-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SfWZlOObqMBCtlGxLGsH8yRJmNXZ/o5LFTZbgJRk8JnQAcTwnF0WGYfwguIaEHpX DhQuDCSOqlfo+x6SUs7Pfg== 0000319019-96-000013.txt : 19960305 0000319019-96-000013.hdr.sgml : 19960305 ACCESSION NUMBER: 0000319019-96-000013 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960304 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALLWOOD ENERGY CORP CENTRAL INDEX KEY: 0000319019 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751319083 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09579 FILM NUMBER: 96530899 BUSINESS ADDRESS: STREET 1: 4582 SOUTH ULSTER ST PKWY STE 1700 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3038507373 MAIL ADDRESS: STREET 1: 4582 SOUTH ULSTER STREET PARKWAY STREET 2: SUITE 1700 CITY: DENVER STATE: CO ZIP: 80237 FORMER COMPANY: FORMER CONFORMED NAME: SAXON OIL CO DATE OF NAME CHANGE: 19891121 10-K405 1 HALLWOOD ENERGY CORPORATION 10-K 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-9579 HALLWOOD ENERGY CORPORATION (Exact name of registrant as specified in its charter) TEXAS (State or other jurisdiction of 75-1319083 incorporation or organization) (I.R.S. Employer Identification Number) 4582 SOUTH ULSTER STREET PARKWAY SUITE 1700 DENVER, COLORADO 80237 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (303) 850-7373 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Name of each exchange Title of each class on which registered NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.50 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, 1996 was approximately $1,737,153. Shares of Common Stock outstanding at February 27, 1996: 792,126 Shares. PART I ITEM 1 - BUSINESS Hallwood Energy Corporation ("HEC") is a publicly traded Texas corporation engaged in the development, production and sale of oil and gas through its ownership of oil and gas properties and its investments in entities with oil and gas activities. HEC is the general partner of Hallwood Energy Partners, L.P. ("HEP"), a publicly traded oil and gas limited partnership. HEC is also the general partner of HEP Operating Partners, L.P. ("HEPO"), one of the operating partnerships for HEP. HEC's wholly owned subsidiary, Hallwood G.P., Inc. is the general partner of EDP Operating, Ltd. ("EDPO"), the other operating partnership for HEP. HEP is engaged in the development, production, sale and transportation of oil and gas and in the acquisition, exploration, development and operation of oil and gas properties. The principal objectives of HEP are to maintain or expand its reserve base and to provide cash distributions to the holders of its units of limited partner interests ("Units"). HEC's general partner interest in HEP entitles it to a share of net revenues derived from HEP's properties ranging from 2% to 25%, and HEC holds approximately 6.5% of HEP's limited partner Units. HEC accounts for its ownership of HEP using the proportionate consolidation method of accounting whereby HEC records its proportional share of each of HEP's revenues and expenses, current assets, current liabilities, noncurrent assets, long-term obligations and fixed assets. HEP owns approximately 40% of the common stock of its affiliate, Hallwood Consolidated Resources Corporation ("HCRC") which HEP accounts for under the equity method. The activities of HEP are conducted by HEPO and EDPO. HEP is the sole limited partner and HEC is the sole general partner of HEPO. Hallwood, G.P., Inc., a wholly-owned subsidiary of HEC, is the sole general partner and HEP is the sole limited partner of EDPO. Solely for purposes of simplicity herein, unless otherwise indicated, all references to HEP in connection with the ownership, exploration, development or production of oil and gas properties include HEPO and EDPO. HEC does not engage in any other line of business nor does it have any employees. Hallwood Petroleum, Inc. ("HPI"), an affiliate of HEP, operates the properties and administers the day to day activities of HEC. On February 27, 1996, HPI had 133 employees. The Hallwood Group Incorporated ("Hallwood Group"), a public company traded on the New York Stock Exchange, owns 80% of the outstanding common shares of HEC. Hallwood Group is a diversified holding company with interests in oil and gas, specialty restaurants, real estate, textile products and hotels. From 1990 through 1995, HEC acquired 267,709 shares (adjusted for Hallwood Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares of Hallwood Group on the open market. HEC is holding the stock of Hallwood Group, as a long-term investment and has classified it as an available-for- sale security. As of June 30, 1994, it was determined that Hallwood Group stock had experienced an other than temporary decline in fair value. Therefore, HEC's investment in Hallwood Group was written down from its original cost to a new cost basis based on its market value at June 30, 1994 of $11.50 per share. The resultant loss of $3,249,000 was recorded as an impairment of investment in parent in the accompanying financial statements for 1994. During 1991 and 1992 HEC acquired $2,439,000 principal amount of Hallwood Group's 13.5% Subordinated Debentures due July 31, 2009, which it subsequently exchanged for 7% Collateralized Subordinated Debentures due July 31, 2000. On March 29, 1995, Hallwood Group repurchased the 7% Collateralized Subordinated Debentures for $1,376,000 plus accrued interest through the purchase date. The debentures were repurchased for an amount approximately equal to their book value. MARKETING The oil and gas produced from the properties owned by HEC 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 producing properties are located. In response to the volatility in the oil markets, HEP entered into financial contracts for hedging transactions of between 3% and 22% of its estimated oil production for 1996 through 1999. The majority of HEC's gas production is sold on the spot market and is transported in intrastate and interstate pipelines. HEP has entered into financial contracts for hedging transactions of between 17% and 47% of its estimated gas production for 1996 through 2000. The purpose of the hedges is to provide protection against price drops and to provide a measure of stability in the volatile environment of oil and natural gas spot pricing. The amounts received or paid upon settlement of these contracts are recognized as oil or gas 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. HEC 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 HEC's business because there are numerous purchasers in the areas in which HEC sells its production. Sales to Conoco Inc. and Marathon Petroleum Company accounted for 30% and 14%, respectively, of HEC's oil and gas sales for the year ended December 31, 1995 and 23% and 12%, respectively, of HEC's oil and gas sales for the year ended December 31, 1994. Sales to Conoco Inc., Koch Oil Company and Marathon Petroleum Company accounted for 21%, 11% and 10%, respectively, of HEC's oil and gas sales for the year ended December 31, 1993. Factors, if they were to occur, which might adversely affect HEC include decreases in oil and gas prices, the reduced availability of a market for production, rising operational costs of producing oil and gas, compliance with and changes in environmental control statutes and increasing costs of transportation. COMPETITION In the course of its development activities, HEC must compete with other entities for the acquisition of undeveloped acreage and desirable leaseholds. As described above under "Marketing," production is sold on the spot market, thereby reducing sales competition; however, oil and gas must compete with coal, atomic energy, hydro-electric power and other forms of energy. REGULATION The production and sale of oil and gas is subject to federal and state governmental regulations in a variety of ways including environmental regulations, labor laws, regulation of 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 HEC 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, HEC cannot predict the effect of possible future public or private action on its business. HEC is taking actions necessary in its operations to conform with applicable federal, state and local environmental regulations and does not presently anticipate that the compliance with federal, state and local environmental regulations will have a material adverse effect upon capital expenditures, earnings or the competitive position of HEC in the oil and gas industry. INSURANCE COVERAGE HEC is subject to all the risks inherent in the exploration for, and development of, oil and gas, including blowouts, fires and other casualties. HEC maintains insurance coverage as is customary for entities of a similar size engaged in operations similar to that of HEC, 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 HEC's earnings and financial position. ITEM 2 - PROPERTIES OIL AND GAS PROPERTIES HEC's oil and gas properties consist primarily of its indirect interest in properties owned through its investment in HEP. Quantities and values related to HEP's properties are shown net to HEC's interest in HEP. The following reserve information for HEC represents estimated quantities of proved oil and gas reserves which are located in the United States. 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 following table presents the December 31, 1995 SEC case reserve data by significant areas and fields. Total Proved Reserve Quantities Discounted Value Mcf of Bbls of Proved Proved Gas Oil Undeveloped Developed Total (In thousands) Scott/West Ridge 5,089 114 $ 9,169 $ 9,169 West Texas 1,862 568 $ 226 3,916 4,142 Kansas 89 56 35 219 254 San Juan Basin 1,484 18 566 584 South Texas Misc. 579 24 165 665 830 Southeastern New Mexico 847 23 850 850 East Riceville 202 243 243 Other 1,485 209 191 2,737 2,928 ------ ----- ----- ------ ------ 11,637 994 $ 635 $18,365 $19,000 ======= ==== ===== ======== ======= The following table presents the oil and gas production for significant areas and fields.
Production for the Years Ended December 31, 1995 1994 Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil (In thousands) Scott/West Ridge 907 24 804 28 West Texas 138 48 98 31 Kansas 16 7 15 7 San Juan Basin 354 258 Southeastern New Mexico 195 6 230 2 East Riceville 32 33 South Texas 76 5 Other 90 40 494 60 ------ ----- ----- ---- 1,808 130 1,932 128 ====== ===== ====== ====
SCOTT/WEST RIDGE The Scott/West Ridge area consists of 12 gas 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, an affiliate of HEP. The four most significant wells in the area, all of which were drilled by HPI since 1989, are the A. L. Boudreaux #1, the G. S. Boudreaux Estate #1, the Lessin Fontenot #1 and the Evangeline Shrine Club #1. During 1995, HEP performed three workovers in this area, two of which were successful. Surface facilities were upgraded on several wells to improve product handling. WEST TEXAS The West Texas area is comprised of two significant groups of properties each containing significant projects. The West Texas Spraberry area consists of 367 producing wells in Borden, Upton, Reagan, Glasscock and Martin counties of Texas. HPI and its affiliates operate 357 of these wells. Most of the current production from these wells is from the Upper Spraberry, Jo Mill, Dean and Upper Wolfcamp formations which are at depths that range from approximately 5,000 to 9,000 feet. HEP discovered a new field during 1995, adding the SRH (Clearfork) as a producing horizon to 70 wells in eastern Reagan County. HEP drilled 44 successful wells and one dry hole, and recompleted 30 wells on acreage in the Rocker "b" Ranch. Most of the work was performed under a line of credit of $4,650,000 net to HEP's interest, provided by a third party lender. The line of credit is secured only by leases in the project area and is otherwise nonrecourse to HEP. HEP plans to purchase additional producing wells and to perform recompletions in this area in 1996. The West Texas Kermit area consists of 39 wells in Gaines and Winkler Counties, Texas, 36 of which are operated by HPI and its affiliates. The primary focus of this area is the development of the Holt and San Andres formation at a depth of 5,100 feet on several leases in Winkler County. During 1995, HEP drilled seven wells; one of which was a dry hole, and performed ten recompletions; two of which were unsuccessful. HEP also purchased eleven wells in the area in 1995. Up to ten new wells may be drilled in 1996, and a secondary recovery project is being planned for the area beyond 1996. KANSAS The Kansas area consists of 310 producing wells, of which 294 are operated by HPI and 16 are operated by unaffiliated entities, located in 15 counties in Kansas. These wells produce principally from the Arbuckle and numerous Lansing-Kansas City formation zones from 3,000 feet to 6,500 feet. During 1995, HEP drilled two development wells, one of which was successful, and performed 15 successful recompletions. The Kansas area is a mature operation where recompletions and limited development drilling represent the most prudent plans for future asset base protection. HEP plans to sell three properties in this area in 1996 and will continue to evaluate and divest nonstrategic properties. SAN JUAN BASIN The San Juan Basin region consists of 52 wells located in San Juan County, New Mexico. The wells produce from the Fruitland Coal, Pictured Cliffs, Mesa Verde and Dakota formations at depths of 1,900 to 7,000 feet. Twenty-four wells are coal bed methane wells qualifying for the Section 29 alternative fuels tax credit. During 1994, HEP, HCRC and an unaffiliated entity formed a partnership to utilize effectively the Section 29 tax credits. During 1995, HEP successfully drilled two additional coal bed methane wells. For 1996, HEP plans to drill one additional well. SOUTHEASTERN NEW MEXICO The Southeastern New Mexico area consists of 63 producing wells, 43 of which are operated by HPI, which produce primarily gas and are located on the northwestern edge of the Delaware Basin in Lea, Eddy and Chavez Counties, New Mexico. These wells produce at depths ranging from approximately 2,500 feet to 14,000 feet from the Delaware, Atoka, Bone Springs and Morrow formations. During 1995, HEP performed nine successful recompletions and participated as a nonoperator in six successful development wells. During 1996, HEP plans to perform additional recompletions and exploit development drilling opportunities. EAST RICEVILLE The East Riceville area consists of three gas wells and one oil well located in Vermilion Parish, Louisiana. The wells produce principally from the Barton Sand formation at a depth of approximately 14,800 feet, and the wells are operated by HPI. No significant development plans for this area are expected for 1996. SOUTH TEXAS The South Texas basin consists of approximately fifteen wells which are operated by unaffiliated entities, producing primarily from the Wilcox at depths of 10,000 to 12,000 feet. The majority of the reserves in this area are located in the Mercy Field in San Jacinto County in the Houston Embayment Basin. In 1995, four miles of existing pipeline were purchased and joined with two miles of newly-constructed pipeline. Several shallower wells of approximate depths of 800 feet were also purchased for deepening potential and to alleviate high salt water disposal expense. Over 500 acres of leases were also acquired to drill a step-out test in 1996. There have also been several successful workovers in 1995 that have potential future benefits. PROPERTY SALES During 1994, HEP received $394,000 in connection with the sale of properties. The proceeds are comprised of numerous sales of various nonstrategic properties, none of which are individually significant. PRODUCTIVE OIL AND GAS WELLS The following table summarizes the productive oil and gas wells as of December 31, 1995 attributable to HEC's and HEP's direct interests. Productive wells are producing wells and wells capable of production. Gross wells are the total number of wells in which HEC and HEP have an interest. Net wells are the sum of HEC's and HEP's fractional interests owned in the gross wells.
HEC Direct HEP Direct Productive Wells Gross Net Gross Net Oil 35 1 892 378 Gas 0 0 351 114 ---- ------ ----- ----- Total 35 1 1,243 492 ===== ====== ===== =====
OIL AND GAS ACREAGE The following table sets forth the developed and undeveloped leasehold acreage held directly by HEC and HEP as of December 31, 1995. 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 HEC and HEP have a working interest. Net acres are the sum of HEC's and HEP's fractional interests owned in the gross acres.
HEC HEP Gross Net Gross Net Developed acreage 9,464 3,585 135,500 76,800 Undeveloped acreage 189,350 39,337 ------ ----- ------- ------ Total 9,464 3,585 324,850 116,137 ====== ====== ======= =======
DRILLING ACTIVITY The following table sets forth the number of wells attributable to HEC's direct interests drilled during 1995. HEC had no drilling activity attributable to its direct interests during the years ended December 31, 1994 and 1993.
Gross Net Development Wells: Productive 29 .98 Dry 1 .04 ---- ----- Total 30 1.02 ==== ====
The following table sets forth the number of wells attributable to HEP's direct interests drilled in the most recent three years.
Year Ended December 31, 1995 1994 1993 Gross Net Gross Net Gross Net DEVELOPMENT WELLS: Productive 66 28.0 30 14.6 12 6.2 Dry 2 .5 4 .7 4 1.2 --- ---- --- ---- ---- ---- Total 68 28.5 34 15.3 16 7.4 === ==== ==== ==== === ==== EXPLORATORY WELLS: Productive 5 .6 2 .1 6 1.1 Dry 1 .9 6 1.2 10 3.9 --- ---- --- ---- --- ---- Total 6 1.5 8 1.3 16 5.0 === ==== === ==== === ====
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.
1995 1994 1993 Oil and condensate (includes the effects of hedging) (per bbl) $17.14 $15.98 $17.73 Natural gas (includes the effects of hedging) (per mcf) 1.81 1.98 1.98 Production costs (per equivalent bbl of oil) 3.35 3.46 3.14
OFFICE SPACE HPI, an affiliate of HEC, leases office space in Denver, Colorado containing approximately 41,000 square feet, for approximately $600,000 per year. These lease payments are included in the allocation of general and administrative expenses to HEC and other affiliated entities. HEP is guarantor of 60% of the lease obligation, and HCRC is guarantor of the remaining 40% of the obligation. HEC is the guarantor of a five year office lease of an affiliate of Hallwood Group in Dallas, Texas covering approximately 17,000 square feet. The affiliate of Hallwood Group has entered into an agreement to indemnify HEC for any loss suffered by HEC because of the guaranty. The total lease payments on this property are approximately $170,000 per year, of which approximately $11,000 is billed to HEC. ITEM 3 - LEGAL PROCEEDINGS See Notes 11 and 12 to the financial statements 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 1995. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Since January 17, 1995, HEC's common stock has been quoted in the OTC Bulletin Board under the symbol "HWEC." Prior to January 17, 1995, HEC's common stock was quoted in the National Association of Securities Dealers National Market System. As of February 27, 1996, there were approximately 667 shareholders of HEC's common stock, including shareholders that hold in street name. 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. See further discussion under Dividends in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
HEC COMMON STOCK High Low Dividends First Quarter 1995 12 1/2 10 1/4 $1.00 Second Quarter 1995 18 1/2 10 1/4 1.50 Third Quarter 1995 21 13 1/2 Fourth Quarter 1995 16 10 .80 ---- $ 3.30 ===== First Quarter 1994 15 13 $1.70 Second Quarter 1994 15 12 Third Quarter 1994 14 10 1.50 Fourth Quarter 1994 10 3/4 9 ----- $3.20 =====
ITEM 6 - SELECTED FINANCIAL DATA - (In thousands except per share) The following table sets forth selected financial data regarding HEC's financial position and results of operations as of the dates indicated. In connection with the change in HEC's reserve calculation methodology in 1994, which is further described in Item 8 - Supplemental Oil and Gas Reserve Information, all periods have been restated to reclassify HEC's share of internal overhead charges attributable to wells operated by HPI from production operating expense to general and administrative expense.
As of and for the Years Ended December 31, 1995 1994 1993 Summary of Operations Oil and gas revenues $ 5,507 $ 5,878 $ 5,922 Total revenue 5,632 6,138 7,268 Production operating expense 1,443 1,555 1,394 Depreciation,depletion, amortization and impairment 2,153 1,959 1,944 Impairment of investment in parent 3,249 Net income (loss) 706 (2,512) 2,514 Net income (loss) per common share (1.00) (3.32) 2.67 Dividends per common share 3.30 3.20 Balance Sheet Working capital (deficit) $ (619) $ (72) $ 2,410 Net property, plant and equipment 9,839 10,569 11,697 Total assets 16,465 18,266 25,298 Long-term debt 825 Long-term obligations of affiliate 5,366 3,917 5,584 Stockholders' equity 7,011 11,316 16,284 (Continued below)
1992 1991 Summary of Operations Oil and gas revenues $ 6,827 $ 6,690 Total revenue 6,835 6,702 Production operating expense 1,780 2,332 Depreciation,depletion, amortization and impairment 2,308 2,328 Impairment of investment in parent Net income (loss) 1,006 498 Net income (loss) per common share .80 .23 Dividends per common share Balance Sheet Working capital (deficit) $ 1,638 $ 1,937 Net property, plant and equipment 12,909 17,470 Total assets 21,792 25,729 Long-term debt Long-term obligations of affiliate 5,183 7,010 Stockholders' equity 16,334 17,774
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY AND CAPITAL RESOURCES HEC had a net working capital deficit of $619,000 at December 31, 1995, including $10,000 of cash and cash equivalents. HEC has adopted a policy of paying dividends in an amount to be determined by the board of directors after consideration of the cash flow and working capital needs of HEC. For 1996, through February 27, 1996, no dividends have been declared by HEC. PROPERTY PURCHASES, SALES AND CAPITAL BUDGET During 1995, HEC participated in drilling seven wells in Winkler County and twenty-three wells in Reagan and Irion Counties, Texas, through its interest in the Saxon Drilling Venture (the "Drilling Venture"). The Company's share of capital costs on these wells was $328,000 through December 31, 1995. The Drilling Venture is a joint venture between the Company and HEP which was originally established in 1985. Under the terms of the Drilling Venture, the Company receives an 18.75% interest in revenues and costs relating to production from certain wells drilled in West Texas, in return for payment of 7.5% of the drilling costs. The Reagan County wells were drilled utilizing the third party financing described below. HEC has recorded its share of debt on these wells ($172,000 at December 31, 1995), under the caption "Current Liabilities of Affiliate" in the accompanying balance sheet because the debt matures in August 1996. During 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 provides the standards for accounting for the impairment of various long-lived assets. The Company is required to adopt SFAS 121 no later than 1996. HEC uses the full cost method of accounting for its property, which requires an impairment to be recorded when total capitalized costs exceed the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves. Therefore, the adoption of SFAS 121 is not expected to have a material effect on the financial position or results of operations of HEC. DIVIDENDS HEC paid a dividend of $1.00 per share of common stock and Series E Preferred Stock on March 3, 1995. On August 15, 1995, HEC paid a dividend of $1.50 per share of common stock and Series E Preferred Stock. On November 15, 1995, HEC paid a dividend of $.80 per share of common stock and Series E Preferred Stock. The board of directors will determine future dividends, if any, after consideration of the cash flow and working capital needs of HEC. HEC's credit agreement limits aggregate dividends paid by the Company to $3.50 per share each fiscal year. HEP DISTRIBUTIONS During 1995, HEP declared $.80 per Unit in distributions to its Unitholders and $2,359,000 to its general partner, HEC. Oil and gas prices continue to be low and the resulting negative effect on cash flow from operations will impact the amount of distributions which HEP will be able to make. On January 19, 1996, HEP paid a dividend of one new Class C Unit for every 15 HEP Class A Units held as of the record date of December 18, 1995. Pursuant to the regulation of the American Stock Exchange, holders of Class A Units who sold their Units between December 14, 1995 and January 19, 1996 also sold their right to receive the associated Class C Unit dividend. Class C Units are a newly created class of units that trade separately from HEP's currently outstanding Units. The Class C Units have a distribution preference of $1.00 per year, payable quarterly, and distributions on the new units will commence for the first quarter of 1996. Class C Units have been created to give HEP greater flexibility in structuring future acquisitions by allowing HEP to issue a security with a set distribution rate. Currently outstanding HEP Units are referred to as Class A Units but will continue to be listed on the American Stock Exchange using the symbol "HEP." If there are no further adverse changes in the factors which effect HEP cash flow, including oil and gas prices, property and partnership expenses and other relevant information, and there is no change in the limitation in HEP's Credit facilities on the amount of distributions permitted, HEP believes that it can distribute $.13 per Class A Unit and $.25 per Class C Unit for each of the four quarters of 1996. The combined effect of the issuance of the new Class C Units and the decrease in distributions on the Class A Units would result in the $.80 annual distribution that has been paid since 1992 being reduced to an annual rate of $.58 on a Class A and associated Class C Unit. Future distributions will be determined after taking into account reduced cash flow and the limitation in HEP's Credit Facilities on the amount of distributions. CASH FLOW Cash used in operating activities was $495,000 in 1995. During 1995, HEC received distributions of $2,886,000 from HEP and paid dividends of $2,673,000. These items, together with investment transactions and borrowings, resulted in a decrease in cash of $658,000 during 1995. FINANCING During the second quarter of 1995, the Company entered into a credit agreement with a bank that has committed to loan the Company up to $1,500,000. As of December 31, 1995, the Company has outstanding borrowings of $1,125,000 against the credit line. Borrowings against the credit line bear interest at the bank's prime rate plus 2% (10.5% at December 31, 1995). Interest is payable monthly, and quarterly principal payments of $75,000 commenced December 1, 1995. The credit line is secured by the HEP Class A Units owned by the Company. The credit agreement limits aggregate dividends paid by the Company to $3.50 per share each fiscal year. Included in the accompanying balance sheet at December 31, 1995 are long-term obligations of affiliate of $5,366,000. This amount represents HEC's share of HEP's outstanding long-term obligations which consist primarily of $24,700,000 borrowed under a line of credit and $12,857,000 borrowed under a note purchase agreement. HEP's borrowings are secured by a first lien on approximately 80% in value of HEP's oil and gas properties. Included within the caption "Current Liabilities of Affiliate" in the accompanying balance sheet as of December 31, 1995 is $172,000 which represents HEC's pro rata share of borrowings from a third party lender used to finance the drilling in which HEC participated through the Saxon Drilling Venture. HEC is not directly a party to the loan; however, HEC will reimburse HEP for HEC's $172,000 share of the borrowings when HEP repays the loan in the first quarter of 1996. INFLATION AND CHANGING PRICES Prices obtained for oil and gas production depend upon numerous factors that are beyond the control of HEC, including the extent of domestic and foreign production, imports of foreign oil, market demand, domestic and worldwide economic and political conditions, and government regulations and tax laws. Prices for both oil and gas have fluctuated significantly in 1995. The following table presents the average prices received each year by HEC and the effects of its share of HEP's hedging transactions:
Oil Oil Gas Gas (excluding (including (excluding (including effects of effects of effects of effects of hedging hedging hedging hedging transactions) transactions) transactions) transactions) (per bbl) (per bbl) (per mcf) (per mcf) 1995 $ 16.88 $ 17.14 $ 1.66 $ 1.81 1994 15.33 15.98 1.94 1.98 1993 17.05 17.73 2.10 1.98
During the first quarter through February 14, 1996, the oil price (for barrels not hedged) averaged between $17.00 and $18.50 per barrel. The weighted average price of natural gas (for mcf not hedged) was between $1.35 and $4.00 per mcf. Inflation did not have a material impact on HEC in 1995 and is not anticipated to have a material impact in 1996. RESULTS OF OPERATIONS The following table is presented to contrast HEC's revenues, expenses and earnings for discussion purposes. Significant fluctuations are discussed in the accompanying narrative. The "HEC" column represents HEC's direct royalty and working interests in oil and gas properties. The "HEP" column represents HEC's combined limited partner and general partner ownership of HEP, which was 7.3% of the limited partner share for the first three quarters of 1995 and 6.5% for the last quarter of 1995, 7.3% of the limited partner share for 1994 and 1993, and 100% of the general partner share for 1995, 1994 and 1993.
TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION (In thousands) For the Year Ended December 31, 1995 HEC HEP Total REVENUE Oil revenue $ 135 $ 2,093 $ 2,228 Gas revenue 35 3,244 3,279 Acquisition fee 11 11 Interest 86 28 114 --- ---- ---- 267 5,365 5,632 --- ------ ----- EXPENSE Production operating 44 1,399 1,443 General and administrative 628 530 1,158 Depreciation, depletion, amortization and impairment 127 2,026 2,153 Interest 106 387 493 Litigation settlement of affiliate 46 46 ---- ----- ----- 905 4,388 5,293 ---- ------ ------ Other Income (Expense): Miscellaneous income (expense) 30 (69) (39) ---- ----- ----- 30 (69) (39) ------ ---- ----- Provision (Benefit) for income taxes - Current 94 94 Deferred (500) (500) ----- ----- ----- (406) (406) ----- ----- ----- Net Income (loss) $ (202) $ 908 $ 706 ======== ======= =======
TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION (In thousands) For the Years Ended December 31, 1994 HEC HEP Total REVENUE Oil revenue $ 30 $ 2,016 $ 2,046 Gas revenue 10 3,822 3,832 Acquisition fee 23 23 Interest 184 53 237 ----- ----- ----- 247 5,891 6,138 ----- ------ ------ EXPENSE Production operating 17 1,538 1,555 General and administrative 570 528 1,098 Depreciation, depletion, amortization and impairment 127 1,832 1,959 Interest 363 363 Litigation settlement of affiliate 308 308 ------ ------ ------ 714 4,569 5,283 ------ ------ ------ Other Income (Expense): Impairment of investment in parent (3,249) (3,249) Miscellaneous income (expense) 65 (50) 15 ------- ------ ------ (3,184) (50) (3,234) ------- ------- ------- Provision (Benefit) for income taxes - Current 133 133 Deferred ----- ------ ----- 133 133 ----- ------ ------ Net Income (loss) $(3,784) $ 1,272 $(2,512) ======== ======= ========
TABLE OF HEC EARNINGS (LOSS) FOR MANAGEMENT DISCUSSION (In thousands) For the Years Ended December 31, 1993 HEC HEP Total REVENUE Oil revenue $ 34 $ 1,916 $ 1,950 Gas revenue 7 3,965 3,972 Litigation settlement of affiliate 1,050 1,050 Acquisition fee 111 111 Interest 143 42 185 ----- ----- ----- 295 6,931 7,268 ----- ------ ----- EXPENSE Production operating 18 1,376 1,394 General and administrative 612 636 1,248 Depreciation,depletion, amortization and impairment 189 1,755 1,944 Interest 442 442 ----- ------ ------ 819 4,209 5,028 ------ ------ ------- Other Income (Expense): Impairment of investment in parent Miscellaneous income (expense) 135 229 364 ----- ----- ----- 135 229 364 ----- ----- ----- Provision (Benefit) for income taxes - Current 90 90 Deferred ----- ------ ----- 90 90 ----- ------ ------ Net Income (loss) $ (479) $ 2,993 $ 2,514 ======= ======== =======
1995 COMPARED TO 1994 OIL REVENUE Oil revenue increased $182,000, or 9%, during 1995. This increase is primarily due to a 2% increase in production from 128,000 barrels in 1994 to 130,000 barrels in 1995, combined with an increase in the average oil price from $15.98 per barrel in 1994 to $17.14 per barrel in 1995. This increase in production is due primarily to HEP's drilling in 1994 and 1995, partially offset by normal production declines. The effect of HEP's hedging transactions described under "Inflation and Changing Prices" during 1995 was to increase HEC's oil price from $16.88 per barrel to $17.14 per barrel, representing $34,000 in additional revenue from hedging transactions. GAS REVENUE Gas revenue decreased $553,000 during 1995, primarily due to a 6% decrease in production from 1,932,000 mcf in 1994 to 1,808,000 mcf in 1995. The gas price also declined 9% from $1.98 per mcf in 1994 to $1.81 per mcf in 1995. The decrease in production is due primarily to normal production declines, partially offset by HEP drilling in 1994 and 1995. The effect of HEP's hedging transactions described under "Inflation and Changing Prices" during 1995 was to increase HEC's gas price from $1.66 per mcf to $1.81 per mcf, representing $271,000 in additional revenue from hedging transactions. ACQUISITION FEE REVENUE The acquisition fee earned in 1995 and 1994 relates to property acquisitions made by HEP. The fee decreased during 1995 as compared to 1994, as a result of a decline in property acquisitions made by HEP during 1995. INTEREST Interest income decreased from 1994 to 1995 primarily as a result of lower invested balances. PRODUCTION OPERATING EXPENSE Production operating expense decreased $112,000 in 1995 as compared to 1994 primarily as a result of general cost reductions in West Texas. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense includes costs incurred for direct administrative services such as legal and audit fees, as well as allocated internal overhead incurred by HPI, an affiliate of HEC, which manages and operates certain oil and gas properties on behalf of HEC and HEP and their affiliates. These costs increased $60,000 during 1995 as compared with 1994 as a result of increased allocated internal overhead from HPI, as well as increased insurance costs during 1995. DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT EXPENSE Depreciation, depletion, amortization and impairment expense increased $194,000 in 1995 as compared to 1994. The increase is primarily the result of HEC's share of HEP's impairment of its investment in Indonesia, which has been abandoned. INTEREST EXPENSE Interest expense increased $130,000 in 1995 as compared to 1994, primarily as a result of HEC's borrowings under its line of credit. LITIGATION SETTLEMENT OF AFFILIATE Litigation settlement of affiliate, which represents HEC's share of various lawsuit settlements made by HEP, declined during 1995 compared to 1994 because HEP settled a significant lawsuit in 1994, as described in Item 8 - Note 11. IMPAIRMENT OF INVESTMENT IN PARENT Impairment of investment in parent of $3,249,000 during the year ended December 31, 1994 represents an other than temporary decline in the fair value of the Hallwood Group stock held by HEC. The impairment, which was recorded at June 30, 1994, reflects the difference between the market value of the stock at June 30, 1994 of $11.50 per share (adjusted for Hallwood Group's 1 for 4 reverse split) and HEC's original cost basis. MISCELLANEOUS INCOME Miscellaneous income consists primarily of HEC's share of HEP's facilities income from two gathering systems in New Mexico, pipeline revenue, equity investment earnings, and miscellaneous income or expense. The decrease in miscellaneous income of $54,000 is primarily due to a decrease in HEC's share of HEP's equity investment earnings. 1994 COMPARED TO 1993 OIL REVENUE Oil revenue increased $96,000, or 5%, during 1994. This increase is primarily due to a 16% increase in production from 110,000 barrels in 1993 to 128,000 barrels in 1994, offset by a decrease in the average oil price from $17.73 per barrel in 1993 to $15.98 to barrel in 1994. This increase in production is due primarily to HEP property acquisitions which occurred late in 1993, partially offset by normal production declines. The effect of HEP's hedging transactions described under "Inflation and Changing Prices" during 1994 was to increase HEC's oil price from $15.33 per barrel to $15.98 per barrel, representing $83,000 in additional revenue from hedging transactions. GAS REVENUE Gas revenue decreased $140,000 during 1994, primarily due to a 4% decrease in production from 2,005,000 mcf in 1993 to 1,932,000 mcf in 1994. The gas price remained consistent at $1.98 per mcf in both 1994 and 1993. The decrease in production is due primarily to decreased production in the Scott/West Ridge area, due to allowable production limits and normal production declines, partially offset by HEP property acquisitions which occurred late in 1993. The effect of HEP's hedging transactions described under "Inflation and Changing Prices" during 1994 was to increase HEC's gas price from $1.94 per mcf to $1.98 per mcf, representing $77,000 in additional revenue from hedging transactions. LITIGATION SETTLEMENT OF AFFILIATE Litigation settlement of affiliate in 1993 represents HEC's share of a lawsuit settlement received by HEP which is further described in Item 8 - Note 11. ACQUISITION FEE REVENUE The acquisition fee earned in 1994 and 1993 relates to property acquisitions made by HEP. The fee decreased during 1994 as compared to 1993, as a result of a decline in property acquisitions made by HEP during 1994. PRODUCTION OPERATING EXPENSE Production operating expense increased $161,000 in 1994 as compared to 1993 primarily as a result of an increase in operating expenses due to property acquisitions and drilling projects completed by HEP late in 1993 combined with increased ad valorem taxes and salt water disposal costs in the Scott/West Ridge area. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense includes costs incurred for direct administrative services such as legal and audit fees, as well as allocated internal overhead incurred by HPI, an affiliate of HEC, which manages and operates certain oil and gas properties on behalf of HEC and HEP and their affiliates. These costs decreased $150,000 during 1994 as compared with 1993 as a result of reductions in internal allocated overhead from HPI, as well as decreased legal expenses during 1994. DEPRECIATION, DEPLETION, AMORTIZATION AND IMPAIRMENT EXPENSE Depreciation, depletion, amortization and impairment expense increased $15,000 in 1994 as compared to 1993. The increase is primarily the result of HEC's share of HEP's impairment of foreign drilling projects which have been abandoned. INTEREST EXPENSE Interest expense decreased $79,000 in 1994 as compared to 1993, primarily as a result of HEP's lower average debt balance in 1994 as compared to 1993, which was partially offset by higher interest rates. LITIGATION SETTLEMENT OF AFFILIATE Litigation settlement of affiliate during 1994 represents HEC's share of various lawsuit settlements made by HEP which are further described in Item 8 - Note 11. IMPAIRMENT OF INVESTMENT IN PARENT Impairment of investment in parent of $3,249,000 during the year ended December 31, 1994 represents an other than temporary decline in the fair value of the Hallwood Group stock held by HEC. The impairment, which was recorded at June 30, 1994, reflects the difference between the market value of the stock at June 30, 1994 of $11.50 per share and HEC's original cost basis. MISCELLANEOUS INCOME Miscellaneous income consists primarily of HEC's share of HEP's facilities income from two gathering systems in New Mexico, pipeline revenue, gas marketing activity and miscellaneous income or expense. The decrease in miscellaneous income of $349,000 is primarily due to a $150,000 decrease in HEC's share of HEP's equity investment and a $50,000 decrease in HEC's share of HEP's revenue from gas marketing activities which were discontinued in March 1993. The remaining decrease is comprised of numerous individually insignificant items. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS: Page Independent Auditors' Report 20 Consolidated Balance Sheets at December 31, 1995 and 1994 21-22 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993 23 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 24 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 25 Notes to Consolidated Financial Statements 26-37 SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION - (UNAUDITED) 38-41 INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS OF HALLWOOD ENERGY CORPORATION: We have audited the consolidated financial statements of Hallwood Energy Corporation as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, listed in the 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 Energy Corporation at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Denver, Colorado February 27, 1996
HALLWOOD ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) December 31, 1995 1994 CURRENT ASSETS Cash and cash equivalents $ 10 $ 668 Accounts receivable: Affiliates 372 526 Trade 26 7 Current assets of affiliate 2,236 1,760 ------- ------ Total 2,644 2,961 ------- ------- PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost method): Proved mineral interests 113,159 111,951 Unproved mineral interests - domestic 82 46 Unproved mineral interests - foreign 288 Other property and equipment 3,758 3,745 ------- ------- Total 116,999 116,030 Less accumulated depreciation, depletion, amortization and property impairment (107,160) (105,461) --------- ---------- Net Property, Plant and Equipment 9,839 10,569 --------- --------- OTHER ASSETS Investment in common stock of parent (carried at market) 2,075 1,680 -------- -------- Investment in bonds of parent (at cost adjusted for amortization of discount) 1,352 Deferred tax asset 500 Noncurrent assets of affiliate 1,407 1,704 ------ ------- Total 3,982 4,736 ------ ------- TOTAL ASSETS $ 16,465 $ 18,266 ======== ========
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HALLWOOD ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands except Shares) December 31, 1995 1994 CURRENT LIABILITIES Accounts payable and accrued liabilities $ 106 $ 154 Current portion of long-term debt 300 Current liabilities of affiliate 2,857 2,879 ------- ------ Total 3,263 3,033 ------- ------- NONCURRENT LIABILITIES Long-term debt 825 Long-term obligations of affiliate 5,366 3,917 ------- ------- Total 6,191 3,917 ------- ------ Total Liabilities 9,454 6,950 ------ ------- STOCKHOLDERS' EQUITY Series D convertible cumulative, redeemable preferred stock, $.01 par value; 65,000 shares authorized; 18,864 shares issued as of 1994 with a liquidation preference of $1,154 (cancelled during 1995) 1 Series E convertible preferred stock; $.01 stated value; 450,000 shares authorized; 356,000 shares issued as of 1994 with a liquidation preference of $.01 per share 4 Common stock, $.50 par value; 80,000,000 shares authorized; 1,198,121 and 842,121 shares issued at 1995 and 1994, respectively 599 421 Capital in excess of par value 53,789 58,248 Accumulated deficit (41,584) (42,290) Unrealized loss on investment in common stock of parent (1,002) (896) Less cost of treasury stock of 405,995 and 347,995 common shares at 1995 and 1994, respectively, and 7,500 Series D preferred shares at 1994 (4,791) (4,172) ------- ------- Stockholders' Equity - net 7,011 11,316 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,465 $ 18,266 ======== ======== The accompanying notes are an integral part of the financial statements.
HALLWOOD ENERGY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per Share) For the Years Ended December 31, 1995 1994 1993 REVENUES: Oil revenue $ 2,228 $ 2,046 $ 1,950 Gas revenue 3,279 3,832 3,972 Litigation settlement of affiliate 1,050 Acquisition fee 11 23 111 Interest 114 237 185 ------ ----- ------ 5,632 6,138 7,268 ------ ------ ------ EXPENSES: Production operating 1,443 1,555 1,394 General and administrative 1,158 1,098 1,248 Depreciation, depletion, amortization and impairment 2,153 1,959 1,944 Interest 493 363 442 Litigation settlement of affiliate 46 308 ------ ------ ------ 5,293 5,283 5,028 ------ ------ ------ OTHER INCOME (EXPENSE): Impairment of investment in parent (3,249) Miscellaneous income (expense) (39) 15 364 ----- ----- ----- (39) (3,234) 364 ----- ------- ----- INCOME (LOSS) BEFORE INCOME TAXES 300 (2,379) 2,604 ----- ------- ------- PROVISION (BENEFIT) FOR INCOME TAXES Current 94 133 90 Deferred (500) ----- ------ ----- (406) 133 90 ----- ----- ----- NET INCOME (LOSS) 706 (2,512) 2,514 PREFERRED STOCK DIVIDENDS 1,175 73 88 ------- ------ ----- NET INCOME (LOSS) FOR COMMON STOCKHOLDERS $ (469) $(2,585) $ 2,426 ======= ======== ======== NET INCOME (LOSS) PER COMMON SHARE $ (1.00) $ (3.32) $ 2.67 ====== ====== ====== NET INCOME (LOSS) PER COMMON SHARE (assuming full dilution) $ (1.00) $ (3.32) $ 2.42 ====== ====== ====== WEIGHTED AVERAGE COMMON SHARES 469 779 907 ====== ===== ===== 1 The accompanying notes are an integral part of the financial statements.
HALLWOOD ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Years Ended December 31, 1995 1994 1993 OPERATING ACTIVITIES: Net income (loss) $ 706 $(2,512) $ 2,514 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation, depletion, amortization and impairment 2,153 1,959 1,944 Impairment of investment in parent 3,249 Undistributed earnings of affiliate (2,917) (3,106) (4,748) Deferred tax benefit (500) Amortization of bond discount (24) (97) (41) ----- ------ ----- Cash used in operations before working capital changes (582) (507) (331) Changes in operating assets and liabilities provided (used) cash: Accounts receivable - affiliates 154 232 (106) Accounts receivable - trade (19) (2) 5 Prepaids and other assets 11 Accounts payable and accrued liabilities (48) (189) 215 ----- ----- ----- Net cash used in operating activities (495) (466) (206) ------ ------ ------ INVESTING ACTIVITIES: Proceeds from property sales 4 7 Additions to property (144) (100) (187) Distributions received from affiliate 2,886 2,904 2,539 Purchase of common stock of parent (501) Proceeds from sale of bonds of parent 1,376 380 Other investing activities (9) (20) ------ ----- ----- Net cash provided by investing activities 3,617 2,799 2,719 ------ ------ ------- FINANCING ACTIVITIES; Proceeds from long-term debt 1,200 Payments of long-term debt (75) Dividends paid (2,673) (2,793) (118) Repurchase of common and preferred stock (2,232) (1,692) ------- --------- ------- Net cash used in financing activities (3,780) (2,793) (1,810) ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (658) (460) 703 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 668 1,128 425 ------ ------- ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 10 $ 668 $ 1,128 ======= ======= ======= The accompanying notes are an integral part of the financial statements.
HALLWOOD ENERGY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Series D Series E Convertible Convertible Capital in Preferred Preferred Common Excess of Stock Stock Stock Par Value BALANCE, December 31, 1992 $ 1 $ 599 $60,955 Net income Preferred stock dividends (88) Purchase of treasury stock Unrealized loss on investment in common stock of parent BALANCE, December 31, 1993 1 599 60,867 Net loss Exchange of Series E preferred stock for common stock $ 4 (178) 174 Dividends (2,793) Unrealized loss on investment in common stock of parent BALANCE, December 31, 1994 1 4 421 58,248 Net income Repurchase and cancellation of Series D Preferred stock (1) (1,612) Repurchase of Common Stock Conversion of Series E Preferred Stock into Common Stock (4) 178 (174) Dividends (2,673) Unrealized loss on investment in common stock of parent BALANCE, December 31, 1995 $ $ $ 599 $53,789 (Continued below)
Accumulated Unrealized Treasury Deficit Loss Stock Total BALANCE, December 31, 1992 $(42,292) $ (449) $ (2,480) $16,334 Net income 2,514 2,514 Preferred stock dividends (88) Purchase of treasury stock (1,692) (1,692) Unrealized loss on investment in common stock of parent (784) (784) BALANCE, December 31, 1993 (39,778) (1,233) (4,172) 16,284 Net loss (2,512) (2,512) Exchange of Series E preferred stock for common stock Dividends (2,793) Unrealized loss on investment in common stock of parent 337 337 BALANCE, December 31, 1994 (42,290) (896) (4,172) 11,316 Net income 706 706 Repurchase and cancellation of Series D Preferred stock 570 (1,043) Repurchase of Common Stock (1,189) (1,189) Conversion of Series E Preferred Stock into Common Stock Dividends (2,673) Unrealized loss on investment in common stock of parent (106) (106) BALANCE, December 31, 1995 $(41,584) $(1,002) $(4,791) $ 7,011 The accompanying notes are an integral part of the financial statements.
HALLWOOD ENERGY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Hallwood Energy Corporation ("HEC" or the "Company") is a Texas corporation engaged in the development, production and sale of oil and gas. HEC is the general partner of Hallwood Energy Partners, L.P. ("HEP"), a publicly traded Delaware limited partnership. HEP commenced operations in August 1985 after completing an exchange offer in which HEP acquired oil and gas properties and operations from HEC, 24 oil and gas limited partnerships of which HEC was the general partner, and certain working interests from owners that had participated in wells with HEC and the limited partnerships. HEC now conducts substantially all of its operations through HEP. HEP's properties are primarily located in the Rocky Mountain, Mid-Continent, Texas and Gulf Coast regions of the United States. The activities of HEP are conducted by HEP Operating Partners, L.P. ("HEPO") and EDP Operating, Ltd. ("EDPO"). HEC's wholly-owned subsidiary, Hallwood G.P., Inc., is the general partner of EDPO. Unless otherwise indicated, all references to HEC in connection with the ownership, exploration, development or production of oil and gas properties refer to HEC and its proportionate ownership of HEP. HEC's parent company, The Hallwood Group Incorporated ("Hallwood Group"), owns 80% of the common shares of HEC. (See Note 3). ACCOUNTING POLICIES: INVESTMENT IN HEP HEC's general partner interest in HEP entitles it to a share of net revenues derived from HEP's properties ranging from 2% to 25%, and HEC holds approximately 6.5% of HEP's limited partner Units. HEC accounts for its ownership of HEP using the proportionate consolidation method of accounting whereby HEC records its proportional share of each of HEP's revenues and expenses, current assets, current liabilities, noncurrent assets, long-term obligations and fixed assets. HEP owns approximately 40% of its affiliate, Hallwood Consolidated Resources Corporation ("HCRC"), which HEP accounts for under the equity method. DERIVATIVES HEP entered into financial contracts for hedging transactions of approximately 56%, 44% and 37% of its actual crude oil production during the years 1993, 1994 and 1995, respectively. The oil price received by HEP was $18.53, $17.93 and $17.31 per barrel in 1993, 1994 and 1995, respectively, for the barrels hedged. HEP also entered into hedging contracts of between 3% and 22% of its forecasted oil production during each of the years 1996 through 1999. The oil price for the volumes hedged is expected to range from $14.83 to $15.38 per barrel. HEP also hedged approximately 53%, 56% and 56% of its gas production during 1993, 1994 and 1995, respectively. The gas price received for the volumes hedged was $1.69, $1.88 and $2.04 per mcf during 1993, 1994 and 1995, respectively. Additionally, HEP has entered into hedging contracts of between 17% and 47% of its forecasted gas production for each of the years 1996 through 1999. The price for the hedged gas production is expected to range from $2.01 to $2.10 per mcf. The purpose of the hedges is to provide protection against price drops and to provide a measure of stability in the volatile environment of oil and natural gas spot pricing. The amounts received or paid in settling these contracts is recognized as oil or gas revenue at the time the hedged volumes are sold. CASH AND CASH EQUIVALENTS All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT HEC follows the full cost method of accounting, whereby all costs related to the acquisition 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. HEC 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. GAS BALANCING HEC uses the sales method to account for gas balancing. Under this method, it 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, 1995, the imbalance net to HEC's interest is not material. Current imbalances can be made up with production from existing wells or from wells which will be drilled as offsets to current producing wells and the imbalance will not have a material effect on the Company's results of operations, liquidity and capital resources. SIGNIFICANT CUSTOMERS For the years ended December 31, 1995, 1994 and 1993 purchases by each of the following companies exceeded 10% of the total oil and gas revenues attributable to HEC's direct interests and its share of HEP. Although the Company sells the majority of its oil and gas production to a few purchasers, there are numerous other purchasers in the area, therefore, the loss of its significant customers would not adversely affect the Company's operations.
1995 1994 1993 Conoco Inc. 30% 23% 21% Koch Oil Company 11% Marathon Petroleum Company 14% 12% 10%
ENVIRONMENTAL CONCERNS HEC is taking actions necessary in its operations to conform with applicable federal, state and local environmental regulations. As of December 31, 1995, HEC 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 HEC in the oil and gas industry. DIVIDENDS HEC paid a dividend of $1.00 per share of common stock and Series E Preferred Stock on March 3, 1995. On August 15, 1995, HEC paid a dividend of $1.50 per share of common stock and Series E Preferred Stock. On November 15, 1995, HEC paid a dividend of $.80 per share of common stock and Series E Preferred Stock. HEC paid a dividend of $1.70 per share of common stock on March 4, 1994. HEC paid a dividend of $1.50 per share of common stock on August 15, 1994. RECLASSIFICATIONS Certain reclassifications have been made to prior years' amounts to conform to the classifications used in the current year. 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. CASH FLOW STATEMENT Cash paid for interest was $106,000 in 1995. There was no cash paid for interest in 1994 or 1993. NOTE 2 - OIL AND GAS PROPERTIES The following table summarizes certain cost information related to HEC's direct interests and its share of HEP's oil and gas activities:
For the Years Ended December 31, 1995 1994 1993 (In thousands) Property acquisition costs - $ 191 $ 637 $1,103 proved Property acquisition costs - 56 257 176 unproved Development costs 979 599 585 Exploration costs 166 273 169 ---- ----- ---- Total $1,392 $1,766 $2,033 ==== ===== ====
Depreciation, depletion, amortization and impairment per equivalent barrel of production for 1995, 1994 and 1993 was $5.00, $4.35 and $4.38, respectively. At December 31, unproved domestic properties consist of the following:
1995 1994 (In thousands) South Louisiana $ 10 $ 40 Texas 27 Other 45 6 --- --- $ 82 $ 46 === ===
At December 31, 1994, unproved foreign properties of $288,000 consisted of HEC's share of HEP's investment in Indonesia which was abandoned during the first quarter of 1995. During 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 provides the standards for accounting for the impairment of various long-lived assets. The Company is required to adopted SFAS 121 no later than 1996. HEC uses the full cost method of accounting for its oil and gas properties, which requires an impairment to be recorded when total capitalized costs exceed the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves. Therefore, the adoption of SFAS 121 is not expected to have a material effect on the financial position or results of operations of HEC. NOTE 3 - RELATED PARTY TRANSACTIONS The Hallwood Group Incorporated ("Hallwood Group"), a public company traded on the New York Stock Exchange, owns 80% of the outstanding common shares of HEC. Hallwood Group is a diversified holding company with interests in oil and gas, specialty restaurants, real estate, textile products and hotels. From 1990 through 1995, HEC acquired 267,709 shares (adjusted for Hallwood Group's 1-for-4 reverse split) or approximately 17% of the outstanding shares of Hallwood Group, on the open market. Because HEC has the ability and the intent to hold the stock of Hallwood Group indefinitely, HEC has recorded it as a long-term investment and has classified it as an available-for-sale security. As of June 30, 1994, it was determined that Hallwood Group stock had experienced an other than temporary decline in fair value. Therefore, HEC's investment in Hallwood Group was written down from its original cost to a new cost basis based on its market value at June 30, 1994 of $11.50 per share. The resultant loss of $3,249,000 was recorded as an impairment of investment in parent in the accompanying financial statements for 1994. During 1991 and 1992 HEC acquired $2,439,000 principal amount of Hallwood Group's 13.5% Subordinated Debentures due July 31, 2009, which it subsequently exchanged for 7% Collateralized Subordinated Debentures due July 31, 2000. On March 29, 1995, Hallwood Group repurchased the 7% Collateralized Subordinated Debentures for $1,376,000 plus accrued interest through the purchase date. The debentures were repurchased for an amount approximately equal to their carrying value. NOTE 4 - DEBT During the second quarter of 1995, the Company entered into a credit agreement with a bank that has committed to loan the Company up to $1,500,000. As of December 31, 1995, the Company has outstanding borrowings of $1,125,000 against the credit line. Borrowings against the credit line bear interest at the bank's prime rate plus 2% (10.5% at December 31, 1995). Interest is payable monthly, and quarterly principal payments of $75,000 commenced December 1, 1995. The credit line is secured by the HEP units owned by the Company. The credit agreement limits aggregate dividends paid by the Company to $3.50 per share each fiscal year. At December 31, 1995, HEC's five year debt maturity schedule is as follows: 1996 $ 300,000 1997 300,000 1998 300,000 1999 225,000 --------- 1,125,000 Less current maturities of long-term debt (300,000) --------- Long-term debt at December 31, 1995 $ 825,000
During 1995, HEP amended its Amended and Restated Credit Agreement ("Credit Agreement") and an Amended and Restated Note Purchase Agreement ("Note Purchase Agreement") (collectively referred to as the "Credit Facilities"). HEP has a borrowing base of $42,000,000 under the Credit Facilities, and amounts outstanding at December 31, 1995 of $24,700,000 under the Credit Agreement and $12,857,000 under the Note Purchase Agreement. HEP's borrowing base is also reduced by an outstanding contract settlement debt of $2,771,000 and capital lease obligations of $87,000; therefore, its unused borrowing base totalled $1,585,000 at February 27, 1996. The Credit Facilities are secured by a first lien on approximately 80% in value of HEP's oil and gas properties. Additionally, aggregate distributions paid by HEP in any 12 month period are limited to 50% of cash flow from operations before working capital changes plus distributions received from affiliates. HEP's five year debt maturities are as follows: $87,000 in 1996, $9,721,000 in 1997, $11,532,000 in 1998, $7,246,000 in 1999, and $7,246,000 in 2000 and $1,812,000 thereafter. NOTE 5 - PRINCIPAL ACQUISITIONS AND SALES HEC had no significant direct acquisitions or sales other than the Hallwood Group stock and Subordinated Debenture transactions described in Note 3. HEP's significant activities are as follows: 1995 During 1995, HEP had no individually significant property acquisitions or sales. 1994 During the second quarter of 1994, HEP and HCRC formed a limited partnership with a third party for the purpose of producing natural gas qualified for the Section 29 tax credit under the Internal Revenue Code. A limited liability company owned by HEP and HCRC is the general partner of the partnership. HEP and HCRC sold a term working interest in certain wells in San Juan County, New Mexico to the limited partnership, in return for which HEP and HCRC received a cash payment totaling $3,400,000 when the sale was closed. HEP and HCRC will receive 97% of the cash flow from production from the wells sold through the year 2002, and 80% of the cash flow thereafter. HEP and HCRC will also receive quarterly cash incentive payments equal to 34% of the Section 29 tax credit generated from the production from the wells. HEP and HCRC will share in all proceeds 55% and 45%, respectively. HEP recorded its $1,870,000 share of the cash payment received as a credit to oil and gas properties in its 1995 financial statements. 1993 During September and October 1993, HEP completed the following transactions which resulted in the acquisition of interests in the following properties (the purchase amounts are net to HEP): 130 wells in twelve counties in central Kansas for $1,200,000, of which $367,000 was paid in cash and $833,000 was paid in the form of 96,607 HEP Class A Units; six wells in Comanche County, Kansas for $750,000; nine wells in Russell County, Kansas for $600,000; three wells in San Juan County, New Mexico for $425,000; and nine wells in Toole County, Montana for $350,000. Additionally, HEP acquired 50% of the stock of Sunburst Exploration, Inc. ("Sunburst") for $1,700,000 by issuing 197,103 HEP Class A Units. Sunburst owns interests in 130 wells in Toole County, Montana, 45 of which are operated by Sunburst. These acquisitions were effective as of various dates from August 1 through October 29, 1993 and added an estimated 464,000 barrels of oil and 5 billion cubic feet of gas to HEP's reserves at December 31, 1993. Effective March 31, 1993, HEP sold its interest in Nycotex and its West Virginia properties which included natural gas reserves estimated at approximately 3.4 billion cubic feet of gas. HEP's share of these proceeds after adjustments was approximately $1,600,000. NOTE 6 - INVESTMENT IN AFFILIATE HEC accounts for its combined general and limited partner interest in HEP (approximately 12%) using the proportionate consolidation method of accounting. The following presents summarized financial information for HEP at December 31, 1995, 1994 and 1993:
1995 1994 1993 (In thousands) Current assets $ 16,715 $ 14,670 $ 33,535 Noncurrent assets 106,649 121,611 138,089 Current liabilities 20,914 24,834 26,515 Noncurrent 41,836 29,721 43,187 liabilities Minority interest 3,042 2,923 3,346 Gross oil and gas 41,010 41,496 42,893 revenue Net income (loss) (9,031) (10,093) 13,064
NOTE 7 - CAPITAL STOCK AND NET INCOME PER SHARE SERIES E PREFERRED STOCK On October 19, 1994, HEC exchanged 356,000 shares of newly authorized Series E preferred stock for 356,000 shares of its outstanding common stock held by Hallwood Group. On December 31, 1995, the Series E preferred stock was converted into common stock. The Series E preferred stock was not entitled to vote for the election of directors, except as required by law, but it was entitled to vote with the common stock on all other matters. The Series E preferred stock was entitled to one vote per share. In addition, the Series E preferred stock was entitled to dividends, when and as declared, at the same rate as the common stock, and it had a liquidation preference of $.01 per share. The Series E preferred stock received $1,175,000 in dividends during 1995. The purpose of the initial exchange was to reduce Hallwood Group's ownership of the Company's common stock below 50% to permit HEC to vote its 14% interest in Hallwood Group, which it was unable to do under Delaware law when Hallwood Group owned greater than 50% of the Company's common stock. Hallwood Group exercised its right to convert the Series E preferred shares to common stock on December 31, 1995 to enable it to consolidate HEC into its federal income tax returns beginning in 1996. The conversion increased Hallwood Group's ownership of common stock to 80%. As a result of the increased ownership, HEC will once again be prohibited, under Delaware law from voting its 14% interest in Hallwood Group. Per share information is based on the weighted average number of common shares and common share equivalents outstanding in each period. Series D preferred stock dividends of $73,000 and $88,000 were declared in 1994 and 1993, respectively, reducing net income per common share in those years. The Series E preferred stock dividends reduced net income per common share in 1995. The weighted average number of common shares outstanding was 469,000, 779,000 and 907,000 in 1995, 1994 and 1993, respectively. Net income per common share (assuming full dilution) for 1995, 1994 and 1993 was determined assuming that the Series D preferred stock was converted into common stock on January 1, 1993 and the Series E on January 1, 1994. Net income was adjusted for the preferred stock dividends declared during the year. The effect of the conversion of the Series E and D preferred stock into common shares was antidilutive during the years ended December 31, 1995 and 1994. For the year ended December 31, 1993, the Series D preferred stock was dilutive. The weighted average number of common shares outstanding (assuming full dilution) was 1,037,481 in 1993. TREASURY STOCK During the first quarter of 1995, HEC repurchased 1,500 shares of its Series D Preferred Stock for $90.88 per share. During April 1995, in two separate transactions, HEC repurchased the remaining 9,864 shares of its Series D Preferred Stock at $91.80 per share. These shares were retired during 1995. In July 1995, HEC purchased 58,000 shares of its common stock from an individual in a privately negotiated transaction for a total cost of $1,189,000. NOTE 8 - EMPLOYEE INCENTIVE PLANS INCENTIVE CASH BONUS PLAN HEC's 1980 Incentive Cash Bonus Plan provides for the payment of cash bonuses to selected employees. The amounts of such bonuses will be prescribed by the Board of Directors of HEC at its sole discretion. No payments under this plan were made in 1995, 1994 or 1993. UNIT OPTION PLAN On January 31, 1995, the Board of Directors of HEC approved the adoption of a Unit option plan to be used for the motivation and retention of directors and employees performing services for HEP. The plan authorized the issuance of 425,000 options to purchase HEP Class A Units. Grants of the total options authorized were made on January 31, 1995, vesting one-third at that time, one-third on January 31, 1996 and one-third on January 31, 1997. In addition, the plan provides that vesting of the options may be accelerated under certain conditions. The exercise price of the options is $5.75, which was the closing price of the Class A Units on January 30, 1995. During 1995 the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123 requires entities to use the fair value method to either account for, or disclose, stock based compensation in their financial statements. The Company is required to adopt SFAS 123 no later than 1996. Because the Company intends to elect only the disclosure provisions of SFAS 123, the adoption of SFAS 123 is not expected to have a material effect on the financial position or results of operations of HEC. NOTE 9 - COMMITMENTS AND CONTINGENCIES HPI, an affiliate of HEC, leases office space in Denver, Colorado containing approximately 41,000 square feet, for approximately $600,000 per year. These lease payments are included in the allocation of general and administrative expenses to HEC and other affiliated entities. HEC is the guarantor of an office lease of an affiliate of Hallwood Group, in Dallas, Texas covering approximately 17,000 square feet. The lease payments on this property total approximately $170,000 per year from June 1, 1994 through May 31, 1999, of which approximately $11,000 per year is allocated to HEC. The affiliate of Hallwood Group has entered into an agreement to indemnify HEC for any loss suffered by HEC because of the guaranty. NOTE 10 - INCOME TAXES At December 31, 1995, HEC has a statutory depletion carryforward of approximately $5,900,000, which may be used to offset future taxable income without expiration limitation. At December 31, 1995, HEC has available an investment tax credit carryforward of approximately $800,000, which will expire between 1996 and 2000 and is reduced annually, as mandated by tax law, and $2,700,000 of capital loss carryforward expiring in 1996. At December 31, 1995, HEC has net operating loss ("NOL") carryforwards of approximately $108,000,000, which expire between 1996 and 2006. A subsidiary of HEC also has approximately $1,000,000 of NOL carryforwards expiring in 2005. The following is a summary of the income tax provision (benefit):
For the Years Ended December 31, 1995 1994 1993 (In thousands State $ 88 $ 100 $ 72 Federal - current 6 33 18 Deferred tax benefit (500) --- ----- --- $ (406) $ 133 $ 90 === === ===
Reconciliations of the expected tax at the statutory tax rate to the effective tax are as follows:
For the Years Ended December 31, Description 1995 1994 1993 (In thousands) Expected tax (benefit) at the statutory rate $ 102 $ (808) $ 885 Increase (decrease) in deferred tax asset valuation allowance net of NOL carryforward (572) 875 (843) State taxes net of federal benefit 58 66 48 Effect of use of AMT 6 ------ ----- ----- Effective tax $ (406) $ 133 $ 90 ======== ======= ========
The following is a schedule of the types and amounts of existing temporary differences and NOL carryforwards, at the statutory tax rate of 34%, tax credits and the valuation allowance at December 31, 1995 and 1994:
1995 Deferred Income Tax Assets Liabilities (In thousands) NOL carryforward $ 36,739 $ Statutory depletion carryforward 1,991 Investment tax credit carryforward 800 AMT credit carryforward 227 Capital loss carryforward 945 Basis difference - investment in partnership and property 1,744 ------- Deferred tax assets 42,446 Less: Deferred tax liabilities Valuation allowance (a) (41,946) --------- ---------- Deferred tax asset $ 500 $ - ========== ==========
(Continued below)
1994 Deferred Income Tax Assets Liabilities (In thousands) NOL carryforward $ 37,047 $ Statutory depletion carryforward 1,991 Investment tax credit carryforward 800 AMT credit carryforward 221 Capital loss carryforward 909 Basis difference - investment in partnership and property 1,550 ------- Deferred tax assets 42,518 Less: Deferred tax liabilities Valuation allowance (a) (42,518) ---------- ---------- Deferred tax asset $ - $ - ========== =========== (a) The net change in the valuation allowance during 1995 was $572,000, $875,000 and $843,000 during 1995, 1994 and 1993, respectively.
NOTE 11 - LITIGATION SETTLEMENTS OF AFFILIATE In 1994, the Minerals Management Services ("MMS") of the Bureau of Land Management notified HEP that the MMS had preliminarily determined that the MMS was owed royalty payments on take-or-pay settlements involving federal oil and gas leases. In the fourth quarter of 1995, HEP and the MMS reached an agreement in principle that HEP would pay $321,000 in settlement of all claims. HEP anticipates that the settlement amount will be paid in the first quarter of 1996. HEC's share of HEP's settlement was recorded as litigation settlements of affiliate in the 1995 financial statements. In September 1995, the court order approving the settlement in the class action lawsuit styled In re. Hallwood Energy Partners, L.P. Securities Litigation became final. As part of the settlement, on September 28, 1995, HEP paid $2,870,000 in cash (which was recorded as an expense in the December 31, 1994 financial statements as the estimated cost associated with the litigation) and issued 1,158,696 HEP Class A Units with a market value of $5,330,000 to a nominee of the class. HCRC subsequently exercised an option to purchase these Units from the nominee for $5,330,000 in cash. Other defendants contributed an additional $900,000 in cash to the settlement. The net proceeds of the settlement will be distributed to a class consisting of former owners of limited partner interests in Energy Development Partner, Ltd. ("EDP") who exchanged their units in that entity for Units of HEP pursuant to the merger of EDP and HEP on May 9, 1990 (the "Transaction"). Upon issuance, these Class A Units were treated, for financial statement purposes only, as additional Class A Units issued in connection with the Transaction, which was accounted for as a reorganization of entities under common control, in a manner similar to a pooling of interest, and have been reflected as outstanding Class A Units since May 9, 1990, the date of the Transaction. As a result, the number of HEP's Units outstanding and the net income (loss) per Class A Unit and Class B Unit have been retroactively restated for all periods subsequent to the Transaction. On June 24, 1993, HEP settled two lawsuits and all related claims with Louisiana Intrastate Gas Corporation ("LIG"). The lawsuits against LIG involved the prices paid for natural gas production under a long-term gas contract. The settlement terminates the contract with LIG and resolves all issues and claims relating to the gas purchase contract for the Northeast Montegut Field located in Terrebonne Parish, Louisiana. The proceeds from the settlement after payment of royalties and related legal costs are reflected in HEP's earnings during the year ended December 31, 1993 and were used to pay down debt and for working capital purposes. In January 1994, Hallwood Oil paid $525,000 to the former shareholders of the general partner of a predecessor entity to settle a claim for payment of Hallwood Oil's $800,000 guaranty of the promissory note of a former affiliate. The promissory note was made in 1985 when EDP was formed. This payment was accrued as litigation settlement expense as of December 31, 1993. In February 1994, HEP and the other parties to the lawsuit styled SAS Exploration, Inc. v. Hall Financial Group, Inc. et al. settled the lawsuit. The plaintiffs alleged that certain leases in the A.L. Boudreaux #1 and A.M. Duhon #1 wells expired and terminated at the end of their primary lease terms as a result of production being from Bol Mex 4 Sand rather than the A.B. Sand. In the settlement, the plaintiffs and the defendants cross-conveyed interests in certain leases to one another and HEP paid the defendants $388,000. The cash paid by HEP was paid from the revenues attributable to the disputed leases that were escrowed beginning in February 1990. The cash paid by HEP was included in litigation settlement expense in the December 31, 1993 financial statements. The interest conveyance resulted in a decrease in HEP's consolidated reserves as of December 31, 1993 totalling 698,000 mcf of gas, 15,000 bbls of oil and $1,317,000 in discounted future net revenues. This reduction has been included in the revisions line in the Supplemental Oil and Gas Reserve Information for the year ended December 31, 1993. NOTE 12 - LEGAL PROCEEDINGS In June 1993, 14 lawsuits were filed against HEP in the 15th Judicial District Court, Lafayette Parish, Louisiana, Docket Nos. 93-2332-F through 93-2345-F, styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al. The plaintiffs in the lawsuits claim that they have valid leases covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul Castille #1 well, Mary Guilbeau #1 well, Evangeline Shrine Club #1 well and Duhon #1 well and are entitled to a portion of the production for the wells dating from February 1990. The plaintiffs are claiming between .4% and 2.3% of HEP's interest in the wells. HEP has not recognized revenue attributable to the contested leases since January 1993. These revenues, totaling $303,000 at December 31, 1995, have been placed in escrow pending resolution of the lawsuits. At this time, HEP believes that the difference between the escrowed amount and the amount of any liability that may result upon resolution of this matter will not be material. In June 1995, an additional lawsuit was filed against HEP in the 15th Judicial District Court, Lafayette Parish, Louisiana, Docket No. 95-2601 3B, styled Lamson Petroleum Corporation v. Hallwood Petroleum, Inc. et al. The plaintiffs in the lawsuit claim that they have additional valid leases covering streets and roads in the units of the A. L. Boudreaux #1 well, G. S. Boudreaux #1 well, Paul Castille #1 well, Mary Guilbeau #1 well and Duhon #1 well and are entitled to a portion of the production from the wells. HEP has not yet determined the amount of its interest in the properties which is at issue. At this time, HEP believes that the difference between the amount already in escrow as a result of the litigation described in the preceding paragraph and the amount of any liability that may result upon resolution of this matter and the matter described in the preceding paragraph will not be material. 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 13 - 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.
December 31, 1995 Carrying Estimated Amount Fair Value (in thousands) Assets: Investment in common stock of parent $ 2,075 $ 2,075 Liabilities: Current portion of 300 300 long-term debt Long-term debt 825 825
The long-term debt is carried in the accompanying balance sheet at an amount which is a reasonable estimate of its fair value as it is revolving debt at floating rate. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1995. 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. HALLWOOD ENERGY CORPORATION SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION DECEMBER 31, 1995 (Unaudited) The following reserve quantities and future net cash flow information for HEC represents proved reserves which are located in the United States. The reserve estimates presented have been prepared by in-house petroleum engineers and the majority of these reserves have 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 HEC's proved oil and gas reserves from year to year. No consideration has been given to future income taxes since HEC's tax basis and net operating loss carryforwards exceed future net cash flows. Under the guidelines set forth by the Securities and Exchange Commission, the calculation is performed using year end prices. At December 31, 1995, oil and gas prices averaged $18.00 per bbl of oil and $2.10 per mcf of gas for HEC, including its interest in HEP. Future production costs are based on year-end costs and include severance taxes. This standardized measure is not necessarily representative of the market value of HEC's properties. As of December 31, 1994, HEC no longer includes its share of internal overhead charges attributable to wells operated by Hallwood Petroleum, Inc. in lease operating expense for reserve calculation purposes. These overhead costs are now included in general and administrative expenses in HEC's financial statements. This change resulted in an upward revision of HEC's reserves during 1994 of 65,000 barrels of oil, 796,000 mcf of gas and $895,000 of discounted future net cash flows. This change was implemented to conform HEC's reserve calculation methodology to what management believes is a more accurate representation of reserves and is the most common practice of HEC's industry peers. HEC's standardized measure of discounted future net cash flows has been decreased by $39,000 at December 31, 1995 for its share of the effect of HEP's 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%.
HALLWOOD ENERGY CORPORATION RESERVE QUANTITIES (In thousands) (Unaudited) Gas Oil Mcf Bbls PROVED RESERVES: Balance, December 31, 1992 17,373 938 Extensions and discoveries 774 66 Revisions of previous estimates (a)(1,993) (205) Sales of reserves in place (460) (37) Purchases of reserves in place 737 70 Production (2,005) (110) -------- ----- Balance, December 31, 1993 14,426 722 Extensions and discoveries 636 104 Revisions of previous estimates (412) 105 Sales of reserves in place (96) (9) Purchases of reserves in place 74 14 Production (1,932) (128) --------- ----- Balance, December 31, 1994 12,696 808 Extensions and discoveries 728 267 Revisions of previous estimates (6) 52 Sales of reserves in place (13) (6) Purchases of reserves in place 40 3 Production (1,808) (130) ------- ----- Balance, December 31, 1995 11,637 994 ======= ===== PROVED DEVELOPED RESERVES: Balance, December 31, 1993 12,779 666 ====== ===== Balance, December 31, 1994 12,061 752 ====== ===== Balance, December 31, 1995 11,009 914 ====== ===== (a) The majority of these revisions relate to the G. S. Boudreaux Estate #1 well which, throughout 1993, produced an increasing amount of water, resulting in higher operating costs and less consistent production rates.
HALLWOOD ENERGY CORPORATION STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (In thousands) (Unaudited) December 31, 1995 1994 1993 Future cash flows $ 43,000 $ 37,000 $ 44,000 Future production and development costs (15,000) (13,000) (13,000) Future net cash flows before discount 28,000 24,000 31,000 10% discount to present value (9,000) (7,000) (10,000) --------- ------- -------- Standardized measure of discounted future net cash flows $ 19,000 $ 17,000 $ 21,000 ======== ======== ========
HALLWOOD ENERGY CORPORATION CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (In thousands) (Unaudited) For the Years Ended December 31, 1995 1994 1993 Standardized measure of discounted future net cash flows at beginning of year $ 17,000 $ 21,000 $25,000 Sales of oil and gas produced, net of production costs (4,064) (4,323) (4,528) Net changes in prices and production costs 2,424 (3,757) 1,150 Extensions, discoveries and other additions, net of future production costs 2,550 1,239 1,361 Changes in estimated future development costs (1,037) (575) (643) Development costs incurred 979 599 585 Revisions of previous quantity estimates (a) 335 214 (3,750) Purchases of reserves in place 63 155 1,346 Sale of reserves in place (54) (148) (793) Accretion of discount 1,700 2,100 2,500 Changes in production rates and other (896) 496 (1,228) ------- ----- ------- Standardized measure of discounted future net cash flows at end of year $19,000 $17,000 $21,000 ======= ======== ======== (a) The majority of these revisions in 1993 relate to the G. S. Boudreaux Estate #1 well which, throughout 1993, produced an increasing amount of water, resulting in higher operating costs and less consistent production rates.
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 HEC relating to HEC's 1996 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 HEC relating to HEC's 1996 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 HEC relating to HEC's 1996 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 HEC relating to HEC's 1996 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 (a) Financial Statements and Financial Statement Schedules. See Index at Item 8. (b) Reports on Form 8-K. HEC filed no current reports on Form 8-K during the last quarter of the period covered by this report. (c) Exhibits. (1) 3.1 - Articles of Incorporation of HEC, as amended through October 26, 1990. (Exhibit 3.1) (3) 3.2 - Bylaws of the Company. (2) 4.2 - Statement of Resolution establishing and designating Series D Preferred Stock of the Company. (Exhibit 10.2) (4) 4.3 - Statement of Resolution establishing and designating Series E preferred stock of the Company. (5) 10.20 - Loan Agreement with NBD Bank dated May 19, 1995. *10.21 - Financial Consulting Agreement between the Hallwood Group Incorporated and Hallwood Petroleum, Inc. dated June 30, 1994. *10.22 - Compensation Agreement between Hallwood Petroleum, Inc. and Anthony J. Gumbiner dated August 1, 1994 *10.23 - Domestic Incentive Plan between the Partnership and Hallwood Petroleum, Inc. dated January 14, 1993 *10.24 - 1995 Unit Option Plan of the Partnership *10.25 - Unit Option Plan Loan Program of the Partnership 21 - Subsidiaries of Registrant. (1) Portions incorporated by reference to the exhibit shown in parentheses filed with Saxon Oil Company's Current Report on Form 8-K, dated December 27, 1984, and portions filed with the Annual Report on Form 10-K for the fiscal year ended December 31, 1990. (2) Incorporated by reference to the exhibit shown in parentheses filed with Saxon Oil Company's Current Report on Form 8-K, dated January 28, 1987. (3) Filed with Annual Report on Form 10-K for fiscal year ended December 31, 1992 and incorporated herein by this reference. (4) Filed with Annual Report on Form 10-K for fiscal year ended December 31, 1994 and incorporated herein by this reference. (5) Filed with Quarterly Report on Form 10-Q for quarterly year ended June 30, 1995 and incorporated herein by this reference. * Designates management contracts or compensating plans or arrangements. 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 ENERGY CORPORATION Date: February 29, 1996 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. Signature Capacity Date /s/Anthony J. Gumbiner Chairman of the February 29, 1996 Anthony J. Gumbiner Board and Director (Chief Executive Officer) /s/Brian M. Troup Director February 29, 1996 Brian M. Troup /s/Hans-Peter Holinger Director February 29, 1996 Hans-Peter Holinger /s/Rex A. Sebastian Director February 29, 1996 Rex A. Sebastian /s/Robert S. Pfeiffer Principal Accounting February 29, 1996 Robert S. Pfeiffer Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Form 10-K for the year ended December 31, 1995 for Hallwood Energy Corporation and is qualified in its entirety by reference to such Form 10-K. 0000319019 HALLWOOD ENERGY CORPORATION 1,000 YEAR DEC-31-1995 DEC-31-1995 10 0 398 0 0 2,644 116,999 107,160 16,465 3,263 825 0 0 599 6,412 14,465 5,507 5,632 0 1,443 3,396 0 493 300 (406) 706 0 0 0 706 (1.00) (1.00)
EX-21 3 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Hallwood G.P., Inc., a Delaware corporation EX-10.21 4 FINANCIAL CONSULTING AGREEMENT THE HALLWOOD GROUP INCORPORATED FINANCIAL CONSULTING AGREEMENT THIS FINANCIAL CONSULTING AGREEMENT (the "Agreement"), made and entered into as of the 30th day of June, 1994, by and between THE HALLWOOD GROUP INCORPORATED, a Delaware corporation (the "Consultant") and HALLWOOD PETROLEUM, INC., a Delaware corporation ("HPI"). W I T N E S S E T H: WHEREAS, HPI, on behalf of its affiliates, is engaged in numerous international activities and shall from time to time require the financial knowledge and expertise of the Consultant or its agents in regard to various transactions between HALLWOOD ENERGY CORPORATION, a Texas corporation ("HEC"), HALLWOOD ENERGY PARTNERS, L.P., a Delaware limited partnership (the "Partnership"), HALLWOOD CONSOLIDATED RESOURCES CORPORATION, a Delaware corporation ("HCRC"), or their affiliates, and any third parties (HPI, HEC, HEP and HCRC and their affiliated entities are sometimes referred to in this Agreement as the "Energy Companies"); WHEREAS, the Energy Companies desire to draw upon and benefit from the financial knowledge and expertise of Consultant or its agents and Consultant desires to consult with the Energy Companies and be available therefor. NOW, THEREFORE, for and in consideration of the mutual undertakings and agreements contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: Section 1. Appointment. HPI hereby appoints and employs the Consultant to act as its financial advisor and consultant upon and subject to the terms and conditions hereinafter set forth, and Consultant hereby accepts such appointment and undertakes to advise and consult with HPI during the term of this Agreement upon and subject to the terms and conditions hereinafter set forth. Section 2. Term. The services of the Consultant under this Agreement shall be for a term commencing on the date of execution of this Agreement and expiring June 30, 1997 (the "Expiration Date") unless earlier terminated by the Consultant for any reason upon thirty (30) days' written notice to HPI. Section 3. Duties of the Consultant. The Consultant shall furnish and perform international consulting and advisory services to the Energy Companies to enable such entities to: (i) render assistance in the implementation of plans of financial restructuring of unrelated companies; (ii) effect acquisitions by the Energy Companies of oil or gas interests or mergers of the Energy Companies with other entities; and (iii) assist and consult with the Energy Companies in structuring and obtaining financing for their activities, and shall perform such services in or from Monaco, Antigua, or such other jurisdictions as Consultant or its agents may, in their sole discretion, deem appropriate, and neither Consultant nor any agent of Consultant shall provide any such services, or otherwise engage in any business of any nature whatsoever, in the United States or the United Kingdom. In particular, the Consultant's duties and obligations hereunder shall include: (a) performing such duties at such times and in such manner as shall be mutually agreeable to HPI and the Consultant, although at all times the Consultant will retain control over how such services are performed and who the Consultant will hire to perform such services; (b) reporting to HPI and any other entity designated by HPI, as needed, to fulfill its obligations regarding the rendition of international financial and consulting advice; and (c) observing and complying with all resolutions, regulations and directions from time to time made or given by HPI as long as such resolutions, regulations and directions do not interfere with the manner in which Consultant performs its duties. Section 4. Compensation. A. As compensation for the Consultant's services, HPI agrees to pay to the Consultant a total of Nine Hundred Thousand Dollars ($900,000), due and payable in Three Hundred Thousand Dollar ($300,000) installments on June 30 of each of 1994, 1995 and 1996. B. The amounts paid pursuant to paragraph A of this section shall be a nonrefundable advance against any fees, commissions or other payments payable to Consultant in the future for services rendered by Consultant in connection with any transactions between the Energy Companies and any third party. C. HPI and the Consultant hereby acknowledge and agree that all amounts payable pursuant to paragraph A of this section are to be paid as a retainer to secure, for the benefit of the Energy Companies, the availability of the Consultant to perform the services referred to in Section 3 of this Agreement. Consequently, all amounts so payable shall be so payable, without offset, withholding or any deduction of any nature whatsoever, whether or not any services are performed at any time, except as provided in paragraph B of this section. D. HPI shall reimburse Consultant for all reasonable and ordinary out-of- pocket business expenses Consultant reasonably incurs in the performance of its duties under this Agreement. Section 5. Relationship of the Parties. In performing its services under this Agreement, the Consultant shall be an independent contractor and, as between HPI and the Consultant, neither HPI nor any other of the Energy Companies shall be responsible for withholding, collection or payment of income taxes or for other taxes of any nature on behalf of the Consultant or any agent of Consultant. Nothing contained in this Agreement shall make the Consultant the agent, employee, joint venturer or partner of the Energy Companies or provide the Consultant with the power or authority to bind the Energy Companies to any contract, agreement or arrangement with any individual or entity except with the prior written approval of such entities. Section 6. Confidentiality. The Consultant recognizes and acknowledges that confidential information of various kinds may exist, from time to time, with respect to the business of the Energy Companies. Accordingly, the Consultant covenants on behalf of itself and its agents, if any, that, (a) except with the prior written consent of HEC, they shall at all times keep confidential and not divulge, furnish or make accessible to anyone (except HEC's or the Partnership's authorized representatives), any confidential information to which the Consultant or its agents have been or shall become privy relating to the business of HEC, the Partnership or any of their affiliates and, (b) except with the prior written consent of HCRC, they shall at all times keep confidential and not divulge, furnish or make accessible to anyone (except HCRC's authorized representatives), any confidential information to which the Consultant or its agents have been or shall become privy relating to the business of HCRC or any of its affiliates. The provisions of this Section 6 shall not apply to any information to the extent (i) it is or shall become generally known to the public or the trade (without the commission of a tortious act), (ii) it is or shall become available in trade or other publications, or (iii) Consultant or its agents are required by law to disclose such information to any person. Section 7. Certain Payments. The Consultant acknowledges that it is aware of the provision of United States law relating to prohibitions of any person representing a United States company from, directly or indirectly, giving anything of value to any foreign official to influence the foreign official in directing or agreeing to do business with the United States firm. In addition, the Consultant acknowledges that it has read the Statement of Company Policy of the Hallwood Entities regarding payment of gifts to foreign officials that has previously been supplied to the Consultant. The Consultant hereby undertakes to abide by such laws and policy and will not use any part of the amounts paid under this Agreement or any payments that are prohibited under such laws or policy. Section 8. Assignment. Neither party hereto may assign, without the other party's prior written consent, this Agreement, or any right or obligation hereunder, and any and all assignments without such prior written consent shall be null and void, except that with the consent of HPI the Consultant may designate agents to perform its obligations under this Agreement. Section 9. Miscellaneous. A. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas, other than the conflicts of laws provisions of such laws. B. Headings. The descriptive headings for the several sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. C. Severability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained in this Agreement. D. Entire Contract. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto and contains all of the covenants and agreements between the parties. In particular, this Agreement supersedes the Financial Consulting Agreement between the parties dated June 30, 1993, which Agreement is no longer in effect. E. Amendments. This Agreement may not be modified, altered, amended, waived or terminated orally, unless in writing signed by the parties hereto. F. Notices. All communications to be given or made pursuant to this Agreement shall be in writing and shall be deemed to have been duly given or made if mailed by registered or certified mail, postage prepaid, addressed to the address set forth opposite each party's name below, or in such other reasonable manner as HPI or the Consultant, as the case may be, shall have previously designated in writing to the other. G. Execution in Counterparts. This Agreement may be executed in counterparts, each to constitute an original, but both in the aggregate to constitute one agreement as executed. IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first above written. CONSULTANT: Address: THE HALLWOOD GROUP INCORPORATED 3710 Rawlins Suite 1500 Dallas, Texas 75219 By: /s/William L. Guzzetti -------------------------- Name: William L. Guzzetti Title: Executive Vice President HPI: Address: HALLWOOD PETROLEUM, INC. 4582 S. Ulster Street Parkway Suite 1700 Denver, Colorado 80237 By: /s/Russell P. Meduna --------------------------- Name: Russell P. Meduna Title: Executive Vice President EX-10.22 5 COMPENSATION AGREEMENT COMPENSATION AGREEMENT FOR ANTHONY J. GUMBINER WITH HALLWOOD PETROLEUM, INC. This Compensation Agreement ("Agreement"), is made and entered into as of August 1, 1994 by and between Hallwood Petroleum, Inc. ("HPI"), and Anthony J. Gumbiner ("Gumbiner"). RECITALS HPI, through its affiliates, is actively engaged in oil and gas activities in the countries of Indonesia, Azerbaijan and Peru and may become actively involved in similar activities in other countries. Gumbiner is the Chairman of the Board of HPI and the parties have agreed that his duties in such office shall be those described in this Agreement and shall be performed outside the United States and the United Kingdom. HPI and Gumbiner wish to promote their mutual best interests by establishing rights and obligations with respect to Gumbiner's employment relationship with HPI and they desire to set forth in writing their mutual understanding and agreement with respect to the conditions, covenants and agreements regarding the employment of Gumbiner by HPI. HPI and Gumbiner previously entered into an agreement dated as of April 1, 1992, which incorrectly reflected the terms of their relationship. AGREEMENT In consideration of the mutual benefits to be derived from this Agreement and the covenants and agreements set forth herein, the receipt and sufficiency of which are acknowledged by the execution and delivery hereof, the parties agree as follows: 1. Engagement. HPI agrees to compensate Gumbiner for his activities outside of the United States and Gumbiner agrees to perform these activities outside of the United States upon the terms and conditions set forth in this Agreement. 2. Duties of Gumbiner. Gumbiner's duties and obligations hereunder shall include: (a) consulting with and assisting HPI in maintaining its relationships with officials in Indonesia, Azerbaijan and Peru and other countries outside the United States and the United Kingdom in which HPI or its affiliates may in the future enter into agreements with respect to oil and gas activities; (b) assisting HPI in negotiating such agreements with the governments or state oil companies of these countries as may be necessary or appropriate to implement the initial agreement HPI or its affiliates entered into in those countries; (c) assist and consult with HPI in structuring and obtaining financing for the activities of its affiliates; (d) reporting to the Boards of Directors of HPI and its affiliates (the "Boards") and any other person designated by the Boards; and (d) observing and complying with all resolutions, regulations and directions from time to time made or given by the Boards. 3. Nondisclosure and Confidentiality. Gumbiner understands that he has developed and been exposed to, or may develop or be exposed to highly confidential information and trade secrets of HPI and its parent, subsidiaries or associated companies ("Confidential Information"), and that maintenance by HPI of its proprietary Confidential Information to the fullest extent possible is extremely important. Except as required during the performance of his duties for HPI or otherwise permitted by HPI, Gumbiner agrees never to disclose or use any Confidential Information either during or after the term of this Agreement and to take all reasonable precautions to prevent inadvertent disclosure, use or transfer of any Confidential Information. 4. Term. This Agreement shall be effective from August 1, 1994 (the "Commencement Date") and shall continue in effect until terminated by either party giving to the other not less than six calendar month's notice in writing. 5. Compensation. As compensation for services rendered by Gumbiner hereunder, HPI shall pay to Gumbiner annual compensation of Two Hundred Fifty Thousand Dollars ($250,000) payable in installments quarterly in advance on the first day of each of February, May, August and November each year beginning August 1, 1994. 6. Expenses. HPI shall within a reasonable time after the occurrence of same, reimburse Gumbiner for reasonable, ordinary business expenses reasonably incurred by him in the performance of his duties for HPI, provided that Gumbiner shall maintain an accurate record of such expenses and shall provide HPI with evidence thereof. 7. Termination. HPI may terminate this Agreement at any time upon the following events: (i) any act of dishonesty on the part of Gumbiner resulting or intended to result directly or indirectly in personal gain or benefit at the expense of HPI or material damage of or to property of HPI; (ii) any act of fraud, misappropriation, embezzlement or willful misconduct by Gumbiner or (iii) the willful breach or repeated, habitual neglect by Gumbiner of his duties under this Agreement to HPI. Upon such termination HPI shall pay to Gumbiner the pro- rata portion of the annual compensation to the date of termination, and he shall be entitled to no other compensation or benefits hereunder, including, without limitation, any other compensation, bonuses or commissions. 8. Disability or Death. If as a result of illness, injury or other disability, Gumbiner shall be unable to perform his duties hereunder on a substantially full-time basis for any period of 30 days or more, HPI may at its option terminate Gumbiner's employment hereunder and shall pay to Gumbiner the pro-rata portion of annual compensation to the date of termination. If Gumbiner shall die during the term of his employment by HPI, HPI shall pay to Gumbiner's estate the pro-rata portion of annual compensation to the date of Gumbiner's death. 9. Certain Payments. Gumbiner acknowledges that he is aware of the provision of United States law relating to prohibitions of any person representing a United States company from, directly or indirectly, giving anything of value to any foreign official to influence the foreign official in directing or agreeing to do business with the United States firm. In addition, Gumbiner acknowledges that he has read the Statement of Company Policy of the Hallwood Entities regarding payment of gifts to foreign officials that has previously been supplied to him. Gumbiner hereby undertakes to abide by such laws and policy and will not use any part of the amounts paid under this Agreement or any payments that are prohibited under such laws or policy. 10. Relationship of the Parties. In performing his services under this Agreement, Gumbiner shall be an independent contractor and, as between HPI and Gumbiner, neither HPI nor any of its affiliates shall be responsible for withholding, collection or payment of income taxes or for other taxes of any nature on behalf of Gumbiner. 11. Miscellaneous. (a) Notices. Any notice to be given hereunder is to be given in writing by either party to the other and delivered or sent by prepaid airmail post or facsimile transmission addressed to the address shown next to each party's signature to this agreement or such other address as may be notified by one party to the other for such purposes and shall be deemed to be served in the case of airmail post three days after posting and in the case of facsimile transmission immediately upon successfully transmission. (b) Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provisions had never been contained herein. (c) Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of Monaco and the parties agree to submit themselves to the jurisdiction of Monaco. (d) Counterparts. This Agreement may be executed in multiple counterparts, all of which shall be deemed originals, but which counterparts shall constitute one and the same instrument. (e) Entire Agreement. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof. No variations, modifications or changes herein or hereof shall be binded upon any party unless set forth in a document duly executed by or on behalf of such party. (f) Supersedes Prior Agreement. This Agreement replaces and supersedes in its entirety the Compensation Agreement for Anthony J. Gumbiner with Hallwood Petroleum, Inc. dated as of April 1, 1992. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and date above first written. HPI: 4582 South Ulster Street Parkway HALLWOOD PETROLEUM, INC. Suite 1700 Denver, Colorado 80237 By: /s/William L. Guzzetti ------------------------ William L. Guzzetti President 24, Avenue Princesse Grace GUMBINER: Monte-Carlo MC98000 Principality of Monaco /s/Anthony J. Gumbiner ---------------------------- ANTHONY J. GUMBINER EX-10.23 6 DOMESTIC INCENTIVE PLAN DOMESTIC INCENTIVE PLAN OF HALLWOOD PETROLEUM, INC. Hallwood Petroleum, Inc., a Delaware corporation (the "Company"), hereby establishes the following Domestic Incentive Plan, which is intended to provide greater incentive and motivation to the Company's key personnel to increase the domestic oil and gas reserves of the affiliates of the Company for which the Company provides management and operational services and to enhance the Company's ability to attract, motivate and retain key employees upon whom, in large measure, the success of the Company and its Affiliates depends. ARTICLE I DEFINITIONS The following words and phrases shall have the meaning set forth below unless the context clearly indicates otherwise: "Affiliates" means the affiliates of the Company for which the Company provides management and operational services, including, but not limited to, Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation, Hallwood Energy Corporation and Hallwood San Juan #1, L.L.C. "Beneficiary" means a Beneficiary designated pursuant to Section 6.6. "Board" means the Board of Directors of the Company or any committee of the Board of Directors to which the Board may delegate its authority to act in connection with this Plan from time to time. The Board shall, with regard to other than procedural matters related to this Plan, act after consultation and recommendation from the boards of directors of the Affiliates of the Company. "Buy-Out Value" shall mean that percentage of the net present value of the then remaining proven reserves of an Eligible Well, as determined by the Board at the time any award is made under the Plan. The net present value of the then remaining proven reserves of an Eligible Well shall be determined based on the Reserve Report.If the net present value of the proven reserves of an Eligible Well is less than zero, the Buy-Out Value shall be zero. "Cash Flow" from an Eligible Well means, with regard to the period in question, (i) all revenues received by the Company or its Affiliates from the sale of production from the Eligible Well plus (ii) all proceeds received from the sale of an interest in the Eligible Well to other than an Affiliate, less in each case (A) all operating expenses paid by the Company or its Affiliates and normally attributable to a working interest in the Eligible Well; (B) all amounts paid by the Company or its Affiliates to improve, recomplete or maintain the production from an Eligible Well (other than amounts spent in connection with the initial spudding, drilling and first Completion of the Eligible Well or recompletion of a Marginal Well); and (C) all severance, production or other production related taxes paid by the Company and its Affiliates and applicable to the Eligible Well. "Company" means Hallwood Petroleum, Inc. and any successor thereto. "Completion" of an Eligible Well or a "Completed" Eligible Well means (i) with regard to an initial drilling, the date such well is spud; (ii) with regard to the recompletion of a Marginal Well, the date when a completion, workover or drilling rig is moved in and rigged up in preparation of imminent work initiation or (iii) with regard to secondary or tertiary recovery operations, the date of first injection of any fluids used for secondary or tertiary recovery. "Effective Date" means January 1, 1992. "Eligible Well" means any domestic well Completed within the Plan Year, any recompleted Marginal Well (in which case the value to be assigned to such recompleted Marginal Well shall be the incremental value attributable to the recompletion), or any secondary or tertiary recovery operation (in which case the value to be assigned to such secondary or tertiary recovery wells not already included in a Plan, shall be calculated by holding constant the proven developed producing reserve rate at the time of first injection, and only considering the production above that rate as added value). "Key Employee" means an employee or consultant of the Company who the Board, in its sole discretion, determines has or may substantially benefit the Company. "Marginal Well" means any well having a net present value, on the Reserve Report, of less than or equal to $25,000. "Participant" means a Key Employee who is selected by the Board to participate in the Plan for any Plan Year. "Participation Point" means one percent of the Plan Cash Flow for any Plan Year; 100 Participation Points shall be awarded to Participants in any Plan Year during which any awards are made. "Plan" means this Domestic Incentive Plan of Hallwood Petroleum, Inc. "Plan Cash Flow" means the aggregate percentage of the Affiliates' collective interest in the Cash Flow of the Eligible Wells that the Board determines for any Plan Year to allocate to the Plan, and which is to be divided among the Participants based on Participation Points. "Plan Distributions" attributable to any Participant's Participation Points means (i) the Plan Cash Flow attributable to the Participation Points and (ii) the Buy-Out Value of the Participation Points upon buy-out pursuant to Section 3.4. "Plan Year" means the twelve-month calendar year. "Reserve Report" means the most recent regularly prepared reserve report which applies the rules and regulations of the Securities and Exchange Commission, except that average, twelve month prices, rather than year-end prices, shall be used. "Termination for Cause" means termination which is initiated by the Company for either misconduct or poor performance. ARTICLE II PARTICIPATION IN THE PLAN 2.1 Eligibility. Any Key Employee of the Company shall be eligible to be selected as a Participant in the Plan. A Key Employee shall become a Participant upon receiving an award of Participation Points by the Board, which shall act upon the recommendation of the boards of directors of its Affiliates, which in turn may take into consideration, among other factors, the recommendation of the Company's and the Affiliates' executive officers, the Key Employee's position, salary, and individual contribution to the performance of the Company's Affiliates. Only Key Employees who are employed by or engaged as consultants to the Company on the date of the award by the Board shall be eligible to be awarded Participation Points. 2.2 Enrollment Procedure. Each Participant shall complete, sign, and return to the Company's Human Resources department an enrollment form supplied by the Company. The enrollment form shall state, among other information, the Participant's address and date of birth and a designation of the names and addresses of the Participant's beneficiaries. The Participant will not be entitled to receive any payments with respect to the Plan until the Participant has properly returned the enrollment form. ARTICLE III ALLOCATION AND DISTRIBUTION OF NET INCOME 3.1 Determination of Participants and Awards. The Board may, based upon the recommendation of the boards of directors of its Affiliates, determine annually the Key Employees who are to be Participants in the Plan with respect to the Plan Year, the percentage of the total Plan Cash Flow to be allocated to awards for the Plan Year, the Plan Buy-Out Value, and the Participation Points to be awarded to each Participant. The Board may make these determinations in its sole discretion, is not required to allocate any Plan Cash Flow for a Plan Year and may award all Participation Points for a Plan Year to one Participant. It is anticipated that determinations of the Plan Cash Flow allocated for a Plan Year, the Participants, the Plan Buy-Out Value and the Participation Points for a Plan Year will be made concurrently with the first regular meeting of the Board held each year. The first such determinations shall be made in 1993 with respect to the 1992 Plan Year, and shall be effective from January 1, 1992. All allocations shall be made on a well-by-well basis or in such other manner as the Board may determine. 3.2 Effect of Award. Subject to Section 3.5, a Participant who is awarded Participation Points shall receive the Plan Cash Flow attributable to those Participation Points for a total of five calendar years, beginning with the Plan Year for which the Participation Points were awarded, as provided in Section 3.3, and in the sixth calendar year shall receive the Buy-Out Value, as provided in Section 3.4. 3.3 Distribution of Plan Cash Flow. On all outstanding awards, the Company shall distribute to each Participant the portion of the Plan Cash Flow attributable to the Participation Points then held by the Participant for each Plan Year. The distributions shall be made quarterly to each Participant or his Beneficiary in the amount of such person's allocable share of the Plan Cash Flow for the preceding quarter, less any applicable withholding of income taxes or other amounts. Distributions shall be made within thirty days of the end of a quarter. 3.4 Buy-out of Plan's Interest. As of January 1 of the sixth year that Cash Flow from an Eligible Well has been allocated under the Plan, the Buy-Out Value, if any, of an Eligible Well shall be paid to the Participants with respect to that Eligible Well and thereafter no further Cash Flow from such Eligible Well shall be paid to the Participants. All payments under this section shall be made on or before the end of the first quarter of the sixth year. 3.5 Vesting. (a) If a Participant's employment with the Company is terminated by the Participant or by the Company as a Termination for Cause, the Participant shall cease to be a Participant in this Plan and all Participation Points of the Participant under this Plan shall be canceled without payment of any compensation and the former Participant shall not thereafter receive any Plan Distributions. Any Participation Points cancelled hereunder and the related Plan Cash Flow shall revert to the Affiliates, and shall not be available to any other Participant. (b) If a Participant's employment with the Company is terminated by the Company as other than a Termination for Cause, the Participant shall, at the option of the Company, (a) continue to receive Plan Distributions in the same manner as though such Participant were still employed by the Company, or (b) receive a cash lump sum payment equal to the present value of such Participant's interest in the estimated remaining Plan Distributions, including the Buy-Out Value, based on the most recent Reserve Report, each of (a) and (b) being based on the Participation Points held by the Participant at the date of termination of employment. (c) If a Participant dies or is permanently and totally disabled, the Participant (or the Participant's Beneficiary) shall, at the option of the Company, (a) continue to receive Plan Distributions in the same manner as though such Participant were still employed by the Company, or (b) receive a cash lump sum payment equal to the present value of such Participant's interest in the estimated remaining Plan Distributions, including the Buy-Out Value, based on the most recent Reserve Report, each of (a) and (b) being based on the Participation Points held by the Participant at the date of death or disablement. (d) If the Company determines under subsection (b) or (c) to exercise the option of making a cash lump sum payment, then it shall notify the terminated or disabled Participant, or a deceased Participant's Beneficiary, of such option within 45 days of the termination of such Participant's employment or consultancy with the Company. Payment for any interest so purchased shall be made by the Company, by check, within 60 days after such termination. ARTICLE IV ALLOCATION OF ADMINISTRATIVE RESPONSIBILITIES 4.1 The Company. The Company shall be responsible for keeping accurate books and accounts with respect to all Eligible Wells, Plan Cash Flow and Plan Distributions and making the payments to Plan Participants provided by the Plan. 4.2 The Board. The Board shall administer the Plan and shall have all powers necessary for that purpose, including, but not limited to, the power to interpret the Plan, to determine the eligibility, status and rights of all persons under the Plan, to make all determinations required to be made under the Plan. 4.3 Others. The Board of the Company may designate one or more persons who may, but need not be, employees of the Company or Participants, to assist it in the ministerial tasks required in administering the Plan. The Company hereby indemnifies each person so designated by the Board against any and all claims, loss, damages, expense and liability arising from any action or failure to act with respect to the Plan, except when the same is judicially determined to be due to the fraud, gross negligence or willful misconduct of such person. ARTICLE V TERMINATION AND AMENDMENT 5.1 Termination of Plan and Discontinuance of Contributions. The Company presently intends to continue the Plan indefinitely, but the continuance of the Plan is not assumed as a contractual obligation and the Company may terminate the Plan at any time by delivering written notice of termination to each Participant and Beneficiary then entitled to receive distributions pursuant to the Plan. In addition, the sale or exchange of all or substantially all of the assets of an Affiliate of the Company (to other than an Affiliate of the Company), the merger of the Company or an Affiliate (if the Company or an Affiliate is not the surviving entity) or any material change in the direct or indirect ownership or control of the Company or an Affiliate (if the new owner is not an Affiliate) or the liquidation of the Company or an Affiliate, shall automatically terminate the Company's obligations under the Plan (as such obligations relate to such Affiliates' Eligible Wells, other than the obligations under Section 5.2). 5.2 Procedure Upon Termination. Upon termination of the Plan, the Company shall, at its option, (i) distribute to each Participant or Beneficiary then participating in the Plan, in one lump sum or in three equal annual installments with interest at the base rate required in order to avoid the imputation of interest under section 483 of the Internal Revenue Code, or any successor provision, an amount equal to the present value of such Participant's or Beneficiary's interest in the estimated remaining Plan Distributions, including the Buy-Out Value, based on the most recent Reserve Report, or (ii) continue to make Plan Distributions in accordance with the provisions of the Plan existing at the time of termination, or (iii) transfer and assign to each Participant and Beneficiary who then holds Participation Points, in proportion to each such person's Participation Points, actual working interests in the Eligible Wells used to determine Plan Distributions, all as the Board in its sole discretion may determine. 5.3 Amendment by the Company. The Company may at any time amend the Plan in any respect by action of its Board, but no amendment shall be made that would have the effect of materially and adversely affecting the economic interest of any person under the Plan with respect to previously awarded Participation Points. ARTICLE VI MISCELLANEOUS 6.1 Right to Dismiss Employees and Consultants. The Company may terminate the employment of any employee or consultant at any time as freely as if this Plan were not in existence. 6.2 Source of Benefits. The obligations hereunder are undertaken by the Company and the Affiliates, and all benefits payable under the Plan shall be paid solely from the general assets of the Company and or its Affiliates, and no allocation of interests or income on the books of the Company or the Affiliates shall be deemed to create a separate fund or any ownership interest on the part of any Participant in any Eligible Wells being used to measure Plan Distributions or in any production from properties. 6.3 No Ownership of Properties; Other Rights. Nothing contained in this Plan shall in any way restrict the right of the Company or the Affiliates in their discretion to operate, abandon, sell, transfer, mortgage, encumber or otherwise deal with the Eligible Wells giving rise to the revenues used to measure Plan Distributions. Any rights accruing to a Participant or other person under the Plan are solely those of an unsecured general creditor of the Company. Nothing contained in the Plan and no action taken pursuant to the provisions of the Plan will create or be construed to create a trust of any kind, or a pledge, or an economic interest in the Eligible Wells, or a fiduciary relationship between the Company, an Affiliate, and a Participant or any other person. Nothing in the Plan will be construed to require that any fund be maintained or any amount be segregated for a Participant's benefit. 6.4 Sale of Eligible Wells. If an Eligible Well is sold or in any way transferred to other than an Affiliate during the time that the Eligible Well is subject to the Plan, the value of the consideration received in connection with the transfer will be considered to be Cash Flow from such Eligible Well and will be distributed as Plan Cash Flow at the time and in the manner required by Section 3.3. 6.5 Deductibility under Internal Revenue Code. If the Company believes in good faith that a Participant may receive total compensation from the Company in one calendar year in excess of the amount which may be deducted by the Company under Internal Revenue Code section 162 (m), then the Company may defer such excess payments until the first year when they would be deductible. 6.6 Beneficiaries. Each Participant shall file with the Company a designation of the Beneficiaries and contingent Beneficiaries to whom income attributable to the Participant's interest under the Plan shall be paid in the event of the Participant's death. Such designation may be changed by the Participant at any time and without the consent of any previously designated Beneficiary. In the absence of an effective Beneficiary designation as to any portion of a Participant's interest under the Plan, Plan Distributions attributable to such interest shall be paid to the Participant's personal representative, but if the Company believes that none had been appointed within six months after the Participant's death, the Company may elect not to pay such income until a personal representative has been appointed or may pay such income to the Participant's surviving spouse, or if none, to his surviving children and issue of deceased children by right of representation, or if there be none, to his surviving parents. 6.7 Non-Transferability of Benefits. No Participant or other person shall have any right to assign, alienate, transfer, hypothecate, encumber or anticipate any interest in any benefits under this Plan, nor shall such benefits be subject to any legal process to levy upon or attach the same for payment of any claim against any such Participant or other person through any process whatsoever, and any attempt to cause such rights to be so subjected will not be recognized except to such extent as may be required by law. 6.8 Payment Due Minor or Incapacitated Persons. If any person entitled to a payment under the Plan is a minor, or if the Company determines that any such person is incapacitated by reason of physical or mental disability, whether or not legally adjudicated as such, the Company shall have the power to cause the payments becoming due to such person to be made to his personal representative or to another for his benefit, without responsibility of the Company to see to the application of such payments. The Company shall have no responsibility to investigate the physical or mental condition of a Participant and any determination of disability made by the Company shall be binding on the Participant and all other persons. Payments made pursuant to such power shall operate as a complete discharge of the Plan and the Company. 6.9 Disposition of Unclaimed Payments. Each Participant must file with the Company from time to time in writing his address and the address of each of his Beneficiaries and each change of address. Any communication, statement or notice addressed to a Participant or Beneficiary at his last post office address filed with the Company, or if no address is filed with the Company then at his last post office address as shown on the Company's records, will be binding on the Participant and his Beneficiaries for all purposes of the Plan. The Company shall not be required to search for or locate a Participant or Beneficiary. If the Company notifies a Participant or Beneficiary that he is entitled to a distribution and also notifies him of the provisions of this section, and the Participant or Beneficiary fails to make his address known to the Company within three calendar years after the notification, the Participation Points of the Participant Beneficiary will be forfeited and canceled as of the end of the Plan Year following the expiration of such three year period. 6.10 Governing Law. The construction and interpretation of this Plan shall be governed by the laws of the State of Colorado. 6.11 Pronouns; Gender and Number. Unless the context clearly indicates otherwise, words in any gender shall include the other genders and the singular shall include the plural and vice versa. As of January 14, 1993. HALLWOOD PETROLEUM INC., as agent for Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation, Hallwood Energy Corporation and Hallwood San Juan #1 L.L.C. /s/William L. Guzzetti ---------------------------------- William L. Guzzetti President EX-10.24 7 UNIT OPTION PLAN 1995 UNIT OPTION PLAN FOR HALLWOOD ENERGY PARTNERS, L.P. SECTION 1. PURPOSE. The purpose of this 1995 Unit Option Plan for Hallwood Energy Partners, L.P. is to advance the interests of Hallwood Energy Partners, L.P., a Delaware limited partnership (the "PARTNERSHIP"), by providing an additional incentive to attract and retain qualified and competent directors, employees and consultants for the Partnership, its general partner and the subsidiaries of the general partner and the Partnership, upon whose efforts and judgment the success of the Partnership is largely dependent, through the encouragement of ownership in the Partnership by such persons. SECTION 2. DEFINITIONS. As used herein, the following terms shall have the meaning indicated: (a) "ACT" shall mean the Securities Exchange Act of 1934, as amended. (b) "BOARD" shall mean the Board of Directors of the General Partner. (c) "BUSINESS DAY" shall mean (i) if the Units trade on a national securities exchange, any day that the national securities exchange on which the Units trade is open or (ii) if the Units do not trade on a national securities exchange, any day that commercial banks in the City of New York are open. (d) "COMMITTEE" shall mean the Compensation Committee of the Board or other committee, if any, appointed by the Board pursuant to SECTION 13 hereof. (e) "CONTINUING DIRECTOR" shall mean (i) any member of the Board on the effective date of this Plan and (ii) any person who subsequently becomes a member of the Board if such person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. (f) "DATE OF GRANT" shall mean the date on which the Committee takes formal action to grant an Option to an Eligible Person, provided it is followed, as soon as reasonably possible, by written notice to the Eligible Person of the grant. (g) "DIRECTOR" shall mean a member of the Board. (h) "ELIGIBLE PERSON(S)" shall mean those persons who are Directors or are employees of, or consultants to, the Partnership, the General Partner or any Subsidiary. (i) "FAIR MARKET VALUE" of a Unit on any date of reference shall mean the Closing Price on the business day immediately preceding such date, unless the Committee in its sole discretion shall determine otherwise in a fair and uniform manner. For this purpose, the Closing Price of the Units on any business day shall be: (i) if the Units are listed or admitted for trading on any United States national securities exchange or included in the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the last reported sale price of Units on such exchange or system, as reported in any newspaper of general circulation; (ii) if Units are quoted on NASDAQ, or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of Units on such system; (iii) if neither clause (i) nor (ii) is applicable, the mean between the high bid and low asked quotations for Units as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for Units on at least five of the ten preceding days; or, (iv) in lieu of the above, if actual transactions in the Units are reported on a consolidated transaction reporting system, the last sale price of the Units for such day and on such system. (j) "GENERAL PARTNER"shall mean Hallwood Energy Corporation, a Delaware corporation, or any successor thereof. (k) "NONQUALIFIED UNIT OPTION" shall mean an option that is not an incentive stock option as defined in Section 422 of the Internal Revenue Code. (l) "OPTION" (when capitalized) shall mean any option granted under this Plan. (m) "OPTIONEE" shall mean a person to whom an Option is granted or any successor to the rights of such Option under this Plan. (n) "PARTNERSHIP" shall mean Hallwood Energy Partners, L.P., a Delaware limited partnership. (o) "PERSON shall mean any individual, corporation, limited liability company, partnership, joint venture or other legal entity. (p) "PLAN" shall mean this 1995 Unit Option Plan for Hallwood Energy Partners, L.P. (q) "SAR" shall mean a stock appreciation right as defined in Section 9 hereof. (r) "UNIT(S)" shall mean units representing limited partner interests in the Partnership. (s) "SUBSIDIARY" shall mean (i) any corporation of which a majority of the outstanding stock having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation, irrespective of whether at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, is at the time, directly or indirectly, owned or controlled by the Partnership, General Partner or by one or more Subsidiaries, or by the Partnership, the General Partner and one or more Subsidiaries or (ii) any partnership, joint venture or limited liability company of which at least a majority of the equity ownership, whether in the form of membership, general, special or limited partnership interests or otherwise, is directly or indirectly owned or controlled by the Partnership, the General Partner or by one or more Subsidiaries or by the Partnership, the General Partner and one or more Subsidiaries. SECTION 3. UNITS AND OPTIONS. The Partnership may grant to Eligible Persons from time to time Options to purchase an aggregate of up to Four Hundred Twenty-Five Thousand (425,000) Units. If any Option granted under the Plan shall terminate, expire, or be cancelled or surrendered as to any Units, new Options may thereafter be granted covering such Units. An Option granted hereunder shall be a Nonqualified Unit Option. SECTION 4. CONDITIONS FOR GRANT OF OPTIONS. (a) Each Option shall be evidenced by an option agreement that may contain any term deemed necessary or desirable by the Committee, provided such terms are not inconsistent with this Plan or any applicable law. Optionees shall be those persons selected by the Committee from Eligible Persons. Any Person who files with the Committee, in a form satisfactory to the Committee, a written waiver of eligibility to receive any Option under this Plan shall not be eligible to receive any Option under this Plan for the duration of such waiver. (b) In granting Options, the Committee shall take into consideration the contribution the Person has made or may make to the success of the Partnership or its Subsidiaries and such other factors as the Committee shall determine. The Committee shall also have the authority to consult with and receive recommendations from officers and other personnel of the General Partner, the Partnership and a Subsidiary with regard to these matters. The Committee may from time to time in granting Options under the Plan prescribe such other terms and conditions concerning such Options as it deems appropriate, including, without limitation, relating an Option to achievement of specific goals established by the Committee or the continued employment of the Optionee for a specified period of time, provided that such terms and conditions are not more favorable to an Optionee than those expressly permitted herein. (c) The Committee in its sole discretion shall determine in each case whether periods of military or government service shall constitute a continuation of employment for the purposes of this Plan or any Option. SECTION 5. EXERCISE PRICE. The exercise price per Unit of any Option shall be any price determined by the Committee. SECTION 6. EXERCISE OF OPTIONS. An Option shall be deemed exercised when (i) the Partnership has received written notice of such exercise in accordance with the terms of the Option, (ii) full payment of the aggregate exercise price of the Units as to which the Option is exercised has been made, and (iii) arrangements that are satisfactory to the Committee in its sole discretion have been made for the Optionee's payment to the Partnership of the amount, if any, that the Committee determines to be necessary for the employer of the Optionee to withhold in accordance with applicable federal or state income tax withholding requirements. Unless further limited by the Committee in any Option, the option price of any Units purchased shall be paid in cash, by certified or cashier's check, by money order, with Units (provided that at the time of exercise the Committee in its sole discretion does not prohibit the exercise of Options through the delivery of already-owned Units) or by a combination of the above; provided, however, that the Committee in its sole discretion may accept a personal check in full or partial payment of any Units. If the exercise price is paid in whole or in part with Units, the value of the Units surrendered shall be their Fair Market Value. The Partnership in its sole discretion, and on such terms as it may determine, may lend money to an Optionee, guarantee a loan to an Optionee, or otherwise assist an Optionee to obtain the cash necessary to exercise all or a portion of an Option granted hereunder or to pay any tax liability of the Optionee attributable to such exercise. SECTION 7. EXERCISABILITY OF OPTIONS. (a) Any Option shall become exercisable in such amounts and at such intervals as the Committee shall provide in any Option, except as otherwise provided in this SECTION 7; provided in each case that the Option has not expired on the date of exercise. (b) The expiration date of an Option shall be determined by the Committee at the Date of Grant, but in no event shall an Option be exercisable after the expiration of ten (10) years from the Date of Grant. (c) The Committee may in its sole discretion accelerate the date on which any Option may be exercised. (d) Unless otherwise provided in any Option, each outstanding Option shall become fully exercisable immediately upon any of the following dates unless, in each case, the applicable transaction is approved in advance by Continuing Directors: (i) ten (10) days prior to the date of any transaction (which shall include a series of transactions occurring within 60 days or occurring pursuant to a plan), which has the result that unitholders of the Partnership immediately before such transaction would cease to own at least 66 % of the voting ownership interests of the Partnership or of any entity that results from the participation of the Partnership in a reorganization, consolidation, merger, liquidation, dissolution or any other comparable form of transaction; (ii) ten (10) days preceding the record date for the approval by the unitholders of the Partnership of a plan of reorganization, consolidation, merger, liquidation, dissolution or other comparable form of transaction in which the Partnership does not survive or as a result of which the unitholders of the Partnership immediately before such transaction would cease to own at least 66 % of the voting ownership interests of the Partnership; (iii) ten (10) days preceding the record date for the approval by the unitholders of the Partnership of a plan for the sale, lease, exchange or other disposition of 50% or more of the property and assets of the Partnership; (iv) ten (10) days preceding the record date for the approval by the unitholders of the Partnership of the removal of the General Partner as general partner of the Partnership; (v) ten (10) days preceding the record date for the approval by the unitholders of the Partnership of the amendment of the Partnership's or any operating partnership's agreement of limited partnership; or (vi) the date any tender offer or exchange offer is made by any person, which, if successfully completed, would result in such person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Act) either 33 % or more of the Partnership's outstanding Units or interests in the Partnership having 33 % or more of the combined voting power of the Partnership's then outstanding voting interests. (e) Notwithstanding any provisions hereof to the contrary, if any Option is accelerated under SUBSECTION 7(C) or (D), the portion of such Option that may be exercised to acquire Units that the Optionee would not be entitled to acquire but for such acceleration (the "ACCELERATION UNITS"), is limited to that number of Acceleration Units that can be acquired without causing the Optionee to have an "excess parachute payment" under Section 280G of the Internal Revenue Code, determined by taking into account all of the Optionee's "parachute payments" determined under Section 280G of the Code. If as a result of this SUBSECTION 7(E), the Optionee may not acquire all of the Acceleration Units, then the Acceleration Units that the Optionee may acquire shall be the last Units that the Optionee would have been entitled to acquire had this Option not been accelerated. SECTION 8. TERMINATION OF OPTION PERIOD. (a) Unless otherwise provided in any Option, the unexercised portion of an Option shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: (i) the date on which the Optionee's employment by the General Partner or a Subsidiary is terminated for any reason other than by reason of: (A) retirement (which, for purposes of this Plan, shall mean any termination of employment after an Optionee has reached the age of sixty-five (65)); (B) a mental or physical disability as determined by a medical doctor satisfactory to the Committee; (C) death; or (D) termination resulting from any transaction described in SECTION 7(D) hereof; (ii) three (3) months after the date on which the Optionee's employment by the General Partner or a Subsidiary is terminated by reason of retirement; (iii) twelve (12) months after the date on which the Optionee's employment by the General Partner or a Subsidiary is terminated by reason of a mental or physical disability as determined by a medical doctor satisfactory to the Committee; (iv) ten (10) years after the date of grant of such Option; (v) (A) twelve (12) months after the date of termination of the Optionee's employment by the General Partner or a Subsidiary by reason of death of the Optionee; (B) three (3) months after the date on which the Optionee shall die if such death shall occur during the three- month period specified in SECTION 8(A)(II) hereof or the twelve-month period specified in SECTION 8(A)(III) hereof; or (C) three (3) years after the termination of the employee's employment by the General Partner or a Subsidiary by reason of a transaction specified in SECTION 7(D) hereof. (b) If provided in an Option, the Committee in its sole discretion shall have the power to cancel, effective upon the date determined by the Committee in its sole discretion, all or any portion of any Option that is then exercisable (whether or not accelerated by the Committee) upon payment to the Optionee of cash in an amount that, in the absolute discretion of the Committee, is determined to be equal to the excess of (i) the aggregate Fair Market Value of the Units subject to such Option on the effective date of the cancellation over (ii) the aggregate exercise price of such Option. 9. STOCK APPRECIATION RIGHTS AND LIMITED STOCK APPRECIATION RIGHTS. (a) The Board shall have authority to grant an SAR or a Limited SAR with respect to all or some of the Units covered by any Option ("RELATED OPTION"). An SAR or Limited SAR may be granted on or after the Date of Grant of such Related Option. (b) For the purposes of this SECTION 9, the following definitions shall apply: (i) The term "OFFER" shall mean any tender offer or exchange offer for twenty-five percent (25%) or more of the outstanding Units of the Partnership, other than one made by the Partnership; provided that the corporation, person or other entity making the Offer acquires Units pursuant to such Offer. (ii) The term "OFFER PRICE PER UNIT" shall mean the highest price per Unit paid in any Offer that is in effect at any time during the period beginning on the 60th day prior to the date that a Limited SAR is exercised and ending on the date that the Limited SAR is exercised. Any securities or properties that are a part or all of the consideration paid or to be paid for Units in the Offer shall be valued in determining the Offer Price Per Unit at the higher of (1) the valuation placed on such securities or properties by the person making such Offer, or (2) the valuation placed on such securities or properties by the Board. (iii) The term "LIMITED SAR" shall mean a right granted under this Plan that shall entitle the Holder to an amount in cash equal to the Offer Spread in the event an Offer is made. (iv) The term "OFFER SPREAD" shall mean, with respect to each Limited SAR, an amount equal to the product obtained by multiplying (1) the excess of (A) the Offer Price Per Unit immediately preceding the date of exercise over (B) the Option Price per Unit of the Related Option multiplied by (2) the number of Units with respect to which such Limited SAR is being exercised. (v) The term "SAR" shall mean a right granted under this Plan that shall entitle the Holder thereof to an amount in cash equal to the SAR Spread. (vi) The term "SAR SPREAD" shall mean with respect to each SAR an amount equal to the product of (1) the excess of (A) the Fair Market Value per Unit on the date of exercise over (B) the Option Price per Unit of the Related Option multiplied by (2) the number of Units with respect to which such SAR is being exercised. (c) To exercise the SAR or Limited SAR, the Holder shall: (i) Give written notice thereof to the Partnership, specifying the SAR or Limited SAR being exercised and the number or Units with respect to which such SAR or Limited SAR is being exercised, and (ii) If requested by the Partnership, deliver within a reasonable time the agreement evidencing the SAR or Limited SAR being exercised, and the Related Option agreement to the Secretary of the General Partner who shall endorse or cause to be endorsed thereon a notation of such exercise and return all agreements to the Holder. (d) As soon as practicable after the exercise of an SAR or Limited SAR, the Partnership shall pay to the Holder (i) cash, (ii) at the request of the Holder and the approval of the Board, or in accordance with the terms of the Related Option, Units, or (iii) a combination of cash and Units, having a Fair Market Value equal to either the SAR Spread, or to the Offer Spread, as the case may be; provided, however, that the Partnership may, in its sole discretion, withhold from such payment any amount necessary to satisfy the Partnership's or a Subsidiary's obligation for federal and state withholding taxes with respect to such exercise. (e) An SAR or Limited SAR may be exercised only if and to the extent that the Related Option is eligible to be exercised; provided, however, a Limited SAR may be exercised only during the period beginning on the first day following the date of expiration of the Offer and ending on the 30th day following such date. (f) Upon the exercise of an SAR or Limited SAR, the Units under the Related Option to that such exercised SAR or Limited SAR relate shall be released, but such released Units shall never again be Units available for grant. (g) Upon the exercise or termination of a Related Option, the SAR or Limited SAR with respect to such Related Option likewise shall terminate. (h) An SAR or Limited SAR shall be transferable only to the extent, if any, that the Related Option is transferable, and under the same conditions. (i) Each SAR or Limited SAR shall be on such terms and conditions not inconsistent with this Plan as the Board may determine and shall be evidenced by a written agreement. (j) The Holder shall have no rights as a unitholder with respect to the related Units as a result of the grant of an SAR or Limited SAR. SECTION 10. ADJUSTMENT OF UNITS. (a) If at any time while the Plan is in effect or unexercised Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding Units through the declaration of a unit dividend or through any recapitalization resulting in a unit split-up, combination or exchange of Units, then and in such event. (i) appropriate adjustment shall be made in the maximum number of Units then subject to being optioned under the Plan, so that the same proportion of the Partnership's issued and outstanding Units shall continue to be subject to being so optioned; and (ii) appropriate adjustment shall be made in the number of Units and the exercise price per Unit thereof then subject to outstanding Options, so that the same proportion of the Partnership's issued and outstanding Units shall remain subject to purchase at the same aggregate exercise price. (b) The Committee may change the terms of Options outstanding under this Plan, with respect to the exercise price or the number of Units subject to the Options, or both, when, in the Committee's sole discretion, such adjustments become appropriate by reason of any transaction. (c) Except as otherwise expressly provided herein, the issuance by the Partnership of any class, or securities convertible into ownership interests of any class, either in connection with direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Partnership convertible into such ownership interests or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number of Units reserved for issuance under the Plan or the number of or exercise price of Units then subject to outstanding Options granted under the Plan. (d) Without limiting the generality of the foregoing, the existence of outstanding Options granted under the Plan shall not affect in any manner the right or power of the Partnership to make, authorize or consummate (1) any or all adjustments, recapitalizations, reorganizations or other changes in the Partnership's capital structure or its business; (2) any merger or consolidation of the Partnership; (3) any issue by the Partnership of debt securities, or partnership interests that would rank above the Units subject to outstanding Options; (4) the dissolution or liquidation of the Partnership; (5) any sale, transfer or assignment of all or any part of the assets or business of the Partnership; or (6) any other partnership act or proceeding, whether of a similar character or otherwise. SECTION 11. TRANSFERABILITY OF OPTIONS. Each Option may provide that such Option may be transferrable by the Optionee in the Optionee's discretion. SECTION 12. ISSUANCE OF UNITS. No person shall be, or have any of the rights or privileges of, a unitholder of the Partnership with respect to any of the Units subject to an Option unless and until certificates representing such Units shall have been issued and delivered to such person. As a condition of any transfer of the certificate for Units, the Committee may obtain such agreements or undertakings, if any, as it may deem necessary or advisable to assure compliance with any provision of the Plan, the agreement evidencing the Option or any law or regulation including, but not limited to, the following: (i) A representation, warranty or agreement by the Optionee to the Partnership at the time any Option is exercised that he or she is acquiring the Units to be issued to him or her for investment and not with a view to, or for sale in connection with, the distribution of any such Units; and (ii) A representation, warranty or agreement to be bound by any legends that are, in the opinion of the Committee, necessary or appropriate to comply with the provisions of any securities laws deemed by the Committee to be applicable to the issuance of the Units and that are endorsed upon the Unit certificates. SECTION 13. ADMINISTRATION OF THE PLAN. (a) The Plan may be administered by the Compensation Committee of the Board or other committee thereof as appointed by the Board (herein called the "COMMITTEE"); or, if the Board so determines, by the Board and in such case all references to the Committee shall be deemed to be references to the Board. Except for the powers set forth in SECTION 16, the Committee shall have all of the powers of the Board with respect to the Plan. Any member of the Committee may be removed at any time, with or without cause, by resolution of the Board and any vacancy occurring in the membership of the Committee may be filled by appointment by the Board. (b) The Committee, from time to time, may adopt rules and regulations for carrying out the purposes of the Plan. The determinations and the interpretation and construction of any provision of the Plan by the Committee shall be final and conclusive. (c) Any and all decisions or determinations of the Committee shall be made either (i) by a majority vote of the members of the Committee at a meeting or (ii) without a meeting by the written approval of a majority of the members of the Committee. (d) Subject to the express provisions of this Plan, the Committee shall have the authority, in its sole and absolute discretion (i) to adopt, amend, and rescind administrative and interpretive rules and regulations relating to this Plan or any Option; (ii) to construe the terms of this Plan or any Option; (iii) as provided in SUBSECTION 10(A), upon certain events to make appropriate adjustments to the exercise price and number of Units subject to this Plan and Option; and (iv) to make all other determinations and perform all other acts necessary or advisable for administering this Plan, including the delegation of such ministerial acts and responsibilities as the Committee deems appropriate. The Committee may correct any defect or supply any omission or reconcile any inconsistency in this Plan or any Option in the manner and to the extent it shall deem expedient to carry it into effect, and it shall be the sole and final judge of such expediency. The Committee shall have full discretion to make all determinations on the matters referred to in this SUBSECTION 13(D), and such determinations shall be final, binding and conclusive. SECTION 14. GOVERNMENT REGULATIONS. This Plan, Options and the obligations of the Partnership to sell and deliver Units under any Options, shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. SECTION 15. MISCELLANEOUS. (a) The grant of an Option shall be in addition to any other compensation paid to the Optionee or other employee benefit plans of the General Partner or a Subsidiary or other benefits with respect to Optionee's position with the General Partner or a Subsidiary. The grant of an Option shall not confer upon the Optionee the right to continue in the Optionee's employment position, or interfere in any way with the rights of the Optionee's employer to terminate his or her status as an employee. (b) Neither the members of the Board nor any member of the Committee shall be liable for any act, omission, or determination taken or made in good faith with respect to this Plan or any Option, and members of the Board and the Committee shall, in addition to all other rights of indemnification and reimbursement, be entitled to indemnification and reimbursement by the Partnership in respect of any claim, loss, damage, or expense (including attorneys' fees, the costs of settling any suit, provided such settlement is approved by independent legal counsel selected by the Partnership, and amounts paid in satisfaction of a judgment, except a judgment based on a finding of bad faith) arising from such claim, loss, damage, or expense to the full extent permitted by law and under any directors' and officers' liability or similar insurance coverage that may from time to time be in effect. (c) Any issuance or transfer of Units to an Optionee, or to his legal representative, heir, legatee, distributee or assignee, in accordance with the provisions of this Plan or the applicable Option, shall, to the extent thereof, be in full satisfaction of all claims of such persons under the Plan. The Committee may require any Optionee, legal representative, heir, legatee, distributee or assignee as a condition precedent to such payment or issuance or transfer of Units, to execute a release and receipt for such payment or issuance or transfer of Units in such form as it shall determine. (d) Neither the Committee nor the Partnership guarantees Units from loss or depreciation. (e) All expenses incident to the administration, termination, or protection of this Plan or any Option, including, but not limited to, legal and accounting fees, shall be paid by the Partnership; provided, however, the Partnership may recover any and all damages, fees, expenses and costs arising out of any actions taken by the Partnership to enforce its rights under this Plan or any Option. (f) Records of the Partnership shall be conclusive for all purposes under this Plan or any Option, unless determined by the Committee to be incorrect. (g) The Partnership shall, upon request or as may be specifically required under this Plan or any Option, furnish or cause to be furnished all of the information or documentation that is necessary or required by the Committee to perform its duties and functions under this Plan or any Option. (h) The Partnership assumes no liability to any Optionee or his legal representatives, heirs, legatees or distributees for any act of, or failure to act on the part of, the Committee. (i) If any provision of this Plan or any Option is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of this Plan or any Option, but such provision shall be fully severable, and the Plan or Option, as applicable, shall be construed and enforced as if the illegal or invalid provision had never been included in the Plan or Option, as applicable. (j) Whenever any notice is required or permitted under this Plan, such notice must be in writing and personally delivered or sent by mail or delivery by a nationally recognized courier service. Any notice required or permitted to be delivered under this Plan shall be deemed to be delivered on the date on which it is personally delivered, or, if mailed, whether actually received or not, on the third Business Day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has previously specified by written notice delivered in accordance with this SUBSECTION 15(J) or, if by courier, seventy-two (72) hours after it is sent, addressed as described in this SUBSECTION 15(J). The Partnership or the Optionee may change, at any time and from time to time, by written notice to the other, the address that it or he had previously specified for receiving notices. Until changed in accordance with this Plan, the address of the Partnership is 4582 South Ulster Street Parkway, Suite 1700, Denver, Colorado 80237 and the address of the Optionee is the Optionee's address in the records of the Optionee's employer. (k) Any person entitled to notice under this Plan may waive such notice. (l) Each Option shall be binding upon the Optionee, his legal representatives, heirs, legatees and distributees and upon the Partnership, its successors, and assigns, and upon the Board, the Committee and its successors. (m) The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of this Plan's provisions. (n) Words used in the masculine shall apply to the feminine where applicable, and wherever the context of this Plan dictates, the plural shall be read as the singular and the singular as the plural. SECTION 16. AMENDMENT AND DISCONTINUATION OF THE PLAN. The Committee may from time to time amend the Plan or any Option; provided, however, that, except to the extent provided in SECTION 8, no amendment or suspension of the Plan or any Option issued hereunder shall, except as specifically permitted in any Option, substantially impair any Option previously granted to any Optionee without the consent of such Optionee. SECTION 17. EFFECTIVE DATE AND TERMINATION DATE. The effective date of the Plan is January 31, 1995, which is the date the Board adopted this Plan. The Plan shall terminate on the tenth anniversary of the effective date. Executed to evidence the 1995 Unit Option Plan of Hallwood Energy Partners, L.P. adopted by the Board on January 31, 1995. HALLWOOD ENERGY PARTNERS, L.P. By: Hallwood Energy Corporation, its general partner By: /s/William L. Guzzetti -------------------------- Name: William L. Guzzetti Title: President EX-10.25 8 UNIT OPTION PLAN LOAN PROGRAM 1995 UNIT OPTION PLAN LOAN PROGRAM FOR HALLWOOD ENERGY PARTNERS, L.P. SECTION 1. PURPOSE. This 1995 Unit Option Plan Loan Program for Hallwood Energy Partners, L.P. (this "Loan Program") has been established in connection with the adoption of the 1995 Unit Option Plan for Hallwood Energy Partners, L.P. (the "Option Plan"). This Loan Program provides for the making of loans by Hallwood Energy Partners, L.P. (the "Partnership"), upon the terms and conditions hereinafter set forth, to the recipients of options to purchase units representing limited partnership interests in the Partnership granted pursuant to the Option Plan. The purpose of this Loan Program is to provide such optionees with funds to pay the exercise price of such options and any additional amounts to be paid to the Partnership in order to comply with applicable federal or state income tax withholding requirements. SECTION 2. DEFINITIONS. As used herein, the following terms shall have the meanings indicated: (A) "ACCELERATED OPTION" shall mean any Option the exercisability of which has been accelerated pursuant to Section 7 of the Option Plan. (B) "FAIR MARKET VALUE" shall mean: (i) with respect to any Traded Securities on any date of reference, the Closing Price on the business day immediately preceding such date, unless the Committee in its sole discretion shall determine otherwise in a fair and uniform manner. For this purpose, the closing price of the Traded Securities on any business day shall be: (A) if the Traded Securities are listed or admitted for trading on any United States national or international securities exchange or included in the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the last reported sale price of the Traded Securities on such exchange or system, as reported in any newspaper of general circulation; (B) if the Traded Securities are quoted on NASDAQ, or any similar system of automated dissemination of quotations of securities prices in common use, the mean between the closing high bid and low asked quotations for such day of the Traded Securities on such system; (C) if neither clause (A) nor (B) is applicable, the mean between the high bid and low asked quotations for the Traded Securities as reported by the National Quotation Bureau, Incorporated if at least two securities dealers have inserted both bid and asked quotations for the Traded Securities on at least five of the ten preceding days; or, (D) in lieu of the above, if actual transactions in the Traded Securities are reported on a consolidated transaction reporting system, the last sale price of the Traded Securities for such day and on such system; (ii) with respect to any U.S. Government Obligations on any date of reference, the mean between the bid and asked quotations for such U.S. Government Obligations for the business day immediately preceding such date as set forth in any newspaper of general circulation; and (iii) with respect to any foreign or domestic real or personal property other than Traded Securities or U.S. Government Obligations, the fair market value of such property as determined by an appraiser of recognized standing duly qualified in the jurisdiction in which such appraiser practices. (C) "FULLY SECURED" shall mean that the Optionee shall have created in favor of the Partnership a perfected security interest in (i) the Units acquired upon exercise of the Related Option as security for such portion of the Loan equal to the Margin Loan Amount and (ii) Other Collateral that has a Fair Market Value equal to the amount of the remaining portion of the Loan (including any portion attributable to Tax Payments). (D) "LOAN" shall mean any loan extended to an Optionee pursuant to this Loan Program. (E) "LOAN DATE" shall mean, with respect to any Loan, the date on which such Loan is made by the Partnership. (F) "MARGIN LOAN AMOUNT" shall mean, with respect to any Loan, an amount equal to fifty percent (50%) of the Fair Market Value as of the Loan Date of the Units acquired upon exercise of the Related Option. (G) "OTHER COLLATERAL" shall mean any property of an Optionee other than Units acquired upon exercise of a Related Option that is pledged to secure any portion of a Loan. (H) "PARTNERSHIP INTEREST RATE" shall mean the rate of interest payable by the Partnership with respect to its revolving line of credit with its primary lender. (I) "RELATED OPTION" shall mean the Option with respect to which the proceeds of a particular Loan shall be used for payment of the exercise price thereunder. (J) "REQUIRED LOAN DOCUMENTS" shall mean (i) the Optionee Loan Application Form, in substantially the form of EXHIBIT A attached hereto, (ii) the Promissory Note, in substantially the form of EXHIBIT B attached hereto, (iii) in the case of a Loan pursuant to Section 3(a) hereof, the Pledge Agreement, in substantially the form of EXHIBIT C attached hereto, covering the Units acquired upon the exercise of a Related Option and any Traded Securities or U.S. Government Obligations included as Other Collateral, (iv) in the case of a Loan pursuant to Section 3(a) hereof, Federal Reserve Form FR G-3, (v) in the case of a Loan pursuant to Section 3(a) that is secured by Other Collateral consisting of real or personal property located in a foreign jurisdiction, the Standard Form All-Monies Legal Charge, in substantially the form of EXHIBIT D attached hereto, and (vi) in the case of a Loan pursuant to Section 3(a) that is secured by Other Collateral consisting of real or personal property located within the United States, any other documentation required by the Committee, in its sole discretion, to create in favor of the Partnership a perfected security interest in such property. (K) "TAX PAYMENTS" shall mean payments to the Partnership in compliance with applicable federal or state income tax withholding requirements. (L) "TRADED SECURITIES" shall mean any securities that are listed or admitted for trading on any United States national or international securities exchange or included in the National Market System of the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or any similar system of automated dissemination of quotations of securities prices in common use. (M) "U.S. GOVERNMENT OBLIGATIONS" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) the obligations of an entity controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and creditobligation of the United States of America. All capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Option Plan. SECTION 3. LOANS. (A) The Partnership, upon the receipt of each of the Required Loan Documents, properly completed and signed by an Optionee, shall extend to such Optionee a Loan in the amount indicated on such form (subject to the terms of this Section 3). The Required Loan Documents must be provided to the Partnership prior to or concurrently with such Optionee's written notice of exercise of the Related Option. Subject to Section 3(b) below, the Loan shall be made on the following terms and conditions: (i) the amount of the Loan may not exceed the aggregate exercise price for the Related Option plus the amount of any Tax Payments; (ii) the amount of the Loan must be Fully Secured; (iii) the principal balance of the Loan shall become due and payable on the fifth anniversary of the Loan Date; (iv) the principal balance of the Loan shall accrue interest at a rate equal to the Partnership Interest Rate in effect as of the Loan Date; and (v) accrued interest shall be payable on the last day of each of the Partnership's fiscal quarters during which the Loan remains outstanding. (B) In the event that (i) any portion of the Related Option is an Accelerated Option and (ii) the Optionee was not a member of the Board at the time the Related Option was granted, then the Loan may be made, at the discretion of the Optionee, on the following terms and conditions: (i) the amount of the Loan may not exceed the aggregate exercise price for the Related Option plus the amount of any Tax Payments; (ii) the Loan may be unsecured; (iii) the principal balance of the Loan shall become due and payable on the first anniversary of the Loan Date; (iv) the principal balance of the Loan shall accrue interest at a rate equal to the Partnership Interest Rate in effect as of the Loan Date plus two percent (2%); and (v) accrued interest shall be payable on the last day of each of the Partnership's fiscal quarters during which the Loan remains outstanding. (C) The proceeds of the Loan may be used by the Optionee solely for (i) the payment, whether full or partial, of the aggregate exercise price of the Related Option and (ii) the payment of any funds by the Optionee to the Partnership in order to comply with applicable federal or state income tax withholding requirements. (D) The principal balance of the Loan may be repaid by the Optionee either in cash or by the surrender of Units having a Fair Market Value as of the date of such repayment equal to such principal balance. (E) The Partnership shall not be obligated to make any Loan if the amount of such Loan is less than $25,000. (F) In no event shall the Partnership be required to make a Loan if, as reflected on the Partnership's latest regularly prepared books and records, the Partnership does not have available sufficient cash or the availability of additional borrowings under its revolving line of credit in a sufficient amount to make the Loan after taking into account all of the Partnership's commitments for cash expenditures and budgeted receipts for at least a one year period after the Loan Date. SECTION 4. COMPLIANCE WITH APPLICABLE LAWS. It is the intent of the Partnership that this Loan Program and the Loans made hereunder comply with all applicable laws, including without limitation Regulation G issued by the Board of Governors of the Federal Reserve System. Accordingly, the Partnership shall register on Federal Reserve Form FR G-1 within 30 days after the end of any calendar quarter during which (i) the aggregate amount of the Loans extended during such quarter equals $200,000 or more or (ii) the aggregate amount of the Loans outstanding at any time during that calendar quarter equals $500,000 or more. Furthermore, if the Partnership has registered on Form FR G-1, then the Partnership shall, within 30 days following June 30 of every year, file Federal Reserve Form FR G-4. SECTION 5. ADMINISTRATION OF LOAN PROGRAM; AMENDMENTS. (A) This Loan Program may be administered by the Compensation Committee of the Board or other committee thereof as appointed by the Board (the "Committee"); or, if the Board so determines, by the Board and in such case all references to the Committee shall be deemed to be references to the Board. The Committee may from time to time amend this Loan Program; provided, however, that no such amendment shall apply to any Loans outstanding prior to the adoption of such amendment. (B) The Committee, from time to time, may adopt rules and regulations for carrying out the purposes of this Loan Program. The determinations and the interpretation and construction of any provision of this Loan Program by the Committee shall be final and conclusive. (C) Any and all decisions or determinations of the Committee shall be made either (i) by a majority vote of the members of the Committee at a meeting or (ii) without a meeting by the written approval of a majority of the members of the Committee. SECTION 6. MISCELLANEOUS. (a) The provision of a Loan shall be in addition to any other compensation paid to the Optionee or other employee benefit plans of the Partnership or other benefits with respect to Optionee's position with the Partnership or its Subsidiaries. The provision of a Loan shall not confer upon the Optionee the right to continue as an Employee, or interfere in any way with the rights of the Partnership to terminate his or her status as an Employee. (b) Neither the members of the Board nor any member of the Committee shall be liable for any act, omission, or determination taken or made in good faith with respect to this Loan Program or any Loan, and members of the Board and the Committee shall, in addition to all other rights of indemnification and reimbursement, be entitled to indemnification and reimbursement by the Partnership in respect of any claim, loss, damage, or expense (including attorneys' fees, the costs of settling any suit, provided such settlement is approved by independent legal counsel selected by the Partnership, and amounts paid in satisfaction of a judgment, except a judgment based on a finding of bad faith) arising from such claim, loss, damage, or expense to the full extent permitted by law and under any directors' and officers' liability or similar insurance coverage that may from time to time be in effect. (c) The provision of a Loan to an Optionee in accordance with the provisions of this Loan Program shall, to the extent thereof, be in full satisfaction of all claims of such Optionee under this Loan Program. The Committee may require any Optionee, legal representative, heir, legatee, distributee or assignee as a condition precedent to the provision of such Loan, to execute a release and receipt for such Loan in such form as it shall determine. (d) All expenses incident to the administration, termination, or protection of this Loan Program, including, but not limited to, legal and accounting fees, shall be paid by the Partnership; provided, however, the Partnership may recover any and all damages, fees, expenses and costs arising out of any actions taken by the Partnership to enforce its rights under this Loan Program or any Required Loan Document. (e) Records of the Partnership shall be conclusive for all purposes under this Loan Program or any Loan, unless determined by the Committee to be incorrect. (f) The Partnership shall, upon request or as may be specifically required under this Loan Program or any Required Loan Document, furnish or cause to be furnished all of the information or documentation that is necessary or required by the Committee to perform its duties and functions under this Loan Program or any Required Loan Document. (g) The Partnership assumes no liability to any Optionee or his legal representatives, heirs, legatees or distributees for any act of, or failure to act on the part of, the Committee. (h) If any provision of this Loan Program or any Required Loan Document is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of this Loan Program or such Required Loan Document, but such provision shall be fully severable, and the Loan Program or Required Loan Document, as applicable, shall be construed and enforced as if the illegal or invalid provision had never been included in the Loan Program or Required Loan Document, as applicable. (i) Whenever any notice is required or permitted under this Loan Program, such notice must be in writing and personally delivered or sent by mail or delivery by a nationally recognized courier service. Any notice required or permitted to be delivered under any Required Loan Document shall be deemed to be delivered on the date on which it is personally delivered, or, if mailed, whether actually received or not, on the third Business Day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address that such person has previously specified by written notice delivered in accordance with this SECTION 6(I) or, if by courier, seventy-two (72) hours after it is sent, addressed as described in this SECTION 6(I). The Partnership or the Optionee may change, at any time and from time to time, by written notice to the other, the address that it or he had previously specified for receiving notices. Until changed in accordance with this Loan Program, the Partnership and the Optionee shall specify as its and his address for receiving notices the address set forth in this Loan Program or any Required Loan Document to which such notice relates. (j) Any person entitled to notice under this Loan Program or any Required Loan Document may waive such notice. (k) This Loan Program shall be binding upon the Optionee, his legal representatives, heirs, legatees and distributees upon the Partnership, its successors, and assigns, and upon the Board, the Committee and its successors. (l) The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of this Loan Program's provisions. EFFECTIVE DATE: JANUARY 31, 1995 EXHIBIT A OPTIONEE LOAN APPLICATION FORM 1. Name of Optionee: . 2. Number of Units Subject to Option: . 3. Number of Units being acquired pursuant to exercise of such Option: . 4. Exercise price per Unit for such Option: 5. Amount of Loan requested: . 6. Is the above-referenced Option an Accelerated Option? Yes No 7. If the above-referenced Option is an Accelerated Option, then the Loan shall be made pursuant to which section of the Loan Program (designate one): Section 3(a) Section 3(b) OPTIONEE: Date: Print Name: EXHIBIT B PROMISSORY NOTE $_________ _____________, 199__ ____________________________________ ("Maker"), for value received, promises and agrees to pay, as herein provided, to the order of Hallwood Energy Partners, L.P., a Delaware limited partnership ("Payee"), at such address or to such bank account as Payee may direct, in lawful money of the United States of America, the principal sum of _______________________________________ Dollars ($_________). This note ("Note") is issued under the terms of that certain 1995 Unit Option Plan Loan Program for Hallwood Energy Partners, L.P. as in effect on the date hereof (the "Loan Program"). 1. PAYMENT OF PRINCIPAL AND INTEREST. (a) The principal balance of this Note and all accrued and unpaid interest thereon shall be due and payable on ______________, _____ (the "Maturity Date"); provided, however, that if such day is not a day on which banks are open for business in the State of ___________ (a "Business Day"), then such payment shall be due on the Business Day next succeeding the Principal Payment Date. The principal balance of this Note may be repaid either in cash or by the surrender of certificates representing units of limited partnership interests in Payee having a fair market value equal to such principal balance (as determined in accordance with the Loan Program). (b) The principal balance outstanding from time to time under this Note (after giving effect to all adjustments thereto made pursuant to the terms of this Note) shall bear interest at a rate of __________ percent (____%) per annum. In no event shall the interest rate payable hereunder exceed the maximum rate of nonusurious interest allowed from time to time by applicable law (the "Highest Lawful Rate"). Maker shall pay to Payee, commencing on _________________ and on the last day of each succeeding three-month period until the Maturity Date, all accrued and unpaid interest on the outstanding principal balance as of such date, unless such day is not a Business Day in which case such payment shall be due on the Business Day next succeeding such day. 2. MAXIMUM INTEREST RATE. (a) It is the intention of Maker and Payee to conform strictly to applicable usury laws. Accordingly, if the interest payable on this Note would be usurious under applicable law, in that event, notwithstanding anything to the contrary herein, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under applicable law that is taken, reserved, contracted for, charged or received under this Note shall under no circumstances exceed the maximum amount of interest allowed by applicable law, and any excess shall be canceled automatically and, if theretofore paid, shall be credited on this Note by the holder hereof (or, to the extent that this Note shall have been or would thereby be paid in full, refunded to Maker); and (ii) in the event that maturity of this Note is accelerated for any reason, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the maximum amount allowed by applicable law, and excess interest, if any, provided for in this Note or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on this Note (or, to the extent that this Note shall have been or would thereby be paid in full, refunded to Maker). All sums paid or agreed to be paid to the holder hereof for the use, forbearance or detention of sums included in the amounts owing to such holder by Maker shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of this Note until payment in full so that the rate or amount of interest on account of indebtedness does not exceed the applicable usury ceiling, if any. As used in this Note, the term "applicable law" shall mean the law of the State of __________. (b) If at maturity or final payment of this Note the total amount of interest paid or accrued under the foregoing provisions is less than the total amount of interest which would have accrued if an interest rate per annum equal to the Interest Rate had at all times been in effect, then Maker agrees to pay to Payee, to the extent allowed by applicable law, an amount equal to the difference between (a) the lesser of (i) the amount of interest which would have accrued on this Note if the Highest Lawful Rate had at all times been in effect or (ii) the amount of interest which would have accrued if an interest rate per annum equal to the Interest Rate had at all times been in effect, and (b) the amount of interest accrued in accordance with the other provisions of this Note. 3. WAIVER. Maker expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of intent to accelerate the maturity hereof, notice of the acceleration of the maturity hereof, bringing of suit and diligence in taking any action to collect amounts called for hereunder and in the handling of securities at any time existing in connection herewith. 4. AMENDMENTS. Any term or provision of this Note and any obligation of Maker hereunder or with respect hereto, may be changed or modified, partially or completely, or noncompliance may be consented to or authorized, by written agreement between Maker and Payee. 5. EVENTS OF DEFAULT. The occurrence and continuance of any of the following events shall be considered an "Event of Default" for purposes of this Note: (a) if Maker uses the proceeds of this Note for any purpose other than in accordance with the terms of the Loan Program; (b) default is made (and not cured within 10 calendar days) in the payment of principal or interest hereon, (c) any involuntary case or other proceeding shall be commenced against Maker that seeks liquidation, reorganization or other relief with respect to it or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator or custodian unless dismissed or stayed within 90 days after the institution thereof (provided that upon ineffectiveness of any stays, an Event of Default shall exist); and (d) Maker shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official with respect to the Maker, or shall consent to any such relief or to the appointment of, or taking possession by, any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors or shall fail generally or shall admit in writing its inability to pay its debts generally as they become due or shall take any corporate action to authorize or effect any of the foregoing. 6. REMEDY. Upon the occurrence of any Event of Default, the entire principal amount of the Note then outstanding together with interest accrued thereon shall become immediately due and payable, all without written notice and without presentment, demand, protest, notice of protest or dishonor or any other notice of default of any kind, all of which are hereby expressly waived by the Maker. 7. COSTS AND ATTORNEYS' FEES. If default is made in the payment of this Note at maturity (regardless of how its maturity may be brought about) and the same is placed in the hands of an attorney for collection, or suit is filed hereon, or proceedings are had in bankruptcy, probate, receivership, reorganization, arrangement, or other judicial proceedings for the establishment or collection of any amount called for hereunder, or any amount payable or to be payable hereunder is collected through any such proceedings, Maker agrees to pay to the owner and holder of this Note reasonable attorneys' fees and costs, including the fees and costs incurred in any appeals, and any collection fees incurred in collection of this Note. 8. SECURITY. The payment and performance of this Note is secured by the security interest described by that certain Unit Pledge Agreement by and between Maker and Payee. 9. GOVERNING LAW. THIS NOTE AND THE RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ___________. (Name of Maker) EXHIBIT C PLEDGE AGREEMENT This PLEDGE AGREEMENT (this "Agreement"), dated as of _______________, 19___, is entered into by and between ______________________________ ("Pledgor") and Hallwood Energy Partners, L.P., a Delaware limited partnership (the "Partnership"), in order to secure the payment of the indebtedness hereinafter referred to of Pledgor to the Partnership. R E C I T A L S As a condition to the Partnership providing a loan to Pledgor in the amount of $_________, which loan is evidenced by a Promissory Note dated of even date herewith, Pledgor has agreed to pledge to the Partnership all of the securities that are described on EXHIBIT A hereto (the "Pledged Securities"). A G R E E M E N T NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. Capitalized terms used herein shall have the meaning specified herein. SECTION 2. PLEDGE. Pledgor hereby pledges, assigns, transfers and delivers to the Partnership, and hereby grants a security interest (the "Security Interest") in, the following (the "Collateral"): the Pledged Securities, the certificates representing such Pledged Securities and all dividends, cash, securities, instruments and other property from time to time paid, payable or otherwise distributed in respect of or in exchange for any or all of such Pledged Securities. SECTION 3. SECURED OBLIGATIONS. The Security Interest shall secure, under the circumstances set forth herein, the Secured Obligations. For purposes of this Agreement, the term "Secured Obligations" shall mean the following (i) the due and punctual payment and performance of the Promissory Note, dated as of _______________, made by Pledgor and payable to the order of the Partnership in the principal amount of $_______________ (the "Note") and (ii) the reimbursement of all costs incurred by the Partnership to obtain, preserve and enforce this Agreement, collect the Secured Obligations and maintain and preserve the Collateral, including without limitation the Partnership's reasonable attorneys' fees, disbursements and legal expenses. SECTION 4. DELIVERY OF COLLATERAL. Upon the execution hereof, Pledgor shall deliver to the Partnership the certificates representing or evidencing the Collateral, in suitable form for transfer by delivery, or accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Partnership. Upon the occurrence and during the continuance of an Event of Default, the Partnership shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register in the name of the Partnership any or all of the Collateral. SECTION 5. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants as follows: (i) The Security Interest constitutes a valid and, upon delivery of the certificates evidencing the Pledged Securities, first perfected security interest in all of the Collateral for payment and performance of the Secured Obligations. (ii) The Collateral is owned by Pledgor free and clear of any lien, claim or encumbrance except for the Security Interest. All representations and warranties of Pledgor contained herein shall survive the execution, delivery and performance of this Agreement until termination of this Agreement under SECTION 16. SECTION 6. FURTHER ASSURANCES. Pledgor agrees that at any time and from time to time, at Pledgor's expense, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that the Partnership may reasonably request, in order to perfect and protect the Security Interest granted or purported to be granted hereby or to enable the Partnership to exercise and enforce the rights and remedies hereunder with respect to any Collateral. SECTION 7. RELEASES OF COLLATERAL. Pledgor shall not sell or otherwise dispose of the Collateral, or any part thereof or any interest therein. If the Collateral, or any part thereof, is sold or otherwise disposed of in violation of these provisions, the Security Interest of the Partnership shall continue in such Collateral or any part thereof notwithstanding such sale or other disposition, and Pledgor will deliver any proceeds thereof to the Partnership to be held as Collateral hereunder. SECTION 8. PARTNERSHIP APPOINTED ATTORNEY-IN-FACT. Pledgor hereby irrevocably appoints the Partnership as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in its name or otherwise, from time to time in the Partnership's discretion, to take any action and to execute any instrument that the Partnership may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same, when and to the extent permitted by this Agreement. SECTION 9. PARTNERSHIP MAY PERFORM. Upon the occurrence and during the continuance of an Event of Default (including an Event of Default resulting from a failure to perform any agreement contained herein), if Pledgor fails to perform any agreement contained herein, the Partnership may itself perform, or cause performance of, such agreement, and the expenses of the Partnership incurred in connection therewith shall be payable by Pledgor under SECTION 12. SECTION 10. REASONABLE CARE. The Partnership shall have an obligation to exercise reasonable care with respect to Collateral in its possession; provided, however, that the Partnership shall be deemed to have exercised reasonable care if the Collateral is accorded treatment substantially comparable to that which the Partnership accords its own property or treatment substantially in accordance with actions requested by Pledgor in writing (although the Partnership shall not be obligated to comply with any such requests and no failure to do so shall be deemed to be a failure to exercise reasonable care). SECTION 11. EVENTS OF DEFAULT: REMEDIES UPON DEFAULT. An "Event of Default" hereunder occurs if Pledgor fails to pay any amount when due under the Note and the Partnership accelerates the payment of the principal and interest thereunder such that such Secured Obligations shall become immediately due and payable (herein called an "Event of Default"). If upon or after the occurrence of any Event of Default, the Partnership elects to exercise remedies under this Agreement (the occurrence of any such event shall be referred to as an "Acceleration"), then upon thirty (30) days' advance notice to the Pledgor: (a) The Partnership may exercise (in compliance with all applicable securities laws) in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party after default under the Uniform Commercial Code in effect in the State of ____________ at that time, and the Partnership may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, over the counter or at the Partnership's offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Partnership may deem commercially reasonable or otherwise in such manner as necessary to comply with applicable federal and state securities laws. Upon consummation of any such sale, the Partnership shall have the right to assign, transfer and deliver to the purchaser or purchasers at any such sale and such purchasers shall hold the property sold absolutely, free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that the Partnership shall not be required to register or qualify any of the Collateral under applicable state or federal securities laws in connection with any such sale if the sale is effected in a manner that complies with all applicable federal and state securities laws or exemptions therefrom. The Partnership shall be authorized at any such sale (if it deems it advisable to do so) to restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing the Collateral for their own account for investment and not with a view to the distribution or sale thereof. In the event that any such Collateral is sold at private sale, Pledgor agrees that if such Collateral is sold for a price that the Partnership in good faith believes to be reasonable under the circumstances then existing, then (a) the sale shall be deemed to be commercially reasonable in all respects, (b) Pledgor shall not be entitled to a credit against the Secured Obligations in an amount in excess of the purchase price, and (c) the Partnership shall not incur any liability or responsibility to Pledgor in connection therewith, notwithstanding the possibility that a substantially higher price might have been realized at a public sale. Pledgor hereby waives any claims against the Partnership arising by reason of the fact that the price at that the Collateral may have been sold at such private sale was less than the price which might have been obtained at a public sale or was less than the Secured Obligations, even if the Partnership accepts the first offer received and does not offer the Collateral to more than one offeree (other than the Partnership or an affiliate of the Partnership), unless such sale was not commercially reasonable under the circumstances. To the extent notice of sale shall be required by law, the Partnership shall give Pledgor at least ten (10) days' (or such longer period as shall be specified by applicable laws) notice of the time and place of any public sale or the time after which any private sale is to be made, which Pledgor agrees shall constitute commercially reasonable notification. At any such sale, the Partnership, to the extent permitted by law, may bid (which bid may be, in whole or in part, in the form of cancellation of Secured Obligations) for and purchase for the account of the Partnership the whole or any part of the Collateral. The Partnership shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Partnership may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. If sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Partnership until the sale price is paid by the purchaser or purchasers thereof, but the Partnership shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. Pledgor agrees that any sale of the Collateral conducted by the Partnership in accordance with the foregoing provisions of this SECTION 11(A) shall be deemed to be a commercially reasonable sale under the Uniform Commercial Code as in effect in the State of ____________ from time to time. As an alternative to exercising the power of sale herein conferred upon it, the Partnership may proceed by a suit or suits at law or in equity to foreclose the security interest granted under this Agreement and to sell the Collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction. (b) Any cash held by the Partnership as Collateral and all cash proceeds received by the Partnership in respect of any sale of, collection from, or other realization upon all or any part of the Collateral (i) prior to the occurrence of an Acceleration shall be held by the Partnership as collateral for the Note, and (ii) following the occurrence of an Acceleration may be held by the Partnership as Collateral and/or then or at any time thereafter applied as follows: (x) first, to the payment to the Partnership of the costs and expenses of retaking, holding and preparing for sale of the Collateral and any other fees, expenses, claims, demands, losses, judgments, damages and liabilities arising out of or related to any loan document which are payable to the Partnership pursuant to SECTION 12, and (y) second, to the Partnership for application against or on account of all or any part of the Notes. (c) Any surplus of such cash or cash proceeds held by the Partnership and remaining after payment in full of all the Notes shall be reassigned and redelivered as provided in SECTION 16 hereof. SECTION 12. EXPENSES. The Partnership shall be entitled to receive from any proceeds of the Collateral, the amount of any and all reasonable expenses, including the fees and expenses of its counsel and of any experts and agents which the Partnership may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Partnership hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. SECTION 13. SECURITY INTEREST ABSOLUTE. All rights of the Partnership hereunder, the interest, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of the Note or the Secured Obligations or any other agreement or instrument relating to the Note or the Secured Obligations; (ii) any change in the time, manner or place of payment of, or in any other term of, the Note or the Secured Obligations, or any renewal or extension of the Note or the Secured Obligations or any other amendment or waiver of or any consent to any departure from this Agreement or any other agreement or instrument; (iii) any sale, exchange, release or nonperfection of any other collateral, or any release of any guarantor or any person liable in any manner for the collection of the Note or the Secured Obligations, or any amendment or waiver of or consent to or departure from any guaranty, for the Note or the Secured Obligations; or (iv) any other circumstance that might otherwise constitute a defense available to, or a discharge of, Pledgor in respect of the Note or the Secured Obligations or in respect of this Agreement. SECTION 14. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Partnership and Pledgor, and then such waiver or consent shall be effective only for the specific purpose for which given. SECTION 15. TIME IS OF THE ESSENCE; NO WAIVER: CUMULATIVE REMEDIES. Time and exactitude of each of the terms, obligations, covenants and conditions of this Agreement are hereby declared to be of the essence. No failure on the part of the Partnership to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy by the Partnership preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. SECTION 16. TERMINATION. This Agreement shall terminate upon the payment in full of the Secured Obligations. Upon such termination, the Partnership shall reassign and redeliver (or cause to be reassigned and redelivered) to Pledgor, or to such person or persons as Pledgor shall designate or to whomever may be lawfully entitled to receive such surplus, against receipt, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Partnership pursuant to the terms hereof and shall still be held by it hereunder, together with appropriate instruments of reassignment and release. Any such reassignment shall be without recourse upon or warranty by the Partnership and at the expense of Pledgor. SECTION 17. ADDRESSES FOR NOTICES. Any notice or communication to be given or made hereunder shall be in writing (including facsimile communication) and may be given or made personally or by first class letter, telecopy, courier telex or tested telex, telegram or cable (confirmed, in the case of a telecopy, telex, telegram or cable, by a letter delivered personally within, or dispatched by first class mall within, twenty-four hours of the dispatch of such telecopy, telex, telegram or cable) and shall be effective when actually received. For the purposes hereof, the address of the Pledgor shall be address maintained in the records of the Partnership (until notice of a change thereof is given as provided in this SECTION 17), and the address of the Partnership (until notice of a change thereof is given as provided in this SECTION 17) shall be as follows: SECTION 18. CONTINUING SECURITY INTEREST; ASSIGNMENTS. This Agreement shall create a continuing security interest in the Collateral and shall (i) remain in full force and effect until termination as provided in SECTION 16, (ii) be binding upon Pledgor, the Partnership and their respective successors and assigns, and (iii) inure, together with the rights, powers and remedies of Pledgor and the Partnership hereunder, to the benefit of Pledgor, the Partnership and their respective successors, transferees and assigns, as the case may be. SECTION 19. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF __________. SECTION 20. SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective. If any provisions of this Agreement or any lien, security interest or other right of the Partnership hereunder shall be held to be invalid, illegal or unenforceable under applicable law, such invalidity, illegality or unenforceability shall not affect any other provision herein or any lien, security interest or other right granted hereby. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the date first above written. PARTNERSHIP: HALLWOOD ENERGY PARTNERS, L.P. By: Hallwood Energy Corporation By: Name: Title: PLEDGOR: Print Name: EXHIBIT A PLEDGED SECURITIES Record Owner Number of Title of Securities and Address Shares or Units Certificate No. EXHIBIT D This form is applicable to FREEHOLDS and LEASEHOLDS whether the title is registered or unregistered and whether given by one or more than one Mortgagor. This Legal Charge made the day of 19 Between (1) (Insert full name(s) and address(es) of the Mortgagor(s)) (hereinafter called "the Mortgagor") and (2) (hereinafter called "the Bank") Witnesses and it is agreed and declared as follows:-- 1. The Mortgagor hereby covenants with the Bank that the Mortgagor will on demand in writing made to the Mortgagor pay or discharge to the Bank all moneys and liabilities which shall for the time being (and whether on or at any time after such demand) be due owing or incurred to the Bank by the Mortgagor whether actually or contingently and whether solely or jointly with any other person and whether as principal or surety including interest discount commission or other lawful charges and expenses which the Bank may in the course of its business charge in respect of any of the matters aforesaid or for keeping the Mortgagor's account and so that interest shall be computed and compounded according to the usual mode of the Bank as well after as before any demand made or judgment obtained hereunder and will on such demand also retire all bills or notes which may for the time being be under discount with the Bank and to which the Mortgagor is a party whether as drawer acceptor maker or indorser without any deduction whatsoever. 2. The Mortgagor as Beneficial Owner hereby charges by way of legal mortgage ALL THAT the property referred to in the schedule hereto (hereinafter called "the Mortgaged Property") with the payment or discharge of all moneys and liabilities hereby covenanted to be paid or discharged by the Mortgagor. 3. A demand for payment or any other demand or notice under this security may be made or given by any manager or officer of the Bank or of any branch thereof by letter addressed to the Mortgagor and sent by post to or left at the last known place of business or abode of the Mortgagor or at the option of the Bank if the Mortgagor is a company its registered office and if sent by post shall be deemed to have been made or given at noon on the day following the day the letter was posted. 4. During the continuance of this security no statutory or other power of granting or agreeing to grant or of accepting or agreeing to accept surrenders of leases or tenancies of the Mortgaged Property or any part thereof shall be capable of being exercised by the Mortgagor without the previous consent in writing of the Bank nor shall section 93 of the Law of Property Act 1925 dealing with the consolidation of mortgages apply to this security. 5. Section 103 of the said Act shall not apply to this security but the statutory power of sale shall as between the Bank and a purchaser from the Bank arise on and be exercisable at any time after the execution of this security provided that the Bank shall not exercise the said power of sale until payment of the moneys hereby secured has been demanded but this proviso shall not affect a purchaser or put him upon inquiry whether such demand has been made. 6. (a) At any time after the Bank shall have demanded payment of any moneys hereby secured or if requested by the Mortgagor the Bank may appoint by writing any person or persons (whether an officer of the Bank or not) to be receiver and manager or receivers and managers (hereinafter called the "Receiver" which expression shall where the context so admits include the plural and any substituted receiver and manager or receivers and managers) of all or any part of the Mortgaged Property. (b) The Bank may from time to time determine the remuneration of the Receiver and may remove the Receiver and appoint another in his place. (c) The Receiver shall (so far as the law permits) be the agent of the Mortgagor (who shall alone be personally liable for his acts defaults and remuneration) and shall have and be entitled to exercise all powers conferred by the Law of Property Act 1925 in the same way as if the Receiver had been duly appointed thereunder and in particular by way of addition to but without hereby limiting any general powers hereinbefore referred to (and without prejudice to any of the Bank's powers) the Receiver shall have power in the name of the Mortgagor or otherwise to do the following things namely:-- (i) to take possession of collect and get in all or any part of the Mortgaged Property and for that purpose to take any proceedings as he shall think fit; (ii) to commence and/or complete any building operations on the Mortgaged Property or any part thereof and to apply for and obtain any planning permissions building regulation approvals and any other permissions consents or licences in each case as he may in his absolute discretion think fit; (iii) to raise money from the Bank or others on the security of the Mortgaged Property or otherwise; (iv) to provide such facilities and services for tenants and generally to manage the Mortgaged Property in such manner as he shall think fit; (v) if the Mortgaged Property is leasehold to vary the terms of or surrender any lease and/or to take a new lease thereof or of any part thereof on such terms as he shall think fit and so that any such new lease shall ipso facto become charged to the Bank on the terms hereof so far as applicable and to execute a formal legal charge over any such new lease in favour of the Bank in such form as it may require; (vi) to sell let or lease or concur in selling letting or leasing and to vary the terms of terminate or accept surrenders of leases or tenancies of the Mortgaged Property or any part thereof in such manner and for such term with or without a premium with such rights relating to other parts thereof and containing such covenants on the part of the Mortgagor and generally on such terms and conditions (including the payment of money to a lessee or tenant on a surrender) as in his absolute discretion he shall think fit; (vii) to make any arrangement or compromise which the Bank or he shall think fit; (viii) to make and effect all repairs improvements and insurances; (ix) to appoint managers officers contractors and agents for the aforesaid purposes upon such terms as to remuneration or otherwise as he may determine; (x) to do all such other acts and things as may be considered to be incidental or conducive to any of the matters or powers aforesaid and which he lawfully may or can do; PROVIDE NEVERTHELESS THAT the Receiver shall not be authorised to exercise any of the aforesaid powers if and insofar and so long as the bank shall in writing exclude the same whether in or at the time of his appointment or subsequently. (d) The statutory powers of sale leasing and accepting surrenders exercisable by the Bank hereunder are hereby extended so as to authorise the Bank whether in its own name or in that of the Mortgagor to grant a lease or leases of the whole or any part or parts of the Mortgaged Property with such rights relating to other parts thereof and containing such covenants on the part of the Mortgagor and generally on such terms and conditions (including the payment of money to a lessee or tenant on a surrender) and whether or not at a premium as the Bank in its absolute discretion shall think fit. (e) In no circumstances shall the Bank be liable to account to the Mortgagor as a mortgagee in possession or otherwise for any moneys not actually received by the Bank. (f) The Mortgagor hereby irrevocably appoints the Bank and the Receiver jointly and also severally the Attorney and Attorneys of the Mortgagor for the Mortgagor and in his name and on his behalf and as his act and deed or otherwise to sign seal deliver and otherwise perfect any deed assurance agreement instrument or act which may be required or may be deemed proper for any of the purposes aforesaid. (g) All powers of the Receiver hereunder may be exercised by the Bank whether as attorney of the Mortgagor or otherwise. 7. The Mortgagor hereby covenants with the Bank that the Mortgagor during the continuance of this security will keep all buildings now or for the time being subject to this security insured against loss or damage by fire and such other risks as the Bank may from time to time require to the full replacement value thereof with an insurance office or underwriters approved by the Bank in writing from time to time and if so required by the Bank in the joint names of the Mortgagor and the Bank and will duly pay all premiums and other moneys necessary for effecting and keeping up such insurance within one week of the same becoming due and will on demand produce to the Bank the policies of such insurance and the receipts for such payments And will keep all buildings now or for the time being subject to this security in good repair And will duly and with reasonable expedition complete any building operations commenced at any time by the Mortgagor on the Mortgaged Property And at any time after payment of the moneys hereby secured has been demanded or if default shall be made by the mortgagor in performing any of the above obligations the Bank may as the case may be insure and keep insured the said buildings in any sum which the Bank may think expedient or may repair and keep in repair the said buildings or may complete any such building operations (with power to enter upon the Mortgaged Property for any of those purposes without thereby becoming a mortgagee in possession) And all moneys expended by the Bank under this provision shall be deemed to be properly paid by the Bank. 8. All moneys received on any insurance whatsoever in respect of loss or damage by fire or otherwise to the said buildings or any part of thereof (whether effected or maintained by the Mortgagor in pursuance of his obligation under the covenant in that behalf contained in clause 7 hereof or independently of or otherwise than in pursuance of such obligation) shall as the Bank requires either be applied in making good the loss or damage in respect of which the moneys are received or be paid to the Bank in or towards payment of the moneys for the time being hereby secured. 9. All costs charges and expenses incurred hereunder by the Bank and all other moneys paid by the Bank or the Receiver in perfecting or otherwise in connection with this security or in respect of the Mortgaged Property including (without prejudice to the generality of the foregoing) all moneys expended by the Bank under clause 7 hereof and all costs of the Bank or the Receiver of all proceedings for enforcement of the security hereby constituted or for obtaining payment of the moneys hereby secured or arising out of or in connection with the acts authorised by clause 6 hereof (and so that any taxation of the Banks costs charges and expenses shall be on the basis of solicitor and own client) shall be recoverable from the Mortgagor as a debt and may be debited to any account of the Mortgagor and shall bear interest accordingly and shall be charged on the Mortgaged Property and the charge hereby conferred shall be in addition and without prejudice to any and every other remedy lien or security which the Bank may have or but for the said charge would have for the moneys hereby secured or any part thereof. 10. The Bank shall be at liberty from time to time to give time for payment of any bills of exchange promissory notes or other securities which may have been discounted for or received on account from the Mortgagor by the Bank or on which the Mortgagor shall or may be liable as drawer acceptor maker indorser or otherwise to any parties liable thereon or thereto as the Bank in its absolute discretion shall think fit without releasing the Mortgagor or affecting the Mortgagor's liability under these presents or the security thereby created. 11. This security shall be a continuing security to the Bank notwithstanding any settlement of account or other matter or thing whatsoever and shall not prejudice or affect any security which may have been created by any deposit of title deeds or other documents which may have been made with the Bank prior to the execution hereof relating to the Mortgaged Property or to any other property or any other security which the Bank may now or at any time hereafter hold in respect of the moneys hereby secured or any of them or any part thereof respectively. 12. The Bank shall on receiving notice that the Mortgagor has incumbered or disposed of the Mortgaged Property or any part thereof be entitled to close the Mortgagor's then current account or accounts and to open a new account or accounts with the Mortgagor and (without prejudice to any right of the Bank to combine accounts) no money paid in or carried to the Mortgagor's credit in any such new account shall be appropriated towards or have the effect of discharging any part of the amount due to the Bank on any such closed account. If the Bank does not open a new account or accounts immediately on receipt of such notice it shall nevertheless be treated as if it had done so at the time when it received such notice and as from that time all payments made by the Mortgagor to the Bank shall be credited or be treated as having been credited to such new account or accounts and shall not operate to reduce the amount due from the Mortgagor to the Bank at the time when it received such notice. 13. At any time after payment of the moneys hereby secured has been demanded and any part thereof remains unpaid the Bank may as agent of the Mortgagor remove and sell any chattels on the Mortgaged Property and the new proceeds of sale thereof shall be paid to the Mortgagor on demand and the Bank shall not have the right to retain or set off such proceeds of sale against any indebtedness of the Mortgagor. 14. The Mortgagor hereby covenants with the Bank to pay any sums which may become payable by the Mortgagor under the Agricultural Holdings Act 1986 for compensation costs or otherwise to a tenant of the Mortgaged Property or any part thereof failing which the Bank may pay the said sum or discharge and charge created in pursuance of the said Act for securing the same and any moneys paid by the Bank under this clause shall be deemed to be expenses properly incurred by the Bank hereunder. 15. The Mortgagor hereby covenants with the Bank that: (a) if and so long as the title to the Mortgaged Property or any part thereof is not registered under the Land Registration Acts 1925 to 1971 no person shall during the continuance of this security be registered under the said Acts as proprietor of the Mortgaged Property or any part thereof without the consent in writing of the Bank. (b) upon any such registration the Mortgagor will forthwith deliver to the Bank all Land Certificates relating to the Mortgaged Property unless such certificates are deposited with the Land Registry. 16. Any party hereto which is a company certifies that this charge does not contravene any of the provisions of its Memorandum and Articles of Association. 17. In these presents where the context so admits the expression "the Mortgagor" shall include persons deriving title under the Mortgagor or entitled to redeem this security and the expression "the Bank" shall include persons deriving title under the Bank and any reference herein to any statute or section of any statute shall be deemed to include reference to any statutory modification or re-enactment thereof for the time being in force. 18. If there are two or more parties hereto of the first part the expression "the Mortgagor" shall throughout mean and include such two or more parties and each of them or (as the case may require) such two or more parties or any of them and shall so far as the context admits be construed as well in the plural as in the singular and all covenants charges agreements and undertakings herein expressed or implied on the part of the Mortgagor shall be deemed to be joint and several covenants charges agreements and undertakings by such parties And in particular this security and the covenant in clause 1 hereof and the remaining covenants charges agreements and undertakings herein contained shall extend and apply to any moneys owing or liabilities incurred by any of such parties to the Bank whether solely or jointly with each other or with any other person and references to the Mortgagor in relation to the retirement of bills and in clauses 3, 9, 10 and 12 shall mean and include any one or more of such parties as well as such parties jointly. In Witness whereof the Mortgagor has executed these presents as a deed the day and year first above written. The Schedule above referred to The property known as or being comprised in the document(s) particulars of which are set out below:-- Description (Conveyance, Lease, Assignment, Date Mortgage, Assent, Etc.) Parties Last Certificate(s) Title No.(s) County/London Borough Signed sealed and delivered by the above named - -------------------------------------------------------------------------------- in the presence of SIGNATURE OF WITNESS--------------------------------------------------- NAME OF WITNESS----------------------------------------------------------SEAL ADDRESS------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OCCUPATION-------------------------------------------------------------------- Signed sealed and delivered by the above named - -------------------------------------------------------------------------------- in the presence of SIGNATURE OF WITNESS--------------------------------------------------- NAME OF WITNESS----------------------------------------------------------SEAL ADDRESS------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OCCUPATION-------------------------------------------------------------------- EXECUTED AND DELIVERED AS A DEED BY - ------------------------------------------------------------------------- DIRECTOR - -----------------------------------------------------------------------SECRETARY Company's registered number--------------------------------------------------- The address of the Bank for service (if title is registered) is: -----END PRIVACY-ENHANCED MESSAGE-----