-----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, DvFL655Mbw8eW7YVA2Qi6/RiR7Nxho8WYnGkqAPQyECVDwLgKZSmODS1ZQoqDHY1 QH8Qaq4DL5U0BpQxsYU3Bg== 0000883953-98-000002.txt : 19980306 0000883953-98-000002.hdr.sgml : 19980306 ACCESSION NUMBER: 0000883953-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980305 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HALLWOOD CONSOLIDATED RESOURCES CORP CENTRAL INDEX KEY: 0000883953 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841176750 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19931 FILM NUMBER: 98558200 BUSINESS ADDRESS: STREET 1: 4582 S ULSTER ST PKWY STREET 2: STE 1700 CITY: DENVER STATE: CO ZIP: 80237 BUSINESS PHONE: 3038507373 MAIL ADDRESS: STREET 1: 4582 SOUTH ULSTER STREET PKWY STE 1700 CITY: DENVER STATE: CO ZIP: 80237 10-K405 1 HCRC 12/31/97 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 For the Fiscal Year Ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-19931 HALLWOOD CONSOLIDATED RESOURCES CORPORATION (Exact name of registrant as specified in its charter) Delaware 84-1176750 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4582 South Ulster Street Parkway Suite 1700 Denver, Colorado 80237 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 850-7373 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange None on which registered None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 27, 1998 was approximately $24,581,000. Shares of Common Stock outstanding at February 27, 1998: 3,001,352 Shares. Page 1 of 51 PART I ITEM 1 - BUSINESS Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a Delaware corporation engaged in the development, production and sale of oil and gas, and in the acquisition, exploration, development and operation of oil and gas properties. The principal objective of HCRC is to maximize shareholder value by increasing its reserves, production and cash flow through a balanced program of development and high potential exploration drilling, as well as selective acquisitions. The Company's properties are primarily located in West Texas, South Louisiana, New Mexico and Kansas. HCRC does not engage in any other line of business. Officers and Key Employees HCRC does not have any employees. Hallwood Petroleum, Inc. ("HPI"), an affiliate of HCRC, operates the properties and administers the day to day activities of HCRC and its affiliates. On February 27, 1998, HPI had 123 employees. Following are brief biographies of the officers and key employees of HCRC and HPI. William L. Guzzetti, 54, has been President and a director of HCRC since May 1991 and of HPI since October 1989, and a director of HPI since August 1989. Mr. Guzzetti is also an Executive Vice President of Hallwood Group and in that capacity may devote a portion of his time to the activities of Hallwood Group, including the management of real estate investments, acquisitions and restructurings of entities controlled by Hallwood Group. He is a director and President of Hallwood Realty and in that capacity may devote a portion of his time to the activities of Hallwood Realty. Russell P. Meduna, 43, has served as Executive Vice President of HCRC since June 1992 and of HPI since October 1989. Mr. Meduna was Vice President of HPI from April 1989 to October 1989 and Manager of Operations from January 1989 to April 1989. He joined HPI in 1984 as Production Manager. Prior to joining HPI, he was employed by both major and independent oil companies. Mr. Meduna is a registered professional engineer in the States of Colorado and Texas. Cathleen M. Osborn, 45, has served as Secretary and General Counsel of HCRC since May 1992 and as Vice President since June 1992. She has been Vice President, Secretary and General Counsel of HPI since September 1986. She joined HPI in 1985 as senior staff attorney. Ms. Osborn is a member of the Colorado Bar Association. Robert S. Pfeiffer, 41, has served as Vice President of HCRC since June 1992 and of HPI since August 1986. Mr. Pfeiffer became Chief Financial Officer of HCRC and HPI in June 1994. He joined and HPI in 1984. From July 1979 to May 1984, he was employed by Price Waterhouse as a senior accountant. Mr. Pfeiffer is a member of the American Institute of Certified Public Accountants and the Colorado Society of Certified Public Accountants. Mr. Pfeiffer resigned his positions with HCRC and its affiliates effective March 6, 1998. Betty J. Dieter, 50, has been Vice President of HPI responsible for domestic operations since January 1995. Her previous positions with HPI have included Operations Manager, Rocky Mountain and Mid-Continent District Manager and Manager for Operations Accounting and Administration. She joined HPI in 1985, and has 25 years experience in accounting and operations, 18 of which are in the oil and gas industry. Ms. Dieter is a Certified Public Accountant. George Brinkworth, 56 has been Vice President-Exploration of HPI since August 1994. He became associated with HPI in 1987 when he was President of a joint venture program funded by HPI and two other domestic oil companies. Mr. Brinkworth has 33 years experience with various exploration and production companies, including previous responsibility for operations in the United Kingdom, Spain, Morocco, Egypt and Indonesia. He is a registered geophysicist in the State of California. William H. Marble, 47, has served as Vice President of HPI since December 1990. His previous positions with HPI have included Texas/Gulf Coast District Manager, Manager of Nonoperated Properties and Chief Engineer. He joined a predecessor general partner of the Partnership in 1984. Mr. Marble is a registered engineer in the State of Colorado and has 23 years oil and gas engineering experience. Marketing The oil and gas produced from the properties owned by HCRC has typically been marketed through normal channels for such products. Oil is generally sold to purchasers at field prices posted by the principal purchasers of crude oil in the areas where the producing properties are located. In response to the volatility in the oil markets, HCRC entered into financial contracts for hedging the price of 14% of its estimated oil production for 1998 and 5% for 1999. The majority of HCRC's gas production is sold on the spot market and is transported in intrastate and interstate pipelines. HCRC has entered into financial contracts for hedging the price of between 5% and 31% of its estimated gas production for 1998 through 2001. The purpose of the hedges is to provide protection against price decreases and to provide a measure of stability in the volatile environment of oil and natural gas spot pricing. The amounts received or paid upon settlement of these contracts are recognized as revenue at the time the hedged volumes are sold. Both oil and natural gas are purchased by refineries, major oil companies, public utilities, industrial customers and other users and processors of petroleum products. HCRC is not confined to, nor dependent upon, any one purchaser or small group of purchasers. Accordingly, the loss of a single purchaser, or a few purchasers, would not materially affect HCRC's business because there are numerous purchasers in the areas in which HCRC sells it production. However, for the years ended December 31, 1997, 1996 and 1995, purchases by the following companies exceeded 10% of the total oil and gas revenues of HCRC: 1997 1996 1995 El Paso Field Services 17% 11% Williams Gas Marketing 13% Koch Oil Company 23% 27% Conoco Inc. 13% 14% Scurlock Permian Corporation 14% Factors, if they were to occur, which might adversely affect HCRC include decreases in oil and gas prices, the reduced availability of a market for production, rising operating costs of producing oil and gas, compliance with and changes in environmental control statutes and increasing costs and difficulties of transportation. Competition HCRC encounters competition from other oil and gas companies in all areas of its operations, including the acquisition of exploratory prospects and proven properties. The Company's competitors include major integrated oil and gas companies and numerous independent oil and gas companies, individuals and drilling income programs. As described under "Marketing," production is sold on the spot market, thereby reducing sales competition. Moreover, oil and gas must compete with coal, atomic energy, hydro-electric power and other forms of energy. Regulation Production and sale of oil and gas are subject to federal and state governmental regulations in a variety of ways including environmental regulations, labor laws, interstate sales, excise taxes and federal and Indian lands royalty payments. Failure to comply with these regulations may result in fines, cancellation of licenses to do business and cancellation of federal, state or Indian leases. The production of oil and gas is subject to regulation by the state regulatory agencies in the states in which HCRC does business. These agencies make and enforce regulations to prevent waste of oil and gas and to protect the rights of owners to produce oil and gas from a common reservoir. The regulatory agencies regulate the amount of oil and gas produced by assigning allowable production rates to wells capable of producing oil and gas. Environmental Considerations The exploration for, and development of, oil and gas involves the extraction, production and transportation of materials which, under certain conditions, can be hazardous or can cause environmental pollution problems. In light of the current interest in environmental matters, HCRC cannot predict the effect of possible future public or private action on its business. HCRC is continually taking actions it believes are necessary in its operations to ensure conformity with applicable federal, state and local environmental regulations. As of December 31, 1997, HCRC has not been fined or cited for any environmental violations which would have a material adverse effect upon capital expenditures, earnings or the competitive position of HCRC in the oil and gas industry. Insurance Coverage HCRC is subject to all the risks inherent in the exploration for, and development of, oil and gas, including blowouts, fires and other casualties. HCRC maintains insurance coverage as is customary for entities of a similar size engaged in operations similar to that of HCRC, but losses can occur from uninsurable risks or in amounts in excess of existing insurance coverage. The occurrence of an event which is not insured or not fully insured could have an adverse impact upon HCRC's earnings, cash flows and financial position. Issues Related to the Year 2000 As the year 2000 approaches, there are uncertainties concerning whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or fail. Because of the nature of the oil and gas industry and the necessity for the Company to make reserve estimates and other plans well beyond the year 2000, the Company's computer systems and software were already configured to accommodate dates beyond the year 2000. The Company believes that the year 2000 will not pose significant operational problems for the Company's computer systems. The Company has not yet completed its assessment of all of its systems, or the computer systems of third parties with which it deals, and while it is not possible at this time to assess the effect of a third party's inability to adequately address year 2000 issues the Company does not believe the potential problems associated with the year 2000 will have a material effect on its financial position. ITEM 2 - PROPERTIES Exploration and Development Projects In 1997, HCRC incurred $12,106,000 in direct property additions and exploration and development costs. The costs were comprised of approximately $9,284,000 for domestic exploration and development expenditures and approximately $2,822,000 for property acquisitions. In 1997, HCRC participated in approximately 98 drilling or recompletion projects, the highlights of which are discussed below. HCRC's 1997 capital program led to the replacement, including revisions to prior year reserves, of 107% of 1997 production. Sales of reserves in place in 1997, which were approximately 1% of 1997 production, were excluded from this calculation. Approximately $2,061,000 of the 1997 capital expenditures were for land and seismic data anticipated to yield prospects for 1998 and subsequent years. Property Sales During 1997, HCRC received approximately $40,000 for the sale of 50 nonstrategic properties located in eight states. Capital Projects Greater Permian Region HCRC expended approximately $5,535,000 of its capital budget on the Greater Permian Region located in Texas and Southeast New Mexico. During 1997, HCRC spent approximately $3,755,000 drilling 29 development wells and 26 exploration wells and acquiring undeveloped acreage and geological and geophysical data. Of the wells drilled, 39 (71%) were successful. A discussion of several of the larger projects within the Region follows. HCRC spent approximately $275,000 successfully recompleting two wells, drilling one successful development well, and drilling two unsuccessful exploration wells in the Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico. HCRC spent approximately $260,000 to drill six exploration and three development wells in the nonoperated Merkle Project in Jones, Taylor, and Nolan Counties, Texas. Five wells were successful. Based on the success in the nonoperated Merkle area, HCRC acquired 74 additional square miles of proprietary 3-D seismic data adjacent to the non-operated area. In 1997, HCRC incurred approximately $730,000 acquiring acreage and drilling 10 exploration wells, seven of which were successful. HCRC purchased an interest in proprietary 3-D seismic data and selected acreage within an 85 square mile area, referred to as the Griffin Project, for approximately $495,000. In 1997, HCRC drilled one successful and one unsuccessful exploratory well in the area for approximately $425,000. HCRC is currently participating in the drilling of one exploration well and incurred approximately $120,000 through December 31, 1997. HCRC spent approximately $850,000 drilling two exploration wells and nine development wells in the Spraberry area of West Texas. Of the wells drilled, eight (73%) are successful. In July, HCRC acquired additional interests in 34 of its existing wells in the area for approximately $510,000. In 1997, HCRC continued to devote capital resources to the East Keystone area in Winkler County, Texas. HCRC spent approximately $380,000 drilling 14 development wells with a success rate of 100%. Rocky Mountain Region HCRC expended approximately $2,205,000 of its capital budget in the Rocky Mountain Region located in Colorado, Montana, North Dakota, Northwest New Mexico and Wyoming. During 1997, HCRC drilled or participated in the drilling or recompletion of 17 wells, seven which were successful. A description of the Region's major projects follows. In the San Juan Basin in LaPlata County, Colorado and Rio Arriba County, New Mexico, HCRC has an interest in 34 wells owned by a special purpose entity owned by a large east coast financial institution. During 1997, seven successful recompletions were performed and one successful exploration well. This work and other activity in the San Juan region have yielded significant upward revisions to HCRC's reserve base. HCRC incurred approximately $205,000 on four recompletion attempts in San Juan County, New Mexico, two of which were successful. In addition, HCRC purchased additional interests in existing wells in the area for $70,000. In the Lone Tree area of Montana, HCRC drilled two exploration wells and three development wells for a cost of approximately $85,000. Two of the development wells and one of the exploration wells were successful. The Hudson Ranch project is a multi-objective exploration project generated from 120 miles of 2-D proprietary seismic data. HCRC's 1997 costs for the project are approximately $340,000. A 3-D seismic data acquisition program is underway, and exploratory drilling is anticipated to begin in 1998. HCRC also participated in the drilling of an 11,500 feet exploration well in the Beach Field of North Dakota. HCRC incurred approximately $215,000 for participation in this successful well. Expenditures in various other areas of the region were approximately $455,000 for drilling two unsuccessful exploration wells and one successful development well. Gulf Coast Region HCRC expended approximately $1,480,000 of its capital budget in the Gulf Coast Region in Louisiana and South and East Texas. During 1997, HCRC spent approximately $945,000 on two unsuccessful exploration attempts, one unsuccessful development well, and one successful development well. Repairs and successful workovers on wells in the Scott Field cost HCRC approximately $230,000. HCRC also incurred approximately $145,000 on miscellaneous projects within the Region for land and geological data. Mid-Continent and Other Areas The remaining $2,886,000 of HCRC's 1997 capital budget was devoted to projects in Kansas, Oklahoma and all other areas. In 1997, HCRC incurred $890,000 for land, geological data and drilling costs for 15 development wells and six exploration wells. Of the wells drilled, 17 (81%) were successful. A description of the major projects follow. HCRC is participating in an exploration prospect in Carter County, Oklahoma. This project is a 19,000 feet deep multi-formation structural test and is currently in the completion phase. The drilling and land costs to HCRC are approximately $355,000. In 1997, HCRC entered into an agreement with another operator to participate in an 8,500 feet deep Spiro/Foster test well in LeFlore County, Oklahoma. The well was a success and cost HCRC approximately $265,000. HCRC also purchased additional interests in eight existing Kansas properties for approximately $110,000. Projects begun in the fourth quarter of 1996 have cost HCRC approximately $525,000 in 1997. These costs are primarily for work in the Gulf Coast Region and in the Greater Permian Region. Miscellaneous land and geological and geophysical data acquired in 1997 cost HCRC approximately $690,000. In September 1997, HCRC and an unaffiliated partner were awarded a deep-water exploration block offshore of northern Peru. Its partner is proceeding with a 1,200 mile seismic program to further evaluate the project. HCRC's partner, a major oil company, is the operator, and HCRC has a carried interest until drilling begins. For 1998, HCRC's capital budget, which will be paid from cash generated from operations, cash on hand and borrowings under HCRC's line of credit, has been set at $21,400,000. HCRC's plans include projects in Texas, New Mexico, Colorado, North Dakota, and Montana. Company Reserves, Production and Discussion by Significant Regions The following table presents the December 31, 1997 reserve data by significant regions.
Present Value of Proved Reserve Quantities Estimated Future Net Cash Flows Proved Proved Mcf of Gas Bbls of Oil Undeveloped Developed Total (In thousands) Greater Permian Region 31,812 2,527 $ 810 $ 27,751 $ 28,561 Gulf Coast Region 9,986 223 118 20,662 20,780 Rocky Mountain Region 32,172 724 377 29,600 29,977 Mid-Continent Region 1,074 2,029 397 6,642 7,039 Other 531 22 59 1,584 1,643 ------ ----- ------ ------- ------- 75,575 5,525 $1,761 $86,239 $88,000 ====== ===== ====== ======= =======
The present value of estimated future net cash flows is calculated using year end average oil and gas prices. At December 31, 1997, oil and gas prices averaged $16.77 per bbl of oil and $2.20 per mcf of gas. If average oil and gas prices as of February 27, 1998 of $15.57 per bbl and $2.00 per mcf of gas had been used in this calculation, the present value of estimated future net cash flows would have been approximately 16% lower. The following table presents the oil and gas production for significant regions.
Production for the Production for the Year Ended 1997 Year Ended 1996 Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil (In thousands) Greater Permian Region 1,719 308 1,712 376 Gulf Coast Region 1,875 64 2,269 73 Rocky Mountain Region 3,977 107 3,899 153 Mid-Continent Region 234 214 270 223 Other 158 18 130 12 ----- --- ----- ---- 7,963 711 8,280 837 ===== === ===== ====
The following table presents the Company's extensions and discoveries by significant regions.
For the Year Ended 1997 For the Year Ended 1996 Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil (In thousands) Greater Permian Region 529 238 710 424 Gulf Coast Region 295 21 33 3 Rocky Mountain Region 1,756 234 792 34 Mid-Continent Region 43 237 Other 314 26 175 30 ----- --- ----- ---- 2,894 562 1,947 491 ===== === ===== ====
A description of the Company's properties by region follows. Greater Permian Region HCRC has significant interests in the Greater Permian Region, which includes West Texas and Southeast New Mexico. In this Region, HCRC has interests in 444 (376 of which are operated) productive oil and gas wells, 38 operated shut-in oil and gas wells and 15 (14 operated) salt water disposal wells or injection wells. During 1997, HCRC drilled or recompleted 55 wells, 39 of which were successful. The following is a description of the significant areas within the Greater Permian Region. Carlsbad/Catclaw Area. HCRC's interests in the Carlsbad/Catclaw Area as of December 31, 1997 consisted of 61 producing wells that produce primarily natural gas and are located on the northwestern edge of the Delaware Basin in Lea, Eddy and Chaves Counties, New Mexico. HPI operates 40 of these wells. The wells produce at depths ranging from approximately 2,500 feet to 14,000 feet from the Delaware, Atoka, Bone Springs and Morrow formations. During 1997, HCRC participated in the drilling or recompletion of five wells, three of which were successful. HCRC has future plans for six additional projects in this area. East Keystone Area. HCRC's interest in the East Keystone Area as of December 31, 1997 consisted of 54 producing wells, 38 of which are operated by HPI, in Winkler County, Texas. The primary focus of this area is the development of the Holt and San Andreas formations at a depth of 5,100 feet. During 1997, HCRC had 14 development projects, all of which were successful. HCRC's future development plans include five projects in this area. Merkle Area. HCRC's nonoperated interest in the Merkle Area includes 10 square miles of proprietary seismic data in Jones, Nolan and Taylor Counties, Texas, which was acquired in 1995. HCRC's focus in this area is exploration of the Canyon, Strawn and Ellenberger formations at depths of 3,500 to 6,500 feet. In 1997, HCRC participated in the drilling and recompletion of six exploration and three development wells, five of which were successful. Based on its success in the nonoperated Merkle Area, HCRC acquired 74 additional miles of proprietary 3-D seismic data adjacent to the nonoperated area. In 1997, HCRC drilled ten exploration wells in the area, seven of which were successful. All of these wells are operated by HPI. Future plans for this area include drilling 22 exploration wells, with possible additional locations contingent upon continued exploration success. Spraberry Area HCRC's interests in the Spraberry Area consist of 345 producing wells, 11 salt water disposal wells and 29 shut-in wells in Dawson, Upton, Reagan and Irion Counties, Texas. HPI operates 385 of these wells. Most of the current production from the wells is from the Upper and Lower Spraberry, Clearfork Canyon, Dean and Fusselman formations at depths ranging from 5,000 feet to 9,000 feet. During 1997, HCRC drilled or recompleted 11 wells, eight of which were successful. Future plans for this area include 20 development wells and workovers and additional projects contingent upon future evaluation. Gulf Coast Region HCRC has significant interests in the Gulf Coast Region in Louisiana and South and East Texas. HCRC's most significant interest in the Gulf Coast Region consists of 10 producing gas wells, one shut-in gas well and six salt water disposal wells located in Lafayette Parish, Louisiana. The wells produce principally from the Bol Mex formations at 13,500 to 14,500 feet and are operated by HPI. The two most significant wells in the area are the A.L. Boudreaux #1 and the G.S. Boudreaux Estate #1. During 1997, HCRC drilled one successful development well, one unsuccessful development well, and two unsuccessful exploration wells. Rocky Mountain Region HCRC has significant interests in the Rocky Mountain Region, which includes producing properties in Colorado, Montana, North Dakota and Northwest New Mexico. HCRC has interests in 203 producing oil and gas wells, 172 of which are operated by HPI, 44 shut-in wells, 35 of which are operated by HPI, and five salt water disposal wells. The following is a description of the significant areas within the Rocky Mountain Region. San Juan Basin. HCRC's interest in the San Juan Basin consists of 82 producing gas wells located in San Juan County, New Mexico and LaPlata County, Colorado. HPI operates 51 wells in New Mexico, 31 of which produce from the Fruitland Coal formation at approximately 2,200 feet and 20 of which produce from the Pictured Cliffs, Mesa Verde and Dakota formations at 1,200 to 7,000 feet. During 1997, HCRC drilled or recompleted four wells, two which were successful. In 1996, HCRC participated in the acquisition of interests in 38 producing gas wells in LaPlata County, Colorado and Rio Arriba County, New Mexico from a subsidiary of Public Service Company of Colorado. Thirty-four of the wells were assigned to a special purpose entity owned by a large East Coast financial institution. The wells produce from the Fruitland Coal formation at approximately 3,200 feet. In connection with the acquisition, HCRC monetized the Section 29 tax credits generated by the wells. The project was financed through a third party lender using a production payment structure. In 1997, HCRC successfully recompleted seven of the wells, and drilled one successful exploration well. HCRC has future plans for eight projects in this area. Toole County Area. HCRC's interests in the Toole County Area consist of 67 wells, 58 of which are operated by HPI. The oil wells produce from the Nisku formation at depths of approximately 3,000 feet, and the gas wells produce from the Bow Island formation at depths of 900 to 1,200 feet. During 1997, HCRC drilled one successful well. HCRC has plans for future development wells and workovers in this area. Lone Tree, Richland County Area. HCRC's interest in the Lone Tree, Richland County area consist of 13 producing wells operated by HPI in Richland County, Montana. The oil wells produce principally from the Mission Canyon, Interlake and Red River formations at depths of 9,000 feet to 12,000 feet. In 1997, HCRC drilled two exploration and three development wells. Two of the development and one of the exploration wells were successful. Mid-Continent Region and Other The Mid-Continent Region and Other is comprised of wells located in Kansas, Oklahoma, California and South Central Texas. HCRC's most significant interests are in Kansas and consist of 224 producing wells, of which 219 are operated by HPI and five are operated by unaffiliated entities. The wells are located in 15 counties primarily in the Central Kansas Uplift and produce principally from the Arbuckle and numerous Lansing-Kansas City formation zones from 3,000 feet to 6,500 feet. HCRC has several projects planned for this area in the future. 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.
1997 1996 1995 Average sales prices (including effects of hedging): Oil and condensate (per bbl) $18.87 $20.13 $17.10 Natural gas (per mcf) 2.17 1.99 1.62 Production costs (per equivalent bbl) 5.01 4.68 4.49
Productive Oil and Gas Wells The following table summarizes the productive oil and gas wells as of December 31, 1997 attributable to HCRC's direct interests. Productive wells are producing wells and wells capable of production. Gross wells are the total number of wells in which HCRC has an interest. Net wells are the sum of HCRC's fractional interests owned in the gross wells. Gross Net Productive Wells Oil 564 204 Gas 278 100 --- --- 842 304 === === Oil and Gas Acreage The following table sets forth the developed and undeveloped leasehold acreage held directly by HCRC as of December 31, 1997. Developed acres are acres which are spaced or assignable to productive wells. Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves. Gross acres are the total number of acres in which HCRC has a working interest. Net acres are the sum of HCRC's fractional interests owned in the gross acres. Gross Net Developed acreage 88,450 28,950 Undeveloped acreage 267,420 67,100 ------- ------ Total 355,870 96,050 ======= ====== States in which HCRC holds undeveloped acreage include Texas, Louisiana, Montana, Wyoming, New Mexico, Kansas, Colorado, North Dakota, California and Michigan. Drilling Activity The following table sets forth the number of wells attributable to HCRC's direct interest drilled in the most recent three years.
Year Ended December 31, 1997 1996 1995 Gross Net Gross Net Gross Net Development Wells: Productive 23 4.0 29 6.2 66 14.4 Dry 4 1.0 4 1.0 2 .5 -- --- -- --- -- ---- Total 27 5.0 33 7.2 68 14.9 == === == === == ==== Exploratory Wells: Productive 14 2.7 1 .1 6 .6 Dry 22 4.2 4 .6 5 .9 -- --- -- -- --- --- Total 36 6.9 5 .7 11 1.5 == === == == == ===
Office Space HCRC is guarantor of 40% of the obligation under the Denver, Colorado office lease which is in the name of HPI. Hallwood Energy Partners, L.P. ("HEP") is guarantor of the remaining 60% of the obligation. HPI leases 41,000 square feet for approximately $600,000 per year. ITEM 3 - LEGAL PROCEEDINGS See Note 14 to the financial statements included in Item 8 - Financial Statements and Supplementary Data. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1997. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS HCRC's common stock has traded over the counter on the NASDAQ National Market System under the symbol "HCRC," since June 4, 1992. As of February 27, 1998, there were 1,495 holders of record of HCRC's common stock. The following table sets forth, for the periods indicated, the high and low closing bid quotations for the common stock as reported by the National Quotation Bureau. HCRC did not pay a dividend during the periods shown. During the third quarter of 1997, the stockholders of HCRC approved a three-for-one split of HCRC's common stock. The stock split was effected by issuing, as a stock dividend, two additional shares of Common Stock for each share outstanding. The stock dividend was paid on August 11, 1997 to shareholders of record on August 4, 1997. The stockholders also approved an increase in the number of authorized shares of common stock from 2,000,000 to 10,000,000 shares. HCRC Common Stock High Low First quarter 1996 12 3/8 7 3/4 Second quarter 1996 20 1/3 10 2/3 Third quarter 1996 19 1/3 15 1/12 Fourth quarter 1996 26 2/3 16 1/3 First quarter 1997 30 1/6 22 3/4 Second quarter 1997 25 15 Third quarter 1997 30 1/2 20 Fourth quarter 1997 26 21 1/4 All share and per share information has been retroactively restated for the three-for-one stock split effective August 11, 1997. ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth selected financial data regarding HCRC's financial position and results of operations as of the dates indicated. All per share information has been restated to reflect the three-for-one stock split, which was effective August 11, 1997.
Hallwood Consolidated Resources Corporation As of and for the Years Ended December 31, 1997 1996 1995 1994 1993 (In thousands except per share) Summary of Operations Oil and gas revenues and pipeline operations $32,258 $34,308 $25,349 $20,459 $19,792 Total revenue 32,411 34,445 25,484 20,644 21,007 Production operating expense 10,218 10,383 8,514 8,367 7,750 Depreciation, depletion and amortization 8,605 9,246 8,206 7,340 6,414 Impairment 9,277 4,721 General and administrative expense 4,884 4,011 4,630 3,842 3,935 Net income (loss) 5,585 8,210 (4,670) (2,974) 809 Net income (loss) per share - basic* 2.05 3.00 (1.48) (.93) .25 Net income (loss) per share - diluted* 1.97 2.91 (1.48) (.93) (.25) Dividends per share 2.40 Balance Sheet Working capital (deficit) $ 4,867 $ (47) $(7,202) $ 430 $ 5,973 Property, plant and equipment, net 76,031 67,285 65,433 55,011 57,993 Total assets 92,371 78,468 73,939 62,125 70,986 Noncurrent liabilities 32,678 24,558 21,790 11,890 17,430 Stockholders' equity 48,686 43,061 36,635 43,589 46,596 *Amounts have been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128 "Earnings per Share," during December 1997.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Cash Flow HCRC generated $9,746,000 of cash flow from operating activities during 1997. The other primary cash inflows were: $29,000,000 from borrowings under long-term debt; $1,144,000 from distributions received from affiliates. Cash was primarily used for: $12,106,000 for property additions, exploration and development costs; $24,000,000 for payments of long-term debt; When combined with miscellaneous other cash activity during the year, the result was an increase in HCRC's cash and cash equivalents of $3,864,000 for the year, from $628,000 at December 31, 1996 to $4,492,000 at December 31, 1997. Property Purchases, Sales and Capital Budget In 1997, HCRC incurred $12,106,000 in direct property additions and exploration and development costs. The costs were comprised of approximately $9,284,000 for domestic exploration and development expenditures and approximately $2,822,000 for property acquisitions. HCRC's 1997 capital program led to the replacement, including revisions to prior year reserves, of 107% of 1997 production using year-end pricing. HCRC's significant direct exploration and development expenditures in the Greater Permian Region in 1997 included approximately $275,000 for successfully recompleting or drilling three development wells, and for drilling two unsuccessful exploration wells in the Carlsbad/Catclaw Draw areas in Lea, Eddy and Chaves Counties, New Mexico; approximately $730,000 for acquiring acreage and drilling 10 exploration wells, seven of which were successful, in the operated Merkle area; approximately $850,000 for drilling two exploration wells and nine development wells in the Spraberry area of West Texas, eight of which were successful; approximately $510,000 to purchase additional interests in the Spraberry area; and approximately $380,000 for drilling 14 development wells in the Keystone area, all of which were successful. In the Hudson Ranch project within the Rocky Mountain Region, HCRC incurred $340,000 on costs associated with a multi-objective exploration project generated from 120 miles of 2-D proprietary seismic data. In the Gulf Coast Region, HCRC spent approximately $945,000 on two unsuccessful exploration attempts, one unsuccessful development well, and one successful development well. Projects begun in the fourth quarter of 1996 have cost HCRC approximately $525,000 in 1997. These costs are primarily for work in the Gulf Coast Region and in the Greater Permian Region. HCRC also incurred approximately $690,000 for miscellaneous land and geological and geophysical data. For 1998, HCRC's capital budget, which will be paid from cash generated from operations, cash on hand and borrowings under HCRC's line of credit has been set at $21,400,000. HCRC's plans include projects in Texas, New Mexico, Colorado, North Dakota, and Montana. See Item 2 - Properties, for further discussion of HCRC's exploration and development projects. Long lived assets, other than oil and gas properties, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To date, the Company has not recognized any impairment losses. The Company made an offer to repurchase odd lot holdings of 99 or fewer shares from its stockholders of record as of November 30, 1995. The offer was initially for the period from November 30, 1995 through January 5, 1996 and was subsequently extended through January 26, 1996. The Company repurchased a total of 296,607 shares through the January 26, 1996 closing date for $2,382,000 at a purchase price of $8.03 per share, of which $1,312,000 was expended during 1996. On April 1, 1996, HCRC made another offer to purchase holdings of 99 or fewer shares from its stockholders of record as of March 25, 1996. The offer was for the period from April 1, 1996 through May 3, 1996. The Company repurchased a total of 77,790 shares at a purchase price of $11.33 per share. HCRC resold 38,895 of these shares to HEP at the price paid by HCRC for such shares, resulting in a net repurchase cost to HCRC of $438,000. Financing On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes ("Subordinated Notes") due December 23, 2007 to a financial institution. HCRC also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an exercise price of $28.99 per share. The Subordinated Notes bear interest at the rate of 10.32% per annum on the unpaid balance, payable quarterly. Annual principal payments of $5,000,000 are due on each of December 23, 2003 through December 23, 2007. During 1997, the Company and its banks amended their credit agreement to extend the term date of the line of credit to May 31, 1999 and to reduce the Company's borrowing base to $10,000,000. As of December 31, 1997, the Company has no borrowings against the credit line. Subsequent to December 31, 1997, HCRC repaid its contract settlement obligation of $1,039,000; therefore, HCRC's unused borrowing base totaled $10,000,000 at February 27, 1998. Borrowings against the credit line bear interest, at the option of the Company, at either (i) the banks' Certificate of Deposit rate plus from 1.375% to 1.875%, (ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the higher of the prime rate of Morgan Guaranty Trust or the sum of one-half of 1% and the Federal funds rate, plus .75%. Interest is payable at least quarterly. The credit facility is secured by a first lien on approximately 80% in value of the Company's oil and gas properties. HCRC has entered into contracts to swap its interest rate payments on $10,000,000 of its debt for 1998 and $5,000,000 for each of 1999 and 2000. In general, it is HCRC's goal to hedge 50% of the principal amount of its debt for the next two years and 25% for each year of the remaining term of the debt. HCRC has entered into four swaps, of which one is an interest rate collar pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85% and the others are interest rate swaps with fixed rates ranging from 5.75% to 6.57%. Under the swap contracts, HCRC makes interest payments on its line of credit as scheduled and receives or makes payments based on the differential between the fixed rate of the swap and a floating rate based on the three-month London Interbank Offered Rate plus a defined spread. Historically, HCRC has not used the swaps for trading purposes, but rather for the purpose of providing a measure of predictability for a portion of HCRC's interest payments under its line of credit, which has a floating rate of interest. The swaps have been accounted for as hedges, and the amounts received or paid upon settlement of the swaps were recognized as interest expense at the time the interest payments were due. HCRC intends to continue this policy in the future. In December 1997, HCRC used a portion of the proceeds from the issuance of the Subordinated Notes mentioned above to repay its line of credit in full, which resulted in the notional amount of HCRC's interest rate swaps being unmatched by outstanding indebtedness at year end. As a result, the swaps did not qualify for hedge accounting as of December 31, 1997. The market value of the swaps as of December 31, 1997 was approximately $93,000. Stock Split During July 1997, the stockholders of HCRC approved an increase in the number of authorized shares of its Common Stock from 2,000,000 to 10,000,000 shares. HCRC also declared a three-for-one split of its outstanding Common Stock. The stock split was effected by issuing, as a stock dividend, two additional shares of Common Stock for each share outstanding. The stock dividend was paid on August 11 to shareholders of record on August 4. All share and per share information has been restated to reflect the three-for-one stock split. Stock Option Plans During 1995, the Company adopted a stock option plan covering 159,000 shares of Common Stock and granted options for all of the shares under the plan. The options were granted effective July 1, 1995 at an exercise price of $6.67 per share, which was equal to the fair market value of the Common Stock on the day preceding the date of grant. The options expire on July 1, 2005, unless sooner terminated pursuant to the provisions of the plan. During December 1996, options to purchase 1,500 shares were exercised. During 1997, options to purchase 9,270 shares were exercised. During the second quarter of 1997, the Company adopted a stock option plan covering 159,000 shares of Common Stock and granted options for all of the shares under the plan. The terms of this plan are generally consistent with the terms of the Company's existing 1995 Stock Option Plan. The options were granted effective June 17, 1997 at an exercise price of $20.33 per share, which was equal to the fair market value of the Common Stock on the day of grant. The options expire on June 17, 2007, unless sooner terminated pursuant to the provisions of the plan. The options are exercisable one-third on June 17, 1997, an additional one-third June 17, 1998, and the remaining one-third on June 17, 1999. In addition, the plan provides that vesting of the options may be accelerated under certain conditions. Gas Balancing HCRC uses the sales method to account for gas balancing. Under this method, HCRC recognizes revenue on all of its sales of production, and any over-production or under-production is recovered at a future date. As of December 31, 1997, HCRC had a net over-produced position of 360,000 mcf ($781,000 valued at average annual prices). The management of HCRC believes that all future imbalances can be made up with production from existing wells or from wells which will be drilled as offsets to current producing wells and that this imbalance will not have a material effect on HCRC's results of operations, liquidity and capital resources. The reserves discussed in Item 2 and Item 8 have been reduced by 360,000 mcf in order to reflect HCRC's gas balancing position. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SAFS 130"). SAFS 130 established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is required to adopt SFAS 130 on January 1, 1998. The Company has not completed the process of evaluating the impact that will result from adopting SFAS 130 or the manner that will be used to disclose the required information in its financial statements. Cautionary Statement Regarding Forward-Looking Statements In the interest of providing the Company's stockholders and potential investors with certain information regarding the Company's future plans and operations, certain statements set forth in this Form 10-K relate to management's future plans and objectives. Such statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange act of 1934, as amended. Although any forward-looking statements contained in this Form 10-K or otherwise expressed by or on behalf of the Company are, to the knowledge and in the judgment of the officers and directors of the Company, expected to prove true and to come to pass, management is not able to predict the future with absolute certainty. Forward-looking statements involve known and unknown risks and uncertainties which may cause the Company's actual performance and financial results in future periods to differ materially from any projection, estimate or forecasted result. These risks and uncertainties include, among other things, volatility of oil and gas prices, competition, risks inherent in the Company's oil and gas operations, the inexact nature of interpretation of seismic and other geological and geophysical data, imprecision of reserve estimates, the Company's ability to replace and expand oil and gas reserves, and such other risks and uncertainties described from time to time in the Company's periodic reports and filings with the Securities and Exchange Commission. Accordingly, stockholders and potential investors are cautioned that certain events or circumstances could cause actual results to differ materially from those projected. Inflation and Changing Prices Prices obtained for oil and gas production depend upon numerous factors that are beyond the control of HCRC, including the extent of domestic and foreign production, imports of foreign oil, market demand, domestic and world-wide economic and political conditions, and government regulations and tax laws. Prices for both oil and gas have fluctuated from 1995 through 1997. The following table sets forth the average price received by HCRC for each of the last three years and the effects of the hedging transactions described below:
Oil Oil Gas Gas (excluding the effects (including the effects (excluding the effects (including the effects of hedging of hedging of hedging of hedging transactions) transactions) transactions) transactions) (Bbl) (Bbl) (Mcf) (Mcf) 1997 $19.13 $18.87 $2.39 $2.17 1996 20.96 20.13 2.11 1.99 1995 16.71 17.10 1.42 1.62
The Company has entered into numerous financial contracts to hedge the price of its oil and natural gas. The purpose of the hedges is to provide protection against price decreases and to provide a measure of stability in the volatile environment of oil and natural gas spot pricing. The following table provides a summary of the Company's financial contracts:
Oil Percent of Direct Production Contract Period Hedged Floor Price (per bbl) 1998 14% $14.57 1999 5% 15.38
Between 30% and 100% of the oil volumes hedged in each year are subject to a participating hedge whereby HCRC will receive the contract price if the posted futures price is lower than the contract price, and will receive the contract price plus 25% of the difference between the contract price and the posted futures price if the posted futures price is greater than the contract price. All of the volumes hedged in each year are subject to a collar agreement whereby HCRC will receive the contract price if the spot price is lower than the contract price, the cap price if the spot price is higher than the cap price, and the spot price if that price is between the contract price and the cap price. The cap prices range from $17.00 to $18.85 per barrel.
Gas Percent of Direct Production Contract Period Hedged Floor Price (per mcf) 1998 31% $1.91 1999 18% 1.67 2000 9% 1.86 2001 5% 1.53
Between 0% and 37% of the gas volumes hedged in each year are subject to a collar agreement whereby HCRC will receive the contract price if the spot price is lower than the contract price, the cap price if the spot price is higher than the cap price, and the spot price if that price is between the contract price and the cap price. The cap price is $2.93 per mcf. During the first quarter through February 27, 1998, the weighted average oil price (for barrels not hedged) was approximately $15.57 per barrel, and the weighted average price of natural gas (for mcfs not hedged) was approximately $2.00 per mcf. Inflation Inflation did not have a material impact on the Company in 1997 and is not anticipated to have a material impact in 1998. Results of Operations The following tables are presented to contrast HCRC's revenue, expense and earnings for discussion purposes. Significant fluctuations are discussed in the accompanying narrative. The "direct owned" column represents HCRC's direct royalty and working share interests in oil and gas properties. The "HEP" column represents HCRC's share of the results of operations of HEP. HCRC owned approximately 9% of the outstanding limited partner units of HEP through the third quarter of 1995, when HCRC's ownership increased to approximately 19%.
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION (In thousands except price) For the Year Ended December 31, 1997 For the Year Ended December 31, 1996 Direct Direct Owned HEP Total Owned HEP Total Oil production (bbl) 576 135 711 668 169 837 Gas production (mcf) 5,951 2,012 7,963 6,134 2,146 8,280 Average oil price $18.84 $19.00 $18.87 $20.17 $19.98 $20.13 Average gas price $ 2.14 $ 2.25 $ 2.17 $ 1.93 $ 2.15 $ 1.99 Oil revenue $10,851 $2,565 $13,416 $13,476 $ 3,376 $16,852 Gas revenue 12,719 4,532 17,251 11,826 4,620 16,446 Pipeline and other revenue 1,035 556 1,591 510 500 1,010 Interest income 84 69 153 28 109 137 ----- ----- ------ ------ ----- ------ Total revenue 24,689 7,722 32,411 25,840 8,605 34,445 Production operating expense 8,108 2,110 10,218 8,203 2,180 10,383 General and administrative expense 3,908 976 4,884 3,186 825 4,011 Interest expense 1,675 583 2,258 1,800 730 2,530 Depreciation, depletion, and amortization 6,621 1,984 8,605 7,050 2,196 9,246 Other 24 90 114 ------ ----- ------ ------ ----- ------ 20,312 5,653 25,965 20,263 6,021 26,284 INCOME BEFORE INCOME TAXES 4,377 2,069 6,446 5,577 2,584 8,161 ------ ----- ------ ----- ----- ------ PROVISION (BENEFIT) FOR INCOME TAXES: Current 961 961 301 301 Deferred (100) (100) (350) (350) ------- ------ ----- ------ 861 861 (49) (49) ------ ------ ----- ------ NET INCOME $ 3,516 $2,069 $ 5,585 $ 5,626 $ 2,584 $ 8,210 ====== ====== ===== ===== ===== =====
TABLE OF HCRC EARNINGS FOR MANAGEMENT DISCUSSION (In thousands except price) For the Year Ended December 31, 1995 Direct Owned HEP Total Oil production (bbl) 611 108 719 Gas production (mcf) 5,725 1,346 7,071 Average oil price $17.14 $16.84 $17.10 Average gas price $ 1.57 $ 1.87 $ 1.62 Oil revenue $10,475 $ 1,819 $12,294 Gas revenue 8,972 2,517 11,489 Pipeline and other revenue 1,299 267 1,566 Interest income 100 35 135 ------ ----- ------ Total revenue 20,846 4,638 25,484 Production operating expense 7,191 1,323 8,514 General and administrative expense 3,975 655 4,630 Interest expense 1,316 482 1,798 Depreciation, depletion, and amortization 6,767 1,439 8,206 Impairment of oil and gas properties 8,943 334 9,277 Other 168 78 246 ------ ----- ------ 28,360 4,311 32,671 INCOME (LOSS) BEFORE INCOME TAXES (7,514) 327 (7,187) ------- ----- ------- PROVISION (BENEFIT) FOR INCOME TAXES: Current 71 71 Deferred (2,588) (2,588) ------- ------ (2,517) (2,517) ------- ------ NET INCOME (LOSS) $(4,997) $ 327 $ (4,670) ======= ====== ========
1997 Compared to 1996 Oil Revenue Oil revenue decreased $3,436,000 during 1997 as compared with 1996. The decrease in revenue is comprised of a decrease in price from $20.13 per barrel in 1996 to $18.87 per barrel in 1997 and a 15% decrease in oil production from 837,000 barrels in 1996 to 711,000 barrels in 1997. The decrease in production is due to the temporary shut-in of two wells in Louisiana during the second quarter of 1997 while workover procedures were performed and to normal production declines. The effect of HCRC's hedging transactions described under "Inflation and Changing Prices" was to decrease HCRC's average oil price from $19.13 per barrel to $18.87 per barrel, resulting in a $185,000 decrease in revenue. Gas Revenue Gas revenue increased $805,000 during 1997 as compared with 1996. The increase is comprised of an increase in the average gas price from $1.99 per mcf in 1996 to $2.17 per mcf in 1997, partially offset by a decrease in production from 8,280,000 mcf in 1996 to 7,963,000 mcf in 1997. The decrease in production is due to the temporary shut-in of two wells in Louisiana during the second quarter of 1997 while workover procedures were performed and to normal production declines. The effect of HCRC's hedging activity was to decrease HCRC's average gas price from $2.39 per mcf to $2.17 per mcf, resulting in a $1,752,000 decrease in revenue. Pipeline and Other Pipeline and other revenue consists of revenue derived from salt water disposal, incentive and tax credit payments from certain coalbed methane wells, and other miscellaneous revenue. Pipeline and other revenue increased by $581,000 during 1997 as compared with 1996, primarily due to the receipt of insurance proceeds during 1997, which reimbursed a portion of expense incurred in a prior period to settle certain litigation. Production Operating Expense Production operating expense decreased $165,000 during 1997 as compared to 1996. The decrease is the result of lower production taxes due to the decrease in production discussed above. General and Administrative Expense General and administrative expense includes costs incurred for direct administrative services such as legal, audit and reserve reports as well as allocated internal overhead incurred by HPI on behalf of the Company. These costs increased $873,000 during 1997 as compared to 1996, primarily as a result of increased performance based compensation during 1997. Interest Expense Interest expense represents interest expense on the Company's outstanding debt, interest incurred on the contract settlement liability related to a recoupable take-or-pay settlement received in the third quarter of 1989, and the Company's pro rata share of HEP's interest expense. The Company does not pay any of HEP's interest expense. Interest expense decreased $272,000 in 1997 as compared to 1996, primarily as a result of a lower average debt balance during 1997. Depreciation, Depletion and Amortization Expense Depreciation, depletion and amortization expense associated with proved oil and gas properties decreased $641,000 during 1997 as compared with 1996. This decrease is due to a lower depletion rate resulting from the decreased production discussed above. Other Other expense for 1996 is comprised of numerous miscellaneous items, none of which is individually significant. 1996 Compared to 1995 Oil Revenue Oil revenue increased $4,558,000 during 1996 as compared with 1995. The increase in revenue is comprised of an 18% increase in price from $17.10 per barrel in 1995 to $20.13 per barrel in 1996 and a 16% increase in oil production from 719,000 barrels in 1995 to 837,000 barrels in 1996. The increase in production is due to increased production from developmental drilling projects in West Texas, Montana and Wyoming, partially offset by normal production declines. The effect of HCRC's hedging transactions was to decrease HCRC's average oil price from $20.96 per barrel to $20.13 per barrel, resulting in a $695,000 decrease in revenue. Gas Revenue Gas revenue increased $4,957,000 during 1996 as compared with 1995. The increase is comprised of a 23% increase in the average gas price from $1.62 per mcf in 1995 to $1.99 per mcf in 1996 and a 17% increase in production, from 7,071,000 mcf in 1995 to 8,280,000 mcf in 1996. The increase in production is due to increased production from developmental drilling projects in West Texas, Montana and Wyoming, partially offset by normal production declines. The effect of HCRC's hedging activity was to decrease HCRC's average gas price from $2.11 per mcf to $1.99 per mcf, resulting in a $994,000 decrease in revenue. Pipeline and Other Pipeline and other revenue decreased by $556,000 during 1996 as compared with 1995, primarily due to a payout adjustment on one of HCRC's wells which occurred during 1995. Production Operating Expense Production operating expense increased $1,869,000 during 1996 as compared to 1995. The increase was the result of higher taxes due to higher production, as well as increased operating expenses in the West Texas area. General and Administrative Expense General and administrative expense decreased by $619,000 during 1996 as compared to 1995, primarily as a result of decreased performance based compensation and a decrease in salaries expense and employee benefits expense due to personnel reductions during 1995. Interest Expense Interest expense increased $732,000 in 1996 as compared to 1995, primarily as a result of increased borrowings against the Company's credit line. Depreciation, Depletion and Amortization Expense Depreciation, depletion and amortization expense associated with proved oil and gas properties increased $1,040,000 during 1996 as compared with 1995. This increase is primarily due to a higher depletion rate due to the increased production discussed above as well as higher capitalized costs during 1996 as a result of capital expenditures incurred during the year. Other Other expense for 1996 and 1995 is comprised of numerous miscellaneous items, none of which is individually significant.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page FINANCIAL STATEMENTS: Independent Auditors' Report 25 Consolidated Balance Sheets at December 31, 1997 and 1996 26-27 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 28 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 29 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 30 Notes to Consolidated Financial Statements 31-43 SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 44-47
INDEPENDENT AUDITORS' REPORT To the Stockholders of Hallwood Consolidated Resources Corporation: We have audited the consolidated financial statements of Hallwood Consolidated Resources Corporation as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, listed in the accompanying index at Item 8. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hallwood Consolidated Resources Corporation at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Denver, Colorado February 27, 1998
HALLWOOD CONSOLIDATED RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands except shares) December 31, 1997 1996 CURRENT ASSETS Cash and cash equivalents $ 4,492 $ 628 Accrued oil and gas revenues 4,266 4,808 Due from affiliates 2,418 897 Prepaid and other assets 844 493 Current assets of affiliates 3,854 3,976 ------ ------ Total current assets 15,874 10,802 ------ ------ PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost method) Proved oil and gas properties 294,922 278,581 Unproved mineral interests - domestic 2,250 1,240 ------- ------- Total 297,172 279,821 Less - accumulated depreciation, depletion, amortization and impairment (221,141) (212,536) -------- -------- Net property, plant and equipment 76,031 67,285 -------- -------- OTHER ASSETS Deferred tax asset 450 350 Noncurrent assets of affiliate 16 31 ------ ----- Total other assets 466 381 ------ --- TOTAL ASSETS $ 92,371 $ 78,468 ====== ====== (Continued on the following page)
HALLWOOD CONSOLIDATED RESOURCES CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands except shares) December 31, 1997 1996 CURRENT LIABILITIES Accounts payable and accrued liabilities 3,087 $ 2,273 Current portion of contract settlement obligation 1,039 Current portion of long-term debt 3,750 Current liabilities of affiliates 6,881 4,826 ------ ------ Total current liabilities 11,007 10,849 ------ ------ NONCURRENT LIABILITIES Contract settlement obligation 948 Long-term debt 25,000 16,250 Long-term obligations of affiliates 7,589 7,243 Deferred liability 89 117 ------- ------ Total noncurrent liabilities 32,678 24,558 ------- ------ Total liabilities 43,685 35,407 ------ ------ COMMITMENTS AND CONTINGENCIES (NOTES 11 AND 14) STOCKHOLDERS' EQUITY Common stock par value $.01; 10,000,000 shares authorized; 2,986,812 shares issued in 1997 and 2,977,542 in 1996 30 30 Additional paid in capital 80,111 80,071 Accumulated deficit (27,581) (33,166) Treasury stock - 259,278 shares in 1997 and 1996 (3,874) (3,874) ------ ------- Stockholders' Equity - net 48,686 43,061 ------ ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,371 $ 78,468 ======= ====== The accompanying notes are an integral part of the financial statements.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share) For the Years Ended December 31, 1997 1996 1995 REVENUES: Oil revenue $ 13,416 $ 16,852 $ 12,294 Gas revenue 17,251 16,446 11,489 Pipeline and other 1,591 1,010 1,566 Interest 153 137 135 ------ ------ ------ 32,411 34,445 25,484 ----- ------ ------ EXPENSES: Production operating 10,218 10,383 8,514 General and administrative 4,884 4,011 4,630 Interest 2,258 2,530 1,798 Depreciation, depletion and amortization 8,605 9,246 8,206 Impairment of oil and gas properties 9,277 Other 114 246 ------ ------ ------ 25,965 26,284 32,671 ------ ------ ------- INCOME (LOSS) BEFORE INCOME TAXES 6,446 8,161 (7,187) ------ ------ ------- PROVISION (BENEFIT) FOR INCOME TAXES: Current 961 301 71 Deferred (100) (350) (2,588) ------ ------ ------- 861 (49) (2,517) ------ ------ ------- NET INCOME (LOSS) $ 5,585 $ 8,210 $ (4,670) ====== ===== ======= NET INCOME (LOSS) PER SHARE - BASIC $ 2.05 $ 3.00 $ (1.48) ====== ===== ======= NET INCOME (LOSS) PER SHARE - DILUTED $ 1.97 $ 2.91 $ (1.48) ====== ===== ======= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,719 2,733 3,165 ====== ===== ======= The accompanying notes are an integral part of the financial statements.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Additional Common Paid in Accumulated Treasury Stock Capital Deficit Stock Total Balance, December 31, 1994 $ 30 $ 82,927 $(36,706) $ (2,662) $ 43,589 Increase in treasury shares (1,168) (1,168) Repurchase and retirement of common stock (1,116) (1,116) Net loss (4,670) (4,670) --- ------- -------- -------- ------- Balance, December 31, 1995 30 81,811 (41,376) (3,830) 36,635 Increase in treasury shares (44) (44) Repurchase and retirement of common stock (1,750) (1,750) Exercise of common stock options 10 10 Net income 8,210 8,210 --- ------- -------- -------- ------- Balance, December 31, 1996 30 80,071 (33,166) (3,874) 43,061 Other (21) (21) Exercise of common stock options 61 61 Net income 5,585 5,585 --- ------- -------- -------- ------- Balance, December 31, 1997 $ 30 $ 80,111 $(27,581) $ (3,874) $ 48,686 === ====== ======== ======= ====== Theaccompanying notes are an integral part of the financial statements.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Years Ended December 31, 1997 1996 1995 OPERATING ACTIVITIES: Net income (loss) $ 5,585 $ 8,210 $ (4,670) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion, amortization and impairment 8,605 9,246 17,483 Deferred income tax benefit (100) (350) (2,588) Noncash interest expense 91 83 109 Recoupment of take-or-pay liability (28) (110) (168) Undistributed earnings of affiliates (3,843) (5,173) (3,469) Changes in operating assets and liabilities provided (used)cash net of noncash activity: Accrued oil and gas revenues 542 (2,134) 22 Due from affiliates (1,569) (1,071) (381) Prepaid and other assets (351) (382) 91 Accounts payable and accrued liabilities 814 (1,402) 1,877 Payable to affiliates (247) ----- ----- ------ Net cash provided by operating activities 9,746 6,917 8,059 ----- ----- ------ INVESTING ACTIVITIES: Proceeds from oil and gas property sales 40 1,368 726 Additions to oil and gas properties (2,822) (2,182) (2,188) Exploration and development costs incurred (9,284) (7,578) (7,379) Refinance of Spraberry investment (6,338) Distributions received from affiliates 1,144 1,144 1,096 Investment in affiliates (5,330) ------- ------- ------- Net cash used in investing activities (10,922) (13,586) (13,075) ------- ------- -------- FINANCING ACTIVITIES: Payments of long-term debt (24,000) (2,000) Proceeds from long-term debt 29,000 10,000 5,000 Repurchase and retirement of common stock (1,750) (1,116) Payments on contract settlement obligation (118) (518) Exercise of stock options 61 10 Other financing activities (21) 16 10 ----- ----- ------ Net cash provided by financing activities 5,040 6,158 3,376 ----- ----- ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,864 (511) (1,640) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR 628 1,139 2,779 ----- ----- ------ END OF YEAR $ 4,492 $ 628 $ 1,139 ===== ====== ====== Theaccompanying notes are an integral part of the financial statements.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Hallwood Consolidated Resources Corporation ("HCRC" or the "Company") is a Delaware corporation engaged in the development, production, sale of oil and gas, and in the acquisition, exploration, development and operation of oil and gas properties. The Company's properties are primarily located in the Rocky Mountain, Mid-Continent, Greater Permian and Gulf Coast regions of the United States. The principal objective of the Company is to maximize shareholder value by increasing its reserves, production and cash flow through a balanced program of development and high potential exploration drilling, as well as selective acquisitions. Accounting Policies Consolidation HCRC accounts for its interest in affiliated oil and gas Companies and limited liability companies using the proportionate consolidation method of accounting. The accompanying financial statements include the activities of HCRC and its pro rata share of the activities of Hallwood Energy Partners, L. P. ("HEP"). Property, Plant and Equipment The Company follows the full cost method of accounting whereby all costs related to the acquisition and development of oil and gas properties are capitalized in a single cost center ("full cost pool") and are amortized over the productive life of the underlying proved reserves using the units of production method. Proceeds from property sales are generally credited to the full cost pool. Capitalized costs of oil and gas properties may not exceed an amount equal to the present value discounted at 10% of estimated future net revenues from proved oil and gas reserves plus the cost, or estimated fair market value, if lower, of unproved properties. Should capitalized costs exceed this ceiling, an impairment is recognized. The present value of estimated future net revenues is computed by applying year-end prices of oil and gas to estimated future production of proved oil and gas reserves as of year end, less estimated future expenditures to be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions. The Company does not accrue costs for future site restoration, dismantlement and abandonment costs related to proved oil and gas properties because the Company estimates that such costs will be offset by the salvage value of the equipment sold upon abandonment of such properties. The Company's estimates are based upon its historical experience and upon review of current properties and restoration obligations. Unproved properties are withheld from the amortization base until such time as they are either developed or abandoned. These properties are evaluated periodically for impairment. Long lived assets other than oil and gas properties which are evaluated for impariment as described above, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To date, the Company has not recognized any impairment losses Derivatives HCRC has entered into numerous financial contracts to hedge the price of its oil and natural gas. The purpose of the hedges is to provide protection against price decreases and to provide a measure of stability in the volatile environment of oil and natural gas spot pricing. The amounts received or paid upon settlement of these contracts are recognized as oil or gas revenue at the time the hedged volumes are sold. Gas Balancing HCRC uses the sales method to account for gas balancing. Under this method, HCRC recognizes revenue on all of its sales of production and any over-production or under-production is recovered or repaid at a future date. As of December 31, 1997, HCRC had a net over-produced position of 360,000 mcf ($781,000 valued at average annual prices). Current imbalances can be made up with production from existing wells or from wells which will be drilled as offsets to current producing wells. HCRC's oil and gas reserves as of December 31, 1997 have been reduced by 360,000 mcf in order to reflect HCRC's gas balancing position. Stock Split During July 1997, the stockholders of HCRC approved an increase in the number of authorized shares of its Common Stock from 2,000,000 to 10,000,000 shares. HCRC also declared a three-for-one split of its outstanding Common Stock. The stock split was effected by issuing, as a stock dividend, two additional shares of Common Stock for each share outstanding. The stock dividend was paid on August 11 to shareholders of record on August 4. All share and per share information has been restated to reflect the three-for-one stock split. Cash and Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Use of Estimates The preparation of the financial statements for the Company in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Computation of Net Income (Loss) Per Share During February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 Earnings per Share ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share (EPS), and supersedes APB Opinion No. 15 and its related interpretations. It replaces the presentation of primary EPS with a presentation of basic EPS, which excludes dilution, and requires dual presentation of basic and diluted EPS for all entities with complex capital structures. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion No. 15. SFAS 128 is effective for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period EPS data presented. HCRC adopted SFAS 128 effective December 31, 1997, and has restated all prior periods. EPS data presented to give retroactive effect to the new accounting standard. Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares. Diluted income (loss) per share includes the potential dilution that could occur upon exercise of the options to acquire common stock described in Note 10, and the effects of the warrants described in Note 6, computed using the treasury stock method which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of the options (which were assumed to have been made at the average market price of the common shares during the reporting period). All share and per share information has been restated to reflect the three-for-one stock split. The following table reconciles the number of shares outstanding used in the calculation of basic and diluted income (loss) per share. The warrants have been ignored in the computation of diluted net income (loss) per share in all periods and the stock options have been ignored in the computation of diluted loss per share in 1995 because their inclusion would be anti-dilutive.
Income Shares Per Share (In thousands except per Share) For the Year Ended December 31, 1997 Net income per share - basic $ 5,585 2,719 $ 2.05 Effect of Options 116 ----- ----- ---- Net Income per share - diluted $ 5,585 2,835 $ 1.97 ====== ===== ======= For the Year Ended December 31, 1996 Net income per share - basic $ 8,210 2,733 $ 3.00 Effect of Options 87 ----- ----- ---- Net Income per share - diluted $ 8,210 2,820 $ 2.91 ====== ===== ======= For the Year Ended December 31, 1995 Net loss per share - basic $ (4,670) 3,165 $(1.48) ----- ----- ---- Net loss per share - diluted $ (4,670) 3,165 $(1.48) ====== ===== =======
Treasury Stock At December 31, 1997 and 1996, the Company owns approximately 19% of the outstanding units of HEP, which owns approximately 46% of the Company's shares; consequently, the Company has an interest in 259,278 of its own shares at December 31, 1997 and 1996. These shares are treated as treasury stock in the accompanying financial statements. Significant Customers Both oil and natural gas are purchased by refineries, major oil companies, public utilities, industrial customers and other users and processors of petroleum products. HCRC is not confined to, nor dependent upon, any one purchaser or small group of purchasers. Accordingly, the loss of a single purchaser, or a few purchasers, would not materially affect HCRC's business because there are numerous purchasers in the areas in which HCRC sells its production. However, for the years ended December 31, 1997, 1996 and 1995, purchases by the following companies exceeded 10% of the total oil and gas revenues of the Company:
1997 1996 1995 El Paso Field Services 17% 11% Williams Gas Marketing 13% Koch Oil Company 23% 27% Conoco Inc. 13% 14% Scurlock Permian Corporation 14%
Environmental Concerns The Company is continually taking actions it believes are necessary in its operations to ensure conformity with applicable federal, state and local environmental regulations. As of December 31, 1997, the Company has not been fined or cited for any environmental violations which would have a material adverse effect upon capital expenditures, earnings, cash flows or the competitive position of the Company in the oil and gas industry. Recently Issued Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SAFS 130"). SAFS 130 established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is required to adopt SFAS 130 on January 1, 1998. The Company has not completed the process of evaluating the impact that will result from adopting SFAS 130 or the manner that will be used to disclose the required information in its financial statements. Reclassifications Certain reclassifications have been made to prior years' amounts to conform to the classifications used in the current year. NOTE 2 - OIL AND GAS PROPERTIES The following table summarizes certain cost information related to the Company's oil and gas activities, including its pro rata share of HEP's oil and gas activities. The Company has no material long-term supply agreements, and all reserves are located within the United States.
For the Years Ended December 31, 1997 1996 1995 (In thousands) Property acquisition costs $ 3,350 $ 2,830 $10,912 Development costs 6,531 8,617 14,766 Exploration costs 8,064 2,206 2,885 ------ ----- ------ Total $17,945 $13,653 $28,563 ====== ====== ======
Depreciation, depletion, amortization and property impairment related to proved oil and gas properties per equivalent barrel of production for the years ended December 31, 1997, 1996 and 1995 was $4.22, $4.17 and $6.96, respectively. At December 31, unproved properties consist of the following: 1997 1996 (In thousands) Texas $ 935 $1,069 California 447 North Dakota 314 Other 554 171 ----- ----- $2,250 $1,240 ===== ===== NOTE 3 - PRINCIPAL ACQUISITIONS AND SALES 1997 During 1997, HCRC had no individually significant property acquisitions or sales. 1996 On July 1, 1996, HCRC and HEP completed a transaction involving the acquisition from Fuel Resources Development Co., a wholly owned subsidiary of Public Service Company of Colorado, and other interest owners of their interests in 38 coal bed methane wells located in LaPlata County, Colorado and Rio Arriba County, New Mexico. Thirty-four of the wells, were assigned to 44 Canyon LLC ("44 Canyon"), a special purpose entity owned by a large east coast financial institution. The wells qualify for tax credits under Section 29 of the Internal Revenue Code. Hallwood Petroleum, Inc. ("HPI") manages and operates the properties on behalf of 44 Canyon. The $28.4 million purchase price was funded by 44 Canyon through the sale of a volumetric production payment to an affiliate of Enron Capital & Trade Resources Corp., a subsidiary of Enron Corp., the sale of a subordinated production payment and certain other property interests for $3.45 million to an affiliate of HCRC and HEP, and additional cash contributed by the owners of 44 Canyon. The affiliate of HCRC and HEP which purchased the subordinated production payment and other property interests is owned equally by HCRC and HEP. The interests in the four wells in Rio Arriba County were acquired directly by HCRC and HEP. 1995 On September 29, 1995, HCRC purchased 1,158,696 Class A Units of HEP having a market value of $5,330,000 from a nominee acting on behalf of the plaintiff class members in a class action lawsuit against HEP pursuant to the terms of an option in the settlement of the lawsuit. The purchase of these Class A Units represents the indirect acquisition of approximately 1.9 million equivalent barrels of reserves. NOTE 4 - DERIVATIVES HCRC has entered into numerous financial contracts to hedge the price of its oil and natural gas. HCRC does not use these hedges for trading purposes, but rather for the purpose of providing a protection against price decreases and to provide a measure of stability in the volatile environment of oil and natural gas spot pricing. The amounts received or paid upon settlement of these contracts is recognized as oil or gas revenue at the time the hedged volumes are sold. The financial contracts used by HCRC to hedge the price of its oil and natural gas production are swaps, collars and participating hedges. Under the swap contracts, HCRC sells its oil and gas production at spot market prices and receives or makes payments based on the differential between the contract price and a floating price which is based on spot market indices. The following table provides a summary of HCRC's financial contracts:
Oil Quantity of Production Contract Period Hedged Floor Price (bbls) (per bbl) 1995 220,000 $16.93 1996 219,000 18.47 1997 262,000 17.88 1998 82,000 14.57 1999 23,000 15.38
From 1998 forward, between 30% and 100% of the oil volumes hedged in each year are subject to a participating hedge whereby HCRC will receive the contract price if the posted futures price is lower than the contract price, and will receive the contract price plus 25% of the difference between the contract price and the posted futures price if the posted futures price is greater than the contract price. From 1998 forward, all of the volumes hedged in each year are subject to a collar agreement whereby HCRC will receive the contract price if the spot price is lower than the contract price, the cap price if the spot price is higher than the cap price, and the spot price if that price is between the contract price and the cap price. The cap prices range from $17.00 to $18.85 per barrel.
Gas Quantity of Production Contract Period Hedged Floor Price (mcf) (mcf) 1995 1,792,000 $1.84 1996 2,429,000 1.77 1997 2,413,000 1.89 1998 1,979,000 1.91 1999 1,062,000 1.67 2000 450,000 1.86 2001 203,000 1.53
From 1998 forward, between 0% and 37% of the gas volumes hedged in each year are subject to a collar agreement whereby HCRC will receive the contract price if the spot price is lower than the contract price, the cap price if the spot price is higher than the cap price, and the spot price if that price is between the contract price and the cap price. The cap price is $2.93 per mcf. In the event of nonperformance by the counterparties to the financial contracts, HCRC is exposed to credit loss, but has no off-balance sheet risk of accounting loss. The Company anticipates that the counterparties will be able to satisfy their obligations under the contracts because the counterparties consist of well-established banking and financial institutions which have been in operation for many years. Certain of HCRC's hedges are secured by the lien on HCRC's oil and gas properties which also secures HCRC's Credit Agreement described in Note 6. NOTE 5 - RELATED PARTY TRANSACTIONS Hallwood Petroleum, Inc. ("HPI"), an affiliated entity, manages and operates certain oil and gas properties on behalf of other joint interest owners and the Company. In such capacity, HPI pays all costs and expenses of operations and distributes all revenues associated with such properties. The Company had receivables from HPI of $2,418,000 and $897,000 as of December 31, 1997 and 1996, respectively. These amounts represent revenues net of operating costs and expenses. The Company reimburses HPI for actual costs and expenses, which include office rent, salaries and associated overhead for personnel of HPI engaged in the acquisition and evaluation of oil and gas properties (technical expenditures which are capitalized as costs of oil and gas properties) and general and administrative and lease operating expenditures necessary to conduct the business of the Company (nontechnical expenditures which are expensed as general and administrative or production operating expense). Reimbursements during 1997, 1996 and 1995 were as follows (in thousands): Technical Nontechnical Expenditures Expenditures 1997 $ 856 $1,225 1996 823 1,293 1995 912 1,627 Included in the nontechnical allocation from HPI attributable to the Company's direct interest is approximately $241,000, $115,000 and $111,000 of consulting fees under a contract with The Hallwood Group Incorporated ("Hallwood"), an affiliated company, during the years ended December 31, 1997, 1996 and 1995, respectively. Also included in the nontechnical allocation is $232,000, $234,000 and $263,000 in 1997, 1996 and 1995, respectively, representing costs incurred by Hallwood and its affiliates on behalf of the Company. During the third quarter of 1994, HPI entered into a consulting agreement with its Chairman of the Board to provide advisory services regarding the international activities of its affiliates. The amount of consulting fees allocated to the Company under this agreement is $125,000 in both 1996 and 1995. The agreement terminated effective December 31, 1996. NOTE 6 - DEBT On December 23, 1997, HCRC sold $25,000,000 of 10.32% Senior Subordinated Notes ("Subordinated Notes") due December 23, 2007 to a financial institution. HCRC also sold Warrants to the lender to purchase 98,599 shares of Common Stock at an exercise price of $28.99 per share. The Subordinated Notes bear interest at the rate of 10.32% per annum on the unpaid balance, payable quarterly. Annual principal payments of $5,000,000 are due on each of December 23, 2003 through December 23, 2007. During 1997, the Company and its banks amended their credit agreement to extend the term date of the line of credit to May 31, 1999 and to reduce its borrowing base to $10,000,000. As of December 31, 1997, the Company has no borrowings against the credit line. Subsequent to December 31, 1997, HCRC repaid its contract settlement obligation of $1,039,000; therefore, its unused borrowing base totaled $10,000,000 at February 27, 1998. Borrowings against the credit line bear interest, at the option of the Company, at either (i) the banks' Certificate of Deposit rate plus from 1.35% to 1.875%, (ii) the Euro-Dollar rate plus from 1.25% to 1.75% or (iii) the higher of the prime rate of Morgan Guaranty Trust or the sum of one-half of 1% and the Federal funds rate, plus .75%. Interest is payable at least quarterly. The credit facility is secured by a first lien on approximately 80% in value of the Company's oil and gas properties. HCRC has no debt maturing within the next five years. Principal payments for the Subordinated Notes commence in 2003. HCRC has entered into contracts to swap its interest rate payments on $10,000,000 of its debt for 1998 and $5,000,000 for each of 1999 and 2000. In general, it is HCRC's goal to hedge 50% of its debt of the principal amount of its debt for the next two years and 25% for each year of the remaining term of the debt. HCRC has entered into four swaps, of which one is an interest rate collar pursuant to which it pays a floor rate of 7.55% and a ceiling rate of 9.85% and the others are interest rate swaps with fixed rates ranging from 5.75% to 6.57%. Under the swap contracts, HCRC makes interest payments on its line of credit as scheduled and receives or makes payments based on the differential between the fixed rate of the swap and a floating rate based on the three-month London Interbank Offered Rate plus a defined spread. Historically, HCRC has not used the swaps for trading purposes, but rather for the purpose of providing a measure of predictability for a portion of HCRC's interest payments under its line of credit, which has a floating rate of interest. The swaps have been accounted for as hedges, and the amounts received or paid upon settlement of the swaps were recognized as interest expense at the time the interest payments were due. HCRC intends to continue this policy in the future. In December 1997, HCRC used a portion of the proceeds from the issuance of the Subordinated Notes mentioned above to repay its line of credit in full, which resulted in the notional amount of HCRC's interest rate swaps being unmatched by outstanding indebtedness at year end. As a result, the swaps did not qualify for hedge accounting as of December 31, 1997. The market value of the swaps as of December 31, 1997 was approximately $93,000. NOTE 7 - CONTRACT SETTLEMENT OBLIGATION In March 1989, the Company received $2,877,000 as a recoupable take-or-pay settlement on a contract with a gas pipeline. The settlement was recoupable monthly in cash or gas volumes, from April 1992 through March 1996 with a balloon payment due during the first quarter of 1998. A liability has been recorded equal to the present value of the settlement discounted at 10.68%, HCRC's estimated borrowing cost in 1989. The Company also repaid $640,000 which represented the balance of suspended payments to the pipeline for previous years, in equal monthly installments of $13,329 through March 1996. This amount was previously recorded as an offset to the full cost pool at the time the contract was initially abrogated by the pipeline. As payment of this obligation was made, it was charged to the full cost pool. At December 31, 1997, the current portion of contract settlement balance consists of a payment of $1,044,000 due in February 1998, net of unaccreted discount of $5,000. NOTE 8 - STATEMENT OF CASH FLOWS Cash paid for interest during 1997, 1996 and 1995 was $1,434,000, $1,374,000 and $625,000, respectively. Cash paid for income taxes during 1997, 1996 and 1995 was $1,416,000, $185,000 and $122,000, respectively. NOTE 9 - INCOME TAXES The following is a summary of the income tax provision (benefit):
For the Years Ended December 31, 1997 1996 1995 (In thousands) State $ 369 $ 236 $ 62 Federal - Current 592 65 9 Deferred (100) (350) (2,588) ----- ----- ------- Total $ 861 $ (49) $(2,517) ==== ===== ======
Reconciliation's of the expected tax at the statutory tax rate to the effective tax are as follows:
For the Years Ended December 31, 1997 1996 1995 (In thousands) Expected tax expense (benefit) at the statutory rate $ 2,192 $ 2,775 $(2,443) State taxes net of federal benefit 243 156 41 Change in valuation allowance (1,444) (3,739) Other (130) 759 (115) ------ ----- ------ Effective tax expense (benefit) $ 861 $ (49) $(2,517) ====== ===== =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of significant items comprising the Company's deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
1997 1996 Deferred tax assets: Net operating loss carryforward $ 2,835 $3,606 Capital loss carryforward 1,889 1,688 Temporary differences between book and tax basis of property 461 1,235 Other ----- ------ Total 5,185 6,529 Valuation allowance (4,735) (6,179) ------ ------ Net deferred tax asset $ 450 $ 350 ===== ======
The Company's net operating loss carryforwards expire between 2008 and 2010. NOTE 10 - EMPLOYEE INCENTIVE PLANS Every year beginning in 1992, the Company's Board of Directors has adopted an incentive plan. Each year the Board of Directors determines the percentage of HCRC's interest in the cash flow from certain wells drilled, recompleted or enhanced during the year allocated to the incentive plan for that year. The specified percentage was 2.4% for 1997 and 1996 and 1.4% for domestic wells for 1995. In 1995, HCRC also had an international incentive plan and the percentage interest in cash flow for that plan was 3%. Beginning in 1996, the domestic and international plans were combined. The specified percentage of cash flow is then allocated among certain key employees who are participants in the plan for that year. Each award under the plan (with regard to domestic properties) represents the right to receive for five years a portion of the specified share of the cash flow attributable to qualifying wells included in the plan for that year. In the sixth year after the award, the participants are each paid a share of an amount equal to a specified percentage (80% for 1997, 1996 and 1995) of the remaining net present value of the qualifying wells, and the award for that year terminates. The expenses attributable to the plans were $400,000 in 1997, $119,000 in 1996 and $147,000 in 1995 and are included in general and administrative expense in the accompanying financial statements. During 1995, the Company adopted a stock option plan covering 159,000 shares of Common Stock and granted options for all of the shares under the plan. The options were granted effective July 1, 1995 at an exercise price of $6.67 per share, which was equal to the fair market value of the Common Stock on the day preceding the date of grant. The options expire on July 1, 2005, unless sooner terminated pursuant to the provisions of the plan. During December 1996, options to purchase 1,500 shares were exercised. During 1997, options to purchase 9,270 shares were exercised. During the second quarter of 1997, the Company adopted a stock option plan covering 159,000 shares of Common Stock and granted options for all of the shares under the plan. The terms of this plan are generally consistent with the terms of the Company's existing 1995 Stock Option Plan. The options were granted effective June 17, 1997 at an exercise price of $20.33 per share, which was equal to the fair market value of the Common Stock on the day of grant. The options expire on June 17, 2007, unless sooner terminated pursuant to the provisions of the plan. The options are exercisable one-third on June 17, 1997, an additional one-third June 17, 1998, and the remaining one-third on June 17, 1999. In addition, the Plan provides that vesting of the options may accelerate under certain conditions. A summary of HCRC's Option Plans and the changes therein for the years ended December 31, 1997, 1996 and 1995 follows:
1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 157,500 $ 6.67 159,000 $6.67 Granted 159,000 20.33 159,000 $6.67 Exercised 9,270 6.67 1,500 6.67 ------- ------ -------- ----- -------- ------ Outstanding at year end 307,230 $13.74 157,500 $6.67 159,000 $6.67 ======= ====== ======= ==== ======== ===== Options exercisable at year end 201,230 $10.26 104,500 $6.67 53,000 $6.67 ======= ====== ======== =====
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, no compensation cost has been recognized for the Option Plan. Had compensation expense for the option plans been determined based on the fair value at the grant dates, consistent with the provisions of SFAS 123, HCRC's net income (loss) and net income (loss) per share would have been changed to the pro forma amounts indicated below:
1997 1996 1995 Net income (loss): as reported $5,585,000 $8,210,000 $(4,670,000) pro forma 5,488,000 7,975,000 (5,078,000) Net income (loss) per share - basic: as reported $2.05 $3.00 $(1.48) pro forma 2.02 2.92 (1.60) Net income (loss) per share - diluted as reported $1.97 $2.91 $(1.48) pro forma 1.94 2.83 (1.60)
The fair value of the options for disclosure purposes was estimated on the date of the grant using the Black-Scholes Model with the following assumptions:
1995 Options 1997 Options Expected dividend yield 0% 0% Expected price volatility 40% 33% Risk-free interest rate 6.2% 6.35% Expected life of options 10 years 6 years
NOTE 11 - COMMITMENTS The Company is guarantor of 40% of the obligation under the Denver, Colorado office lease which is in the name of HPI. HEP is guarantor of the remaining 60% of the obligation. HPI leases 41,000 square feet for approximately $600,000 per year. The lease expires in 1999. NOTE 12 - ODD LOT REPURCHASE The Company made an offer to repurchase odd lot holdings of 99 or fewer shares from its stockholders of record as of November 30, 1995. The offer was initially for the period from November 30, 1995 through January 5, 1996 and was subsequently extended through January 26, 1996. The Company repurchased a total of 296,607 shares through the January 26, 1996 closing date. The repurchase price was $8.03 per share. On April 1, 1996, HCRC made another offer to purchase holdings of 99 or fewer shares from its stockholders of record as of March 25, 1996. The offer was for the period from April 1, 1996 through May 3, 1996. The Company repurchased a total of 77,790 shares at a purchase price of $11.33 per share. HCRC resold 38,895 of these shares to HEP at the price paid by HCRC for such shares. NOTE 13 - INVESTMENT IN AFFILIATED ENTITIES HCRC accounts for its 19% investment in HEP and, in 1995, its 60% investment in Hallwood Spraberry Drilling Company, L.L.C. ("HSD") using the pro rata method of accounting. The following presents summarized financial information for HEP as of and for the years ended December 31, 1997, 1996 and 1995, and for HSD as of and for the year ended December 31, 1995. HCRC assumed direct ownership of the properties previously held by HSD effective April 1, 1996.
HEP 1997 1996 1995 (In thousands) Current assets $ 22,142 $ 20,380 $ 18,503 Noncurrent assets 109,461 102,412 106,649 Current liabilities 23,115 21,735 22,866 Noncurrent liabilities 33,166 33,506 41,672 Minority interest 3,258 3,336 3,042 Revenue 45,103 51,066 43,780 Net income (loss) 12,803 15,726 (9,031) HSD 1995 (In thousands) Current assets $ 629 Noncurrent assets 14,243 Current liabilities 1,900 Noncurrent liabilities 11,000 Revenue 4,194 Net income 1,631
No other individual entity in which HCRC owns an interest comprises in excess of 10% of the revenues, net income or assets of HCRC. NOTE 14 - LEGAL PROCEEDINGS On December 3, 1997, Arcadia Exploration and Production Company ("Arcadia") filed a Demand for Arbitration with the American Arbitration Association against Hallwood Consolidated Resources Corporation, Hallwood Energy Partners, L.P., E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P. (collectively referred to herein as "Hallwood"), claiming that Hallwood breached a Purchase and Sale Agreement dated August 25, 1997, between Arcadia and HCRC and HEP. Arcadia's Demand for Arbitration seeks specific performance of the agreement which Arcadia claims requires Hallwood to purchase oil and gas properties from Arcadia for approximately $27 million. HCRC and HEP terminated the agreement because of environmental and title problems with the properties. Additionally, Arcadia seeks incidental and special damages, prejudgment interests and attorneys' fees and costs. Hallwood filed its Answering Statement and Counterclaim asserting that it properly terminated and/or rescinded the Agreement and seeking refund of Hallwood's earnest money deposit, prejudgment interest, attorneys' fees and costs. HCRC's management intends to vigorously defend the claims asserted by Arcadia and intends to vigorously pursue the counterclaim against Arcadia. This matter is currently in its preliminary stages as pre-hearing discovery has only just commenced. Thus, it is too early to predict the ultimate outcome of this arbitration proceeding. On April 23, 1992, a lawsuit was filed in the Chancery Court for New Castle County, Delaware, styled Tappe v. Hallwood Consolidated Resources Corporation, Hallwood Consolidated Partners, L. P., Hallwood Oil and Gas, Inc., Hallwood Energy Partners, L. P., and Hallwood Petroleum, Inc. (C. A. No 12536). The lawsuit seeks to rescind the conversion of Hallwood Consolidated Partners, L.P. ("HCP") into the Company ("Conversion") and to recover damages in unspecified amounts. The plaintiff also seeks class certification to represent similarly situated HCP unitholders. In general, the suit alleges that the defendants breached fiduciary duties to HCP unitholders by, among other things, proposing allocation of common stock in the Conversion on a basis that the plaintiff alleges is unfair, failing to require that the allocation be approved by an independent third party, causing the costs of proposing the Conversion to be borne indirectly by the partners of HCP whether or not the Conversion was completed, and failing to disclose certain matters in the Consent Statement/Prospectus soliciting consents to the Conversion. The defendants believe that they fully considered and disclosed all material information in connection with the Conversion, and they believe that the suit is without merit. HCRC plans to vigorously defend this case, but because of its early stages, cannot predict the outcome of this matter or any possible effect an adverse outcome might have. The Company is involved in other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. The Company believes that its liability, if any, as a result of such proceedings and claims will not materially affect its financial condition or operations. NOTE 15 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
December 31, 1997 Carrying Estimated Fair Amount Value (In thousands) Liabilities: Oil and gas hedge contracts $ -0- $ 1,060 Long-term debt 25,000 25,000
The estimated fair value of the oil and gas hedge contracts is determined by multiplying the difference between contract termination prices for oil and gas and the hedge contract price by the quantities under contract. This amount has been discounted using an interest rate that could be available to the Company. Long-term debt is carried in the accompanying balance sheet at an amount which is a reasonable estimate of its fair value. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and current estimates of fair value may differ significantly from the amounts presented herein. HALLWOOD CONSOLIDATED RESOURCES CORPORATION SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (Unaudited) The following reserve quantity and future net cash flow information for the Company represents proved reserves which are located in the United States. The reserve estimates presented have been prepared by in-house petroleum engineers, and a majority of these reserves has been reviewed by independent petroleum engineers. The determination of oil and gas reserves is based on estimates which are highly complex and interpretive. The estimates are subject to continuing change as additional information becomes available. The standardized measure of discounted future net cash flows provides a comparison of the Company's proved oil and gas reserves from year to year. Under the guidelines set forth by the Securities and Exchange Commission, the calculation is performed using year end prices. At December 31, 1997, oil and gas prices averaged $16.77 per bbl of oil and $2.20 per mcf of gas for the Company, including its interest in HEP. Future production costs are based on year end costs and include severance taxes. The present value of future cash inflows is based on a 10% discount rate. The reserve calculations using these December 31, 1997 prices result in 5.5 million bbls of oil, 76 billion cubic feet of gas and a standardized measure of $88,000,000. This standardized measure is not necessarily representative of the market value of the Company's properties. HCRC's standardized measure of future net cash flows has been decreased by $1,935,000 at December 31, 1997 for the effect of its hedge contracts. This amount represents the difference between year end oil and gas prices and the hedge contract prices multiplied by the quantities subject to contract, discounted at 10%.
HALLWOOD CONSOLIDATED RESOURCES CORPORATION RESERVE QUANTITIES (Unaudited) (In thousands) Gas Oil (Mcf) (Bbls) Proved Reserves: Balance, December 31, 1994 42,924 4,959 Extensions and discoveries 7,548 2,761 Revisions of previous estimates 2,790 131 Sales of reserves in place (52) (151) Purchases of reserves in place 7,533 664 Production (7,071) (719) ------- ----- Balance, December 31, 1995 53,672 7,645 Extensions and discoveries 1,947 491 Revisions of previous estimates 7,701 (28) Sales of reserves in place (1,627) (160) Purchases of reserves in place 11,488 70 Production (8,280) (837) ------- ----- Balance, December 31, 1996 64,901 7,181 Extensions and discoveries 2,894 562 Revisions of previous estimates 15,261 (1,672) Sales of reserves in place (163) (3) Purchases of reserves in place 645 168 Production (7,963) (711) ------- ----- Balance, December 31, 1997 75,575 5,525 ====== ===== Proved Developed Reserves: Balance, December 31, 1995 49,854 6,657 ====== ===== Balance, December 31, 1996 63,044 6,431 ====== ===== Balance, December 31, 1997 73,250 5,080 ====== =====
HALLWOOD CONSOLIDATED RESOURCES CORPORATION STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (Unaudited) (In thousands) December 31, 1997 1996 1995 Future sales $227,000 $413,000 $243,000 Future production and development costs (100,000) (158,000) (106,000) Provision for income tax (8,000) (30,000) (4,000) -------- ------- -------- Future cash flows 119,000 225,000 133,000 10% discount to present value (31,000) (91,000) (48,000) -------- ------- -------- Standardized measure of discounted future net cash flows $ 88,000 $134,000 $ 85,000 ======= ======= =========
HALLWOOD CONSOLIDATED RESOURCES CORPORATION CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (Unaudited) (In thousands) For the Years Ended December 31, 1997 1996 1995 Standardized measure of discounted future net cash flows at beginning of year $134,000 $ 85,000 $ 52,000 Sales of oil and gas produced, net of production costs (20,449) (22,915) (15,268) Net changes in prices and production costs (71,933) 46,516 11,325 Extensions and discoveries net of future production and development costs 5,616 7,011 22,133 Changes in estimated future development costs (6,480) (7,292) (15,738) Development costs incurred 6,531 8,617 14,766 Revisions of previous quantity estimates 4,688 10,802 3,280 Purchase of reserves in place 1,482 17,061 10,571 Sale of reserves in place (162) (3,707) (879) Accretion of discount 13,439 8,513 5,200 Net change in income taxes 16,206 (15,332) (2,121) Changes in production rates and other 5,062 (274) (269) Standardized measure of discounted ------ ------- ------- future net cash flows at end of year $88,000 $134,000 $ 85,000 ====== ======= =======
The standardized measure of discounted future net cash flows is calculated using year end average oil and gas prices. At December 31, 1997, oil and gas prices averaged $16.77 per bbl of oil and $2.20 per mcf of gas. If average oil and gas prices as of February 27, 1998 of $15.57 per bbl of oil and $2.00 per mcf of gas had been used in this calculation, the standardized measure of discounted future net cash flows would have been approximately 16% lower. ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item will be included in the definitive proxy statement of HCRC relating to HCRC's 1998 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 11 - EXECUTIVE COMPENSATION The information required by this item will be included in the definitive proxy statement of HCRC relating to HCRC's 1998 Annual Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be included in the definitive proxy statement of HCRC relating to HCRC's 1998 Annual Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be included in the definitive proxy statement of HCRC relating to HCRC's 1998 Annual Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14A, which information is incorporated herein by reference. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements and Financial Statement Schedules See Index at Item 8 Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1997. Exhibits (1) 3.1 Restated Certificate of Incorporation of HCRC, as amended through January 21, 1992 (1) 3.2 Bylaws of HCRC (2) 3.3 Amendment to Bylaws of HCRC (3) 3.4 Certificate of Amendment of Restated Certificate of Incorporation dated November 9, 1995. (7) 3.5 Certificate of Amendment of Restated Certificate of Incorporation, effective August 1, 1997. 4.1 Common Stock Purchase Warrant dated December 23, 1997. 4.2 Registration Rights Agreement dated as of December 23, 1997. (1) 10.1 Agreement of Limited Partnership of Hallwood Consolidated Partners, L.P. (originally, agreement of HCP Acquisition, L. P.) (1) 10.5 Management Agreement between Hallwood Petroleum, Inc. and HCRC (4) 10.7 Amended and Restated Credit Agreement dated as of March 31, 1995 among HCRC and the Banks listed therein. 10.8 Extension of Management Agreement between HCRC and Hallwood Petroleum, Inc. dated May 1, 1997. * (4) 10.9 Domestic Incentive Plan between HCRC and Hallwood Petroleum, Inc. dated January 14, 1993. * (5) 10.10 1995 Stock Option Plan * (5) 10.11 1995 Stock Option Loan Program (7) 10.13 Second Amended and Restated Credit Agreement dated as of May 31, 1997. * (7) 10.14 1997 Stock Option Plan * (8) 10.15 1997 Stock Option Plan Loan Program (8) 10.16 Amendment No. 1 to Second Amended and Restated Credit Agreement dated as of October 31, 1997. 10.17 Subordinated Note and Warrant Purchase Agreement dated as of December 23, 1997. 10.18 Amendment No. 2 to Second Amended and Restated Credit Agreement dated as of December 23, 1997. (6) 21 Subsidiaries of Registrant 23.1 Consent of Deloitte & Touche LLP 23.2 Consent of Deloitte & Touche LLP - ------------------------------------- (1) Incorporated by reference to the Registrant's Registration Statement No. 33-45729 on Form S-4 filed on February 14, 1992. (2) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1992. (3) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (4) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (5) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (6) Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 1995. (7) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (8) Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. * Designates management contract or compensatory plan or arrangement. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HALLWOOD CONSOLIDATED RESOURCES CORPORATION Date: February 27, 1998 By: /s/William L. Guzzetti William L. Guzzetti President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date /s/Anthony J. Gumbiner Chairman of the Board and February 27, 1998 Anthony J. Gumbiner Director /s/Brian M. Troup Director February 27, 1998 Brian M. Troup /s/John R. Isaac,Jr. Director February 27, 1998 John R. Isaac, Jr. /s/Jerry A. Lubliner Director February 27, 1998 Jerry A. Lubliner /s/Hamilton P. Schrauff Director February 27, 1998 Hamilton P. Schrauff Bill M. Van Meter Director February 27, 1998 /s/Robert S. Pfeiffer Vice President - February 27, 1998 Robert S. Pfeiffer Chief Financial Officer (Principal Accounting Officer)
EX-4.1 2 COMMON STOCK PURCHASE WARRANT THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT. HALLWOOD CONSOLIDATED RESOURCES CORPORATION Common Stock Purchase Warrant PPN 40636V 2* 9 New York, New York No. RW-1 December 23, 1997 HALLWOOD CONSOLIDATED RESOURCES CORPORATION (the "Company"), a Delaware corporation, for value received, hereby certifies that THE PRUDENTIAL INSURANCE COMPANY OF AMERICA or its registered assigns is entitled to purchase from the Company 98,599 duly authorized, validly issued, fully paid and nonassessable shares of the Company's common stock, par value $0.01 per share (the "Original Common Stock"), at an initial exercise price per share of $28.99, at any time or from time to time after the date hereof and prior to 5:00 p.m., New York City time, on December 23, 2009 (the "Expiration Date"), all subject to the terms, conditions and adjustments set forth below in this Warrant. This Warrant (the "Warrant", such term to include all Warrants issued in substitution therefor) has been issued pursuant to that certain Subordinated Note and Warrant Purchase Agreement dated of even date herewith (the "Purchase Agreement") between the Company and The Prudential Insurance Company of America (the "Purchaser"). The applicable provisions of the Purchase Agreement are incorporated by reference, and a conformed copy thereof will be furnished to the holder hereof by the Company upon written request. Certain capitalized terms used in this Warrant are defined in section 13. 1. Exercise of Warrant. 1A. Manner of Exercise. This Warrant may be exercised by the holder hereof, in whole or in part, for the purchase of the Common Stock or Other Securities which such holder is then entitled to purchase, during normal business hours on any Business Day on or after the date hereof to and including the Expiration Date by surrender of this Warrant, with the form of subscription at the end hereof (or a reasonable facsimile thereof) duly executed by such holder, to the Company at its principal office (or, if -1- such exercise shall be in connection with an underwritten public offering of shares of Common Stock (or Other Securities) subject to this Warrant, at the location at which the underwriters shall have agreed to accept delivery thereof), accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying (a) the number of shares of Original Common Stock (without giving effect to any adjustment therein) designated in such form of subscription by (b) $28.99. The number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock which the holder of this Warrant shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of section 2) be issuable upon such exercise, as designated by the holder hereof pursuant to this section 1A, by a fraction of which (a) the numerator is $28.99 and (b) the denominator is the Exercise Price in effect on the date of such exercise. The "Exercise Price" shall initially be $28.99 per share, shall be adjusted and readjusted from time to time as provided in section 2 and, as so adjusted and readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by section 2. 1B. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected and the Exercise Price shall be determined immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to the Company as provided in section 1A, and at such time the person or persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities) shall be issuable upon such exercise as provided in section 1C shall be deemed to have become the holder or holders of record thereof. 1C. Delivery of Stock Certificates, etc. Promptly after the exercise of this Warrant, in whole or in part, and in any event within three (3) Business Days thereafter (unless such exercise shall be in connection with an underwritten public offering of shares of Common Stock (or Other Securities) subject to this Warrant, in which event concurrently with such exercise), the Company at its expense will cause to be issued in the name of and delivered to the holder hereof or, subject to section 8, as such holder may direct, (a) a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise, and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, specifying the aggregate on the face or faces thereof the number of shares of Common Stock equal to the number of such shares specified on the face of this Warrant minus the number of such shares designated by the holder upon such exercise as provided in section 1A. 1D. Company to Reaffirm Obligations. The Company will, at the time of or at any time after each exercise of this Warrant, upon the request of the holder hereof or of any shares of Common Stock (or -2- Other Securities) issued upon such exercise, acknowledge in writing its continuing obligation to afford to such holder all rights to which such holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant, provided that if any such holder shall fail to make any such request, the failure shall not affect the continuing obligation of the Company to afford such rights to such holder. 1E. Fractional Shares. No fractional shares shall be issued upon exercise of this Warrant and no payment or adjustment shall be made upon any exercise on account of any cash dividends (except as provided in section 2B) on the Common Stock or Other Securities issued upon such conversion. If any fractional interest in a share of Common Stock would, except for the provisions of the first sentence of this section 1E, be deliverable upon the exercise of this Warrant, the Company shall, in lieu of delivering the fractional share therefor, pay to the holder exercising this Warrant an amount in cash equal to the Market Price of such fractional interest. 1F. Cashless Exercise. As an alternative to exercise of this Warrant by payment in cash (or by certified or official bank check), as provided above in section 1A, the holder of this Warrant may exercise its right to purchase some or all of the shares of Common Stock pursuant to this Warrant, on a net basis without the exchange of any funds (a "Cashless Exercise"), such that the holder hereof receives that number of shares of Common Stock subscribed to pursuant to this Warrant less that number of shares of Common Stock, valued at Market Price, at the time of exercise equal to the aggregate Exercise Price that would otherwise have been paid by the holder of this Warrant for such shares of Common Stock. 2. Protection Against Dilution or Other Impairment of Rights; Adjustment of Exercise Price. 2A. Issuance of Additional Shares of Common Stock. In case the Company, at any time or from time to time after the date hereof (the "Initial Date"), shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to section 2C or 2D) without consideration or for a consideration per share (determined pursuant to section 2E) less than the greater of the Exercise Price or the Market Price in effect, in each case, on the date of and immediately prior to such issue or sale, then, and in each such case, subject to section 2H, the Exercise Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Exercise Price by a fraction, (a) the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale and (ii) the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued or sold would purchase at the greater of such Market Price or such Exercise Price, and -3- (b) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale, provided that, for the purposes of this section 2A, (x) immediately after any Additional Shares of Common Stock are deemed to have been issued pursuant to section 2C or 2D, such Additional Shares shall be deemed to be outstanding, and (y) treasury shares shall not be deemed to be outstanding. 2B. Extraordinary Dividends and Distributions. In case the Company at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement and any redemption or acquisition of any such stock or Options on the Common Stock), other than (a) a dividend payable in Additional Shares of Common Stock or in Options for Common Stock or (b) a regular periodic dividend payable in cash then, and in each such case, the Company shall pay over to the holder of this Warrant, on the date on which such dividend or other distribution is paid to the holders of Common Stock, the securities and other property (including cash) which such holder would have received if such holder had exercised this Warrant immediately prior to the record date fixed in connection with such dividend or other distribution. 2C. Treatment of Options and Convertible Securities. In case the Company, at any time or from time to time after the date hereof, shall issue, sell, grant (which term, for purposes of this section 2C, all related provisions of this Warrant and all definitions used in this section 2C or in such related provisions, shall also include the vesting after the date hereof of Options granted under the 1997 Stock Option Plan) or assume, or shall fix a record date for the determination of holders of any class of securities entitled to receive, any Options or Convertible Securities, whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, issuable upon the conversion or exchange of such Convertible Securities (or the exercise of such Options for Convertible Securities and subsequent conversion or exchange of the Convertible Securities issued), shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date, provided, that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to section 2E) of such shares would be less than the greater of the Exercise Price or the Market Price in effect, in each case, on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading, as the case may be, and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued, -4- (a) if an adjustment of the Exercise Price shall be made upon the fixing of a record date as referred to in the first sentence of this section 2C, no further adjustment of the Exercise Price shall be made as a result of the subsequent issue or sale of any Options or Convertible Securities for the purpose of which such record date was set; (b) no further adjustment of the Exercise Price shall be made upon the subsequent issue or sale of Additional Shares of Common Stock or Convertible Securities upon the exercise of such Options or the conversion or exchange of such Convertible Securities; (c) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any change in the consideration payable to the Company, or change in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Exercise Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such change becoming effective, be recomputed to reflect such change insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (d) upon the expiration of any such Options or of the rights of conversion or exchange under any such Convertible Securities which shall not have been exercised (or upon purchase by the Company and cancellation or retirement of any such Options which shall not have been exercised or of any such Convertible Securities the rights of conversion or exchange under which shall not have been exercised), the Exercise Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (i) in the case of Options for Common Stock or in the case of Convertible Securities, the only Additional Shares of Common Stock issued or sold (or deemed issued or sold) were the Additional Shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was (x) an amount equal to (A) the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus (B) the consideration actually received by the Company upon such exercise, minus (C) the consideration paid by the Company for any purchase of such Options which were not exercised, or (y) an amount equal to (A) the consideration actually received by the Company for the issue, sale, grant or assumption of all such Convertible Securities which were actually converted or exchanged, plus (B) the additional consideration, if any, actually received by the Company upon such conversion or exchange, minus (C) the excess, if any, of the consideration paid by the Company for any purchase of such Convertible Securities, the rights of conversion or exchange under which were not -5- not exercised, over an amount that would be equal to the Fair Value of the Convertible Securities so purchased if such Convertible Securities were not convertible into or exchangeable for Additional Shares of Common Stock, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was an amount equal to (x) the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus (y) the consideration deemed to have been received by the Company (pursuant to section 2E) upon the issue or sale of the Convertible Securities with respect to which such Options were actually exercised, minus (z) the consideration paid by the Company for any purchase of such Options which were not exercised; and (e) no recomputation pursuant to subsection (c) or (d) above shall have the effect of increasing the Exercise Price then in effect by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities. 2D. Treatment of Stock Dividends, Stock Splits, Etc. In case the Company, at any time or from time to time after the date hereof, shall declare or pay any dividend or other distribution on any class of securities of the Company payable in shares of Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (a) in the case of any such dividend or other distribution, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend or other distribution, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. 2E. Computation of Consideration. For the purposes of this Warrant: (a) The consideration for the issue or sale of any Additional Shares of Common Stock or for the issue, sale, grant or assumption of any Options or Convertible Securities, irrespective of the accounting treatment of such consideration, (i) insofar as it consists of cash, shall be computed as the amount of cash received by the Company, and insofar as it consists of securities or other property, shall be computed as of the date immediately preceding such issue, sale, grant or assumption as the Fair Value of such consideration (or, if such consideration is received for the issue or sale of Additional Shares of Common Stock and the Market Price thereof is less than the Fair Value of such -6- consideration, then such consideration shall be computed as the Market Price of such Additional Shares of Common Stock), in each case without deducting any expenses paid or incurred by the Company, any commissions or compensation paid or concessions or discounts allowed to underwriters, dealers or other performing similar services and any accrued interest or dividends in connection with such issue or sale, and (ii) in case Additional Shares of Common Stock are issued or sold or Options or Convertible Securities are issued, sold, granted or assumed together with other stock or securities or other assets of the Company for a consideration which covers both, shall be the proportion of such consideration so received, computed as provided in clause (i) above, allocable to such Additional Shares of Common Stock or Options or Convertible Securities, as the case may be, all as determined in good faith by the Board of Directors of the Company. (b) All Additional Shares of Common Stock, Options or Convertible Securities issued in payment of any dividend or other distribution on any class of stock of the Company and all Additional Shares of Common Stock issued to effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock) shall be deemed to have been issued without consideration. (c) Additional Shares of Common Stock deemed to have been issued for consideration pursuant to section 2C, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subsection (a), by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. -7- 2F. Adjustments for Combinations, Etc. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Exercise Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 2G. Dilution in Case of Other Securities. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company (or any issuer of Other Securities or any other Person referred to in section 2I) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by the Company (or any such other issuer or Person) for a consideration such as to dilute, in accordance with the standards established in this section 2, the exercise rights granted by this Warrant, then, and in each such case, the computations do not apply, adjustments and readjustments provided for in this Warrant with respect to the Exercise Price shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of this Warrant, so as to protect the holder of this Warrant against the effect of such dilution. 2H. Minimum Adjustment of Exercise Price. If the amount of any adjustment of the Exercise Price required hereunder would be less than one percent of the Exercise Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least one percent of such Exercise Price; provided, that upon the exercise of this Warrant, all adjustments carried forward and not theretofore made up to and including the date of such exercise shall be made to the nearest .001 of a cent. 2I. Changes in Common Stock. In case at any time the Company shall be a party to any transaction (including, without limitation, a merger, consolidation, sale of all or substantially all of the Company's assets, liquidation or recapitalization of the Common Stock) in which the previously outstanding Common Stock shall be changed into or exchanged for different securities of the Company or common stock or other securities of another corporation or interests in a noncorporate entity or other property (including cash) or any combination of any of the foregoing or in which the Common Stock ceases to be a publicly traded security either listed on the New York Stock Exchange or the American Stock Exchange or quoted by the Nasdaq National Market or any successor thereto or comparable system (each such transaction being herein called the "Transaction", the date on which the Transaction is first announced to the public being herein called the "Announcement Date", the date of consummation of the Transaction being herein called the "Consummation Date", the Company (in the case of a recapitalization of the Common Stock or any other such transaction in which the Company retains substantially all of its assets and survives as a corporation) or such other corporation or entity (in each other case) being herein called the "Acquiring Company", and the common stock (or equivalent equity interest) of the Acquiring Company being herein called the "Acquirer's Common Stock", except that if the Acquiring Company shall not meet -8- the requirements set forth in subsections (d), (e) and (f) below and a corporation which directly or indirectly controls the Acquiring Company (a "Parent") meets such requirements, "Acquiring Company" shall refer to such Parent and "Acquirer's Common Stock" shall refer to such Parent's common stock (or equivalent equity interests)) then, as a condition of the consummation of the Transaction, lawful and adequate provisions (in form satisfactory to the Required Holders) shall be made so that the holder of this Warrant, upon the exercise thereof at any time on or after the Consummation Date (but subject, in the case of an election pursuant to subsection (b) or (c) below, to the time limitation hereinafter provided for such election), (a) shall be entitled to receive, and this Warrant shall thereafter represent the right to receive, in lieu of the Common Stock issuable upon such exercise prior to the Consummation Date, shares of the Acquirer's Common Stock at an Exercise Price per share equal to the lesser of (i) the Exercise Price in effect immediately prior to the Consummation Date multiplied by a fraction the numerator of which is the Market Price per share of the Acquirer's Common Stock determined as of the Consummation Date and the denominator of which is the Market Price per share of the Common Stock determined as of the Consummation Date, or (ii) the Market Price per share of the Acquirer's Common Stock determined as of the Consummation Date (subject in each case to adjustments from and after the Consummation Date as nearly equivalent as possible to the adjustments provided for in this Warrant), or at the election of the holder of this Warrant pursuant to notice given to the Company within six months after the Consummation Date, (b) shall be entitled to receive, and this Warrant shall thereafter represent the right to receive, in lieu of each share of Common Stock issuable upon such exercise prior to the Consummation Date, either (i) the greatest amount of cash, securities or other property given to any shareholder in consideration for any share of Common Stock at any time during the period from and after the Announcement Date to and including the Consummation Date by the Acquiring Company, the Company or any Affiliate of either thereof, or (ii) an amount in cash equal to the product obtained by multiplying (x) the number of shares of the Acquirer's Common Stock purchasable upon the exercise or conversion of such Warrant as shall result from adjustments thereto that would have been required pursuant to subsection (a) above times (y) the Market Price per share for the Acquirer's Common Stock, determined as of the day within the period from and after the Announcement Date to and including the Consummation Date for which the amount determined as provided in the definition of Market Price shall have been the greatest, or, if neither the Acquiring Company nor the Parent meets the requirements set forth in subsections (d), (e) and (f) below, at the election of the holder of this Warrant pursuant to notice given to the Company within six months after the Consummation Date; or, (c) shall be entitled to receive, within 30 days after such election, in full satisfaction of the exercise rights afforded under this Warrant to the holder thereof, an amount equal to the fair market value of such exercise rights as determined by an independent investment banker (with an established national reputation as a valuer of equity securities) selected -9- by the Required Holders with the approval of the Company, such fair market value to be determined with regard to all material relevant factors but without regard to any negative effects on such value of the Transaction. The Company agrees to obtain, and deliver to each holder of Warrants a copy of the determination of an independent investment banker (selected by the Required Holders with the approval of the Company) necessary to permit elections under subsection (c) above within 15 days after the Consummation Date of any Transaction to which subsection (c) is applicable. Notwithstanding anything contained herein to the contrary, the Company shall not effect any Transaction unless prior to the consummation thereof each corporation or entity (other than the Company) which may be required to deliver any securities or other property upon the exercise of Warrants shall assume, by written instrument delivered to each holder of Warrants, the obligation to deliver to such holder such securities or other property as to which, in accordance with the foregoing provisions, such holder may be entitled, and such corporation or entity shall have similarly delivered to each holder of Warrants an opinion of counsel for such corporation or entity, satisfactory to each holder of Warrants, which opinion shall state that all the outstanding Warrants, shall thereafter continue in full force and effect and shall be enforceable against such corporation or entity in accordance with the terms hereof and thereof, together with such other matters as such holders may reasonably request. 2J. Certain Issues Excepted. Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment of the Exercise Price in the case of (i) the issuance of the Warrants and the issuance of shares of Common Stock issuable upon exercise of the Warrants (ii) the issuance or sale of Common Stock upon the exercise of Options granted by the Company pursuant to the 1995 Stock Option Plan or the Options to purchase 53,000 shares of Common Stock that have vested as of the date hereof pursuant to the 1997 Stock Option Plan, or (iii) the grant of Options that may be granted after the date hereof to non-management employees of the Company or any of its Affiliates pursuant to any benefit plans of the Company or such Affiliates. 2K. Notice of Adjustment. Upon the occurrence of any event requiring an adjustment of the Exercise Price, then and in each such case the Company shall promptly deliver to the holder of this Warrant an Officer's Certificate stating the Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of shares of Common Stock issuable upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Within 90 days after each fiscal year in which any such adjustment shall have occurred, or within 30 days after any request therefor by the holder of this Warrant stating that such holder contemplates the exercise of such Warrant, the Company will obtain and deliver to the holder of this Warrant the opinion of its regular independent auditors or another firm of independent public accountants of recognized national standing selected by the Company's Board of Directors, which opinion shall confirm the statements in the most recent Officer's Certificate delivered under this section 2K. -10- 2L. Other Notices. In case at any time: (a) the Company shall declare to the holders of Common Stock any dividend other than a regular periodic cash dividend or any periodic cash dividend in excess of 115% of the cash dividend for the comparable fiscal period in the immediately preceding fiscal year; (b) the Company shall declare or pay any dividend upon Common Stock payable in stock or make any special dividend or other distribution (other than regular cash dividends) to the holders of Common Stock; (c) the Company shall offer for subscription pro rata to the holders of Common Stock any additional shares of stock of any class or other rights; (d) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or other entity; (e) there shall be a voluntary or involuntary dissolution, liquidation or winding- up of the Company; (f) there shall be made any tender offer for any shares of capital stock of the Company; or (g) there shall be any other Transaction; then, in any one or more of such cases, the Company shall give to the holder of this Warrant (i) at least 15 days prior to any event referred to in subsection (a) or (b) above, at least 30 days prior to any event referred to in subsection (c), (d) or (e) above, and within five days after it has knowledge of any pending tender offer or other Transaction, written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up or Transaction or the date by which shareholders must tender shares in any tender offer and (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up or tender offer or Transaction known to the Company, at least 30 days prior written notice of the date (or, if not then known, a reasonable approximation thereof by the Company) when the same shall take place. Such notice in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (ii) shall also specify the date (if known to the Company) on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding-up, tender offer or Transaction, as the case may be. Such -11- notice shall also state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act or to a favorable vote of security holders, if either is required. 2M. Certain Events. If any event occurs as to which, in the good faith judgment of the Board of Directors of the Company, the other provisions of this Warrant are not strictly applicable or if strictly applicable would not fairly protect the exercise rights of the holders of the Warrants in accordance with the essential intent and principles of such provisions, then the Board of Directors of the Company shall appoint its regular independent auditors or another firm of independent public accountants of recognized national standing which shall give their opinion upon the adjustment, if any, on a basis consistent with such essential intent and principles, necessary to preserve, without dilution, the rights of the holders of the Warrants. Upon receipt of such opinion, the Board of Directors of the Company shall forthwith make the adjustments described therein; provided, that no such adjustment shall have the effect of increasing the Exercise Price as otherwise determined pursuant to this Warrant. The Company may make such reductions in the Exercise Price as it deems advisable, including any reductions necessary to ensure that any event treated for Federal income tax purposes as a distribution of stock or stock rights not be taxable to recipients. 2N. Prohibition of Certain Actions. The Company will not, by amendment of its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of all Warrants from time to time outstanding, (c) will not take any action which results in any adjustment of the Exercise Price if the total number of shares of Common Stock or Other Securities issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock or Other Securities then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such conversion, and (d) will not issue any capital stock of any class which has the right to more than one vote per share or any capital stock of any class which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding-up, unless the rights of the holders thereof shall be limited to a fixed sum or percentage (or floating rate related to market yields) of par value or stated value in respect of participation in dividends and a fixed sum or percentage of par value or stated value in any such distribution of assets. -12- 3. Stock to be Reserved. The Company will at all times reserve and keep available out of the authorized Common Stock, solely for the purpose of issue upon the exercise of the Warrants as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants and the Company will maintain at all times all other rights and privileges sufficient to enable it to fulfill all its obligations hereunder. The Company covenants that all shares of Common Stock which shall be so issuable shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable, free from preemptive or similar rights on the part of the holders of any shares of capital stock or securities of the Company or any other Person, and free from all taxes, liens and charges with respect to the issue thereof (not including any income taxes payable by the holders of Warrants being exercised in respect of gains thereon), and the Exercise Price will be credited to the capital and surplus of the Company. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any applicable requirements of the National Association of Securities Dealers, Inc. and of any domestic securities exchange upon which the Common Stock may be listed. 4. Registration of Common Stock. If any shares of Common Stock required to be reserved for purposes of the exercise of Warrants require registration with or approval of any governmental authority under any Federal or State law (other than the Securities Act, registration under which is governed by the Registration Rights Agreement), before such shares may be issued upon the exercise thereof, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. Shares of Common Stock issuable upon exercise of the Warrants shall be registered by the Company under the Securities Act or similar statute then in force if required by the Registration Rights Agreement and subject to the conditions stated in such agreement. At any such time as the Common Stock is listed on any national securities exchange or quoted by the Nasdaq National Market or any successor thereto or any comparable system, the Company will, at its expense, obtain promptly and maintain the approval for listing on each such exchange or quoting by the Nasdaq National Market or such successor thereto or comparable system, upon official notice of issuance, the shares of Common Stock issuable upon exercise of the then outstanding Warrants and maintain the listing or quoting of such shares after their issuance so long as the Common Stock is so listed or quoted; and the Company will also cause to be so listed or quoted, will register under the Exchange Act and will maintain such listing or quoting of, any Other Securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company. 5. Issue Tax. The issuance of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the holders hereof for any issuance tax in respect thereto. 6. Closing of Books. The Company will at no time close its transfer books against the transfer of any Warrant or of any share of Common Stock issued or issuable upon the exercise of any Warrant in any manner which interferes with the timely exercise of such Warrant. -13- 7. No Rights or Liabilities as Stockholders. This Warrant shall not entitle the holder thereof to any of the rights of a stockholder of the Company, except as expressly contemplated herein. No provision of this Warrant, in the absence of the actual exercise of such Warrant and receipt by the holder thereof of Common Stock issuable upon such conversion, shall give rise to any liability on the part of such holder as a stockholder of the Company, whether such liability shall be asserted by the Company or by creditors of the Company. 8. Restrictive Legends. Except as otherwise permitted by this section 8, each Warrant originally issued and each Warrant issued upon direct or indirect transfer or in substitution for any Warrant pursuant to this section 8 shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, or under state securities laws, and may not be transferred in the absence of such registration or an exemption therefrom under such Act or such laws." Except as otherwise permitted by this section 8, (a) each certificate for Common Stock (or Other Securities) issued upon the exercise of any Warrant, and (b) each certificate issued upon the direct or indirect transfer of any such Common Stock (or Other Securities) shall be stamped or otherwise imprinted with a legend in substantially the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under state securities laws, and may not be transferred in the absence of such registration or an exemption therefrom under such Act or such laws." The holder of any Restricted Securities shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing the applicable legend set forth above in this section 8 when such securities shall have been (a) effectively registered under the Securities Act and disposed of in accordance with the registration statement covering such Restricted Securities, (b) sold pursuant to Rule 144 or any comparable rule under the Securities Act, (c) transferred to a limited number of institutional holders, each of which shall have represented in writing that it is acquiring such Restricted Securities for investment and not with a view to the disposition thereof, or (d) when, in the opinion of counsel (which may include in-house counsel) for the holder thereof experienced in Securities Act matters, such restrictions are no longer required in order to insure compliance with the Securities Act. 9. Availability of Information. The Company will cooperate with each holder of any Restricted Securities in supplying such information as may be necessary for such holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of an exemption from the Securities Act for the sale of any Restricted Securities. The Company will furnish to each holder of any Warrants, promptly upon their -14- becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Company to its stockholders, and copies of all regular and periodic reports and all registration statements and prospectuses filed by the Company with any securities exchange or with the Commission. 10. Information Required By Rule 144A. The Company will, upon the request of the holder of this Warrant, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Warrants, except at such times as the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. For the purpose of this section 10, the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. 11. Registration Rights Agreement; Participation Rights Agreement. The holder of this Warrant and the holders of any securities issued or issuable upon the exercise hereof are each entitled to the benefits of the Registration Rights Agreement and the Participation Rights Agreement. 12. Ownership, Transfer and Substitution of Warrants. 12A. Ownership of Warrants. Except as otherwise required by law, the Company may treat the Person in whose name any Warrant is registered on the register kept at the principal office of the Company as the true and lawful owner and holder thereof for all purposes, notwithstanding any notice to the contrary except that, if and when any Warrant is properly assigned in blank, the Company, in its discretion, may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes, notwithstanding any notice to the Company to the contrary. Subject to section 8, a Warrant, if properly assigned, may be exercised by a new holder without first having a new Warrant issued. 12B. Transfer and Exchange of Warrants. Upon the surrender of any Warrant, properly endorsed, for registration of transfer or for exchange at the principal office of the Company, the Company at its expense will (subject to compliance with section 8, if applicable) execute and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Original Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 12C. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant held by a Person other than the Purchaser or any institutional investor reasonably satisfactory to the Company, upon delivery of its unsecured indemnity reasonably satisfactory to the Company in form and amount or, in the case of any such mutilation, upon surrender of such Warrant for cancellation at the -15- principal office of the Company, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 13. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Additional Shares of Common Stock" shall mean all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to section 2C or 2D) deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than shares of Common Stock issued upon the exercise or partial exercise of the Warrants. "Acquiring Company" shall have the meaning specified in Section 2I. "Acquirer's Common Stock" shall have the meaning specified in Section 2I. "Affiliate" shall have the meaning specified in the Purchase Agreement. "Announcement Date" shall have the meaning specified in Section 2I. "Business Day" shall mean any day on which banks are open for business in New York City (other than a Saturday, a Sunday or a legal holiday in the States of New York or New Jersey), provided, that any reference to "days" (unless Business Days are specified) shall mean calendar days. "Cashless Exercise" shall have the meaning specified in section 1F. "Commission" shall mean the Securities and Exchange Commission or any successor federal agency having similar powers. "Common Stock" shall mean the Original Common Stock, any stock into which such stock shall have been converted or changed or any stock resulting from any reclassification of such stock and all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. "Company" shall mean Hallwood Consolidated Resources Corporation, a Delaware corporation. "Consummation Date" shall have the meaning specified in section 2I. -16- "Convertible Securities" shall mean any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exercise Price" shall have the meaning specified in section 1A. "Fair Value" shall mean with respect to any securities or other property, the fair value thereof as of a date which is within 15 days of the date as of which the determination is to be made (a) determined by agreement between the Company and the Required Holders, or (b) if the Company and the Required Holders fail to agree, determined jointly by an independent investment banking firm retained by the Company and by an independent investment banking firm retained by the Required Holders, either of which firms may be an independent investment banking firm regularly retained by the Company, or (c) if the Company or the Required Holders shall fail so to retain an independent investment banking firm within ten Business Days of the retention of such a firm by the Required Holders or the Company, as the case may be, determined solely by the firm so retained, or (d) if the firms so retained by the Company and by such holders shall be unable to reach a joint determination within 15 Business Days of the retention of the last firm so retained, determined by another independent investment banking firm which is not a regular investment banking firm of the Company chosen by the first two such firms. "Initial Date" shall have the meaning specified in section 2A. "Market Price" shall mean on any date specified herein, (a) with respect to Common Stock or to common stock (or equivalent equity interests) of an Acquiring Person or its Parent, the amount per share equal to (i) the last sale price of shares of Common Stock, regular way, or of shares of such common stock (or equivalent equity interests) on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which the same are then listed or admitted to trading, or (ii) if no shares of Common Stock or no shares of such common stock (or equivalent equity interests), as the case may be, are then listed or admitted to trading on any national securities exchange, the last sale price of shares of Common Stock, regular way, or of shares of such common stock (or equivalent equity interests) on such date, in each case or, if no such sale takes place on such date, the average of the reported closing bid and asked prices thereof on such date as quoted in the Nasdaq National Market or, if no shares of Common Stock or no shares of such common stock (or equivalent equity interest), as the case may be, are then quoted in the Nasdaq National Market, as published by the National Quotation Bureau, Incorporated or any similar successor organization, and in either case as reported by any member firm of the New York Stock Exchange selected by the Company, or (iii) if no shares of Common Stock or no shares of such common stock (or equivalent equity interests), as the case may be, are then listed or admitted to trading on any national securities exchange or quoted or published in the over-the-counter market, the higher of (x) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board -17- of Directors of the Company, as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made or (y) the Fair Value thereof; and (b) with respect to any other securities, the Fair Value thereof. "1995 Stock Option Plan" shall mean the 1995 Stock Option Plan for Hallwood Consolidated Resources Corporation pursuant to which Options for 159,000 shares of Common Stock have been granted and have become vested and of which 10,770 have been exercised as of the date hereof. "1997 Stock Option Plan" shall mean the 1997 Stock Option Plan for Hallwood Consolidated Resources Corporation pursuant to which Options for 159,000 shares of Common Stock have been granted and of which Options for 53,000 shares have become vested (with no Options having been exercised) as of the date hereof. "Officer's Certificate" shall mean a certificate signed in the name of the Company by its President, one of its Vice Presidents or its Treasurer. "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities. "Original Common Stock" shall have the meaning specified in the opening paragraphs of this Warrant. "Other Securities" shall mean any stock (other than Common Stock) and any other securities of the Company or any other Person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to section 2I or otherwise. "Parent" shall have the meaning specified in section 2I. "Participation Rights Agreement" shall mean that certain Participation Rights Agreement dated of even date herewith by and among the Purchaser, the Company and certain holders of the Company's Common Stock that are parties thereto. "Person" shall mean and include an individual, a partnership, an association, a joint venture, a corporation, a trust, a limited liability company, an unincorporated organization and a government or any department or agency thereof. "Purchase Agreement" shall have the meaning specified in the opening paragraphs of this Warrant. -18- "Purchaser" shall have the meaning specified in the opening paragraphs of this Warrant. "Registration Rights Agreement" shall mean the Registration Rights Agreement dated of even date herewith by and between the Company and the Purchaser. "Required Holders" shall mean the holders of at least 66 2/3% of all the Warrants at the time outstanding, determined on the basis of the number of shares of Common Stock then purchasable upon the exercise of all Warrants then outstanding. "Restricted Securities" shall mean (a) any Warrants bearing the applicable legend set forth in section 8 and (b) any shares of Common Stock (or Other Securities) which have been issued upon the exercise of Warrants and which are evidenced by a certificate or certificates bearing the applicable legend set forth in such section, and (c) unless the context otherwise requires, any shares of Common Stock (or Other Securities) which are at the time issuable upon the exercise of Warrants and which, when so issued, will be evidenced by a certificate or certificates bearing the applicable legend set forth in such section. "Securities Act" shall mean the Securities Act of 1933, as amended. "Transaction" shall have the meaning specified in section 2I. "Warrant" shall have the meaning specified in the opening paragraphs of this Warrant. 14. Remedies. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 15. Notices. All notices and other communications under this Warrant shall be in writing and shall be sent (a) by registered or certified mail, return receipt requested, (b) by telecopy if the sender on the same day sends a conforming copy of such notice by a recognized overnight delivery service, or (c) by a recognized overnight delivery service, addressed (i) if to any holder of any Warrant or any holder of any Common Stock (or Other Securities), at the registered address of such holder as set forth in the applicable register kept at the principal office of the Company, or (ii) if to the Company, to the attention of the Legal Department at its principal office, provided that the exercise of any Warrant shall be effected in the manner provided in section 1. -19- 16. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. The agreements of the Company contained in this Warrant other than those applicable solely to the Warrants and the holders thereof shall inure to the benefit of and be enforceable by any holder or holders at the time of any Common Stock (or Other Securities) issued upon the exercise of Warrants, whether so expressed or not. This Warrant shall be construed and enforced in accordance with and governed by the laws of the State of New York. The section headings in this Warrant are for purposes of convenience only and shall not constitute a part hereof. HALLWOOD CONSOLIDATED RESOURCES CORPORATION By: /s/ Cathleen M. Osborn Name: Cathleen M. Osborn Title: Vice President -20- FORM OF SUBSCRIPTION (To be executed only upon exercise of Warrant) To HALLWOOD CONSOLIDATED RESOURCES CORPORATION The undersigned registered holder of the within Warrant hereby irrevocably exercises such Warrant for, and purchases thereunder, _____1 shares of Common Stock of HALLWOOD CONSOLIDATED RESOURCES CORPORATION, [and herewith makes payment of $_______________ therefor]2 [in a Cashless Exercise pursuant to Section 1F of the within Warrant]3, and requests that the certificates for such shares be issued in the name of, and delivered to _________________________ whose address is _________________________. Dated: (Signature must conform in all respects to name of holder as specified on the face of this Warrant) (Street Address) (City) (State) (Zip Code) - -------- 1 Insert here the number of shares called for on the face of this Warrant (or, in the case of a partial exercise, the portion thereof as to which this Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of this Warrant, may be delivered upon exercise. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of this Warrant, to the holder surrendering the same. 2 Use in connection with an exercise involving a delivery of funds to the Company. 3 Use in connection with a Cashless Exercise. -21- FORM OF ASSIGNMENT (To be executed only upon transfer of Warrant) For value received, the undersigned registered holder of the within Warrant hereby sells, assigns and transfers unto _________________________ the right represented by such Warrant to purchase _________________________1 shares of Common Stock of HALLWOOD CONSOLIDATED RESOURCES CORPORATION, to which such Warrant relates, and; appoints _________________________ Attorney to make such transfer on the books of HALLWOOD CONSOLIDATED RESOURCES CORPORATION, maintained for such purpose, with full power of substitution in the premises. Dated: (Signature must conform in all respects to name of holder as specified on the face of this Warrant) - ------------------------------------------------------------------------------- (Street Address) - ------------------------------------------------------------------------------- (City) (State) (Zip Code) Signed in the presence of: - -------- 1 Insert here the number of shares called for on the face of this Warrant (or, in the case of a partial exercise, the portion thereof as to which this Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of this Warrant, may be delivered upon exercise. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of this Warrant, to the holder surrendering the same. -22- EX-4.2 3 REGISTRATION RIGHTS AGREEMENT EXHIBIT F REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of December 23, 1997, between HALLWOOD CONSOLIDATED RESOURCES CORPORATION, a Delaware corporation (the "Company"), and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "Purchaser"). 1. Background. The Company and the Purchaser have entered into that certain Subordinated Note and Warrant Purchase Agreement (the "Purchase Agreement"), dated as of the date hereof, pursuant to which the Company has agreed, among other things, to issue and sell its Common Stock Purchase Warrants (the "Warrants"), evidencing rights to purchase an aggregate of 98,599 shares (subject to adjustment as provided therein) of the Company's common stock, par value $0.01 per share (the "Common Stock"). This agreement shall become effective upon the issuance of such Warrants. 2. Registration under Securities Act, etc. 2.1. Registration on Request. (a) Request by Holders of Warrants or Registrable Securities. At any time after the date hereof any holder or holders of Warrants or Registrable Securities may request in writing that the Company effect the registration under the Securities Act of all or part of such holders' Registrable Securities. Such request shall specify the number of shares of Registrable Securities proposed to be sold by such holder or holders and the intended method of disposition thereof. Promptly after receiving such request, the Company will give written notice of such requested registration to all other holders of Warrants or Registrable Securities and thereupon the Company will use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Securities which the Company has been so requested to register by such holders, and (ii) all other Registrable Securities which the Company has been requested to register by such other holders of Warrants or Registrable Securities by written request given to the Company within 30 days after the giving of such written notice by the Company (which request shall specify the number of shares of 1 Registrable Securities proposed to be sold by such holder or holders and the intended method of disposition of such Registrable Securities), all to the extent necessary to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered. (b) Registration of Other Securities. Whenever the Company shall effect a registration pursuant to this Section 2.1 in connection with an underwritten offering by one or more holders of Registrable Securities, no securities other than Registrable Securities shall be included among the securities covered by such registration unless (a) the managing underwriter of such offering shall have advised each holder of Registrable Securities to be covered by such registration (and each holder of Warrants therefor) in writing that the inclusion of such other securities would not adversely affect such offering or (b) the holders of all Registrable Securities to be covered by such registration (and the holders of all Warrants therefor) shall have consented in writing to the inclusion of such other securities. (c) Registration Statement Form. Registrations under this Section 2.1 shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and as shall be reasonably acceptable to the Requisite Holders and (ii) as shall permit the disposition of such Registrable Securities in accordance with the intended method or methods of disposition specified in their request for such registration. The Company agrees to include in any such registration statement all information which holders of Registrable Securities being registered (or holders of Warrants therefor) shall reasonably request. (d) Expenses. The Company will pay all Registration Expenses in connection with any registration requested pursuant to this Section 2.1 if such registration has been requested in relation to at least 66 2/3% (by number of shares) of Registrable Securities; provided, however, that the Company shall in all events and at all times be responsible for the fees and disbursements of counsel for the Requisite Holders in connection with the rendering of opinions requested by the Company or any underwriter. The Registration Expenses (and underwriting discounts and commissions and transfer taxes, if any) in connection with each other registration requested under this Section 2.1 shall be allocated on a pro rata basis among all Persons on whose behalf securities of the Company are included in such registration, in accordance with the amount of the securities then being registered on behalf of each such Person. (e) Effective Registration Statement. A registration requested pursuant to this Section 2.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, (ii) if after it has become effective, such effectiveness has been suspended for one or more periods that equal or exceed ten (10) Business Days in the aggregate by the issuance of any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason, or (iii) if the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied. 2 (f) Selection of Underwriters. If a requested registration pursuant to this Section 2.1 involves an underwritten offering, the underwriter or underwriters thereof shall be selected by the Company and shall be reasonably satisfactory to the Requisite Holders. (g) Priority in Requested Registrations. If a requested registration pursuant to this Section 2.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Warrants or Registrable Securities requesting registration) that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the Requisite Holders, the Company will include in such registration to the extent of the number which the Company is so advised can be sold in such offering Registrable Securities requested to be included in such registration, pro rata among the holders of Registrable Securities (or Warrants therefor) requesting such registration on the basis of the percentage of such Registrable Securities held by or issuable to such holders. In connection with any registration as to which the provisions of this subdivision (g) apply, no securities other than Registrable Securities shall be covered by such registrations. The holders of Warrants or Registrable Securities shall be entitled to no more than two requested registrations pursuant to this Section 2.1. 2.2. Incidental Registration. (a) Right to Include Registrable Securities. If the Company at any time proposes to register any of its securities under the Securities Act (other than by a registration on Form S-4 or S-8 or any successor or similar form and other than pursuant to Section 2.1), whether or not for sale for its own account, it will each such time give prompt written notice to all holders of Warrants or Registrable Securities of its intention to do so and of such holders' rights under this Section 2.2. Upon the written request of any such holder made within 30 days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holders thereof, provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each holder of Warrants or Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Warrants or Registrable Securities entitled to do so to request that such registration be effected as a registration under Section 2.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected 3 under this Section 2.2 shall be deemed to have been effected pursuant to Section 2.1 or shall relieve the Company of its obligation to effect any registration upon request under Section 2.1. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 2.2. (b) Priority in Incidental Registrations. If (i) a registration pursuant to this Section 2.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, and (ii) the managing underwriter of such underwritten offering shall inform by letter the Company and the holders of Warrants or Registrable Securities requesting such registration of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering, then the Company may include all securities proposed by the Company to be sold for its own account and may decrease the number of Registrable Securities and other securities of the Company so proposed to be sold and so requested to be included in such registration (pro rata among the holders thereof on the basis of the number of such Registrable Securities and other securities held by such holders and requested to be included therein) to the extent necessary to reduce the number of securities to be included in the registration to the level recommended by the managing underwriter. 2.3. Registration Procedures. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 2.1 and 2.2, the Company will as expeditiously as possible: (i) prepare and (as soon thereafter as possible or in any event no later than 90 days after the end of the period within which requests for registration may be given to the Company) file with the Commission the requisite registration statement to effect such registration and thereafter use its best efforts to cause such registration statement to become effective, provided that the Company may discontinue any registration of its securities which are not Registrable Securities (and, under the circumstances specified in Section 2.2(a), its securities which are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement (which period shall not exceed 270 days from the date the registration statement is declared effective unless the effectiveness thereof is suspended for any reason); 4 (iii) furnish to each seller of Registrable Securities covered by such registration statement such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request; (iv) use its best efforts to register or qualify all Registrable Securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as each seller thereof shall reasonably request, to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities covered by the registration statement, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified, to subject itself to taxation in any jurisdiction or to consent to general service of process in any such jurisdiction where it is not then so subject; (v) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) furnish to each seller of Registrable Securities and each Requesting Holder a signed counterpart, addressed to such seller and such Requesting Holder (and underwriters, if any) of: (x) an opinion of counsel for the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), reasonably satisfactory in form and substance to such seller and such Requesting Holder, and (y) a "comfort" letter, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such 5 financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters, and, in the case of the legal opinion, such other legal matters, as such seller or such Requesting Holder, if any, may reasonably request; (vii) notify each seller of Registrable Securities covered by such registration statement and each Requesting Holder, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such seller or Requesting Holder promptly prepare and furnish to such seller or Requesting Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (viii) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the end of the fiscal quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act, and will furnish to each such seller at least five business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (ix) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement; (x) use its best efforts to cause all Registrable Securities covered by such registration statement to be listed on any securities exchange on which any of the Registrable Securities are then listed or to be quoted by the Nasdaq National Market (or any successor thereto or any comparable system) on which any of the Registrable Securities are then quoted; and 6 (xi) enter into such agreements and take such other actions as the Requisite Holders shall reasonably request in order to expedite or facilitate the disposition of such Registrable Securities. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that upon receipt of any notice from the Company of the happening of any event of the kind described in the subdivision (vii) of this Section 2.3, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of this Section 2.3 or until it is advised in writing (the "Advice") by the Company that the use of the prospectus may be resumed, and, if so directed by the Company, such holders will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holders' possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. In the event the Company shall give any such notice to suspend the offering and disposition of the Registrable Securities (including, without limitation, pursuant to the next paragraph hereof), the time periods regarding the maintenance of the applicable registration statement shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to subdivision (vii) of this Section 2.3 and including the date when such holders shall have received the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of this Section 2.3 or the Advice. Notwithstanding the foregoing, (a) the Company may delay the filing of any registration statement, any amendment thereof or any supplement to the related prospectus, and may withhold efforts to cause any registration statement to become effective, and (b) in the case of an effective registration statement, upon the written request of the Company the holders of Registrable Securities participating in such registration shall refrain from selling any shares pursuant to such registration statement, if (i) the Company determines in good faith that such registration or sale would (A) materially interfere with or adversely affect in any material respect the negotiation or completion of any material transaction that is being contemplated by the Company at the time the right to delay is exercised or a request is made or (B) involve initial or continuing disclosure obligations not otherwise required by law or the rules and regulations of the Commission, which disclosure would have a material adverse effect on the Company or (ii) in the written opinion of a nationally recognized investment bank, that the Company is unable to consummate an underwritten offering due to then currently prevailing market conditions; provided however, that the duration of any such delay or period in which shares of Registrable Securities may not be sold pursuant to an effective registration statement shall not exceed a period of 90 days. 7 2.4 Underwritten Offerings. (a) Requested Underwritten Offerings. If requested by the underwriters for any underwritten offering of Registrable Securities pursuant to a registration requested under Section 2.1, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to be reasonably satisfactory in substance and form to each holder of such Registrable Securities (or Warrants therefor) and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally customary in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in Section 2.7. The holders of Registrable Securities to be distributed by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. (b) Incidental Underwritten Offerings. If the Company at any time proposes to register any of its securities under the Securities Act as contemplated by Section 2.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Warrants or Registrable Securities as provided in Section 2.2 and subject to the provisions of Section 2.2(b), arrange for such underwriters to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters. The holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registrable Securities. Any such holder of Registrable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registrable Securities and such holder's intended method of distribution and any other representation required by law. 2.5. Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the Company will give the holders of Registrable Securities registered under such registration statement (or the holders of 8 Warrants therefor), their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act; provided, however, that such holder shall, if requested by the Company, cause its counsel and accountants to execute confidentiality agreements in customary form and such holder shall, consistent with its customary practices, use its best efforts to keep confidential any records, information or documents that are designated by the Company in writing as confidential, except that such records, information and documents may be disclosed by such holder to (i) such holder's directors, officers, employees, agents and professional consultants, (ii) any other holder of any Registrable Security, (iii) any Person to which such holder offers to sell Registrable Securities or any part thereof, (iv) any Person from which such holder offers to purchase any other security of the Company, (v) any federal or state regulatory authority having jurisdiction over such holder, (vi) the National Association of Insurance Commissioners or any similar organization, or (vii) any other Person to which such delivery or disclosure may be necessary or appropriate (a) in compliance with any law, rule, regulation or order applicable to such holder, (b) in response to any subpoena or other legal process or other investigative demand, or (c) in connection with any litigation to which such holder is a party; provided, further that such holder shall cause the agents and professional consultants referred to in clause (i) and the Persons referred to in clauses (iii) and (iv) to enter into confidentiality agreements which shall contain provisions substantially identical to those applicable to such holders under this Section 2.5. 2.6. Rights of Requesting Holders. The Company will not file any registration statement under the Securities Act, unless it shall first have given to all holders of Warrants or Registrable Securities at least 30 days prior written notice thereof and, if so requested by the Requisite Holders, shall have consulted with such holders concerning the selection of underwriters, counsel and independent accountants for the Company for such offering and registration. If such holders shall so request within 30 days after such notice, each of them shall be a "Requesting Holder" hereunder and shall have the rights of a Requesting Holder provided in this section 2.6 and in sections 2.3, 2.5 and 2.7. The Company further covenants that a Requesting Holder shall have the right (a) to participate in the preparation of any such registration or comparable statement and to require the insertion therein of material furnished to the Company in writing, which in such Requesting Holder's judgment, reasonable exercised, should be included, and (b) at the Company's expense, to retain counsel and/or independent public accountants to assist such Requesting Holder in such participation. In addition, if any such registration statement refers to any Requesting Holder by name or otherwise as the holder of any securities of the Company, then such Requesting Holder shall have the right to require (a) the insertion therein of language, in form and substance satisfactory to such Requesting Holder, to the effect that the holding by such Requesting Holder of such securities does not necessarily make such Requesting Holder a "controlling person" of the Company within the meaning of the Securities Act and is not to be 9 construed as a recommendation by such Requesting Holder of the investment quality of the Company's debt or equity securities covered thereby and that such holding does not imply that such Requesting Holder will assist in meeting any future financial requirements of the Company, or (b) in the event that such reference to such Requesting Holder by name or otherwise is not required by the Securities Act or any rules and regulations promulgated thereunder, the deletion of the reference to such Requesting Holder. 2.7. Indemnification. (a) Indemnification by the Company. The Company will, and hereby does, in the case of any registration statement filed pursuant to Section 2.1 or 2.2 indemnify and hold harmless the seller of any Registrable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller or any such director or officer or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any other noncompliance or alleged noncompliance with the Securities Act or the applicable underwriting agreement, and the Company will reimburse such seller and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation thereof and, provided further that the Company shall not be liable to any Person who participates as an underwriter, in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended, to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or any such 10 director, officer, underwriter or controlling person and shall survive the transfer of such Registrable Securities by such seller. (b) Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 2.3, that the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registrable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 2.7) the Company, each director of the Company, each officer of the Company and each other Person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling Person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 2.7, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 2.7, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this Section 2.7 (with appropriate modifications) shall be given by the Company and each 11 seller of Registrable Securities with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority other than the Securities Act. (e) Indemnification Payments. The indemnification required by this Section 2.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense as and when bills are received or expense, loss, damage or liability is incurred. 2.8. Adjustments Affecting Registrable Securities. The Company will not effect or permit to occur any combination or subdivision of shares which would adversely affect the ability of the holders of Registrable Securities or Warrants therefor to include such Registrable Securities in any registration of its securities contemplated by this Section 2 or the marketability of such Registrable Securities under any such registration. 3. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: Commission: The Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. Common Stock: As defined in Section 1. Company: As defined in the introductory paragraph of this Agreement. Exchange Act: The Securities Exchange Act of 1934, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934 shall include a reference to the comparable section, if any, of any such similar Federal statute. Person: A corporation, an association, a partnership, a business, a joint venture, a limited liability company, an individual, a governmental or political subdivision thereof or a governmental agency. Purchase Agreement: As defined in Section 1. Purchaser: As defined in the introductory paragraph of this Agreement. Registrable Securities: (a) Any shares of Common Stock issued or issuable upon exercise of any of the Warrants and (b) any securities issued or issuable with respect to any such Common Stock by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registrable 12 Securities, once issued such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been sold pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, or (d) they shall have ceased to be outstanding. Registration Expenses: All expenses incident to the Company's performance of or compliance with Section 2, including, without limitation, all registration, filing and National Association of Securities Dealers fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the fees and disbursements incurred by the holders of Registrable Securities to be registered and the holders of Warrants therefor (including the fees and disbursements of any counsel and accountants retained by the Requisite Holders), premiums and other costs of policies of insurance against liabilities arising out of the public offering of the Registrable Securities being registered and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes, if any, provided that, in any case where Registration Expenses are not to be borne by the Company, such expenses shall not include salaries of Company personnel or general overhead expenses of the Company, auditing fees, premiums or other expenses relating to liability insurance required by underwriters of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business or which the Company would have incurred in any event. Requesting Holder: As defined in Section 2.6. Requisite Holders: With respect to any registration of Registrable Securities by the Company pursuant to Section 2, any holder or holders of 66 2/3% (by number of shares) of the Registrable Securities to be so registered or of Warrants for such Registrable Securities. Securities Act: The Securities Act of 1933, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as of the same shall be in effect at the time. 13 References to a particular section of the Securities Act of 1933 shall include a reference to the comparable section, if any, of any such similar Federal Statute. 4. Rule 144: If the Company shall have filed a registration statement pursuant to the requirements of Section 12 of the Exchange Act or a registration statement pursuant to the requirements of the Securities Act, the Company will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder (or, if the Company is not required to file such reports, will, upon the request of any holder of Warrants or Registrable Securities, make publicly available other information) and will take such further action as any holder of Warrants or Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any holder of Warrants or Registrable Securities, the Company will deliver to such holder a written statement as to whether it has complied with such requirements. 5. Amendments and Waivers. This Agreement may be amended and the Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the Requisite Holders. Each holder of any Warrants or Registrable Securities at the time or thereafter outstanding shall be bound by any consent authorized by this Section 5, whether or not such Registrable Securities shall have been marked to indicate such consent. 6. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election, be treated as the holder of such Warrants or Registrable Securities for purposes of any request or other action by any holder or holders of Warrants or Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Warrants or Registrable Securities held by any holder or holders of Warrants or Registrable Securities contemplated by this Agreement. If the beneficial owner of any Warrants or Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Warrants or Registrable Securities. 7. Notices. All communications provided for hereunder shall be sent by first-class mail and (a) if addressed to a party other than the Company, addressed to such party in the manner set forth in the Purchase Agreement, or at such other address as such party shall have furnished to the Company in writing, or (b) if addressed to the Company, at 4582 South Ulster Street Parkway, Suite 1700, Denver, Colorado 80237 Attention: Legal Department, or at such other address, or to the attention of such other officer, as the Company shall have furnished to each holder of Warrants or Registrable Securities at the time outstanding; provided, however, that any such communication to the Company may 14 also, at the option of any of the parties hereunder, be either delivered to the Company at its address set forth above or to any officer of the Company. 8. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for the benefit of and enforceable by any subsequent holder of any Warrants or Registrable Securities, subject to the provisions respecting the minimum numbers or percentages of shares of Warrants or Registrable Securities required in order to be entitled to certain rights, or take certain actions contained herein. 9. Descriptive Headings. The descriptive headings of the several sections and subdivisions of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 10. Specific Performance. The parties hereto recognize and agree that money damages may be insufficient to compensate the holders of any Warrants or Registrable Securities for breaches by the Company of the terms hereof and, consequently, that the equitable remedy of specific performance of the terms hereof will be available in the event of any such breach. 11. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of New York. 12. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. [Remainder of Page Intentionally Left Blank; Signature Page Follows] 15 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. HALLWOOD CONSOLIDATED RESOURCES CORPORATION By: /s/ Cathleen M. Osborn Title: Vice President THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Title: 16 EX-10. 4 MANAGEMENT AGREEMENT EXTENSION EXTENSION OF MANAGEMENT AGREEMENT This Extension of Management Agreement dated May 18, 1997 is between Hallwood Petroleum, Inc. ("HPI") and Hallwood Consolidated Resources Corporation ("HCRC"). Whereas, HPI and HCRC are parties to a Management Agreement dated May 18, 1992, and Whereas, the Management Agreement provided that it may be extended for successive one year terms by written agreement of the parties, and Whereas, the parties desire to extend the Management Agreement until May 18, 1998, Now, therefore, in consideration of the mutual agreements contained herein, the parties agree that the term of the Management Agreement is extended to May 18, 1998. HALLWOOD PETROLEUM, INC. By______________________________ Russell P. Meduna Vice President HALLWOOD CONSOLIDATED RESOURCES CORPORATION By_______________________________ William L. Guzzetti President EX-10.17 5 SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT ================================================================= HALLWOOD CONSOLIDATED RESOURCES CORPORATION $25,000,000 10.32% SENIOR SUBORDINATED NOTES DUE DECEMBER 23, 2007 and COMMON STOCK PURCHASE WARRANTS --------------- SUBORDINATED NOTE AND WARRANT PURCHASE AGREEMENT --------------- Dated as of December 23, 1997 ================================================================= TABLE OF CONTENTS (Not Part of Agreement) Page PARAGRAPH 1. AUTHORIZATION OF ISSUE OF SECURITIES.............................1 1A. Authorization of Issue of Notes.................................1 1B. Authorization of Issue of Warrants..............................1 PARAGRAPH 2. PURCHASE AND SALE OF SECURITIES..................................2 2. Purchase and Sale of Securities.................................2 PARAGRAPH 3. CONDITIONS PRECEDENT.............................................2 3. Conditions to Closing...........................................2 3A. Certain Documents.........................................2 3B. Opinion of Purchaser's Special Counsel....................4 3C. Representations and Warranties; No Default................4 3D. Purchase Permitted By Applicable Laws.....................4 3E. Proceedings...............................................4 3F. Private Placement Numbers.................................4 3G. Fees......................................................4 PARAGRAPH 4. PREPAYMENTS......................................................5 4. Prepayments.....................................................5 4A. Required Prepayments......................................5 4B. Optional Prepayment of Notes with Yield-Maintenance Amount...................................................5 4C. Change in Control.........................................5 4D. Partial Payments Pro Rata.................................7 4E. Retirement of Notes.......................................7 PARAGRAPH 5. AFFIRMATIVE COVENANTS............................................7 5. Affirmative Covenants...........................................7 5A. Financial Statements......................................7 5B. Information Required by Rule 144A........................10 5C. Inspection of Property...................................10 5D. Covenant to Secure Notes Equally.........................10 5E. Corporate Existence, Licenses and Permits; Maintenance of Properties...........................................11 5F. Maintenance of Insurance.................................11 5G. Payment of Taxes and Other Claims........................11 5H. ERISA Compliance.........................................12 (i) 5I. Compliance with Laws.....................................12 5J. Maintenance of Books of Record; Reserves.................12 5K. Assumption of the Subsidiary Guaranty by After-Acquired Subsidiaries............................................12 PARAGRAPH 6. NEGATIVE COVENANTS..............................................13 6. Negative Covenants.............................................13 6A. Financial Covenants......................................13 6B. Other Restrictions.......................................13 6C. Change of Business.......................................17 6D. New Subsidiaries.........................................17 PARAGRAPH 7. SUBORDINATION OF NOTES..........................................17 7A. Subordination...........................................17 7B. Obligation of the Company Unconditional.................19 7C. Subrogation.............................................19 7D. Rights of Holders of Senior Debt........................19 PARAGRAPH 8. EVENTS OF DEFAULT...............................................20 8. Events of Default..............................................20 8A. Acceleration............................................20 8B. Rescission of Acceleration..............................23 8C. Notice of Acceleration or Rescission....................23 8D. Other Remedies..........................................23 PARAGRAPH 9. REPRESENTATIONS, COVENANTS AND WARRANTIES.......................24 9. Representations, Covenants and Warranties......................24 9A. Organization............................................24 9B. Financial Statements....................................24 9C. Actions Pending.........................................24 9D. Outstanding Indebtedness................................25 9E. Title to Properties.....................................25 9F. Taxes...................................................25 9G. Conflicting Agreements and Other Matters................25 9H. Authorized Capital Stock................................26 9I. Offering of Securities..................................26 9J. Use of Proceeds.........................................27 9K. ERISA...................................................27 9L. Governmental Consent....................................27 9M. Environmental Compliance................................28 9N. Disclosure..............................................28 (ii) PARAGRAPH 10. REPRESENTATIONS OF THE PURCHASER...............................28 10. Representations of the Purchaser..............................28 10A. Nature of Purchase......................................28 10B. Source of Funds.........................................28 PARAGRAPH 11. DEFINITIONS....................................................29 11. Definitions...................................................29 11A. Yield-Maintenance Terms.................................29 11B. Other Terms.............................................30 11C. Accounting Principles, Terms and Determinations.........39 PARAGRAPH 12. MISCELLANEOUS..................................................39 12. Miscellaneous.................................................39 12A. Note Payments...........................................40 12B. Expenses................................................40 12C. Consent to Amendments...................................40 12D. Form, Registration, Transfer and Exchange of Notes; Lost Notes.............................................41 12E. Persons Deemed Owners; Participations...................41 12F. Survival of Representations and Warranties; Entire Agreement.......................................41 12G. Successors and Assigns..................................42 12H. Disclosure to Other Persons.............................42 12I. Notices.................................................42 12J. Payments Due on Non-Business Days.......................42 12K. Satisfaction Requirement................................43 12L. Governing Law...........................................43 12M. Waiver of Jury Trial; Consent to Jurisdiction; Limitation of Remedies.................................43 12N. Severability............................................44 12O. Descriptive Headings....................................44 12P. Maximum Interest Payable................................44 12Q. Counterparts............................................45 (iii) PURCHASER SCHEDULE SCHEDULE 9D -- EXISTING INDEBTEDNESS, NON-RECOURSE DEBT AND LIENS SCHEDULE 9G -- LIST OF AGREEMENTS RESTRICTING INDEBTEDNESS EXHIBIT A -- FORM OF SENIOR SUBORDINATED NOTE EXHIBIT B -- FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT C-1 -- FORM OF OPINION OF COMPANY'S GENERAL COUNSEL EXHIBIT C-2 -- FORM OF OPINION OF COMPANY'S SPECIAL COUNSEL EXHIBIT D -- FORM OF SUBSIDIARY GUARANTY EXHIBIT E -- FORM OF PARTICIPATION RIGHTS AGREEMENT EXHIBIT F -- FORM OF REGISTRATION RIGHTS AGREEMENT EXHIBIT G -- FORM OF ASSUMPTION OF SUBSIDIARY GUARANTY EXHIBIT H -- FORM OF OPINION RELATING TO FUTURE SUBSIDIARY'S ASSUMPTION OF SUBSIDIARY GUARANTY (iv) HALLWOOD CONSOLIDATED RESOURCES CORPORATION 4582 South Ulster Street Parkway, Suite 1700 Denver, Colorado 80237 As of December 23, 1997 The Prudential Insurance Company of America c/o Prudential Capital Group Four Gateway Center 100 Mulberry Street Newark, New Jersey 07102 $25,000,000 10.32% Senior Subordinated Notes due 2007 Common Stock Purchase Warrants Ladies and Gentlemen: The undersigned, Hallwood Consolidated Resources Corporation, a Delaware corporation (the "Company"), hereby agrees with you as follows: PARAGRAPH 1. AUTHORIZATION OF ISSUE OF SECURITIES. 1A. Authorization of Issue of Notes. The Company will authorize the issue of its senior subordinated promissory notes (any such promissory notes which have been issued pursuant to this Agreement, and any such notes which may be issued in substitution or exchange therefor, herein collectively called the "Notes") in the aggregate principal amount of $25,000,000, to be dated the date of issue thereof, to mature December 23, 2007 and to bear interest on the unpaid balance thereof from the date thereof until the principal thereof shall have become due and payable at the rate of 10.32% per annum and on overdue payments at the rate specified therein; such Notes shall be substantially in the form of Exhibit A attached hereto. 1B. Authorization of Issue of Warrants. The Company will also authorize the issue of its Common Stock Purchase Warrants (any such Common Stock Purchase Warrants which have been issued pursuant to this Agreement, and any such Common Stock Purchase Warrants which may be issued in substitution or exchange therefor, herein collectively called the "Warrants") evidencing rights to purchase from the Company an aggregate of 98,599 shares of the Company's common stock, par value $.01 per share (the "Common Stock"), at an initial exercise price per share of $28.99, at any time or from time to time after the Date of 1 Closing, all subject to the terms, conditions and adjustments set forth in the Warrants; such Warrants shall be substantially in the form of Exhibit B attached hereto. Capitalized terms used herein have the meanings specified in paragraph 11. PARAGRAPH 2. PURCHASE AND SALE OF SECURITIES. 2. Purchase and Sale of Securities. The Company hereby agrees to sell to you and, subject to the terms and conditions herein set forth, you agree to purchase from the Company the following: (i) Notes in the aggregate principal amount of $25,000,000; and (ii) Warrants evidencing rights to purchase an aggregate of 98,599 shares of Common Stock. The aggregate purchase price for the Notes shall be 100% of the principal amount of the Notes. The aggregate purchase price for the Warrants shall be $10.00. The Company will deliver to you, at the offices of Baker & Botts, L.L.P. at 2001 Ross Avenue, Dallas, Texas 75201, (a) one or more Notes registered in your name, evidencing the aggregate principal amount of Notes to be purchased by you and in the denomination or denominations specified in the Purchaser Schedule attached hereto, and (b) one or more Warrants registered in your name, evidencing rights to purchase an aggregate of 98,599 shares of Common Stock, such Warrant or Warrants to evidence rights to purchase the number of shares of Common Stock specified in the Purchaser Schedule attached hereto, against payment of the purchase price for the Securities by transfer of immediately available funds for credit to account # 4159-672336 at Wells Fargo Bank, Denver, Colorado, ABA#121000248, on the date of closing, which shall be December 23, 1997 or any other date on or before December 31, 1997 upon which the Company and you may mutually agree (the "Closing" or the "Date of Closing"). PARAGRAPH 3. CONDITIONS PRECEDENT. 3. Conditions to Closing. Your obligation to purchase and pay for the Securities to be purchased by you hereunder is subject to the satisfaction, on or before the Date of Closing, of the following conditions: 3A. Certain Documents. You shall have received the following, each dated the Date of Closing unless otherwise indicated: (i) The Notes to be purchased by you. (ii) The Warrants to be purchased by you. 2 (iii) Certified copies of the resolutions of the Board of Directors of the Company approving this Agreement, the Notes, the Subsidiary Guaranty, the Warrants, the Registration Rights Agreement and the Participation Rights Agreement and of all documents evidencing other necessary corporate or limited partnership action and governmental approvals, if any, with respect to this Agreement, the Notes, the Subsidiary Guaranty, the Warrants, the Registration Rights Agreement and the Participation Rights Agreement. (iv) A certificate of the Secretary or an Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Agreement, the Notes, the Subsidiary Guaranty, the Warrants, the Registration Rights Agreement, the Participation Rights Agreement and the other documents to be delivered hereunder. (v) Certified copies of the Certificate of Incorporation and bylaws of the Company and of the Limited Partnership Agreement, as amended, and the Certificate of Limited Partnership, as amended, of HCP. (vi) Favorable opinions of Cathleen Osborn, Esq., General Counsel of the Company, and of King & Spalding, special counsel to the Company and HCP, satisfactory to you and substantially in the respective forms of Exhibits C-1 and C-2 attached hereto and as to such other matters as you may reasonably request. (vii) Certified copies of Requests for Information or Copies (Form UCC-11), or equivalent reports, dated within 30 days prior to the Date of Closing, listing all effective financing statements which name the Company or HCP (under its or their present name or any previous name) as debtor and which are filed in the States of Colorado, Louisiana and Texas. (viii) A letter satisfactory to you from Prudential Securities, Inc., placement agent for the Company, regarding the private offering of the Securities. (ix) The Registration Rights Agreement, duly executed and delivered by the Company. (x) The Participation Rights Agreement, duly executed and delivered by the Company and HEP. (xi) The Subsidiary Guaranty, in the form of Exhibit D attached hereto, duly executed and delivered by HCP. (xii) An amendment to the Credit Agreement to permit the issuance of the Notes and the execution, delivery and performance of this Agreement and the Subsidiary Guaranty. 3 (xiii) Additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as you may reasonably request. 3B. Opinion of Purchaser's Special Counsel. You shall have received from Baker & Botts, L.L.P., who are acting as special counsel for you in connection with this transaction, a favorable opinion satisfactory to you as to such matters incident to the matters herein contemplated as you may reasonably request. 3C. Representations and Warranties; No Default. The representations and warranties contained in paragraph 9 hereof and in section 8 of the Subsidiary Guaranty shall be true on and as of the Date of Closing, except to the extent of changes caused by the transactions herein contemplated; there shall exist on the Date of Closing no Event of Default or Default; and the Company shall have delivered to you an Officer's Certificate, dated the Date of Closing, to both such effects. 3D. Purchase Permitted By Applicable Laws. The offer by the Company of, and the purchase of and payment for, the Securities to be purchased by you on the Date of Closing on the terms and conditions herein provided (including the use of the proceeds of such Securities by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation G or X of the Board of Governors of the Federal Reserve System) and shall not subject you to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and you shall have received such certificates or other evidence as you may request to establish compliance with this condition. 3E. Proceedings. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident hereto shall be satisfactory in substance and form to you, and you shall have received all such counterpart originals or certified or other copies of such documents as you may reasonably request. 3F. Private Placement Numbers. Private Placement numbers issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes and the Warrants. 3G. Fees. Without limiting the provisions of paragraph 12B, your special counsel and your petroleum engineering consultant shall have received their respective fees, charges and disbursements to the extent reflected in statements rendered to the Company at least one Business Day prior to the Closing. 4 PARAGRAPH 4. PREPAYMENTS. 4. Prepayments. The Notes shall be subject to prepayment only with respect to the prepayments specified in paragraphs 4A, 4B and 4C. 4A. Required Prepayments. Until the Notes shall be paid in full, the Company shall apply to the prepayment of the Notes, without premium, the sum of $5,000,000 on December 23 in each of the years 2003 through 2006, inclusive, and such principal amounts of the Notes, together with accrued and unpaid interest thereon to such prepayment dates, shall become due on such prepayment dates. The remaining outstanding principal amount of the Notes, together with interest accrued and unpaid thereon, shall become due on the maturity date of the Notes. 4B. Optional Prepayment of Notes with Yield-Maintenance Amount. (i) The Notes shall be subject to prepayment, on any Business Day, in whole at any time or from time to time in part (in multiples of $1,000,000), at the option of the Company, at 100% of the principal amount so prepaid plus unpaid accrued interest thereon to the prepayment date plus the Yield-Maintenance Amount, if any, with respect to each Note being so prepaid. Any partial prepayment of the Notes pursuant to this paragraph 4B shall be applied in satisfaction of required payments of principal in inverse order of their scheduled due dates. (ii) The Company shall give the holder of each Note irrevocable written notice of any prepayment pursuant to this paragraph 4B not less than 25 days and not more than 45 days prior to the prepayment date, specifying such prepayment date and the principal amount of the Notes, and of the Notes held by such holder, to be prepaid on such date and stating that such prepayment is to be made pursuant to this paragraph 4B. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, with respect thereto, shall become due and payable on such prepayment date. 4C. Change in Control. (i) Notice of Occurrence of Change in Control. The Company will, within five Business Days after any Responsible Officer has knowledge of the occurrence of any Change in Control, give written notice of such Change in Control to each holder of Notes. If a Change in Control has occurred, such notice shall contain and constitute an offer to prepay Notes as described in clause (iii) of this paragraph 4C and shall be accompanied by the certificate described in clause (vi) hereof. (ii) Notice of Impending Change in Control. The Company will not take any action that consummates or finalizes a Change in Control unless at least 30 days prior to such action it shall have given to each holder of 5 Notes written notice of such impending Change in Control. (iii) Offer to Prepay Notes. The offer to prepay Notes contemplated by the foregoing clause (i) shall be an offer to prepay, in accordance with and subject to this paragraph 4C, all, but not less than all, the Notes held by each holder (in this case only, "holder" in respect of any Note registered in the name of a nominee for a disclosed beneficial owner shall mean such beneficial owner) on a date specified in such offer (the "Proposed Prepayment Date"). Such Proposed Prepayment Date shall be not less than 50 days and not more than 60 days after the date of such offer (if the Proposed Prepayment Date shall not be specified in such offer, the Proposed Prepayment Date shall be the 50th day after the date of such offer). (iv) Rejection; Acceptance. A holder of Notes may accept the offer to prepay made pursuant to this paragraph 4C by causing a notice of such acceptance to be delivered to the Company at least five days prior to the Proposed Prepayment Date. A failure by a holder of Notes to respond to an offer to prepay made pursuant to this paragraph 4C shall be deemed to constitute an acceptance of such offer by such holder. (v) Prepayment; Reduction of Required Prepayments. Prepayment of the Notes to be prepaid pursuant to this paragraph 4C shall be at 100% of the principal amount of such Notes, plus interest on such Notes accrued to the date of prepayment plus Yield-Maintenance Amount, if any, with respect to each Note being so prepaid. On the Business Day preceding the date of prepayment under this paragraph 4C, the Company shall deliver to each holder of Notes being so prepaid a statement showing the Yield-Maintenance Amount due in connection with such prepayment and setting forth the details of the computation of such amount. Such prepayment shall be made on the Proposed Prepayment Date. Upon any partial prepayment of Notes pursuant to this paragraph 4C, the principal amount of the required prepayment of Notes becoming due under paragraph 4A on or after the date of such prepayment shall be reduced in the same proportion as the aggregate unpaid principal amount of Notes is reduced as a result of such prepayment. (vi) Officer's Certificate. Each offer to prepay the Notes pursuant to this paragraph 4C shall be accompanied by a certificate, executed by a Responsible Officer of the Company and dated the date of such offer, specifying: (a) the Proposed Prepayment Date; (b) that such offer is made pursuant to this paragraph 4C; (c) the principal amount of each Note offered to be prepaid; (d) the estimated Yield-Maintenance Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment) and the details of such calculation; (e) the interest that would be due on each Note offered to be prepaid, accrued to the Proposed Prepayment Date; (f) that the conditions of this paragraph 4C have been fulfilled; and (g) in reasonable detail, the nature and date of the Change in Control. 6 4D. Partial Payments Pro Rata. Upon any partial prepayment of Notes pursuant to paragraph 4A or 4B the principal amount so prepaid shall be allocated to all Notes at the time outstanding (including, for the purpose of this paragraph 4D only, all such Notes prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph 4A, 4B or 4C) in proportion to the respective outstanding principal amounts thereof. 4E. Retirement of Notes. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraph 4A, 4B or 4C or upon acceleration of such final maturity pursuant to paragraph 8A), or purchase or otherwise acquire, directly or indirectly, Notes held by any holder unless the Company or such Subsidiary or Affiliate shall have offered to prepay or otherwise retire or purchase or otherwise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes held by each other holder of Notes at the time outstanding upon the same terms and conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraph 4D. PARAGRAPH 5. AFFIRMATIVE COVENANTS. 5. Affirmative Covenants. So long as any Note shall remain unpaid (or, if no Note shall remain unpaid but any Warrant shall remain outstanding, (i) if at the time in question the Common Stock is listed or admitted to trading on any national securities exchange or is traded in the over-the-counter market and is subject to bid and asked prices with respect thereto being quoted in the NASDAQ National Market, then only with respect to the covenants of the Company set forth in paragraphs 5A(i), (ii), (iii) and (vii) and 5B, or (ii) if the Common Stock is not so listed, admitted to trading or subject to such bid and asked prices being so quoted, then only with respect to the covenants of the Company set forth in paragraphs 5A, 5B and 5C (other than the provisions thereof that permit inspection of properties or require that the Company bear the expense of any inspection therein contemplated)), the Company covenants that: 5A. Financial Statements. The Company will deliver to each holder in duplicate: (i) as soon as practicable and in any event within 50 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated statements of income and cash flows and a consolidated statement of stockholders' equity of the Company and its Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail 7 and satisfactory in form to the Required Holder(s) and certified by an authorized financial officer of the Company, subject to changes resulting from year-end adjustments; provided, that delivery pursuant to clause (iii) below of copies of the Quarterly Report on Form 10-Q of the Company for such quarterly period filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (i) with respect to consolidated financial statements if such financial statements are included in such report; (ii) as soon as practicable and in any event within 100 days after the end of each fiscal year, consolidated statements of income and cash flows and a consolidated statement of stockholders' equity of the Company and its Subsidiaries for such year, and a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding consolidated figures from the preceding annual audit, all in reasonable detail and satisfactory in form to the Required Holder(s) and reported on by independent public accountants of recognized national standing selected by the Company whose report shall be without limitation as to the scope of the audit and satisfactory in substance to the Required Holder(s); provided, that delivery pursuant to clause (iii) below of copies of the Annual Report on Form 10-K of the Company for such fiscal year filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this clause (ii) with respect to consolidated financial statements if such financial statements are included in such report; (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its public stockholders and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); (iv) promptly upon receipt thereof, a copy of each other report submitted to the Company or any Subsidiary by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any Subsidiary; (v) as soon as practicable and in any event within five Business Days after any officer of the Company obtaining knowledge (a) of any condition or event which, in the opinion of management of the Company, could have a material adverse effect on the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole, (b) that any Person has given any notice to the Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in paragraph 8A(iii), (c) of the institution of any litigation involving claims against the Company or any of its Subsidiaries equal to or greater than $200,000 with respect to any single cause of action or of any adverse determination in any court proceeding in any litigation involving a potential liability to the Company or any of its Subsidiaries equal to or greater than $200,000 with respect to any single cause of action which makes the likelihood of an adverse determination in such litigation against 8 the Company or such Subsidiary substantially more probable, (d) of any regulatory proceeding which could have a material adverse effect on the business, condition, (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole, an Officer's Certificate specifying the nature and period of existence of any such condition or event, or specifying the notice given or action taken by such Person and the nature of any such claimed default, event or condition, or specifying the details of such proceeding, litigation or dispute and what action the Company or any of its Subsidiaries has taken, is taking or proposes to take with respect thereto; (vi) promptly after the filing or receiving thereof, copies of all reports and notices which the Company or any Subsidiary files under ERISA with the Internal Revenue Service or the PBGC or the U.S. Department of Labor or which the Company or any Subsidiary receives from any of them; (vii) (a) by April 1 and August 1 of each year, a report in form and substance reasonably satisfactory to the Required Holders, which may be prepared by or under the supervision of a petroleum engineer who may be an employee of the Company or an Affiliate, which shall evaluate each interest in oil and gas reserves (including without limitation any production payment with respect to any such reserves) which is, or is to be, taken into account in the determination of the "Debt Limit" pursuant to the Credit Agreement as of the preceding December 31 or June 30, respectively; and (b) together with the report furnished pursuant to the foregoing clause (a) as of December 31 of any year, an audit report by April 1 of each year, which shall be in form and substance reasonably satisfactory to the Required Holders and shall be prepared by Williamson Petroleum Consultants, Inc. or other independent petroleum engineers reasonably acceptable to the Required Holders, which audit report shall state that such independent petroleum engineers have reviewed at least 50% in value of the interests in oil and gas reserves subject to such report in detail in order to confirm the reserve figures and have conducted a general review of the remaining properties of the Company and its Subsidiaries, provided that each year the detailed review of 50% of the interests in oil and gas reserves contained in such audit report shall cover a different group of such interests so that 100% of such interests will be covered over each four-year period; and provided, further that each such review will always include the two interests in oil and gas properties greatest in value at the time of such review; and provided, further, that the reviews contained in each audit report shall separately cover proved developed producing reserves, proved developed non- producing reserves and proved undeveloped reserves; (viii) all other reports and information the Company is required to provide to the banks under the Credit Agreement; and (ix) with reasonable promptness, such other information respecting the condition or operations, financial or otherwise, of the Company or any of its Subsidiaries as such holder may reasonably request. 9 Together with each delivery of financial statements required by clauses (i) and (ii) above, the Company will deliver to each holder an Officer's Certificate demonstrating (with computations in reasonable detail) compliance by the Company and its Subsidiaries with the provisions of paragraphs 6A(1), 6A(2), 6B(2), 6B(4), 6B(6) and 6B(7) and stating that there exists no Event of Default or Default, or, if any Event of Default or Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. Together with each delivery of financial statements required by clause (ii) above, the Company will deliver to each holder a certificate of such accountants stating that, in making the audit necessary for their report on such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if they have obtained knowledge of any Event of Default or Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to anyone by reason of their failure to obtain knowledge of any Event of Default or Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards. The Company also covenants that immediately after any Responsible Officer obtains knowledge of an Event of Default or Default, it will deliver to each holder an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. 5B. Information Required by Rule 144A. The Company will, upon the request of the holder of any Security provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of the Securities, except at such times as the Company is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. For the purpose of this paragraph 5B, the term "qualified institutional buyer" shall have the meaning specified in Rule 144A under the Securities Act. 5C. Inspection of Property. The Company will permit any Person designated by the holder of any Security in writing, at the Company's expense during the continuance of a Default or Event of Default if such designation has been made by a Significant Holder and otherwise at the expense of the holder making such designation, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Company and its indepen dent public accountants (and by this provision the Company authorizes such accountants to discuss the affairs, finances and accounts of such corporations), all at such reasonable times and as often as such holder may reasonably request. 5D. Covenant to Secure Notes Equally. The Company will, if it or any Subsidiary shall create or assume any Lien upon any of its property or assets, whether now owned or hereafter acquired to secure Indebtedness other than Liens permitted by paragraph 6B(2) (unless prior written consent to the creation or assumption thereof shall have been obtained pursuant to paragraph 12C), make or 10 cause to be made effective provision whereby the Notes will be secured by such Lien equally and ratably with any and all other Indebtedness thereby secured so long as any such other Indebtedness shall be so secured pursuant to such agreements and instruments as shall be approved by the Required Holder(s), and the Company will cause to be delivered to the holder of each Note an opinion of independent counsel to the effect that such agreements and instruments are enforceable in accordance with their terms and that the Notes are equally and ratably secured with such other Indebtedness. 5E. Corporate Existence, Licenses and Permits; Maintenance of Properties. The Company will at all times do or cause to be done all things necessary to maintain, preserve and renew its existence as a corporation organized under the laws of a state of the United States of America, will preserve and keep in force and effect, and cause each of its Subsidiaries to preserve and keep in force and effect, all licenses and permits necessary to the conduct of its and their respective businesses and will maintain and keep, and will cause each of its Subsidiaries to maintain and keep, its and their respective properties in good repair, working order and condition, and from time to time make all necessary and proper repairs, renewals and replacements, so that the business carried on in connection therewith may be properly and advantageously conducted at all times in the normal course of business as conducted prior to the date of repair; provided, however, that nothing contained in this paragraph 5E shall prevent the Company or any Subsidiary from ceasing or omitting to exercise any right, license or permit or to make any repair, renewal or replacement that (i) in the reasonable judgment of the Company or such Subsidiary is no longer in the best interests of the Company or such Subsidiary and (ii) such cessation or omission could not result in a material adverse effect on the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. 5F. Maintenance of Insurance. The Company will carry and maintain, and cause each Subsidiary to carry and maintain, insurance (subject to customary deductibles and retentions) in at least such amounts and against such liabilities and hazards and by such methods as customarily maintained by other companies operating similar businesses. 5G. Payment of Taxes and Other Claims. The Company will and will cause each of its Subsidiaries to file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, levies, trade accounts payable and claims for work, labor or materials (all the foregoing being referred to collectively as "Claims") payable by any of them, to the extent such Claims have become due and payable and before they have become delinquent; provided that neither the Company nor any Subsidiary need pay any Claim if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with generally accepted accounting principles on the books of the Company or such Subsidiary or (ii) the nonpayment of all such Claims in the aggregate could not result in a material adverse change in the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. 11 5H. ERISA Compliance. The Company will, and will cause each ERISA Affiliate to, at all times: (i) with respect to each Plan, make timely payments of contributions required to meet the minimum funding standard set forth in ERISA or the Code with respect thereto and, with respect to any Multiemployer Plan, make timely payment of contributions required to be paid thereto as provided by Section 515 of ERISA, and (ii) comply with all other provisions of ERISA applicable to the Company or such ERISA Affiliate, as the case may be, except for such failures to make contributions and failures to comply as could not have a material adverse effect on the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. 5I. Compliance with Laws. The Company will comply, and will cause each of its Subsidiaries to comply, with all applicable laws, rules, regulations and orders (including those relating to protection of the environment) except, in any such case, where failure to comply could not have a material adverse effect on the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. 5J. Maintenance of Books of Record; Reserves. The Company, both individually and on a consolidated basis, will keep proper books of record and account and set aside appropriate reserves, all in accordance with GAAP. 5K. Assumption of the Subsidiary Guaranty by After-Acquired Subsidiaries. The Company will, if it acquires the stock or other equity interest of any Person which after giving effect to such acquisition is a Subsidiary and which delivers or is required to deliver a Guarantee, or grants or is required to grant a Lien, to any holder of Senior Debt (or a trustee, collateral agent or similar Person on behalf of such holder), cause such Subsidiary to deliver to you (i) an Assumption of Subsidiary Guaranty, in the form of Exhibit G attached hereto, duly executed by such Subsidiary, (ii) a copy of a resolution of the board of directors of such Subsidiary, or other appropriate organizational action if such Subsidiary is not a corporation, approving the Assumption of Subsidiary Guaranty and the execution and delivery thereof, which copy shall be certified to be a true copy by the Secretary or an Assistant Secretary of such Subsidiary or other appropriate person if such Subsidiary is not a corporation, and (iii) an opinion, in the form of Exhibit H attached hereto, from counsel to the Company addressing such Subsidiary and such Assumption of Subsidiary Guaranty. 12 PARAGRAPH 6. NEGATIVE COVENANTS. 6. Negative Covenants. So long as any Note shall remain unpaid, the Company covenants that: 6A. Financial Covenants. The Company will not permit, at any time, 6A(1). Total Debt to EBITDA Ratio. The ratio of (i) Total Debt to (ii) EBITDA for the most recently ended four consecutive fiscal quarters to be greater than 4.00 to 1.00. 6A(2). Consolidated Net Worth. Consolidated Net Worth on the last day of any fiscal quarter, commencing with the fiscal quarter ending December 31, 1997, to be less than the sum of (i) $31,255,900 plus (ii) 100% of any Equity Proceeds plus (iii) the cumulative total of 50% of Consolidated Net Income for each fiscal quarter after September 30, 1997 in which Consolidated Net Income is positive, to and including the fiscal quarter ended on such measurement date. 6B. Other Restrictions. The Company will not and will not permit any Subsidiary to: 6B(1). Prohibition Against Layering Indebtedness. Incur, create, issue, assume, guarantee or in any other manner become directly or indirectly liable with respect to or responsible for, or permit to remaining outstanding, any Indebtedness (including, without limitation, Indebtedness permitted pursuant to paragraphs 6A(1) and 6B(6)) that is subordinate or junior in right of payment to any Senior Debt or any Guarantee in respect thereof unless such Indebtedness is subordinate in right of payment to the Notes or the Subsidiary Guaranty, as the case may be, at least to the same extent as the Notes are subordinate in right of payment to Senior Debt pursuant to the subordination provisions contained in paragraph 7 or the Subsidiary Guaranty is subordinate in right of payment to Senior Debt pursuant to the subordination provisions contained in the Subsidiary Guaranty, as the case may be. 6B(2). Liens. Create, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired (whether or not provision is made for the equal and ratable securing of the Notes in accordance with the provisions of paragraph 5D), except: (i) Liens, on assets of the Company and HCP other than limited partner units or other equity interests in HEP, securing Senior Debt and obligations in respect of Hedging Transactions and Swaps of the Company and HCP under the Credit Agreement; (ii) the Lien in favor of FAR Gas Acquisitions Corporation described on Schedule 9D attached hereto; 13 (iii) statutory Liens incidental to the conduct of business or the ownership of properties of the Company and its Subsidiaries (including Liens in connection with worker's compensation, unemployment insurance and other like laws (other than Liens imposed by ERISA), warehousemen's and mechanic's liens and statutory landlord's liens) and Liens to secure statutory obligations, property taxes and assessments of governmental charges or other Liens of like general nature which in each case are incurred in the ordinary course of business and not in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of property and which do not in any event materially impair the value or use of the property encumbered thereby in the operation of the business of the Company and its Subsidiaries; provided in each case, that the obligation secured is not overdue or is being contested in good faith by appropriate proceedings and reserves with respect thereto have been established to the extent required by GAAP; (iv) Liens on properties of the Company and its Subsidiaries that secure Non-recourse Debt in an aggregate amount not to exceed at any time 5% of Consolidated Net Worth, unless otherwise agreed to in writing by the Required Holders; and (v) other Liens on the property of the Company or any Subsidiary, provided that the aggregate amount of Indebtedness or other obligations secured by such Liens plus (without duplication) the aggregate amount of Indebtedness of all Subsidiaries does not exceed at any time the greater of $1,000,000 or 2% of Consolidated Net Worth. 6B(3). Consolidation, Merger or Transfer of Assets. Merge or consolidate with or into any Person or convey, transfer, lease or otherwise dispose of all or substantially all of its assets to any Person, except that: (i) any Subsidiary may merge with the Company (provided that the Company shall be the sole continuing or surviving Person) or with any one or more other Person(s) (provided that each surviving Person shall be a Wholly Owned Subsidiary); (ii) any Subsidiary may convey, transfer, lease or otherwise dispose of all or substantially all of its assets to the Company or to a Wholly Owned Subsidiary; and (iii) the Company may merge or consolidate with or into any other corporation or convey, transfer, lease or otherwise dispose of all or substantially all of its assets to any other corporation or to HEP or a limited partnership formed as the successor to HEP and the Company; provided, that: (a) there shall be a single successor formed by such 14 consolidation or a single survivor formed by such merger, as the case may be, (b) the successor formed by such consolidation, the survivor of such merger, HEP, such limited partnership or the corporation that acquires by conveyance, transfer, lease or other disposition all or substantially all of the assets of the Company, as the case may be, shall be organized and existing under the laws of a state of the United States and shall have a majority of its assets and business located in the United States, (c) if the Company is not such successor or survivor, then either (1) the successor, survivor or acquirer (including HEP or such limited partnership) or (2) the corporation (which shall be organized and existing under the laws of a state of the United States and shall have a majority of its assets and business located in the United States) that owns a majority of the Voting Stock of the successor, survivor or acquirer shall have expressly assumed all obligations of the Company under or with respect to the Notes, the Warrants, this Agreement, the Registration Rights Agreement, the Participation Rights Agreement and any other agreement entered into in connection with the transactions contemplated hereby, (d) the Person assuming such obligations shall have caused to be delivered to each holder of Securities an opinion of independent counsel reasonably acceptable to the Required Holder(s), to the effect that all agreements and instruments effecting such assumption are enforceable in accordance with their terms (subject to customary exceptions regarding bankruptcy and equitable principles and such other exceptions and qualifications, if any, that are reasonably approved by the Required Holders) and comply with the terms hereof, (e) no Default or Event of Default shall exist, either prior to or immediately after giving effect to such merger, consolidation or asset conveyance, transfer, lease or other disposition, and (f) the consolidated net worth (which shall be determined in the same manner as Consolidated Net Worth) of the successor, survivor or acquirer (including circumstances in which the Company is the successor or the survivor) or, in the case of clause (c)(2) above, the parent corporation of the successor, survivor or acquirer, shall be equal to or greater than the Consolidated Net Worth of the Company immediately prior to such merger, consolidation or asset transfer, lease or other disposition. 6B(4). Limitation on Certain Asset Dispositions. Except as permitted by paragraph 6B(3), make any Asset Disposition unless (a) in the good faith opinion of the Company, the Asset Disposition is in exchange for consideration having a Fair Market Value at least equal to that of the property exchanged and is in the best interest of the Company or such Subsidiary; (b) immediately after giving effect to the Asset Disposition, no Default or Event of Default would exist; and (c) immediately after giving effect to the Asset Disposition, the Disposition Value of all property that was the subject of any Asset Disposition occurring (i) in the period of 365 days then ending would not exceed 15% of Consolidated Assets as of the end of the then most recently ended fiscal quarter of the Company, and (ii) at any time after September 30, 1997 would not exceed 40% of Consolidated Assets as of the end of the then most recently ended fiscal quarter of the Company. Notwithstanding anything contained in the foregoing to the contrary, if the net proceeds for any Transfer is applied to a Property 15 Reinvestment Application within 180 days after such Transfer, then such Transfer, only for the purpose of determining compliance with clause (c) of this paragraph 6B(4) as of any date, shall be deemed not to be an Asset Disposition. 6B(5). Transactions With Affiliates. Other than in the case of transactions between Wholly Owned Subsidiaries, directly or indirectly, purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, (i) any Affiliate, (ii) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of the Company (of any class having ordinary voting power for the election of directors) aggregating 5% or more of such voting power or (iii) any Person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) or (ii) of this paragraph 6B(5), except in the ordinary course of business (as determined by reference to the ordinary course of business in the oil and gas industry) and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon terms and conditions at least as favorable to the Company or such Subsidiary as the terms and conditions that would then be obtainable in a comparable arm's-length transaction with a Person not an Affiliate; provided, that the Company may sell to, or purchase from, any such Person shares of the Company's stock so long as no Default or Event of Default exists immediately prior to or immediately after giving effect to any such purchase by the Company; provided, further, that the Company may enter into a merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company with HEP in a transaction if such transaction complies in all respects with the provisions of paragraph 6B(3)(iii); and provided, further, that the Company or any of its Subsidiaries may participate in, or effect any transaction in connection with, any joint enterprise or other joint arrangement with any Affiliate if the Company or such Subsidiary participates in or effects such transaction in the ordinary course of its business and on a basis no less advantageous than the basis on which the Company or such Subsidiary would participate in a similar transaction with a Person not an Affiliate. 6B(6). Priority Debt. Permit Indebtedness of Subsidiaries plus (without duplication) Indebtedness secured by Liens permitted by clause (v) of paragraph 6B(2) to exceed, at any time, the greater of $1,000,000 or 2% of Consolidated Net Worth. 6B(7). Hedging Transactions. Be or become a party to any Swap or any Hedging Transaction for any purpose except for bona fide hedging purposes. Without limiting the generality of the foregoing, at no time during any calendar year will the Company be a party to or permit any Subsidiary to be a party to any Hedging Transaction with respect to natural gas or crude oil if, immediately after giving effect to such Hedging Transaction, the aggregate reference quantity of hydrocarbons with respect to Hedging Transactions with respect to natural gas or crude oil that the Company and its Subsidiaries shall have entered into during such year exceeds 65% of the aggregate natural gas and crude oil production of the Company and its Subsidiaries for such year (calculated on the basis of actual natural gas and crude oil production for such year to date 16 and a good faith estimate of the aggregate amount of such production for the remainder of such year). 6C. Change of Business. The Company will not and will not permit any Subsidiary to change in any material respect the nature of its respective business or operations from the exploration, development and production, gathering, processing and marketing of oil and gas and activities relating directly thereto, and will not engage, and will not permit any Subsidiary to engage, directly or indirectly, in any material business activity, or purchase or otherwise acquire any material property, in any case not directly related to the conduct of the above-described business or operations. 6D. New Subsidiaries. The Company will not form, create or otherwise have any Subsidiaries other than HCP and HCRC Holdings, Inc., a Delaware corporation. PARAGRAPH 7. SUBORDINATION OF NOTES. 7A. Subordination. Anything in this Agreement to the contrary notwithstanding, the Indebtedness evidenced by the Notes, including principal, Yield-Maintenance Amount, if any, and interest, shall be subordinate and junior to the extent set forth in subparagraphs (i) through (vi) inclusive, below, to all Senior Debt. (i) If the Company shall default in the payment of any principal of or interest on any Senior Debt in an amount in excess of $100,000 owing under any single instrument when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or at any other date on which the Company is required to prepay any Senior Debt or by declaration of acceleration or otherwise, then, unless and until such default shall have been remedied by payment in full or waived, no holder of the Notes shall accept or receive any direct or indirect payment of or on account of any Indebtedness in respect of the Notes. (ii) In the event of any insolvency, bankruptcy, liquidation, reorganization or other similar proceedings, or any receivership proceedings in connection therewith, relative to the Company, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company, whether or not involving insolvency or bankruptcy proceedings, then all Senior Debt shall first be paid in full before any payment of or on account of principal or Yield-Maintenance Amount, if any, or interest is made by the Company in respect of the Notes. (iii) In any of the proceedings referred to in subparagraph (ii) above, any payment or distribution of any kind or character, whether in cash, property, stock or obligations, which may be payable or deliverable by the Company in respect of the Notes shall be paid or delivered directly to the holders of Senior Debt (or to a banking institution selected by the 17 court or Person making the payment or delivery or designated by any holder of Senior Debt) for application in payment thereof in accordance with the priorities then existing among such holders, unless and until all Senior Debt shall have been paid in full; provided, however, that (a) if the payment or delivery by the Company of such cash, property, stock or obligations to the holders of the Notes is authorized by an order or decree giving effect, and stating in such order or decree that effect is given, to the subordination of the Notes to Senior Debt, and made in a reorganization proceeding under any applicable bankruptcy or reorganization law, no payment or delivery by the Company of such cash, property, stock or obligations payable or deliverable with respect to the Notes shall be made to the holders of Senior Debt; and (b) no such delivery shall be made to holders of Senior Debt of stock or obligations if the delivery thereof is authorized by an order or decree giving effect, and stating in such order or decree that effect is given, to the subordination of the Notes to Senior Debt, and if such stock or obligations are subordinate and junior (whether by law or agreement) at least to the extent provided in this paragraph 7 to the payment of all Senior Debt then outstanding and to the payment of any stock or obligations which are issued pursuant to such reorganization proceedings in exchange or substitution for any Senior Debt then outstanding. A transaction permitted by paragraph 6B(3)(iii) shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this paragraph 7. (iv) Upon the occurrence and during the continuance of any Default Subordination Event (other than under circumstances when the terms of subparagraph (ii) above are applicable), no holder of Notes shall accept or receive any direct or indirect payment by setoff or otherwise of or on account of any indebtedness in respect of the Notes during the Stand-Still Period, provided that in the case of any payment on or in respect of any Note which would (in the absence of any such Default Subordination Event) have been due and payable on any date during such Stand-Still Period, the provisions of this subparagraph (iv) shall not prevent such payment on or after the date immediately following the termination of such Stand-Still Period. There shall be no more than three Stand-Still Periods so long as the Notes are outstanding. (v) If any payment or distribution of any character, whether in cash, securities or other property, shall be received by any holder of Notes in contravention of any of the terms of this paragraph 7 and before all the Senior Debt shall have been paid in full, such payment or distribution shall be received in trust for the benefit of the holders of the Senior Debt at the time outstanding and shall forthwith be paid over or delivered and transferred to the holders of Senior Debt. 18 (vi) If any payment by the Company in respect of Senior Debt must be disgorged by any holder of Senior Debt as a result of any action under the United States Bankruptcy Code or other debtor relief law, the obligations in respect of which such payment was made shall continue to constitute Senior Debt and shall remain entitled to the benefit of the provisions of this provision. Without limitation of the foregoing, in the event of any such disgorgement by a holder of Senior Debt, all holders of Notes, if any, who have become subrogated to the rights of such holder of Senior Debt pursuant to this Agreement and have obtained payment from the Company through the exercise of such subrogation rights shall disgorge and pay to such holder of Senior Debt any payment so obtained, to the extent of the payment or payments disgorged by such holders of Senior Debt. 7B. Obligation of the Company Unconditional. The provisions of this paragraph 7 are for the purpose of defining the relative rights of the holders of Senior Debt on the one hand, and the holders of the Notes on the other hand, against the Company and its property, and nothing herein shall impair, as between the Company and the holders of the Notes, the obligation of the Company, which is unconditional and absolute, to pay to the holders thereof the principal thereof and Yield- Maintenance Amount, if any, and interest thereon in accordance with their terms and the provisions hereof, nor shall anything herein prevent the holders of the Notes from exercising all remedies otherwise permitted by applicable law or hereunder upon default hereunder or under the Notes (including, without limitation, the right to demand payment and sue for performance hereof and of the Notes and to accelerate the maturity thereof as provided in paragraph 8A), subject to the rights, if any, under this paragraph 7 of holders of Senior Debt to receive cash, property, stock or obligations otherwise payable or deliverable by the Company to the holders of the Notes. 7C. Subrogation. Upon payment in full of Senior Debt, the holders of the Notes shall be subrogated to the rights of the holders of the Senior Debt to receive payments or distributions of assets of the Company made on Senior Debt until the principal of and Yield-Maintenance Amount, if any, and interest on the Notes shall be paid in full, and, for the purposes of such subrogation, no payments to the holders of Senior Debt of any cash, property, stock or obligations to which the holders of the Notes would be entitled except for the provisions of paragraph 7A(iii) shall, as between the Company, its creditors (other than the holders of the Senior Debt) and the holders of the Notes, be deemed to be a payment by the Company to or on account of Senior Debt. 7D. Rights of Holders of Senior Debt. The provisions of this paragraph 7 shall be deemed a continuing offer to all holders of Senior Debt to act in reliance on such provisions (but no such reliance shall be required to be proven to receive the benefits hereof) and may be enforced by such holders and no right of any present or future holder of any Senior Debt to enforce subordination as provided in this paragraph 7 shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Agreement or the Notes. Without in any way limiting the generality of the foregoing, the holders of Senior Debt may, at any time and from time to time, without the consent of or notice to the holders of the Notes, and without impairing or releasing the subordination provided in this paragraph 7 or the obligations hereunder of the holders of the 19 Notes to the holders of Senior Debt, do any one or more of the following, subject in all cases to the limitations contained in the definition of Senior Debt: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter (including, without limitation, by increasing or decreasing the "Availability Limit" and the "Debt Limit," in each case as defined in the Credit Agreement pursuant to which Senior Debt is incurred), or waive defaults under, Senior Debt, or otherwise amend or supplement in any manner Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release any Person liable in any manner for the payment or collection of Senior Debt; and (iv) exercise or refrain from exercising any rights against the Company and any other Person, including any guarantor or surety. PARAGRAPH 8. EVENTS OF DEFAULT. 8. Events of Default. 8A. Acceleration. If any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) the Company defaults in the payment of any principal of or Yield- Maintenance Amount payable with respect to any Note, in any case when the same shall become due, either by the terms thereof or otherwise as herein provided; or (ii) the Company defaults in the payment of any interest on any Note for more than five days after the date due; or (iii) the Company or any Subsidiary defaults (whether as primary obligor or as guarantor or other surety) in any payment of principal of or interest on or premium, if any, with respect to any other Indebtedness beyond any period of grace provided with respect thereto, or the Company or any Subsidiary fails to perform or observe any other agreement, term or condition contained in any agreement under which any such Indebtedness is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause such obligation to become due (or to be purchased by the Company or any Subsidiary) prior to any stated maturity; provided, that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing acceleration (or sale to the Company or any Subsidiary) shall occur and be continuing exceeds $2,500,000; or (iv) any representation or warranty made by the Company herein, by a Subsidiary in the Subsidiary Guaranty or by the Company or any of its officers in any writing furnished in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made; or 20 (v) the Company fails to perform or observe any term, covenant or agreement contained in paragraph 6A, 6B(1), 6B(2), 6B(3), 6B(4), 6B(6), 6B(7) or 6D; or (vi) the Company fails to perform or observe any other agreement, covenant, term or condition contained herein and such failure shall not be remedied within 30 days after (a) any Responsible Officer obtains actual knowledge thereof or (b) the Company receives written notice of such failure from any holder; or (vii) the Company or any Subsidiary makes an assignment for the benefit of creditors or is generally not paying its debts as such debts become due; or (viii) any decree or order for relief in respect of the Company or any Subsidiary is entered under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (the "Bankruptcy Law"), of any jurisdiction; or (ix) the Company or any Subsidiary petitions or applies to any tribunal for, or consents to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of the Company or any Subsidiary, or of any substantial part of the assets of the Company or any Subsidiary, or commences a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Subsidiary) relating to the Company or any Subsidiary under the Bankruptcy Law of any other jurisdiction; or (x) any such petition or application is filed, or any such proceedings are commenced, against the Company or any Subsidiary and the Company or such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree is entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree remains unstayed and in effect for more than 30 days; or (xi) any order, judgment or decree is entered in any proceedings against the Company decreeing the dissolution of the Company and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xii) any order, judgment or decree is entered in any proceedings against the Company or any Subsidiary decreeing a split-up of the Company or such Subsidiary which requires the divestiture of assets representing a substantial part, or the divestiture of the stock of a Subsidiary whose assets represent a substantial part, of the consolidated assets of the Company and its Subsidiaries (determined in accordance with generally accepted accounting principles) or which requires the divestiture of assets, or stock of a Subsidiary, which shall have contributed a substantial part of consolidated net income of the Company and its 21 Subsidiaries (determined in accordance with GAAP) for any of the three fiscal years then most recently ended, and such order, judgment or decree remains unstayed and in effect for more than 60 days; or (xiii) one or more final judgments or final orders, in an aggregate amount in excess of $1,000,000 is rendered against the Company or any Subsidiary and either (i) enforcement proceedings have been commenced by any creditor upon such judgment or order or (ii) within 45 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 45 days after the expiration of any such stay, such judgment is not discharged; or (xiv) any Termination Event with respect to a Plan shall have occurred and, within 30 days after the occurrence thereof, (a) such Termination Event (if correctable) shall not have been corrected and (b) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $1,000,000 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a) (2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); or (xv) the Company or any of its ERISA Affiliates as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an aggregate amount exceeding $1,000,000; then (a) if such event is an Event of Default specified in clause (i) or (ii) of this paragraph 7A, the holder of any Note (other than the Company or any of its Subsidiaries or Affiliates) may at its option, by notice in writing to the Company, declare such Note to be, and such Note shall thereupon be and become, immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company, (b) if such event is an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 8A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (c) if such event is not an Event of Default specified in clause (viii), (ix) or (x) of this paragraph 8A with respect to the Company, the Required Holder(s) may at its or their option, by notice in writing to the Company, declare all of the Notes to be, and all of the Notes shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Company. 22 The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provisions for payment of the Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default are intended to provide compensation for the deprivation of such right under such circumstances. 8B. Rescission of Acceleration. At any time after any or all of the Notes shall have been declared immediately due and payable pursuant to paragraph 8A, the Required Holder(s) may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have paid all overdue interest on the Notes, the principal of and Yield-Maintenance Amount, if any, payable with respect to any Notes which have become due otherwise than by reason of such declaration, and interest on such overdue interest and overdue principal and Yield- Maintenance Amount, if any, at the rate specified in the Notes, (ii) the Company shall not have paid any amounts which have become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to paragraph 12C, and (iv) no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes or this Agreement. No such rescission or annulment shall extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom. 8C. Notice of Acceleration or Rescission. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 8A or any such declaration shall be rescinded and annulled pursuant to paragraph 8B, the Company shall forthwith give written notice thereof to the holder of each Note at the time outstanding. 8D. Other Remedies. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement, such Note and the Subsidiary Guaranty by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or the Subsidiary Guaranty or in aid of the exercise of any power granted herein or therein. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise. 23 PARAGRAPH 9. REPRESENTATIONS, COVENANTS AND WARRANTIES. 9. Representations, Covenants and Warranties. The Company represents, covenants and warrants as follows: 9A. Organization. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware, and HCP is duly formed and existing as a limited partnership in good standing under the laws of the State of Colorado. HCP and HCRC Holdings, Inc. a Delaware corporation which is the sole limited partner of HCP, are the only Subsidiaries of the Company. Each of the Company and its Subsidiaries is duly qualified and in good standing as a foreign corporation or limited partnership, as the case may be, in each jurisdiction in which the nature of the business transacted or the property owned or leased is such as to require such qualification, except where such failure to be so qualified, whether individually or in the aggregate, would not result in any material adverse effect upon the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. The execution, delivery and performance by the Company of this Agreement, the Notes, the Warrants, the Registration Rights Agreement and the Participation Rights Agreement are within the Company's corporate powers and have been duly authorized by all necessary corporate action. The execution, delivery and performance by HCP of the Subsidiary Guaranty are within the limited partnership powers of HCP and have been duly authorized by all necessary action on the part of HCP. 9B. Financial Statements. The Company has furnished you with the following financial statements, identified by a principal financial officer of the Company: (i) a consolidated balance sheet of the Company and its Subsidiaries as at December 31 in each of the years 1994 to 1996, inclusive, and consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries for each such year, all reported on by Deloitte & Touche LLP; and (ii) a consolidated balance sheet of the Company and its Subsidiaries as at September 30, 1997 and consolidated statements of income, stockholders' equity and cash flows for the fiscal quarter ended on such date, prepared by the Company. Such financial statements (including any related schedules and/or notes) are true and correct in all material respects (subject, as to interim statements, to changes resulting from audits and year-end adjustments, which in the aggregate will not be material), have been prepared in accordance with GAAP consistently followed throughout the periods involved and show all liabilities, direct and contingent, of the Company and its Subsidiaries required to be shown in accordance with GAAP. The balance sheets fairly present the condition of the Company and its Subsidiaries as at the dates thereof, and the statements of income, stockholders' equity and cash flows fairly present the results of the operations of the Company and its Subsidiaries and their cash flows for the periods indicated. There has been no material adverse change in the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole since December 31, 1996. 9C. Actions Pending. Except as disclosed to you in a letter of even date herewith, there is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its 24 Subsidiaries, or any properties or rights of the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body which could reasonably be expected to result in any material adverse change in the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. There is no action, suit, investigation or proceeding pending or threatened against the Company or any of its Subsidiaries which purports to affect the validity or enforceability of this Agreement, any Note, the Subsidiary Guaranty, any Warrant, the Registration Rights Agreement or the Participation Rights Agreement. 9D. Outstanding Indebtedness. Neither the Company nor any of its Subsidiaries has outstanding any Indebtedness or Non-recourse Debt except as permitted by paragraphs 6A(1) and 6B(6) and all of which is described in Schedule 9D attached hereto. There exists no default under (and no waiver of default is currently in effect with respect to) the provisions of any instrument evidencing such Indebtedness or of any agreement relating thereto, and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. 9E. Title to Properties. The Company has, and each of its Subsidiaries has, (i) in the case of each property having a market value of at least $100,000, good and marketable title to its respective real properties (including, without limitation, oil and gas properties but excluding office space that it leases), and (ii) in the case of all of its other respective properties and assets, good title, including for purposes of both clause (i) and clause (ii) the properties and assets reflected in the balance sheet as at September 30, 1997 referred to in paragraph 9B (other than properties and assets disposed of in the ordinary course of business). All leases necessary in any material respect for the conduct of the respective businesses of the Company and its Subsidiaries are valid and subsisting and are in full force and effect. 9F. Taxes. The Company has, and each of its Subsidiaries has, filed all federal, state and other income tax returns which, to the knowledge of the officers of the Company, are required to be filed, and each has paid all taxes as shown on such returns and on all assessments received by it to the extent that such taxes have become due, except such taxes as are being contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with GAAP. 9G. Conflicting Agreements and Other Matters. Neither the Company nor any of its Subsidiaries is subject to any charter, limited partnership agreement or other corporate or limited partnership restriction which materially and adversely affects its business, property or assets, or financial condition. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which materially and adversely affects (after taking into consideration the benefits reasonably expected to be obtained by the Company or such Subsidiary thereunder) its business, property or assets, or financial condition. Neither the execution nor delivery of this Agreement, the Notes, the 25 Subsidiary Guaranty, the Warrants, the Registration Rights Agreement or the Participation Rights Agreement nor the offering, issuance and sale of the Securities, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes, the Subsidiary Guaranty, the Warrants, the Registration Rights Agreement and the Participation Rights Agreement will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or result in the creation of any Lien upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, the charter, limited partnership agreement or by-laws of the Company or any of its Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of the Company of the type to be evidenced by the Notes or of the Indebtedness of HCP or any other Subsidiary of the type to be evidenced by the Subsidiary Guaranty except as set forth in the agreements listed in Schedule 9G attached hereto. 9H. Authorized Capital Stock. The authorized capital stock of the Company consists of 10,000,000 shares of Common Stock, $0.01 par value per share, of which 2,977,542 shares are issued and outstanding as of the date hereof, and 500,000 shares of Preferred Stock, $0.01 par value, none of which has been issued. All the outstanding shares of Common Stock are duly authorized, validly issued, fully paid and nonassessable. The Company does not have outstanding any warrants, options, convertible securities or other rights for the purchase or acquisition of shares of its capital stock other than (a) the Warrants and (b) options outstanding under its 1995 Stock Option Plan to purchase 159,000 shares of Common Stock (options for all of such shares having become vested and for 10,770 of such shares having been exercised as of the date of this Agreement) and options outstanding under its 1997 Stock Option Plan to purchase 159,000 shares of Common Stock (options for none of such shares having been exercised, and options for 53,000 of such shares having become vested, as of the date of this Agreement). The Warrants and shares of Common Stock issuable upon the exercise of the Warrants have been duly and validly authorized, and such shares of Common Stock have been duly reserved for issuance upon exercise of the Warrants. No shareholder of the Company or any other Person is entitled to preemptive or similar rights with respect to the shares of Common Stock which are issuable upon exercise of the Warrants and, if and when issued upon exercise of the Warrants in accordance with the provisions thereof, such shares will be validly issued, fully paid and nonassessable shares. 9I. Offering of Securities. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes, the Warrants or any similar security of the Company for sale to, or solicited any offers to buy the Notes, the Warrants or any similar security of the Company from, or otherwise approached or negotiated with respect thereto with, any Person other than institu tional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes or the Warrants to the provisions of Section 5 of the 26 Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction. 9J. Use of Proceeds. Neither the Company nor any Subsidiary owns any "margin stock" as defined in Regulation G (12 CFR Part 207) of the Board of Governors of the Federal Reserve System ("margin stock") other than the 1,948,189 Class A Units of limited partner interest and the 129,877 Class C Units of limited partner interest owned by the Company in HEP (the "HEP Units"). The proceeds of sale of the Securities will be used to refinance existing Indebtedness of the Company as indicated in Schedule 9D, to acquire producing property and for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock or for the purpose of maintaining, reducing or retiring any Indebtedness which was originally incurred to purchase or carry any stock that is currently a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation G. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Securities to violate Regulation G or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect. The HEP Units do not constitute more than 22% of the value of the assets of the Company and its Subsidiaries, on a consolidated basis, prior to the receipt by the Company of the proceeds from the issuance of the Securities, and the Company does not have any present intention that HEP Units or other margin stock will constitute more than 25% of the value of the assets of the Company and its Subsidiaries, on a consolidated basis. 9K. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Securities will be exempt from, or will not involve any transaction which is subject to, the prohibi tions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of your representation in paragraph 10B. 9L. Governmental Consent. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the 27 Securities is such as to require any authorization, consent, approval, exemption or other action by or notice to or filing with any court or administrative or governmental or regulatory body (other than routine filings after the Date of Closing with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the Subsidiary Guaranty, the Registration Rights Agreement, the Participation Rights Agreement, the offering, issuance, sale or delivery of the Securities or fulfillment of or compliance with the terms and provisions of this Agreement, the Subsidiary Guaranty, the Registration Rights Agreement, the Participation Rights Agreement or the Securities. 9M. Environmental Compliance. The Company and its Subsidiaries and all of their respective properties and facilities have complied at all times and in all respects with all federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations relating to protection of the environment except, in all such cases considered in the aggregate, where failure to comply would not reasonably be expected to result in a material adverse effect on the business, condition (financial or other), assets, properties, operations or prospects of the Company and its Subsidiaries taken as a whole. 9N. Disclosure. Neither this Agreement nor any other document, certificate or statement furnished to you by or on behalf of the Company in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the business, property or assets, or financial condition of the Company or any of its Subsidiaries and which has not been set forth in this Agreement or in the other documents, certificates and statements furnished to you by or on behalf of the Company prior to the date hereof in connection with the transactions contemplated hereby. The pro forma financial projections dated as of October 7, 1997 titled "$25MM Fixed Debt, $50MM Total Debt, Arcadia at 10% RoR 10% Drilling" and previously delivered to you by the Company are reasonable based on the assumptions stated therein and the best information available to the officers of the Company other than with respect to the assumptions regarding the acquisition of assets of Arcadia. PARAGRAPH 10. REPRESENTATIONS OF THE PURCHASER. 10. Representations of the Purchaser. You represent as follows: 10A. Nature of Purchase. You are an "insurance company" as defined in section 2(13) of the Securities Act and you are not acquiring the Notes to be purchased by you hereunder with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act of 1933, as amended, provided that the disposition of your property shall at all times be and remain within your control. 10B. Source of Funds. No part of the funds being used by you to pay the purchase price of the Notes being purchased by you hereunder constitutes assets allocated to a separate account maintained by you. For the purpose of this 28 paragraph 10B, the terms "separate account" shall have the meaning specified in section 3 of ERISA. PARAGRAPH 11. DEFINITIONS. 11. Definitions. For the purpose of this Agreement, the terms defined in the introductory sentence and in paragraphs 1 and 2 shall have the respective meanings specified therein, and the following terms shall have the meanings specified with respect thereto below (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 11A. Yield-Maintenance Terms. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed. "Called Principal" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4B or 4C or is declared to be immediately due and payable pursuant to paragraph 8A, as the context requires. "Designated Spread" shall mean, (i) with respect to the Called Principal of any Note that is prepaid pursuant to paragraph 4C, 2.50% (250 basis points), and (ii) in all other cases 1.00% (100 basis points). "Discounted Value" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" shall mean the sum of the Designated Spread plus the yield to maturity implied by (i) the yields reported, as of 10:00 a.m. (New York City time) on the Business Day next preceding the Settlement Date with respect to such Called Principal, on the display designated as "Page 678" on the Telerate Service (or such other display as may replace Page 678 on the Telerate Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, (a) if necessary, by (x) converting U.S. Treasury bill quotations to bond- equivalent yields in accordance with accepted financial practice and (y) interpolating linearly between yields reported for various maturities and (b) by converting all such implied yields to a quarterly payment basis in accordance with accepted financial practice. "Remaining Average Life" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date. "Settlement Date" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4B or 4C or is declared to be immediately due and payable pursuant to paragraph 8A as the context requires. "Yield-Maintenance Amount" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of and including the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero. 11B. Other Terms. "Affiliate" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. Unless the context clearly requires otherwise, "Affiliate" shall mean an Affiliate of the Company. "Asset Disposition" shall mean, with respect to the Company or any Subsidiary, any transaction or series of related transactions in which such Person sells, conveys, transfers, leases (as lessor) or otherwise disposes of (collectively, for purposes of this definition, a "transfer"), directly or indirectly, any of its property or assets, including, without limitation, any Indebtedness of any Subsidiary or capital stock of or other equity interests in any Subsidiary (including the issuance of such stock or other equity interests by such Subsidiary), other than (i) transfers from a Subsidiary to the Company or a Wholly Owned Subsidiary, (ii) transfers from the Company to another corporation, HEP or a limited partnership described in paragraph 6B(3)(iii) of all or substantially all of the assets of the 29 Company pursuant to, and in compliance with the terms of, such paragraph or (iii) sales of oil and gas production in the ordinary course of the Company's or a Subsidiary's business. "Bankruptcy Law" shall have the meaning specified in clause (viii) of paragraph 8A. "Business Day" shall mean any day on which banks are open for business in New York City (other than a Saturday, a Sunday or a legal holiday in the States of New York or New Jersey). "Capitalized Lease Obligation" shall mean any rental obligation which, under generally accepted accounting principles, would be required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "Change in Control" shall mean if any Person or Persons acting in concert, together with Affiliates thereof, shall in the aggregate, directly or indirectly, control or own (beneficially or otherwise) more than 50% (by number of shares) of the issued and outstanding Voting Stock of the Company. Notwithstanding the foregoing, a merger or consolidation of the Company with, or a sale of all or substantially all of the assets of the Company to, HEP or a corporation or limited partnership formed to combine the assets of HEP and the Company will not be a "Change in Control". "Claims" shall have the meaning specified in paragraph 5G. "Closing" or "Date of Closing" shall have the meaning specified in paragraph 2. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Stock" shall have the meaning specified in paragraph 1B. "Consolidated Assets" shall mean, at any time, the total assets of the Company and its Subsidiaries which would be shown as assets on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP, after eliminating, without duplication, (i) amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries, and (ii) assets subject to Non-recourse Debt. "Consolidated Interest Expense" shall mean, with respect to any period, the sum (without duplication) of the following (in each case, eliminating, without duplication, all offsetting debits and credits between the Company and its Subsidiaries, all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP, all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries, all items that are included in such consolidated 30 financial statements by virtue of the proportionate consolidation method of accounting and constitute the pro rata share of the Company and its Subsidiaries of the activities of HEP, and all items in respect of Non-recourse Debt): (a) all interest and prepayment charges in respect of Indebtedness of the Company and its Subsidiaries (including imputed interest in respect of Capitalized Lease Obligations and net costs of Swaps) deducted in determining Consolidated Net Income for such period, together with all interest capitalized or deferred during such period and not deducted in determining Consolidated Net Income for such period, and (b) all debt discount and expense amortized or required to be amortized in the determination of Consolidated Net Income for such period. "Consolidated Net Income" shall mean, with respect to any period, the sum of (i) distributions from HEP that are actually received by the Company or any of its Subsidiaries during such period plus, without duplication, (ii) the net income (or loss) of the Company and its Subsidiaries for such period as determined in accordance with GAAP, after eliminating, without duplication, (a) all items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP, (b) all amounts properly attributable to minority interests, if any, in the stock and surplus of Subsidiaries, (c) all items that are included in such consolidated financial statements by virtue of the proportionate consolidation method of accounting and constitute the pro rata share of the Company and its Subsidiaries of the activities of HEP, and (d) all items in respect of Non-recourse Debt; provided that there shall also be excluded the following: any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets), any gains resulting from the write-up of assets, any earnings of any Person acquired by the Company or any Subsidiary through purchase, merger or consolidation or otherwise for any period prior to the date of acquisition, any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary, any gains from the acquisition of securities or the retirement or extinguishment of Indebtedness, any gains on collections from insurance policies or settlements, any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such period, the cumulative effect of changes in accounting principles included in income during the period, any income or gain during such period from any discontinued operations or the disposition thereof, from any extraordinary items or from any prior period adjustments, or, in the case of a successor to the Company or any Subsidiary by consolidation or merger or as a transferee of its assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets or any equity of the Company or any Subsidiary in the undistributed earnings (but not losses) of any Person which is not a Subsidiary. "Consolidated Net Worth" shall mean an amount equal to consolidated stockholders' equity of the Company determined in accordance with GAAP (less amounts attributable to redeemable preferred stock) minus the net equity of the Company and its Subsidiaries in any assets subject to Non-recourse Debt. 31 "Convertible Securities" shall mean any debt instrument that is by its terms convertible into an equity interest in the Company or a Subsidiary. "Credit Agreement" shall mean the Second Amended and Restated Credit Agreement dated as of May 31, 1997, among the Company, HCP and the banks listed therein, First Union National Bank, as Collateral Agent, and Morgan Guaranty Trust Company of New York, as Agent, as amended from time to time. "Default Subordination Event" shall mean the existence of all of the following: (i) a Subordination Event of Default shall have occurred and be continuing in respect of any Senior Debt, (ii) the holders of the Notes shall have received a notice from or on behalf of any holder of such Senior Debt specifying that such Subordination Event of Default has occurred and is continuing and that such notice constitutes a "Default Subordination Notice" and (iii) no other Default Subordination Notice shall have been delivered by any holder of Senior Debt within the 365 day period immediately preceding the giving of such notice. The "Stand-Still Period" relating to any Default Subordination Event shall be deemed to continue until the earlier of (a) the Subordination Event of Default under the Senior Debt giving rise thereto shall have been cured or waived; (b) a period of 120 days shall have elapsed from the giving of the Default Subordination Notice relating thereto; and (c) the Senior Debt giving rise thereto shall have been accelerated. "Default Subordination Notice" shall have the meaning specified in the definition of "Default Subordination Event." "Disposition Value" shall mean, at any time, with respect to any property (a) in the case of property that does not constitute Subsidiary Stock, the book value thereof at the time of such disposition, and (b) in the case of property that constitutes Subsidiary Stock, an amount equal to that percentage of book value of the assets of the Subsidiary that issued such stock as is equal to the percentage that the book value of such Subsidiary Stock represents of the book value of all of the outstanding capital stock of such Subsidiary (assuming, in making such calculations, that all securities convertible into such capital stock are so converted and giving full effect to all transactions that would occur or be required in connection with such conversion) determined at the time of the disposition thereof, in good faith by the Company. "EBITDA" shall mean, for any period, the sum of (i) Consolidated Net Income plus (ii) to the extent deducted in the determination of Consolidated Net Income (other than as a result of clauses (b), (c) and (d) of the definition thereof), (a) all provisions for federal, state and other income tax, (b) Consolidated Interest Expense and (c) provisions for depletion, depreciation and amortization and impairment of oil and gas properties. 32 "Equity Proceeds" shall mean the aggregate sum of (i) the net proceeds received after the Date of Closing by the Company or any Subsidiary upon the sale of any equity interest in the Company or any Subsidiary (other than in the case of sales by a Subsidiary to the Company or to a Wholly Owned Subsidiary), plus (ii) the net proceeds received after the Date of Closing by the Company or any Subsidiary upon (a) the exercise of the Warrants, or any other warrants, options or similar instruments issued by the Company or any Subsidiary (other than in the case of warrants or similar instruments issued to and held by the Company or a Wholly Owned Subsidiary), and (b) the conversion of any Convertible Securities into common stock or other equity interest in the Company or any Subsidiary (other than conversions by the Company or a Wholly Owned Subsidiary). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code. "Event of Default" shall mean any of the events specified in paragraph 8A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "Default" shall mean any of such events, whether or not any such requirement has been satisfied. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" shall mean, at any time and with respect to any property, the sale value of such property that would be realized in an arm's-length sale at such time between an informed and willing buyer and an informed and willing seller (neither being under a compulsion to buy or sell). "GAAP" shall have the meaning specified in paragraph 11C. "Guarantee" shall mean, with respect to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including, without limitation, any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or 33 for any transportation or services regardless of the non-delivery or non-furnishing thereof, in any such case if the purpose, intent or effect of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. The amount of any Guarantee shall be equal to the outstanding principal amount of the obligation guaranteed or such lesser amount to which the maximum exposure of the guarantor shall have been specifically limited. "HCP" shall mean Hallwood Consolidated Partners, L.P., a Colorado limited partnership. "Hedging Transaction" shall mean any commodity basis swap, forward commodity transaction, commodity swap, commodity option, commodity index swap, commodity cap transaction, commodity floor transaction, commodity collar transaction, any other similar transaction that relates to commodities (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. For the purposes of this Agreement, the amount of the obligation under any Hedging Transaction shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Hedging Transaction had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Hedging Transaction provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "HEP" shall mean Hallwood Energy Partners, L.P., a Delaware limited partnership, and its successors. "Indebtedness" shall mean, with respect to any Person and without duplication: (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) which under GAAP are shown on the balance sheet as a liability (including, without limitation, Capitalized Lease Obligations, but excluding accounts payable in the ordinary course of business and accrued expenses shown as current liabilities; (ii) indebtedness secured by any Lien existing on property owned subject to such Lien, whether or not the indebtedness secured thereby shall have been assumed, provided, that the obligations secured by any Liens permitted by paragraph 6B(2)(iv) shall not constitute Indebtedness; (iii) redemption obligations in respect of mandatorily redeemable preferred stock; (iv) all liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (v) Swaps and Hedging Transactions; and (vi) Guarantees of Indebtedness of other Persons of the types described in the foregoing clauses (i) through (vi). Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (i) through (vi) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. 34 "Lien" shall mean any mortgage, pledge, priority, security interest, encumbrance, contractual deposit arrangement, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "Multiemployer Plan" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA). "Non-recourse Debt" means Indebtedness which is secured by specific assets and is issued pursuant to or evidenced or secured by an instrument which limits the recourse against the obligor thereunder to such specific assets and which, in the case of Indebtedness created, assumed, or incurred after the date hereof, contains a provision to the effect that if the holder of such Indebtedness should ever become entitled to recourse against the obligor pursuant to ss.1111(b) of the Bankruptcy Reform Act of 1978 (11. U.S.C. ss.111(b)) or any other provision of any bankruptcy insolvency, or other law of any jurisdiction, then such holder's claim in respect of such Indebtedness shall thereupon become and thereafter remain in all respects subordinate and junior to all indebtedness evidenced by the Notes and such holder shall not be entitled to receive any payment, under any condition, in respect of any such Indebtedness until all Notes and all other amounts which may become due, or are stated in this Agreement to become due, shall have been paid in full or funds for their payment shall have been duly and sufficiently provided. "Notes" shall have the meaning specified in paragraph 1A. "Officer's Certificate" shall mean a certificate signed in the name of the Company by its President, one of its Vice Presidents or its Treasurer. "Participation Rights Agreement" shall mean the Participation Rights Agreement, dated of even date herewith, by and among you, the Company and certain holders of the Common Stock, that are parties thereto; such Participation Rights Agreement shall be substantially in the form of Exhibit E attached hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor entity. "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, a limited liability company, an unincorporated organization and a government or any department or agency thereof. 35 "Plan" shall mean any "employee pension benefit plan" (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate. "Property Reinvestment Application" means, with respect to any Transfer of property, the satisfaction of each of the following conditions: (a) an amount equal to the proceeds with respect to such Transfer shall have been applied, or irrevocably committed and then actually applied within 30 days, to the acquisition by the Company, or any of its Subsidiaries making such Transfer, of oil and gas property that is not encumbered by (i) any Lien (other than Liens described in paragraph 6B(2)(iv)) or (ii) any Lien described in paragraph 6B(2)(i) but only if the proceeds result from a Transfer of oil and gas property that also was subject to such a Lien; and (b) the Company shall have delivered an Officer's Certificate to each holder referring to paragraph 6B(4) and identifying the property that was the subject of such Transfer, the Disposition Value of such property, and the nature, terms, amount and application of the proceeds from the Transfer. "Registration Rights Agreement" shall mean the Registration Rights Agreement, dated of even date herewith, by and between you and the Company and substantially in the form of Exhibit F attached hereto. "Required Holder(s)" shall mean the holder or holders of at least 662/3% of the aggregate principal amount of the Notes from time to time outstanding. "Responsible Officer" shall mean the chief executive officer, chief operating officer, chief financial officer or chief accounting officer of the Company or any other officer of the Company involved principally in its financial administration or its controllership function. "Securities" shall mean the Notes and the Warrants. "Securities Act" shall mean the Securities Act of 1933, as amended. "Senior Debt" shall mean the unpaid principal of, interest on premium, if any, and commitment and other similar fees with respect to Indebtedness pursuant to the Credit Agreement outstanding, from time to time, in accordance with paragraph 6A(1). "Significant Holder" shall mean each holder of at least 10% of the Notes or 10% of the Warrants. "Stand-Still Period" shall have the meaning specified in the definition of "Default Subordination Event." 36 "Subordination Event of Default" shall mean (i) any default in the payment of any principal of or interest on any Senior Debt in an amount less than or equal to $100,000 owing under any single instrument when the same becomes due and payable or (ii) any event of default under any other agreement evidencing Senior Debt that would entitle the holders of such Senior Debt to accelerate the obligations under such Senior Debt (other than as a result of any nonpayment of any amount owing under Senior Debt). "Subsidiary" shall mean a corporation, trust, association, partnership or other business entity of which, at the time such determination is made, at least 50.1% of the total Voting Stock is owned by the Company and/or one or more of its Subsidiaries. "Subsidiary Guaranty" shall mean the Senior Subordinated Guaranty, dated of even date herewith and executed by HCP and each other Subsidiary, in substantially the form of Exhibit D attached hereto. "Subsidiary Stock" means, with respect to any Person, the stock (or any options or warrants to purchase stock or other securities exchangeable for or convertible into stock) of any Subsidiary of such Person. "Swaps" shall mean with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations (other than Hedging Transactions), in each case obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "Termination Event" shall mean (i) a Reportable Event described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the Pension Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of the Company or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the Pension Benefit Guaranty Corporation, or (v) any other event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. 37 "Total Debt" shall mean, at the time of determination, the then outstanding aggregate principal amount of all Indebtedness, other than Non-recourse Debt, of the Company and its Subsidiaries on a consolidated basis. "Transfer" means, with respect to any Person, any transaction in which such Person sells, conveys, transfers or leases (as lessor) any of its property, including, without limitation, Subsidiary Stock. For purposes of determining the application of the proceeds in respect of any Transfer, the Company may designate any Transfer as one or more separate Transfers each yielding separate proceeds. In any such case, (a) the Disposition Value of any property subject to each such separate Transfer and (b) the amount of Consolidated Assets attributable to any property subject to each such separate Transfer shall be determined by ratably allocating the aggregate Disposition Value of, and the aggregate Consolidated Assets attributable to, all property subject to all such separate Transfers to each such separate Transfer on a proportionate basis. "Transferee" shall mean any direct or indirect transferee of all or any part of any Note or Warrant purchased by you under this Agreement. "Voting Stock" shall mean, securities or other equity interest of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election or removal of corporate directors or persons (such as general partners or managers) performing similar functions in the case of business entities other than corporations. "Warrants" shall have the meaning specified in paragraph 1B. "Wholly Owned Subsidiary" shall mean any Subsidiary all of the equity interests (except directors' qualifying shares) of which are owned, directly or indirectly, by the Company or other Wholly Owned Subsidiaries. 11C. Accounting Principles, Terms and Determinations. All references in this Agreement to "generally accepted accounting principles" or to "GAAP" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all unaudited financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with generally accepted accounting principles, applied on a basis consistent with the most recent audited consolidated financial statements of the Company and its Subsidiaries delivered pursuant to clause (ii) of paragraph 5A or, if no such statements have been so delivered, the most recent audited financial statements referred to in clause (i) of paragraph 9B. PARAGRAPH 12. MISCELLANEOUS. 12. Miscellaneous. 38 12A. Note Payments. So long as you shall hold any Note, the Company will make payments of principal of, interest on and any Yield-Maintenance Amount payable with respect to such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit (not later than 12:00 noon, New York City time, on the date due) to your account or accounts as specified in the Purchaser Schedule attached hereto, or such other account or accounts in the United States as you may designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. You agree that, before disposing of any Note, you will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 12A to any Transferee which shall have made the same agreement as you have made in this paragraph 12A. 12B. Expenses. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save you and any Transferee harmless against liability for the payment of, all out-of-pocket expenses arising in connection with such transactions, including (i) all document production and duplication charges and the fees and expenses of any special counsel engaged by you or such Transferee in connection with this Agreement, the transactions contemplated hereby and any subsequent proposed modification of, or proposed consent under, this Agreement whether or not such proposed modification shall be effected or proposed consent granted, and (ii) the costs and expenses, including attorneys' fees, incurred by you or such Transferee in enforcing (or determining whether or how to enforce) any rights under this Agreement, the Notes, the Warrants, the Registration Rights Agreement or the Participation Rights Agreement or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement, such other documents or the transactions contemplated hereby or thereby or by reason of your or such Transferee's having acquired any Note or Warrant, including without limitation costs and expenses incurred in any bankruptcy case. The obligations of the Company under this paragraph 12B shall survive the transfer of any Note or portion thereof or interest therein by you or any Transferee and the payment of any Note. 12C. Consent to Amendments. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) except that, without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to this Agreement shall change the maturity of any Note, or change the principal of, or the rate or time of payment of interest on or any Yield-Maintenance Amount payable with respect to any Note, or affect the time, amount or allocation of any prepayments, or change the proportion of the principal amount of the Notes required with respect to any consent, amendment, waiver or declaration. Each holder of any Securities at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 12C, whether or not such Securities shall have been marked to indicate such consent, but any Securities issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Securities nor any delay in exercising any rights hereunder or under any Securities shall operate as a waiver of any rights of any holder of such Securities. As used herein and in the Notes, the term "this Agreement" and 39 references thereto shall mean this Agreement as it may from time to time be amended or supplemented. 12D. Form, Registration, Transfer and Exchange of Notes; Lost Notes. The Notes are issuable as registered notes without coupons in denominations of at least $100,000, except as may be necessary to reflect any principal amount not evenly divisible by $100,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. 12E. Persons Deemed Owners; Participations. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of, interest on and any Yield-Maintenance Amount payable with respect to such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion, provided that any such participation shall be in a principal amount of at least $100,000. 12F. Survival of Representations and Warranties; Entire Agreement. All representa tions and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by you of any Warrant or Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of you or any Transferee. Subject to the preceding sentence, this Agreement, the Notes, the Warrants, the Registration Rights Agreement and the Participation Rights Agreement embody the entire agreement and 40 understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 12G. Successors and Assigns. All covenants and other agreements in this Agreement contained by or on behalf of either of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not. 12H. Disclosure to Other Persons. The Company acknowledges that the holder of any Security may deliver copies of any financial statements and other documents delivered to such holder, and disclose any other information disclosed to such holder, by or on behalf of the Company or any Subsidiary in connection with or pursuant to this Agreement to (i) such holder's directors, officers, employees, agents and professional consultants, (ii) any other holder of any Security, (iii) any Person to which such holder offers to sell such Security or any part thereof, (iv) any Person to which such holder sells or offers to sell a participation in all or any part of a Note, (v) any Person from which such holder offers to purchase any other security of the Company, (vi) any federal or state regulatory authority having jurisdiction over such holder, (vii) the National Association of Insurance Commissioners or any similar organization or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (a) in compliance with any law, rule, regulation or order applicable to such holder, (b) in response to any subpoena or other legal process or informal investigative demand or (c) in connection with any litigation to which such holder is a party. 12I. Notices. All notices or other communications provided for hereunder shall be in writing and sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to you, addressed to you at the address specified for such communications in the Purchaser Schedule attached hereto, or at such other address as you shall have specified to the Company in writing, (ii) if to any other holder of any Security, addressed to such other holder at such address as such other holder shall have specified to the Company in writing or, if any such other holder shall not have so specified an address to the Company, then addressed to such other holder in care of the last holder of such Security which shall have so specified an address to the Company, and (iii) if to the Company, addressed to it at 4582 S. Ulster St. Pkwy., Suite 1700, Denver, Colorado 80237, Attention: Legal Department, or at such other address as the Company shall have specified to the holder of each Security in writing; provided, that any such communication to the Company may also, at the option of the holder of any Security, be delivered by any other means either to the Company at its address specified above or to any officer of the Company. 12J. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest or Yield-Maintenance Amount on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. 41 12K. Satisfaction Requirement. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to you or to the Required Holder(s), the determination of such satisfaction shall be made by you or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination. 12L. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK. This Agreement may not be changed orally, but (subject to the provisions of paragraph 12C) only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 12M. Waiver of Jury Trial; Consent to Jurisdiction; Limitation of Remedies. (i) THE COMPANY AND EACH HOLDER OF SECURITIES HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION OF ANY CLAIM WHICH IS BASED HEREON, OR ARISES OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES, THE WARRANTS, THE REGISTRATION RIGHTS AGREEMENT OR THE PARTICIPATION RIGHTS AGREEMENT, OR ANY TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE COMPANY OR SUCH HOLDERS. THE COMPANY ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR YOU TO ENTER INTO THIS AGREEMENT. (ii) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES, THE WARRANTS, THE REGISTRATION RIGHTS AGREEMENT OR THE PARTICIPATION RIGHTS AGREEMENT, OR ANY TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE COMPANY OR THE HOLDERS OF SECURITIES MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND THE COMPANY HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTIONS, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF 42 ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. 12N. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 12O. Descriptive Headings. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 12P. Maximum Interest Payable. The Company, you and any other holders of the Notes specifically intend and agree to limit contractually the amount of interest payable under this Agreement, the Notes and all other instruments and agreements related hereto and thereto to the maximum amount of interest lawfully permitted to be charged under applicable law. Therefore, none of the terms of this Agreement, the Notes or any instrument pertaining to or relating to this Agreement or the Notes shall ever be construed to create a contract to pay interest at a rate in excess of the maximum rate permitted to be charged under applicable law, and neither the Company, any guarantor nor any other party liable or to become liable hereunder, under the Notes, any guaranty or under any other instruments and agreements related hereto and thereto shall ever be liable for interest in excess of the amount determined at such maximum rate, and the provisions of this paragraph 12P shall control over all other provisions of this Agreement, any Notes, any guaranty or any other instrument pertaining to or relating to the transactions herein contemplated. If any amount of interest taken or received by you or any holder of a Note shall be in excess of said maximum amount of interest which, under applicable law, could lawfully have been collected by you or such holder incident to such transactions, then such excess shall be deemed to have been the result of a mathematical error by all parties hereto and shall be refunded promptly by the Person receiving such amount to the party paying such amount, or, at the option of the recipient, credited ratably against the unpaid principal amount of the Note or Notes held by you or such holder, respectively. All amounts paid or agreed to be paid in connection with such transac tions which would under applicable law be deemed "interest" shall, to the extent permitted by such applicable law, be amortized, prorated, allocated and spread throughout the stated term of this Agreement and the Notes. "Applicable law" as used in this paragraph means that law in effect from time to time which permits the charging and collection of the highest permissible lawful, nonusurious rate of interest on the transactions herein contemplated including laws of the State of New York and of the United States of America, and "maximum rate" as used in this paragraph means, with respect to each of the Notes, the maximum lawful, nonusurious rates of interest (if any) which under applicable law may be charged to the Company from time to time with respect to such Notes. 43 12Q. Counterparts. This Agreement may be executed in any number of counter parts, each of which shall be an original but all of which together shall constitute one instrument. [Remainder of Page Intentionally Left Blank; Signature Page Follows] 44 If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the Company, whereupon this letter shall become a binding agreement between the Company and you. Very truly yours, HALLWOOD CONSOLIDATED RESOURCES CORPORATION By /s/ Cathleen Osborn Title: Vice President The foregoing Agreement is hereby accepted as of the date first above written. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ Vice President 45 EXHIBIT A [FORM OF SENIOR SUBORDINATED NOTE] HALLWOOD CONSOLIDATED RESOURCES CORPORATION 10.32% SENIOR SUBORDINATED NOTE DUE DECEMBER 23, 2007 No._________________ ___________, _____ $___________________ PPN 40636V A* 0 FOR VALUE RECEIVED, the undersigned, HALLWOOD CONSOLIDATED RESOURCES CORPORATION (the "Company"), a corporation organized and existing under the laws of the State of Delaware, hereby promises to pay to _____________________________, or registered assigns, the principal sum of ___________________________ DOLLARS ($______________) on December 23, 2007, with interest (computed on the basis of a 360-day year -- 30-day month) payable quarterly (or, upon the occurrence of a Default or an Event of Default and until such Default of Event of Default has been cured or waived in writing (such period constituting a "Default Interest Period"), at the option of the registered holder hereof, on demand) on the 23rd day of March, June, September and December in each year, commencing with the 23rd day of March, June, September or December next succeeding the date hereof, until the principal hereof shall have become due and payable (a) on the unpaid balance hereof at the rate of 10.32% per annum from the date hereof, and (b) during a Default Interest Period on the unpaid balance hereof and all other obligations of the Company under the Note Agreement referred to below, including any payment or overdue payment or prepayment of principal, interest and any Yield-Maintenance Amount (as such term is defined in the Note Agreement referred to below), at a rate per annum from time to time equal to the lesser of (i) the maximum rate permitted by applicable law or (ii) the greater of (y) 12.32% or (z) 2.0% over the rate of interest publicly announced by The Bank of New York from time to time in New York City as its Prime Rate. Payments of principal of, interest on and any Yield-Maintenance Amount payable with respect to this Note are to be made at the main office of The Bank of New York in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America. This Note is one of a series of 10.32% Senior Subordinated Notes (the "Notes") issued pursuant to a Subordinated Note and Warrant Purchase Agreement, dated as of December 23, 1997 (the "Agreement"), between the Company and The Prudential Insurance Company of America and is entitled to the benefits thereof. A-1 This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note of like tenor for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. This Note is subject to certain prepayments, as specified in the Agreement. This Note and the debt evidenced hereby, including the principal, interest and Yield- Maintenance Amount, if any, shall at all times remain junior and subordinate to any and all Senior Debt (as defined in the Agreement), all on the terms and to the extent more fully set forth in the Agreement. If an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement. The Company, and the purchaser and the registered holder of this Note specifically intend and agree to limit contractually the amount of interest payable under this Note to the maximum amount of interest lawfully permitted to be charged under applicable law. Therefore, none of the terms of this Note shall ever be construed to create a contract to pay interest at a rate in excess of the maximum rate permitted to be charged under applicable law, and neither the Company nor any other party liable or to become liable hereunder shall ever be liable for interest in excess of the amount determined at such maximum rate, and the provisions of paragraph 12P of the Agreement shall control over any contrary provision of this Note. THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF SUCH STATE. HALLWOOD CONSOLIDATED RESOURCES CORPORATION By [Vice] President A-2 EX-10.18 6 AMEND. #2 TO 2ND AMENDED & RESTATED CREDIT AGRMT. AMENDMENT NO. 2 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT dated as of December 23, 1997 among HALLWOOD CONSOLIDATED RESOURCES CORPORATION ("HCRC"), a Delaware corporation and HALLWOOD CONSOLIDATED PARTNERS, L.P. ("HCP"), a Colorado limited partnership (individually a "Borrower" and collectively the "Borrowers"), the BANKS listed on the signature pages hereof (the "Banks"), First Union National Bank, as collateral agent (the "Collateral Agent"), MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H : WHEREAS, the Borrowers, the Banks, the Collateral Agent and the Agent are parties to a Second Amended and Restated Credit Agreement (as amended, the "Credit Agreement"); WHEREAS, contemporaneously with the execution and delivery of this Amendment, HCRC and The Prudential Insurance Company of America (with its successors, "Prudential") are entering into a Subordinated Note and Warrant Purchase Agreement dated as of December 23, 1997 (the "Subordinated Notes Agreement"); WHEREAS, contemporaneously with the execution and delivery of this Amendment, HCP is entering into a Senior Subordinated Guaranty Agreement in favor of Prudential dated as of December 23, 1997 (the "Subordinated Guaranty"); WHEREAS, in the absence of this Amendment, the execution and delivery by HCRC of the Subordinated Notes Agreement and by HCP of the Subordinated Guaranty and the consummation of the transactions contemplated by the Subordinated Note Agreement and the Subordinated Guaranty, including without limitation the issuance of the Subordinated Notes, would constitute an Event of Default under the Credit Agreement; WHEREAS, the Borrowers have asked the Banks, and the Banks are willing, on the terms and conditions set forth herein, to amend the Credit Agreement to permit the execution and delivery by HCRC of the Subordinated Notes Agreement 1 and by HCP of the Subordinated Guaranty and the consummation of the transactions contemplated by the Subordinated Notes Agreement and the Subordinated Guaranty; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement shall have the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Credit Agreement" and each other similar reference contained in the Credit Agreement shall from and after the date hereof refer to the Credit Agreement as amended hereby. SECTION 2. Additional Definitions Relating to the Subordinated Debt; Reset of Availability Limit; Reset of Debt Limit. (a) New definitions of "Prudential", "Subordinated Guaranty", "Subordinated Notes" and "Subordinated Notes Agreement" are added in alphabetical order to Section 1.01 of the Credit Agreement to read in their entirety as follows: "Prudential" means The Prudential Insurance Company of America and its successors and assigns. "Subordinated Guaranty" means the Senior Subordinated Guaranty Agreement by HCP in favor of Prudential dated as of December 23, 1997. "Subordinated Notes" means the 10.32% Senior Subordinated Notes Due December 23, 2007 issued by HCRC pursuant to the Subordinated Notes Agreement. "Subordinated Notes Agreement" means the Subordinated Note and Warrant Purchase Agreement dated as of December 23, 1997 between HCRC and Prudential, substantially in the form approved by the Banks prior to the date of effectiveness of Amendment No.2 to this Agreement dated as of December 23, 1997 among the Borrowers, the Banks, the Collateral Agent and the Agent. (b) The definition of "Availability Limit"set forth in Section 1.01 of the Credit Agreement is hereby amended to read in its entirety as follows: "Availability Limit" means, on any date, an amount equal to the lesser of (i) the aggregate amount of the Commitments at such date and (ii) $10,000,000. The Availability Limit may be increased only by an amendment in accordance with Section 8.05, which the Banks may agree to or not agree to in their sole discretion. 2 (c) Effective on and as of the date of this Amendment, the "Debt Limit", as determined in accordance with subsection (b) of Section 4.17 of the Credit Agreement, shall be $10,000,000. SECTION 3. Change in the Default Interest Rate. Clause (e) of Section 2.04 is hereby amended to read in its entirety as follows: "(e) On each day during which a Default shall occur and be continuing, all outstanding Loans of each Bank, and all interest which is past due to such Bank on such day, shall bear interest at a rate per annum equal to the sum of 2% plus the Base Rate for such day, but in no event to exceed the Highest Lawful Rate of such Bank." SECTION 4. Additional Events Requiring Notice to the Banks. Section 4.01 of the Credit Agreement is hereby amended by adding a new clause (d) immediately after clause (c) thereof, to read in its entirety as follows: "(d) contemporaneously with the delivery of any information (including without limitation financial information), reports or notices to Prudential pursuant to Section 5A of the Subordinated Notes Agreement, a copy thereof to each Bank (unless previously delivered to such Bank under this Agreement);" SECTION 5. Additional Permitted Debt of the Borrowers. Section 4.17 of the Credit Agreement is hereby amended by : (i) deleting the "and" at the end of clause (v) thereof; (ii) renumbering clause (vi) thereof as clause (vii) thereof; and (iii) adding a new clause (vi) immediately after clause (v) thereof to read in its entirety as follows: "(vi) the Subordinated Notes and the Subordinated Guaranty; and" SECTION 6. Additional Permitted Debt of HCP. Section 4.20(d) of the Credit Agreement is hereby amended by : (i) deleting the "and" at the end of clause (iii) thereof; (ii) renumbering clause (vi) thereof as clause (v) thereof; and 3 (iii) adding a new clause (iv) immediately after clause (iii) thereof to read in its entirety as follows: "(iv) the Subordinated Guaranty; and" SECTION 7. Restrictions of Payments of Subordinated Debt. New Sections 4.37 and 4.38 are added to the Credit Agreement immediately after Section 4.36 thereof, to read in their entirety as follows: "SECTION 4.37. Incorporation By Reference of Certain Covenants. The provisions of Paragraph 6A of the Subordinated Notes Agreement and related definitions are hereby incorporated by reference with the same effect as if such provisions were fully set forth herein; provided that any amendments or waivers of any such provisions or related definitions shall be effective hereunder solely if consented to in writing by the Required Banks. SECTION 4.38. Restrictions with Respect to Subordinated Debt. (a) HCRC shall not, and shall not permit any of its Subsidiaries to, make any payments with respect to the Subordinated Notes, other than (i) scheduled payments of interest, (ii) scheduled repayments of principal, each in the amount of $5,000,000 on or about December 23 in each of the years 2003 through 2006, inclusive, and (iii) scheduled payments of principal in the amount of $5,000,000 on or about December 23, 2007, in each case subject to the subordination provisions set forth in the Subordinated Note Agreement. (b) Neither Borrower will enter into any amendment or waiver of any term of the Subordinated Notes Agreement, the Subordinated Guaranty or any Subordinated Notes without the prior written consent of the Required Banks." SECTION 8. Effectiveness. This Amendment shall become effective on the date on which the Agent shall have received (i) counterparts of this Amendment duly executed by the Borrowers, the Required Banks, the Collateral Agent and the Agent (or, in the case of any party as to which an executed counterpart shall not have been received, the Agent shall have received telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party) and (ii) evidence satisfactory to the Agent that (x) HCRC and HCP shall have executed and delivered the Subordinated Notes Agreement and the Subordinated Guaranty, respectively and (y) HCRC shall have received proceeds of not less than $25,000,000 from the issuance and sale of the Subordinated Notes. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be duly executed as of the date first above written. HALLWOOD CONSOLIDATED RESOURCES CORPORATION By /s/ Robert S. Pfeiffer ------------------------------------------------- Title: Vice President HALLWOOD CONSOLIDATED PARTNERS, L.P. By: HALLWOOD CONSOLIDATED RESOURCES CORPORATION By /s/ Robert S. Pfeiffer ------------------------------------------------- Title: Vice President The General Partner of Hallwood Consolidated Partners, L.P. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ John Kowalczuk -------------------------------------------------- Title: Vice President FIRST UNION NATIONAL BANK By /s/ Michael J. Kolosowsky ------------------------------------------------- Title: Vice President 5 NATIONSBANK OF TEXAS, N.A. By /s/ W. Keith Buchanan ------------------------------------------------- Title: Vice President MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By /s/ John Kowalczuk ------------------------------------------------- Title: Vice President FIRST UNION NATIONAL BANK, as Collateral Agent By /s/ Michael J. Kolosowsky ------------------------------------------------- Title: Vice President 6 EX-23.1 7 CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by Reference in Registration Statement No. 333-1154 of Hallwood Consolidated Resources Corporation on Form S-8 of our report dated February 27, 1998, appearing in this Annual Report on Form 10-K of Hallwood Consolidated Resources Corporation for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Denver, Colorado February 27, 1998 EX-23.2 8 CONSENT Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by Reference in Registration Statement No. 333-34105 of Hallwood Consolidated Resources Corporation on Form S-8 of our report dated February 27, 1998, appearing in this Annual Report on Form 10-K of Hallwood Consolidated Resources Corporation for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Denver, Colorado February 27, 1998 EX-27 9 FDS HCRC
5 This schedule contains summary financial information extracted from Form 10-K for the year ended December 31, 1997 for Hallwood Consolidated Resources Corporation and is qualified in its entirety by reference to such Form 10-K. 0000883953 Hallwood Consolidated Resources Corporation 1,000 12-MOS Dec-31-1997 Dec-31-1997 4,492 0 3,262 0 0 15,874 297,172 221,141 92,371 11,007 0 0 0 30 48,656 92,371 30,667 32,411 0 23,707 0 0 2,258 6,446 861 5,585 0 0 0 5,585 2.05 1.97
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