such
designation, to visit and inspect any of the properties of the Company and its
Subsidiaries, to examine the corporate books and financial records of the
Company and its Subsidiaries and make copies thereof or extracts therefrom and
to discuss the affairs, finances and accounts of any of such corporations with
the principal officers of the Company and its indepen dent public accountants
(and by this provision the Company authorizes such accountants to discuss the
affairs, finances and accounts of such corporations), all at such reasonable
times and as often as such holder may reasonably request.
5D. Covenant to Secure Notes Equally. The Company will, if it or any
Subsidiary shall create or assume any Lien upon any of its property or assets,
whether now owned or hereafter acquired to secure Indebtedness other than Liens
permitted by paragraph 6B(2) (unless prior written consent to the creation or
assumption thereof shall have been obtained pursuant to paragraph 12C), make or
10
<PAGE>
cause to be made effective provision whereby the Notes will be secured by such
Lien equally and ratably with any and all other Indebtedness thereby secured so
long as any such other Indebtedness shall be so secured pursuant to such
agreements and instruments as shall be approved by the Required Holder(s), and
the Company will cause to be delivered to the holder of each Note an opinion of
independent counsel to the effect that such agreements and instruments are
enforceable in accordance with their terms and that the Notes are equally and
ratably secured with such other Indebtedness.
5E. Corporate Existence, Licenses and Permits; Maintenance of Properties.
The Company will at all times do or cause to be done all things necessary to
maintain, preserve and renew its existence as a corporation organized under the
laws of a state of the United States of America, will preserve and keep in force
and effect, and cause each of its Subsidiaries to preserve and keep in force and
effect, all licenses and permits necessary to the conduct of its and their
respective businesses and will maintain and keep, and will cause each of its
Subsidiaries to maintain and keep, its and their respective properties in good
repair, working order and condition, and from time to time make all necessary
and proper repairs, renewals and replacements, so that the business carried on
in connection therewith may be properly and advantageously conducted at all
times in the normal course of business as conducted prior to the date of repair;
provided, however, that nothing contained in this paragraph 5E shall prevent the
Company or any Subsidiary from ceasing or omitting to exercise any right,
license or permit or to make any repair, renewal or replacement that (i) in the
reasonable judgment of the Company or such Subsidiary is no longer in the best
interests of the Company or such Subsidiary and (ii) such cessation or omission
could not result in a material adverse effect on the business, condition
(financial or other), assets, properties, operations or prospects of the Company
and its Subsidiaries taken as a whole.
5F. Maintenance of Insurance. The Company will carry and maintain, and
cause each Subsidiary to carry and maintain, insurance (subject to customary
deductibles and retentions) in at least such amounts and against such
liabilities and hazards and by such methods as customarily maintained by other
companies operating similar businesses.
5G. Payment of Taxes and Other Claims. The Company will and will cause each
of its Subsidiaries to file all income tax or similar tax returns required to be
filed in any jurisdiction and to pay and discharge all taxes shown to be due and
payable on such returns and all other taxes, assessments, governmental charges,
levies, trade accounts payable and claims for work, labor or materials (all the
foregoing being referred to collectively as "Claims") payable by any of them, to
the extent such Claims have become due and payable and before they have become
delinquent; provided that neither the Company nor any Subsidiary need pay any
Claim if (i) the amount, applicability or validity thereof is contested by the
Company or such Subsidiary on a timely basis in good faith and in appropriate
proceedings, and the Company or a Subsidiary has established adequate reserves
therefor in accordance with generally accepted accounting principles on the
books of the Company or such Subsidiary or (ii) the nonpayment of all such
Claims in the aggregate could not result in a material adverse change in the
business, condition (financial or other), assets, properties, operations or
prospects of the Company and its Subsidiaries taken as a whole.
11
<PAGE>
5H. ERISA Compliance. The Company will, and will cause each ERISA Affiliate
to, at all times:
(i) with respect to each Plan, make timely payments of contributions
required to meet the minimum funding standard set forth in ERISA or the
Code with respect thereto and, with respect to any Multiemployer Plan, make
timely payment of contributions required to be paid thereto as provided by
Section 515 of ERISA, and
(ii) comply with all other provisions of ERISA applicable to the
Company or such ERISA Affiliate, as the case may be,
except for such failures to make contributions and failures to comply as could
not have a material adverse effect on the business, condition (financial or
other), assets, properties, operations or prospects of the Company and its
Subsidiaries taken as a whole.
5I. Compliance with Laws. The Company will comply, and will cause each of
its Subsidiaries to comply, with all applicable laws, rules, regulations and
orders (including those relating to protection of the environment) except, in
any such case, where failure to comply could not have a material adverse effect
on the business, condition (financial or other), assets, properties, operations
or prospects of the Company and its Subsidiaries taken as a whole.
5J. Maintenance of Books of Record; Reserves. The Company, both
individually and on a consolidated basis, will keep proper books of record and
account and set aside appropriate reserves, all in accordance with GAAP.
5K. Assumption of the Subsidiary Guaranty by After-Acquired Subsidiaries.
The Company will, if it acquires the stock or other equity interest of any
Person which after giving effect to such acquisition is a Subsidiary and which
delivers or is required to deliver a Guarantee, or grants or is required to
grant a Lien, to any holder of Senior Debt (or a trustee, collateral agent or
similar Person on behalf of such holder), cause such Subsidiary to deliver to
you (i) an Assumption of Subsidiary Guaranty, in the form of Exhibit G attached
hereto, duly executed by such Subsidiary, (ii) a copy of a resolution of the
board of directors of such Subsidiary, or other appropriate organizational
action if such Subsidiary is not a corporation, approving the Assumption of
Subsidiary Guaranty and the execution and delivery thereof, which copy shall be
certified to be a true copy by the Secretary or an Assistant Secretary of such
Subsidiary or other appropriate person if such Subsidiary is not a corporation,
and (iii) an opinion, in the form of Exhibit H attached hereto, from counsel to
the Company addressing such Subsidiary and such Assumption of Subsidiary
Guaranty.
12
<PAGE>
PARAGRAPH 6. NEGATIVE COVENANTS.
6. Negative Covenants. So long as any Note shall remain unpaid, the Company
covenants that:
6A. Financial Covenants. The Company will not permit, at any time,
6A(1). Total Debt to EBITDA Ratio. The ratio of (i) Total Debt to (ii)
EBITDA for the most recently ended four consecutive fiscal quarters to be
greater than 4.00 to 1.00.
6A(2). Consolidated Net Worth. Consolidated Net Worth on the last day of
any fiscal quarter, commencing with the fiscal quarter ending December 31, 1997,
to be less than the sum of (i) $31,255,900 plus (ii) 100% of any Equity Proceeds
plus (iii) the cumulative total of 50% of Consolidated Net Income for each
fiscal quarter after September 30, 1997 in which Consolidated Net Income is
positive, to and including the fiscal quarter ended on such measurement date.
6B. Other Restrictions. The Company will not and will not permit any
Subsidiary to:
6B(1). Prohibition Against Layering Indebtedness. Incur, create, issue,
assume, guarantee or in any other manner become directly or indirectly liable
with respect to or responsible for, or permit to remaining outstanding, any
Indebtedness (including, without limitation, Indebtedness permitted pursuant to
paragraphs 6A(1) and 6B(6)) that is subordinate or junior in right of payment to
any Senior Debt or any Guarantee in respect thereof unless such Indebtedness is
subordinate in right of payment to the Notes or the Subsidiary Guaranty, as the
case may be, at least to the same extent as the Notes are subordinate in right
of payment to Senior Debt pursuant to the subordination provisions contained in
paragraph 7 or the Subsidiary Guaranty is subordinate in right of payment to
Senior Debt pursuant to the subordination provisions contained in the Subsidiary
Guaranty, as the case may be.
6B(2). Liens. Create, assume or suffer to exist any Lien upon any of its
properties or assets, whether now owned or hereafter acquired (whether or not
provision is made for the equal and ratable securing of the Notes in accordance
with the provisions of paragraph 5D), except:
(i) Liens, on assets of the Company and HCP other than limited partner
units or other equity interests in HEP, securing Senior Debt and
obligations in respect of Hedging Transactions and Swaps of the Company and
HCP under the Credit Agreement;
(ii) the Lien in favor of FAR Gas Acquisitions Corporation described
on Schedule 9D attached hereto;
13
<PAGE>
(iii) statutory Liens incidental to the conduct of business or the
ownership of properties of the Company and its Subsidiaries (including
Liens in connection with worker's compensation, unemployment insurance and
other like laws (other than Liens imposed by ERISA), warehousemen's and
mechanic's liens and statutory landlord's liens) and Liens to secure
statutory obligations, property taxes and assessments of governmental
charges or other Liens of like general nature which in each case are
incurred in the ordinary course of business and not in connection with the
borrowing of money, the obtaining of advances or credit or the payment of
the deferred purchase price of property and which do not in any event
materially impair the value or use of the property encumbered thereby in
the operation of the business of the Company and its Subsidiaries; provided
in each case, that the obligation secured is not overdue or is being
contested in good faith by appropriate proceedings and reserves with
respect thereto have been established to the extent required by GAAP;
(iv) Liens on properties of the Company and its Subsidiaries that
secure Non-recourse Debt in an aggregate amount not to exceed at any time
5% of Consolidated Net Worth, unless otherwise agreed to in writing by the
Required Holders; and
(v) other Liens on the property of the Company or any Subsidiary,
provided that the aggregate amount of Indebtedness or other obligations
secured by such Liens plus (without duplication) the aggregate amount of
Indebtedness of all Subsidiaries does not exceed at any time the greater of
$1,000,000 or 2% of Consolidated Net Worth.
6B(3). Consolidation, Merger or Transfer of Assets. Merge or consolidate
with or into any Person or convey, transfer, lease or otherwise dispose of all
or substantially all of its assets to any Person, except that:
(i) any Subsidiary may merge with the Company (provided that the
Company shall be the sole continuing or surviving Person) or with any one
or more other Person(s) (provided that each surviving Person shall be a
Wholly Owned Subsidiary);
(ii) any Subsidiary may convey, transfer, lease or otherwise dispose
of all or substantially all of its assets to the Company or to a Wholly
Owned Subsidiary; and
(iii) the Company may merge or consolidate with or into any other
corporation or convey, transfer, lease or otherwise dispose of all or
substantially all of its assets to any other corporation or to HEP or a
limited partnership formed as the successor to HEP and the Company;
provided, that: (a) there shall be a single successor formed by such
14
<PAGE>
consolidation or a single survivor formed by such merger, as the case may
be, (b) the successor formed by such consolidation, the survivor of such
merger, HEP, such limited partnership or the corporation that acquires by
conveyance, transfer, lease or other disposition all or substantially all
of the assets of the Company, as the case may be, shall be organized and
existing under the laws of a state of the United States and shall have a
majority of its assets and business located in the United States, (c) if
the Company is not such successor or survivor, then either (1) the
successor, survivor or acquirer (including HEP or such limited partnership)
or (2) the corporation (which shall be organized and existing under the
laws of a state of the United States and shall have a majority of its
assets and business located in the United States) that owns a majority of
the Voting Stock of the successor, survivor or acquirer shall have
expressly assumed all obligations of the Company under or with respect to
the Notes, the Warrants, this Agreement, the Registration Rights Agreement,
the Participation Rights Agreement and any other agreement entered into in
connection with the transactions contemplated hereby, (d) the Person
assuming such obligations shall have caused to be delivered to each holder
of Securities an opinion of independent counsel reasonably acceptable to
the Required Holder(s), to the effect that all agreements and instruments
effecting such assumption are enforceable in accordance with their terms
(subject to customary exceptions regarding bankruptcy and equitable
principles and such other exceptions and qualifications, if any, that are
reasonably approved by the Required Holders) and comply with the terms
hereof, (e) no Default or Event of Default shall exist, either prior to or
immediately after giving effect to such merger, consolidation or asset
conveyance, transfer, lease or other disposition, and (f) the consolidated
net worth (which shall be determined in the same manner as Consolidated Net
Worth) of the successor, survivor or acquirer (including circumstances in
which the Company is the successor or the survivor) or, in the case of
clause (c)(2) above, the parent corporation of the successor, survivor or
acquirer, shall be equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such merger, consolidation or asset
transfer, lease or other disposition.
6B(4). Limitation on Certain Asset Dispositions. Except as permitted by
paragraph 6B(3), make any Asset Disposition unless (a) in the good faith opinion
of the Company, the Asset Disposition is in exchange for consideration having a
Fair Market Value at least equal to that of the property exchanged and is in the
best interest of the Company or such Subsidiary; (b) immediately after giving
effect to the Asset Disposition, no Default or Event of Default would exist; and
(c) immediately after giving effect to the Asset Disposition, the Disposition
Value of all property that was the subject of any Asset Disposition occurring
(i) in the period of 365 days then ending would not exceed 15% of Consolidated
Assets as of the end of the then most recently ended fiscal quarter of the
Company, and (ii) at any time after September 30, 1997 would not exceed 40% of
Consolidated Assets as of the end of the then most recently ended fiscal quarter
of the Company. Notwithstanding anything contained in the foregoing to the
contrary, if the net proceeds for any Transfer is applied to a Property
15
<PAGE>
Reinvestment Application within 180 days after such Transfer, then such
Transfer, only for the purpose of determining compliance with clause (c) of this
paragraph 6B(4) as of any date, shall be deemed not to be an Asset Disposition.
6B(5). Transactions With Affiliates. Other than in the case of transactions
between Wholly Owned Subsidiaries, directly or indirectly, purchase, acquire or
lease any property from, or sell, transfer or lease any property to, or
otherwise deal with, in the ordinary course of business or otherwise, (i) any
Affiliate, (ii) any Person owning, beneficially or of record, directly or
indirectly, either individually or together with all other Persons to whom such
Person is related by blood, adoption or marriage, stock of the Company (of any
class having ordinary voting power for the election of directors) aggregating 5%
or more of such voting power or (iii) any Person related by blood, adoption or
marriage to any Person described or coming within the provisions of clause (i)
or (ii) of this paragraph 6B(5), except in the ordinary course of business (as
determined by reference to the ordinary course of business in the oil and gas
industry) and pursuant to the reasonable requirements of the Company's or such
Subsidiary's business and upon terms and conditions at least as favorable to the
Company or such Subsidiary as the terms and conditions that would then be
obtainable in a comparable arm's-length transaction with a Person not an
Affiliate; provided, that the Company may sell to, or purchase from, any such
Person shares of the Company's stock so long as no Default or Event of Default
exists immediately prior to or immediately after giving effect to any such
purchase by the Company; provided, further, that the Company may enter into a
merger, consolidation or sale or other disposition of all or substantially all
of the assets of the Company with HEP in a transaction if such transaction
complies in all respects with the provisions of paragraph 6B(3)(iii); and
provided, further, that the Company or any of its Subsidiaries may participate
in, or effect any transaction in connection with, any joint enterprise or other
joint arrangement with any Affiliate if the Company or such Subsidiary
participates in or effects such transaction in the ordinary course of its
business and on a basis no less advantageous than the basis on which the Company
or such Subsidiary would participate in a similar transaction with a Person not
an Affiliate.
6B(6). Priority Debt. Permit Indebtedness of Subsidiaries plus (without
duplication) Indebtedness secured by Liens permitted by clause (v) of paragraph
6B(2) to exceed, at any time, the greater of $1,000,000 or 2% of Consolidated
Net Worth.
6B(7). Hedging Transactions. Be or become a party to any Swap or any
Hedging Transaction for any purpose except for bona fide hedging purposes.
Without limiting the generality of the foregoing, at no time during any calendar
year will the Company be a party to or permit any Subsidiary to be a party to
any Hedging Transaction with respect to natural gas or crude oil if, immediately
after giving effect to such Hedging Transaction, the aggregate reference
quantity of hydrocarbons with respect to Hedging Transactions with respect to
natural gas or crude oil that the Company and its Subsidiaries shall have
entered into during such year exceeds 65% of the aggregate natural gas and crude
oil production of the Company and its Subsidiaries for such year (calculated on
the basis of actual natural gas and crude oil production for such year to date
16
<PAGE>
and a good faith estimate of the aggregate amount of such production for the
remainder of such year).
6C. Change of Business. The Company will not and will not permit any
Subsidiary to change in any material respect the nature of its respective
business or operations from the exploration, development and production,
gathering, processing and marketing of oil and gas and activities relating
directly thereto, and will not engage, and will not permit any Subsidiary to
engage, directly or indirectly, in any material business activity, or purchase
or otherwise acquire any material property, in any case not directly related to
the conduct of the above-described business or operations.
6D. New Subsidiaries. The Company will not form, create or otherwise have
any Subsidiaries other than HCP and HCRC Holdings, Inc., a Delaware corporation.
PARAGRAPH 7. SUBORDINATION OF NOTES.
7A. Subordination. Anything in this Agreement to the contrary
notwithstanding, the Indebtedness evidenced by the Notes, including principal,
Yield-Maintenance Amount, if any, and interest, shall be subordinate and junior
to the extent set forth in subparagraphs (i) through (vi) inclusive, below, to
all Senior Debt.
(i) If the Company shall default in the payment of any principal of or
interest on any Senior Debt in an amount in excess of $100,000 owing under
any single instrument when the same becomes due and payable, whether at
maturity or at a date fixed for prepayment or at any other date on which
the Company is required to prepay any Senior Debt or by declaration of
acceleration or otherwise, then, unless and until such default shall have
been remedied by payment in full or waived, no holder of the Notes shall
accept or receive any direct or indirect payment of or on account of any
Indebtedness in respect of the Notes.
(ii) In the event of any insolvency, bankruptcy, liquidation,
reorganization or other similar proceedings, or any receivership
proceedings in connection therewith, relative to the Company, and in the
event of any proceedings for voluntary liquidation, dissolution or other
winding up of the Company, whether or not involving insolvency or
bankruptcy proceedings, then all Senior Debt shall first be paid in full
before any payment of or on account of principal or Yield-Maintenance
Amount, if any, or interest is made by the Company in respect of the Notes.
(iii) In any of the proceedings referred to in subparagraph (ii)
above, any payment or distribution of any kind or character, whether in
cash, property, stock or obligations, which may be payable or deliverable
by the Company in respect of the Notes shall be paid or delivered directly
to the holders of Senior Debt (or to a banking institution selected by the
17
<PAGE>
court or Person making the payment or delivery or designated by any holder
of Senior Debt) for application in payment thereof in accordance with the
priorities then existing among such holders, unless and until all Senior
Debt shall have been paid in full; provided, however, that
(a) if the payment or delivery by the Company of such cash,
property, stock or obligations to the holders of the Notes is
authorized by an order or decree giving effect, and stating in such
order or decree that effect is given, to the subordination of the
Notes to Senior Debt, and made in a reorganization proceeding under
any applicable bankruptcy or reorganization law, no payment or
delivery by the Company of such cash, property, stock or obligations
payable or deliverable with respect to the Notes shall be made to the
holders of Senior Debt; and
(b) no such delivery shall be made to holders of Senior Debt of
stock or obligations if the delivery thereof is authorized by an order
or decree giving effect, and stating in such order or decree that
effect is given, to the subordination of the Notes to Senior Debt, and
if such stock or obligations are subordinate and junior (whether by
law or agreement) at least to the extent provided in this paragraph 7
to the payment of all Senior Debt then outstanding and to the payment
of any stock or obligations which are issued pursuant to such
reorganization proceedings in exchange or substitution for any Senior
Debt then outstanding.
A transaction permitted by paragraph 6B(3)(iii) shall not be
deemed a dissolution, winding-up, liquidation or reorganization for
the purposes of this paragraph 7.
(iv) Upon the occurrence and during the continuance of any Default
Subordination Event (other than under circumstances when the terms of
subparagraph (ii) above are applicable), no holder of Notes shall accept or
receive any direct or indirect payment by setoff or otherwise of or on
account of any indebtedness in respect of the Notes during the Stand-Still
Period, provided that in the case of any payment on or in respect of any
Note which would (in the absence of any such Default Subordination Event)
have been due and payable on any date during such Stand-Still Period, the
provisions of this subparagraph (iv) shall not prevent such payment on or
after the date immediately following the termination of such Stand-Still
Period. There shall be no more than three Stand-Still Periods so long as
the Notes are outstanding.
(v) If any payment or distribution of any character, whether in cash,
securities or other property, shall be received by any holder of Notes in
contravention of any of the terms of this paragraph 7 and before all the
Senior Debt shall have been paid in full, such payment or distribution
shall be received in trust for the benefit of the holders of the Senior
Debt at the time outstanding and shall forthwith be paid over or delivered
and transferred to the holders of Senior Debt.
18
<PAGE>
(vi) If any payment by the Company in respect of Senior Debt must be
disgorged by any holder of Senior Debt as a result of any action under the
United States Bankruptcy Code or other debtor relief law, the obligations
in respect of which such payment was made shall continue to constitute
Senior Debt and shall remain entitled to the benefit of the provisions of
this provision. Without limitation of the foregoing, in the event of any
such disgorgement by a holder of Senior Debt, all holders of Notes, if any,
who have become subrogated to the rights of such holder of Senior Debt
pursuant to this Agreement and have obtained payment from the Company
through the exercise of such subrogation rights shall disgorge and pay to
such holder of Senior Debt any payment so obtained, to the extent of the
payment or payments disgorged by such holders of Senior Debt.
7B. Obligation of the Company Unconditional. The provisions of this
paragraph 7 are for the purpose of defining the relative rights of the holders
of Senior Debt on the one hand, and the holders of the Notes on the other hand,
against the Company and its property, and nothing herein shall impair, as
between the Company and the holders of the Notes, the obligation of the Company,
which is unconditional and absolute, to pay to the holders thereof the principal
thereof and Yield- Maintenance Amount, if any, and interest thereon in
accordance with their terms and the provisions hereof, nor shall anything herein
prevent the holders of the Notes from exercising all remedies otherwise
permitted by applicable law or hereunder upon default hereunder or under the
Notes (including, without limitation, the right to demand payment and sue for
performance hereof and of the Notes and to accelerate the maturity thereof as
provided in paragraph 8A), subject to the rights, if any, under this paragraph 7
of holders of Senior Debt to receive cash, property, stock or obligations
otherwise payable or deliverable by the Company to the holders of the Notes.
7C. Subrogation. Upon payment in full of Senior Debt, the holders of the
Notes shall be subrogated to the rights of the holders of the Senior Debt to
receive payments or distributions of assets of the Company made on Senior Debt
until the principal of and Yield-Maintenance Amount, if any, and interest on the
Notes shall be paid in full, and, for the purposes of such subrogation, no
payments to the holders of Senior Debt of any cash, property, stock or
obligations to which the holders of the Notes would be entitled except for the
provisions of paragraph 7A(iii) shall, as between the Company, its creditors
(other than the holders of the Senior Debt) and the holders of the Notes, be
deemed to be a payment by the Company to or on account of Senior Debt.
7D. Rights of Holders of Senior Debt. The provisions of this paragraph 7
shall be deemed a continuing offer to all holders of Senior Debt to act in
reliance on such provisions (but no such reliance shall be required to be proven
to receive the benefits hereof) and may be enforced by such holders and no right
of any present or future holder of any Senior Debt to enforce subordination as
provided in this paragraph 7 shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act by any such holder, or by any non-compliance by the Company
with the terms, provisions and covenants of this Agreement or the Notes. Without
in any way limiting the generality of the foregoing, the holders of Senior Debt
may, at any time and from time to time, without the consent of or notice to the
holders of the Notes, and without impairing or releasing the subordination
provided in this paragraph 7 or the obligations hereunder of the holders of the
19
<PAGE>
Notes to the holders of Senior Debt, do any one or more of the following,
subject in all cases to the limitations contained in the definition of Senior
Debt: (i) change the manner, place or terms of payment or extend the time of
payment of, or renew or alter (including, without limitation, by increasing or
decreasing the "Availability Limit" and the "Debt Limit," in each case as
defined in the Credit Agreement pursuant to which Senior Debt is incurred), or
waive defaults under, Senior Debt, or otherwise amend or supplement in any
manner Senior Debt or any instrument evidencing the same or any agreement under
which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise deal
with any property pledged, mortgaged or otherwise securing Senior Debt; (iii)
release any Person liable in any manner for the payment or collection of Senior
Debt; and (iv) exercise or refrain from exercising any rights against the
Company and any other Person, including any guarantor or surety.
PARAGRAPH 8. EVENTS OF DEFAULT.
8. Events of Default.
8A. Acceleration. If any of the following events shall occur and be
continuing for any reason whatsoever (and whether such occurrence shall be
voluntary or involuntary or come about or be effected by operation of law or
otherwise):
(i) the Company defaults in the payment of any principal of or Yield-
Maintenance Amount payable with respect to any Note, in any case when the
same shall become due, either by the terms thereof or otherwise as herein
provided; or
(ii) the Company defaults in the payment of any interest on any Note
for more than five days after the date due; or
(iii) the Company or any Subsidiary defaults (whether as primary
obligor or as guarantor or other surety) in any payment of principal of or
interest on or premium, if any, with respect to any other Indebtedness
beyond any period of grace provided with respect thereto, or the Company or
any Subsidiary fails to perform or observe any other agreement, term or
condition contained in any agreement under which any such Indebtedness is
created (or if any other event thereunder or under any such agreement shall
occur and be continuing) and the effect of such failure or other event is
to cause such obligation to become due (or to be purchased by the Company
or any Subsidiary) prior to any stated maturity; provided, that the
aggregate amount of all obligations as to which such a payment default
shall occur and be continuing or such a failure or other event causing
acceleration (or sale to the Company or any Subsidiary) shall occur and be
continuing exceeds $2,500,000; or
(iv) any representation or warranty made by the Company herein, by a
Subsidiary in the Subsidiary Guaranty or by the Company or any of its
officers in any writing furnished in connection with or pursuant to this
Agreement shall be false in any material respect on the date as of which
made; or
20
<PAGE>
(v) the Company fails to perform or observe any term, covenant or
agreement contained in paragraph 6A, 6B(1), 6B(2), 6B(3), 6B(4), 6B(6),
6B(7) or 6D; or
(vi) the Company fails to perform or observe any other agreement,
covenant, term or condition contained herein and such failure shall not be
remedied within 30 days after (a) any Responsible Officer obtains actual
knowledge thereof or (b) the Company receives written notice of such
failure from any holder; or
(vii) the Company or any Subsidiary makes an assignment for the
benefit of creditors or is generally not paying its debts as such debts
become due; or
(viii) any decree or order for relief in respect of the Company or any
Subsidiary is entered under any bankruptcy, reorganization, compromise,
arrangement, insolvency, readjustment of debt, dissolution or liquidation
or similar law, whether now or hereafter in effect (the "Bankruptcy Law"),
of any jurisdiction; or
(ix) the Company or any Subsidiary petitions or applies to any
tribunal for, or consents to, the appointment of, or taking possession by,
a trustee, receiver, custodian, liquidator or similar official of the
Company or any Subsidiary, or of any substantial part of the assets of the
Company or any Subsidiary, or commences a voluntary case under the
Bankruptcy Law of the United States or any proceedings (other than
proceedings for the voluntary liquidation and dissolution of a Subsidiary)
relating to the Company or any Subsidiary under the Bankruptcy Law of any
other jurisdiction; or
(x) any such petition or application is filed, or any such proceedings
are commenced, against the Company or any Subsidiary and the Company or
such Subsidiary by any act indicates its approval thereof, consent thereto
or acquiescence therein, or an order, judgment or decree is entered
appointing any such trustee, receiver, custodian, liquidator or similar
official, or approving the petition in any such proceedings, and such
order, judgment or decree remains unstayed and in effect for more than 30
days; or
(xi) any order, judgment or decree is entered in any proceedings
against the Company decreeing the dissolution of the Company and such
order, judgment or decree remains unstayed and in effect for more than 60
days; or
(xii) any order, judgment or decree is entered in any proceedings
against the Company or any Subsidiary decreeing a split-up of the Company
or such Subsidiary which requires the divestiture of assets representing a
substantial part, or the divestiture of the stock of a Subsidiary whose
assets represent a substantial part, of the consolidated assets of the
Company and its Subsidiaries (determined in accordance with generally
accepted accounting principles) or which requires the divestiture of
assets, or stock of a Subsidiary, which shall have contributed a
substantial part of consolidated net income of the Company and its
21
<PAGE>
Subsidiaries (determined in accordance with GAAP) for any of the three
fiscal years then most recently ended, and such order, judgment or decree
remains unstayed and in effect for more than 60 days; or
(xiii) one or more final judgments or final orders, in an aggregate
amount in excess of $1,000,000 is rendered against the Company or any
Subsidiary and either (i) enforcement proceedings have been commenced by
any creditor upon such judgment or order or (ii) within 45 days after entry
thereof, such judgment is not discharged or execution thereof stayed
pending appeal, or within 45 days after the expiration of any such stay,
such judgment is not discharged; or
(xiv) any Termination Event with respect to a Plan shall have occurred
and, within 30 days after the occurrence thereof, (a) such Termination
Event (if correctable) shall not have been corrected and (b) the then
present value of such Plan's vested benefits exceeds the then current value
of assets accumulated in such Plan by more than the amount of $1,000,000
(or in the case of a Termination Event involving the withdrawal of a
"substantial employer" (as defined in Section 4001(a) (2) of ERISA), the
withdrawing employer's proportionate share of such excess shall exceed such
amount); or
(xv) the Company or any of its ERISA Affiliates as employer under a
Multiemployer Plan shall have made a complete or partial withdrawal from
such Multiemployer Plan and the plan sponsor of such Multiemployer Plan
shall have notified such withdrawing employer that such employer has
incurred a withdrawal liability in an aggregate amount exceeding
$1,000,000;
then (a) if such event is an Event of Default specified in clause (i) or (ii) of
this paragraph 7A, the holder of any Note (other than the Company or any of its
Subsidiaries or Affiliates) may at its option, by notice in writing to the
Company, declare such Note to be, and such Note shall thereupon be and become,
immediately due and payable at par together with interest accrued thereon,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Company, (b) if such event is an Event of Default
specified in clause (viii), (ix) or (x) of this paragraph 8A with respect to the
Company, all of the Notes at the time outstanding shall automatically become
immediately due and payable together with interest accrued thereon and together
with the Yield-Maintenance Amount, if any, with respect to each Note, without
presentment, demand, protest or notice of any kind, all of which are hereby
waived by the Company, and (c) if such event is not an Event of Default
specified in clause (viii), (ix) or (x) of this paragraph 8A with respect to the
Company, the Required Holder(s) may at its or their option, by notice in writing
to the Company, declare all of the Notes to be, and all of the Notes shall
thereupon be and become, immediately due and payable together with interest
accrued thereon and together with the Yield-Maintenance Amount, if any, with
respect to each Note, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Company.
22
<PAGE>
The Company acknowledges, and the parties hereto agree, that each holder of
a Note has the right to maintain its investment in the Notes free from repayment
by the Company (except as herein specifically provided for) and that the
provisions for payment of the Yield-Maintenance Amount by the Company in the
event that the Notes are prepaid or are accelerated as a result of an Event of
Default are intended to provide compensation for the deprivation of such right
under such circumstances.
8B. Rescission of Acceleration. At any time after any or all of the Notes
shall have been declared immediately due and payable pursuant to paragraph 8A,
the Required Holder(s) may, by notice in writing to the Company, rescind and
annul such declaration and its consequences if (i) the Company shall have paid
all overdue interest on the Notes, the principal of and Yield-Maintenance
Amount, if any, payable with respect to any Notes which have become due
otherwise than by reason of such declaration, and interest on such overdue
interest and overdue principal and Yield- Maintenance Amount, if any, at the
rate specified in the Notes, (ii) the Company shall not have paid any amounts
which have become due solely by reason of such declaration, (iii) all Events of
Default and Defaults, other than non-payment of amounts which have become due
solely by reason of such declaration, shall have been cured or waived pursuant
to paragraph 12C, and (iv) no judgment or decree shall have been entered for the
payment of any amounts due pursuant to the Notes or this Agreement. No such
rescission or annulment shall extend to or affect any subsequent Event of
Default or Default or impair any right arising therefrom.
8C. Notice of Acceleration or Rescission. Whenever any Note shall be
declared immediately due and payable pursuant to paragraph 8A or any such
declaration shall be rescinded and annulled pursuant to paragraph 8B, the
Company shall forthwith give written notice thereof to the holder of each Note
at the time outstanding.
8D. Other Remedies. If any Event of Default or Default shall occur and be
continuing, the holder of any Note may proceed to protect and enforce its rights
under this Agreement, such Note and the Subsidiary Guaranty by exercising such
remedies as are available to such holder in respect thereof under applicable
law, either by suit in equity or by action at law, or both, whether for specific
performance of any covenant or other agreement contained in this Agreement or
the Subsidiary Guaranty or in aid of the exercise of any power granted herein or
therein. No remedy conferred in this Agreement upon the holder of any Note is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to every other remedy conferred
herein or now or hereafter existing at law or in equity or by statute or
otherwise.
23
<PAGE>
PARAGRAPH 9. REPRESENTATIONS, COVENANTS AND WARRANTIES.
9. Representations, Covenants and Warranties. The Company represents,
covenants and warrants as follows:
9A. Organization. The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware, and HCP is
duly formed and existing as a limited partnership in good standing under the
laws of the State of Colorado. HCP and HCRC Holdings, Inc. a Delaware
corporation which is the sole limited partner of HCP, are the only Subsidiaries
of the Company. Each of the Company and its Subsidiaries is duly qualified and
in good standing as a foreign corporation or limited partnership, as the case
may be, in each jurisdiction in which the nature of the business transacted or
the property owned or leased is such as to require such qualification, except
where such failure to be so qualified, whether individually or in the aggregate,
would not result in any material adverse effect upon the business, condition
(financial or other), assets, properties, operations or prospects of the Company
and its Subsidiaries taken as a whole. The execution, delivery and performance
by the Company of this Agreement, the Notes, the Warrants, the Registration
Rights Agreement and the Participation Rights Agreement are within the Company's
corporate powers and have been duly authorized by all necessary corporate
action. The execution, delivery and performance by HCP of the Subsidiary
Guaranty are within the limited partnership powers of HCP and have been duly
authorized by all necessary action on the part of HCP.
9B. Financial Statements. The Company has furnished you with the following
financial statements, identified by a principal financial officer of the
Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as
at December 31 in each of the years 1994 to 1996, inclusive, and consolidated
statements of income, stockholders' equity and cash flows of the Company and its
Subsidiaries for each such year, all reported on by Deloitte & Touche LLP; and
(ii) a consolidated balance sheet of the Company and its Subsidiaries as at
September 30, 1997 and consolidated statements of income, stockholders' equity
and cash flows for the fiscal quarter ended on such date, prepared by the
Company. Such financial statements (including any related schedules and/or
notes) are true and correct in all material respects (subject, as to interim
statements, to changes resulting from audits and year-end adjustments, which in
the aggregate will not be material), have been prepared in accordance with GAAP
consistently followed throughout the periods involved and show all liabilities,
direct and contingent, of the Company and its Subsidiaries required to be shown
in accordance with GAAP. The balance sheets fairly present the condition of the
Company and its Subsidiaries as at the dates thereof, and the statements of
income, stockholders' equity and cash flows fairly present the results of the
operations of the Company and its Subsidiaries and their cash flows for the
periods indicated. There has been no material adverse change in the business,
condition (financial or other), assets, properties, operations or prospects of
the Company and its Subsidiaries taken as a whole since December 31, 1996.
9C. Actions Pending. Except as disclosed to you in a letter of even date
herewith, there is no action, suit, investigation or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of its
24
<PAGE>
Subsidiaries, or any properties or rights of the Company or any of its
Subsidiaries, by or before any court, arbitrator or administrative or
governmental body which could reasonably be expected to result in any material
adverse change in the business, condition (financial or other), assets,
properties, operations or prospects of the Company and its Subsidiaries taken as
a whole. There is no action, suit, investigation or proceeding pending or
threatened against the Company or any of its Subsidiaries which purports to
affect the validity or enforceability of this Agreement, any Note, the
Subsidiary Guaranty, any Warrant, the Registration Rights Agreement or the
Participation Rights Agreement.
9D. Outstanding Indebtedness. Neither the Company nor any of its
Subsidiaries has outstanding any Indebtedness or Non-recourse Debt except as
permitted by paragraphs 6A(1) and 6B(6) and all of which is described in
Schedule 9D attached hereto. There exists no default under (and no waiver of
default is currently in effect with respect to) the provisions of any instrument
evidencing such Indebtedness or of any agreement relating thereto, and no event
or condition exists with respect to any Indebtedness of the Company or any
Subsidiary that would permit (or that with notice or the lapse of time, or both,
would permit) one or more Persons to cause such Indebtedness to become due and
payable before its stated maturity or before its regularly scheduled dates of
payment.
9E. Title to Properties. The Company has, and each of its Subsidiaries has,
(i) in the case of each property having a market value of at least $100,000,
good and marketable title to its respective real properties (including, without
limitation, oil and gas properties but excluding office space that it leases),
and (ii) in the case of all of its other respective properties and assets, good
title, including for purposes of both clause (i) and clause (ii) the properties
and assets reflected in the balance sheet as at September 30, 1997 referred to
in paragraph 9B (other than properties and assets disposed of in the ordinary
course of business). All leases necessary in any material respect for the
conduct of the respective businesses of the Company and its Subsidiaries are
valid and subsisting and are in full force and effect.
9F. Taxes. The Company has, and each of its Subsidiaries has, filed all
federal, state and other income tax returns which, to the knowledge of the
officers of the Company, are required to be filed, and each has paid all taxes
as shown on such returns and on all assessments received by it to the extent
that such taxes have become due, except such taxes as are being contested in
good faith by appropriate proceedings and for which adequate reserves have been
established in accordance with GAAP.
9G. Conflicting Agreements and Other Matters. Neither the Company nor any
of its Subsidiaries is subject to any charter, limited partnership agreement or
other corporate or limited partnership restriction which materially and
adversely affects its business, property or assets, or financial condition.
Neither the Company nor any of its Subsidiaries is a party to any contract or
agreement which materially and adversely affects (after taking into
consideration the benefits reasonably expected to be obtained by the Company or
such Subsidiary thereunder) its business, property or assets, or financial
condition. Neither the execution nor delivery of this Agreement, the Notes, the
25
<PAGE>
Subsidiary Guaranty, the Warrants, the Registration Rights Agreement or the
Participation Rights Agreement nor the offering, issuance and sale of the
Securities, nor fulfillment of nor compliance with the terms and provisions
hereof and of the Notes, the Subsidiary Guaranty, the Warrants, the Registration
Rights Agreement and the Participation Rights Agreement will conflict with, or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, or result in any violation of, or result in the creation of any
Lien upon any of the properties or assets of the Company or any of its
Subsidiaries pursuant to, the charter, limited partnership agreement or by-laws
of the Company or any of its Subsidiaries, any award of any arbitrator or any
agreement (including any agreement with stockholders), instrument, order,
judgment, decree, statute, law, rule or regulation to which the Company or any
of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries
is a party to, or otherwise subject to any provision contained in, any
instrument evidencing Indebtedness of the Company or such Subsidiary, any
agreement relating thereto or any other contract or agreement (including its
charter) which limits the amount of, or otherwise imposes restrictions on the
incurring of, Indebtedness of the Company of the type to be evidenced by the
Notes or of the Indebtedness of HCP or any other Subsidiary of the type to be
evidenced by the Subsidiary Guaranty except as set forth in the agreements
listed in Schedule 9G attached hereto.
9H. Authorized Capital Stock. The authorized capital stock of the Company
consists of 10,000,000 shares of Common Stock, $0.01 par value per share, of
which 2,977,542 shares are issued and outstanding as of the date hereof, and
500,000 shares of Preferred Stock, $0.01 par value, none of which has been
issued. All the outstanding shares of Common Stock are duly authorized, validly
issued, fully paid and nonassessable. The Company does not have outstanding any
warrants, options, convertible securities or other rights for the purchase or
acquisition of shares of its capital stock other than (a) the Warrants and (b)
options outstanding under its 1995 Stock Option Plan to purchase 159,000 shares
of Common Stock (options for all of such shares having become vested and for
10,770 of such shares having been exercised as of the date of this Agreement)
and options outstanding under its 1997 Stock Option Plan to purchase 159,000
shares of Common Stock (options for none of such shares having been exercised,
and options for 53,000 of such shares having become vested, as of the date of
this Agreement). The Warrants and shares of Common Stock issuable upon the
exercise of the Warrants have been duly and validly authorized, and such shares
of Common Stock have been duly reserved for issuance upon exercise of the
Warrants. No shareholder of the Company or any other Person is entitled to
preemptive or similar rights with respect to the shares of Common Stock which
are issuable upon exercise of the Warrants and, if and when issued upon exercise
of the Warrants in accordance with the provisions thereof, such shares will be
validly issued, fully paid and nonassessable shares.
9I. Offering of Securities. Neither the Company nor any agent acting on its
behalf has, directly or indirectly, offered the Notes, the Warrants or any
similar security of the Company for sale to, or solicited any offers to buy the
Notes, the Warrants or any similar security of the Company from, or otherwise
approached or negotiated with respect thereto with, any Person other than
institu tional investors, and neither the Company nor any agent acting on its
behalf has taken or will take any action which would subject the issuance or
sale of the Notes or the Warrants to the provisions of Section 5 of the
26
<PAGE>
Securities Act or to the provisions of any securities or Blue Sky law of any
applicable jurisdiction.
9J. Use of Proceeds. Neither the Company nor any Subsidiary owns any
"margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of
Governors of the Federal Reserve System ("margin stock") other than the
1,948,189 Class A Units of limited partner interest and the 129,877 Class C
Units of limited partner interest owned by the Company in HEP (the "HEP Units").
The proceeds of sale of the Securities will be used to refinance existing
Indebtedness of the Company as indicated in Schedule 9D, to acquire producing
property and for general corporate purposes. None of such proceeds will be used,
directly or indirectly, for the purpose, whether immediate, incidental or
ultimate, of purchasing or carrying any margin stock or for the purpose of
maintaining, reducing or retiring any Indebtedness which was originally incurred
to purchase or carry any stock that is currently a margin stock or for any other
purpose which might constitute this transaction a "purpose credit" within the
meaning of such Regulation G. Neither the Company nor any agent acting on its
behalf has taken or will take any action which might cause this Agreement or the
Securities to violate Regulation G or any other regulation of the Board of
Governors of the Federal Reserve System or to violate the Exchange Act, in each
case as in effect now or as the same may hereafter be in effect. The HEP Units
do not constitute more than 22% of the value of the assets of the Company and
its Subsidiaries, on a consolidated basis, prior to the receipt by the Company
of the proceeds from the issuance of the Securities, and the Company does not
have any present intention that HEP Units or other margin stock will constitute
more than 25% of the value of the assets of the Company and its Subsidiaries, on
a consolidated basis.
9K. ERISA. No accumulated funding deficiency (as defined in section 302 of
ERISA and section 412 of the Code), whether or not waived, exists with respect
to any Plan (other than a Multiemployer Plan). No liability to the PBGC has been
or is expected by the Company or any ERISA Affiliate to be incurred with respect
to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or
any ERISA Affiliate which is or would be materially adverse to the business,
condition (financial or other), assets, properties, operations or prospects of
the Company and its Subsidiaries taken as a whole. Neither the Company, any
Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur
any withdrawal liability under Title IV of ERISA with respect to any
Multiemployer Plan which is or would be materially adverse to the business,
condition (financial or other), assets, properties, operations or prospects of
the Company and its Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the issuance and sale of the Securities will be exempt from,
or will not involve any transaction which is subject to, the prohibi tions of
section 406 of ERISA and will not involve any transaction in connection with
which a penalty could be imposed under section 502(i) of ERISA or a tax could be
imposed pursuant to section 4975 of the Code. The representation by the Company
in the next preceding sentence is made in reliance upon and subject to the
accuracy of your representation in paragraph 10B.
9L. Governmental Consent. Neither the nature of the Company or of any
Subsidiary, nor any of their respective businesses or properties, nor any
relationship between the Company or any Subsidiary and any other Person, nor any
circumstance in connection with the offering, issuance, sale or delivery of the
27
<PAGE>
Securities is such as to require any authorization, consent, approval, exemption
or other action by or notice to or filing with any court or administrative or
governmental or regulatory body (other than routine filings after the Date of
Closing with the Securities and Exchange Commission and/or state Blue Sky
authorities) in connection with the execution and delivery of this Agreement,
the Subsidiary Guaranty, the Registration Rights Agreement, the Participation
Rights Agreement, the offering, issuance, sale or delivery of the Securities or
fulfillment of or compliance with the terms and provisions of this Agreement,
the Subsidiary Guaranty, the Registration Rights Agreement, the Participation
Rights Agreement or the Securities.
9M. Environmental Compliance. The Company and its Subsidiaries and all of
their respective properties and facilities have complied at all times and in all
respects with all federal, state, local and regional statutes, laws, ordinances
and judicial or administrative orders, judgments, rulings and regulations
relating to protection of the environment except, in all such cases considered
in the aggregate, where failure to comply would not reasonably be expected to
result in a material adverse effect on the business, condition (financial or
other), assets, properties, operations or prospects of the Company and its
Subsidiaries taken as a whole.
9N. Disclosure. Neither this Agreement nor any other document, certificate
or statement furnished to you by or on behalf of the Company in connection
herewith contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein and
therein not misleading. There is no fact peculiar to the Company or any of its
Subsidiaries which materially adversely affects or in the future may (so far as
the Company can now foresee) materially adversely affect the business, property
or assets, or financial condition of the Company or any of its Subsidiaries and
which has not been set forth in this Agreement or in the other documents,
certificates and statements furnished to you by or on behalf of the Company
prior to the date hereof in connection with the transactions contemplated
hereby. The pro forma financial projections dated as of October 7, 1997 titled
"$25MM Fixed Debt, $50MM Total Debt, Arcadia at 10% RoR 10% Drilling" and
previously delivered to you by the Company are reasonable based on the
assumptions stated therein and the best information available to the officers of
the Company other than with respect to the assumptions regarding the acquisition
of assets of Arcadia.
PARAGRAPH 10. REPRESENTATIONS OF THE PURCHASER.
10. Representations of the Purchaser. You represent as follows:
10A. Nature of Purchase. You are an "insurance company" as defined in
section 2(13) of the Securities Act and you are not acquiring the Notes to be
purchased by you hereunder with a view to or for sale in connection with any
distribution thereof within the meaning of the Securities Act of 1933, as
amended, provided that the disposition of your property shall at all times be
and remain within your control.
10B. Source of Funds. No part of the funds being used by you to pay the
purchase price of the Notes being purchased by you hereunder constitutes assets
allocated to a separate account maintained by you. For the purpose of this
28
<PAGE>
paragraph 10B, the terms "separate account" shall have the meaning specified in
section 3 of ERISA.
PARAGRAPH 11. DEFINITIONS.
11. Definitions. For the purpose of this Agreement, the terms defined in
the introductory sentence and in paragraphs 1 and 2 shall have the respective
meanings specified therein, and the following terms shall have the meanings
specified with respect thereto below (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
11A. Yield-Maintenance Terms.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
day on which commercial banks in New York City are required or authorized
to be closed.
"Called Principal" shall mean, with respect to any Note, the principal
of such Note that is to be prepaid pursuant to paragraph 4B or 4C or is
declared to be immediately due and payable pursuant to paragraph 8A, as the
context requires.
"Designated Spread" shall mean, (i) with respect to the Called
Principal of any Note that is prepaid pursuant to paragraph 4C, 2.50% (250
basis points), and (ii) in all other cases 1.00% (100 basis points).
"Discounted Value" shall mean, with respect to the Called Principal of
any Note, the amount obtained by discounting all Remaining Scheduled
Payments with respect to such Called Principal from their respective
scheduled due dates to the Settlement Date with respect to such Called
Principal, in accordance with accepted financial practice and at a discount
factor (applied on the same periodic basis as that on which interest on the
Notes is payable) equal to the Reinvestment Yield with respect to such
Called Principal.
"Reinvestment Yield" shall mean the sum of the Designated Spread plus
the yield to maturity implied by (i) the yields reported, as of 10:00 a.m.
(New York City time) on the Business Day next preceding the Settlement Date
with respect to such Called Principal, on the display designated as "Page
678" on the Telerate Service (or such other display as may replace Page 678
on the Telerate Service) for actively traded U.S. Treasury securities
having a maturity equal to the Remaining Average Life of such Called
Principal as of such Settlement Date, or if such yields shall not be
reported as of such time or the yields reported as of such time shall not
be ascertainable, (ii) the Treasury Constant Maturity Series yields
reported, for the latest day for which such yields shall have been so
reported as of the Business Day next preceding the Settlement Date with
respect to such Called Principal, in Federal Reserve Statistical Release
H.15 (519) (or any comparable successor publication) for actively traded
U.S. Treasury securities having a constant maturity equal to the Remaining
Average Life of such Called Principal as of such Settlement Date. Such
implied yield shall be determined, (a) if necessary, by (x) converting U.S.
Treasury bill quotations to bond- equivalent yields in accordance with
accepted financial practice and (y) interpolating linearly between yields
reported for various maturities and (b) by converting all such implied
yields to a quarterly payment basis in accordance with accepted financial
practice.
"Remaining Average Life" shall mean, with respect to the Called
Principal of any Note, the number of years (calculated to the nearest
one-twelfth year) obtained by dividing (i) such Called Principal into (ii)
the sum of the products obtained by multiplying (a) each Remaining
Scheduled Payment of such Called Principal (but not of interest thereon) by
(b) the number of years (calculated to the nearest one-twelfth year) which
will elapse between the Settlement Date with respect to such Called
Principal and the scheduled due date of such Remaining Scheduled Payment.
"Remaining Scheduled Payments" shall mean, with respect to the Called
Principal of any Note, all payments of such Called Principal and interest
thereon that would be due on or after the Settlement Date with respect to
such Called Principal if no payment of such Called Principal were made
prior to its scheduled due date.
"Settlement Date" shall mean, with respect to the Called Principal of
any Note, the date on which such Called Principal is to be prepaid pursuant
to paragraph 4B or 4C or is declared to be immediately due and payable
pursuant to paragraph 8A as the context requires.
"Yield-Maintenance Amount" shall mean, with respect to any Note, an
amount equal to the excess, if any, of the Discounted Value of the Called
Principal of such Note over the sum of (i) such Called Principal plus (ii)
interest accrued thereon as of and including the Settlement Date with
respect to such Called Principal. The Yield-Maintenance Amount shall in no
event be less than zero.
11B. Other Terms.
"Affiliate" shall mean any Person directly or indirectly controlling,
controlled by, or under direct or indirect common control with, the
Company. A Person shall be deemed to control a corporation if such Person
possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such corporation, whether
through the ownership of voting securities, by contract or otherwise.
Unless the context clearly requires otherwise, "Affiliate" shall mean an
Affiliate of the Company.
"Asset Disposition" shall mean, with respect to the Company or any
Subsidiary, any transaction or series of related transactions in which such
Person sells, conveys, transfers, leases (as lessor) or otherwise disposes
of (collectively, for purposes of this definition, a "transfer"), directly
or indirectly, any of its property or assets, including, without
limitation, any Indebtedness of any Subsidiary or capital stock of or other
equity interests in any Subsidiary (including the issuance of such stock or
other equity interests by such Subsidiary), other than (i) transfers from a
Subsidiary to the Company or a Wholly Owned Subsidiary, (ii) transfers from
the Company to another corporation, HEP or a limited partnership described
in paragraph 6B(3)(iii) of all or substantially all of the assets of the
29
<PAGE>
Company pursuant to, and in compliance with the terms of, such paragraph or
(iii) sales of oil and gas production in the ordinary course of the Company's or
a Subsidiary's business.
"Bankruptcy Law" shall have the meaning specified in clause (viii) of
paragraph 8A.
"Business Day" shall mean any day on which banks are open for business
in New York City (other than a Saturday, a Sunday or a legal holiday in the
States of New York or New Jersey).
"Capitalized Lease Obligation" shall mean any rental obligation which,
under generally accepted accounting principles, would be required to be
capitalized on the books of the Company or any Subsidiary, taken at the
amount thereof accounted for as indebtedness (net of interest expense) in
accordance with such principles.
"Change in Control" shall mean if any Person or Persons acting in
concert, together with Affiliates thereof, shall in the aggregate, directly
or indirectly, control or own (beneficially or otherwise) more than 50% (by
number of shares) of the issued and outstanding Voting Stock of the
Company. Notwithstanding the foregoing, a merger or consolidation of the
Company with, or a sale of all or substantially all of the assets of the
Company to, HEP or a corporation or limited partnership formed to combine
the assets of HEP and the Company will not be a "Change in Control".
"Claims" shall have the meaning specified in paragraph 5G.
"Closing" or "Date of Closing" shall have the meaning specified in
paragraph 2.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall have the meaning specified in paragraph 1B.
"Consolidated Assets" shall mean, at any time, the total assets of the
Company and its Subsidiaries which would be shown as assets on a
consolidated balance sheet of the Company and its Subsidiaries as of such
time prepared in accordance with GAAP, after eliminating, without
duplication, (i) amounts properly attributable to minority interests, if
any, in the stock and surplus of Subsidiaries, and (ii) assets subject to
Non-recourse Debt.
"Consolidated Interest Expense" shall mean, with respect to any
period, the sum (without duplication) of the following (in each case,
eliminating, without duplication, all offsetting debits and credits between
the Company and its Subsidiaries, all other items required to be eliminated
in the course of the preparation of consolidated financial statements of
the Company and its Subsidiaries in accordance with GAAP, all amounts
properly attributable to minority interests, if any, in the stock and
surplus of Subsidiaries, all items that are included in such consolidated
30
<PAGE>
financial statements by virtue of the proportionate consolidation method of
accounting and constitute the pro rata share of the Company and its
Subsidiaries of the activities of HEP, and all items in respect of
Non-recourse Debt): (a) all interest and prepayment charges in respect of
Indebtedness of the Company and its Subsidiaries (including imputed
interest in respect of Capitalized Lease Obligations and net costs of
Swaps) deducted in determining Consolidated Net Income for such period,
together with all interest capitalized or deferred during such period and
not deducted in determining Consolidated Net Income for such period, and
(b) all debt discount and expense amortized or required to be amortized in
the determination of Consolidated Net Income for such period.
"Consolidated Net Income" shall mean, with respect to any period, the
sum of (i) distributions from HEP that are actually received by the Company
or any of its Subsidiaries during such period plus, without duplication,
(ii) the net income (or loss) of the Company and its Subsidiaries for such
period as determined in accordance with GAAP, after eliminating, without
duplication, (a) all items required to be eliminated in the course of the
preparation of consolidated financial statements of the Company and its
Subsidiaries in accordance with GAAP, (b) all amounts properly attributable
to minority interests, if any, in the stock and surplus of Subsidiaries,
(c) all items that are included in such consolidated financial statements
by virtue of the proportionate consolidation method of accounting and
constitute the pro rata share of the Company and its Subsidiaries of the
activities of HEP, and (d) all items in respect of Non-recourse Debt;
provided that there shall also be excluded the following: any gains (net of
expenses and taxes applicable thereto) in excess of losses resulting from
the sale, conversion or other disposition of capital assets (i.e., assets
other than current assets), any gains resulting from the write-up of
assets, any earnings of any Person acquired by the Company or any
Subsidiary through purchase, merger or consolidation or otherwise for any
period prior to the date of acquisition, any deferred credit representing
the excess of equity in any Subsidiary at the date of acquisition over the
cost of the investment in such Subsidiary, any gains from the acquisition
of securities or the retirement or extinguishment of Indebtedness, any
gains on collections from insurance policies or settlements, any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of income accrued during such
period, the cumulative effect of changes in accounting principles included
in income during the period, any income or gain during such period from any
discontinued operations or the disposition thereof, from any extraordinary
items or from any prior period adjustments, or, in the case of a successor
to the Company or any Subsidiary by consolidation or merger or as a
transferee of its assets, any earnings of the successor corporation prior
to such consolidation, merger or transfer of assets or any equity of the
Company or any Subsidiary in the undistributed earnings (but not losses) of
any Person which is not a Subsidiary.
"Consolidated Net Worth" shall mean an amount equal to consolidated
stockholders' equity of the Company determined in accordance with GAAP
(less amounts attributable to redeemable preferred stock) minus the net
equity of the Company and its Subsidiaries in any assets subject to
Non-recourse Debt.
31
<PAGE>
"Convertible Securities" shall mean any debt instrument that is by its
terms convertible into an equity interest in the Company or a Subsidiary.
"Credit Agreement" shall mean the Second Amended and Restated Credit
Agreement dated as of May 31, 1997, among the Company, HCP and the banks
listed therein, First Union National Bank, as Collateral Agent, and Morgan
Guaranty Trust Company of New York, as Agent, as amended from time to time.
"Default Subordination Event" shall mean the existence of all of the
following: (i) a Subordination Event of Default shall have occurred and be
continuing in respect of any Senior Debt, (ii) the holders of the Notes
shall have received a notice from or on behalf of any holder of such Senior
Debt specifying that such Subordination Event of Default has occurred and
is continuing and that such notice constitutes a "Default Subordination
Notice" and (iii) no other Default Subordination Notice shall have been
delivered by any holder of Senior Debt within the 365 day period
immediately preceding the giving of such notice. The "Stand-Still Period"
relating to any Default Subordination Event shall be deemed to continue
until the earlier of (a) the Subordination Event of Default under the
Senior Debt giving rise thereto shall have been cured or waived; (b) a
period of 120 days shall have elapsed from the giving of the Default
Subordination Notice relating thereto; and (c) the Senior Debt giving rise
thereto shall have been accelerated.
"Default Subordination Notice" shall have the meaning specified in the
definition of "Default Subordination Event."
"Disposition Value" shall mean, at any time, with respect to any
property
(a) in the case of property that does not constitute Subsidiary
Stock, the book value thereof at the time of such disposition, and
(b) in the case of property that constitutes Subsidiary Stock, an
amount equal to that percentage of book value of the assets of the
Subsidiary that issued such stock as is equal to the percentage that
the book value of such Subsidiary Stock represents of the book value
of all of the outstanding capital stock of such Subsidiary (assuming,
in making such calculations, that all securities convertible into such
capital stock are so converted and giving full effect to all
transactions that would occur or be required in connection with such
conversion) determined at the time of the disposition thereof, in good
faith by the Company.
"EBITDA" shall mean, for any period, the sum of (i) Consolidated Net
Income plus (ii) to the extent deducted in the determination of
Consolidated Net Income (other than as a result of clauses (b), (c) and (d)
of the definition thereof), (a) all provisions for federal, state and other
income tax, (b) Consolidated Interest Expense and (c) provisions for
depletion, depreciation and amortization and impairment of oil and gas
properties.
32
<PAGE>
"Equity Proceeds" shall mean the aggregate sum of (i) the net proceeds
received after the Date of Closing by the Company or any Subsidiary upon
the sale of any equity interest in the Company or any Subsidiary (other
than in the case of sales by a Subsidiary to the Company or to a Wholly
Owned Subsidiary), plus (ii) the net proceeds received after the Date of
Closing by the Company or any Subsidiary upon (a) the exercise of the
Warrants, or any other warrants, options or similar instruments issued by
the Company or any Subsidiary (other than in the case of warrants or
similar instruments issued to and held by the Company or a Wholly Owned
Subsidiary), and (b) the conversion of any Convertible Securities into
common stock or other equity interest in the Company or any Subsidiary
(other than conversions by the Company or a Wholly Owned Subsidiary).
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" shall mean any corporation which is a member of the
same controlled group of corporations as the Company within the meaning of
section 414(b) of the Code, or any trade or business which is under common
control with the Company within the meaning of section 414(c) of the Code.
"Event of Default" shall mean any of the events specified in paragraph
8A, provided that there has been satisfied any requirement in connection
with such event for the giving of notice, or the lapse of time, or the
happening of any further condition, event or act, and "Default" shall mean
any of such events, whether or not any such requirement has been satisfied.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall mean, at any time and with respect to any
property, the sale value of such property that would be realized in an
arm's-length sale at such time between an informed and willing buyer and an
informed and willing seller (neither being under a compulsion to buy or
sell).
"GAAP" shall have the meaning specified in paragraph 11C.
"Guarantee" shall mean, with respect to any Person, any direct or
indirect liability, contingent or otherwise, of such Person with respect to
any indebtedness, lease, dividend or other obligation of another,
including, without limitation, any such obligation directly or indirectly
guaranteed, endorsed (otherwise than for collection or deposit in the
ordinary course of business) or discounted or sold with recourse by such
Person, or in respect of which such Person is otherwise directly or
indirectly liable, including, without limitation, any such obligation in
effect guaranteed by such Person through any agreement (contingent or
otherwise) to purchase, repurchase or otherwise acquire such obligation or
any security therefor, or to provide funds for the payment or discharge of
such obligation (whether in the form of loans, advances, stock purchases,
capital contributions or otherwise), or to maintain the solvency or any
balance sheet or other financial condition of the obligor of such
obligation, or to make payment for any products, materials or supplies or
33
<PAGE>
for any transportation or services regardless of the non-delivery or
non-furnishing thereof, in any such case if the purpose, intent or effect
of such agreement is to provide assurance that such obligation will be paid
or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such obligation will be protected against loss
in respect thereof. The amount of any Guarantee shall be equal to the
outstanding principal amount of the obligation guaranteed or such lesser
amount to which the maximum exposure of the guarantor shall have been
specifically limited.
"HCP" shall mean Hallwood Consolidated Partners, L.P., a Colorado
limited partnership.
"Hedging Transaction" shall mean any commodity basis swap, forward
commodity transaction, commodity swap, commodity option, commodity index
swap, commodity cap transaction, commodity floor transaction, commodity
collar transaction, any other similar transaction that relates to
commodities (including any option with respect to any of the foregoing
transactions) or any combination of the foregoing transactions. For the
purposes of this Agreement, the amount of the obligation under any Hedging
Transaction shall be the amount determined in respect thereof as of the end
of the then most recently ended fiscal quarter of such Person, based on the
assumption that such Hedging Transaction had terminated at the end of such
fiscal quarter, and in making such determination, if any agreement relating
to such Hedging Transaction provides for the netting of amounts payable by
and to such Person thereunder or if any such agreement provides for the
simultaneous payment of amounts by and to such Person, then in each such
case, the amount of such obligation shall be the net amount so determined.
"HEP" shall mean Hallwood Energy Partners, L.P., a Delaware limited
partnership, and its successors.
"Indebtedness" shall mean, with respect to any Person and without
duplication: (i) all items (excluding items of contingency reserves or of
reserves for deferred income taxes) which under GAAP are shown on the
balance sheet as a liability (including, without limitation, Capitalized
Lease Obligations, but excluding accounts payable in the ordinary course of
business and accrued expenses shown as current liabilities; (ii)
indebtedness secured by any Lien existing on property owned subject to such
Lien, whether or not the indebtedness secured thereby shall have been
assumed, provided, that the obligations secured by any Liens permitted by
paragraph 6B(2)(iv) shall not constitute Indebtedness; (iii) redemption
obligations in respect of mandatorily redeemable preferred stock; (iv) all
liabilities in respect of letters of credit or instruments serving a
similar function issued or accepted for its account by banks and other
financial institutions (whether or not representing obligations for
borrowed money); (v) Swaps and Hedging Transactions; and (vi) Guarantees of
Indebtedness of other Persons of the types described in the foregoing
clauses (i) through (vi). Indebtedness of any Person shall include all
obligations of such Person of the character described in clauses (i)
through (vi) to the extent such Person remains legally liable in respect
thereof notwithstanding that any such obligation is deemed to be
extinguished under GAAP.
34
<PAGE>
"Lien" shall mean any mortgage, pledge, priority, security interest,
encumbrance, contractual deposit arrangement, lien (statutory or otherwise)
or charge of any kind (including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any
lease in the nature thereof, and the filing of or agreement to give any
financing statement under the Uniform Commercial Code of any jurisdiction)
or any other type of preferential arrangement for the purpose, or having
the effect, of protecting a creditor against loss or securing the payment
or performance of an obligation.
"Multiemployer Plan" shall mean any Plan which is a "multiemployer
plan" (as such term is defined in section 4001(a)(3) of ERISA).
"Non-recourse Debt" means Indebtedness which is secured by specific
assets and is issued pursuant to or evidenced or secured by an instrument
which limits the recourse against the obligor thereunder to such specific
assets and which, in the case of Indebtedness created, assumed, or incurred
after the date hereof, contains a provision to the effect that if the
holder of such Indebtedness should ever become entitled to recourse against
the obligor pursuant to ss.1111(b) of the Bankruptcy Reform Act of 1978
(11. U.S.C. ss.111(b)) or any other provision of any bankruptcy insolvency,
or other law of any jurisdiction, then such holder's claim in respect of
such Indebtedness shall thereupon become and thereafter remain in all
respects subordinate and junior to all indebtedness evidenced by the Notes
and such holder shall not be entitled to receive any payment, under any
condition, in respect of any such Indebtedness until all Notes and all
other amounts which may become due, or are stated in this Agreement to
become due, shall have been paid in full or funds for their payment shall
have been duly and sufficiently provided.
"Notes" shall have the meaning specified in paragraph 1A.
"Officer's Certificate" shall mean a certificate signed in the name of
the Company by its President, one of its Vice Presidents or its Treasurer.
"Participation Rights Agreement" shall mean the Participation Rights
Agreement, dated of even date herewith, by and among you, the Company and
certain holders of the Common Stock, that are parties thereto; such
Participation Rights Agreement shall be substantially in the form of
Exhibit E attached hereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor entity.
"Person" shall mean and include an individual, a partnership, a joint
venture, a corporation, a trust, a limited liability company, an
unincorporated organization and a government or any department or agency
thereof.
35
<PAGE>
"Plan" shall mean any "employee pension benefit plan" (as such term is
defined in section 3 of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company
or any ERISA Affiliate.
"Property Reinvestment Application" means, with respect to any
Transfer of property, the satisfaction of each of the following conditions:
(a) an amount equal to the proceeds with respect to such Transfer
shall have been applied, or irrevocably committed and then actually
applied within 30 days, to the acquisition by the Company, or any of
its Subsidiaries making such Transfer, of oil and gas property that is
not encumbered by (i) any Lien (other than Liens described in
paragraph 6B(2)(iv)) or (ii) any Lien described in paragraph 6B(2)(i)
but only if the proceeds result from a Transfer of oil and gas
property that also was subject to such a Lien; and
(b) the Company shall have delivered an Officer's Certificate to
each holder referring to paragraph 6B(4) and identifying the property
that was the subject of such Transfer, the Disposition Value of such
property, and the nature, terms, amount and application of the
proceeds from the Transfer.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated of even date herewith, by and between you and the Company
and substantially in the form of Exhibit F attached hereto.
"Required Holder(s)" shall mean the holder or holders of at least
662/3% of the aggregate principal amount of the Notes from time to time
outstanding.
"Responsible Officer" shall mean the chief executive officer, chief
operating officer, chief financial officer or chief accounting officer of
the Company or any other officer of the Company involved principally in its
financial administration or its controllership function.
"Securities" shall mean the Notes and the Warrants.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Senior Debt" shall mean the unpaid principal of, interest on premium,
if any, and commitment and other similar fees with respect to Indebtedness
pursuant to the Credit Agreement outstanding, from time to time, in
accordance with paragraph 6A(1).
"Significant Holder" shall mean each holder of at least 10% of the
Notes or 10% of the Warrants.
"Stand-Still Period" shall have the meaning specified in the
definition of "Default Subordination Event."
36
<PAGE>
"Subordination Event of Default" shall mean (i) any default in the
payment of any principal of or interest on any Senior Debt in an amount
less than or equal to $100,000 owing under any single instrument when the
same becomes due and payable or (ii) any event of default under any other
agreement evidencing Senior Debt that would entitle the holders of such
Senior Debt to accelerate the obligations under such Senior Debt (other
than as a result of any nonpayment of any amount owing under Senior Debt).
"Subsidiary" shall mean a corporation, trust, association, partnership
or other business entity of which, at the time such determination is made,
at least 50.1% of the total Voting Stock is owned by the Company and/or one
or more of its Subsidiaries.
"Subsidiary Guaranty" shall mean the Senior Subordinated Guaranty,
dated of even date herewith and executed by HCP and each other Subsidiary,
in substantially the form of Exhibit D attached hereto.
"Subsidiary Stock" means, with respect to any Person, the stock (or
any options or warrants to purchase stock or other securities exchangeable
for or convertible into stock) of any Subsidiary of such Person.
"Swaps" shall mean with respect to any Person, payment obligations
with respect to interest rate swaps, currency swaps and similar obligations
(other than Hedging Transactions), in each case obligating such Person to
make payments, whether periodically or upon the happening of a contingency.
For the purposes of this Agreement, the amount of the obligation under any
Swap shall be the amount determined in respect thereof as of the end of the
then most recently ended fiscal quarter of such Person, based on the
assumption that such Swap had terminated at the end of such fiscal quarter,
and in making such determination, if any agreement relating to such Swap
provides for the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the simultaneous payment
of amounts by and to such Person, then in each such case, the amount of
such obligation shall be the net amount so determined.
"Termination Event" shall mean (i) a Reportable Event described in
Section 4043 of ERISA and the regulations issued thereunder (other than a
Reportable Event not subject to the provision for 30-day notice to the
Pension Benefit Guaranty Corporation under such regulations), or (ii) the
withdrawal of the Company or any of its ERISA Affiliates from a Plan during
a plan year in which it was a "substantial employer" as defined in Section
4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate
a Plan or the treatment of a Plan amendment as a termination under Section
4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan
by the Pension Benefit Guaranty Corporation, or (v) any other event or
condition that might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan.
37
<PAGE>
"Total Debt" shall mean, at the time of determination, the then
outstanding aggregate principal amount of all Indebtedness, other than
Non-recourse Debt, of the Company and its Subsidiaries on a consolidated
basis.
"Transfer" means, with respect to any Person, any transaction in which
such Person sells, conveys, transfers or leases (as lessor) any of its
property, including, without limitation, Subsidiary Stock. For purposes of
determining the application of the proceeds in respect of any Transfer, the
Company may designate any Transfer as one or more separate Transfers each
yielding separate proceeds. In any such case, (a) the Disposition Value of
any property subject to each such separate Transfer and (b) the amount of
Consolidated Assets attributable to any property subject to each such
separate Transfer shall be determined by ratably allocating the aggregate
Disposition Value of, and the aggregate Consolidated Assets attributable
to, all property subject to all such separate Transfers to each such
separate Transfer on a proportionate basis.
"Transferee" shall mean any direct or indirect transferee of all or
any part of any Note or Warrant purchased by you under this Agreement.
"Voting Stock" shall mean, securities or other equity interest of any
class or classes, the holders of which are ordinarily, in the absence of
contingencies, entitled to vote for the election or removal of corporate
directors or persons (such as general partners or managers) performing
similar functions in the case of business entities other than corporations.
"Warrants" shall have the meaning specified in paragraph 1B.
"Wholly Owned Subsidiary" shall mean any Subsidiary all of the equity
interests (except directors' qualifying shares) of which are owned,
directly or indirectly, by the Company or other Wholly Owned Subsidiaries.
11C. Accounting Principles, Terms and Determinations. All references in
this Agreement to "generally accepted accounting principles" or to "GAAP" shall
be deemed to refer to generally accepted accounting principles in effect in the
United States at the time of application thereof. Unless otherwise specified
herein, all accounting terms used herein shall be interpreted, all
determinations with respect to accounting matters hereunder shall be made, and
all unaudited financial statements and certificates and reports as to financial
matters required to be furnished hereunder shall be prepared, in accordance with
generally accepted accounting principles, applied on a basis consistent with the
most recent audited consolidated financial statements of the Company and its
Subsidiaries delivered pursuant to clause (ii) of paragraph 5A or, if no such
statements have been so delivered, the most recent audited financial statements
referred to in clause (i) of paragraph 9B.
PARAGRAPH 12. MISCELLANEOUS.
12. Miscellaneous.
38
<PAGE>
12A. Note Payments. So long as you shall hold any Note, the Company will
make payments of principal of, interest on and any Yield-Maintenance Amount
payable with respect to such Note, which comply with the terms of this
Agreement, by wire transfer of immediately available funds for credit (not later
than 12:00 noon, New York City time, on the date due) to your account or
accounts as specified in the Purchaser Schedule attached hereto, or such other
account or accounts in the United States as you may designate in writing,
notwithstanding any contrary provision herein or in any Note with respect to the
place of payment. You agree that, before disposing of any Note, you will make a
notation thereon (or on a schedule attached thereto) of all principal payments
previously made thereon and of the date to which interest thereon has been paid.
The Company agrees to afford the benefits of this paragraph 12A to any
Transferee which shall have made the same agreement as you have made in this
paragraph 12A.
12B. Expenses. The Company agrees, whether or not the transactions
contemplated hereby shall be consummated, to pay, and save you and any
Transferee harmless against liability for the payment of, all out-of-pocket
expenses arising in connection with such transactions, including (i) all
document production and duplication charges and the fees and expenses of any
special counsel engaged by you or such Transferee in connection with this
Agreement, the transactions contemplated hereby and any subsequent proposed
modification of, or proposed consent under, this Agreement whether or not such
proposed modification shall be effected or proposed consent granted, and (ii)
the costs and expenses, including attorneys' fees, incurred by you or such
Transferee in enforcing (or determining whether or how to enforce) any rights
under this Agreement, the Notes, the Warrants, the Registration Rights Agreement
or the Participation Rights Agreement or in responding to any subpoena or other
legal process or informal investigative demand issued in connection with this
Agreement, such other documents or the transactions contemplated hereby or
thereby or by reason of your or such Transferee's having acquired any Note or
Warrant, including without limitation costs and expenses incurred in any
bankruptcy case. The obligations of the Company under this paragraph 12B shall
survive the transfer of any Note or portion thereof or interest therein by you
or any Transferee and the payment of any Note.
12C. Consent to Amendments. This Agreement may be amended, and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, if the Company shall obtain the written consent
to such amendment, action or omission to act, of the Required Holder(s) except
that, without the written consent of the holder or holders of all Notes at the
time outstanding, no amendment to this Agreement shall change the maturity of
any Note, or change the principal of, or the rate or time of payment of interest
on or any Yield-Maintenance Amount payable with respect to any Note, or affect
the time, amount or allocation of any prepayments, or change the proportion of
the principal amount of the Notes required with respect to any consent,
amendment, waiver or declaration. Each holder of any Securities at the time or
thereafter outstanding shall be bound by any consent authorized by this
paragraph 12C, whether or not such Securities shall have been marked to indicate
such consent, but any Securities issued thereafter may bear a notation referring
to any such consent. No course of dealing between the Company and the holder of
any Securities nor any delay in exercising any rights hereunder or under any
Securities shall operate as a waiver of any rights of any holder of such
Securities. As used herein and in the Notes, the term "this Agreement" and
39
<PAGE>
references thereto shall mean this Agreement as it may from time to time be
amended or supplemented.
12D. Form, Registration, Transfer and Exchange of Notes; Lost Notes. The
Notes are issuable as registered notes without coupons in denominations of at
least $100,000, except as may be necessary to reflect any principal amount not
evenly divisible by $100,000. The Company shall keep at its principal office a
register in which the Company shall provide for the registration of Notes and of
transfers of Notes. Upon surrender for registration of transfer of any Note at
the principal office of the Company, the Company shall, at its expense, execute
and deliver one or more new Notes of like tenor and of a like aggregate
principal amount, registered in the name of such transferee or transferees. At
the option of the holder of any Note, such Note may be exchanged for other Notes
of like tenor and of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Note to be exchanged at the principal office of
the Company. Whenever any Notes are so surrendered for exchange, the Company
shall, at its expense, execute and deliver the Notes which the holder making the
exchange is entitled to receive. Every Note surrendered for registration of
transfer or exchange shall be duly endorsed, or be accompanied by a written
instrument of transfer duly executed, by the holder of such Note or such
holder's attorney duly authorized in writing. Any Note or Notes issued in
exchange for any Note or upon transfer thereof shall carry the rights to unpaid
interest and interest to accrue which were carried by the Note so exchanged or
transferred, so that neither gain nor loss of interest shall result from any
such transfer or exchange. Upon receipt of written notice from the holder of any
Note of the loss, theft, destruction or mutilation of such Note and, in the case
of any such loss, theft or destruction, upon receipt of such holder's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Note, the Company will make and deliver a new Note, of like
tenor, in lieu of the lost, stolen, destroyed or mutilated Note.
12E. Persons Deemed Owners; Participations. Prior to due presentment for
registration of transfer, the Company may treat the Person in whose name any
Note is registered as the owner and holder of such Note for the purpose of
receiving payment of principal of, interest on and any Yield-Maintenance Amount
payable with respect to such Note and for all other purposes whatsoever, whether
or not such Note shall be overdue, and the Company shall not be affected by
notice to the contrary. Subject to the preceding sentence, the holder of any
Note may from time to time grant participations in such Note to any Person on
such terms and conditions as may be determined by such holder in its sole and
absolute discretion, provided that any such participation shall be in a
principal amount of at least $100,000.
12F. Survival of Representations and Warranties; Entire Agreement. All
representa tions and warranties contained herein or made in writing by or on
behalf of the Company in connection herewith shall survive the execution and
delivery of this Agreement and the Notes, the transfer by you of any Warrant or
Note or portion thereof or interest therein and the payment of any Note, and may
be relied upon by any Transferee, regardless of any investigation made at any
time by or on behalf of you or any Transferee. Subject to the preceding
sentence, this Agreement, the Notes, the Warrants, the Registration Rights
Agreement and the Participation Rights Agreement embody the entire agreement and
40
<PAGE>
understanding between you and the Company and supersede all prior agreements and
understandings relating to the subject matter hereof.
12G. Successors and Assigns. All covenants and other agreements in this
Agreement contained by or on behalf of either of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any Transferee) whether so expressed or
not.
12H. Disclosure to Other Persons. The Company acknowledges that the holder
of any Security may deliver copies of any financial statements and other
documents delivered to such holder, and disclose any other information disclosed
to such holder, by or on behalf of the Company or any Subsidiary in connection
with or pursuant to this Agreement to (i) such holder's directors, officers,
employees, agents and professional consultants, (ii) any other holder of any
Security, (iii) any Person to which such holder offers to sell such Security or
any part thereof, (iv) any Person to which such holder sells or offers to sell a
participation in all or any part of a Note, (v) any Person from which such
holder offers to purchase any other security of the Company, (vi) any federal or
state regulatory authority having jurisdiction over such holder, (vii) the
National Association of Insurance Commissioners or any similar organization or
(viii) any other Person to which such delivery or disclosure may be necessary or
appropriate (a) in compliance with any law, rule, regulation or order applicable
to such holder, (b) in response to any subpoena or other legal process or
informal investigative demand or (c) in connection with any litigation to which
such holder is a party.
12I. Notices. All notices or other communications provided for hereunder
shall be in writing and sent by first class mail or nationwide overnight
delivery service (with charges prepaid) and (i) if to you, addressed to you at
the address specified for such communications in the Purchaser Schedule attached
hereto, or at such other address as you shall have specified to the Company in
writing, (ii) if to any other holder of any Security, addressed to such other
holder at such address as such other holder shall have specified to the Company
in writing or, if any such other holder shall not have so specified an address
to the Company, then addressed to such other holder in care of the last holder
of such Security which shall have so specified an address to the Company, and
(iii) if to the Company, addressed to it at 4582 S. Ulster St. Pkwy., Suite
1700, Denver, Colorado 80237, Attention: Legal Department, or at such other
address as the Company shall have specified to the holder of each Security in
writing; provided, that any such communication to the Company may also, at the
option of the holder of any Security, be delivered by any other means either to
the Company at its address specified above or to any officer of the Company.
12J. Payments Due on Non-Business Days. Anything in this Agreement or the
Notes to the contrary notwithstanding, any payment of principal of or interest
or Yield-Maintenance Amount on any Note that is due on a date other than a
Business Day shall be made on the next succeeding Business Day without including
the additional days elapsed in the computation of the interest payable on such
next succeeding Business Day.
41
<PAGE>
12K. Satisfaction Requirement. If any agreement, certificate or other
writing, or any action taken or to be taken, is by the terms of this Agreement
required to be satisfactory to you or to the Required Holder(s), the
determination of such satisfaction shall be made by you or the Required
Holder(s), as the case may be, in the sole and exclusive judgment (exercised in
good faith) of the Person or Persons making such determination.
12L. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF
THE STATE OF NEW YORK. This Agreement may not be changed orally, but (subject to
the provisions of paragraph 12C) only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification or discharge
is sought.
12M. Waiver of Jury Trial; Consent to Jurisdiction; Limitation of Remedies.
(i) THE COMPANY AND EACH HOLDER OF SECURITIES HEREBY KNOWINGLY,
VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY
JURY IN ANY LITIGATION OF ANY CLAIM WHICH IS BASED HEREON, OR ARISES OUT
OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES, THE WARRANTS,
THE REGISTRATION RIGHTS AGREEMENT OR THE PARTICIPATION RIGHTS AGREEMENT, OR
ANY TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE
COMPANY OR SUCH HOLDERS. THE COMPANY ACKNOWLEDGES THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR YOU TO ENTER INTO THIS AGREEMENT.
(ii) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT,
THE NOTES, THE WARRANTS, THE REGISTRATION RIGHTS AGREEMENT OR THE
PARTICIPATION RIGHTS AGREEMENT, OR ANY TRANSACTIONS RELATING HERETO OR
THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
ORAL OR WRITTEN), OR ACTIONS OF THE COMPANY OR THE HOLDERS OF SECURITIES
MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES
OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND THE COMPANY HEREBY
ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. THE
COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTIONS, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF
42
<PAGE>
ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.
12N. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
12O. Descriptive Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
12P. Maximum Interest Payable. The Company, you and any other holders of
the Notes specifically intend and agree to limit contractually the amount of
interest payable under this Agreement, the Notes and all other instruments and
agreements related hereto and thereto to the maximum amount of interest lawfully
permitted to be charged under applicable law. Therefore, none of the terms of
this Agreement, the Notes or any instrument pertaining to or relating to this
Agreement or the Notes shall ever be construed to create a contract to pay
interest at a rate in excess of the maximum rate permitted to be charged under
applicable law, and neither the Company, any guarantor nor any other party
liable or to become liable hereunder, under the Notes, any guaranty or under any
other instruments and agreements related hereto and thereto shall ever be liable
for interest in excess of the amount determined at such maximum rate, and the
provisions of this paragraph 12P shall control over all other provisions of this
Agreement, any Notes, any guaranty or any other instrument pertaining to or
relating to the transactions herein contemplated. If any amount of interest
taken or received by you or any holder of a Note shall be in excess of said
maximum amount of interest which, under applicable law, could lawfully have been
collected by you or such holder incident to such transactions, then such excess
shall be deemed to have been the result of a mathematical error by all parties
hereto and shall be refunded promptly by the Person receiving such amount to the
party paying such amount, or, at the option of the recipient, credited ratably
against the unpaid principal amount of the Note or Notes held by you or such
holder, respectively. All amounts paid or agreed to be paid in connection with
such transac tions which would under applicable law be deemed "interest" shall,
to the extent permitted by such applicable law, be amortized, prorated,
allocated and spread throughout the stated term of this Agreement and the Notes.
"Applicable law" as used in this paragraph means that law in effect from time to
time which permits the charging and collection of the highest permissible
lawful, nonusurious rate of interest on the transactions herein contemplated
including laws of the State of New York and of the United States of America, and
"maximum rate" as used in this paragraph means, with respect to each of the
Notes, the maximum lawful, nonusurious rates of interest (if any) which under
applicable law may be charged to the Company from time to time with respect to
such Notes.
43
<PAGE>
12Q. Counterparts. This Agreement may be executed in any number of counter
parts, each of which shall be an original but all of which together shall
constitute one instrument.
[Remainder of Page Intentionally Left Blank; Signature Page Follows]
44
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Company, whereupon this letter shall become a binding agreement between the
Company and you.
Very truly yours,
HALLWOOD CONSOLIDATED RESOURCES
CORPORATION
By /s/ Cathleen Osborn
Title: Vice President
The foregoing Agreement is hereby accepted as of the date first above written.
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/
Vice President
45
<PAGE>
EXHIBIT A
[FORM OF SENIOR SUBORDINATED NOTE]
HALLWOOD CONSOLIDATED RESOURCES CORPORATION
10.32% SENIOR SUBORDINATED NOTE DUE DECEMBER 23, 2007
No._________________ ___________, _____
$___________________ PPN 40636V A* 0
FOR VALUE RECEIVED, the undersigned, HALLWOOD CONSOLIDATED RESOURCES
CORPORATION (the "Company"), a corporation organized and existing under the laws
of the State of Delaware, hereby promises to pay to
_____________________________, or registered assigns, the principal sum of
___________________________ DOLLARS ($______________) on December 23, 2007, with
interest (computed on the basis of a 360-day year -- 30-day month) payable
quarterly (or, upon the occurrence of a Default or an Event of Default and until
such Default of Event of Default has been cured or waived in writing (such
period constituting a "Default Interest Period"), at the option of the
registered holder hereof, on demand) on the 23rd day of March, June, September
and December in each year, commencing with the 23rd day of March, June,
September or December next succeeding the date hereof, until the principal
hereof shall have become due and payable (a) on the unpaid balance hereof at the
rate of 10.32% per annum from the date hereof, and (b) during a Default Interest
Period on the unpaid balance hereof and all other obligations of the Company
under the Note Agreement referred to below, including any payment or overdue
payment or prepayment of principal, interest and any Yield-Maintenance Amount
(as such term is defined in the Note Agreement referred to below), at a rate per
annum from time to time equal to the lesser of (i) the maximum rate permitted by
applicable law or (ii) the greater of (y) 12.32% or (z) 2.0% over the rate of
interest publicly announced by The Bank of New York from time to time in New
York City as its Prime Rate.
Payments of principal of, interest on and any Yield-Maintenance Amount
payable with respect to this Note are to be made at the main office of The Bank
of New York in New York City or at such other place as the holder hereof shall
designate to the Company in writing, in lawful money of the United States of
America.
This Note is one of a series of 10.32% Senior Subordinated Notes (the
"Notes") issued pursuant to a Subordinated Note and Warrant Purchase Agreement,
dated as of December 23, 1997 (the "Agreement"), between the Company and The
Prudential Insurance Company of America and is entitled to the benefits thereof.
A-1
<PAGE>
This Note is a registered Note and, as provided in the Agreement, upon
surrender of this Note for registration of transfer, duly endorsed, or
accompanied by a written instrument of transfer duly executed, by the registered
holder hereof or such holder's attorney duly authorized in writing, a new Note
of like tenor for a like principal amount will be issued to, and registered in
the name of, the transferee. Prior to due presentment for registration of
transfer, the Company may treat the person in whose name this Note is registered
as the owner hereof for the purpose of receiving payment and for all other
purposes, and the Company shall not be affected by any notice to the contrary.
This Note is subject to certain prepayments, as specified in the Agreement.
This Note and the debt evidenced hereby, including the principal, interest
and Yield- Maintenance Amount, if any, shall at all times remain junior and
subordinate to any and all Senior Debt (as defined in the Agreement), all on the
terms and to the extent more fully set forth in the Agreement.
If an Event of Default, as defined in the Agreement, shall occur and be
continuing, the principal of this Note may be declared or otherwise become due
and payable in the manner and with the effect provided in the Agreement.
The Company, and the purchaser and the registered holder of this Note
specifically intend and agree to limit contractually the amount of interest
payable under this Note to the maximum amount of interest lawfully permitted to
be charged under applicable law. Therefore, none of the terms of this Note shall
ever be construed to create a contract to pay interest at a rate in excess of
the maximum rate permitted to be charged under applicable law, and neither the
Company nor any other party liable or to become liable hereunder shall ever be
liable for interest in excess of the amount determined at such maximum rate, and
the provisions of paragraph 12P of the Agreement shall control over any contrary
provision of this Note.
THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF SUCH STATE.
HALLWOOD CONSOLIDATED
RESOURCES CORPORATION
By
[Vice] President
A-2
<PAGE>
AMENDMENT NO. 2 TO SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
AMENDMENT dated as of December 23, 1997 among HALLWOOD CONSOLIDATED
RESOURCES CORPORATION ("HCRC"), a Delaware corporation and HALLWOOD CONSOLIDATED
PARTNERS, L.P. ("HCP"), 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
parties to a Second Amended and Restated Credit Agreement (as amended, the
"Credit Agreement");
WHEREAS, contemporaneously with the execution and delivery of this
Amendment, HCRC and The Prudential Insurance Company of America (with its
successors, "Prudential") are entering into a Subordinated Note and Warrant
Purchase Agreement dated as of December 23, 1997 (the "Subordinated Notes
Agreement");
WHEREAS, contemporaneously with the execution and delivery of this
Amendment, HCP is entering into a Senior Subordinated Guaranty Agreement in
favor of Prudential dated as of December 23, 1997 (the "Subordinated Guaranty");
WHEREAS, in the absence of this Amendment, the execution and delivery by
HCRC of the Subordinated Notes Agreement and by HCP of the Subordinated Guaranty
and the consummation of the transactions contemplated by the Subordinated Note
Agreement and the Subordinated Guaranty, including without limitation the
issuance of the Subordinated Notes, would constitute an Event of Default under
the Credit Agreement;
WHEREAS, the Borrowers have asked the Banks, and the Banks are willing, on
the terms and conditions set forth herein, to amend the Credit Agreement to
permit the execution and delivery by HCRC of the Subordinated Notes Agreement
1
<PAGE>
and by HCP of the Subordinated Guaranty and the consummation of the transactions
contemplated by the Subordinated Notes Agreement and the Subordinated Guaranty;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit Agreement shall
have the meaning assigned to such term in the Credit Agreement. Each reference
to "hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Credit Agreement" and each other similar reference
contained in the Credit Agreement shall from and after the date hereof refer to
the Credit Agreement as amended hereby.
SECTION 2. Additional Definitions Relating to the Subordinated Debt; Reset
of Availability Limit; Reset of Debt Limit. (a) New definitions of "Prudential",
"Subordinated Guaranty", "Subordinated Notes" and "Subordinated Notes Agreement"
are added in alphabetical order to Section 1.01 of the Credit Agreement to read
in their entirety as follows:
"Prudential" means The Prudential Insurance Company of America
and its successors and assigns.
"Subordinated Guaranty" means the Senior Subordinated Guaranty
Agreement by HCP in favor of Prudential dated as of December 23, 1997.
"Subordinated Notes" means the 10.32% Senior Subordinated Notes
Due December 23, 2007 issued by HCRC pursuant to the Subordinated
Notes Agreement.
"Subordinated Notes Agreement" means the Subordinated Note and
Warrant Purchase Agreement dated as of December 23, 1997 between HCRC
and Prudential, substantially in the form approved by the Banks prior
to the date of effectiveness of Amendment No.2 to this Agreement dated
as of December 23, 1997 among the Borrowers, the Banks, the Collateral
Agent and the Agent.
(b) The definition of "Availability Limit"set forth in Section 1.01 of the
Credit Agreement is hereby amended to read in its 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) $10,000,000. 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.
2
<PAGE>
(c) Effective on and as of the date of this Amendment, the "Debt Limit", as
determined in accordance with subsection (b) of Section 4.17 of the Credit
Agreement, shall be $10,000,000.
SECTION 3. Change in the Default Interest Rate. Clause (e) of Section 2.04
is hereby amended to read in its entirety as follows:
"(e) On each day during which a Default shall occur and be
continuing, all outstanding Loans of each Bank, and all interest
which is past due to such Bank on such day, shall bear interest
at a rate per annum equal to the sum of 2% plus the Base Rate for
such day, but in no event to exceed the Highest Lawful Rate of
such Bank."
SECTION 4. Additional Events Requiring Notice to the Banks. Section 4.01 of
the Credit Agreement is hereby amended by adding a new clause (d) immediately
after clause (c) thereof, to read in its entirety as follows:
"(d) contemporaneously with the delivery of any information
(including without limitation financial information), reports or
notices to Prudential pursuant to Section 5A of the Subordinated
Notes Agreement, a copy thereof to each Bank (unless previously
delivered to such Bank under this Agreement);"
SECTION 5. Additional Permitted Debt of the Borrowers. Section 4.17 of the
Credit Agreement is hereby amended by :
(i) deleting the "and" at the end of clause (v) thereof;
(ii) renumbering clause (vi) thereof as clause (vii)
thereof; and
(iii) adding a new clause (vi) immediately after clause (v)
thereof to read in its entirety as follows:
"(vi) the Subordinated Notes and the Subordinated Guaranty;
and"
SECTION 6. Additional Permitted Debt of HCP. Section 4.20(d) of the Credit
Agreement is hereby amended by :
(i) deleting the "and" at the end of clause (iii) thereof;
(ii) renumbering clause (vi) thereof as clause (v) thereof;
and
3
<PAGE>
(iii) adding a new clause (iv) immediately after clause
(iii) thereof to read in its entirety as follows:
"(iv) the Subordinated Guaranty; and"
SECTION 7. Restrictions of Payments of Subordinated Debt. New Sections 4.37
and 4.38 are added to the Credit Agreement immediately after Section 4.36
thereof, to read in their entirety as follows:
"SECTION 4.37. Incorporation By Reference of Certain
Covenants. The provisions of Paragraph 6A of the Subordinated
Notes Agreement and related definitions are hereby incorporated
by reference with the same effect as if such provisions were
fully set forth herein; provided that any amendments or waivers
of any such provisions or related definitions shall be effective
hereunder solely if consented to in writing by the Required
Banks.
SECTION 4.38. Restrictions with Respect to Subordinated
Debt. (a) HCRC shall not, and shall not permit any of its
Subsidiaries to, make any payments with respect to the
Subordinated Notes, other than (i) scheduled payments of
interest, (ii) scheduled repayments of principal, each in the
amount of $5,000,000 on or about December 23 in each of the years
2003 through 2006, inclusive, and (iii) scheduled payments of
principal in the amount of $5,000,000 on or about December 23,
2007, in each case subject to the subordination provisions set
forth in the Subordinated Note Agreement.
(b) Neither Borrower will enter into any amendment or waiver
of any term of the Subordinated Notes Agreement, the Subordinated
Guaranty or any Subordinated Notes without the prior written
consent of the Required Banks."
SECTION 8. Effectiveness. This Amendment shall become effective on the date
on which the Agent shall have received (i) counterparts of this Amendment duly
executed by the Borrowers, the Required 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) and (ii) evidence satisfactory to the Agent that (x) HCRC and HCP
shall have executed and delivered the Subordinated Notes Agreement and the
Subordinated Guaranty, respectively and (y) HCRC shall have received proceeds of
not less than $25,000,000 from the issuance and sale of the Subordinated Notes.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be duly executed as of the date first above written.
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.
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By /s/ John Kowalczuk
--------------------------------------------------
Title: Vice President
FIRST UNION NATIONAL BANK
By /s/ Michael J. Kolosowsky
-------------------------------------------------
Title: Vice President
5
<PAGE>
NATIONSBANK OF TEXAS, N.A.
By /s/ W. Keith Buchanan
-------------------------------------------------
Title: Vice President
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
6
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by Reference in Registration Statement No.
333-1154 of Hallwood Consolidated Resources Corporation on Form S-8 of our
report dated February 27, 1998, appearing in this Annual Report on Form 10-K of
Hallwood Consolidated Resources Corporation for the year ended December 31,
1997.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 27, 1998
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by Reference in Registration Statement No.
333-34105 of Hallwood Consolidated Resources Corporation on Form S-8 of our
report dated February 27, 1998, appearing in this Annual Report on Form 10-K of
Hallwood Consolidated Resources Corporation for the year ended December 31,
1997.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form
10-K for the year ended December 31, 1997 for Hallwood Consolidated Resources
Corporation and is qualified in its entirety by reference to such Form 10-K.
</LEGEND>
<CIK> 0000883953
<NAME> Hallwood Consolidated Resources Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 4,492
<SECURITIES> 0
<RECEIVABLES> 3,262
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 15,874
<PP&E> 297,172
<DEPRECIATION> 221,141
<TOTAL-ASSETS> 92,371
<CURRENT-LIABILITIES> 11,007
<BONDS> 0
0
0
<COMMON> 30
<OTHER-SE> 48,656
<TOTAL-LIABILITY-AND-EQUITY> 92,371
<SALES> 30,667
<TOTAL-REVENUES> 32,411
<CGS> 0
<TOTAL-COSTS> 23,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,258
<INCOME-PRETAX> 6,446
<INCOME-TAX> 861
<INCOME-CONTINUING> 5,585
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,585
<EPS-PRIMARY> 2.05
<EPS-DILUTED> 1.97
</TABLE>
