<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER: 1-8303
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS, SUITE 1500, DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (214) 528-5588
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock ($.10 par value) New York Stock Exchange
13.5% Subordinated Debentures Due July 31, 2009 New York Stock Exchange
7% Collateralized Senior Subordinated Debentures Due July New York Stock Exchange
31, 2000
</TABLE>
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 Common Stock, $.10 par value per share,
held by non-affiliates of the registrant, based on the closing price of $27.00
per share on March 21, 1997 on the New York Stock Exchange, was $21,486,000.
1,566,294 shares of Common Stock, $.10 par value per share, were
outstanding at March 21, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be filed with the Securities and Exchange Commission not later than 120 days
after December 31, 1996.
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<PAGE> 2
FORM 10-K
TABLE OF CONTENTS
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PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 7
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 16
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 16
Item 11. Executive Compensation...................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 16
Item 13. Certain Relationships and Related Transactions.............. 17
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 17
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
Upon its formation in 1981, The Hallwood Group Incorporated ("Hallwood" or
the "Company") (NYSE:HWG) became engaged in the ownership, operation and
management of the real estate portfolios of its corporate predecessors and in
the merchant banking business, specializing in assisting troubled companies to
implement plans of financial restructuring. After 1981, the Company disposed of
a substantial portion of its initial real estate portfolio and significantly
expanded the range of its merchant banking activities. The Company has acquired
substantial investment positions in a number of previously unaffiliated
enterprises and has thereby become a diversified holding company engaged in
three principal activities: asset management, operating subsidiaries and
investments in associated companies. At December 31, 1996, the Company, its
operating subsidiaries and associated company were currently engaged in the
commercial and industrial real estate, energy, textile products, hotel and
restaurant businesses. For financial reporting purposes, Hallwood considers
itself to operate in five business segments: real estate, energy, textile
products, hotels and restaurants. The Company is no longer engaged in the
merchant banking business, other than in connection with the businesses in which
its operating subsidiaries are engaged. The Company is no longer engaged in the
restaurant business, as the entire investment was sold in March 1997 through a
secondary public offering by its associated company, ShowBiz Pizza Time, Inc.
("ShowBiz"). Financial information for each industry segment in which the
company operates is set forth in Note 18 to the Company's consolidated financial
statements.
In October 1995, the Company changed its year end from July 31 to December
31, effective December 31, 1995.
Asset Management. The Company's asset management division consists of real
estate and energy business segments.
Real Estate. Real estate activities are conducted primarily through the
Company's wholly owned subsidiaries, Hallwood Realty Corporation ("HRC") and
Hallwood Commercial Real Estate, Inc. ("HCRE"), formerly named Hallwood
Management Company. HRC is the sole general partner of Hallwood Realty Partners,
L.P. ("HRP"), a publicly-traded real estate master limited partnership
(AMEX:HRY). HRC owns a 1% general partner interest and Hallwood owns a 24%
limited partner interest in HRP. HRC is responsible for asset management,
financing, acquiring and disposing of HRP properties as it deems appropriate. In
addition, HRC provides general operating and administrative services to HRP. At
December 31, 1996, HRP owned twelve commercial properties, of which seven are
office building properties and five are industrial park properties. HCRE was
formed in June 1991 as Hallwood Management Company and acquired the rights to
manage the HRP properties under various property management agreements. HCRE is
responsible for on-site property management and receives various fees for
managing, leasing and construction supervision at such properties. The latest
financial statements of HRP are included elsewhere within this document.
In December 1995, the Company completed the sale of the office-retail
property located in the United Kingdom for $7,543,000. A provision for loss of
$101,000 was recorded in connection with the sale.
The Company previously had a significant investment in mortgage loan
portfolios secured by residential lots and condominiums. The portfolios were
liquidated during the year ended July 31, 1995, in connection with various sales
and the assignment of a portion of the portfolio to a plaintiff in settlement of
a lawsuit.
In the year ended December 31, 1996, real estate accounted for 3% of the
Company's total revenues, compared to 3% in the five months ended December 31,
1995, and 4% in the years ended July 31, 1995 and 1994.
See Note 12 to the Company's consolidated financial statements.
Energy. Energy operations became reportable in May 1990, when the Company
increased its ownership of Hallwood Energy Corporation ("HEC") from 11% to 53%,
through the conversion of its preferred stock
2
<PAGE> 4
into common stock and the purchase of additional common stock. Since May 1990
HEC has been accounted for as a consolidated subsidiary of the Company. As a
result of HEC's subsequent purchases of its own stock for treasury and the
Company's acquisition of additional HEC common stock, the Company's effective
percentage ownership increased to 82%, and after the Company's November 1996
successful tender offer for the remaining minority shares, HEC was merged into
the Company.
Certain energy assets acquired by the Company from the merger were
subsequently transferred to two wholly-owned entities, HEPGP Ltd. ("HEPGP") and
Hallwood G.P., Inc. ("HGP"), the general partner of HEPGP.
The Company's energy operations are now conducted primarily through HEPGP.
HEPGP is engaged in the development, production and sale of oil and gas, and in
the acquisition, exploration, development and operation of additional oil and
gas properties. HEPGP is the sole general partner of Hallwood Energy Partners,
L.P. ("HEP"), a publicly-traded oil and gas master limited partnership
(AMEX:HEP), and conducts substantially all if its operations through HEP.
HEPGP's general partner interest in HEP entitles it to a share of net revenue
derived from HEP's properties ranging from 2% to 25%. In addition, the Company
holds approximately 6.5% of HEP's limited partner units.
The Company and its subsidiaries account for their ownership of HEP using
the proportionate consolidation method, whereby they record a proportional share
of HEP's revenues and expenses, current assets, current liabilities, noncurrent
assets, long-term obligations and fixed assets.
In the year ended December 31, 1996, energy accounted for 7% of the
Company's total revenues, compared to 8% in the five months ended December 31,
1995, and 5% and 6% in the years ended July 31, 1995 and 1994, respectively.
See Note 13 to the Company's consolidated financial statements.
Operating Subsidiaries. The Company's operating subsidiaries division
consists of textile products and hotel business segments.
Textile Products. Textile products operations are conducted through the
Company's wholly-owned Brookwood Companies Incorporated ("Brookwood")
subsidiary. Brookwood is a complete textile service firm that develops and
produces innovative fabrics and related products through specialized finishing,
treating and coating processes.
In the year ended December 31, 1996, textile products accounted for 67% of
the Company's total revenues, compared to 69% in the five months ended December
31, 1995, and 69% and 67% in years ended July 31, 1995 and 1994, respectively.
See Note 14 to the Company's consolidated financial statements.
Hotels. Hotel operations are conducted through the Company's wholly-owned,
Hallwood Hotels, Inc. ("Hallwood Hotels") and Hallwood-Integra Holding Company,
Inc. ("Integra Hotels") subsidiaries, and consist of (i) leasehold interests in
two hotel properties, the Longboat Key Holiday Inn, Sarasota, Florida and the
Airport Embassy Suites, Oklahoma City, Oklahoma, both of which were purchased
from the Company's then affiliate, Integra-A Hotel and Restaurant Company, in
June 1991 and (ii) fee interests in two Residence Inns located in Tulsa,
Oklahoma and Greenville, South Carolina, and a leasehold interest in a Residence
Inn located in Huntsville, Alabama. The Company previously owned and operated
The Lido Beach Holiday Inn, Sarasota, Florida, which was sold in January 1995,
and operated two Residence Inn hotels under management contracts which were sold
during the year ended July 31, 1995.
All of the hotels are operated under license agreements with Holiday Inns
Franchising, Inc., Embassy Suites, Inc. or Marriott International, Inc. The
license agreements permit the licensor to prescribe, at such times as it
determines, standards for the operation and maintenance of the various
properties and their furnishings, equipment and facilities. Substantial capital
expenditures may be required from time to time to comply with license standards.
3
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In the year ended December 31, 1996, hotel revenues accounted for 18% of
the Company's total revenues, compared to 20% in the five months ended December
31, 1995, and 22% and 20% in the years ended July 31, 1995 and 1994,
respectively.
Associated Companies. Hallwood's investment in an associated company
consisted of its 13% common stock investment in ShowBiz (NASDAQ:SHBZ). The
Company is no longer engaged in the restaurant business, as its entire
investment was sold in March 1997 through a secondary public offering by
ShowBiz. The Company sold 262,500 ShowBiz shares during 1996 for $4,139,000 in
cash resulting in a $2,431,000 gain. The latest financial statements of ShowBiz
are included elsewhere in this document. The Company accounts for its investment
in ShowBiz on the equity basis. In the year ended December 31, 1996, the
Company's income from ShowBiz accounted for 4% of the Company's total revenues,
compared to net losses in the five months ended December 31, 1995 and year ended
July 31, 1995, and 1% of total revenues in the year ended July 31, 1994.
The Company formerly owned a 15% interest in Oakhurst Capital, Inc. (20%
assuming exercise of warrants). In February 1994, the Company completed a cash
sale of its entire investment for $1,250,000, resulting in a gain of $30,000.
See Notes 2 and 21 to the Company's consolidated financial statements.
Competition. The Company's real estate operations are subject to
competition from other entities, many of which have more experience and
substantially greater financial resources.
The energy industry is highly competitive. Major oil and gas companies,
independent drilling and production programs and individual producers and
operators are active bidders for oil and gas properties, as well as for the
equipment and labor required to operate such properties. The market for oil and
gas depends on a number of factors, including the level of domestic production,
pace of the general economy, supply of imported oil and gas, actions of foreign
oil-producing nations and the extent of governmental regulation and taxation.
Textile products operations encounter competition in all regions in which
they are conducted. In the volume areas of the textile business, competition is
sometimes based on price, particularly during a soft economy.
Hotel operations are subject to competition from similar types of
properties in the vicinities in which they are located. The sale of hotels may
be impacted by the inability of prospective purchasers to obtain equity capital
or suitable financing.
Environmental Compliance. A number of jurisdictions in which the Company
operates have adopted laws and regulations relating to environmental matters.
Such laws and regulations may require the Company to secure governmental permits
and approvals and undertake measures to comply therewith. Compliance with the
requirements imposed may be time-consuming and costly. While environmental
considerations, by themselves, have not materially affected the Company's
business to date or that of its associated company, it is possible that such
considerations may have a material and adverse impact in the future. The Company
actively monitors its environmental compliance and is not aware of any material
compliance issues.
4
<PAGE> 6
Number of Employees. The Company had 1,020 and 1,009 employees as of
February 28, 1997 and 1996, respectively, comprised as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------
1997 1996
----- -----
<S> <C> <C>
Hallwood.................................................... 4 5
Brookwood................................................... 389 377
Hotel subsidiaries.......................................... 392 386
HEPGP/HEC................................................... 127 133
HCRE........................................................ 88 89
HRC......................................................... 20 19
----- -----
Total..................................................... 1,020 1,009
===== =====
</TABLE>
A substantial amount of the salaries and related costs of HEPGP/HEC, HRC
and HCRE employees are reimbursed by the respective energy and real estate
partnership affiliates.
ITEM 2. PROPERTIES
Real Properties
The general character, location and nature of the significant real
properties owned by the Company and its subsidiaries and the encumbrances
against such properties are described below and/or in Schedule III hereto.
Cost of real estate owned by property type and geographic distribution (in
thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
OPERATING NON-OPERATING
PROPERTY TYPE PROPERTIES PROPERTIES TOTAL PERCENTAGE
------------- ---------- ------------- ------- ----------
<S> <C> <C> <C> <C>
Textile Products
Dyeing and finishing plant -- Kenyon,
RI(2)................................... $ 4,705 $-- $ 4,705 16%
Hotels
Longboat Key Holiday Inn -- Sarasota,
FL(1)(2)................................ 7,611 -- 7,611 26
Residence Inn -- Greenville, SC(2)......... 7,296 -- 7,296 24
Residence Inn -- Tulsa, OK (2)............. 5,671 -- 5,671 19
Embassy Suites -- Oklahoma City,
OK(1)(2)................................ 3,254 -- 3,254 11
Residence Inn -- Huntsville, AL(1)......... 1,326 -- 1,326 4
Parking lot -- Irving, TX.................. -- 50 50 *
------- --- ------- ---
Subtotal........................... 25,158 50 25,208 84
------- --- ------- ---
Total.............................. $29,863 $50 $29,913 100%
======= === ======= ===
</TABLE>
- ---------------
* Less than 1%.
(1) Cost represents purchased leasehold interest in hotel property and capital
improvements.
(2) Property is pledged as collateral under loan or bond indenture agreements.
5
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<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
NUMBER OF
GEOGRAPHIC DISTRIBUTION INVESTMENTS AMOUNT PERCENTAGE
----------------------- ----------- ------- ----------
<S> <C> <C> <C>
United States
Oklahoma.......................................... 2 $ 8,925 30%
Florida........................................... 1 7,611 26
South Carolina.................................... 1 7,296 24
Rhode Island...................................... 1 4,705 16
Alabama........................................... 1 1,326 4
Texas............................................. 1 50 *
- ------- ---
Total..................................... 7 $29,913 100%
= ======= ===
</TABLE>
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* Less than 1%.
As of December 31, 1996, no single real estate property constituted 10% or
more of the Company's consolidated assets.
The textile products' dyeing and finishing plant was custom-built and is
well-suited for that particular business. The development of new products
requires the plant to be constantly upgraded, along with various levels of
utilization. The plant is a multi-shift facility, which can be fully-utilized
for a particular operation at any given time.
Hotel properties are operated under license and, as such, must meet and
maintain standards established by licensor. At any time during the term of the
license, the licensor may require modernization, renovation and other upgrading
of the hotel. Except for a franchisor mandated acceleration of the capital
expenditures at one of the hotel properties, the Company is in compliance with
all current requirements. The Company expects to be in full compliance by June
30, 1997.
Oil and Gas Properties
The Company's oil and gas properties consist primarily of the Company's and
HEPGP's indirect interest in properties owned through their investment in HEP.
Quantities and values presented in the financial statements attached hereto
related to HEP's properties are shown net to their interest in HEP. The
supplemental oil and gas reserve information appended to the consolidated
financial statements represents estimated quantities of proved oil and gas
reserves. These reserves are located principally in six areas within the United
States. The determination of oil and gas reserves is based on estimates which
are highly complex and interpretive. The estimates are subject to continuing
change as additional information becomes available.
See Note 13 to the Company's consolidated financial statements and
Supplemental Oil and Gas Reserve Information.
The following tables summarize certain oil and gas information related to
the Company's and HEPGP's direct interests and their share of HEP's oil and gas
activities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
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<S> <C> <C>
Net mineral interests, includes $157 and $82, of unproved
mineral interests at December 31, 1996 and 1995,
respectively.............................................. $8,846 $9,468
Net other property and equipment............................ 82 371
------ ------
Oil and gas properties, net................................. $8,928 $9,839
====== ======
</TABLE>
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1994
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<S> <C> <C> <C>
Development costs........................................... $1,321 $979 $599
Property acquisition cost................................... 366 247 894
Exploration cost............................................ 100 166 273
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company, certain of its affiliates and others were named as defendants
in several lawsuits relating to various transactions in which it or its
affiliated entities participated. The majority of these matters have been
settled and negotiations with respect to the settlement of certain of the other
matters are in process. Nevertheless, the remaining lawsuits seek or may seek
substantial damages from the Company and the other defendants, and there can be
no assurances as to the ultimate outcome of these actions. The Company intends
to defend, or in some cases negotiate to settle, the remaining actions and does
not currently anticipate that such actions will have a material adverse effect
on its financial condition, results of operations or cash flows beyond the
reserves the Company has established for such purposes. See Note 17 to the
Company's consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of security holders during the period.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares of common stock, $.10 par value per share ("Common
Stock"), are traded on the New York Stock Exchange under the symbol of HWG.
There were 1,825 stockholders of record as of March 21, 1997.
The following table sets forth, for the periods indicated, a two-year
record of high and low closing prices on the New York Stock Exchange, adjusted
for the one-for-four reverse split of Common Stock effective June 28, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995
-------------- -------------
QUARTERS HIGH LOW HIGH LOW
- -------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First.................................................... $14 3/8 $ 9 1/8 $14 $ 7
Second................................................... 14 5/8 13 1/4 13 11
Third.................................................... 14 1/4 11 3/8 10 1/2 10
Fourth................................................... 15 7/8 13 1/2 10 3/8 7 3/4
</TABLE>
The Company has not paid cash dividends since fiscal 1989 and, at present,
does not intend to pay cash dividends in the foreseeable future.
The closing price per share of the Common Stock on the New York Stock
Exchange on March 21, 1997 was $27.00.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, -----------------------------------------
1996 1995 1995 1994 1993 1992
------------ ------------ -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Asset Management
Real estate............................ $ 3,947 $ 1,211 $ 4,595 $ 4,399 $ 6,586 $ 6,160
Energy(a).............................. 7,515 3,149 5,359 6,234 8,455 7,112
Operating Subsidiaries
Textile products....................... 77,583 28,229 77,808 71,624 70,185 71,393
Hotels(b).............................. 20,948 8,073 24,898 20,896 17,818 19,325
Associated Companies(c).................. 4,448 (88) (171) 1,356 12,232 9,547
Other.................................... 960 233 737 2,193 854 1,618
-------- ------- -------- -------- -------- --------
115,401 40,807 113,226 106,702 116,130 115,155
EXPENSES
Asset Management
Real estate............................ 2,329 1,343 3,244 4,287 3,969 6,107
Energy(a).............................. 5,233 2,873 5,575 5,412 6,763 7,044
Operating Subsidiaries
Textile product........................ 76,361 28,222 77,604 70,761 68,678 71,062
Hotels(b).............................. 20,948 8,326 22,075 20,330 17,583 19,846
Associated Companies(c).................. 1,558 310 687 486 5,057 25,061
Other.................................... 6,974 3,322 8,158 7,737 10,007 14,608
-------- ------- -------- -------- -------- --------
113,403 44,396 117,343 109,013 112,057 143,728
-------- ------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary gain and cumulative
effect of SFAS No. 109 adoption........ 1,998 (3,589) (4,117) (2,311) 4,073 (28,573)
Income taxes (benefit)................... (4,525) (299) 830 2,727 5,498 (1,702)
-------- ------- -------- -------- -------- --------
Income (loss) before extraordinary gain
and cumulative effect of SFAS No. 109
adoption............................... 6,523 (3,290) (4,947) (5,038) (1,425) (26,871)
Extraordinary gain from extinguishment of
debt................................... -- 25 143 648 -- 452
-------- ------- -------- -------- -------- --------
Income (loss) before cumulative effect of
SFAS No. 109 adoption.................. 6,523 (3,265) (4,804) (4,390) (1,425) (26,419)
Cumulative effect of SFAS No. 109
adoption............................... -- -- -- -- -- 12,133
-------- ------- -------- -------- -------- --------
NET INCOME (LOSS)........................ $ 6,523 $(3,265) $ (4,804) $ (4,390) $ (1,425) $(14,286)
======== ======= ======== ======== ======== ========
PER COMMON SHARE (PRIMARY)
Net income (loss) per common
share(d)............................ $ 4.87 $ (2.45) $ (3.50) $ (3.20) $ (1.04) $ (10.11)
DIVIDENDS PER COMMON SHARE............... -- -- -- -- -- --
WEIGHTED AVERAGE SHARES OUTSTANDING...... 1,329 1,331 1,374 1,372 1,371 1,413
FINANCIAL CONDITION
Total assets........................... $116,796 $98,223 $112,375 $127,325 $138,378 $152,019
Subordinated debentures................ 50,564 48,324 48,605 49,768 52,513 49,518
Loans payable.......................... 37,342 24,794 32,731 38,054 29,323 43,426
Redeemable preferred stock............. 1,000 1,000 1,000 -- -- --
Common stockholders' equity
(deficit)........................... 5,784 (391) 3,323 7,977 13,760 16,919
</TABLE>
- ---------------
(a) The Company acquired a 53% majority interest in HEC and commenced reporting
of its consolidated energy operations in May 1990. Its majority interest was
subsequently increased by step acquisitions to 82% by November 1996 and,
after a successful tender offer for the minority shares, HEC was merged into
the Company.
(b) The Company's hotel operations commenced in December 1989, as a result of
the purchase of a fee-owned hotel, which was sold in January 1995, and the
purchase of three leased properties in June 1991, one of which was sold in
January 1993. Hotel operations were also increased by the March 1994
acquisition of a fee interest, two leasehold interests and two management
contracts. The two management contracts were sold during the fiscal year
ended July 31, 1995. In May 1996 the Company acquired the fee interest in
the Greenville, South Carolina hotel. Prior to the acquisition, the Company
held a leasehold interest in the hotel.
(c) In March 1997, the Company sold its entire investment in ShowBiz through a
secondary public offering by ShowBiz, which constituted its restaurant
business segment.
(d) Per share information has been adjusted for the one-for-four reverse split
of the Company's Common Stock effective June 28, 1995.
8
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company changed its fiscal year from July 31 to December 31, effective
December 31, 1995. The Company was not required to file a Form 10-K for the
period ended December 31, 1995, but herein has reported the audited accounts for
the five month period then ended. Comparisons to the five month period ended
December 31, 1995 are not meaningful, therefore management's discussion and
analysis focuses on the year ended December 31, 1996 and the years ended July
31, 1995 and 1994. However, significant items occurring in the five month period
ended December 31, 1995 are noted.
Results of Operations. The Company reported net income of $6,523,000 for
the year ended December 31, 1996 ("Calendar 1996"), compared to net losses of
$3,265,000 for the five months ended December 31, 1995 and $4,804,000 and
$4,390,000 for the years ended July 31, 1995 ("Fiscal 1995") and July 31, 1994
("Fiscal 1994"), respectively.
Total revenue for Calendar 1996 was $115,401,000, compared to $40,807,00
for the five months ended December 31, 1995, $113,226,000 for Fiscal 1995 and
$106,702,000 for Fiscal 1994.
Following is an analysis of the results of operations by asset management,
operating subsidiaries and associated companies divisions and by the real
estate, energy, textile products, hotels and restaurant business segments:
Asset Management. The business segments of the Company's asset management
division consist of real estate and energy.
REAL ESTATE
Revenues. Real estate revenues of $3,947,000 for Calendar 1996, $1,211,000
for the five months ended December 31, 1995 and $4,595,000 and $4,399,000 for
Fiscal 1995 and Fiscal 1994, respectively, include fee income, equity loss from
the Company's investments in HRP, interest and discounts on the mortgage loan
portfolio and rentals.
Fee income of $5,672,000 in Calendar 1996 increased significantly compared
to $3,906,000 for Fiscal 1995 and $3,924,000 for Fiscal 1994. The Company's HRC
subsidiary became general partner of HRP on November 1, 1990, upon completion of
the consolidation of eight real estate limited partnerships originally sponsored
and managed by Equitec Financial Group, Inc. ("Equitec") into HRP. HRC earns an
asset management fee and certain related fees from HRP properties, which
amounted to $467,000 for Calendar 1996, $436,000 for Fiscal 1995 and $435,000
for Fiscal 1994. Effective June 1, 1991, the Company's HCRE subsidiary purchased
the property management contracts relating to the HRP properties from Equitec
for $2,475,000. Equitec had retained the rights to manage the HRP properties for
a three-year period after the consolidation. The property management contracts
encompass day-to-day property management responsibilities, for which HCRE
receives management fees, leasing commissions and certain other fees. HCRE
earned fees and commissions from HRP and certain third parties in the amounts of
$5,205,000 for Calendar 1996, $3,470,000 for Fiscal 1995 and $3,489,000 for
Fiscal 1994. The increase in revenues during Calendar 1996 was due primarily to
the significant level of leasing fees earned by HCRE in Calendar 1996, in
connection with the long term renewal of a lease for a major tenant.
As a result of the December 1995 sale of the United Kingdom office-retail
property, the Company reported no rental income in Calendar 1996, compared to
$702,000 in Fiscal 1995 and $567,000 in Fiscal 1994. The increase in Fiscal 1995
was due to higher retail occupancy levels at the office-retail property.
Interest and discounts from mortgage loans decreased to $6,000 in Calendar
1996, compared to $198,000 in Fiscal 1995, as a result of the June 1995 sale of
the Burgundy Condominium loan portfolio, which constituted substantially all of
the Company's remaining mortgage loan portfolio. The Fiscal 1995 amount
decreased by 44%, compared to $354,000 in Fiscal 1994, due to the sale of a
portion of the mortgage loan portfolio and the January 1995 settlement of the
lawsuit styled Third National Bank in Nashville, Trustee, v. The Hallwood Group
Incorporated, whereby the Company directly assigned a portion of the portfolio
to the plaintiff as part of a negotiated settlement.
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<PAGE> 11
The equity loss from investments in HRP represents the Company's
recognition of its pro-rata share of the loss recorded by HRP. The Company
recorded equity losses of $1,731,000 for Calendar 1996, $833,000 for the five
months ended December 31, 1995, $211,000 for Fiscal 1995 and $446,000 for Fiscal
1994. The equity losses were recorded on both the general partner and limited
partner interests. The increased loss for Calendar 1996 resulted from the
Company's additional investment in HRP limited partner units. Since March 1995,
the Company has acquired 323,771 additional limited partner units, pursuant to
HRP's reverse unit split and commission-free, odd-lot buyback programs. HRP
purchased odd lot units and resold such units to the Company at the purchase
price under a previously announced intention. The Company commenced recording
its pro rata share of losses in Fiscal 1995 relating to the newly-acquired
units. The reduced loss in Fiscal 1995 was due to the fact that the carrying
value of the Company's limited partner units acquired prior to March 1995
(89,269 units) had been reduced to zero; therefore, the Company was not
subsequently required to record its pro rata share of HRP's losses with respect
to such units. The Company will continue to recognize significant non-cash
equity losses until the carrying value of all limited partner units are reduced
to zero. See Note 2 to the Company's consolidated financial statements.
Expenses. Real estate expenses were $2,329,000 for Calendar 1996 compared
to $1,343,000 for the five months ended December 31, 1995, $3,244,000 for Fiscal
1995, and $4,287,000 for Fiscal 1994, including $1,500,000 for litigation
settlement. This category also includes administration expenses, depreciation
and amortization, interest, provision for losses (recovery) and operating
expenses.
Administrative expenses of $1,387,000 for Calendar 1996 represent an
increase of $213,000, or 18%, from $1,174,000 for Fiscal 1995. Similarly, Fiscal
1995 administrative expenses increased $151,000, or 15%, from $1,023,000 in
Fiscal 1994. These increases were attributable to the payment of higher leasing
commissions relating to increased leasing fee income earned by HCRE.
Depreciation and amortization of $673,000 for Calendar 1996 decreased
$299,000, or 31%, compared to $972,000 for Fiscal 1995. The decrease was due to
the December 1995 sale of the office-retail property located in the United
Kingdom. The Fiscal 1995 amount decreased $88,000 or 8%, compared to $1,060,000
for Fiscal 1994. The decline in Fiscal 1995 was attributable to the full
amortization of the acquired property management rights in October 1993.
Depreciation expense relates to the office-retail property. Amortization expense
relates to HRC's general partner interest in HRP to the extent allocated to
management rights.
Interest expense of $281,000, $639,000 and $672,000 for Calendar 1996,
Fiscal 1995 and Fiscal 1994, respectively, relates primarily to a term loan
secured by the office-retail property, a promissory note in the original amount
of $1,500,000 and a $500,000 promissory note secured by 89,269 HRP limited
partner units.
In April 1994, the Company settled the Equitec Rollup Litigation, and
recorded the expense relating to the issuance of the $1,500,000 promissory note.
See Note 17 to the Company's consolidated financial statements.
In Calendar 1996, the Company recorded a recovery of $21,000 in connection
with the resolution of litigation over a defaulted mortgage. The provision for
loss of $101,000 for the five month period ended December 31, 1995 related to
the loss on sale of the office-retail property, which was sold for $7,543,000
all cash in December 1995. The Fiscal 1995 provision for losses of $431,000 is
comprised of (i) a $221,000 loss on disposition of a portion of the mortgage
loan portfolio; (ii) a $200,000 write-down on the carrying value of the
office-retail property located in the United Kingdom; and (iii) a $10,000 loss
on the disposition of a developed land parcel in Flint, Michigan.
Operating expenses were immaterial for the periods.
ENERGY
Revenues. After the Company's successful completion of the tender offer for
the minority shares of HEC and the subsequent merger of HEC, it effectively
acquired ownership of the assets formerly held by HEC. Following the merger,
certain HEC assets were transferred to two wholly owned entities. The two
entities, in addition to other energy assets which remain with the Company,
constitute the Company's investment in the energy industry. The general partner
interest in HEP entitles the general partner to interests in HEP's
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<PAGE> 12
properties ranging from 2% to 25%, and the Company holds approximately 6.5% of
HEP's limited partner units. The Company and its energy subsidiaries account for
their ownership of HEP using the proportionate consolidation method of
accounting, whereby they record their proportional share of HEP's revenues and
expenses, current assets, current liabilities, noncurrent assets, long-term
obligations and fixed assets.
Oil and gas revenues of $7,066,000 for Calendar 1996, compares to
$2,980,000 for the five months ended December 31, 1995, $5,343,000 for Fiscal
1995 and $5,983,000 for Fiscal 1994. Calendar 1996 production volumes decreased
5% from Fiscal 1995 and increased 2% in Fiscal 1995 from Fiscal 1994. The
decrease in production volume in Calendar 1996 is primarily due to normal
production declines. The increase in production in Fiscal 1995 is the result of
increased production from developmental drilling projects in West Texas,
partially offset by normal production declines. Oil prices averaged $20.64 per
barrel in Calendar 1996, compared to an average price of $16.45 in Fiscal 1995
and $16.28 in Fiscal 1994. Gas prices averaged $2.49 per mcf in Calendar 1996,
compared to $1.70 in Fiscal 1995 and $2.13 in Fiscal 1994.
Other income of $449,000 for Calendar 1996, compares to $16,000 for Fiscal
1995 and $251,000 for Fiscal 1994. The increase in Calendar 1996 is attributable
to a $298,000 acquisition fee earned by HEC which relates to property
acquisitions made by HEP, as well as an increase in the equity in earnings of
HEP's affiliate due to a 6% increase in HEP's ownership of the affiliate and the
inclusion in Fiscal 1995 of a provision for impairment of oil and gas properties
by the affiliate. The decrease in Fiscal 1995 from Fiscal 1994 is primarily due
to a decrease in the equity in earnings of HEP's affiliate due to the provision
for impairment recorded in Fiscal 1995.
Expenses. Energy expenses of $5,233,000 for Calendar 1996, compares to
$2,873,000 for the five months ended December 31, 1995, $5,575,000 for Fiscal
1995 and $5,412,000 for Fiscal 1994.
Depreciation, depletion, amortization and impairment of properties
decreased 36% in Calendar 1996 to $1,532,000 from $2,403,000 in Fiscal 1995, as
a result of lower capitalized costs during Calendar 1996, due to impairment
expense of $464,000 representing HEC's pro-rata share of HEP's write-off of its
Indonesian operations which was recorded in Fiscal 1995. The 19% increase in
Fiscal 1995 from $2,018,000 in Fiscal 1994 was due to HEC's pro-rata shares of
HEP's impairment expense.
Operating expenses, which are comprised of the costs of operating wells and
production-related taxes, for Calendar 1996 increased by $173,000, or 13%, to
$1,509,000 from the Fiscal 1995 amount of $1,336,000. The increase in Calendar
1996 is attributable to increased production taxes due to the increase in oil
and gas revenue. Fiscal 1995 operating expenses decreased $220,000, or 14%,
compared to the Fiscal 1994 amount of $1,556,000. The decrease is comprised of
lower production taxes resulting from the 11% decrease in oil and gas revenue
discussed above and operating cost reductions in West Texas.
Administrative expenses for Calendar 1996 decreased $211,000, or 14%, to
$1,314,000 from the Fiscal 1995 amount of $1,525,000, due to a decrease in
performance based compensation and a decrease in salaries and employee benefit
expense due to personnel reductions during 1995. Administrative expenses for
Fiscal 1995 increased $476,000, or 45%, from the Fiscal 1994 amount of
$1,049,000. This increase was a result of HEC's share of litigation settlements
entered into by HEP.
Interest expense in Calendar 1996 increased by $81,000, or 22%, to $456,000
from the Fiscal 1995 amount of $375,000, due primarily to the procurement of a
$2,500,000 loan in November 1996. Fiscal 1995 interest expense decreased $3,000
from $378,000 in Fiscal 1994, due to HEP's lower average debt balance.
Minority interest, which represents the interest of other common and
preferred shareholders in the net income (loss) of HEC, of $422,000, $(64,000)
and $411,000 for Calendar 1996, Fiscal 1995 and Fiscal 1994, respectively,
fluctuates depending upon HEC's net income (loss) and percentage of minority
ownership. The minority interest was eliminated in the November 1996 as a result
of the merger of HEC into the Company.
Operating Subsidiaries. The business segments of the Company's operating
subsidiaries division consists of textile products and hotels.
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TEXTILE PRODUCTS
Revenues. Textile products revenue decreased slightly to $77,583,000 for
Calendar 1996, compared to $77,808,000 for Fiscal 1995. This decrease of
$225,000 resulted from lower revenue from Brookwood Laminating due to weak
market conditions, partially offset by higher revenues of the distribution
businesses due to continued growth. The 9% increase in revenues from $71,624,000
in Fiscal 1994 to $77,808,000 in Fiscal 1995 resulted from growth of
distribution businesses principally in fabric for use in consumer products.
Expenses. Textile products cost of sales decreased $1,541,000, or 2%, to
$67,256,000 for Calendar 1996 from $68,797,000 in Fiscal 1995. The decrease was
due to more efficient operations at the Kenyon dyeing and finishing plant and
the increased level of distribution sales with their higher profit margins. Cost
of sales increased 10% to $68,797,000 for Fiscal 1995 from $62,705,000 for
Fiscal 1994. The increase in cost of sales for Fiscal 1995 was principally the
result of a 9% increase of sales revenue. Gross margins were 13.3%, 11.6% and
12.5% in Calendar 1996, Fiscal 1995 and Fiscal 1994, respectively. The lower
gross profit margin for Fiscal 1995 was the result of manufacturing
inefficiencies at the Kenyon finishing plant.
Administrative and selling expenses increased $509,000 in Calendar 1996 to
$8,482,000 from the Fiscal 1995 amount of $7,973,000, primarily due to increased
operating expenses associated with growth of the distribution businesses and a
$100,000 provision for costs related to management changes at the Kenyon plant.
The $519,000 increase in Fiscal 1995 from the Fiscal 1994 amount of $7,454,000
was due to the sales growth in the distribution businesses and the increased use
of consultants on special projects. Interest expense decreased $211,000 to
$623,000 in Calendar 1996, compared to $834,000 in Fiscal 1995 as a result of
lower average borrowings and interest rates. The $232,000 increase in interest
expense from the Fiscal 1994 amount of $602,000 was the result of higher average
borrowings and higher interest rates in Fiscal 1995.
HOTELS
Revenues. Calendar 1996 sales of $20,948,000 decreased by $1,554,000, or
7%, compared to Fiscal 1995 sales of $22,502,000. The decrease is primarily
attributable to the January 1995 sale of the Lido Beach Holiday Inn hotel.
Fiscal 1995 sales increased by $1,606,000, or 8%, compared to $20,896,000 from
Fiscal 1994. Such increase was due to the inclusion of a full year of operations
of the Integra Hotels' properties, acquired in March 1994, offset by the January
1995 sale of the Lido Beach Holiday Inn hotel. For the properties which were
owned during all of both Calendar 1996 and Fiscal 1995, revenues increased
$678,000, or 3%, and the average daily rate increased 7% between the periods.
During Fiscal 1995 the Company sold both its fee interest in the Lido Beach
Holiday Inn hotel resulting in a gain of $2,164,000 and two management contracts
resulting in a gain of $232,000.
Expenses. Hotel expenses were $20,948,000 for Calendar 1996, $8,326,000 for
the five month period ended December 31, 1995, $22,075,000 in Fiscal 1995 and
$20,330,000 in Fiscal 1994, respectively.
Operating expenses of $17,137,000 for Calendar 1996 decreased by
$1,607,000, or 9%, from the Fiscal 1995 amount of $18,744,000. The decrease is
primarily attributable to the aforementioned sale of the Lido Beach Holiday Inn
hotel. Operating expenses for Fiscal 1995 increased by $1,406,000, or 8%, from
the Fiscal 1994 expenses of $17,338,000. The increase was primarily due to the
inclusion of a full year for the Integra Hotels properties and the sale of the
Lido Beach Holiday Inn hotel. For properties which were owned during all of both
Calendar 1996 and Fiscal 1995 operating expenses increased $196,000, or 1%,
between the periods.
Depreciation and amortization increased to $2,657,000 for Calendar 1996
from $2,429,000 in Fiscal 1995 and $2,104,000 in Fiscal 1994, due to the May
1996 purchase of the fee interest for the Residence Inn located in Greenville,
South Carolina and significant capital improvements. Amortization expense for
all three year periods relates to leaseholds at the Longboat Key Holiday Inn,
the Oklahoma City Embassy Suites, the Huntsville Residence Inn, the Greenville
Residence Inn (until May 1996) and two former Residence Inn management
contracts.
Interest expense increased to $1,154,000 for Calendar 1996, from $902,000
in Fiscal 1995 and $888,000 in Fiscal 1994. The increase of $252,000 in Calendar
1996, compared to Fiscal 1995 was due to the
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<PAGE> 14
procurement of a $6,800,000 term loan on the Greenville, South Carolina hotel,
partially offset by the January 1995 payoff of the term loan secured by the Lido
Beach Holiday Inn hotel. The increase of $14,000 in Fiscal 1995, compared to
Fiscal 1994 was due to assumption and subsequent renegotiation of the mortgage
loan on the Residence Inn hotel located in Tulsa, Oklahoma in March 1994,
partially offset by the aforementioned payoff of the Lido Beach hotel term loan.
ASSOCIATED COMPANY
Revenues. Associated company income for Calendar 1996 in the amount of
$4,448,000 compares to a (loss) of $(171,000) for Fiscal 1995 and $1,356,000 for
Fiscal 1994. All income (loss) is derived from ShowBiz in all three years. The
$4,619,000 increase in Calendar 1996 is attributable to (i) higher equity
earnings, resulting from a 9.8% increase in comparable store sales and improved
operating margins, and (ii) the Company's sale of 262,500 common shares of
ShowBiz for aggregate proceeds of $4,139,000, resulting in a gain of $2,431,000.
The decline in Fiscal 1995 from Fiscal 1994 of $1,527,000 was due to a
substantial decline in ShowBiz results, which was attributable to lower
operating margins and certain non-cash charges that negatively impacted results,
including a reduction in deferred tax credits, a charge for new store pre-
opening costs, a reserve for asset impairment and a reserve for legal
settlements. In March 1997, the Company sold its entire investment in ShowBiz
pursuant to a secondary offering by its ShowBiz affiliate at $15.68 per share,
net of underwriting commissions. The Company will report a significant gain from
this transaction in the first quarter of 1997.
The Fiscal 1994 amount includes a gain of $30,000 from the sale of the
Company's entire investment in Oakhurst Capital, Inc. for $1,250,000.
Expenses. Interest expense for Calendar 1996 was $1,558,000, compared to
the Fiscal 1995 amount of $687,000 and the Fiscal 1994 amount of $486,000. The
$871,000 increase in Calendar 1996 is primarily attributable to (i) the
recognition of additional expense from a "participation" provision contained in
the note payable to the Integra Unsecured Creditors' Trust in the amount of
$755,000, and (ii) additional borrowings under the margin loan with Merrill
Lynch Business Financial Services Inc. ("MLPFS"). The Fiscal 1995 increase of
$201,000 was attributable to an increase in rate on the MLBFS margin loan,
offset by a decline in the average outstanding balance, and the March 1994
issuance of the 5% fixed interest note to the Integra Unsecured Creditors'
Trust. At December 31, 1996, all of the Company's shares of ShowBiz common stock
were pledged as collateral to secure the MLBFS and Integra Unsecured Creditors'
Trust loan obligations. See Notes 2, 6 and 21 to the Company's consolidated
financial statements.
OTHER
Revenues. Interest on short-term investments and other income increased
$223,000, or 71%, to $535,000 in Calendar 1996, compared to $312,000 for Fiscal
1995. The increase was primarily attributable to rental income earned from
subleasing executive office space formerly occupied by the Company's Integra
affiliate. Fiscal 1995 interest and other income decreased by $28,000, or 8%,
compared to $340,000 for Fiscal 1994 as a result of lower cash available for
investment. Fee income for Calendar 1996 and Fiscal 1995 was $425,000, compared
to the Fiscal 1994 amount of $150,000. Fee income is derived from financial
consulting contracts with an HEP affiliate and ShowBiz. The consulting contract
with the HEP affiliate, which was effective July 1994, provided for a $300,000
annual fee until its termination on December 31, 1996. The Company entered into
a new contract on similar terms apart from an increase in amount to $550,000,
effective December 31, 1996. The ShowBiz contract provided for a $125,000 annual
fee until its termination in March 1997.
On February 4, 1994, the Company received $1,703,000 in cash as its share
of a final liquidation distribution of Alliance Bancorporation. Due to previous
uncertainties involving the recoverability of this investment, the Company had
previously written off the asset; therefore, the entire amount received was
recognized as income.
Expenses. Interest expense reported for Calendar 1996, Fiscal 1995 and
Fiscal 1994 primarily relates to the Company's 13.5% Subordinated Debentures and
7% Collateralized Senior Subordinated Debentures.
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Interest expense in Calendar 1996 was $4,258,000, a slight decrease from the
Fiscal 1995 amount of $4,304,000. Interest expense for Fiscal 1995 was slightly
lower than the Fiscal 1994 amount of $4,322,000. See Note 7 to the Company's
consolidated financial statements.
Other administrative expenses of $2,724,000 in Calendar 1996 compares to
$3,841,000 for Fiscal 1995, and to $3,268,000 for Fiscal 1994. The decrease of
$1,117,000, or 29%, in Calendar 1996, compared to Fiscal 1995, is primarily
attributable to costs of litigation settlements in Fiscal 1995, partially offset
by costs associated with the merger of HEC, higher legal and accounting costs
incurred in the development of certain tax planning strategies and higher
consulting fees in Calendar 1996. The increase of $573,000, or 18%, in Fiscal
1995 is attributable to increased costs related to litigation matters, offset by
lower personnel and office expenses.
In Calendar 1996, the Company recorded a recovery of $8,000 from an
investment in a marketable security. In Fiscal 1995, the Company recorded a
$13,000 provision for loss due to an unfavorable foreign currency exchange rate
fluctuation. In Fiscal 1994, the Company recorded a $147,000 provision for loss
from an investment in a marketable security.
Income Taxes. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 -- Accounting for Income
Taxes ("SFAS No. 109"). Among other things this standard requires the
recognition of future tax benefits, measured by enacted tax rates, attributable
to net deductible temporary differences between financial statement and income
tax bases of assets and liabilities (approximately $10,750,000 at December 31,
1996) and tax net operating loss carryforwards ("NOLs") (approximately
$149,362,000 at December 31, 1996) and tax credit carryforwards (approximately
$1,727,000 at December 31, 1996), to the extent that realization of such
benefits is "more likely than not", as defined in SFAS No. 109. As a result of
the appreciation in the market value of the Company's investment in ShowBiz
during Calendar 1996 and the sale of the ShowBiz investment resulting in a
substantial tax gain in 1997, management determined that the deferred tax asset
be increased to reflect the anticipated realization of future tax benefits. As a
result the deferred tax asset was increased to $11,000,000 at December 31, 1996,
from $5,929,000 at December 31, 1995, with a corresponding deferred tax benefit
in Calendar 1996 of $5,071,000.
The Company's NOLs expire as follows: 1997 -- $50,582,000;
1998 -- $42,469,000; 1999 to 2004 -- $1,240,000; and 2006 to
2011 -- $55,071,000. SFAS No. 109 requires that the tax benefit of such NOLs be
recorded as an asset to the extent that management assesses the utilization of
such NOLs to be "more likely than not". Based upon the Company's expectations
and available tax planning strategies, including the aforementioned sale of the
ShowBiz investment in 1997, management has determined that taxable income will
more likely than not be sufficient to utilize approximately $33,000,000 of the
NOLs prior to their ultimate expiration in the year 2010.
Management believes that the Company has certain tax planning strategies
available, including the sale of its hotel properties and certain other assets,
that could be implemented, if necessary, to supplement income from operations to
fully realize the recorded tax benefits before their expiration. Management has
considered such strategies in reaching its conclusion that it is more likely
than not that taxable income will be sufficient to utilize a significant portion
of the NOLs before expiration, however, future levels of operating income and
taxable gains are dependent upon general economic conditions and other factors
beyond the Company's control. Accordingly, no assurance can be given that
sufficient taxable income will be generated for utilization of the NOLs.
Extraordinary Gain. In Fiscal 1995, the Company purchased 7% Debentures
from its HEC subsidiary having a face amount of $1,894,000 for a discounted
amount of $1,385,000. Since this transaction was with a consolidated subsidiary,
no gain was recorded. Additionally, during Fiscal 1995 the Company purchased 7%
Debentures having a face amount of $604,000 for a discounted amount of $460,000,
which resulted in an extraordinary gain from extinguishment of debt in the
amount of $143,000 . During Fiscal 1994 the Company purchased 7% Debentures with
a face amount of $2,174,000 for a discounted amount of $1,526,000, which
resulted in an extraordinary gain of $648,000.
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<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents at December 31, 1996 totaled $7,495,000.
The Company's real estate segment generates funds principally from its
property management activities without significant additional capital costs.
Each quarter HRC reviews HRP's capacity to make cash distributions to its
partners.
The Company's energy segment generates funds from operating and financing
activities. Cash flow is subject to fluctuating oil and gas production and
prices. In accordance with the proportionate consolidation method of accounting,
the Company and its subsidiaries report their share totaling $4,432,000 at
December 31, 1996 of the long-term obligations of HEP. HEP's borrowings are
secured by a first lien on approximately 80% in value of HEP's oil and gas
properties. In December 1996, the newly-formed wholly-owned energy partnership,
HEPGP, obtained a $2,500,000 term loan. The term loan is collateralized by
various general partner and limited partner interests and had a balance of
$2,361,000 at December 31, 1996. At December 31, 1996, HEP had $8,571,000
outstanding under a note purchase agreement which matures in April 1998, and
$26,700,000 outstanding under a revolving credit agreement which matures in
February 2001. HEP's unused borrowing capacity under the revolving credit
agreement was $10,217,000 at February 28, 1997.
The general partner of HEP has indicated that, if there are no further
adverse changes in the factors which effect HEP's cash flow and there are no
changes in the limitation on the distribution amounts as required by its loan
facilities, the general partner believes HEP it can distribute $0.52 per unit to
Class A unitholders and $1.00 per unit to Class C unitholders in 1997. HEPGP's
new term loan contains a provision which prohibits HEPGP from making any
distribution, directly or indirectly, to the Company during the term of the
loan, which matures in May 1998.
At December 31, 1996, Brookwood maintained a $13,500,000 revolving line of
credit facility with The Chase Manhattan Bank, N.A., which was collateralized by
accounts receivable and equipment. The Chase facility was replaced by a new
revolving credit facility in an amount of $14,000,000 ($15,000,000 April through
June) in January 1997 with The Bank of New York. Borrowings under The Bank of
New York facility are collateralized by accounts receivable, certain inventory
and equipment. At February 28, 1997, Brookwood had $1,348,000 of unused
borrowing capacity.
In January 1997, a $1,000,000 cash dividend was paid by Brookwood on its
preferred stock. Future dividends will be declared by Brookwood as permitted by
The Bank of New York loan agreement, which restricts dividends to 80% of net
income plus depreciation and amortization expense less capital expenditures and
debt service.
The Company's hotels have benefitted from the upturn in occupancy and
average daily rates experienced by the lodging industry. Although capital
expenditures are periodically required under franchise agreements, funds
generated from hotel operations have contributed significantly to the Company's
working capital. The sale of hotels is also a source of liquidity; however, it
may be impacted by the inability of prospective purchasers to obtain equity
capital or suitable financing. The Company estimates that 1997 capital
expenditures for the hotel segment will approximate $1,200,000. Additionally,
the lessor of the Longboat Key Holiday Inn hotel has agreed in principle to fund
capital expenditures of approximately $2,500,000 in 1997. In connection with
this major renovation, the Company anticipates exercising its option to extend
its leasehold interest to the year 2008 and entering into a supplemental lease
agreement.
In March 1997, the Company sold its entire investment in ShowBiz pursuant
to a secondary offering by its ShowBiz affiliate. The ShowBiz investment
consisted of 2,413,789 shares of common stock (all of which were pledged under
two loan agreements) and 219,194 ShowBiz unpledged shares acquired in January
1997. Upon closing, the Company repaid the $7,000,000 MLBFS margin loan and the
$4,000,000 note payable to the Integra Unsecured Creditors' Trust. Additionally,
approximately $2,500,000 was placed into an escrow account in connection with a
dispute involving a "Participation" provision contained in the note agreement
with the Integra Unsecured Creditors' Trust, as further discussed in Notes 6 and
21 to in the Company's consolidated financial statements. The Company intends to
use the remaining proceeds to repay debt and focus on core investments. The
significant tax gain from the sale will be offset by the utilization of NOLs.
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<PAGE> 17
Management believes that it will have sufficient funds to satisfy its
obligations.
As described in Note 17 to the Company's consolidated financial statements,
the Company had outstanding contingencies and commitments of approximately
$13,935,000 (excluding operating lease commitments of $14,723,000).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the
independent auditors' report, are included elsewhere herein. Reference is made
to Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form 8-K".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item 10 is contained in the
definitive proxy statement of the Company for its Annual Meeting of Stockholders
(the "Proxy Statement") under the heading "Election of Directors," and such
information is incorporated herein by reference. The Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1996.
In addition to certain directors of the Company who serve as executive
officers, the following individuals also serve as executive officers of the
Company:
William L. Guzzetti, age 53, has served as Executive Vice President of the
Company since October 1989. Mr. Guzzetti has served as President, Chief
Operating Officer and a Director of the general partner of HEP since February
1985 and as President, Chief Operating Officer and a Director of HCRC since May
1991. Prior to that, Mr. Guzzetti served as Senior Vice President, Secretary and
General Counsel of HEC from November 1980 until February 1985. Since November
1990 and May 1991, Mr. Guzzetti has served as the President, Chief Operating
Officer and a Director of HRC and HCRE, respectively.
Melvin J. Melle, age 54, has served as Vice President and Chief Financial
Officer of the Company since December 1984 and as Secretary of the Company since
October 1987. Mr. Melle served as Assistant Secretary of the Company from
December 1984 to October 1987. Mr. Melle had served as Secretary and Principal
Financial and Accounting Officer of Alliance Bancorporation from April 1989
until its liquidation in February 1994. From June 1980 through June 1986, Mr.
Melle served as Chief Financial Officer of The Twenty Seven Trust. Mr. Melle is
a member of the American Institute of Certified Public Accountants and of the
Ohio Society of Certified Public Accountants.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is contained in the
Proxy Statement under the headings "Executive Compensation," "Compensation of
Directors" and "Certain Relationships and Related Transactions," and such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of certain of the Company's outstanding
securities is contained in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
contained in the Proxy Statement under the headings "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions," and such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Reference is made to the "Index to Financial Statements and Schedules"
appearing after the signature page hereof.
1. Financial Statements.
Included in Part II, Item 8. of this report are the following:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Operations, Year ended December 31, 1996,
Five months ended December 31, 1995 and Years ended July 31, 1995 and
1994
Consolidated Statements of Changes in Stockholders' Equity (Deficit),
Year ended July 31, 1994, 1995, Five months ended December 31, 1995 and
Year ended December 31, 1996
Consolidated Statements of Cash Flows, Year ended December 31, 1996,
Five months ended December 31, 1995 and Years ended July 31, 1995 and
1994
Notes to Consolidated Financial Statements
Supplemental Oil and Gas Reserve Information (Unaudited)
2. Financial Statement Schedules.
Independent Auditors' Report on Schedules
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts and Reserves
III Real Estate and Accumulated Depreciation
All other schedules are omitted since the required information is not
applicable or is included in the financial statements or related notes.
Financial Statements of ShowBiz Pizza Time, Inc.
Form 10-K, for the year ended December 27, 1996.
Financial Statements of Hallwood Realty Partners, L.P.
Form 10-K, for the year ended December 31, 1996
3. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<C> <S>
3.1 -- Second Restated Certificate of Incorporation of The
Hallwood Group Incorporated, is incorporated herein by
reference to Exhibit 4.2 to the Company's Form S-8
Registration Statement, File No. 33-63709.
</TABLE>
17
<PAGE> 19
<TABLE>
<S> <C>
3.2 -- Restated Bylaws of the Company, as currently in effect,
including all amendments thereto, is incorporated herein
by reference to Exhibit 3.4 to the Company's Form 10-K
for the fiscal year ended July 31, 1992, File No. 1-8303.
4.1 -- Indenture Agreement, dated as of April 14, 1983, among
Atlantic Metropolitan Corporation, Atlantic Metropolitan
(U.K.) plc and The Law Debenture Trust Corporation plc,
as Trustee, relating to the 12% Convertible Notes due
July 31, 1997 of Anglo Metropolitan (U.K.) plc is
incorporated herein by reference to Exhibit 4.4 to
Atlantic Metropolitan Corporation's Form 10-K for the
fiscal year ended July 31, 1983, File No. 1-8303.
4.2 -- Indenture Agreement, and related Pledge Agreement, dated
as of March 2, 1993, among Norwest Bank Minnesota,
National Association, Trustee, and the Company, regarding
7% Collateralized Senior Subordinated Debentures due July
31, 2000, is incorporated herein by reference to Exhibit
4.2 to the Company's Form 10-Q for the fiscal quarter
ended January 31, 1993, File No. 1-8303.
4.3 -- Indenture, dated as of May 1, 1989, between the Company
and The Bank of New York, as Trustee, is incorporated
herein by reference to Exhibit T3C to the Company's
Application for Qualification of Indenture on Form T-3,
Registration No. 22-19326.
10.1 -- Consulting Agreement with Robert L. Lynch is incorporated
herein by reference to Exhibit 10.2 to Umet Properties
Corporation's Registration Statement on Form S-11, File
No. 2-73345.
10.2 -- Amendment to Consulting Agreement with Robert L. Lynch,
effective October 1, 1982, is incorporated herein by
reference to Exhibit 10.4 to Umet Properties
Corporation's Form 10-K for the fiscal year ended
November 30, 1982, File No. 1-8384.
10.3 -- Amended and Restated Agreement, dated March 30, 1990,
between the Company and Stanwick Management Company, Inc.
(subsequently merged into its parent, Stanwick Holdings,
Inc.) concerning the allocation of costs and expenses
incurred in connection with the operation and management
of their common offices is incorporated herein by
reference to Exhibit 10.30 to the Company's Form 10-Q for
the fiscal quarter ended April 30, 1990, File No. 1-8303.
10.4* -- Employment Agreement, dated January 1, 1994, between the
Company and Melvin John Melle, as incorporated by
reference to Exhibit 10.9 to the Company's Form 10-K for
the fiscal year ended July 31, 1994, File No. 1-8303.
10.5 -- Agreement, dated December 18, 1987, between the Company,
Grainger Trust plc, Atlantic Metropolitan (U.K.) plc and
Alan George Crisp, relating to the sale by the Company of
Atlantic Metropolitan (U.K.) plc is incorporated herein
by reference to Exhibit 2.1 to the Company's Form 8-K
dated January 6, 1988, File No. 1-8303.
10.6 -- Tax Sharing Agreement, dated as of March 15, 1989,
between the Company and Brookwood Companies Incorporated
is incorporated herein by reference to Exhibit 10.25 to
the Company's Form 10-K for the fiscal year ended July
31, 1989, File No. 1-8303.
10.7 -- Amended Tax-Favored Savings Plan Agreement of the
Company, effective as of February 1, 1992, is
incorporated herein by reference to Exhibit 10.33 to the
Company's Form 10-K for the fiscal year ended July 31,
1992, File No. 1-8303.
</TABLE>
18
<PAGE> 20
<TABLE>
<S> <C>
10.8 -- Hallwood Special Bonus Agreement, dated as of August 1,
1993, between the Company and all members of its control
group that now, or hereafter, participate in the Hallwood
Tax Favored Savings Plan and its related trust, and those
employees who, during the plan year of reference are
highly-compensated employees of the Company, is
incorporated herein by reference to Exhibit 10.34 to the
Company's Form 10-K for the fiscal year ended July 31,
1994, File No. 1-8303.
10.9 -- Credit Agreement and Guaranty, dated as of December 9,
1992, among Brookwood Companies Incorporated as Borrower,
the Guarantor signatory hereto, the Banks signatory
hereto and The Chase Manhattan Bank, N.A., as Agent; and
the First Amendment to Credit Agreement and Guaranty,
dated as of March 31, 1993, is incorporated herein by
reference to Exhibit 10.55 to the Company's 10-Q for the
quarter ended April 30, 1993, File No. 1-8303.
10.10 -- Second Amendment to Credit and Guaranty, dated as of
September 27, 1994, among Brookwood Companies
Incorporated, as Borrower, Kenyon Industries, Inc., as
Guarantor and The Chase Manhattan Bank, N.A., as Bank and
as Agent for the Banks, is incorporated herein by
reference to Exhibit 10.56 to the Company's Form 10-K for
the fiscal year ended July 31, 1994, File No. 1-8303.
10.11 -- Third Amendment to Credit and Guaranty, dated as of June
23, 1995, among Brookwood Companies Incorporated, as
Borrower, Kenyon Industries, Inc., as Guarantor and The
Chase Manhattan Bank, N.A., as Bank and as Agent for the
Banks, is incorporated herein by reference to Exhibit
10.15 to the Company's Form 10-K for the fiscal year
ended July 31, 1995, File No. 1-8303.
10.12 -- WCMA Note and Loan Agreement and Pledge and Collateral
Assignment of Securities Account and Securities, dated as
of April 19, 1994 between the Company and Merrill Lynch
Business Financial Services, Inc.; and Amendment to Loan
Documents, dated September 8, 1994, is incorporated
herein by reference to Exhibit 10.58 to the Company's
Form 10-K for the fiscal year ended July 31, 1994, File
No. 1-8303.
10.13* -- Employment Agreement, dated as of April 1, 1992, between
the Company's Hallwood Monaco SAM subsidiary and Anthony
J. Gumbiner, is incorporated herein by reference to
Exhibit 10.59 to the Company's Form 10-K for the fiscal
year ended July 31, 1994, File No. 1-8303.
10.14* -- Financial Consulting Agreement, dated as of August 1,
1994, between the Company and Hallwood Financial
Corporation, is incorporated herein by reference to
Exhibit 10.60 to the Company's Form 10-K for the fiscal
year ended July 31, 1994, File No. 1-8303.
10.15* -- Financial Consulting Agreement, dated as of June 30,
1994, between the Company and Hallwood Petroleum, Inc.,
is incorporated herein by reference to Exhibit 10.61 to
the Company's Form 10-K for the fiscal year ended July
31, 1994, File No. 1-8303.
10.16* -- Agreement, dated as of January 1, 1993, between Hallwood
Investment Company and Brian Michael Troup, is
incorporated herein by reference to Exhibit 10.20 to the
Company's Form 10-K for the fiscal year ended July 31,
1995, File No. 1-8303.
10.17 -- Financial and Management Consulting Services Agreement,
between ShowBiz Pizza Time, Inc. and the Company, dated
December 1988, is incorporated herein by reference to
Exhibit 10.21 to the Company's Form 10-K for the fiscal
year ended July 31, 1995, File No. 1-8303.
10.18* -- 1995 Stock Option Plan for The Hallwood Group
Incorporated is incorporated herein by reference to
Exhibit 4.1 of the Company's Form S-8 Registration
Statement, File No. 33-63709.
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C>
10.19 -- Fourth Amendment and Waiver of Credit Agreement and
Guaranty, dated as of December 31, 1995, among Brookwood
Companies Incorporated and subsidiaries, as borrower, and
The Chase Manhattan Bank N.A., as Bank and Agents for the
Banks, is incorporated herein by reference to Exhibit
10.16 to the Company's 10-Q for the two months and five
months ended December 31, 1995, File No. 1-8303.
10.20 -- Credit Agreement, dated as of December 10, 1996, among
HEPGP Ltd., as borrower, the Company, as a guarantor,
Hallwood G.P., Inc., as a guarantor, and First Union
National Bank of North Carolina, as lender, is filed
herewith.
10.21 -- Credit Agreement, dated as of January 7, 1997, among
Brookwood Companies Incorporated, Kenyon Industries, Inc.
and Brookwood Laminating, Inc., as borrower, and The Bank
of New York, as Bank, is filed herewith.
10.22* -- Financial Consulting Agreement, dated as of December 31,
1996, between the Company and HSC Financial Corporation,
is filed herewith.
10.23* -- Financial Consulting Agreement, dated as of December 31,
1996, between the Company and Hallwood Petroleum, Inc.,
is filed herewith.
11 -- Statement Regarding Computation of Per Share Earnings.
22 -- Active Subsidiaries of the Registrant as of February 28,
1997.
27 -- Financial Data Schedule.
- ---------------
</TABLE>
* Constitutes a compensation plan or agreement for executive officers.
(b) Reports on Form 8-K.
None.
20
<PAGE> 22
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.
THE HALLWOOD GROUP INCORPORATED
By: /s/ MELVIN J. MELLE
----------------------------------
Melvin J. Melle
Vice President -- Finance
(Principal Financial and
Accounting Officer)
Dated: March 28, 1997
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 on the 28th day of March 1997.
<TABLE>
<C> <S>
/s/ MELVIN J. MELLE Vice President -- Finance (Principal Financial
- ----------------------------------------------------- and Accounting Officer)
(Melvin J. Melle)
/s/ ANTHONY J. GUMBINER Chairman of the Board and Director (Principal
- ----------------------------------------------------- Executive Officer)
(Anthony J. Gumbiner)
/s/ ROBERT L. LYNCH Vice Chairman and Director
- -----------------------------------------------------
(Robert L. Lynch)
/s/ BRIAN M. TROUP President and Director (Principal Operating
- ----------------------------------------------------- Officer)
(Brian M. Troup)
/s/ CHARLES A. CROCCO, JR. Director
- -----------------------------------------------------
(Charles A. Crocco, Jr.)
/s/ J. THOMAS TALBOT Director
- -----------------------------------------------------
(J. Thomas Talbot)
</TABLE>
21
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Independent Auditors' Report................................ 23
Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and 1995... 24-25
Consolidated Statements of Operations, Year Ended December
31, 1996, Five Months Ended December 31, 1995 and Years
Ended July 31, 1995 and 1994........................... 26-27
Consolidated Statements of Changes in Stockholders' Equity
(Deficit), Years Ended July 31, 1994 and 1995, Five
Months Ended December 31, 1995 and Year Ended December
31, 1996............................................... 28
Consolidated Statements of Cash Flows, Year Ended December
31, 1996, Five Months Ended December 31, 1995 and Years
Ended July 31, 1995 and 1994........................... 29
Notes to Consolidated Financial Statements................ 30-60
Supplemental Oil and Gas Reserve Information
(Unaudited)............................................ 61
Independent Auditors' Report on Schedules................... 64
Schedules:
I Condensed Financial Information of Registrant......... 65-69
II Valuation and Qualifying Accounts and Reserves........ 70
III Real Estate and Accumulated Depreciation.............. 71
All other schedules are omitted since the required
information is not applicable or is included in the
financial statements or related notes.
Financial Statements of ShowBiz Pizza Time, Inc.
Form 10-K, for the Year Ended December 27, 1996
Financial Statements of Hallwood Realty Partners, L.P.
Form 10-K, for the Year Ended December 31, 1996
</TABLE>
22
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
The Hallwood Group Incorporated
We have audited the accompanying consolidated balance sheets of The
Hallwood Group Incorporated and its subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows for the year ended December 31,
1996, the five months ended December 31, 1995 and the years ended July 31, 1995
and July 31, 1994. 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 The Hallwood Group Incorporated
and its subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the year ended December 31, 1996, the five
months ended December 31, 1995 and the years ended July 31, 1995 and July 31,
1994, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997 (March 21, 1997 as to the last paragraph of Note 21
of the Notes to the Consolidated Financial Statements)
23
<PAGE> 25
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- -------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE (NOTES 2, 6 AND 12)
Investments in HRP..................................... $ 7,007 $ 9,406
Receivables and other assets........................... 1,220 514
-------- -------
8,227 9,920
ENERGY (NOTES 3, 6 AND 13)
Oil and gas properties, net............................ 8,928 9,839
Current assets of HEP.................................. 2,426 2,236
Noncurrent assets of HEP............................... 1,664 1,407
Receivables and other assets........................... 548 1,122
-------- -------
13,566 14,604
-------- -------
Total asset management assets..................... 21,793 24,524
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTES 6 AND 14)
Inventories............................................ 17,188 13,735
Receivables............................................ 13,094 10,938
Property, plant and equipment, net..................... 8,791 8,709
Other.................................................. 1,037 1,092
-------- -------
40,110 34,474
HOTELS (NOTES 4 AND 6)
Properties, net........................................ 15,568 10,498
Receivables and other assets........................... 2,076 2,195
-------- -------
17,644 12,693
-------- -------
Total operating subsidiaries assets............... 57,754 47,167
ASSOCIATED COMPANY (NOTES 2, 6 AND 21)
Investment in ShowBiz Pizza Time, Inc..................... 16,945 16,490
OTHER (NOTES 5 AND 10)
Deferred tax asset, net................................... 11,000 5,929
Cash and cash equivalents................................. 7,495 3,339
Other..................................................... 1,236 688
Restricted cash........................................... 573 96
-------- -------
Total other assets................................ 20,304 10,052
-------- -------
TOTAL ASSETS...................................... $116,796 $98,233
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 26
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- -------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE (NOTES 2 AND 6)
Loans payable.......................................... $ 500 $ 937
Accounts payable and accrued expenses.................. 490 340
-------- -------
990 1,277
ENERGY (NOTES 6 AND 13)
Long-terms obligations of HEP.......................... 4,432 5,366
Current liabilities of HEP............................. 2,531 2,857
Loan payable........................................... 2,361 1,125
Accounts payable and accrued expenses.................. 1,223 106
Minority interest...................................... -- 3,293
-------- -------
10,547 12,747
-------- -------
Total asset management liabilities................ 11,537 14,024
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTES 6 AND 14)
Loans payable.......................................... 11,200 8,300
Accounts payable and accrued expenses.................. 8,678 6,586
-------- -------
19,878 14,886
HOTELS (NOTE 6)
Loans payable.......................................... 12,281 5,432
Accounts payable and accrued expenses.................. 1,976 2,238
-------- -------
14,257 7,670
-------- -------
Total operating subsidiaries liabilities.......... 34,135 22,556
ASSOCIATED COMPANIES (NOTES 6 AND 21)
Loans payable............................................. 11,000 9,000
Accounts payable and accrued expenses..................... 870 63
-------- -------
Total associated companies liabilities............ 11,870 9,063
OTHER (NOTES 6 AND 7)
13.5% Subordinated Debentures............................. 25,672 22,855
7% Collateralized Senior Subordinated Debentures.......... 24,892 25,469
Interest and other accrued expenses....................... 1,906 3,657
-------- -------
Total other liabilities........................... 52,470 51,981
-------- -------
TOTAL LIABILITIES................................. 110,012 97,624
REDEEMABLE PREFERRED STOCK (NOTE 8)
Series B, $.10 par value; 250,000 shares issued and
outstanding............................................ 1,000 1,000
CONTINGENCIES AND COMMITMENTS (NOTE 17)
STOCKHOLDERS' EQUITY (DEFICIT) (NOTES 9 AND 21)
Preferred stock, $.10 par value; authorized 500,000
shares; 250,000 shares issued and outstanding as Series
B...................................................... -- --
Common stock, $.10 par value; authorized 10,000,000
shares; issued 1,597,204 shares in both years;
outstanding 1,298,509 and 1,326,635 shares,
respectively........................................... 160 160
Additional paid-in capital................................ 57,306 57,210
Accumulated (deficit)..................................... (44,490) (50,963)
Treasury stock, 298,695 and 270,569 shares, respectively;
at cost................................................ (7,192) (6,798)
-------- -------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).............. 5,784 (391)
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)........................................ $116,796 $98,233
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ---------------------
1996 1995 1995 1994
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
ASSET MANAGEMENT
REAL ESTATE (NOTES 2, 6 AND 12)
Fees........................................... $ 5,672 $ 1,744 $ 3,906 $ 3,924
Equity loss from investments in HRP............ (1,731) (833) (211) (446)
Interest and discounts from mortgage loans..... 6 2 198 354
Rentals........................................ -- 298 702 567
------- ------- ------- -------
3,947 1,211 4,595 4,399
Administrative expenses........................ 1,387 517 1,174 1,023
Depreciation and amortization.................. 673 405 972 1,060
Interest....................................... 281 303 639 672
Provision for losses (recovery)................ (21) 101 431 --
Operating expenses............................. 9 17 28 32
Litigation settlement.......................... -- -- -- 1,500
------- ------- ------- -------
2,329 1,343 3,244 4,287
------- ------- ------- -------
Income (loss) from real estate operations...... 1,618 (132) 1,351 112
ENERGY (NOTES 3, 6 AND 13)
Oil and gas revenues........................... 7,066 2,980 5,343 5,983
Other income (including intercompany amounts of
$181 and $202 in years ended July 31, 1995
and 1994, respectively)...................... 449 169 16 251
------- ------- ------- -------
7,515 3,149 5,359 6,234
Depreciation, depletion, amortization and
impairment................................... 1,532 887 2,403 2,018
Operating expenses............................. 1,509 801 1,336 1,556
Administrative expenses........................ 1,314 704 1,525 1,049
Interest....................................... 456 289 375 378
Minority interest.............................. 422 192 (64) 411
------- ------- ------- -------
5,233 2,873 5,575 5,412
------- ------- ------- -------
Income (loss) from energy operations...... 2,282 276 (216) 822
------- ------- ------- -------
Income from asset management operations... 3,900 144 1,135 934
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTES 6 AND 14)
Sales.......................................... 77,583 28,229 77,808 71,624
Cost of sales.................................. 67,256 24,824 68,797 62,705
Administrative and selling expenses............ 8,482 3,091 7,973 7,454
Interest (including intercompany amounts of $16
and $83 in years ended July 31, 1995 and
1994, respectively).......................... 623 307 834 602
------- ------- ------- -------
76,361 28,222 77,604 70,761
------- ------- ------- -------
Income from textile products operations... 1,222 7 204 863
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31
DECEMBER 31, DECEMBER 31, --------------------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS (NOTES 4 AND 6)
Sales........................................ $20,948 $ 8,073 $22,502 $20,896
Gain from sale of hotel and management
contracts.................................. -- -- 2,396 --
------- ------- ------- -------
20,948 8,073 24,898 20,896
Operating expenses........................... 17,137 7,163 18,744 17,338
Depreciation and amortization................ 2,657 943 2,429 2,104
Interest..................................... 1,154 220 902 888
------- ------- ------- -------
20,948 8,326 22,075 20,330
------- ------- ------- -------
Income (loss) from hotel operations..... -- (253) 2,823 566
------- ------- ------- -------
Income (loss) from operating
subsidiaries.......................... 1,222 (246) 3,027 1,429
ASSOCIATED COMPANIES (NOTES 2 AND 6)
Income (loss)................................... 4,448 (88) (171) 1,356
Interest........................................ 1,558 310 687 486
------- ------- ------- -------
Income (loss) from associated
companies............................. 2,890 (398) (858) 870
OTHER (NOTE 7)
Interest on short-term investments and other
income....................................... 535 56 312 340
Fee income...................................... 425 177 425 150
Recovery from investment in Alliance
Bancorporation............................... -- -- -- 1,703
------- ------- ------- -------
960 233 737 2,193
Interest, net of $197 and $285 in years ended
July 31, 1995 and 1994, respectively, from
other segments............................... 4,258 1,728 4,304 4,322
Administrative expenses......................... 2,724 1,594 3,841 3,268
Provision for losses (recovery)................. (8) -- 13 147
------- ------- ------- -------
6,974 3,322 8,158 7,737
------- ------- ------- -------
Other loss, net......................... (6,014) (3,089) (7,421) (5,544)
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary gain........................... 1,998 (3,589) (4,117) (2,311)
Income taxes (benefit) (Note 10)................ (4,525) (299) 830 2,727
------- ------- ------- -------
Income (loss) before extraordinary gain......... 6,523 (3,290) (4,947) (5,038)
Extraordinary gain from extinguishment of debt
(Note 7)..................................... -- 25 143 648
------- ------- ------- -------
NET INCOME (LOSS)................................. $ 6,523 $(3,265) $(4,804) $(4,390)
======= ======= ======= =======
PER COMMON SHARE (PRIMARY)
Income (loss) before extraordinary gain......... $ 4.87 $ (2.47) $ (3.60) $ (3.67)
Extraordinary gain from extinguishment of
debt......................................... -- 0.02 0.10 0.47
------- ------- ------- -------
Net income (loss)....................... $ 4.87 $ (2.45) $ (3.50) $ (3.20)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JULY 31, 1994 AND 1995,
FIVE MONTHS ENDED DECEMBER 31, 1995 AND
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM
COMMON STOCK ADDITIONAL FOREIGN TREASURY STOCK TOTAL
------------------ PAID-IN ACCUMULATED CURRENCY ---------------- STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) TRANSLATION SHARES COST EQUITY
------ --------- ---------- ----------- ----------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1993.......... 6,395 $ 639 $58,088 $(38,504) $(167) 907 $(6,296) $13,760
Net loss....................... (4,390) (4,390)
Foreign currency translation
gain......................... 253 253
Proportionate share of
stockholders' equity
transactions of equity
investments.................. (1,646) (1,646)
------ ----- ------- -------- ----- ---- ------- -------
BALANCE, JULY 31, 1994........... 6,395 639 56,442 (42,894) 86 907 (6,296) 7,977
Net loss....................... (4,804) (4,804)
Purchase of treasury stock .... 102 (314) (314)
Foreign currency translation
gain......................... 243 243
Proportionate share of
stockholders' equity
transactions of equity
investments.................. 238 238
Reverse split.................. (479) 479 --
Change in number of shares... (4,796) (757)
Cash payment in lieu of
fractional shares.......... (2) (17) (17)
------ ----- ------- -------- ----- ---- ------- -------
BALANCE, JULY 31, 1995........... 1,597 160 57,142 (47,698) 329 252 (6,610) 3,323
Net loss....................... (3,265) (3,265)
Foreign currency translation
loss......................... (329) (329)
Purchase of treasury stock .... 19 (188) (188)
Proportionate share of
stockholders' equity
transactions of equity
investments.................. 68 68
------ ----- ------- -------- ----- ---- ------- -------
BALANCE, DECEMBER 31, 1995....... 1,597 160 57,210 (50,963) -- 271 (6,798) (391)
Net income..................... 6,523 6,523
Purchase of treasury stock..... 28 (394) (394)
Preferred stock dividends ..... (50) (50)
Proportionate share of
stockholders' equity
transactions of equity
investments.................. 96 96
------ ----- ------- -------- ----- ---- ------- -------
BALANCE, DECEMBER 31, 1996....... 1,597 $ 160 $57,306 $(44,490) $ -- 299 $(7,192) $ 5,784
====== ===== ======= ======== ===== ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, --------------------
1996 1995 1995 1994
------------ ----------------- -------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 6,523 $(3,265) $(4,804) $(4,390)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, depletion, amortization and impairment.... 5,953 2,705 6,846 6,252
Net change in deferred tax asset........................ (5,071) (500) 471 2,633
Undistributed income from energy affiliate.............. (4,559) (1,592) (2,567) (3,543)
Accrued interest on 13.5% Debentures.................... 2,656 (1,789) 8 8
Distributions from energy affiliate..................... 2,562 1,332 2,892 2,743
Gain on sale of investment in associated company........ (2,431) -- -- (30)
Amortization of deferred gain from debenture exchange... (577) (234) (517) (571)
Equity in net (income) loss of associated
companies/affiliates.................................. (286) 921 382 (880)
Increase in mortgage loans from sale of real estate..... (10) -- (18) --
Proceeds from collections of mortgage loans............. 7 2 1,144 638
(Recovery of) provision for losses, net................. 2 101 423 (1,556)
Gain from sale of hotel and hotel management
contracts............................................. -- -- (2,396) --
Issuance of redeemable preferred stock.................. -- -- 1,000 --
Mortgage loans assigned to plaintiff in litigation
settlement............................................ -- -- 592 --
Gain from extinguishment of debt........................ -- (25) (143) (648)
Amortization of mortgage loan discounts................. -- -- (29) (51)
Issuance of note payable to plaintiff in litigation
settlement............................................ -- -- -- 1,500
Net change in textile products assets and
liabilities........................................... (3,517) 2,817 (1,547) 351
Net change in other assets and liabilities.............. (2,020) 226 (3,000) 250
Net change in energy assets and liabilities............. 321 (287) 49 (380)
------- -------- ------- -------
Net cash provided by (used in) operating
activities....................................... (447) 412 (1,214) 2,326
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures and acquisition of hotels and real
estate.................................................. (7,761) (402) (1,106) (1,332)
Proceeds from sale of investment in associated
companies............................................... 4,139 -- -- 1,250
Purchase of additional shares in HEC...................... (1,750) -- -- --
Investments in textile products property and equipment.... (1,118) (371) (1,465) (1,193)
Investments in energy property and equipment.............. (346) (126) (36) (147)
Net change in restricted cash for investing activities.... (102) 37 (83) 450
Investments in associated companies/affiliates............ (53) (1) (4,473) (8)
Proceeds from sale of hotel and real estate assets........ 23 7,610 14,132 5
Proceeds from sale of marketable securities............... -- -- 610 --
Proceeds from sale of (investment in) insurance contracts,
net..................................................... -- -- 229 858
Disbursements related to Integra -- asset held for sale,
net..................................................... -- -- -- (5,344)
Proceeds from liquidation of Alliance Bancorporation...... -- -- -- 1,703
------- -------- ------- -------
Net cash provided by (used in) investing
activities....................................... (6,968) 6,747 7,808 (3,758)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable........... 14,775 250 4,005 6,100
Repayment of bank borrowings and loans payable............ (2,227) (8,066) (9,447) (7,922)
Purchase of common stock for treasury..................... (394) (188) (314) --
Purchase of capital stock by energy subsidiary for
treasury................................................ (158) (1,189) (1,042) (1,454)
Payment of dividends to Series B preferred stockholders... (50) -- -- --
Net change in restricted cash for financing activities.... (375) -- 1,432 144
Payment of dividends to minority stockholders of energy
subsidiary.............................................. -- (429) (661) --
Repurchase of 7% Debentures............................... -- -- (460) (1,526)
Purchase of fractional shares -- reverse split............ -- -- (17) --
Repurchase of 13.5% Debentures............................ -- (22) -- --
------- -------- ------- -------
Net cash provided by (used in) financing
activities....................................... 11,571 (9,644) (6,504) (4,658)
------- -------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... -- -- 6 (19)
------- -------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 4,156 (2,485) 96 (6,109)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 3,339 5,824 5,728 11,837
------- -------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 7,495 $ 3,339 $ 5,824 $ 5,728
======= ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
The significant accounting policies of the Company are as follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries:
Brookwood Companies Incorporated and subsidiary
HEPGP Ltd.
HSC Securities Corporation
HWG 95 Advisors, Inc.
HWG Realty Investors, Inc.
Hallwood Energy Corporation and subsidiaries (merged in 1996)
Hallwood G.P., Inc.
Hallwood Commercial Real Estate, Inc. (formerly Hallwood Management
Company)
Hallwood Hotels, Inc.
Hallwood-Integra Holding Company and subsidiaries
Hallwood Investment Company
Hallwood-Kenyon Holding Company
Hallwood Monaco SAM (liquidated in 1995)
Hallwood Realty Corporation
Integra Resort Management, Inc.
NJ Portfolio Limited (liquidated in 1995)
The Lido Beach Hotel, Inc. (liquidated in 1995)
The Company fully consolidates all subsidiaries and records a minority
interest in those less than wholly owned. All significant intercompany
balances and transactions have been eliminated in consolidation. Hallwood
Energy Corporation was included on the basis of a June 30 year end for the
years ended July 31, 1995 and 1994.
(b) Recognition of Income
Fee income from real estate operations is generally received in cash
and is recognized as the services (e.g. management, leasing, acquisition,
construction) are performed in accordance with various service agreements.
Interest income on mortgage loans is recognized as earned. The general
policy is to discontinue accruing interest when management believes
collection is unlikely or if foreclosure proceedings are imminent or in
process. Previously accrued interest deemed uncollectible is written off.
Textile products sales are recognized upon shipment or release of
product or when title passes to the customer.
(c) Carrying Value of Investments
Common shares and other securities are recorded at fair value
determined as of the date acquired. Thereafter, equity accounting is
utilized where the Company is able to exercise significant influence over
the issuer's operating and financial policies.
Mortgage loans are stated at cost, less allowance for losses.
Real estate is carried at cost, including interest costs associated
with properties under development or renovation.
30
<PAGE> 32
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Oil and Gas Properties
The Company and its energy subsidiaries and affiliates follow the
accounting policy known as "full cost accounting," whereby all the costs of
exploration for and development of oil and gas reserves, including both
productive and nonproductive costs, are capitalized as incurred. The
capitalized costs applicable to evaluated oil and gas properties and
related future development costs are amortized on a unit-of-production
method based on reserve estimates prepared by in-house petroleum engineers.
A portion of these reserves have been reviewed by independent petroleum
engineers.
The full cost method of accounting also provides that capitalized
costs of oil and gas properties shall not exceed the "cost center ceiling."
The cost center ceiling is a function of the present value, discounted at
10%, of future net revenues from estimated production of proved oil and gas
reserves. Future net revenues are estimated using prices currently in
effect, except in instances where a future price reduction is known.
Unproved property costs are excluded from the amortization base until
the related properties are evaluated. Such unproved property costs are
assessed periodically, and a provision for impairment is made to the full
cost amortization base when appropriate.
Hallwood Energy Partners, L.P. ("HEP") has entered into numerous
financial contracts to hedge the price of its oil and natural gas. The
purpose of the hedges is to provide protection against price drops and to
provide a measure of stability in the volatile environment of oil and
natural gas spot pricing. The revenue associated with these contracts is
recognized as oil or gas revenue at the time the hedged volumes are sold.
(e) Investment in Energy Affiliate
The Company and its energy subsidiaries account for their ownership of
HEP using the proportionate consolidation method of accounting, whereby the
entities record their proportional share of HEP's revenues and expenses,
current assets, current liabilities, noncurrent assets, long-term
obligations and fixed assets.
(f) Purchase Price in Excess of Fair Value of Net Assets Acquired
The purchase price in excess of fair value of the net assets acquired
in business acquisitions is amortized over the expected period of benefit.
(g) Allowance for Losses
Adjustments to the allowance for losses are based on periodic reviews
of the investment portfolio by management, including, where necessary,
determination of estimated net realizable values by current appraisals of
the underlying properties and such other significant factors as, in the
judgment of management, result in a reasonable allowance for possible
losses.
(h) Depreciation and Amortization
Depreciation of fee-owned real estate and hotel properties is computed
on the straight-line method over periods of twenty to forty years, five to
thirty years for improvements, and three to ten years for furniture and
equipment. Amortization of hotel leasehold interests is computed on the
straight-line method over the remaining lease term and varies from 6 to 10
years.
Expenditures for maintenance and repairs are charged to operations.
Renewals and betterments are capitalized and depreciated over the estimated
useful lives of the assets.
31
<PAGE> 33
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121-Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed Of ("SFAS No. 121").
Accordingly, the Company's management routinely reviews its investments for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS
No. 121 did not have a material impact on the consolidated financial
statements of the Company.
(i) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have
been translated to United States dollars. All balance sheet accounts are
translated at the period-end exchange rate, and statement of operations
items are translated at the average exchange rate for the period. Resulting
translation adjustments are made directly to a separate component of
stockholders' equity.
(j) Income Taxes
The Company files a consolidated federal income tax return. Deferred
tax assets and liabilities are recorded based on the difference between the
tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences, and net
operating carryforwards and tax credits reduced by a valuation allowance.
Provision is made for deferred taxes relating to temporary differences in
the recognition of income and expense for financial reporting.
(k) Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
(l) Statement of Cash Flows
The Company considers its holdings of highly liquid debt and money
market instruments to be cash equivalents if such securities mature within
ninety days from the date of acquisition.
(m) Anticipated Adoption Dates of New Accounting Pronouncements
In October 1996, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 96-1, "Environmental
Remediation Liabilities". Among other things, this SOP is effective for the
Company's financial statements beginning in 1997. SOP 96-1 provides that
environmental remediation liabilities should be accrued when the criteria
of SFAS No. 5, "Accounting for Contingencies" are met. In the opinion of
the Company's management, it is not anticipated that the adoption of SOP
96-1 will have a material effect on the consolidated financial position,
results of operations or cash flows of the Company.
(n) Reclassifications
Certain prior period amounts within the accompanying statements have
been reclassified for comparability.
(o) Common Stock
Share and per share amounts have been adjusted to give effect to the
one-for-four reverse stock split effected on June 28, 1995.
32
<PAGE> 34
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(p) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses as of and for the reporting periods. Actual results
may differ from such estimates.
(q) Net Income (Loss) Per Common Share
Net income (loss) per common share is based on net income (loss) after
preferred stock dividend requirements. The weighted average number of
common shares outstanding during each period presented consider the effect
of stock options deemed to be dilutive common stock equivalents. Fully
diluted net income (loss) per share is the same as primary net income
(loss) per share. Average common and common share equivalents used in the
computation of net income (loss) per share are approximately 1,329,000 for
the year ended December 31, 1996, 1,331,000 for the five months ended
December 31, 1995 and 1,374,000 and 1,372,000 for the years ended July 31,
1995 and 1994, respectively.
NOTE 2 -- INVESTMENTS IN AFFILIATE AND ASSOCIATED COMPANIES (DOLLAR AMOUNTS IN
THOUSANDS):
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENTS FOR PERIOD
DECEMBER 31, 1996 AMOUNT AT WHICH --------------------------------------------
-------------------- CARRIED AT FIVE MONTHS YEARS ENDED
NUMBER COST OR DECEMBER 31, YEAR ENDED ENDED JULY 31,
BUSINESS SEGMENTS AND OF UNITS ASCRIBED ----------------- DECEMBER 31, DECEMBER 31, --------------
DESCRIPTION OF INVESTMENTS OR SHARES VALUE 1996 1995 1996 1995 1995 1994
-------------------------- --------- -------- ------- ------- ------------ ------------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSET MANAGEMENT REAL ESTATE
AFFILIATE
HALLWOOD REALTY PARTNERS,
L.P.(A)
-- General partner
interest.................. $ 8,650 $ 5,117 $ 5,841 $ (101) $ (47) $ (90) $ (287)
-- Limited partner units 413,040 5,377 1,890 3,565 (1,630) (786) (121) (159)
------- ------- ------- ------- ----- ----- ------
Totals............... $14,027 $ 7,007 $ 9,406 $(1,731) $(833) $(211) $ (446)
======= ======= ======= ======= ===== ===== ======
ASSOCIATED COMPANIES
SHOWBIZ PIZZA TIME, INC.(B)
-- Common stock............. 2,413,789 $ 4,905 $16,945 $16,490 $ -- $ -- $ -- $ --
------- ------- ------- ------- ----- ----- ------
Equity in earnings
(loss).................. -- -- -- 2,017 (88) (171) 1,326
Gain on sale of shares.... -- -- -- 2,431 -- -- --
------- ------- ------- ------- ----- ----- ------
4,905 16,945 16,490 4,448 (88) (171) 1,326
OAKHURST CAPITAL, INC.(C)
-- Common stock Gain on sale
of shares................ -- -- -- -- -- -- 30
------- ------- ------- ------- ----- ----- ------
Totals............... $ 4,905 $16,945 $16,490 $ 4,448 $ (88) $(171) $1,356
======= ======= ======= ======= ===== ===== ======
</TABLE>
The ownership percentages reported below assume conversion/exercise of all
convertible securities owned by the Company but no conversion/exercise of any of
the convertible securities owned by any other holder of such securities.
(A) On November 1, 1990, the Company, through its wholly-owned subsidiary
Hallwood Realty Corporation ("HRC"), acquired from Equitec Financial Group, Inc.
("Equitec") the general partnership interests in eight Equitec sponsored and
managed limited partnerships for $8,650,000 and consummated the consolidation of
such limited partnerships into Hallwood Realty Partners, L.P. ("HRP"). See Note
12. The Company has subsequently acquired additional limited partner units of
HRP in open market purchases. The
33
<PAGE> 35
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company accounts for its investment in HRP on the equity method of accounting.
In addition to recording its share of net income (loss), the Company also
records its pro rata share of various partner capital transactions reported by
HRP. The Company's proportionate share of the underlying equity in net assets of
HRP exceeds its investment by $6,236,000, which is being amortized on the
straight-line basis over a period of 10 years.
The carrying value of the Company's investment in the general partner
interest of HRP includes the value of intangible rights to provide asset
management and property management services. Equitec initially retained the
property management rights for a three-year period following the November 1,
1990 consolidation. On June 1, 1991, the Company purchased the retained property
management rights from Equitec for the balance of the three-year period, and has
fully amortized the $2,475,000 cost. Beginning November 1, 1993 the Company
commenced amortization, over a ten-year period, of that portion of the general
partner interest ascribed to the management rights and such amortization was
$672,000 for the year ended December 31, 1996, $280,000 for the five months
ended December 31, 1995 and $672,000 and $504,000 for the years ended July 31,
1995 and 1994, respectively.
Between December 1990 and February 1995, the Company purchased 89,269
limited partner units (post reverse split basis) for $905,000 in various
transactions. In March 1995, HRP completed a one-for-five reverse split of its
limited partner units and the Company purchased 30,000 post reverse split units
(estimated to be the number of fractional units to be purchased by HRP) for
$356,000.
In June 1995, HRP announced a commission-free program for its limited
partner unitholders to sell their less than round lot holdings of 99 or fewer
units as of the May 31, 1995 record date. As a result of this program, which
expired on July 10, 1995, HRP acquired 293,539 limited partner units. These
units were resold to the Company for $4,115,000, which was the same price that
HRP paid for such units. In subsequent incidental transactions, the Company
acquired 232 additional units.
As the Company continues to record its share of HRP's net loss, primarily
the result of non-cash depreciation expense, it is anticipated that the carrying
value of the limited partner units will be reduced to zero. At such time, no
further recording of equity losses will be required. However, unrecognized
losses which may occur after the carrying value has been reduced to zero must be
recovered before the Company would be able to recognize income on such units in
the future.
The carrying value of the Company's investment in HRP includes non-cash
adjustments for its pro rata share of HRP's partner capital transactions with
corresponding adjustments to additional paid-in capital. The carrying value was
decreased by $49,000 for such adjustments at December 31, 1996.
As further discussed in Note 6, the Company has pledged 89,269 limited
partner units to collateralize a promissory note, due March 1998, in the
principal amount of $500,000.
As of December 31, 1996, the Company owned a 1% general partner and a 24%
limited partner interest in HRP.
(B) The Company acquired its investment in ShowBiz Pizza Time, Inc.
("ShowBiz") in 1988 as a result of (i) a spinoff of ShowBiz, formerly a
90%-owned subsidiary of Integra-A Hotel and Restaurant Company ("Integra"), (ii)
common stock warrants it received as consideration for providing a subordinated
loan to ShowBiz and for arranging and guaranteeing a $10,000,000 five-year
secured senior loan, and (iii) common stock warrants it received in connection
with the conversion of its subordinated loan into a floating rate subordinated
bond, which was called in November 1993. A portion of the Company's investment
in Integra, which was based upon the average of the quoted market values of
Integra and ShowBiz following the spin-off, was ascribed to the initial
investment in ShowBiz.
During fiscal 1990, ShowBiz accelerated the exercise period for all of the
common stock warrants. In June 1990, the Company exercised its warrants to
purchase 808,122 shares of common stock of ShowBiz at $4.00 per share for an
aggregate purchase price of $3,232,000.
34
<PAGE> 36
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 26, 1991, and again on March 20, 1992, ShowBiz completed 3-for-2
common stock splits in the form of 50% stock dividends, which increased the
number of ShowBiz shares owned by the Company from 1,204,086 to 2,709,193. The
Company's percentage ownership was unaffected by these stock dividends.
In various transactions between June 1992 and June 1993, the Company sold
925,000 common shares of ShowBiz for total proceeds of approximately
$24,200,000.
In May 1996, ShowBiz completed a 3-for-2 common stock split in the form of
a 50% stock dividend, which increased the number of ShowBiz shares owned by the
Company from 1,684,193 to 2,526,289. During the May-July 1996 period, the
Company sold 262,500 (post-split basis) shares of common stock for $4,139,000.
The net gain from the sales was $2,431,000.
The Company accounted for its investment in ShowBiz using the equity method
of accounting because the Company maintains significant influence by virtue of
having five of its directors sitting on the nine-member board of ShowBiz. In
addition to recording its share of net income (loss), the Company also records
its pro rata share of various shareholders' equity transactions reported by
ShowBiz. The Company's proportionate share of the underlying equity in net
assets of ShowBiz exceeds its investment by $2,304,000, which is being amortized
on the straight-line basis over a period of 15 years.
The carrying value of the Company's investment in ShowBiz includes non-cash
adjustments for its pro rata share of ShowBiz's shareholders' equity capital
transactions with corresponding adjustments to additional paid-in capital. At
December 31, 1996, the carrying value was decreased by $1,194,000 for such
adjustments.
As of December 31, 1996, the Company owned approximately 13% of the common
stock of ShowBiz and all of its ShowBiz shares are pledged to secure certain
loans payable. See also Notes 6 and 21.
On January 3, 1997, the Board of Directors of the Company authorized the
issuance of 267,709 treasury shares in exchange for 219,194 common shares of
ShowBiz from the Alpha and Epsilon Trusts, which are associated with Messrs.
Anthony J. Gumbiner and Brian M. Troup, chairman and president of the Company,
respectively. For purposes of the exchange, the shares of both companies were
valued at their average closing price for the month of December 1996. The
completion of the exchange was contingent upon regulatory approval which was
received on March 12, 1997.
On March 26, 1997, the Company sold its entire investment in ShowBiz and
reference is made to Note 21 for a further discussion of the transaction.
(C) In February 1994, the Company completed the all cash sale of its entire
15% common stock investment in Oakhurst Capital, Inc. (20% assuming exercise of
warrants) for $1,250,000, which resulted in a gain of $30,000.
The quoted market price per unit/share and the Company's carrying value per
unit/share of the limited partner units of HRP and the common shares of ShowBiz
at December 31, 1996 were:
<TABLE>
<CAPTION>
AMOUNT PER SHARE
------------------
SECURITY DESCRIPTION MARKET CARRYING
AND (QUOTRON SYMBOL) PRICE VALUE
-------------------- ------ --------
<S> <C> <C>
HRP limited partner units (HRY)............................. $24.50 $4.58
ShowBiz common shares (SHBZ)................................ 18.12 7.02
</TABLE>
The general partner interest in HRP is not publicly traded.
35
<PAGE> 37
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth summarized (unaudited) financial data as of
and for the years ended December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
SHOWBIZ HALLWOOD
PIZZA REALTY
TIME, INC. PARTNERS, L.P.
---------- --------------
<S> <C> <C>
1996
Balance Sheet Data
Current Assets............................................ $ 27,588 $ 5,162
Non-current assets........................................ 188,992 205,052
Total assets.............................................. 216,580 210,214
Current liabilities....................................... 33,523 7,434
Non-current liabilities................................... 41,581 172,096
Total liabilities......................................... 75,104 179,350
Total stockholders' equity/partners' capital.............. 141,476 30,684
Statement of Operations Data
Revenue................................................... $293,990 $ 49,612
Net income (loss)......................................... 13,221 (9,428)
1995
Balance Sheet Data
Current assets............................................ $ 20,041 $ 15,382
Non-current assets........................................ 178,969 209,977
Total assets.............................................. 199,010 225,359
Current liabilities....................................... 29,931 7,625
Non-current liabilities................................... 42,592 175,817
Total liabilities......................................... 72,523 183,442
Total stockholders' equity/partners' capital.............. 126,487 41,917
Statement of Operations Data
Revenue................................................... $263,783 $ 50,829
Net income (loss) before extraordinary items.............. 63 (9,024)
Net income (loss)......................................... 63 (9,789)
</TABLE>
- ---------------
The data used to compile the above table was obtained from published
reports, including Securities and Exchange Commission filings on Forms 10-K.
36
<PAGE> 38
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- OIL AND GAS PROPERTIES
The following tables summarize certain oil and gas information by category
(full cost method), cost and unproved mineral interest (at cost). The tables
relate to all of HEPGP, the Company and its energy subsidiaries proportionate
share of HEP's oil and gas properties. Amounts are as of December 31, 1996 and
1995 and for the years then ended (in thousands):
(a) Category:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Proved mineral interests........................... $ 113,601 $ 113,159
Unproved mineral interests......................... 157 82
Other property and equipment....................... 404 3,758
--------- ---------
114,162 116,999
Less: Accumulated depreciation, depletion,
amortization and property impairment......... (105,234) (107,160)
--------- ---------
Oil and gas properties, net...................... $ 8,928 $ 9,839
========= =========
</TABLE>
(b) Cost:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Development.................................... $1,321 $ 979 $ 599
Exploration.................................... 100 166 273
Property acquisition -- proved................. 279 191 637
Property acquisition -- unproved............... 87 56 257
------ ------ ------
Total................................ $1,787 $1,392 $1,766
====== ====== ======
</TABLE>
Depreciation, depletion, amortization and impairment per equivalent barrel
of production for the years ended 1996, 1995 and 1994, was $3.54, $5.00 and
$4.35, respectively.
(c) Unproved mineral interests (at cost):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
----- ----
<S> <C> <C>
Exploration acreage......................................... $129 $37
Other....................................................... 28 45
---- ---
Total............................................. $157 $82
==== ===
</TABLE>
37
<PAGE> 39
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- HOTEL PROPERTIES
The following table summarizes the cost and accumulated depreciation and
amortization of the hotel segment as of the balance sheet dates (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Building improvements and equipment.................... $15,406 $ 8,502
Leasehold acquisition costs............................ 8,026 8,026
Land and land improvements............................. 1,776 959
------- -------
25,208 17,487
Less: Accumulated depreciation and amortization........ (9,640) (6,989)
------- -------
Total........................................ $15,568 $10,498
======= =======
</TABLE>
In May 1996, a newly-formed wholly-owned special purpose subsidiary, Brock
Suite Greenville, Inc., acquired the fee interest in the Residence Inn hotel in
Greenville, South Carolina for $6,550,000. Prior to the acquisition, the Company
held a leasehold interest in the hotel.
In connection with the March 1994 consummation of the plan of
reorganization of the Company's former affiliate, Integra-A Hotel and Restaurant
Company and its emergence from bankruptcy, the reorganized Integra continued in
business as a wholly-owned subsidiary of the Company under its new name, Integra
Hotels, Inc. ("Integra"). Assets acquired by Integra included a fee interest in
one hotel property and leasehold interests in three additional hotel properties
and two management contracts. At December 31, 1996, hotel properties consisted
of fee interests in two hotels and leasehold interests in three hotels.
NOTE 5 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of the balance sheet dates are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
<S> <C> <C>
Cash equivalents......................................... $6,452 $2,562
Cash..................................................... 1,043 777
------ ------
Total.......................................... $7,495 $3,339
====== ======
</TABLE>
Cash equivalents consisted of secured bank repurchase agreements,
commercial paper, treasury bills, Eurodollar investments and interest-bearing
demand deposits, all of which had original maturities as of the date of purchase
of 90 days or less.
38
<PAGE> 40
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- LOANS PAYABLE
Loans payable at the balance sheet dates (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Real Estate.
Promissory note, 8%, due March 1998....................... $ 500 $ 500
Promissory note, 7.5%, repaid July 1996................... -- 437
------- -------
500 937
Energy.
Term loan, prime + 1%, due May 1998....................... 2,361 --
Line of credit, prime + 2%, repaid November 1996.......... -- 1,125
------- -------
2,361 1,125
Textile Products.
Revolving credit facility, prime + .5%, refinanced January
1997................................................... 11,200 8,100
Equipment loan, 10%, repaid December 1996................. -- 200
------- -------
11,200 8,300
Hotels.
Term loan, prime + 3.5%, due May 2001..................... 6,739 --
Term loan, 10%, due October 2001.......................... 5,001 5,099
Term loan, certificate of deposit rate, repaid January
1997................................................... 375 --
Non-interest bearing obligation, repaid March 1997........ 166 333
------- -------
12,281 5,432
Associated Companies.
Line of credit, prime + .75%, repaid March 1997........... 7,000 5,000
Promissory note, 5%, repaid March 1997.................... 4,000 4,000
------- -------
11,000 9,000
------- -------
Total............................................. $37,342 $24,794
======= =======
</TABLE>
Further information regarding loans payable is provided below:
REAL ESTATE
Promissory note. In connection with the settlement of an obligation related
to Integra, the Company issued a four-year, $500,000 promissory note due March
1998. The note is secured by a pledge of 89,269 HRP limited partner units. The
settlement agreement also provided that the pledgee has the right to receive an
additional payment in an amount equal to 25% of the increase in the value of the
HRP units over the base amount of $8.44 per unit, but in no event more than an
additional $500,000 (the "HRP Participation Amount"). As the HRP per unit price
was $24.50 at December 31, 1996, the Company accrued $330,000 for the HRP
Participation Amount as a charge to interest expense, of which $230,000 was
recorded in the year ended December 31, 1996 and $100,000 in the five month
period ended December 31, 1995.
Promissory note. The Company issued a promissory note in the amount of
$1,500,000 in August 1994 to the agent for the plaintiffs in the litigation
styled Equitec Roll-up Litigation, referred to in Note 17. The note was payable
in twenty-four installments and collateralized by 187,500 shares of common stock
of HEC. The final payment was made in July 1996.
39
<PAGE> 41
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Term loan. In connection with the December 1995 sale of the office-retail
property located in the United Kingdom, the Company's Hallwood Investment
Company subsidiary repaid the outstanding balance of $4,654,000 of the related
term loan.
ENERGY
Term loan. On December 10, 1996, HEPGP Ltd. ("HEPGP") entered into a
$2,500,000 term loan with First Union National Bank of North Carolina ("First
Union"). The loan is collateralized by the Company's HEP limited partner units
and its investment in HEPGP and Hallwood GP. HEPGP has also pledged its direct
interests in certain oil and gas properties. Other significant terms include:
(i) maturity date of May 31, 1998; (ii) monthly principal payments of $139,000,
plus interest; (iii) interest rate of prime plus 1% (9.25% at December 31,
1996); (iv) a negative pledge relating to a portion of the Company's ShowBiz
common shares, which was released in March 1997 as a result of a $500,000
principal payment from proceeds of sale of the ShowBiz shares as discussed in
Note 21; and (v) restrictions on the declaration of distributions or redemptions
of partnership interests.
Line of credit. In May 1995, Hallwood Energy Corporation ("HEC") entered
into a credit agreement with a bank that has committed to loan it up to
$1,500,000 based upon borrowing the value of the borrowing base. At December 31,
1995, the balance was $1,125,000. The line of credit having an outstanding
balance of $875,000 was repaid in November 1996.
Long term obligations. Included in the consolidated balance sheets at
December 31, 1996 and 1995 are long-term obligations of HEP in the amount of
$4,432,000 and $5,366,000, respectively. These amount represent the Company's
and its subsidiaries share of HEP's outstanding long-term obligations, at
December 31, 1996, which consisted primarily of $8,571,000 under a note purchase
agreement and $26,700,000 under a revolving credit agreement. HEP's borrowings
are secured by a first lien on approximately 80% in value of HEP's oil and gas
properties.
TEXTILE PRODUCTS
Revolving credit facility. In December 1992, Brookwood established a
revolving line of credit facility in an amount up to $13,500,000 (the "Brookwood
Revolver") with the Chase Manhattan Bank, N.A. ("Chase"). Borrowings are
collateralized by accounts receivable, inventory imported under trade letters of
credit and certain industrial machinery and equipment located in Kenyon, Rhode
Island. The remaining balance of a 1992 bridge financing provided by the Company
was subordinate to the Brookwood Revolver. In September 1994, the Brookwood
Revolver was amended to extend the expiration date to August 31, 1997, reduce
the interest rate at Brookwood's option from one percent over prime to one-half
percent over prime (8.75% at December 31, 1996) or LIBOR plus 2.25%, permit
repayment of the $1,000,000 balance of bridge financing to the Company and
change certain of the financial covenants. In June 1995, the Brookwood Revolver
was further amended to increase the amount available to $15,500,000 for ninety
days and waive compliance of a financial ratio covenant at April 30, 1995. The
outstanding balance at December 31, 1996 was $11,200,000.
The Chase facility was replaced by a new revolving credit facility in an
amount of up to $14,000,000 ($15,000,000 April through June) on January 7, 1997
with The Bank of New York ("BNY"). Borrowings under the BNY facility are
collateralized by accounts receivable, inventory imported under trade letters of
credit, certain finished goods inventory and the machinery and equipment of
Brookwood's subsidiaries. The BNY facility expires on January 7, 2000 and bears
interest, at Brookwood's option, of one-quarter percent over prime (8.5% at
December 31, 1996) or LIBOR plus 2.25%. The facility contains covenants, which
include maintenance of certain financial ratios, restrictions on dividends and
repayment of debt or cash transfers to the Company.
40
<PAGE> 42
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equipment loan. In December 1991, Brookwood entered into a $900,000
equipment financing arrangement with CIT Group/Equipment Financing, Inc. The
loan matured in December 1996, bore a 10% fixed interest rate and was secured by
certain dyeing and finishing equipment.
HOTELS
Term loan. In May 1996, a newly-formed, wholly-owned special purpose
subsidiary, Brock Suite Greenville, Inc., acquired the fee interest in the
Residence Inn hotel in Greenville, South Carolina for $6,550,000. Prior to the
acquisition, the Company held a leasehold interest in the hotel. The acquisition
was financed by a $6,800,000 loan from Allied Capital Commercial Corporation and
Business Mortgage Investors, Inc. The loan is secured by the hotel and includes
the following significant terms: (i) interest rate of prime plus 3.5% (11.75% at
December 31, 1996) (minimum rate 12%, maximum rate 17%); (ii) loan payments
based upon a 19-year amortization schedule with a maturity date of May 2001;
(iii) loan may be prepaid, subject to a prepayment premium which declines from
4% to 1% of loan balance, depending on the prepayment date; and (iv) various
financial and non-financial covenants, including a minimum debt service coverage
ratio, as defined, of 1.25. The outstanding balance at December 31, 1996 was
$6,739,000.
Term loan. In October 1994, the Company entered into a mortgage loan in the
amount of $5,200,000 to replace a loan obligation that the Company assumed as
part of Integra's emergence from bankruptcy in March 1994. The loan is secured
by the Tulsa, Oklahoma Residence Inn hotel and includes the following
significant terms: (i) fixed interest rate of 10%; (ii) loan payments based upon
a 20-year amortization schedule with a call after the seventh year; (iii)
participation by lender of 15% of net cash flow (as defined) after debt service
and 15% of residual value at maturity or upon sale or refinancing; and (iv)
maintenance of a 4% capital reserve. The outstanding balance at December 31,
1996 was $5,001,000.
Term loan. In connection with the acquisition of the fee interest of the
Greenville Residence Inn, the Company issued a promissory note to the former
owner in the amount of $375,000. The promissory note bears interest at the same
rate as the related $375,000 certificate of deposit, which secures the repayment
of the note. The certificate of deposit is included in restricted cash and was
repaid in full from proceeds of the certificate of deposit which matured in
January 1997.
Non-interest bearing obligation. The $500,000 non-interest bearing
obligation to the former preferred shareholders of Integra was issued in
connection with the Settlement and Supplemental Settlement and was payable in
three equal annual installments in the amount of $166,667, the third and final
payment was made on March 8, 1997. The outstanding balance at December 31, 1996
was $166,667.
ASSOCIATED COMPANIES
Line of credit. In April 1994, the Company obtained a line of credit from
Merrill Lynch Business Financial Services ("MLBFS") which replaced a former
margin loan. Significant terms of the line of credit were (i) interest
rate -- prime plus 0.75% (9.00% at December 31, 1996); (ii)
collateral -- 2,159,047 shares of ShowBiz common stock; and (iii) availability
limited to 50% of the market value of the pledged shares of ShowBiz. The
maturity date was extended to April 30, 1997, and the maximum commitment amount
was increased to $7,000,000. The Company drew down the available funds under
this line in June 1996. MLBFS consented to the release and sale of 262,500
shares as discussed in Note 2. At December 31, 1996, 1,896,547 shares were
pledged to MLBFS and the outstanding balance was $7,000,000. The line of credit
was repaid in March 1997 from proceeds of sale of the Company's ShowBiz
investment as discussed in Note 21.
Promissory note. The Company issued a $4,000,000 promissory note to the
Integra Unsecured Creditors' Trust (the "Trust") in connection with the
consummation of the Integra Plan of Reorganization. Significant terms are (i)
maturity date -- March 8, 1997; (ii) interest rate -- 5% fixed; (iii)
collateral -- 517,242 shares of ShowBiz common stock; and (iv) the Trust is
entitled to an additional payment at the "Payment Date", as
41
<PAGE> 43
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
defined, in an amount equal to 100% of the increase in the market value of the
ShowBiz shares over the base amount of $16.67 per share, the "ShowBiz
Participation Amount". As the ShowBiz per share price was $18.12 at December 31,
1996, the Company accrued $755,000 for the ShowBiz Participation Amount as a
charge to interest expense in the year ended December 31, 1996. Although the
Company has accrued the ShowBiz Participation Amount, it contends that proper
tender of payment and accrued interest was made in October 1996, and therefore
no ShowBiz Participation Amount is owed. As the Trust contends that the
promissory note does not provide for prepayment, and that both the promissory
note and ShowBiz Participation Amount were owing, the Company filed suit to
resolve the matter.
In connection with the disposition of the Company's entire ShowBiz
investment in March 1997, the Company and the Trust have entered into an
agreement (the "Partial Compromise and Settlement Agreement"), whereby the Trust
has consented to the sale of the 517,242 shares of ShowBiz in exchange for (i)
the repayment of the $4,000,000 principal amount of the note and accrued
interest through October 11, 1996 and (ii) the deposit into an escrow
$2,512,590, which is a combination of the disputed ShowBiz Participation Amount
and balance of accrued interest to the maturity date.
Schedule of Maturities. Maturities of aggregate loans payable and
debentures for the next five years, are as follows (in thousands):
<TABLE>
<CAPTION>
BUSINESS SEGMENT
---------------------------------------------------------------
YEARS ENDED REAL TEXTILE ASSOCIATED
DECEMBER 31, ESTATE ENERGY(A) PRODUCTS HOTELS COMPANIES OTHER(B) TOTAL
------------ ------ --------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1997................................. $ -- $2,168 $ 5,200 $ 755 $11,000 $ -- $19,123
1998................................. 500 193 -- 238 -- 1,927 2,858
1999................................. -- -- -- 265 -- -- 265
2000................................. -- -- 6,000 296 -- 20,881 27,177
2001................................. -- -- -- 10,727 -- -- 10,727
---- ------ ------- ------- ------- ------- -------
Total......................... $500 $2,361 $11,200 $12,281 $11,000 $22,808 $60,150
==== ====== ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) HEP's long-term indebtedness of $35,271,000 is not a direct obligation of
HEPGP or of the Company. HEP's debt maturities are as follows: $5,810,000 in
1997; $12,032,000 in 1998; $7,746,000 in 1999; $7,746,000 in 2000; and
$1,937,000 in 2001.
(b) Sinking fund requirement and maturity for the 7% Debentures only. There is
no sinking fund requirement and the maturity for the 13.5% Debentures is
July 31, 2009.
NOTE 7 -- 13.5% SUBORDINATED DEBENTURES AND 7% COLLATERALIZED SENIOR
SUBORDINATED DEBENTURES
13.5% Subordinated Debentures. On May 15, 1989, the Company distributed to
its stockholders $46,318,600 aggregate principal amount of a new issue of its
13.5% Subordinated Debentures Due July 31, 2009 (the "13.5% Debentures or
"Original Series"). The Company had authorized the issuance of up to
$100,000,000 aggregate principal amount of 13.5% Debentures. The 13.5%
Debentures are subordinate to bank borrowings, guarantees of the Company and
other "Senior Indebtedness" (as defined in the indenture relating to the 13.5%
Debentures). Ten dollars principal amount of the 13.5% Debentures was
distributed for each share of common stock of the Company outstanding at the
close of business on March 31, 1989.
Interest on the 13.5% Debentures is payable annually on August 15, and, at
the Company's option, up to two annual interest payments in any five-year period
may be paid in-kind by the issuance of additional 13.5% Debentures in lieu of
cash. Interest due on August 15, 1989 and 1990 was paid in cash. Interest due on
August 15, 1991 was paid in-kind by the issuance of $6,019,500 additional 13.5%
Debentures (the "1991 Series") and $139,200 of cash in lieu of fractional
debentures. Interest due on August 15, 1992 was paid in-kind by the issuance of
$6,792,900 additional 13.5% Debentures (the "1992 Series") and $172,500 of cash
42
<PAGE> 44
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in lieu of fractional debentures. Interest due on August 15, 1993, 1994 and 1995
was paid in cash. Interest due on August 15, 1996 was paid in-kind by the
issuance of $2,817,100 additional 13.5% Debentures (the "1996 Series") and
$260,100 of cash in lieu of fractional debentures. The 1996 Series does not meet
the $5,000,000 minimum listing requirement on a recognized exchange and
therefore is not listed. Under terms of the Indenture, the Company is not
obligated to pay cash interest until August 15, 1998. Since the issuance of the
13.5% Debentures in 1989, the Company has repurchased and retired 13.5%
Debentures with a face amount of $2,230,000.
7% Collateralized Senior Subordinated Debentures. On March 1, 1993, the
Company completed an exchange offer ("Exchange Offer") whereby $27,481,000 of
its 13.5% Debentures were exchanged for a new issue of 7% Collateralized Senior
Subordinated Debentures due July 31, 2000 (the "7% Debentures"), and purchased
for cash $14,538,000 of its 13.5% Debentures at 80% of face amount. Interest is
payable quarterly in arrears in cash. The 7% Debentures are secured by a pledge
of the capital shares of certain wholly-owned subsidiaries of the Company having
an aggregate net carrying value at March 1, 1993 (the issue date) of
$27,607,000. The pledged shares presently consist of all of the outstanding
shares of common and preferred stock of Brookwood and all of the outstanding
shares of common stock of Hallwood Hotels, Inc. The common and preferred stock
of Brookwood are also subject to a prior pledge in favor of BNY.
Pursuant to the Indenture, the Company is obligated to redeem 10% of the
original issue of 7% Debentures ($2,748,000) prior to March 1996 and an
additional 15% ($4,122,000) prior to March 1998. During the year ended July 31,
1994, the Company repurchased 7% Debentures with a face amount of $2,174,000 for
$1,526,000, which resulted in an extraordinary gain from debt extinguishment in
the amount of $648,000. During the year ended July 31, 1995, the Company
repurchased (i) 7% Debentures from its former HEC subsidiary having a face
amount of $1,894,000 for $1,385,000 and (ii) 7% Debentures having a face amount
of $604,000 for $460,000. The 1995 repurchases resulted in an extraordinary gain
from debt extinguishment of $143,000. These repurchases totaling $4,672,000
satisfied the Company's obligation to retire 10% of the issue prior to March
1996 and partially satisfied the Company's obligation to retire an additional
15% of the issue prior to March 1998. The 1995 repurchases were made using a
portion of the net proceeds from the sale of The Lido Beach Holiday Inn hotel.
The repurchases exceeded the $2,360,000 aggregate carrying value ascribed to the
common stock of The Lido Beach Hotel, Inc. subsidiary at the original issue
date, therefore the trustee has released its pledge over the stock of that
subsidiary. The Company liquidated The Lido Beach Hotel, Inc. subsidiary in 1996
since it had no further business purpose.
The Company accounted for the Exchange Offer in accordance with Statement
of Financial Accounting Standards No. 15 -- Accounting by Debtors and Creditors
for Troubled Debt Restructuring ("SFAS No. 15"). SFAS No. 15 requires that
concessions given the Company by 13.5% debentureholders should be accounted for
as a modification of an existing obligation and no current period gain should be
recognized. The amount of unrecognized gain, which is being amortized, using the
constant effective interest rate method over the 7 years and 5 months term of
the 7% Debentures, is composed of the following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Gain on purchase of 1991 Series and 1992 Series at 80% of
face amount............................................... $2,207
Gain on exchange of 1989 Original Series, resulting from the
waiver of interest for the period August 15, 1993 through
March 1, 1994............................................. 2,013
------
Totals............................................ $4,220
======
</TABLE>
The total unrecognized gain was recorded as an increase to the carrying
value of the 7% Debentures, and is being amortized as a reduction of interest
expense. This amortization results in an effective interest rate of
approximately 4.2% for the 7% Debentures. The amortization of such unrecognized
gain was $577,000 for the
43
<PAGE> 45
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year ended December 31, 1996, $234,000 for the five months ended December 31,
1995 and $517,000 and $571,000 for the years ended July 31, 1995 and 1994,
respectively.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
DESCRIPTION 1996 1995
----------- ------- -------
<S> <C> <C>
7% Debentures (face amount)................................. $22,808 $22,808
Unrecognized gain from purchase and exchange, net of $2,136
and $1,559 accumulated amortization....................... 2,084 2,661
------- -------
Totals............................................ $24,892 $25,469
======= =======
13.5% Debentures (face amount)
1989 Original Series...................................... $18,203 $18,203
1991 Series............................................... 2,292 2,292
1992 Series............................................... 2,360 2,360
1996 Series............................................... 2,817 --
------- -------
Totals............................................ $25,672 $22,855
======= =======
</TABLE>
NOTE 8 -- REDEEMABLE PREFERRED STOCK
In connection with the settlement of the following lawsuits: (i) Louis G.
Reese, Inc. et al, v. The Hallwood Group Incorporated, et al; (ii) European
American Reinsurance Corporation v. The Hallwood Group Incorporated, et al, and
(iii) Hermitage Hotel, Ltd. L.P. v. The Hallwood Group Incorporated, et al, as
further discussed in Note 17, the Company agreed to issue 250,000 shares of a
newly-designated series of preferred stock (the "Series B Preferred Stock") to
the plaintiffs in these lawsuits in exchange for the dismissal of all of these
actions with prejudice. The holders of Series B Preferred Stock are entitled to
dividends in an annual amount of $0.20 per share, the first of which was paid in
1996. For the first five years, dividends are cumulative and the payment of cash
dividends on any common stock is prohibited before the full payment of any
accrued dividends. Thereafter, dividends will accrue and be payable only if and
when declared by the Board of Directors. The Series B Preferred Stock also has
dividend and liquidation preferences to the Company's common stock. The shares
are subject to mandatory redemption 15 years from the date of issuance, at 100%
of the liquidation preference of $4.00 per share plus all accrued and unpaid
dividends, and may be redeemed at any time on the same terms at the option of
the Company. The holders of the shares of Series B Preferred Stock are not
entitled to vote on matters brought before the Company's stockholders, except as
otherwise provided by law.
NOTE 9 -- STOCKHOLDERS' EQUITY
Reverse Stock Split and Stock Transfer Restrictions. At a Special Meeting
of Stockholders held on June 27, 1995, stockholders voted to amend the Company's
Certificate of Incorporation to (i) effect a one-for-four reverse stock split
(the "Reverse Split") of the Company's common stock and (ii) restrict certain
transfers of the Company's common stock in an attempt to protect certain of the
Company's federal income tax benefits.
Common Stock. The number of outstanding shares of common stock does not
include shares of common stock held as treasury stock. See "Treasury Stock"
below.
Preferred Stock. Under its Second Restated Certificate of Incorporation the
Company is authorized to issue 500,000 shares of preferred stock, par value $.10
per share, and did issue 250,000 shares of newly designated Series B Preferred
Stock, which is described in Note 8.
44
<PAGE> 46
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Treasury Stock. Prior to the merger, HEC purchased 267,709 shares of the
Company's outstanding common stock (approximately 17% of the total outstanding
shares ) in open market transactions at a cost of $6,326,000. Since these shares
were acquired by a then consolidated subsidiary, they were reported as treasury
shares. The remaining 30,986 treasury shares are held by the Company at a cost
of $866,000.
Commission-Free Offer to Purchase Common Stock. On June 10, 1996, the
Company announced a commission-free offer (the "Offer") program for stockholders
holding 99 or fewer shares of the Company's common stock as of the record date
of June 7, 1996 to sell their shares to the Company. The Offer allowed eligible
stockholders to sell all, but not less than all, of their shares to the Company
without incurring any brokerage commission. The price paid by the Company was
$14.00 per share, which was higher than the average of the closing market prices
of the shares for the five trading days immediately preceding the Record Date,
as reported by the Wall Street Journal. On July 10, 1996, the Offer was extended
from its original termination date of July 12, 1996 to July 23, 1996. As a
result, the Company purchased 28,126 shares (1.76% of the total outstanding
shares) from 1,590 stockholders at a total cost of $394,000 and are included in
treasury shares.
Re-issuance of Treasury Stock. On January 3, 1997 the Board of Directors
authorized an exchange of the 267,709 treasury shares acquired in the merger
with HEC for 219,194 shares of ShowBiz from the Alpha and Epsilon Trusts, as
further discussed in Note 21.
Stock Options. All options issued under the 1995 Stock Option Plan for The
Hallwood Group Incorporated Plan are nonqualified stock options. The exercise
prices of all options granted were at the fair market value of the Company's
common stock on the date of grant, expire ten years from date of grant and were
fully vested and exercisable on the date of grant.
Below is the status of 1995 Stock Option Plan as of December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Total options authorized............. 68,000 In March 1997, the Board of Directors
authorized an increase in the number
of options to 136,000 subject to
approval of stockholders at Annual
Meeting
Less: Options granted, not exercised
Year ended December 31, 1996... (46,500) Exercise price of $11.75, expiring
September 2006
Five months ended December 31, --
1995.........................
Year ended July 31, 1995....... (10,750) Exercise price of $11.50, expiring
------- June 2005
Sub-total...................... (57,250)
-------
Options available for grant.......... 10,750 Remaining options granted in February
======= 1997 at an exercise price of $22.50,
expiring February 2007
</TABLE>
45
<PAGE> 47
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has adopted the disclosure-only provisions of Statement of
Financial Standards No. 123 -- Accounting for Stock Based Compensation ("SFAS
No. 123"). Accordingly, no compensation cost has been recognized for the
options. Had compensation costs for the options been determined based on the
fair value at the grant date for the awards in 1995 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been the pro forma amounts indicated below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JULY 31,
1996 1995 1995
------------ ------------ ----------
<S> <C> <C> <C>
Net income (loss) -- as reported................ $6,523 $(3,265) $(4,804)
Net income (loss) -- pro forma.................. 6,222 (3,265) (4,871)
Net income (loss) per share -- as reported...... 4.87 (2.45) (3.50)
Net income (loss) per share -- pro forma........ 4.64 (2.45) (3.54)
</TABLE>
The fair value of the options granted are estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 55%, risk-free interest rate of 6.0%-6.7%, expected life
of 5 years and no distribution yield.
NOTE 10 -- INCOME TAXES
The following is a summary of the income tax provision (in thousands):
<TABLE>
<CAPTION>
YEAR FIVE MONTHS YEARS ENDED
ENDED ENDED JULY 31,
DECEMBER 31, DECEMBER 31, --------------
1996 1995 1995 1994
------------ ------------ ---- ------
<S> <C> <C> <C> <C>
Federal
Deferred tax (benefit)...................... $(5,071) $(500) $471 $2,633
Current tax (refund)........................ 183 6 133 (4)
State......................................... 363 195 226 98
------- ----- ---- ------
Total............................... $(4,525) $(299) $830 $2,727
======= ===== ==== ======
</TABLE>
Reconciliations of the expected tax or (benefit) at the statutory tax rate
to the effective tax are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR FIVE MONTHS
ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ---------------------
1996 1995 1995 1994
------------ ------------ --------- --------
<S> <C> <C> <C> <C>
Expected tax or (benefit) at the statutory
tax rate................................. $ 679 $(1,212) $(1,351) $ (565)
Increase/(decrease) in deferred tax asset
valuation allowance...................... (5,879) (736) 1,605 3,663
State taxes (net of federal benefit)....... 240 129 226 98
Alternative minimum tax.................... 183 6 133 --
Foreign (gain) loss not taxable............ 190 1,094 331 (411)
Capital loss carryover..................... -- -- (515) --
Net (increase) decrease in tax credits..... -- -- (133) 103
Other...................................... 62 420 534 (161)
------- ------- ------- ------
Effective tax or (benefit)................. $(4,525) $ (299) $ 830 $2,727
======= ======= ======= ======
</TABLE>
46
<PAGE> 48
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid only a federal alternative minimum tax of $183,000 and
$133,000 for the years ended December 31, 1996 and July 31, 1995, respectively,
due to the utilization of net operating loss carryforwards ("NOLs") to offset
taxable income. The Company did not incur any actual federal income tax or
alternative minimum tax for the year ended July 31, 1994 and the five months
ended December 31, 1995.
A schedule of the types and amounts of existing temporary differences and
NOL's, at the blended statutory tax rate of 34%, tax credits and valuation
allowance as of the balance sheet dates are as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED TAX
-----------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Net operating loss carryforward................ $ 50,783 $ -- $ 56,355 $ --
Reserves recorded for financial statement
purposes and not for tax purposes............ 881 -- 902 --
Equity in earnings (losses) of unconsolidated
affiliates................................... 2,982 (4,796) 1,211 (4,111)
Original issue discounts and cancellation of
debt income on 7% and 13.5% Debentures....... 3,255 -- 2,992 --
Basis differences.............................. -- (231) 4,482 --
Tax credits.................................... 1,727 -- 1,612 --
Litigation costs deferred for tax purposes..... 425 -- 425 --
Other temporary differences.................... 679 (476) 575 (485)
Capital loss carryforward...................... -- -- 945 --
Depreciation and amortization.................. 936 -- 650 --
-------- ------- -------- -------
Deferred tax assets and liabilities............ 61,668 $(5,503) 70,149 $(4,596)
======= =======
Less deferred tax liabilities.................. (5,503) (4,596)
-------- --------
56,165 65,553
Less valuation allowance....................... (45,165) (59,624)
-------- --------
Deferred tax asset, net.............. $ 11,000 $ 5,929
======== ========
</TABLE>
Below is a schedule of expiring NOLs by year (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, NOLS
- ------------ --------
<S> <C> <C>
1997.............................................................. $ 50,582
1998.............................................................. 42,469
2001.............................................................. 793
2004.............................................................. 447
2006.............................................................. 4,118
2007.............................................................. 29,809
2009.............................................................. 12,896
2010.............................................................. 6,916
2011.............................................................. 1,332
--------
Total................................................... $149,362
========
</TABLE>
In addition, the Company has approximately $927,000 of alternative minimum
tax credits which have no expiration date, a depletion carryforward of
approximately $5,900,000, which may be used to offset future
47
<PAGE> 49
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
taxable income without an expiration limitation and an investment tax credit
carryforward of approximately $800,000, which will expire between 1997 and 2000.
Current tax laws and regulations relating to specified changes in ownership
may limit the Company's ability to utilize its NOLs and tax credit
carryforwards. As of December 31, 1996, management was not aware of any
ownership changes which would limit the utilization of the NOLs and tax credit
carryforwards.
NOTE 11 -- SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash investing and financing activities. The
following transactions affected recognized assets or liabilities but did not
result in cash receipts or cash payments (in thousands):
<TABLE>
<CAPTION>
FIVE
YEAR MONTHS
ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ---------------------
DESCRIPTION 1996 1995 1995 1994
----------- ------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Payment in-kind of annual interest on 13.5%
Debentures....................................... $2,817 $ -- $ -- $ --
Recording of proportionate share of stockholders'
equity transactions of equity investments........ 96 67 238 1,646
Real estate acquired through foreclosure........... -- 25 -- --
Issuance of Redeemable Preferred Stock............. -- -- 1,000 --
Effect of reverse split on common stock/paid-in
capital.......................................... -- -- 479 --
Issuance of promissory note payable in connection
with Integra bankruptcy.......................... -- -- -- 4,000
Issuance of note payable in connection with
litigation settlement............................ -- -- -- 1,500
Renegotiate loan payable to reduced amount......... -- -- -- 901
Deed back to lender of hotel property acquired from
Integra.......................................... -- -- -- 435
Assets (liabilities) acquired in connection with
the emergence of Integra from bankruptcy:
Hotel properties................................. -- -- -- 7,048
Receivables and other assets..................... -- -- -- 2,296
Loans payable.................................... -- -- -- (6,135)
Accounts payable and accrued expenses............ -- -- -- (3,586)
Less: Investment in net assets received.......... -- -- -- (1,700)
Integra cash balance at emergence from
bankruptcy............................... -- -- -- 2,077
Supplemental disclosures of cash payments (in
thousands):
Interest paid (including capitalized interest)... $4,625 $4,645 $8,010 $ 7,360
Income taxes paid................................ 482 95 280 130
</TABLE>
NOTE 12 -- ORGANIZATION AND OPERATIONS OF HALLWOOD REALTY PARTNERS, L.P.
On November 1, 1990, Hallwood Realty Partners, L.P., a publicly traded
Delaware limited partnership ("HRP"), consummated an exchange through a series
of mergers (the "Exchange"), of newly issued units of limited partnership
interest in HRP ("Units") for outstanding limited partnership interests in eight
limited partnerships originally formed by Equitec Financial Group, Inc. ("EFG")
(the "Participating Equitec Partnerships"). The Exchange was consummated
pursuant to a proxy statement/prospectus, dated June 29, 1990, as supplemented.
48
<PAGE> 50
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Exchange, HRC, a wholly-owned subsidiary of the
Company, purchased the general partner interests in the Participating Equitec
Partnerships from EFG for $5,155,000. This purchase was pursuant to the terms of
the Amended and Restated Agreement among EFG, Equitec Properties Company ("EPC")
and the Company, dated as of October 17, 1989, as amended (EFG, EPC and its
affiliates are collectively referred to as "Equitec"). HRC contributed such
general partner interests, plus $13,118 in cash, to HRP in exchange for a 1%
general partner interest in HRP. HWG Realty Investors, Inc., a wholly-owned
subsidiary of the Company, purchased a 0.1% partnership interest in each of the
Participating Equitec Partnerships by making capital contributions to the
Participating Equitec Partnerships aggregating $131,177 in cash on November 1,
1990. The total acquisition cost of the general partner interest, which
aggregated $8,650,000, included other capitalized costs of $3,351,000. In
addition, the Participating Equitec Partnerships paid EFG an aggregate of
$8,073,080 in connection with the Exchange.
As a result of the foregoing, HRP acquired 99.9% of the equity interests
in, and thereby became the indirect owner of, all of the real estate and other
assets of the Participating Equitec Partnerships.
As general partner, HRC earns an asset management fee and certain related
fees from HRP properties, which amounted to $467,000 for the year ended December
31, 1996, $190,000 for the five months ended December 31, 1995 and $436,000 and
$435,000 for the years ended July 31, 1995 and 1994, respectively.
On June 1, 1991, the Company's HCRE subsidiary purchased the property
management contracts from Equitec which related to the HRP properties for
$2,475,000. Equitec had retained the rights to manage the HRP properties for a
three-year period after the Exchange. The property management contracts
encompass day-to-day property management responsibilities, for which HCRE
receives management fees, leasing commissions and certain other fees. HCRE
earned fees and commissions from HRP and certain related third parties of
$5,205,000 during the year ended December 31, 1996, $1,554,000 for the five
months ended December 31, 1995 and $3,470,000 and $3,489,000 in the years ended
July 31, 1995 and 1994, respectively.
NOTE 13 -- ORGANIZATION AND OPERATIONS OF HALLWOOD ENERGY CORPORATION AND HEPGP
LTD.
Organization. On May 4, 1990, the Company acquired a majority interest in
Hallwood Energy Corporation ("HEC") through a step acquisition (as that concept
is referred to in Accounting Principles Bulletin No. 16). Prior to that date the
Company owned approximately 11% of HEC (38% assuming conversion of preferred
stock) and accounted for the investment under the equity method of accounting.
On May 4, 1990, the Company converted its 44,846 shares of HEC's Series D
preferred stock into 17,938,400 shares of common stock. No consideration was
paid by the Company in connection with the conversion other than the surrender
of its Series D preferred stock. The Company also purchased 8,000,000 shares of
HEC common stock, in consideration for the cancellation of the principal amount
of a $1,500,000 note receivable from HEC, all pursuant to the terms of a letter
agreement dated May 3, 1990. As a result of (i) the stock issuance from these
two transactions, (ii) additional purchases of 37,312 HEC shares in 1995; (iii)
a 1-for-50 reverse split; (iv) the conversion of 356,000 shares of its Series E
Preferred Stock for 356,000 shares of common stock; and (v) subsequent purchases
by HEC, between May 1990 and the merger date, of its own common stock for
treasury, the Company owned 633,917 shares of common stock of HEC (approximately
82%) prior to the tender offer and merger discussed below.
Tender Offer for Minority Shares and Merger of HEC into the Company. On
October 10, 1996, the Company and HEC announced that the two companies had
entered into a definitive merger agreement providing for the merger of HEC into
the Company. Prior to the merger, the Company agreed to commence a tender offer
for all of the 143,209 outstanding shares of HEC not currently owned by the
Company, at a price of $19.50 per share, subject to the terms and conditions of
the tender offer documents.
The Board of Directors of HEC and a special committee of the board of
directors of HEC unanimously approved the tender offer and merger and determined
that the terms of the tender offer and the merger were
49
<PAGE> 51
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair to and in the best interest of the stockholders of HEC. The board of
directors of HEC had recommended that all stockholders of HEC accept the tender
offer and tender their shares. The completion of the transaction was conditioned
upon, among other things, the valid tender of a majority of the HEC shares not
currently held by the Company, which together with the shares currently held by
the Company, would constitute at least 90% of the issued and outstanding shares
of HEC.
The tender offer expired on November 22, 1996. The tendered shares
represented in excess of 10% of the remaining outstanding shares of HEC. As a
result of the tenders, the Company owned in excess of 92% of the total
outstanding shares of HEC and, on November 22, 1996, the merger of HEC into the
Company was consummated. At December 31, 1996, the Company has included
$1,043,000 in accounts payable and accrued expenses, representing the amount due
the former HEC shareholders who have yet to surrender their minority shares at
$19.50 per share.
Certain assets acquired by the Company from the merger were subsequently
transferred to two wholly-owned entities, HEPGP and Hallwood G.P., Inc., the
general partner of HEPGP. The Company's energy operations are now conducted
primarily through HEPGP.
The $200,000 value of the net assets acquired in excess of the purchase
price has been allocated to oil and gas properties and reduces the full cost
pool and will be amortized over the productive life of the underlying proved
reserves using the units of production method. HEC's results of operations have
been included in the consolidated statements of operations since May 1990,
including recognition of the minority interest in net income (loss) to the
merger date in the consolidated statement of operations.
Operations. HEP entered into financial contracts for hedging transactions
of approximately 31%, 36% and 40% of its actual crude oil production during the
year ended December 31, 1996, the five months ended December 31, 1995, and the
year ended July 31, 1995, respectively. The oil price received by HEP was
$18.33, $17.41 and $17.86 for the respective periods for the barrels hedged. HEP
also entered into financial contracts for hedging between 3% and 46% of its
estimated oil production for 1997 through 1999. HEP also hedged approximately
43%, 47% and 51% of its gas production for the year ended December 31, 1996, the
five months ended December 31, 1995, and the year ended July 31, 1995,
respectively. The gas price received for the volumes hedged was $1.94, $1.94 and
$1.91 for the respective periods. Additionally, HEP has entered into financial
contracts for hedging of between 18% and 54% of its estimated gas production for
1997 through 2000. The purpose of the hedges is to provide protection against
price drops and to provide a measure of stability in the volatile environment of
oil and natural gas spot pricing. The amount received or paid in settling these
contracts is recognized as oil or gas revenue at the time the hedges volumes are
sold.
NOTE 14 -- ORGANIZATION AND OPERATIONS OF BROOKWOOD COMPANIES INCORPORATED
Organization. Brookwood Companies Incorporated, a wholly-owned subsidiary
of the Company ("Brookwood"), was formed in March 1989 to acquire certain assets
and assume certain liabilities of a nylon textile converting and finishing
company. Brookwood is a complete textile service firm that develops and produces
innovative fabrics and related products through specialized finishing, treating
and coating processes.
Operations. Brookwood maintains factoring agreements which provide that
receivables resulting from credit sales to customers, excluding the U.S.
Government, may be sold to the factor without recourse, subject to a commission
of 0.7% and the factor's prior approval. A significant majority of the
receivables are factored. Commissions paid to the factors were approximately
$330,000 for the year ended December 31, 1996, $118,000 for the five months
ended December 31, 1995 and $335,000 and $312,000 for the years ended July 31,
1995 and 1994, respectively.
50
<PAGE> 52
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Raw materials............................................... $ 4,472 $ 3,927
Work in process............................................. 2,669 2,346
Finished goods.............................................. 10,481 7,943
------- -------
17,622 14,216
Less: Obsolescence reserve.................................. (434) (481)
------- -------
Total............................................. $17,188 $13,735
======= =======
</TABLE>
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------- -------
<S> <C> <C>
Land........................................................ $ 391 $ 391
Buildings and improvements.................................. 4,314 4,263
Leasehold improvements...................................... 113 162
Machinery and equipment..................................... 6,739 6,822
Office furniture and equipment.............................. 1,421 1,289
Construction in progress.................................... 2,192 1,294
------- -------
15,170 14,221
Less: Accumulated depreciation.............................. (6,379) (5,512)
------- -------
Total............................................. $ 8,791 $ 8,709
======= =======
</TABLE>
NOTE 15 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 -- Disclosures about
Fair Value of Financial Instruments ("SFAS No. 107"), requires disclosure of the
estimated fair values of certain financial instruments. The estimated fair value
amounts have been determined using available market information or other
appropriate valuation methodologies that require considerable judgment in
interpreting market data and developing estimates. 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.
The fair value of financial instruments that are short-term or reprice
frequently and have a history of negligible credit losses are considered to
approximate their carrying value. These include cash and cash equivalents,
restricted cash, short term receivables, accounts payable and other liabilities.
Investments accounted for under the equity method, hotel and real estate
properties and other assets consist of nonfinancial instruments, which are
excluded from the scope of SFAS No. 107.
Management has reviewed the carrying value of its loans payable and
debenture issues in connection with interest rates currently available to the
Company for borrowings with similar characteristics and maturities. Management
has determined that the estimated fair value of the loans payable approximates
the carrying value of $37,342,000 and $24,794,000 at December 31, 1996 and 1995,
respectively, as the terms are comparable to those which management believes it
could obtain in a current market transaction. The estimated fair value of the
debenture issues are $41,675,000 and $27,505,000, as of December 31, 1996 and
1995, respectively, based on market prices on the New York Bond Exchange, as
compared to the carrying values of $50,564,000 and $48,324,000.
51
<PAGE> 53
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996 and 1995, the fair value information presented
herein is based on pertinent information available to management. 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,
therefore current estimates of fair value may differ significantly from the
amounts presented herein.
NOTE 16 -- RELATED PARTY TRANSACTIONS
Hallwood Securities Limited. Pursuant to an agreement dated September 29,
1992 (the "1992 Consulting Agreement"), Hallwood Securities Limited ("Limited"),
a corporation with which Anthony J. Gumbiner, the Company's chairman and chief
executive officer and Brian M. Troup, the Company's president and chief
operating officer, are associated, provided consulting services to the Company
with respect to strategic and tactical advice regarding the Company's assets and
investments and proposed transactions involving the Company and its affiliates.
As compensation for its services under the 1992 Consulting Agreement, Limited
was paid a fee of $600,000 (excluding reimbursement for out-of-pocket and other
reasonable expenses of Limited) in the year ended July 31, 1994. The 1992
Consulting Agreement terminated July 31, 1994.
HSC Financial Corporation. Effective August 1, 1994, the Company entered
into a new consulting agreement (the "1994 Consulting Agreement"), with HSC
Financial Corporation ("HSC"), a corporation with which Messrs. Gumbiner and
Troup are associated, pursuant to which HSC agreed to provide international
consulting and advisory services to the Company and its affiliates for an annual
fee of $350,000, excluding reimbursement for out-of-pocket and other reasonable
expenses. This Consulting Agreement was terminated effective December 31, 1996.
The compensation committee also approved entering into a Financial
Consulting Contract with HSC, dated December 31, 1996, which provides for HSC to
furnish and perform international consulting and advisory services to the
Company and its subsidiaries, including strategic planning and merger
activities, for annual compensation of $825,000. The annual amount is payable in
monthly installments, as a retainer to secure the availability of HSC to perform
such services as and when required by the Company. This contract will terminate
on July 31, 1998, however, it shall automatically renew for a one year period if
not terminated by the parties beforehand.
Hallwood Petroleum, Inc. Effective August 1, 1994, Hallwood Petroleum, Inc.
("HPI"), a wholly-owned subsidiary of HEP, entered into a Compensation Agreement
with Mr. Gumbiner, pursuant to which Mr. Gumbiner is to consult with and assist
HPI and its energy affiliates in connection with their present and future
international activities. HPI paid Mr. Gumbiner annual compensation of $250,000.
This Compensation Agreement was terminated effective December 31, 1996.
In July 1993, the Company renewed a financial consulting agreement with
HEC, pursuant to which the Company or Limited furnished consulting and advisory
services to HEC and its Affiliates, including HEP. The Company assigned this
contract to Limited at its inception. Under the terms of the financial
consulting agreement, HEC and its affiliates paid $300,000 to the Company in
June 1993 for the year ended June 30, 1994, of which approximately $7,000 was
paid by HEC, and the remainder by HEP and other affiliates of HEC. This
agreement was terminated June 30, 1994.
The Company entered into a new Financial Consulting Agreement with HPI,
dated as of June 30, 1994, which provided that the Company or its agent provide
consulting services to HPI for compensation at the rate of $300,000 per year.
The Board of Directors compensation committee determined that these services
would be most appropriately provided by HSC, acting as the Company's agent,
through the services of Mr. Gumbiner and Mr. Troup, and that as consideration
for these services the Company would pay to HSC the fee to which the Company is
entitled under the agreement. Of the $300,000 payments made in June 1996 and
1995, approximately $9,000 in each year, was paid by HEC, and the remainder by
HEP and other
52
<PAGE> 54
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
affiliates of HEC. This Financial Consulting Agreement was terminated effective
December 31, 1996, and replaced by a new Financial Consulting Agreement, dated
as of December 31, 1996 on substantially the same terms and conditions, apart
from an increase in amount of compensation to $550,000 per annum.
Expenses. Pursuant to an existing agreement, the Company reimburses HSC for
reasonable and necessary expenses in providing office space and administrative
services used by Mr. Gumbiner. The Company reimbursed HSC $307,000 for the year
ended December 31, 1996, $114,000 for the five months ended December 31, 1995,
$275,000 and $271,000 for the years ended July 31, 1995 and 1994, respectively.
Of the amounts paid in the periods, the Company paid $58,000 for the year ended
December 31, 1996, $29,000 for the five months ended December 31, 1995, $69,000
and $65,000 for the years ended July 31, 1995 and 1994, respectively. The
balance of the amounts were paid by affiliates of the Company, including HEC,
HEP and HRP.
Exchange. On January 3, 1997, the Board of Directors of the Company
authorized the issuance of 267,709 common shares of the Company (formerly owned
by HEC, and considered treasury shares) in exchange for 219,194 common shares of
ShowBiz from the Alpha and Epsilon Trust, which are associated with Messrs.
Anthony J. Gumbiner and Brian M. Troup, respectively. For purposes of the
exchange, the shares of both companies were valued at their average closing
price for the month of December 1996. The completion of the exchange was
contingent upon regulatory approval, which was received on March 12, 1997.
Other. The Company shares common offices, facilities and staff with
Stanwick Holdings, Inc. ("Stanwick"). The Company pays the common general and
administrative expenses of the two entities and charges Stanwick a management
fee for its allocable share of the expenses. Stanwick reimbursed the Company
$25,000 for each of the years ended December 31, 1996, July 31, 1995 and 1994,
respectively, and $12,500 for the five months ended December 31, 1995. Stanwick
is a subsidiary of Luxembourg-based Hallwood Holdings S.A. ("HHSA"). Anthony J.
Gumbiner and Brian M. Troup are directors of HHSA. Melvin J. Melle is chief
financial officer of HHSA and Stanwick.
NOTE 17 -- LITIGATION, CONTINGENCIES AND COMMITMENTS
Litigation. The Company, certain of its affiliates and others were named as
defendants in several lawsuits relating to various transactions, in which it or
its affiliated entities participated. The Company intends to defend, or in some
cases negotiate to settle, the remaining actions and does not currently
anticipate that such actions will have a material adverse effect on its
financial condition, results of operations or cash flows beyond the reserves the
Company has established for such purposes.
In February 1997, a unitholder of HRP filed a lawsuit in the Court of
Chancery of the State of Delaware styled Gotham Partners L.P. v. Hallwood Realty
Partners, L.P. and Hallwood Realty Corporation requesting the court to order
that the defendants, HRP and HRC, permit the plaintiff to, among other things,
inspect certain books and records of HRP. The plaintiff alleges that HRP and HRC
breached the HRP partnership agreement, the Delaware Revised Uniform Limited
Partnership Act and their fiduciary duties to the plaintiff by not supplying the
requested materials in response to a prior demand from the plaintiff. Because
the suit was only recently filed, it is not possible at this time to predict
with certainty the impact of the suit.
In December 1996, the Company's subsidiary, Integra Hotels, Inc., was added
to a consolidated lawsuit, styled Marc P. Malcuit, et al, Plaintiffs v. Howard
Johnson International, Inc., et al, Defendants, and numerous Third Party
Defendants (including Integra Hotels Incorporated); No. 96-CI-00049, et seg.,
filed in Warren Circuit Court (Division 1), Bowling Green, Kentucky. This
lawsuit, involving the alleged wrongful death and various personal injury claims
of twelve or more people, arose out of a fire that occurred in early 1996 at a
Howard Johnson International, Inc. hotel in Bowling Green, Kentucky. Integra
never owned this property, but it apparently leased, renovated, and operated it
as a hotel as late as the early 1990's. The plaintiffs and franchisor Howard
Johnson International, Inc. allege, among other things, that the fire/smoke
53
<PAGE> 55
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
detection/suppression, and other safety features in the hotel were inadequate;
and the plaintiffs allege that Howard Johnson International, Inc.'s negligently
failed to identify and remedy any alleged defects. Integra is not alleged to
have had any involvement with the facility at the time of the fire itself. If
Integra is held liable for any portion of any recovery in this case, the Company
believes that any such recovery should be covered by applicable liability
insurance. Integra's uninsured exposure, if any, at this time is uncertain
because, among other things, the plaintiffs have included a claim for punitive
damages, which, if awarded, would not likely be covered by insurance. The
Company has not had a sufficient opportunity to analyze all of the facts and
underlying issues in this lawsuit and, therefore, cannot predict with certainty
at this time the outcome of this matter or the effect an adverse outcome might
have. However, Integra intends to defend this case vigorously.
In July 1996, two subsidiaries of the Company were added to a lawsuit,
styled Muriel Luper, Individually and as Independent Executor of the Estate of
Oral L. Luper, Plaintiffs v. Marriott Residence Inn II Limited Partnership, et
al, (including Hallwood subsidiaries Integra Hotels Incorporated and Brock Suite
Hotels, Inc.), Defendants, earlier filed in Santa Fe, New Mexico state court.
This lawsuit arose out of the accidental death of a guest of Santa Fe's Marriott
Residence Inn, who died shortly after falling down the stairs in his suite. The
plaintiffs allege, among other things, that the design and construction of the
hotel room stairwell caused the accident. Neither the Company nor its
subsidiaries ever owned or operated this hotel facility. However, one of the
subsidiaries may have been a prospective franchisor to the original hotel owner
prior to its construction in 1986. The plaintiff alleges damages against
multiple defendants (many of whom, including the Company's subsidiaries, are
described as "distributors of prototype plans") in excess of $2,000,000, plus
punitive damages for alleged gross negligence. If either subsidiary is held
liable for any portion of any recovery in this case, the Company believes that
any such recovery should be covered by applicable liability insurance. Integra's
uninsured exposure, if any, at this time is uncertain because, among other
things, the plaintiffs have included a claim for punitive damages which, if
awarded, would not likely be covered by insurance. There has been little
activity in this lawsuit to date, and , although the Company's subsidiaries
intend to defend this case vigorously, the Company cannot predict with certainty
at this time the outcome of this matter or the effect an adverse outcome might
have.
In November 1996, a lawsuit was filed in United States District Court for
the District of Colorado styled The Ravenswood Investment Company, L.P. v.
Hallwood Energy Corporation, Hallwood Group Inc., et al. The case alleges that
in connection with the tender offer to the shareholders of HEC and the
subsequent merger of HEC into the Company, the defendants failed to disclose
certain matters in the tender offer documents, breached their fiduciary duty to
the shareholders of HEC, and committed certain fraudulent acts. The plaintiff
seeks rescission or rescissionary damages of an unspecified amount. The
plaintiff also seeks class certification to represent similarly situated former
shareholders of HEC. In a related case filed by the plaintiff in March 1997 in
the District Court of Dallas County, Texas, plaintiff is also demanding an
appraisal of the fair value of the HEC shares owned by plaintiff. The defendants
believe that they fully considered and disclosed all material information in
connection with the tender offer and merger and that the price paid for the HEC
shares was fair, and that both cases are without merit. The Company plans to
vigorously defend these cases, but because of their early stages, cannot predict
the outcome of this matter or any possible effect an adverse outcome might have.
In July 1996, the Company announced that it agreed to a settlement of a
claim by the Securities and Exchange Commission ("SEC") arising from the sale of
a small portion of its holdings in the stock of ShowBiz during a four-day period
in June 1993. These and other similar sales were made by the Company pursuant to
a pre-planned, long-term selling program begun in December 1992. The SEC
asserted that some, but not all, of the Company's June 1993 sales were improper
because, before the sales program was completed, the Company was alleged to have
received non-public information about ShowBiz. In connection with the
settlement, the Company paid approximately $953,000, representing the loss that
the SEC alleged the Company avoided by selling during the four-day period, plus
interest of $240,000. This money was deposited into a fund for the benefit of
those who bought ShowBiz stock from the Company during the
54
<PAGE> 56
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
four-day period. The Company has also agreed to be subject to an injunction
against any future violations of certain federal securities laws. In addition,
the SEC alleged that Anthony J. Gumbiner failed to take appropriate action to
discontinue the Company's sales of the ShowBiz shares during the four days in
question. Mr. Gumbiner did not directly conduct the sales, nor did he sell any
shares for his own account or for the account of any trust for which he has the
power to designate the trustee. Although the sales were made solely by the
Company, the SEC assessed a civil penalty of $477,000 against Mr. Gumbiner, as a
"control person" for the Company. Mr. Gumbiner, however, is not subject to any
separate injunction concerning his future personal activities.
As provided in the settlement, neither the Company nor Mr. Gumbiner
admitted or denied the allegations made by the SEC, and both entered into the
settlement to avoid the extraordinary time and expense that would be involved in
protracted litigation with the government. The Company believes that the SEC's
legal theories in any such litigation would have been novel, but feels that this
settlement was in its best interests and fair to the shareholders who were
affected by the Company's sales.
As the settlement had been anticipated and estimated amounts previously
accrued, the Company's contribution, including interest, did not result in an
additional charge against operations in the year ended December 31, 1996. The
Company had established reserves of $250,000 in the five months ended December
31, 1995 and $500,000 in each of the years ended July 31, 1995 and 1994,
respectively. In approving the terms of the settlement, the Board of Directors
of the Company also authorized the Company to loan Mr. Gumbiner the amount
needed to satisfy his personal assessment. Significant terms of the promissory
note from Mr. Gumbiner include: (i) principal amount of $477,000; (ii) interest
rate of prime plus 0.75%; and (iii) quarterly principal and interest payments
totaling $31,250.
In August 1995, the United States District Court for the Southern District
of New York issued a Final Order approving the settlement of the purported class
action entitled In Re: Hallwood Energy Partners, L.P. Securities Litigation. The
consolidated complaint asserted claims for alleged violations of securities laws
based on alleged misstatements and omissions in the prospectus and supplemental
proxy material relating to the merger of Energy Development Partners, Ltd. into
HEP. The terms of the settlement included payments by HEP of $2,870,000 in cash
and units of HEP with a market value of $5,330,000. In September 1995, HCRC
exercised an option to purchase all of the units issued in the settlement for
$5,330,000.
In February 1995, the Company entered into agreements to settle the
following three lawsuits styled: (1) Louis G. Resse, Inc., et al v. The Hallwood
Group Incorporated, et al, which was filed in the Fourteenth District Court of
Dallas County, Texas; (2) European American Reinsurance Corporation v. The
Hallwood Group Incorporated, et al, which was also filed in the Fourteenth
District Court of Dallas County, Texas; and (3) Hermitage Hotel, Ltd. v. The
Hallwood Group Incorporated, et al, which was filed in the 101st District Court
of Dallas County, Texas. Pursuant to these settlement agreements, the Company
paid an aggregate of $425,000 in cash and issued 250,000 shares of a newly
designated series of preferred stock (the "Series B Preferred Stock") to the
plaintiffs in these lawsuits in exchange for the dismissal of all of these
actions with prejudice. The holders of Series B Preferred Stock are entitled to
dividends in an annual amount of $0.20 per share. For the first five years,
dividends are cumulative and the payment of cash dividends on any common stock
is prohibited before the full payment of any accrued dividends. Thereafter,
dividends will accrue and be payable only if and when declared by the Board of
Directors. The Series B Preferred Stock also has dividend and liquidation
preferences to the Company's common stock. The shares are subject to mandatory
redemption fifteen years from the date of issuance at 100% of the liquidation
preference of $4.00 per share plus all accrued and unpaid dividends, and may be
redeemed at any time on the same terms at the option of the Company. The holders
of the Series B Preferred Stock are not entitled to vote on matters brought
before the Company's stockholders, except as otherwise provided by law.
55
<PAGE> 57
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 1995, the Company settled the lawsuit styled Third National Bank
in Nashville, Trustee v. The Hallwood Group Incorporated filed in the United
States District Court for the Middle District of Tennessee. The court dismissed
this action with prejudice, the terms of which are confidential.
The Company was a named defendant in Nitti v. Frank, et al, No. 93-06753,
in the 68th District Court of Dallas County, Texas, in which the plaintiff,
purporting to act derivatively on behalf of ShowBiz, contended that the
defendants made misleading statements on behalf of ShowBiz to the securities
market, breached fiduciary duties to stockholders of ShowBiz, committed
constructive fraud and unjustly enriched themselves by selling ShowBiz stock
prior to ShowBiz's report of a reduced earnings estimate in 1993. Plaintiffs
demanded restitution and/or unspecified damages and punitive and exemplary
damages. In November 1995, the court issued an order for final judgment that
approved a settlement of all the claims in this matter at no cost to the
Company.
In September 1994, the Court in the In Re Equitec Rollup Litigation and
Aaberg, et al, v. Equitec Financial Group, Inc., et al, actions entered a final
order approving the settlement of these actions. In connection with the
settlement, the Company issued a promissory note in the amount of $1,500,000 to
an agent for the plaintiffs. The note was payable in twenty-four monthly
installments and bore an interest of 7 1/2% per annum. The final payment was
made in July 1996.
The Company and its subsidiaries are from time to time involved in various
other legal proceedings in the ordinary course of their respective businesses.
Management believes that the resolution of these matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
Contingencies. The Company has committed to make additional contributions
to the capital of HRC, the general partner of HRP, upon demand, up to a maximum
aggregate amount of $13,118,000, subject to the terms of a subscription
agreement, to the extent HRC has insufficient capital to satisfy creditors of
HRP. As of the date of this report no such demands have been made.
The Company remains contingently liable for L477,503 ($817,000 at December
31, 1996) plus interest at the rate of 12% to maturity (July 31, 1997) on the
12% Convertible Notes ("Notes") issued by the Company's former wholly owned
subsidiary, Atlantic Metropolitan (U.K.) plc ("Atlantic"). Grainger Trust plc
("Grainger") assumed the obligations to make payment of interest and principal
on the Notes in connection with its purchase of the Company's investment in
Atlantic in fiscal 1988. The indenture under which the Notes were originally
issued limits the amount of borrowings or the issuance of other indebtedness by
the Company or its subsidiaries to two and one-half the Adjusted Stockholders'
Equity (as defined in such indenture). The Company has notified the indenture
trustee that it is in default of this covenant. The Company believes that this
default is not materially prejudicial to the holders of the Notes, since it is
acting solely as a guarantor. The trustee has not indicated what action, if any,
it may take in response to this default.
Commitments. Total lease expense was $4,575,000 for the year ended December
31, 1996, $1,977,000 for the five months ended December 31, 1995, and $4,991,000
and $4,095,000 for the years ended July 31, 1995 and 1994, respectively. The
company leases certain hotel property, including land, buildings and equipment,
executive office facilities at several locations, and certain textile
manufacturing equipment. The leases generally require the Company to pay
property taxes, insurance and maintenance of the leased assets. Lease expense on
certain office facilities is incurred on behalf of partnerships, of which the
Company is general partner and is substantially reimbursed by such partnerships.
Certain of the hotel property leases requires the payment of rent contingent
upon hotel revenue. Contingent rent was $473,000 for the year ended December 31,
1996, $126,000 for the five months ended December 31, 1995 and $689,000 and
$451,000 for the years ended July 31, 1995 and 1994, respectively.
56
<PAGE> 58
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, aggregate net minimum annual rental commitments under
noncancelable operating leases having an initial or remaining term of more that
one year, were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
------------ -------
<S> <C> <C>
1997.............................................................. $ 3,898
1998.............................................................. 3,519
1999.............................................................. 2,560
2000.............................................................. 1,949
2001.............................................................. 1,897
Thereafter........................................................ 900
-------
Total................................................... $14,723
=======
</TABLE>
NOTE 18 -- BUSINESS BY INDUSTRY SEGMENT
The Company's business by industry segment is summarized below (in
thousands):
<TABLE>
<CAPTION>
REAL TEXTILE ASSOCIATED
ESTATE ENERGY PRODUCTS HOTELS COMPANIES OTHER CONSOLIDATED
------- ------- -------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Total revenue........................ $ 3,947 $ 7,515 $77,583 $20,948 $ 4,448 $ 960 $115,401
======= ======= ======= ======= ======= ======= ========
Operating income..................... $ 1,618 $ 2,282 $ 1,222 $ -- $ 2,890 $ -- $ 8,012
======= ======= ======= ======= ======= =======
Unallocable expenses, net............ $(6,014) (6,014)
======= --------
Income before income taxes........... $ 1,998
========
Identifiable assets, December 31,
1996............................... $ 8,227 $13,566 $40,110 $17,644 $16,945 $ -- $ 96,492
Cash allocable with segment.......... 436 182 90 916 -- 6,444 8,068
------- ------- ------- ------- ------- ------- --------
$ 8,663 $13,748 $40,200 $18,560 $16,945 $ 6,444 104,560
======= ======= ======= ======= ======= =======
Corporate assets..................... $12,236 12,236
======= --------
Total assets, December 31, 1996...... $116,796
========
Depreciation, depletion, amortization
and impairment..................... $ 673 $ 1,532 $ 1,091 $ 2,657 $ -- $ -- $ 5,953
======= ======= ======= ======= ======= ======= ========
Capital expenditures/acquisitions.... $ 40 $ 346 $ 1,118 $ 7,721 $ -- $ -- $ 9,225
======= ======= ======= ======= ======= ======= ========
FIVE MONTHS ENDED DECEMBER 31, 1995
Total revenue........................ $ 1,211 $ 3,149 $28,229 $ 8,073 $ (88) $ 233 $ 40,807
======= ======= ======= ======= ======= ======= ========
Operating income (loss).............. $ (132) $ 276 $ 7 $ (253) $ (398) $ -- $ (500)
======= ======= ======= ======= ======= =======
Unallocable expenses, net............ $(3,089) (3,089)
======= --------
Loss before income taxes............. $ (3,589)
========
Identifiable assets, December 31,
1995............................... $ 9,920 $14,604 $34,474 $12,693 $16,490 $ -- $ 88,181
Cash allocable with segment.......... 2,872 10 136 135 -- 282 3,435
------- ------- ------- ------- ------- ------- --------
$12,792 $14,614 $34,610 $12,828 $16,490 $ 282 91,616
======= ======= ======= ======= ======= =======
Corporate assets..................... $ 6,617 6,617
======= --------
Total assets, December 31, 1995...... $ 98,233
========
Depreciation, depletion, amortization
and impairment..................... $ 405 $ 887 $ 470 $ 943 $ -- $ -- $ 2,705
======= ======= ======= ======= ======= ======= ========
Capital expenditures/acquisitions.... $ 18 $ 126 $ 371 $ 384 $ -- $ -- $ 899
======= ======= ======= ======= ======= ======= ========
</TABLE>
57
<PAGE> 59
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's business by industry segment is summarized below (in
thousands):
<TABLE>
<CAPTION>
REAL TEXTILE ASSOCIATED
ESTATE ENERGY PRODUCTS HOTELS COMPANIES OTHER CONSOLIDATED
------- ------- -------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1995
Total revenue........................ $ 4,595 $ 5,359 $77,808 $24,898 $ (171) $ 737 $113,226
======= ======= ======= ======= ======= ======= ========
Operating income (loss)*............. $ 1,351 $ (216) $ 204 $ 2,823 $ (858) $ -- $ 3,304
======= ======= ======= ======= ======= =======
Unallocable expenses, net............ $(7,421) (7,421)
======= --------
Loss before income taxes............. $ (4,117)
========
Identifiable assets, July 31, 1995... $18,887 $14,428 $37,340 $13,253 $16,511 $ -- $100,419
Cash allocable with segment.......... 253 2,022 226 322 -- 3,134 5,957
------- ------- ------- ------- ------- ------- --------
$19,140 $16,450 $37,566 $13,575 $16,511 $ 3,134 106,376
======= ======= ======= ======= ======= =======
Corporate assets..................... $ 5,999 5,999
======= --------
Total assets, July 31, 1995.......... $112,375
========
Depreciation, depletion, amortization
and impairment..................... $ 972 $ 2,402 $ 1,043 $ 2,429 $ -- $ -- $ 6,846
======= ======= ======= ======= ======= ======= ========
Capital expenditures/acquisitions.... $ 12 $ 36 $ 1,465 $ 1,094 $ -- $ -- $ 2,607
======= ======= ======= ======= ======= ======= ========
YEAR ENDED JULY 31, 1994
Total revenue........................ $ 4,399 $ 6,234 $71,624 $20,896 $ 1,356 $ 2,193 $106,702
======= ======= ======= ======= ======= ======= ========
Operating income*.................... $ 112 $ 822 $ 863 $ 566 $ 870 $ -- $ 3,233
======= ======= ======= ======= ======= =======
Unallocable expenses, net............ $(5,544) (5,544)
======= --------
Loss before income taxes............. $ (2,311)
========
Identifiable assets, July 31, 1994... $17,473 $17,286 $34,916 $26,455 $16,444 $ -- $112,754
Cash allocable with segment.......... 1,188 804 170 1,559 -- 3,489 7,210
------- ------- ------- ------- ------- ------- --------
$18,661 $18,090 $35,086 $28,014 $16,444 $ 3,489 119,784
======= ======= ======= ======= ======= =======
Corporate assets..................... $ 7,541 7,541
======= --------
Total assets, July 31, 1994.......... $127,325
========
Depreciation, depletion, amortization
and impairment..................... $ 1,060 $ 2,018 $ 1,070 $ 2,104 $ -- $ -- $ 6,252
======= ======= ======= ======= ======= ======= ========
Capital expenditures/acquisitions.... $ 44 $ 147 $ 1,193 $ 1,288 $ -- $ -- $ 2,672
======= ======= ======= ======= ======= ======= ========
</TABLE>
- ---------------
* Operating income of the textile products industry segment is net of $16 and
$83 of intercompany interest expense in years ended July 31, 1995 and 1994,
respectively.
58
<PAGE> 60
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The result of operations for the quarters ended in the year ended December
31, 1996, five months ended December 31, 1995 and the year ended July 31, 1995
are summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenues................. $27,125 $32,463 $27,842 $27,971
Gross profit....................... 3,628 5,927 4,066 2,284
Net income......................... 308 2,396 500 3,319
Net income per share............... 0.23 1.77 0.37 2.50
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTHS ENDED DECEMBER 31, 1995
--------------------------------------------------------
OCTOBER 31 DECEMBER 31
---------- -----------
<S> <C> <C> <C> <C>
Operating revenues................. $25,302 $15,505
Gross profit....................... 1,614 703
Net loss........................... (1,699) (1,566)
Net loss per share................. (1.27) (1.18)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1995
--------------------------------------------------------
OCTOBER 31 JANUARY 31 APRIL 30 JULY 31
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenues................. $25,744 $27,659 $31,117 $28,706
Gross profit....................... 2,130 3,021 3,067 2,178
Net loss........................... (1,262) (2,419) (73) (1,050)
Net loss per share................. (0.92) (1.76) (0.05) (0.77)
</TABLE>
Year ended December 31, 1996. In December 1996, the Company recorded a
deferred tax benefit of $5,260,000 as a result of the significant appreciation
in the market value of the Company's investment in ShowBiz and management's
determination that the deferred tax asset should be increased to reflect the
anticipated realization of a substantial tax gain in 1997 from the sale of the
ShowBiz investment.
Five months ended December 31, 1995. In October 1995, the Company changed
its fiscal year end from July 31 to December 31, effective December 31, 1995.
The transition period reflects results for the Company's five-month period from
August 1, 1995 through December 31, 1995, and six month period from July 1, 1995
through December 31, 1995 for its former HEC subsidiary and former ShowBiz
affiliate.
Year ended July 31, 1995. Significant transactions which resulted in the
1995 fourth quarter net loss of $1,050,000 were (i) a $200,000 write-down on the
office-retail property and (ii) a $143,000 extraordinary gain from debt
extinguishment.
NOTE 20 -- EMPLOYEE BENEFIT RETIREMENT PLANS
In August 1989, the Company established a contributory, tax-deferred 401(k)
tax favored savings plan covering substantially all of its non-union employees.
The original plan provided that eligible employees may contribute up to 15% of
their compensation to the plan, and the Company would match 50% of its
employees' contributions up to the first 6% contributed. Amounts contributed by
employees are 100% vested and non-forfeitable. The plan was amended on February
1, 1992 and August 1, 1993 to (i) modify eligibility requirements: (ii) make the
Company's matching contribution discretionary, to be determined annually by the
Company's Board of Directors; (iii) exclude the Company's hotel hourly employees
from a matching contribution; (iv) exclude highly compensated employees from a
matching contribution, although this group receives a compensatory bonus in lieu
of such contribution and diminution of related benefits; and (v) spinout
59
<PAGE> 61
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Brookwood employees into a separate plan. The Company matching contributions
vest at a rate of 20% per year of service and become fully vested after five
years. Employees of HRC, HCRE and salaried hotel employees also participate in
the Company's 401(k) plan. HEC has a separate 401(k) plan which is similar to
the Company's plan. Employer contributions paid on behalf of HRC and HEC
employees are substantially paid by the respective real estate and energy master
limited partnerships. The Company's contributions to the plan for the year ended
December 31, 1996, the five months ended December 31, 1995 and the years ended
July 31, 1995 and 1994, respectively, excluding contributions from the HRC and
HEC subsidiaries to the extent paid by the master limited partnership, were
$220,000, $24,000, $150,000 and $126,000, respectively.
Brookwood's union employees belong to a pension fund maintained by their
union. The Company contributes $78 per month per employee to the fund. Total
contributions for the year ended December 31, 1996, five months ended December
31, 1995 and the years ended July 31, 1995 and 1994, were $207,000, $85,000,
$198,000 and $194,000, respectively. At September 30, 1995, the date of the
latest actuarial valuation, Brookwood was not subject to a withdrawal liability
upon termination of the pension plan because it was fully funded.
NOTE 21 -- SUBSEQUENT EVENTS
On January 3, 1997, the Board of Directors of the Company authorized the
issuance of 267,709 treasury shares in exchange for 219,194 common shares of
ShowBiz from the Alpha and Epsilon Trusts, which are associated with Messrs.
Anthony J. Gumbiner and Brian M. Troup, chairman and president of the Company,
respectively. For purposes of the exchange, the shares of both companies were
valued at their average closing price for the month of December 1996. The
completion of the exchange was contingent upon regulatory approval which was
received on March 12, 1997.
On February 24, 1997, ShowBiz filed a registration statement with the
Securities and Exchange Commission covering a proposed public offering of
3,200,000 shares of common stock (2,305,371 shares of which were to be sold by
the Company and 894,629 shares by the Alpha and Epsilon Trusts). The
underwriters were also granted, and did exercise their option to purchase an
additional 454,746 shares of common stock from the Company and the Trusts to
cover over-allotments. The Company had determined to sell its shares to repay
debt, utilize expiring federal income tax loss carryforwards and focus on core
investments. On March 26, 1997, the Company completed the sale of its entire
2,632,983 ShowBiz shares at $15.68 per share, net of underwriting commissions. A
portion of the proceeds from the sale were used to repay the $7,000,000 MLBFS
line of credit and the $4,000,000 promissory note as discussed in Note 6. The
Company will report a significant gain from this transaction in the first
quarter of 1997. Concurrent with the sale, all five directors of the Company who
were also directors of ShowBiz resigned from the ShowBiz board.
60
<PAGE> 62
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1996
(UNAUDITED)
The following reserve quantity and future net cash flow information for the
oil and gas properties for the Company, its energy subsidiaries and HEP (the
"Energy Interests") represents proved reserves which are located in the United
States. The reserve estimates presented have been prepared by in-house petroleum
engineers and the majority of these reserves have been reviewed by independent
petroleum engineers. The determination of oil and gas reserves is base 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 Energy Interests proved oil and gas reserves from year to
year. No consideration has been given to future income taxes since the tax basis
and net operating loss carryforwards for the Energy Interests exceed future net
cash flows. Under the guidelines set forth by the Securities and Exchange
Commission, the calculation is performed using year-end prices. At December 31,
1996, oil and gas prices averaged $24.15 per barrel of oil and $3.88 per mcf of
gas for the Energy Interests, including its interest in HEP. Future production
costs are based on year-end costs and include severance taxes. This standardized
measure is not necessarily representative of the market value of the properties.
The standardized measure of discounted future net cash flows for the Energy
Interests has been decreased by $1,692,000 at December 31, 1996 for the effect
of HEP's hedge contracts. This amount represents the difference between year-end
prices and the hedge contract prices multiplied by the quantities subject to
contract, discounted at 10%.
61
<PAGE> 63
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
RESERVE QUANTITIES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GAS OIL
MCF BBLS
------ ----
<S> <C> <C>
PROVED RESERVES:
Balance, January 1, 1994.................................. 14,426 722
Extensions and discoveries................................ 636 104
Revision of previous estimates............................ (412) 105
Sales of reserves in place................................ (96) (9)
Purchases of reserves in place............................ 74 14
Production................................................ (1,932) (128)
------ ----
Balance, December 31, 1994................................ 12,696 808
Extensions and discoveries................................ 728 267
Revision of previous estimates............................ (6) 52
Sales of reserves in place................................ (13) (6)
Purchases of reserves in place............................ 40 3
Production................................................ (1,808) (130)
------ ----
Balance, December 31, 1995................................ 11,637 994
Extensions and discoveries................................ 263 107
Revision of previous estimates............................ 1,083 28
Sales of reserves in place................................ (374) (54)
Purchases of reserves in place............................ 1,169 2
Production................................................ (1,728) (125)
------ ----
Balance, December 31, 1996................................ 12,050 952
====== ====
PROVED DEVELOPED RESERVES:
Balance, December 31, 1994................................ 12,061 752
====== ====
Balance, December 31, 1995................................ 11,009 914
====== ====
Balance, December 31, 1996................................ 11,768 904
====== ====
</TABLE>
62
<PAGE> 64
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
DESCRIPTION 1996 1995 1994
----------- -------- -------- --------
<S> <C> <C> <C>
Future cash flows.......................................... $ 70,000 $ 43,000 $ 37,000
Future production and development costs.................... (21,000) (15,000) (13,000)
-------- -------- --------
Future net cash flows before discount...................... 49,000 28,000 24,000
10% discount to present value.............................. (18,000) (9,000) (7,000)
-------- -------- --------
Standardized measure of discounted future net cash flows... $ 31,000 $ 19,000 $(17,000)
======== ======== ========
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
DESCRIPTION 1996 1995 1994
----------- ------- ------- -------
<S> <C> <C> <C>
Standardized measure of discounted future net cash at
beginning of year ........................................ $19,000 $17,000 $21,000
Sales of oil and gas produced, net of production costs...... (5,557) (4,064) (4,323)
Net changes in prices and production costs.................. 11,583 2,424 (3,757)
Extensions, discoveries and other additions, net of future
production costs.......................................... 1,582 2,550 1,239
Changes in estimated future development costs............... (1,125) (1,037) (575)
Development costs incurred.................................. 1,321 979 599
Revisions of previous quantity estimates.................... 2,186 335 214
Purchases of reserves in place.............................. 2,064 63 155
Sales of reserves in place.................................. (1,220) (54) (148)
Accretion of discount....................................... 1,900 1,700 2,100
Changes in production rates and other....................... (734) (896) 496
------- ------- -------
Standardized measure of discounted future net cash flows at
the end of year........................................... $31,000 $19,000 $17,000
======= ======= =======
</TABLE>
63
<PAGE> 65
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
We have audited the consolidated financial statements of The Hallwood Group
Incorporated and its subsidiaries at December 31, 1996 and 1995 and the related
consolidated statements of operations, changes in stockholders equity and cash
flows for the year ended December 31, 1996, the five month period ended December
31, 1995, and the years ended July 31, 1995 and July 31, 1994, and have issued
our report thereon dated February 28, 1997 (March 21, 1997 as to the last
paragraph of Note 21 of the Notes to the Consolidated Financial Statements),
which report is included elsewhere in this Form 10-K. Our audits also included
the financial statement schedules of The Hallwood Group Incorporated and its
subsidiaries, listed in the accompanying index at Item 14(a)2. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997 (March 21, 1997 as to the last paragraph of Note 21
of the Notes to the Consolidated Financial Statements)
64
<PAGE> 66
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Investments in subsidiaries................................. $ 33,229 $ 36,836
Investments in associated company........................... 16,945 16,490
Deferred tax asset, net..................................... 11,000 5,429
Cash and cash equivalents................................... 6,288 125
Investment in real estate affiliate......................... 1,890 3,565
Receivables and other assets................................ 1,052 552
Mortgage loans, net......................................... 62 59
Real estate properties, net................................. 39 --
Energy division
Oil and gas properties, net............................... 4,569 --
Current assets of HEP..................................... 1,298 --
Noncurrent assets of HEP.................................. 815 --
-------- --------
Total Assets.............................................. $ 77,187 $ 63,056
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
13.5% Subordinated Debentures............................... $ 25,672 $ 22,855
7% Collateralized Senior Subordinated Debentures............ 24,892 25,469
Loans payable............................................... 11,500 9,937
Accounts payable, accrued interest and other accrued
expenses.................................................. 3,564 4,186
Energy division
Long-term obligations of HEP.............................. 2,347 --
Current liabilities of HEP................................ 1,385 --
Accounts payable and accrued expenses..................... 1,043 --
-------- --------
Total Liabilities......................................... 70,403 62,447
Redeemable preferred stock.................................. 1,000 1,000
Common stock................................................ 160 160
Additional paid-in capital.................................. 57,306 57,210
Accumulated (deficit)....................................... (44,490) (50,963)
Treasury stock.............................................. (7,192) (6,798)
-------- --------
Total Stockholders' Equity (Deficit)...................... 5,784 (391)
-------- --------
Total Liabilities and Stockholders' Equity................ $ 77,187 $ 63,056
======== ========
</TABLE>
The "Notes to Consolidated Financial Statements of the Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant".
65
<PAGE> 67
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR FIVE MONTHS
ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, --------------------
1996 1995 1995 1994
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
INCOME
Income (loss) from investments in associated
companies/affiliates......................... $ 2,818 $ (874) $ (292) $ 1,197
Intercompany income from subsidiaries
Management fees.............................. 2,598 833 1,988 1,596
Dividends.................................... 1,100 1,792 2,292 1,814
Interest income.............................. 524 505 1,797 2,132
Equity in net income (loss) of subsidiaries..... 1,431 (2,097) (2,607) (27)
Fee income...................................... 425 177 425 150
Energy division -- oil and gas revenues......... 251 -- -- --
Other income.................................... 215 21 53 35
Interest on short-term investments.............. 175 18 113 114
------- ------- ------- -------
Total income............................ 9,537 375 3,769 7,011
EXPENSES
Interest expense................................ 6,097 2,174 5,116 4,892
Administrative expenses......................... 2,174 1,401 3,332 2,775
Energy division -- oil and gas expenses......... 152 -- -- --
Provision for losses (recovery)................. (29) -- 11 1,647
Hotel and real estate operating expenses........ 9 3 11 120
Intercompany expenses of subsidiaries
Management fees.............................. -- -- 300 300
Interest expense............................. -- 50 38 38
------- ------- ------- -------
Total expenses.......................... 8,403 3,628 8,808 9,772
------- ------- ------- -------
Income (loss) before income taxes and
extraordinary gain........................... 1,134 (3,253) (5,039) (2,761)
Income taxes (benefit).......................... (5,389) 37 418 2,277
------- ------- ------- -------
Income (loss) before extraordinary gain......... 6,523 (3,290) (5,457) (5,038)
Extraordinary gain from extinguishment of
debt......................................... -- 25 653 648
------- ------- ------- -------
NET INCOME (LOSS)................................. $ 6,523 $(3,265) $(4,804) $(4,390)
======= ======= ======= =======
</TABLE>
The "Notes to Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
66
<PAGE> 68
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
YEAR ENDED ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ------------------
1996 1995 1995 1994
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................... $ 523 $(1,997) $(2,718) $ (572)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investments in
associated companies...................... 4,139 -- -- 1,250
Return of (additional) investment in
subsidiaries.............................. 2,176 (607) 9,774 1,480
Purchase of additional shares in HEC......... (1,750) -- -- --
Capital acquisition of real estate........... (40) -- -- --
Investments in associated
companies/affiliates...................... (4) -- (4,473) (8)
Proceeds from sale of marketable
securities................................ -- -- 610 --
Disbursements related to asset held for
sale...................................... -- -- 79 (5,721)
Proceeds from sale of real estate............ -- -- -- 5
------ ------- ------- -------
Net cash provided by (used in)
investing activities............... 4,521 (607) 5,990 (2,994)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans
payable................................... 2,000 -- -- 6,000
Repayment of bank borrowings and loans
payable................................... (437) (213) (1,750) (6,150)
Purchase of common stock for treasury........ (394) -- -- --
Payment of dividends to Series B preferred
stockholders.............................. (50) -- -- --
Repurchase of 7% Debentures.................. -- -- (1,845) (1,526)
Repurchase of 13.5% Debentures............... -- -- -- --
Purchase of fractional shares -- reverse
split..................................... -- (22) (17) --
------ ------- ------- -------
Net cash provided by (used in)
financing activities............... 1,119 (235) (3,612) (1,676)
------ ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 6,163 (2,839) (340) (5,242)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................... 125 2,964 3,304 8,546
------ ------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $6,288 $ 125 $ 2,964 $ 3,304
====== ======= ======= =======
</TABLE>
The "Notes to Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
67
<PAGE> 69
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Supplemental schedule of non-cash investing and financing activities. The
following transactions affected recognized assets or liabilities but did not
result in cash receipts or cash payments (in thousands):
<TABLE>
<CAPTION>
YEAR FIVE MONTHS
ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ----------------------------
DESCRIPTION 1996 1995 1995 1994
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Payment in-kind of annual interest on
13.5% Debentures.................... $2,817 $ -- $ -- $ --
Effect of reverse split on common
stock/paid-in capital............... 479 --
Recording of proportionate share of
stockholders' equity transactions of
equity investments.................. 96 67 238 1,646
Issuance of promissory note payable in
connection with Integra
bankruptcy.......................... -- -- -- 4,000
Issuance of note payable in connection
with litigation settlement.......... -- -- -- 1,500
Renegotiation loan payable to reduced
amount.............................. -- -- -- 901
Real estate acquired through
foreclosure......................... -- 25 -- --
Supplemental disclosures of cash
payments (in thousands):
Interest paid (including capitalized
interest)........................... $2,659 $4,645 $5,591 $5,452
Income taxes paid..................... 322 95 15 13
</TABLE>
The "Notes to Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
68
<PAGE> 70
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
NOTE 1 -- BASIS OF PRESENTATION
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the condensed financial statements of the Registrant do not include
all of the information and notes normally included with financial statements
prepared in accordance with generally accepted accounting principles. In
addition, for purposes of this schedule, the investments in majority owned
subsidiaries are accounted for using the equity method of accounting which is
not in accordance with generally accepted accounting principles. It is,
therefore suggested that these condensed financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Registrant's annual report as referenced in Form 10-K, Part II,
Item 8.
NOTE 2 -- DEBENTURE ISSUES AND LOANS PAYABLE
As further referenced to Notes 6 and 7 in the Consolidated Financial
Statements, the Registrant's debenture issues and loans payable are comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
DESCRIPTION 1996 1995
----------- ----------- -------
<S> <C> <C>
Debenture Issues
13.5% Debentures.......................................... $25,672 $22,855
7% Debentures............................................. 24,892 25,469
------- -------
$50,564 $48,324
======= =======
Loans Payable
Associated companies...................................... $11,000 $ 9,000
Real estate............................................... 500 937
------- -------
11,500 9,937
======= =======
Totals............................................ $62,064 $58,261
======= =======
</TABLE>
Maturities over the next five years are as follows (in thousands):
1997 -- $11,000; 1998 -- $2,427; 1999 -- $-0-; 2000 -- $20,881; 2001 -- $-0-.
NOTE 3 -- LITIGATION, CONTINGENCIES AND COMMITMENTS
See Note 17 to the consolidated financial statements.
69
<PAGE> 71
SCHEDULE II
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE, CHARGED TO CHARGED BALANCE,
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
REAL ESTATE
Allowance for losses -- real estate:
Year ended December 31, 1996........ $ -- $ -- $ -- $ -- $ --
Five months ended December 31,
1995.............................. 1,037 102 -- (1,139)(b) --
Year ended July 31, 1995............ 1,010 211 -- (184)(a)(b) 1,037
Year ended July 31, 1994............ 980 -- -- 30(a) 1,010
Allowance for losses -- mortgage loans:
Year ended December 31, 1996........ -- -- -- -- --
Five months ended December 31,
1995.............................. -- -- -- -- --
Year ended July 31, 1995............ 226 220 -- (446)(b) --
Year ended July 31, 1994............ 442 -- -- (216)(b) 226
TEXTILE PRODUCTS
Allowance for losses -- accounts
receivable:
Year ended December 31, 1996........ 534 35 -- (114)(c) 455
Five months ended December 31,
1995.............................. 461 75 -- (2)(c) 534
Year ended July 31, 1995............ 467 104 -- (110)(c) 461
Year ended July 31, 1994............ 365 232 -- (130)(c) 467
ASSOCIATED COMPANIES
Allowance for losses -- investments in
associated companies:
Year ended December 31, 1996........ -- -- -- -- --
Five months ended December 31,
1995.............................. -- -- -- -- --
Year ended July 31, 1995............ -- -- -- -- --
Year ended July 31, 1994............ 925 (30)(d) -- (895)(b) --
OTHER
Allowance for losses -- marketable
securities:
Year ended December 31, 1996........ 130 -- -- -- 130
Five months ended December 31,
1995.............................. 130 -- -- -- 130
Year ended July 31, 1995............ 277 -- -- (147)(b) 130
Year ended July 31, 1994............ 718 (1,556)(d) -- 1,115(b) 277
</TABLE>
- ---------------
Notes:
(a) Change in foreign currency exchange rate
(b) Write-off upon disposition/foreclosure
(c) Write-off, net of recoveries
(d) Gain from disposition in excess of net book value, net of additional expense
70
<PAGE> 72
SCHEDULE III
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT
WHICH CARRIED
INITIAL COST TO AT CLOSE OF
COMPANY COSTS CAPI- PERIOD
----------------- TALIZED SUB- -----------------
BUILD- SEQUENT TO BUILD- ACCUM-
INGS AND ACQUISITION INGS AND ULATED
ENCUM- IMPROVE- (IMPROVE- IMPROVE- DEPRECIA-
BRANCES LAND MENTS MENTS) LAND MENTS TOTAL TION
------- ------ -------- ------------ ------ -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TEXTILE PRODUCTS
Industrial plant
Kenyon, Rhode Island..................... (b) $ 391 $ 2,355 $ 1,959 $ 391 $ 4,314 $ 4,705 $ 1,398
HOTELS
Sarasota, Florida (a)...................... (b) -- 5,100 2,511 -- 7,611 7,611 5,155
Greenville, South Carolina................. $6,739 -- 459 6,837 817 6,479 7,296 522
Tulsa, Oklahoma............................ 5,001 909 4,285 477 909 4,762 5,671 1,370
Oklahoma City, Oklahoma(a)................. (b) -- 1,525 1,729 -- 3,254 3,254 2,227
Huntsville, Alabama(a)..................... -- -- 942 384 -- 1,326 1,326 366
Miscellaneous investments.................. -- 50 -- -- 50 -- 50 --
------ ------- ------- ------ ------- ------- -------
Subtotal............................. 959 12,311 11,938 1,776 23,432 25,208 9,640
------ ------- ------- ------ ------- ------- -------
Totals............................... $1,350 $14,666 $13,897 $2,167 $27,746 $29,913 $11,038
====== ======= ======= ====== ======= ======= =======
<CAPTION>
DEPRE-
CIABLE
DATE LIFE IN
ACQUIRED YEARS
-------- -------
<S> <C> <C>
TEXTILE PRODUCTS
Industrial plant
Kenyon, Rhode Island..................... 3/89 20
HOTELS
Sarasota, Florida (a)...................... 6/91 7
Greenville, South Carolina................. 3/94 15
Tulsa, Oklahoma............................ 3/94 10
Oklahoma City, Oklahoma(a)................. 6/91 6
Huntsville, Alabama(a)..................... 3/94 10
Miscellaneous investments.................. 3/94 n/a
Subtotal.............................
Totals...............................
</TABLE>
Changes in real estate owned and accumulated depreciation for the year
ended December 31, 1996, five months ended December 31, 1995 and years ended
July 31, 1995, and 1994 are summarized below (in thousands):
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ------------------------------------------------
1996 1995 1995 1994
---------------------- ----------------------- ----------------------- ----------------------
REAL ACCUMULATED REAL ACCUMULATED REAL ACCUMULATED REAL ACCUMULATED
ESTATE DEPRECIATION ESTATE DEPRECIATION ESTATE DEPRECIATION ESTATE DEPRECIATION
------- ------------ -------- ------------ -------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF
PERIOD.................... $22,141 $ 8,168 $ 32,500 $ 8,915 $ 43,619 $ 7,964 $35,307 $ 5,411
Additions during the
period
Costs capitalized....... 7,772 -- 402 -- 1,135 -- 7,876 --
Foreclosures............ -- -- -- -- -- -- -- --
Depreciation............ -- 2,870 -- 1,153 -- 2,893 -- 2,553
Foreign exchange
adjustment............ -- -- (330) -- 417 -- 441 (3,423)
Deductions during the
period
Sales................... -- -- (10,431) (1,900) (12,671) (1,942) (5) --
------- ------- -------- ------- -------- ------- ------- -------
BALANCE, END OF PERIOD...... $29,913 $11,038 $ 22,141 $ 8,168 $ 32,500 $ 8,915 $43,619 $ 7,964
======= ======= ======== ======= ======== ======= ======= =======
</TABLE>
- ---------------
Notes:
See Note 1(g) to the Company's consolidated financial statements.
The aggregate cost basis of real estate owned for federal income tax
purposes was approximately $1.9 million higher than the basis for financial
reporting purposes.
(a) Leasehold interest. Cost represents price paid for leasehold
interest, plus furnishings and equipment.
(b) The stock of the subsidiary which holds this asset is pledged as
collateral for the 7% Debentures as described in Note 7 to the
Company's consolidated financial statements.
71
<PAGE> 73
================================================================================
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 27, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER 0-15782
SHOWBIZ PIZZA TIME, INC.
(Exact name of registrant as specified in its charter)
KANSAS 48-0905805
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4441 WEST AIRPORT FREEWAY
P.O. BOX 152077
IRVING, TEXAS 75015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 258-8507
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.10 each
(Title of Class)
Class A Preferred Stock, par value $60.00 each
(Title of Class)
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 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. [ ]
At March 14, 1997, an aggregate of 18,518,417 shares of the
registrant's Common Stock, par value of $.10 each (being the registrant's only
class of common stock), were outstanding, and the aggregate market value
thereof (based upon the last reported sale price on March 14, 1997) held by
non-affiliates of the registrant was $ 13,722,126.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed
pursuant to Section 14(a) of the Act in connection with the registrant's 1996
annual meeting of shareholders, have been incorporated by reference in Part III
of this report.
================================================================================
<PAGE> 74
P A R T I
Item 1. Business
GENERAL
ShowBiz Pizza Time, Inc. (the "Company"), was incorporated in the State of
Kansas in 1980 and is engaged in the family restaurant/entertainment center
business. The Company considers this to be its sole industry segment.
The Company operated, as of March 14, 1997, 245 Chuck E. Cheese's Pizza
(R) ("Chuck E. Cheese's") restaurants (including four restaurants managed by
the Company for others). In addition, as of March 14, 1997, franchisees of the
Company operated 69 Chuck E. Cheese's restaurants.
CHUCK E. CHEESE'S RESTAURANTS
BUSINESS DEVELOPMENT
Chuck E. Cheese's restaurants offer a variety of pizza, a salad bar,
sandwiches and desserts and feature musical and comic entertainment by
life-size, computer-controlled robotic characters, family oriented games, rides
and arcade-style activities. The restaurants are intended to appeal to
families with children between the ages of 2 and 12. The Company opened its
first restaurant in March 1980.
The Company and its franchisees operate in a total of 44 states and the
Company has concentrated its ownership and operation of Chuck E. Cheese's
restaurants within a 32-state area. See "Item 2. Properties."
The following table sets forth certain information with respect to the
Chuck E. Cheese's restaurants owned by the Company (excludes restaurants
managed by the Company for others and franchised restaurants):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average annual revenues
per restaurant (1) $ 1,286,000 $1,178,000 $1,206,000
Number of restaurants open at end
of period 240 222 220
Percent of total restaurant revenues:
Food and beverage sales 70.1% 70.2% 71.0%
Game sales 26.6% 26.6% 25.8%
Merchandise sales 3.3% 3.2% 3.2%
</TABLE>
- -------
(1) In computing these averages, only restaurants which were open for a
period greater than one year at the beginning of each respective year
were included (213, 190 and 159 restaurants in 1996, 1995 and 1994,
respectively).
The revenues from Chuck E. Cheese's restaurants are seasonal in nature.
The restaurants tend to generate more revenues during the first and third
fiscal quarters as compared to the second and fourth fiscal quarters.
Each Chuck E. Cheese's restaurant generally employs a general manager, one
or two managers, an electronic specialist who is responsible for repair and
maintenance of the robotic characters and games, and 45 to 75 food preparation
and service employees, most of whom work only part-time.
2
<PAGE> 75
To maintain a unique and exciting environment in the restaurants, the
Company believes it is essential to reinvest capital through the evolution of
its games, rides and entertainment packages and continuing enhancement of the
facilities. In 1994, the Company initiated a "repositioning" program to evolve
and expand its efforts to significantly enhance its Chuck E. Cheese's
restaurants. Between March 1994 and December 1996, the Company completed 223
restaurants under this program which is approximately 91% of all
Company-operated restaurants. The Company plans to reposition the remaining
restaurants by the end of the second quarter of 1997.
The Company opened one new Chuck E. Cheese's restaurant in 1995. The
Company anticipates opening approximately six to eight new stores in 1997 and
approximately 10 to 12 new stores in 1998. The Company periodically
reevaluates the site characteristics of its restaurants. In the event certain
site characteristics considered essential for the success of a restaurant
deteriorate, the Company will consider relocating the restaurant to a more
desirable site.
The Company believes its ownership of trademarks to the names and character
likenesses featured in the robotic animation stage show (and other in-store
entertainment) in its restaurants to be an important competitive advantage.
Restaurant Design and Entertainment
Chuck E. Cheese's restaurants are typically located in shopping centers or
in free-standing buildings near shopping centers and generally occupy 8,000 to
14,000 square feet in area. Chuck E. Cheese's restaurants are typically
divided into three areas: a kitchen and related area (cashier and prize area,
salad bar, manager's office, technician's office, restrooms, etc.) occupies
approximately 35% of the space, a dining area occupies approximately 25% of the
space and an activity area occupies approximately 40% of the space.
The dining area of each Chuck E. Cheese's restaurant features a variety of
comic and musical entertainment by computer-controlled robotic characters,
together with video monitors and animated props, located on various stage type
settings. The dining area typically provides table and chair seating for 250
to 375 customers.
Each Chuck E. Cheese's restaurant typically contains a family oriented
playroom area offering approximately 40 coin- and token-operated attractions,
including arcade-style games, kiddie rides, video games, skill oriented games
and other similar entertainment. Most games dispense tickets that can be
redeemed by guests for prize merchandise such as toys and dolls. Also included
in the playroom area are tubes and tunnels suspended from or reaching to the
ceiling ("SkyTubes") or other free attractions for young children, with booth
and table seating for the entire family. The playroom area normally occupies
approximately 60% of the restaurant's public area and contributes significantly
to its revenues. A limited number of free tokens are furnished with food
orders. Additional tokens may be purchased. These tokens are used to play the
games in the playroom.
Food and Beverage Products
Each Chuck E. Cheese's restaurant offers varieties of pizza, a salad bar,
sandwiches and desserts. Soft drinks, coffee and tea are also served, along
with beer and wine where permitted by local laws. The Company believes that
the quality of its food compares favorably with that of its competitors.
The majority of food, beverages and other supplies used in the
Company-operated restaurants is currently distributed under a system-wide
agreement with a major food distributor. The Company believes that this
distribution system creates certain cost and operational efficiencies for the
Company.
3
<PAGE> 76
Marketing
The primary customer base for the Company's restaurants consists of
families having children between 2 and 12 years old. The Company conducts
advertising campaigns which target families with young children and feature the
family entertainment experiences available at Chuck E. Cheese's restaurants,
and is primarily aimed at increasing the frequency of customer visits. The
primary advertising medium continues to be television, due to its broad access
to family audiences and its ability to communicate the Chuck E. Cheese's
experience. The television advertising campaigns are supplemented by
promotional offers in newspapers.
Franchising
The Company began franchising its restaurants in October 1981 and the first
franchised restaurant opened in June 1982. At March 14, 1997, 69 Chuck E.
Cheese's restaurants were operated by a total of 44 different franchisees, as
compared to 93 of such restaurants at March 15, 1996. In September 1996, the
Company purchased all of the 19 Chuck E. Cheese's restaurants owned by its
largest franchisee. The Company sold four franchises in 1996.
The Company opened a second franchise restaurant in Chile during the fourth
quarter of 1996. Opportunities for further international franchise development
are being reviewed by the Company.
The Chuck E. Cheese's standard franchise agreements grant to the franchisee
the right to develop and operate a restaurant and use the associated trademarks
within the standards and guidelines established by the Company. The franchise
agreement presently offered by the Company has an initial term of 15 years and
includes a 10-year renewal option. The standard agreement provides the Company
with a right of first refusal should a franchisee decide to sell a restaurant.
The earliest expiration dates of outstanding Chuck E. Cheese's franchises are
in 1997.
The franchise agreements governing existing franchised Chuck E. Cheese's
restaurants currently require each franchisee to pay: (i) to the Company, in
addition to an initial franchise fee of $50,000, a continuing monthly royalty
fee equal to 3.8% of gross sales; (ii) to the Advertising Fund [an independent
fund established and managed by an association of the Company and its
franchisees to pay costs of system-wide advertising (the "Association")] an
amount equal to 0.9% of gross sales; and (iii) to the Entertainment Fund (an
independent fund established and managed by such Association to further develop
and improve entertainment attractions) an amount equal to 0.4% of gross sales.
In 1997, the Advertising Fund will increase assessments from .9% of gross sales
to 1.4% of gross sales. The Chuck E. Cheese's franchise agreements also
require franchisees to expend at least 3% of gross sales for local advertising.
Under the Chuck E. Cheese's franchise agreements, the Company is required, with
respect to Company-operated restaurants, to spend for local advertising and to
contribute to the Advertising Fund and the Entertainment Fund at the same rates
as franchisees.
Competition
The restaurant and entertainment industries are highly competitive, with a
number of major national and regional chains operating in the restaurant or
family entertainment business. Although other restaurant chains presently
utilize the combined family restaurant / entertainment concept, these
competitors primarily operate on a regional, market-by- market basis.
The Company believes that it will continue to encounter competition in the
future. Major national and regional chains, some of which may have capital
resources as great or greater than the Company, are competitors of the Company.
The Company believes that the principal competitive factors affecting Chuck E.
Cheese's restaurants are the relative quality of food and service, quality and
variety of offered entertainment, and location and attractiveness of the
restaurants as compared to its competitors in the restaurant or entertainment
industries.
4
<PAGE> 77
Monterey's Tex-Mex Cafe Restaurants
The Company, through its wholly owned subsidiary BHC Acquisition
Corporation ("BAC"), operated 27 Monterey's Tex-Mex Cafe restaurants.
Effective May 5, 1994, the Company sold its Monterey's Tex-Mex Cafe restaurants
for an aggregate purchase price consisting of approximately $6.7 million in
cash, $4.7 million in subordinated promissory notes and the retention of a 12
1/2% equity interest in the acquiring company.
Trademarks
The Company owns various trademarks, including "Chuck E. Cheese" and
"ShowBiz Pizza" that are used in connection with the restaurants and have been
registered with the United States Patent and Trademark Office. The duration of
such trademarks is unlimited, subject to continued use. The Company believes
that it holds the necessary rights for protection of the marks considered
essential to conduct its present restaurant operations.
Government Regulation
The development and operation of Chuck E. Cheese's restaurants are subject
to various federal, state and local laws and regulations, including but not
limited to those that impose restrictions, levy a fee or tax, or require a
permit or license on the service of alcoholic beverages and the operation of
games and rides. The Company is subject to the Fair Labor Standards Act, the
Americans With Disabilities Act, and family leave mandates. A significant
portion of the Company's restaurant personnel are paid at rates related to the
minimum wage established by federal and state law. Increases in such minimum
wage result in higher labor costs to the Company, which may be partially offset
by price increases and operational efficiencies.
Working Capital Practices
The Company attempts to maintain only sufficient inventory of supplies in
the restaurants which it operates to satisfy current operational needs. The
Company's accounts receivable consist primarily of credit card receivables,
franchise royalties, management fees and advances to managed properties.
Employees
The Company's employment varies seasonally, with the greatest number being
employed during the summer months. On March 14, 1997, the Company employed
approximately 11,000 employees, including 10,800 in the operation of Chuck E.
Cheese's restaurants and 185 employed by the Company in the Company's executive
offices. None of the Company's employees is a member of any union or
collective bargaining group. The Company considers its employee relations to
be good.
5
<PAGE> 78
Item 2. Properties
The following table sets forth certain information regarding the Chuck E.
Cheese's restaurants operated by the Company (excluding four restaurants
managed by the Company for others) as of March 14, 1997.
<TABLE>
<CAPTION>
Chuck E.
State Cheese's
----- ----------
<S> <C>
Alabama 5
Arkansas 2
California 46
Colorado 4
Connecticut 5
Delaware 1
Florida 15
Georgia 7
Idaho 1
Illinois 15
Indiana 7
Iowa 4
Kansas 3
Kentucky 1
Louisiana 4
Maryland 10
Massachusetts 10
Michigan 11
Missouri 7
Nevada 1
Nebraska 2
New Hampshire 2
New Jersey 9
New York 5
North Carolina 2
Ohio 11
Pennsylvania 9
South Carolina 3
Tennessee 5
Texas 26
Virginia 5
Wisconsin 3
---
241
===
</TABLE>
Of the 241 Chuck E. Cheese's restaurants owned by the Company as of March
14, 1997, 226 occupy leased premises and 15 occupy owned premises. The leases
of these restaurants will expire at various times from 1997 to 2009, as
described in the table below.
<TABLE>
<CAPTION>
Year of Number of Range of Renewal
Expiration Restaurants Options (Years)
---------- ----------- ---------------
<S> <C> <C>
1997 15 None to 10
1998 31 None to 15
1999 15 None to 15
2000 18 None to 15
2001 and thereafter 147 None to 15
</TABLE>
6
<PAGE> 79
The leases of Chuck E. Cheese's restaurants contain terms which vary from
lease to lease, although a typical lease provides for a primary term of 10
years, with two additional five-year options to renew, and provides for annual
minimum rent payments of approximately $6.00 to $22.00 per square foot, subject
to periodic adjustment. Most of the restaurant leases require the Company to
pay the cost of repairs, insurance and real estate taxes and, in many instances,
provide for additional rent equal to the amount by which a percentage (typically
6%) of gross revenues exceeds the minimum rent.
Item 3. Legal Proceedings.
From time to time the Company is involved in litigation, most of which is
incidental to its business. In the Company's opinion, no litigation in which
the Company currently is a party is likely to have a material adverse effect on
the Company's results of operations, financial condition or cash flows.
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 1996.
7
<PAGE> 80
P A R T I I
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
As of March 14, 1997, there were an aggregate of 18,518,417 shares of the
Company's Common Stock outstanding and approximately 4,171 stockholders of
record.
The Company's Common Stock is listed on the National Market System of the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
system under the symbol "SHBZ". The following table sets forth the highest and
lowest prices per share of the Common Stock during each quarterly period within
the two most recent years, as reported on the National Market System of NASDAQ:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1996
- 1st quarter $ 12 13/16 $ 8
- 2nd quarter 17 5/8 12 1/2
- 3rd quarter 19 1/4 12
- 4th quarter 20 14
1995
- 1st quarter $ 7 3/16 $ 4 7/8
- 2nd quarter 8 3/16 5 13/16
- 3rd quarter 9 1/16 7 5/16
- 4th quarter 8 15/16 7 1/4
</TABLE>
The Company may not pay any dividends to holders of its Common Stock
(except in shares of Common Stock) unless an amount equal to all dividends then
accrued on its Class A Preferred Stock par value $60.00 per share ("the
Preferred Stock") has been paid or set aside to be paid. A dividend to holders
of record of Preferred Stock as of December 27, 1996 in the amount of $1.20 per
share will be paid on March 27, 1997.
The Company has not paid any cash dividends on its Common Stock and has no
present intention of paying cash dividends thereon in the future. The Company
plans to retain any earnings to finance anticipated capital expenditures and
reduce its long-term debt. Future dividend policy with respect to the Common
Stock will be determined by the Board of Directors of the Company, taking into
consideration factors such as future earnings, capital requirements, potential
loan agreement restrictions and the financial condition of the Company.
8
<PAGE> 81
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Thousands, except per share and store data)
<S> <C> <C> <C> <C> <C>
Operating results (1):
Revenues . . . . . . . . . . . . . . . . . . . . . $ 293,990 $ 263,783 $ 268,515 $ 272,344 $ 253,444
Costs and expenses . . . . . . . . . . . . . . . . . 271,769 263,408 265,402 254,097 228,194
--------- --------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . 22,221 375 3,113 18,247 25,250
Income taxes:
Current expense . . . . . . . . . . . . . . . . . 2,855 701 869 1,751 1,161
Deferred expense (benefit) . . . . . . . . . . . . 6,145 (389) 1,568 4,605 8,586
--------- --------- --------- --------- ---------
9,000 312 2,437 6,356 9,747
--------- --------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . $ 13,221 $ 63 $ 676 $ 11,891 $ 15,503
======== ========= ========= ========= =========
Per Share (2):
Primary:
Net income (loss) . . . . . . . . . . . . . . . $ .70 $ (.02) $ .02 $ .57 $ .74
Weighted average shares outstanding . . . . . . . 18,477 18,098 18,191 20,183 20,493
Fully diluted:
Net income (loss) . . . . . . . . . . . . . . . . $ .70 $ (.02) $ .02 $ .57 $ .74
Weighted average shares outstanding . . . . . . . 18,532 18,098 18,191 20,196 20,570
Cash flow data:
Cash provided by operations . . . . . . . . . . . . $ 48,362 $ 27,810 $ 30,819 $ 44,905 $ 44,246
Cash used in investing activities . . . . . . . . . (51,868) (30,548) (22,576) (45,909) (35,872)
Cash provided by (used in) financing activities . . 1,319 5,946 (10,373) 2,053 (7,631)
Balance sheet data:
Total assets . . . . . . . . . . . . . . . . . . . . $ 216,580 $ 199,010 $ 188,308 $ 193,649 $ 173,217
Long-term obligations (including current portion
and redeemable preferred stock) . . . . . . . . 39,571 39,244 33,223 29,816 17,743
Shareholders' equity . . . . . . . . . . . . . . . . 141,476 126,487 125,515 136,647 132,167
Number of restaurants at year end:
Chuck E. Cheese's:
Company operated . . . . . . . . . . . . . . . . 244 226 226 215 182
Franchise . . . . . . . . . . . . . . . . . . . . 70 93 106 110 113
--------- --------- --------- --------- ---------
314 319 332 325 295
Monterey's Tex-Mex Cafe's . . . . . . . . . . . . . 27 28
--------- --------- --------- --------- ---------
314 319 332 352 323
========= ========= ========= ========= =========
</TABLE>
- ----------------------
(1) Fiscal year 1992 was 53 weeks in length while fiscal years 1996, 1995,
1994, and 1993 were 52 weeks in length.
(2) No cash dividends on common stock were paid in any of the years presented.
9
<PAGE> 82
Item 7. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
RESULTS OF OPERATIONS
1996 Compared to 1995
Revenues increased 11.5% to $294.0 million in 1996 from $263.8 million in
1995 primarily due to an increase of 9.8% in sales of the Company's Chuck E.
Cheese's restaurants which were open during all of 1996 and 1995 ("comparable
store sales"). In addition, the Company purchased 19 restaurants from its
largest franchisee in September 1996.
Income before income taxes increased to $22.2 million in 1996 from $375,000
in 1995. A material portion of operating costs are fixed resulting in an
improvement of operating margins at higher sales levels. Net income increased
to $13.2 million in 1996 from $63,000 in 1995. The Company's primary and fully
diluted earnings per share increased to $.70 per share in 1996 compared to a
loss of $.02 per share in 1995.
A summary of the results of operations of the Company as a percentage of
revenues for the last three fiscal years is shown below.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
------ ------ ------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . 48.7% 51.8% 51.3%
Selling, general and administrative . . . . . . . 14.8% 17.0% 17.6%
Depreciation and amortization . . . . . . . . . . 8.5% 8.8% 9.7%
Interest expense . . . . . . . . . . . . . . . . 1.2% 1.2% .7%
(Gain) loss on property transactions . . . . . . .1% .1% (1.0%)
Other operating expenses . . . . . . . . . . . . 19.1% 21.0% 20.5%
----- ----- ------
92.4% 99.9% 98.8%
----- ----- ------
Income before income taxes . . . . . . . . . . . . . 7.6% .1% 1.2%
===== ===== ======
</TABLE>
Revenues
Revenues increased to $294.0 million in 1996 from $263.8 million in 1995.
Comparable store sales of Chuck E. Cheese's restaurants increased by 9.8% in
1996. In addition, the Company purchased 19 restaurants from its largest
franchisee in September 1996. Average annual sales per restaurant increased to
approximately $1,286,000 in 1996 from approximately $1,178,000 in 1995.
Management believes that several factors contributed to the comparable store
sales increase with the primary factor being sales increases at repositioned
stores. Menu prices increased 3.2% between the two years.
Revenues from franchise fees and royalties were $3.7 million in 1996, an
increase of 6.1% from 1995, primarily due to an increase in franchise fee
income in 1996 and an increase of 3.6% in comparable franchise store sales for
1996. The increase in comparable franchise store sales was partially offset by
a decline in the number of franchise restaurants operated each year. During
1996, four new franchise restaurants opened, eight franchise restaurants closed
and 19 franchise restaurants were purchased by the Company.
Costs and Expenses
Costs and expenses as a percentage of revenues decreased to 92.4% in 1996
from 99.9% in 1995.
Cost of sales as a percentage of revenues decreased to 48.7% in 1996 from
51.8% in 1995. Cost of food, beverage, prize and merchandise items for Chuck
E. Cheese's restaurants as a percentage of restaurant sales decreased to 17.4%
in 1996 from 17.9% in 1995 primarily due to a 3.2% increase in menu prices.
Labor expenses for Chuck E. Cheese's restaurants as a percentage of restaurant
sales declined to 28.7% in 1996 from 30.9% in 1995 primarily due to an increase
in comparable store sales and more effective utilization of hourly employees.
10
<PAGE> 83
Selling, general and administrative expenses as a percentage of revenues
decreased to 14.8% in 1996 from 17.0% in 1995 primarily due to comparable store
sales increases and a reduction of advertising costs between the two periods.
Depreciation and amortization expense as a percentage of revenues decreased
to 8.5% in 1996 from 8.8% in 1995 primarily due to the full amortization of
certain deferred charges.
Interest expense increased to $3.5 million in 1996 from $3.1 million in
1995 primarily due to an increase in the Company's average outstanding debt
between the two periods. Debt increased as a result of capital expenditures in
connection with the repositioning of 126 and 87 restaurants in 1996 and 1995,
respectively.
The Company had a net loss on property transactions of $263,000 in 1996 and
$136,000 in 1995 due to the replacement of assets arising from the enhancement
of facilities and entertainment packages of restaurants. The loss in 1995 was
net of a gain of $100,000 from the sale of certain assets which had been held
for resale.
Other operating expenses decreased as a percentage of revenues to 19.1% in
1996 from 21.0% in 1995 primarily due to a decrease in insurance costs, the
increase in comparable store sales and the fact that a significant portion of
operating costs are fixed.
Net Income
The Company had net income of $13.2 million in 1996 compared to $63,000 in
1995 due to the changes in revenues and expenses discussed above. The
Company's primary and fully diluted earnings per share increased to $.70 per
share in 1996 compared to a loss of $.02 per share in 1995.
1995 Compared to 1994
Revenues declined 1.8% to $263.8 million in 1995 from $268.5 million in
1994 due to the sale of the Company's Monterey's Tex-Mex Cafe restaurants
effective May 5, 1994. Revenue generated by the Company's Chuck E. Cheese's
restaurants increased to $263.3 million in 1995 from $262.0 million in 1994 due
to the net addition of 11 Company restaurants in 1994 and two Company
restaurants in 1995. Comparable store sales from the Company's Chuck E.
Cheese's restaurants declined by 1.4% from 1994 to 1995. Revenues from the
Company's Monterey's Tex-Mex Cafe restaurants were $6.5 million in 1994.
Income before income taxes decreased to $375,000 in 1995 from $3.1 million
in 1994. Included in income before taxes in 1994 was a gain of $5.5 million
related to the sale of the Company's Monterey's Tex-Mex Cafe restaurants and a
$2.3 million loss associated with the impairment in fair value of certain Chuck
E. Cheese's restaurants. Income before income taxes in 1994 was also reduced
by approximately $900,000 due to a write-off of all unamortized preopening
expenses resulting from a change in the estimated future benefit of such
expenses. A material portion of operating costs are fixed resulting in an
erosion of operating margins at lower sales levels. Net income declined to
$63,000 in 1995 from $676,000 in 1994.
Revenues
Revenues decreased to $263.8 million in 1995 from $268.5 million in 1994
due to the sale of the Company's Monterey's Tex-Mex Cafe restaurants effective
May 4, 1994. Comparable store sales of Chuck E. Cheese's restaurants declined
by 1.4% from 1994 to 1995. Average annual sales per restaurant decreased to
approximately $1,178,000 in 1995 from approximately $1,206,000 in 1994. Menu
prices were comparable between the two years. The increasing number of
completed repositioned restaurants resulted in a 2.3% increase in comparable
store sales in the fourth quarter of 1995 compared to the same period of the
prior year. This was the first quarter since 1992 that comparable store sales
had increased from the prior year.
11
<PAGE> 84
Revenues from franchise fees and royalties were $3.5 million in 1995, a
decrease of 15.1% from 1994, primarily due to a 6.2% decline in comparable
franchise store sales for 1995 and a decline in the number of franchise
restaurants operated each year. During 1995, one new franchise restaurant
opened and 14 franchise restaurants closed.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 99.9% in 1995
from 98.8% in 1994.
Cost of sales as a percentage of revenues increased to 51.8% in 1995 from
51.3% in 1994. Cost of food, beverage, prize and merchandise items for Chuck
E. Cheese's restaurants as a percentage of restaurant sales decreased to 17.9%
in 1995 from 18.2% in 1994 primarily due to an increase in game sales as a
percentage of total restaurant sales. Labor expenses for Chuck E. Cheese's
restaurants as a percentage of restaurant sales increased to 30.9% in 1995 from
30.0% in 1994 primarily due to increased labor rates, reduced management
turnover and the decline in comparable store sales.
Selling, general and administrative expenses as a percentage of revenues
decreased to 17.0% in 1995 from 17.6% in 1994 primarily due to a reduction in
corporate overhead expenses.
Depreciation and amortization expense as a percentage of revenues decreased
to 8.8% in 1995 from 9.7% in 1994. Preopening expense declined due to the
write-off of all unamortized preopening expense in the fourth quarter of 1994
resulting from a change in the estimated useful future benefit of such
expenses. Depreciation and amortization expense decreased by $2.8 million in
1995 primarily due to a change effected in the first quarter of 1995 in the
estimated useful lives of certain fixed assets based on a review of historical
asset utilization that resulted in approximately $2.3 million of such decrease
and the sale of Monterey's Tex-Mex Cafe restaurants in May 1994.
Interest expense increased to $3.1 million in 1995 from $1.9 million in
1994 primarily due to an increase in interest rates and the Company's average
outstanding debt between the periods.
The Company had a net loss on property transactions of $136,000 in 1995
compared to a net gain on property transactions of $2.6 million in 1994. In
1994, the Company recognized a gain of $5.5 million from the sale of
substantially all of the assets of its Monterey's Tex-Mex Cafe restaurants on
May 5, 1994. The gain was partially offset by a loss of approximately $2.3
million in 1994. The loss was a result of the Company's decision to close one
Chuck E. Cheese's restaurant and the impairment in fair value of the fixed
assets of 10 Chuck E. Cheese's restaurants due to the Company's decision not to
renew the leases as a result of the deterioration of site characteristics or
the inability to renew the leases at acceptable rental terms. The Company will
consider possible relocation of some of the restaurants.
Other operating expenses as a percentage of revenues increased to 21.0% in
1995 from 20.5% in 1994 primarily due to increased rent expense and the decline
in comparable store sales.
Net Income
In 1994, the Company established an allowance of approximately $1.1 million
related to deferred tax credit carryforwards which are estimated to expire in
1997. Income tax expense was increased by approximately $1.1 million as a
result of this allowance. The Company's net income decreased to $63,000 in
1995 from $676,000 in 1994 due to the changes in revenues and expenses as
discussed above. The Company's primary and fully diluted earnings per share
decreased to a loss of $.02 per share in 1995 from earnings of $.02 per share
in 1994.
INFLATION
The Company's costs of operations, including but not limited to, labor,
supplies, utilities, financing and rental costs, are significantly affected by
inflationary factors. The Company pays most of its part-time employees rates
that are related to federal and state mandated minimum wage requirements.
Management anticipates that recent increases in federally mandated minimum wage
will result in increased labor costs for the Company. Any other increases in
such costs would result in higher costs to the Company, which the Company
expects would be partially offset by menu price increases and increased
efficiencies in operations.
12
<PAGE> 85
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations increased to $48.4 million in 1996 from $27.8
million in 1995. Cash outflow from investing activities for 1996 was $51.9
million. Cash inflow from financing activities in 1996 was $1.3 million. The
Company's primary requirements for cash relate to planned capital expenditures
and debt service. The Company expects that it will satisfy such requirements
from cash provided by operations and funds available under its line of credit.
The Company repositioned 126, 87 and 10 restaurants in 1996, 1995 and 1994,
respectively. Company expenditures relating to the remodeling program averaged
approximately $330,000 per restaurant during 1996 representing total
expenditures of approximately $41.6 million. The Company anticipates
remodeling the remaining 21 restaurants in the first half of 1997 at an average
cost of approximately $350,000 per restaurant for a total of approximately $7.4
million. However, this amount can vary significantly at a particular
restaurant depending on several factors, including the restaurant's square
footage, the date of the most recent remodel and the existing assets at the
restaurant. Expenditures relating to the repositioning program have been
financed primarily by cash flow from operations and borrowings under the
Company's line of credit.
The Company plans to open approximately six to eight new stores in 1997 and
10 to 12 new stores in 1998. The Company currently anticipates the cost of
opening such new stores to average approximately $1.3 million per store. In
addition to such new store openings, the Company plans to expand 10 to 15
existing stores in 1997 by an average of 1,000 to 4,000 square feet per store.
The Company also anticipates adding new game packages to as many as 100 stores
in 1997 at an average cost of approximately $150,000 per store. The Company
currently estimates that capital expenditures in 1997, including expenditures
for the remodeling of existing stores, new store openings, existing store
expansions and equipment investments, will be approximately $40 to $50 million.
The Company plans to finance these expenditures through cash flow from
operations and, if necessary, borrowings under the Company's line of credit.
In August 1996, the Company increased its line of credit to $15.0 million
from $5.0 million and extended the maturity date from June 1997 to June 1998.
Currently, any borrowings under this line of credit would be at prime or at the
London Interbank Offered Rate ("LIBOR") plus 2%. As of December 27, 1996, $7.4
million was outstanding under the line of credit.
The Company believes it will realize substantial benefit in the future from
utilization of approximately $47 million in net operating loss carryforwards to
reduce its future federal income tax liability. Such net operating loss
carryforwards expire from years 1999 through 2001. Although the use of such
carryforwards could, under certain circumstances, be limited, the Company is
presently unaware of the occurrence of any event which would result in the
imposition of such limitation. The Company has adopted an amendment to its
Restated Articles of Incorporation which is intended to prevent changes in
ownership of its common stock that would cause such limitation. In addition,
the Company has investment tax credit, job tax credit and alternative minimum
tax credit carryforwards of approximately $7 million. The investment tax
credit and the job tax credit carryforwards expire in years 1997 through 2010.
Tax credit carryforwards can be utilized by the Company only after all net
operating loss carryforwards have been realized. If the improvement in the
Company's results of operations do not continue, a portion of the net operating
loss and tax credit carryforwards could expire prior to utilization, resulting
in a charge against income. Taxable income for the five years ending December
27, 1996 was $66 million. Based on current results of the repositioned
restaurants, the Company currently projects future taxable income levels
sufficient to realize its net operating loss and tax credit carryforwards prior
to their expiration after considering an allowance of $1.1 million for the
estimated expiration of tax credit carryforwards in 1997. However, there can
be no assurance that the levels of taxable income will be sufficient to realize
these benefits.
13
<PAGE> 86
Item 8. Financial Statements and Supplementary Data
SHOWBIZ PIZZA TIME, INC.
YEARS ENDED DECEMBER 27, 1996 DECEMBER 29, 1995
AND DECEMBER 30, 1994
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditors' report . . . . . . . . . . . . . . . 15
Consolidated financial statements:
Consolidated balance sheets . . . . . . . . . . . . . . 16
Consolidated statements of earnings . . . . . . . . . . 17
Consolidated statements of shareholders' equity . . . . 18
Consolidated statements of cash flows . . . . . . . . . 19
Notes to consolidated financial statements . . . . . . 20
</TABLE>
14
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShowBiz Pizza Time, Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheets of ShowBiz Pizza
Time, Inc. and subsidiary as of December 27, 1996 and December 29, 1995, and
the related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended December 27, 1996. 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 ShowBiz Pizza Time, Inc. and
subsidiary as of December 27, 1996 and December 29, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for pre-opening costs in 1994.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 21, 1997
15
<PAGE> 88
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 27, 1996 AND DECEMBER 29, 1995
(THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS DECEMBER 27, DECEMBER 29,
1996 1995
-------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 3,402 $ 5,589
Accounts receivable, including receivables from related parties
of $675 and $415, respectively . . . . . . . . . . . . . . . . . . . 3,543 3,327
Current portion of notes receivable, including receivables from
related parties of $221 and $327, respectively . . . . . . . . . . . 457 608
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,368 3,589
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,185 2,781
Current portion of deferred tax asset . . . . . . . . . . . . . . . . . 13,633 4,147
-------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 27,588 20,041
-------- ---------
Investments in related parties . . . . . . . . . . . . . . . . . . . . . . 1,315 761
--------- ----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 163,998 137,181
------- ---------
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,296 28,582
--------- ---------
Other assets:
Notes receivable, less current portion, including receivables from
related parties of $2,323 and $1,983, respectively . . . . . . . . . 7,257 7,072
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,126 5,373
--------- ---------
11,383 12,445
--------- ---------
$ 216,580 $ 199,010
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . $ 1,785 $ 95
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 31,738 29,836
-------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 33,523 29,931
-------- ---------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 34,668 35,753
-------- ---------
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,795 3,443
-------- ---------
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010 1,391
------- ---------
Commitments and contingencies
Redeemable preferred stock, $60 par value, redeemable for
$2,974 in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,108 2,005
-------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 50,000,000 shares;
21,519,075 and 21,435,092 shares issued, respectively . . . . . . . 2,152 2,144
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 153,795 153,515
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,613 4,733
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . (1,821) (3,642)
Less treasury shares of 3,109,176 at both dates, at cost . . . . . . . . (30,263) (30,263)
----------- ---------
141,476 126,487
---------- ---------
$ 216,580 $ 199,010
========= =========
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 89
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Food and beverage revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $202,624 $182,376 $189,257
Games and merchandise revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 86,444 76,969 74,331
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,675 3,464 4,078
Interest income, including related party income of $246, $222, and $209,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,051 872 688
Joint venture income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 102 161
-------- -------- --------
293,990 263,783 268,515
-------- -------- --------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,381 136,700 137,729
Selling, general and administrative expenses, including related
party expenses of $125 in each year . . . . . . . . . . . . . . . . . . . . . 43,534 44,794 47,263
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 25,057 23,184 26,032
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,476 3,118 1,861
(Gain) loss on property transactions . . . . . . . . . . . . . . . . . . . . . 263 136 (2,597)
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,058 55,476 55,114
-------- -------- --------
271,769 263,408 265,402
-------- -------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,221 375 3,113
Income taxes:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,855 701 869
Deferred (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,145 (389) 1,568
-------- -------- --------
9,000 312 2,437
-------- -------- --------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,221 $ 63 $ 676
======== ========= ========
Earnings per common and common equivalent share:
Primary:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .70 $ (.02) $ .02
======== ========= ========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . 18,477 18,098 18,191
======== ========= ========
Fully diluted:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .70 $ (.02) $ .02
======== ========= ========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . 18,532 18,098 18,191
======== ========= ========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 90
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON TREASURY
STOCK CAPITAL IN DEFERRED STOCK
------------------ EXCESS OF RETAINED COMPEN- -------------
SHARES PAR VALUE PAR VALUE EARNINGS SATION SHARES COST
------ --------- ----------- -------- ---------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 . . . . . . . . 21,425 $ 2,143 $156,511 $ 4,677 $ (9,934) 1,569 $(16,750)
Net income . . . . . . . . . . . . . . . 676
Redeemable preferred stock accretion . . (103)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . 81 8 232
Tax benefit from exercise of stock options
and stock grants . . . . . . . . . . (928)
Treasury stock acquired . . . . . . . . 1,540 (13,513)
Amortization of deferred compensation . 2,734
------- -------- ---------- ---------- ------- ------- --------
Balances, December 30, 1994 . . . . . . . . 21,506 2,151 155,815 5,012 (7,200) 3,109 (30,263)
Net income . . . . . . . . . . . . . . . 63
Redeemable preferred stock accretion . . (104)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . 19 2 88
Stock grant shares forfeited . . . . . . (90) (9) (1,734) 1,737
Tax benefit from exercise of stock options
and stock grants . . . . . . . . . . (654)
Amortization of deferred compensation . 1,821
------- -------- ---------- ---------- ------- ------- --------
Balances, December 29, 1995 . . . . . . . . 21,435 2,144 153,515 4,733 (3,642) 3,109 (30,263)
Net income . . . . . . . . . . . . . . . 13,221
Redeemable preferred stock accretion . . (103)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . 77 7 930
Tax benefit from exercise of stock options
and stock grants . . . . . . . . . . (655)
Amortization of deferred compensation . 1,821
Stock issued under 401(k) plan . . . . . 8 1 51
Stock split costs . . . . . . . . . . . (30)
Cancellation of fractional shares . . . (1) (16)
------- ---------- --------------------- --------- ------- --------
Balances, December 27, 1996 . . . . . . . . 21,519 $ 2,152 $153,795 $ 17,613 $(1,821) 3,109 $(30,263)
======= ======= ======== ======== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 91
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
(THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,221 $ 63 $ 676
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . 25,057 23,184 26,032
Deferred income tax expense (benefit) . . . . . . . . . . . . . 6,145 (389) 1,568
(Gain) loss on property transactions . . . . . . . . . . . . . . 263 136 (2,597)
Compensation expense under stock grant plan . . . . . . . . . . 1,821 1,821 2,734
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 418 619
Net change in receivables, inventories, prepaids, payables and
accrued liabilities . . . . . . . . . . . . . . . . . . . . . 1,503 2,577 1,787
--------- -------- --------
Cash provided by operations . . . . . . . . . . . . . . . . . 48,362 27,810 30,819
-------- -------- --------
Investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . (51,719) (28,277) (29,421)
Proceeds from disposition of property and equipment . . . . . . . . 20 6,725
Payments received on notes receivable . . . . . . . . . . . . . . . 3,534 2,503 2,992
Additions to notes receivable . . . . . . . . . . . . . . . . . . . (3,568) (3,047) (2,169)
Change in investments and other assets . . . . . . . . . . . . . . (115) (1,747) (703)
--------- ------- --------
Cash used in investing activities . . . . . . . . . . . . . . . (51,868) (30,548) (22,576)
-------- ------- --------
Financing activities:
Proceeds from line of credit . . . . . . . . . . . . . . . . . . . 7,600 38,895 8,535
Payments on line of credit . . . . . . . . . . . . . . . . . . . . (6,900) (32,995) (5,235)
Reduction of debt and capital lease obligations . . . . . . . . . . (95) (59) (47)
Redeemable preferred stock dividends . . . . . . . . . . . . . . . (238) (238) (238)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . (13,513)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . 937 90 240
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 253 (115)
------- -------- --------
Cash provided by (used in) financing activities . . . . . . . . 1,319 5,946 (10,373)
------ --------- --------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . (2,187) 3,208 (2,130)
Cash and cash equivalents, beginning of year . . . . . . . . . . . . 5,589 2,381 4,511
------- --------- --------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . $ 3,402 $ 5,589 $ 2,381
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 92
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations:
ShowBiz Pizza Time, Inc. (the "Company") operates and franchises family
restaurant entertainment centers as Chuck E. Cheese's restaurants, and
through BHC Acquisition Corporation ("BAC"), its wholly owned subsidiary,
also operated Monterey's Tex-Mex Cafe restaurants. The Monterey's Tex-Mex
Cafe restaurants were sold effective May 5, 1994.
Fiscal year:
The Company's fiscal year is 52 or 53 weeks and ends on the Friday
nearest December 31. References to 1996, 1995 and 1994 are for the fiscal
years ended December 27, 1996, December 29, 1995 and December 30, 1994,
respectively. Fiscal years 1996, 1995 and 1994 were each 52 weeks in
length.
Basis of consolidation:
The consolidated financial statements include the accounts of the
Company and BAC. All significant intercompany accounts and transactions
have been eliminated.
Cash and cash equivalents:
Cash and cash equivalents of the Company are composed of demand
deposits with banks and short-term cash investments with remaining
maturities of three months or less from the date of purchase by the
Company.
Inventories:
Inventories of food, paper products and supplies are stated at the
lower of cost or market on a first-in, first- out basis.
Property and equipment, depreciation and amortization:
Property and equipment are stated at cost. Depreciation and
amortization are provided by charges to operations over the estimated
useful lives of the assets, or the lease term if less, by the straight-line
method. During the first quarter of 1995, the Company changed its estimate
of the useful lives of certain fixed assets. As a result of this change,
income before income taxes increased approximately $2.3 million, net income
increased approximately $1.4 million and earnings per share increased
approximately $.12 in 1995.
Deferred charges and related amortization:
In the fourth quarter of 1994, the Company revised its estimate of the
future benefit for preopening expenses. As a result, the Company expensed
all unamortized preopening expenses of approximately $900,000. The Company
now expenses all preopening expenses as incurred. Previously, preopening
expenses were amortized over a two year period. Other deferred charges are
amortized over various periods of up to five years. All amortization is
provided by the straight-line method, which approximates the interest
method.
20
<PAGE> 93
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Franchise fees and royalties:
The Company recognizes initial franchise fees upon fulfillment of all
significant obligations to the franchisee. Royalties from franchisees are
accrued as earned.
Impairment of intangibles and long-lived assets:
Impairment losses are recognized if the future cash flows expected to
be generated by intangibles and long-lived assets are less than the
carrying value of the assets. The impairment loss is equal to the amount
by which the carrying value of the assets exceeds the fair value of the
assets.
Use of estimates and assumptions:
The preparation of financial statements 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 those
estimates.
Accounting for stock-based compensation:
The Company has elected to not apply the accounting provisions of the
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" issued by the Financial Accounting Standards
Board ("SFAS 123") . In 1996, the Company implemented the disclosure
provisions of SFAS 123 (Note 19).
Earnings per share:
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" effective for
years ending after December 15, 1997. The Company does not believe that
adoption will have a material impact on historical earnings per share.
2. SIGNIFICANT TRANSACTIONS:
In September 1996, the Company purchased from its largest franchisee 19
restaurants plus the 49% minority interest of one restaurant previously
operated as a joint venture by the Company and seller. In addition to the
cash purchase price of $2.6 million, the Company reimbursed the seller for
remodeling costs for three restaurants which had been recently remodeled.
The Company assumed no liabilities under the asset purchase. Results of
operations for the assets purchased are included in the Company's results
from the date of this acquisition.
Effective May 5, 1994, the Company sold its Monterey's Tex-Mex Cafe
restaurants for an aggregate purchase price consisting of approximately
$6.7 million in cash, $4.7 million in subordinated promissory notes and the
retention of a 12 1/2% equity interest in the acquiring company. Due to
the Company's substantial equity interest, the acquiring company is a
related party subsequent to the transaction. Revenues from the Company's
Monterey's Tex-Mex Cafe restaurants were $6.5 million in 1994. Income
before income taxes was $6.3 million in 1994 including a gain of $5.5
million from the sale.
21
<PAGE> 94
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
2. SIGNIFICANT TRANSACTIONS (CONTINUED):
The Company provided for a loss of approximately $2.3 million in 1994
as a result of the Company's decision to close one Chuck E. Cheese's
restaurant and the impairment in fair value of the fixed assets of 10 Chuck
E. Cheese's restaurants. The impairment in fair value of the 10
restaurants was due to the Company's decision not to renew the leases as a
result of the deterioration of site characteristics or the inability to
renew the leases at acceptable rental terms.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
1996 1995
-------- ---------
(THOUSANDS)
<S> <C> <C>
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 538 $ 516
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,025 2,886
------ ------
3,563 3,402
Less allowance for doubtful collection . . . . . . . . . . . . . . . . . . . . . (20) (75)
------- -------
$ 3,543 $ 3,327
======= =======
</TABLE>
4. NOTES RECEIVABLE:
The Company's notes receivable at December 27, 1996 and December 29,
1995 arose principally as a result of the sale of restaurants, lines of
credit established with the International Association of ShowBiz Pizza Time
Restaurants, Inc., a related party (Note 18), and advances to franchisees,
joint ventures and managed properties. All obligors under the notes
receivable are principally engaged in the restaurant industry. The notes
have various terms, but most are payable in monthly installments of
principal and interest through 2001, with interest rates ranging from 7.5%
to 12.0%. The notes are generally collateralized by the related property
and equipment. Balances of notes receivable are net of an allowance for
doubtful collection of $174,000 and $354,000 at December 27, 1996 and
December 29, 1995, respectively.
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED
LIVES 1996 1995
----------- -------- --------
(IN YEARS) (THOUSANDS)
<S> <C> <C> <C>
Land and improvements . . . . . . . . . . . . . . . . . . . . 0 - 20 $ 5,208 $ 4,630
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 4 - 20 135,201 118,041
Buildings and improvements . . . . . . . . . . . . . . . . . . 4 - 25 9,161 8,789
Furniture, fixtures and equipment . . . . . . . . . . . . . . 2 - 15 120,688 97,703
Property leased under capital leases (Note 7) . . . . . . . . 10 - 15 1,328 1,328
-------- ----------
271,586 230,491
Less accumulated depreciation and amortization . . . . . . . . (108,345) (94,781)
--------- ---------
163,241 135,710
Construction in progress . . . . . . . . . . . . . . . . . . . 757 1,471
----------- ----------
$ 163,998 $ 137,181
========= =========
</TABLE>
22
<PAGE> 95
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
1996 1995
------- -------
(THOUSANDS)
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,240 $ 12,851
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,292 4,215
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,714 8,805
Taxes, other than income . . . . . . . . . . . . . . . . . . . . . . . . 3,037 2,561
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,455 1,404
-------- --------
$ 31,738 $ 29,836
======== ========
</TABLE>
7. LEASES:
The Company leases certain restaurants and related property and
equipment under operating and capital leases. All leases require the
Company to pay property taxes, insurance and maintenance of the leased
assets. The leases generally have initial terms of 7 to 30 years with
various renewal options.
Following is a summary of property leased under capital leases:
<TABLE>
<CAPTION>
1996 1995
------ ------
(THOUSANDS)
<S> <C> <C>
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . $ 1,328 $ 1,328
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . (982) (877)
------- -------
$ 346 $ 451
======= =======
</TABLE>
Scheduled annual maturities of the obligations for capital and
operating leases as of December 27, 1996, are as follows:
<TABLE>
<CAPTION>
YEARS CAPITAL OPERATING
--------- ------- ---------
(THOUSANDS)
<S> <C> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 292 $ 28,270
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 26,419
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 24,731
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 23,073
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 20,348
2002-2009 (aggregate payments) . . . . . . . . . . . . . . . . . . . . . . . . 838 27,076
-------- --------
Minimum future lease payments 1,971 $149,917
========
Less amounts representing interest . . . . . . . . . . . . . . . . . . . . . . (918)
-------
Present value of future minimum lease payments . . . . . . . . . . . . . . . . 1,053
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (117)
-------
$ 936
=======
</TABLE>
23
<PAGE> 96
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996
DECEMBER 29, 1995 AND DECEMBER 30, 1994
7. LEASES (CONTINUED):
Certain of the Company's real estate leases, both capital and
operating, require payment of contingent rent in the event defined revenues
exceed specified levels.
The Company's rent expense is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . $30,484 $28,730 $28,003
Contingent . . . . . . . . . . . . . . . . . . . . . . . . 195 146 216
--------- ------- -------
$30,679 $28,876 $28,219
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
8. LONG-TERM DEBT:
1996 1995
--------- ---------
(THOUSANDS)
<S> <C> <C>
Term loans, 10.02%, due June 2001 . . . . . . . . . . . . . . . . . . . . . . $ 18,000 $ 18,000
Term loans, LIBOR plus 3.5%, due June 2000 . . . . . . . . . . . . . . . . . . 10,000 10,000
Term loans, LIBOR plus 3.5%, due October 1997 . . . . . . . . . . . . . . . . 5,000
Revolving bank loan, prime plus 0% to .5% or LIBOR plus 2% to 3%,
due June 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,400 1,700
Obligations under capital leases (Note 7) . . . . . . . . . . . . . . . . . . 1,053 1,148
--------- ---------
36,453 35,848
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,785) (95)
--------- ---------
$ 34,668 $ 35,753
======== =========
</TABLE>
In August 1996, the Company's line of credit agreement was amended to
provide the Company with available borrowings of up to $15 million expiring
in June 1998. In September 1996, the Company prepaid $5 million in term
notes. The Company's credit facility totals $43 million, which consists of
$28 million in term notes and the $15 million line of credit. Interest
under the line of credit is dependent on earnings and debt levels of the
Company. Currently, any borrowings under this line of credit would be at
prime (8.25% at December 27, 1996) plus 0% or, at LIBOR (5.5% at December
27, 1996) plus 2%. At December 27, 1996, $7.4 million was outstanding
under the line of credit. A 3/8% commitment fee is payable on any unused
credit line. The Company is required to comply with certain financial
ratio tests during the terms of the loan agreements.
24
<PAGE> 97
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
8. LONG-TERM DEBT (CONTINUED):
As of December 27, 1996, scheduled annual maturities of all long-term
debt (exclusive of obligations under capital leases) are as follows
(thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
------ ------
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . $ 1,668
1998 . . . . . . . . . . . . . . . . . . . . . . 10,732
1999 . . . . . . . . . . . . . . . . . . . . . . 9,333
2000 . . . . . . . . . . . . . . . . . . . . . . 7,667
2001 . . . . . . . . . . . . . . . . . . . . . 6,000
---------
$35,400
========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES:
The Company has guaranteed certain obligations related to restaurant
building and equipment leases. The underlying assets are collateral for
the leases and the makers or assignees of all of the obligations are
required to perform thereunder before the Company is required to fulfill
its guarantee. In the event of default by the maker or assignee, the
Company, in almost all cases, may make payment under the guarantees in
accordance with the original payment schedule and has the right to locate
potential buyers or subtenants for the assets. As of December 27, 1996,
such guarantees aggregated approximately $142,000.
10. LITIGATION:
From time to time the Company is involved in litigation, most of which
is incidental to its business. In the Company's opinion, no litigation to
which the Company currently is a party is likely to have a material adverse
effect on the Company's results of operations, financial condition or cash
flows.
11. REDEEMABLE PREFERRED STOCK:
As of December 27, 1996, the Company had 49,570 shares of its
redeemable preferred stock authorized and outstanding. The stock pays
dividends at $4.80 per year, subject to a minimum cash flow test. As of
December 27, 1996, one quarterly dividend, totaling $59,484 or $1.20 per
share, was accrued but not yet paid. The redeemable preferred stock has
been recorded at the net present value and is being accreted on the
straight-line basis. The Company's restated articles of incorporation
provide for the redemption of such shares at $60 per share in 2005.
During the continuation of any event of default by the Company, the
preferred shareholders shall be able to elect a majority of the directors
of the Company.
25
<PAGE> 98
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
12. EARNINGS PER COMMON SHARE:
Earnings per common and common equivalent share were computed based on
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Net income available per common share has
been adjusted for the items indicated.
Earnings per common and common equivalent share (adjusted for a
three-for-two stock split effected May 22, 1996) were computed as follows
(thousands, except per share data):
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,221 $ 63 $ 676
Accretion of redeemable preferred stock . . . . . . . . . . . . . . . . (103) (104) (103)
Redeemable preferred stock dividends . . . . . . . . . . . . . . . . . . (238) (238) (238)
------- ------ --------
Adjusted income (loss) applicable to common shares . . . . . . . . . . . $ 12,880 $ (279) $ 335
======== ====== =======
Primary:
Weighted average common shares outstanding . . . . . . . . . . . . . 18,207 18,098 18,117
Common equivalent shares for stock options . . . . . . . . . . . . . 270 74
-------- --------- --------
Weighted average shares outstanding . . . . . . . . . . . . . . . . 18,477 18,098 18,191
======== ======= =======
Earnings (loss) per common and common equivalent share . . . . . . . $ .70 $ ( .02) $ .02
========= ======= ========
Fully Diluted:
Weighted average common shares outstanding . . . . . . . . . . . . . 18,207 18,098 18,117
Common equivalent shares for stock options . . . . . . . . . . . . . 325 74
-------- --------- --------
Weighted average shares outstanding . . . . . . . . . . . . . . . . 18,532 18,098 18,191
======== ======= =======
Earnings (loss) per common and common equivalent share . . . . . . . $ .70 $ (.02) $ .02
========== ======= ========
</TABLE>
13. FRANCHISE FEES AND ROYALTIES:
At December 27, 1996, 70 Chuck E. Cheese's restaurants were operated by
a total of 44 different franchisees. The standard franchise agreements
grant to the franchisee the right to develop and operate a restaurant and
use the associated trade names, trademarks and service marks within the
standards and guidelines established by the Company.
Initial franchise fees included in revenues were $274,000, $98,000, and
$315,000 in 1996, 1995 and 1994, respectively.
14. COST OF SALES:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Food, beverage and related supplies . . . . . . . . . . . . . . $ 45,681 $ 43,412 $ 46,328
Games and merchandise . . . . . . . . . . . . . . . . . . . . . 14,816 13,285 12,369
Labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,884 80,003 79,032
---------- ------- -------
$ 143,381 $136,700 $137,729
========= ======== ========
</TABLE>
26
<PAGE> 99
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
15. INCOME TAXES:
The significant components of income tax expense are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,855 $ 701 $ 869
Deferred expense:
Utilization of operating loss carryforwards . . . . . . . . . . . . 8,664 1,138 2,204
Net tax benefits from exercise of stock
options and stock grants . . . . . . . . . . . . . . . . . . . . . (655) (654) (928)
Allowance for tax credit carryforwards expiring in 1997 . . . . . . 1,104
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . (475) (127) (237)
Other (primarily temporary differences related to depreciation) . . (1,389) (746) (575)
-------- -------- ---------
$ 9,000 $ 312 $ 2,437
======= ======= =======
</TABLE>
At December 27, 1996, the Company has recorded a deferred tax asset of
approximately $26.0 million reflecting the $17.5 million tax effect of
$47.0 million in net operating loss carryforwards, $7.7 million in tax
credit carryforwards and tax effected net taxable deductions of $800,000.
Realization of the deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of these carryforwards. Tax credit
carryforwards can be utilized only after all net operating loss
carryforwards have been realized. In 1994, the Company recorded a valuation
allowance of $1.1 million for tax credit carryforwards which are estimated
to expire in 1997. Although realization is not assured, the Company
believes it is more likely than not that the deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable could
be reduced in the near term if estimates of future taxable income are
reduced.
As of December 27, 1996, the Company has investment tax credit and jobs
tax credit carryforwards totaling $5,258,000 and $548,000, respectively,
and alternative minimum tax credits of $1,928,000.
A schedule of expiring NOL's and tax credits by fiscal year are as
follows:
<TABLE>
<CAPTION>
AMOUNT
-----------------
YEARS NOL'S TAX CREDITS
--------- ----- -----------
(THOUSANDS)
<S> <C> <C>
1997 . . . . . . . . . . . . . . . . . . $ 1,104
1998 . . . . . . . . . . . . . . . . . . 4,007
1999 . . . . . . . . . . . . . . . . . . $14,000 395
2000 . . . . . . . . . . . . . . . . . . 19,000 149
2001 . . . . . . . . . . . . . . . . . . 14,000 19
2002 - 2010 . . . . . . . . . . . . . . 132
-------- ----------
$47,000 $ 5,806
======= ========
</TABLE>
The Company's alternative minimum tax credits have no expiration date.
27
<PAGE> 100
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
15. INCOME TAXES (CONTINUED):
Current tax laws and regulations relating to substantial changes in
control may limit the utilization of net operating loss and tax credit
carryforwards in any one year. As of December 27, 1996, no limitation of
such carryforwards has occurred.
A reconciliation of the statutory rate to taxes provided is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 34.0% 34.0%
State income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 9.0% 106.1% 14.8%
Allowance for tax credit carryforwards . . . . . . . . . . . . . . . 35.5%
Tax credits earned . . . . . . . . . . . . . . . . . . . . . . . . . (2.1%) (33.9%) (6.9%)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.4%) (23.0%) .9%
--------- ------- -------
Income taxes provided . . . . . . . . . . . . . . . . . . . . . . . 40.5% 83.2% 78.3%
======= ======= =======
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company has certain financial instruments consisting primarily of
cash, cash equivalents, notes receivable, notes payable and redeemable
preferred stock. The carrying amount of cash and cash equivalents
approximates fair value because of the short maturity of those instruments.
The carrying amount of the Company's notes receivable and long-term debt
approximates fair value based on the interest rates charged on instruments
with similar terms and risks. The estimated fair value of the Company's
redeemable preferred stock is $3.0 million.
17. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,429 $ 3,055 $ 1,781
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,222 801 1,389
Supplemental schedule of noncash investing and financing activities:
Notes received in connection with the disposition of property and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,650
Investment received in connection with the disposition of
property and equipment . . . . . . . . . . . . . . . . . . . . . . 438
Notes and accounts receivable canceled in connection with the
acquisition of property and equipment . . . . . . . . . . . . . . 483
</TABLE>
28
<PAGE> 101
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
18. RELATED PARTY TRANSACTIONS:
The Hallwood Group, Incorporated ("Hallwood") is the beneficial owner
of approximately 2.6 million shares or 14.2% of the outstanding common
stock of the Company. The directors of Hallwood serve as a majority of the
directors of the Company. In February 1997, the Company announced a public
offering of 3.2 million shares of common stock to be sold by Hallwood and
certain of its affiliates. The selling stockholders have also granted
underwriters an option to purchase an additional 454,746 shares of common
stock to cover over allotments, if any. All of the 2.6 million shares
owned by Hallwood is offered for sale in the public offering and over
allotment option. It is anticipated that after the closing of the public
offering, the directors of Hallwood will resign as directors of the
Company. The Company will not receive any proceeds from the proposed sale
of shares by the selling stockholders.
The Company made annual payments to Hallwood of $125,000 for
consulting services in 1996, 1995 and 1994. The consulting agreement will
be terminated upon the closing of the public offering. In consideration
for rent reductions resulting from Hallwood's negotiation of the Company's
home office lease agreement in December 1990, the Company assigned to
Hallwood its sublease interest in the home office building with a fair
value of approximately $120,000 per year.
The Company has advanced amounts to joint ventures in which the
Company has a 50% interest or less. At December 27, 1996, approximately
$757,000 was outstanding under these notes. Principal and interest are
payable in monthly installments, with interest at various rates from prime
to 12%. The Company also has miscellaneous accounts receivable from joint
ventures of approximately $669,000 and $410,000 at December 27, 1996 and
December 29, 1995, respectively.
The Company has granted three separate operating lines of credit to
the International Association of ShowBiz Pizza Time Restaurants, Inc. (the
"Association"). In December 1996, the lines were renewed to provide the
Association with available borrowings of $2.5 million at 10.5% interest
and are due December 31, 1997. The Association develops entertainment
attractions and produces system wide advertising. Two officers of the
Association are also officers of the Company. At December 27, 1996,
approximately $1,787,000 was outstanding under these lines of credit. The
Company also had miscellaneous accounts receivable from the Association of
$6,000 and $5,000 at December 27, 1996 and December 29, 1995,
respectively.
19. EMPLOYEE BENEFIT PLANS:
The Company has employee benefit plans that include: a) executive
bonus compensation plans based on the performance of the Company; b)
non-statutory stock option plans for its employees and non-employee
directors; c) a stock grant plan and d) a retirement and savings plan.
In 1995, the Company increased the number of shares of the Company's
common stock which may be issued under its employee stock option plan by
750,000 shares to an aggregate of 2,772,038 shares. All shares must be
granted before December 31, 1998. The exercise price for options granted
under the plan may not be less than the fair market value of the Company's
common stock at date of grant. Options may not be exercised until the
employee has been continuously employed at least one year after the date
of grant. Options which expire or terminate may be re-granted under the
plan.
29
<PAGE> 102
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
19. EMPLOYEE BENEFIT PLANS (CONTINUED):
In 1995, the Company adopted a stock option plan for its non-employee
directors. The number of shares of the Company's common stock that may be
issued under this plan cannot exceed 150,000 shares.
At December 27, 1996, there were 810,515 shares available for grant.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE PER SHARE
---------------------------- ------------------------
1996 1995 1994 1996 1995 1994
--------- ------- ------ ----- ------ ----
<S> <C> <C> <C>
Options outstanding, beginning of year 848,942 759,953 558,993 $9.08 $10.92 $15.08
Granted . . . . . . . . . . 276,734 391,860 512,250 8.39 6.08 8.10
Exercised . . . . . . . . . . (77,495) (19,239) (77,570) 12.10 4.70 2.92
Terminated . . . . . . . . . (37,670) (283,632) (233,720) 11.01 10.17 17.60
----------- --------- ---------
Options outstanding, end of year 1,010,511 848,942 759,953 8.58 9.08 10.92
=========== ======== ========
</TABLE>
All stock options are granted at fair market value of the common stock
at the grant date. The estimated fair value of options granted during 1996
was $3.08 per share. The fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1996:
risk free interest rate of 6.5%; no dividend yield; expected lives of four
years; and expected volatility of 40%. Stock options expire five years
from the grant date. Stock options vest over various periods ranging from
one to four years. The number of stock option shares exercisable at
December 27, 1996 was 430,794. These stock options have exercise prices
ranging from $5.29 to $22.33 per share and have a weighted average exercise
price of $10.56 per share. In January 1997, the Company granted 789,933
additional options at exercise prices of $17.25 to $17.65 per share.
The number of shares of the Company's common stock which may be awarded
to senior executives of the Company under the Stock Grant Plan is 1,718,637
shares. No grants were awarded in 1996, 1995 or 1994. In connection with
an employment agreement effective January 1998, the Company granted
105,000 shares in January 1997. Compensation expense recognized by the
Company pursuant to this plan was $1,821,000, $1,821,000 and $2,734,000 in
1996, 1995 and 1994, respectively. All shares vest over periods ranging
from 3 years to 6 years and are subject to forfeiture upon termination of
the participant's employment by the Company. The shares are
nontransferable during the vesting periods.
As a result of shares awarded to the Company's Chairman of the Board
and Chief Executive Officer, the Company recognized deferred compensation
of $12.0 million in 1993. In 1995, the Company's Chairman of the Board and
Chief Executive Officer forfeited 90,000 shares of unvested common stock of
the Company previously awarded to him under the Company's stock grant plan.
As a result of this forfeiture, deferred compensation and capital in excess
of par value were reduced by approximately $1.7 million. The deferred
compensation is amortized over the compensated periods of service through
1997.
30
<PAGE> 103
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 27, 1996,
DECEMBER 29, 1995 AND DECEMBER 30, 1994
19. EMPLOYEE BENEFIT PLANS (CONTINUED):
The Company applies the provisions of APB Opinion 25 and related
Interpretations in accounting for its employee benefit plans. Accordingly,
no compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock -based compensation plans been
determined based on the fair value at the grant date for awards under those
plans consistent with the method prescribed by SFAS 123, the Company's
proforma net income would have been $12.8 million in 1996 and a net loss of
$154,000 in 1995. Proforma earnings per share would have been $.67 per
share in 1996 and a loss of $.03 per share in 1995.
The Company has adopted the ShowBiz 401(k) Retirement and Savings Plan,
to which it may at its discretion make an annual contribution out of its
current or accumulated earnings. Contributions by the Company may be made
in the form of its common stock or in cash. In 1996, the Company made
contributions of approximately $37,000 and $15,000 in common stock for the
1995 and 1994 plan years, respectively. The Company plans to contribute
$59,000 in common stock for the 1996 plan year.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations
for the years ended December 27, 1996 and December 29, 1995 (thousands,
except per share data).
<TABLE>
<CAPTION>
Fiscal year ended December 27, 1996
----------------------------------------------
March 29 June 28 Sept. 27 Dec. 27
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $ 78,452 $ 69,848 $ 74,777 $ 70,913
Income before income taxes . . . . . . . . . . 8,771 3,840 5,993 3,617
Net income . . . . . . . . . . . . . . . . . 5,175 2,265 3,537 2,244
Per Share:
Primary and fully diluted:
Net income . . . . . . . . . . . . . . . . $ 0.28 $ 0.12 $ 0.19 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended December 29, 1995
----------------------------------------------
March 31 June 30 Sept. 29 Dec. 29
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $ 72,751 $ 62,643 $ 66,976 $ 61,413
Income (loss) before income taxes . . . . . . 4,266 (1,963) 287 (2,215)
Net income (loss) . . . . . . . . . . . . . . 2,565 (1,180) 61 (1,383)
Per Share:
Primary and fully diluted:
Net income (loss) . . . . . . . . . . . . $ .14 $ (.07) $ .00 $ (.08)
</TABLE>
31
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShowBiz Pizza Time, Inc.
Irving, Texas
We have audited the consolidated financial statements of ShowBiz Pizza Time,
Inc. and subsidiary as of December 27, 1996, and December 29, 1995, and for
each of the three years in the period ended December 27, 1996, and have issued
our report thereon dated February 21, 1997; such report which expresses an
unqualified opinion and includes an explanatory paragraph relating to the
change in the method of accounting.discloses a change in the method of
accounting for preopening expenses in 1994, is included elsewhere in this Form
10-K. Our audits also included the consolidated financial statement schedule
of ShowBiz Pizza Time, Inc. and subsidiary, listed in Item 14. This
consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 21, 1997
32
<PAGE> 105
SCHEDULE II
SHOWBIZ PIZZA TIME, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------------------------------------
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
=========================================================================================================================
(THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Years ended:
December 27, 1996 . . . $ 75 $ 55 (A) $ 20
========= ======= ========
December 29, 1995 . . . $ 475 $ 400 (A) $ 75
======== ======= ========
December 30, 1994 . . . $ 266 $ 209 $ 475
======== ======= =======
Reserve for uncollectible notes receivable:
Years ended:
December 27, 1996 . . . $ 354 $ 180 (B) $ 174
======= ======= ======
December 29, 1995 . . . $ 139 $ 215 $ 354
======= ======= ======
December 30, 1994 . . . $ 139 $ 139
======= =======
</TABLE>
________________
(A) Settlement of previously reserved accounts.
(B) Adjustment to notes receivable reserve.
33
<PAGE> 106
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
P A R T I I I
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item regarding the directors and
executive officers of the Company shall be included in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1997 annual meeting of stockholders and is incorporated herein by
reference thereto.
Item 11. Executive Compensation.
The information required by this Item regarding the directors and
executive officers of the Company shall be included in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1997 annual meeting of stockholders and is incorporated herein by
reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item shall be included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with Company's 1997 annual meeting of stockholders and is incorporated herein
by reference thereto.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item shall be included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's 1997 annual meeting of stockholders and is incorporated
herein by reference thereto.
P A R T I V
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) Financial Statements and Supplementary Data:
Independent auditors' report.
ShowBiz Pizza Time, Inc. consolidated financial statements:
Consolidated balance sheets as of December 27, 1996 and
December 29, 1995.
Consolidated statements of earnings for the years ended
December 27, 1996, December 29, 1995, and December 30, 1994.
Consolidated statements of shareholders' equity for the years
ended December 27, 1996, December 29, 1995, and December 30,
1994.
Consolidated statements of cash flows for the years ended
December 27, 1996, December 29, 1995, and December 30, 1994.
Notes to consolidated financial statements.
(2) Financial Statement Schedules:
ShowBiz Pizza Time, Inc.
II --- Valuation and qualifying accounts and reserves.
34
<PAGE> 107
(3) Exhibits:
Number Description
- ------ -----------
3(a) Restated Articles of Incorporation of the Company, dated November
26, 1996 (filed as Exhibit 3.1 to the Company's Registration
Statement on Form S-3 (No. 333-22229) and incorporated herein by
reference).
3(b) Restated Bylaws of the Company, dated August 16, 1994 (filed as
Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994, and incorporated herein by
reference).
3(c) Amendment to the Bylaws, dated May 5, 1995 (filed as Exhibit 3 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, and incorporated herein by reference).
4(a) Specimen form of certificate representing $.10 par value Common
Stock (filed as Exhibit 4(a) to the Company's Annual Report on
Form 10-K for the year ended December 28, 1990, and incorporated
herein by reference).
4(b) Specimen form of certificate representing $60 par value Class A
Preferred Stock (filed as Exhibit 4(b) to the Company's Annual
Report on Form 10-K for the year ended December 28, 1990, and
incorporated herein by reference).
10(a)(1) Amended and Restated Employment Agreement dated April 14, 1993,
between the Company and Richard M. Frank (filed as Exhibit
10(a)(8) to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 2, 1993, and incorporated herein by
reference).
10(a)(2) Amendment No. 1 to the Amended and Restated Employment Agreement
dated July 19, 1996, between the Company and Richard M. Frank.
10(b)(1) Consulting Agreement dated January 5, 1989 between the Company
and Richard M. Frank (filed as Exhibit 10(a)(5) to the Company's
Annual Report on Form 10-K for the year ended December 27, 1991,
and incorporated herein by reference).
10(b)(2) Amendment to Consulting Agreement dated January 29, 1992,
amending the Consulting Agreement dated January 5, 1989 between
the Company and Richard M. Frank (filed as Exhibit 10(a)(6) to
the Company's Annual Report on Form 10-K for the year ended
December 27, 1991, and incorporated herein by reference).
10(c)(1) Stock Grant Trust Agreement dated January 29, 1992, among the
Company, Richard M. Frank, Ronald F. Saupe and Kevin J. Shepherd
(filed as Exhibit 10(a)(7) to the Company's Annual Report on Form
10-K for the year ended December 27, 1991, and incorporated
herein by reference).
10(d) Employment Agreement dated January 4, 1994, between the Company
and Michael H. Magusiak (filed as Exhibit 10(b) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993,
and incorporated herein by reference).
10(e) Financial and Management Consulting Services Agreement between
the Company and The Hallwood Group Incorporated (filed as Exhibit
10(I) to the Company's Annual Report on Form 10-K for the year
ended December 30, 1988, and incorporated herein by reference).
10(f) Stock Purchase and Registration Agreement dated as of May 5,
1992, among the Company, The Hallwood Group Incorporated and
certain shareholders of the Company (filed as Exhibit 28 to the
Company's Registration Statement on Form S-3 (No. 33-48307) and
incorporated herein by reference).
35
<PAGE> 108
10(g) Note Purchase Agreement dated June 15, 1995, between Allstate
Life Insurance Company, Connecticut Mutual Life Insurance
Company, C M Life Insurance Company, MassMutual Corporate Value
Partners Limited, Massachusetts Mutual Life Insurance Company,
Modern Woodmen of America, and the Company (filed as Exhibit 10
(a)(1) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by
reference).
10(h) 10.02% Series A Senior Note Due 2001, in the stated amount of
$10,000,000.00, dated June 15, 1995, between Allstate Life
Insurance Company and the Company (filed as Exhibit 10 (b)(1) to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, and incorporated herein by reference).
10(i)(1) 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between Connecticut Mutual
Life Insurance Company and the Company (filed as Exhibit 10
(c)(1) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by
reference).
10(i)(2) 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between Connecticut Mutual
Life Insurance Company and the Company (filed as Exhibit 10
(c)(2) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by
reference).
10(i)(3) 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between Connecticut Mutual
Life Insurance Company and the Company (filed as Exhibit 10
(c)(3) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by
reference).
10(j)(1) 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between C M Life Insurance
Company and the Company (filed as Exhibit 10 (d)(1) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, and incorporated herein by reference).
10(j)(2) 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between C M Life Insurance
Company and the Company (filed as Exhibit 10 (d)(2) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995, and incorporated herein by reference).
10(k)(1) Floating Rate Series B Senior Note Due 2000, in the stated
amount of $2,000,000.00, dated June 15, 1995, between
Massachusetts Mutual Life Insurance Company and the Company
(filed as Exhibit 10 (e)(1) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, and incorporated
herein by reference).
10(k)(2) Floating Rate Series B Senior Note Due 2000, in the stated
amount of $2,000,000.00, dated June 15, 1995, between
Massachusetts Mutual Life Insurance Company and the Company
(filed as Exhibit 10 (e)(2) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, and incorporated
herein by reference).
10(k)(3) Floating Rate Series B Senior Note Due 2000, in the stated
amount of $2,000,000.00, dated June 15, 1995, between
Massachusetts Mutual Life Insurance Company and the Company
(filed as Exhibit 10 (e)(3) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, and incorporated
herein by reference).
10(l) Floating Rate Series B Senior Note Due 2000, in the stated
amount of $4,000,000.00, dated June 15, 1995, between MassMutual
Corporate Value Partners Limited (I/N/O Webell & Co.) and the
Company (filed as Exhibit 10 (f)(1) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995, and
incorporated herein by reference).
36
<PAGE> 109
10(m) Floating Rate Series A Senior Note Due 2001, in the stated amount
of $3,000,000.00, dated June 15, 1995, between Modern Woodmen of
America and the Company (filed as Exhibit 10 (g)(1) to the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995, and incorporated herein by reference).
10(n)(1) Loan Agreement in the stated amount of $5,000,000.00, dated June
27, 1995, between Bank One, Texas, N.A. and the Company (filed
as Exhibit 10 (h)(1) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995, and incorporated herein
by reference).
10(n)(2) Revolving Credit Note in the stated amount of $5,000,000, dated
June 27, 1995, between Bank One, Texas, N.A. and the Company
(filed as Exhibit 10 (h)(2) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995, and incorporated
herein by reference).
10(o)(1) Loan Agreement in the stated amount of $2,000,000.00, dated
January 18, 1996, between Bank One, Texas, N.A. and the Company
(filed as Exhibit 10 (e)(1) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1996, and incorporated
herein by reference).
10(o)(2) Promissory Note in the stated amount of $2,000,000.00, dated
January 18,1996, between Bank One, Texas, N.A. and the Company
(filed as Exhibit 10 (e)(2) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1996, and incorporated
herein by reference).
10(o)(3) Security Agreement in the stated amount of $2,000,000.00, dated
January 18,1996, between Bank One, Texas, N.A. and the Company
(filed as Exhibit 10 (e)(3) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1996, and incorporated
herein by reference).
10(p)(1) Modification and Extension Agreement (to the Loan Agreement dated
June 27, 1995) in the stated amount of $15,000,000.00, dated
August 1, 1996, between Bank One, Texas, N.A. and the Company
(filed as Exhibit 10 (h)(1) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 27, 1996, and
incorporated herein by reference).
10(p)(2) Restated Revolving Credit Note in the stated amount of
$15,000,000, dated August 1, 1996, between Bank One, Texas, N.A.
and the Company (filed as Exhibit 10 (h)(2) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 27,
1996, and incorporated herein by reference).
10(q)(1) Non-Statutory Stock Option Plan (filed as Exhibit A to the
Company's Proxy Statement for Annual Meeting of Stockholders to
be held on June 8, 1995, and incorporated herein by reference).
10(q)(2) Specimen form of Contract under the Non-Statutory Stock Option
Plan of the Company, as amended to date (filed as Exhibit 10 (d)
to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 28, 1996, and incorporated herein by reference).
10(r)(1) Stock Grant Plan of the Company, as amended to date (filed as
Exhibit 10(d)(1) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, and incorporated herein by
reference).
10(r)(2) Specimen form of Certificate of Participation to certain
participants under the Stock Grant Plan of the Company (filed as
Exhibit 10(e)(3) to the Company's Annual Report on Form 10-K for
the year ended December 29, 1989, and incorporated herein by
reference).
10(s)(1) Non-Employee Directors Stock Option Plan (filed as Exhibit B to
the Company's Proxy Statement for Annual Meeting of Stockholders
to be held on June 8, 1995, and incorporated herein by
reference).
37
<PAGE> 110
10(s)(2) Specimen form of Contract under the Non-Employee Directors Stock
Option Plan of the Company, as amended to date.
10(t)(1) Specimen form of the Company's current Franchise Agreement (filed
as Exhibit 10 (f) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1996, and incorporated herein by
reference).
10(t)(2) Specimen form of the Company's current Development Agreement
(filed as Exhibit 10 (g) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 28, 1996, and incorporated
herein by reference).
10(u)(1) Entertainment Operating Fund Line of Credit, in the stated amount
of $250,000.00, dated December 16, 1996, between International
Association of ShowBiz Pizza Time Restaurants, Inc. and the
Company.
10(u)(2) Entertainment Operating Fund Promissory Note, in the stated
amount of $250,000.00, dated December 16, 1996, between
International Association of ShowBiz Pizza Time Restaurants, Inc.
and the Company.
10(v)(1) National Advertising Production Line of Credit, in the stated
amount of $750,000.00, dated December 16, 1996, between
International Association of ShowBiz Pizza Time Restaurants, Inc.
and the Company.
10(v)(2) National Advertising Production Promissory Note, in the stated
amount of $750,000.00, dated December 16, 1996, between
International Association of ShowBiz Pizza Time Restaurants, Inc.
and the Company.
10(w)(1) National Media Fund Line of Credit, in the stated amount of
$1,500,000.00, dated December 16, 1996, between International
Association of ShowBiz Pizza Time Restaurants, Inc. and the
Company.
10(w)(2) National Media Fund Promissory Note, in the stated amount of
$1,500,000.00, dated December 16, 1996, between International
Association of ShowBiz Pizza Time Restaurants, Inc. and the
Company.
23 Independent Auditors Consent
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed in the fourth quarter of 1996.
(c) EXHIBITS PURSUANT TO ITEM 601 OF REGULATION S-K:
Pursuant to Item 601(b)(4) of Regulation S-K, there have been excluded from the
exhibits filed pursuant to this report instruments defining the right of
holders of long-term debt of the Company where the total amount of the
securities authorized under each such instrument does not exceed 10% of the
total assets of the Company. The Company hereby agrees to furnish a copy of
any such instruments to the Commission upon request.
(d) FINANCIAL STATEMENTS EXCLUDED FROM THE ANNUAL REPORT TO SHAREHOLDERS BY
RULE 14A - 3(b):
No financial statements are excluded from the annual report to the Company's
shareholders by Rule 14a - 3(b).
38
<PAGE> 111
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.
Dated: March 14, 1997 SHOWBIZ PIZZA TIME, INC.
By: /s/ Richard M. Frank
-----------------------------
Richard M. Frank
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/s/ Richard M. Frank Chairman of the Board, March 14, 1997
- -------------------------------- Chief Executive Officer,
Richard M. Frank and Director (Principal
Executive Officer)
/s/ Michael H. Magusiak President and Director March 14, 1997
- --------------------------------
Michael H. Magusiak
/s/ Larry G. Page Executive Vice President, March 14, 1997
- --------------------------------
Larry G. Page Treasurer, (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Charles A. Crocco, Jr. Director March 14, 1997
- --------------------------------
Charles A. Crocco, Jr.
/s/ Anthony J. Gumbiner Director March 14, 1997
- --------------------------------
Anthony J. Gumbiner
/s/ Robert L. Lynch Director March 14, 1997
- --------------------------------
Robert L. Lynch
/s/ J. Thomas Talbot Director March 14, 1997
- --------------------------------
J. Thomas Talbot
/s/ Brian M. Troup Director March 14, 1997
- --------------------------------
Brian M. Troup
/s/ Louis P. Neeb Director March 14, 1997
- --------------------------------
Louis P. Neeb
/s/ Cynthis I. Pharr Director March 14, 1997
- --------------------------------
Cynthia I. Pharr
</TABLE>
39
<PAGE> 112
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
10(a)(2) Amendment No. 1 to the Amended and Restated
Employment Agreement dated July 19, 1996,
between the Company and Richard M. Frank. 41
10(s)(2) Specimen form of Contract under the
Non-Employee Directors Stock Option Plan of
the Company, as amended to date. 45
10(u)(1) Entertainment Operating Fund Line of Credit,
in the stated amount of $250,000.00, dated
December 16, 1996, between International
Association of ShowBiz Pizza Time
Restaurants, Inc. and the Company. 50
10(u)(2) Entertainment Operating Fund Promissory Note,
in the stated amount of $250,000.00, dated
December 16, 1996, between International
Association of ShowBiz Pizza Time
Restaurants, Inc. and the Company. 55
10(v)(1) National Advertising Production Line of
Credit, in the stated amount of $750,000.00,
dated December 16, 1996, between
International Association of ShowBiz Pizza
Time Restaurants, Inc. and the Company. 60
10(v)(2) National Advertising Production Promissory
Note, in the stated amount of $750,000.00,
dated December 16, 1996, between
International Association of ShowBiz Pizza
Time Restaurants, Inc. and the Company. 65
10(w)(1) National Media Fund Line of Credit, in the
stated amount of $1,500,000.00, dated
December 16, 1996, between International
Association of ShowBiz Pizza Time
Restaurants, Inc. and the Company. 70
10(w)(2) National Media Fund Promissory Note, in the
stated amount of $1,500,000.00, dated
December 16, 1996, between International
Association of ShowBiz Pizza Time
Restaurants, Inc. and the Company. 75
23 Independent Auditors Consent 80
</TABLE>
40
<PAGE> 113
================================================================================
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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD - FROM TO
---------------- ---------------
COMMISSION FILE NUMBER: 1-10643
---------------
HALLWOOD REALTY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
---------------
DELAWARE 75-2313955
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS
SUITE 1500
DALLAS, TEXAS 75219-4298
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Name of each exchange on
Title of each class which registered
------------------- ------------------------
UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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]
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 [ ]
THE AGGREGATE MARKET VALUE OF THE UNITS HELD BY NONAFFILIATES OF THE
REGISTRANT AS OF MARCH 14, 1997 WAS APPROXIMATELY $34,162,000.
CLASS: UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
OUTSTANDING AT MARCH 14, 1997: 1,672,556 UNITS.
================================================================================
Page 1 of 32
<PAGE> 114
HALLWOOD REALTY PARTNERS, L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I
- ------
Item 1. Business 3
Item 2. Properties 4
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of
Security Holders 6
PART II
- -------
Item 5. Market for Registrant's Units and Related
Security Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 8. Financial Statements and Supplemental Information 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 26
PART III
- --------
Item 10. Directors and Executive Officers of the
Registrant 27
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 30
Item 13. Certain Relationships and Related Transactions 30
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K. 31
</TABLE>
Page 2 of 32
<PAGE> 115
PART I
ITEM 1. BUSINESS
DESCRIPTION OF THE BUSINESS
Hallwood Realty Partners, L.P. ("HRP" or the "Partnership"), a publicly traded
Delaware limited partnership, is engaged in diversified real estate activities,
including the acquisition, ownership and operation of commercial office and
industrial real estate and other real estate related assets. The Partnership's
limited partners' interests ("Units") are traded on the American Stock
Exchange.
As of December 31, 1996, the Partnership owned twelve real estate assets (the
"Properties"), of which seven are office building properties and five are
industrial park properties. The Properties are located in six states (see Item
2 - Properties). The Partnership seeks to maximize the value of the Properties
by making capital and tenant improvements, by executing marketing programs to
attract and retain tenants and by reducing operating expenses.
Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is responsible for asset management of the Partnership and its
Properties, including the decision making responsibility for financing,
refinancing, acquiring and disposing of properties. In addition, HRC provides
general operating and administrative services to the Partnership. Hallwood
Commercial Real Estate, Inc. ("HCRE", formerly named Hallwood Management
Company), another wholly-owned subsidiary of Hallwood, provides property
management services to the Properties.
OCCUPANCY/MAJOR TENANT INFORMATION
In the aggregate, the Properties were 90% occupied at December 31, 1996. Set
forth below are the percentages of square feet represented by scheduled lease
expirations for each calendar year, assuming that none of the tenants exercise
early termination or renewal options:
<TABLE>
<S> <C>
1997 19%
1998 22%
1999 18%
2000 12%
2001 9%
Thereafter 20%
</TABLE>
During 1996 and 1995, two tenants leasing space in the Properties each
contributed more than 10% of the total revenues of the Partnership. Ford Motor
Company and affiliates ("Ford") leases space in Parklane Towers and Fairlane
Commerce Park and contributed approximately 16% and 18% of revenues in 1996 and
1995, respectively. The Centers for Disease Control and Prevention, an agency
of the U.S. Department of Health and Human Services, ("CDC") leases space in
Corporate Square and Executive Park and contributed approximately 10% of 1996's
revenues. First National Bank of Maryland leases space in the First Maryland
Building and contributed 12% of 1995's revenues.
As of December 31, 1996, Ford occupied approximately 283,000 square feet of
office space under 14 separate leases at Parklane Towers and approximately
246,000 square feet of office, technical laboratory and industrial space under
8 separate leases at Fairlane Commerce Park. These leases expire between 1997
and 2001 and most contain renewal options, providing for one to ten year
renewals. As of December 31, 1996, CDC occupied approximately 202,000 square
feet of office space at Executive Park under 3 leases which expire between 1999
and 2003. CDC also occupied approximately 158,000 square feet of office space
at Corporate Square under a lease which expires in 2013.
The remaining tenants are not concentrated in any one industry, nor is the
Partnership otherwise dependent on any one tenant or group of tenants for 10%
or more of its revenues.
Page 3 of 32
<PAGE> 116
COMPETITION AND OTHER FACTORS
The Properties are subject to substantial competition from similar properties
in the vicinity in which they are located. In addition, there are numerous
other potential investors seeking to purchase improved real property and many
property holders seeking to dispose of real estate with which HRP will compete,
including companies substantially larger than HRP and with substantially
greater resources. Furthermore, current economic conditions in each property's
respective real estate market are competitive and as such, competition for
tenants will continue to affect rental rates and revenue.
The environmental laws of the federal government and of certain state and local
governments impose liability on current property owners for the cleanup of
hazardous and toxic substances discharged on such property. This liability may
be imposed without regard to the timing, cause or person responsible for the
release of such substances onto the property. HRP could be subject to
additional liability in the event that it owns properties having such
environmental problems. Parklane Towers, as well as certain other properties
to a lesser extent, are known to contain asbestos. Removal of asbestos at
Parklane Towers is estimated to cost $1,700,000; however, it is not required to
be removed because it is not friable and HRP has an Operations and Maintenance
Program in place.
In July 1990, the Americans with Disabilities Act was passed by the United
States Congress. HRC and HCRE, on behalf of HRP, monitor compliance with the
Americans with Disabilities Act and are currently not aware of any material
non- compliance issues.
HRP does not directly employ any individuals. All employees rendering services
on behalf of HRP and its Properties are employees of HRC and/or HCRE.
The business of HRP involves only one industry segment. Accordingly, all
information required by Item 101(b) of Regulation S-K is included in the
Consolidated Financial Statements included in Item 8. HRP has no foreign
operations and its business is not seasonal.
ITEM 2. PROPERTIES
At December 31, 1996, HRP owned twelve properties in six states with
approximately 5,167,000 net rentable square feet, of which seven are office
building properties (2,610,000 square feet) and five are industrial park
properties (2,557,000 square feet).
<TABLE>
<CAPTION>
NAME AND LOCATION GENERAL DESCRIPTION OF THE PROPERTY
- ----------------- -----------------------------------
<S> <C>
OFFICE BUILDING PROPERTIES:
Airport Plaza Fee simple interest in a 3-story office building constructed in
San Diego, California 1982 containing 48,853 net rentable square feet of space located
on 2 acres of land. The property was 87% occupied at December
31, 1996.
Bellevue Corporate Plaza Fee simple interest in a 10-story office building constructed in
Bellevue, Washington 1980 containing 235,850 net rentable square feet of space located
on 3.6 acres of land. The property was 86% occupied at December
31, 1996.
Corporate Square Fee simple interest in an 8-building office complex ranging from
Atlanta, Georgia one to seven stories, constructed between 1968 and 1973,
containing an aggregate of 445,518 net rentable square feet of
space located on 26 acres of land. The property was 92% occupied
at December 31, 1996.
</TABLE>
Page 4 of 32
<PAGE> 117
<TABLE>
<CAPTION>
NAME AND LOCATION GENERAL DESCRIPTION OF THE PROPERTY
- ----------------- -----------------------------------
OFFICE BUILDING PROPERTIES - CONTINUED:
<S> <C>
Executive Park Fee simple interest in 26 buildings ranging from one to six
Atlanta, Georgia stories, constructed between 1965 and 1972, containing a total of
908,445 net rentable square feet of space located on 70 acres of
land. The property was 93% occupied at December 31, 1996.
First Maryland Building Fee simple interest in a 22-story office building constructed in
Baltimore, Maryland 1972 containing 343,773 net rentable square feet of office space
on 0.6 acres of land. At December 31, 1996, the property was 90%
occupied.
Montrose Office Center Fee simple interest in a 10-story office building constructed in
Rockville, Maryland 1980 containing 147,896 net rentable square feet of space on 3
acres of land. The property was 98% occupied at December 31,
1996.
Parklane Towers Fee simple interest in twin 15-story office buildings constructed
Dearborn, Michigan in 1973 containing 479,501 net rentable square feet of space on
31.8 acres of land. The property was 93% occupied at December
31, 1996.
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks Fee simple interest in 21 single-story buildings located at four
Sacramento and separate sites containing an aggregate of 452,838 net rentable
Rancho Cordova, California square feet of office/warehouse space on 31 acres of land and
constructed between 1973 and 1981. At December 31, 1996, the
property was 94% occupied.
Fairlane Commerce Park Fee simple interest in a portion of an office/industrial park
Dearborn, Michigan consisting of 13 single-story buildings constructed between 1974
and 1990. The property consists of 421,422 net rentable square
feet of space on 36 acres of land. The property was 87% occupied
at December 31, 1996.
Joy Road Distribution Center Fee simple interest in a 455,500 square foot warehouse situated
Detroit, Michigan on 21 acres and originally constructed in the early 1940's. The
property was 82% occupied at December 31, 1996.
Raintree Industrial Park Fee simple interest in an office/industrial complex constructed
Solon, Ohio between 1971 and 1978 containing 795,065 net rentable square feet
of space in 14 buildings on 49 acres of land. The property was
95% occupied at December 31, 1996.
Seattle Business Parks Fee simple interest in office/industrial parks located at two
Kent and Tukwila, Washington separate sites. The buildings were completed between 1972 and
1978 and contain an aggregate of 432,467 net rentable square feet
of space in 18 buildings on 27 acres of land. At December 31,
1996, the property was 81% occupied.
</TABLE>
For information regarding the encumbrances to which the properties are subject
and the status of the related mortgage loans, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" contained in Item 7 and Note 4 to the Consolidated Financial
Statements and Schedule III contained in Item 8.
Page 5 of 32
<PAGE> 118
ITEM 3. LEGAL PROCEEDINGS
The Partnership is from time to time involved in various legal proceedings in
the ordinary course of its business. Management believes that the resolution
of these matters will not have a material effect on the financial position,
cash flow or operations of the Partnership.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Partnership
during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED SECURITY HOLDER MATTERS
The Partnership's Units are listed on the American Stock Exchange under the
symbol "HRY". As of March 14, 1997, there were approximately 35,500
unitholders of record of the 1,672,556 Units outstanding. Each quarter HRC
reviews HRP's capacity to make cash distributions to its partners.
The following table shows the range of sales prices for the periods indicated,
as reported by the American Stock Exchange and adjusted for a 1-for-5 reverse
split that was effective at the close of business on March 3, 1995:
<TABLE>
<CAPTION>
Trading Ranges
----------------------
High Low
---- ---
<S> <C> <C>
1995 -
1st Quarter $ 12.50 $ 9.50
2nd Quarter 14.50 9.625
3rd Quarter 15.375 13.50
4th Quarter 16.75 13.50
1996 -
1st Quarter $ 20.375 $ 16.50
2nd Quarter 21.75 19.125
3rd Quarter 30.00 21.625
4th Quarter 29.00 24.50
</TABLE>
Page 6 of 32
<PAGE> 119
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding the
Partnership's results of operations and financial position as of the dates
indicated. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Item 7 and the Consolidated Financial Statements and notes thereto
contained in Item 8.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ------ ------ ------ ------
(in thousands except per unit amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
- ------------------------
Total revenues (a) $ 49,612 $ 50,829 $ 48,615 $ 48,065 $ 63,356
Loss before extraordinary item (9,428) (9,024) (18,161) (18,769) (28,176)
Net loss (9,428) (9,789) (18,161) (18,769) (16,799)
Net loss per Unit (b) (5.50) (5.55) (10.38) (10.73) (9.60)
Cash distributions to
limited partners - - - - -
Balance Sheet:
- --------------
Real estate, net (c) $ 182,877 $ 192,266 $ 205,212 $ 219,710 $ 226,193
Total assets 210,214 225,359 225,418 248,093 246,354
Mortgages payable 160,732 166,675 160,296 162,938 148,572
Partners' capital (d) 30,684 41,917 51,522 69,683 88,452
</TABLE>
Notes to Selected Financial Data:
(a) Total revenues declined in 1993 versus 1992 primarily due to property
dispositions during 1992.
(b) Reflects effect of a 1-for-5 reverse split of the outstanding Units
effective as of the close of business on March 3, 1995.
(c) Real estate assets declined in each of the years due to depreciation
and amortization exceeding the additions of tenant and capital
improvements.
(d) Partners' capital is allocated 99% to the limited partners and 1% to
the general partner.
Page 7 of 32
<PAGE> 120
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with Item 6 - Selected Financial
Data and Item 8 - Financial Statements and Supplemental Information.
RESULTS OF OPERATIONS:
1996 VERSUS 1995 -
REVENUE FROM PROPERTY OPERATIONS in 1996 decreased $1,359,000, or 2.7%, as
compared to 1995. The following table illustrates the components of the
change:
<TABLE>
<S> <C>
Rental income, net $ (459,000)
Expense recoveries (539,000)
Other property income (361,000)
------------
Net decrease $ (1,359,000)
============
</TABLE>
This change in rental income is primarily due to a reduction in rental rates at
First Maryland Building and decreases in occupancy at Parklane Towers and
Corporate Square, partially offset by a rise in occupancy at Executive Park and
the addition of the Joy Road property in February 1996. The First Maryland
Building rental rate reduction is discussed in Note 4 to the financial
statements. Corporate Square's decrease in occupancy was temporary due to the
expiration of a significant lease in late 1995. In early 1996, the space was
re-leased and effective September 25, 1996, the new tenant took possession,
which increased the property's occupancy from 72% to 91%.
During the first quarter of 1995, expense recoveries were abnormally high due
to adjustments made to the amount of real estate recoveries from tenants in the
state of Michigan for the two years prior to 1995. Accordingly, expense
recoveries for 1996 decreased from 1995. Michigan eliminated certain property
taxes as the major source of school funding in the summer of 1993 and later
reinstated them.
INTEREST INCOME increased $142,000 primarily as a result of increased earnings
on investments of funds held in loan reserve escrow accounts.
PROPERTY OPERATIONS EXPENSES for 1996 increased $1,102,000, or 4.6%, as
compared to 1995, primarily due to higher utility costs, lease commission
amortization, security control costs and repairs to heating and air duct
systems, partially offset by one-time costs for certain professional fees in
1995. The following table illustrates the components of the change:
<TABLE>
<S> <C>
Administrative costs $ 49,000
Management fees (22,000)
Marketing and leasing 328,000
Utilities 191,000
Services, including janitorial 203,000
Repairs and maintenance 289,000
Real estate taxes 65,000
Insurance (1,000)
-----------
Net increase $ 1,102,000
===========
</TABLE>
INTEREST EXPENSE decreased $2,199,000, or 14.0%, due to (i) an increase of
$1,356,000 in amortization of First Maryland's debt forgiveness, (ii) reduction
in First Maryland's cash interest expense of $998,000 due to lower debt, (iii)
reduction in loan cost amortization of $251,000, and (iv) a net increase of
$406,000 in interest costs associated with all of the mortgages and notes
excluding First Maryland. This net increase of $406,000 is the result of a
higher average debt level between the years, partially offset by a reduction in
the aggregate average interest rates between the years.
DEPRECIATION AND AMORTIZATION EXPENSE decreased $337,000 primarily due to
reduced building improvement depreciation.
GENERAL AND ADMINISTRATIVE EXPENSES increased $621,000, or 21.6%, in 1996 as
compared to 1995, as the result of certain due diligence costs for a potential
acquisition and increases in business/franchise taxes, certain professional
fees, personnel and other overhead costs.
Page 8 of 32
<PAGE> 121
RESULTS OF OPERATIONS:
1995 VERSUS 1994 -
REVENUE FROM PROPERTY OPERATIONS in 1995 increased $2,200,000, or 4.6%, as
compared to 1994. The following table illustrates the components of the
change:
<TABLE>
<S> <C>
Rental income, net $ 1,053,000
Expense recoveries 971,000
Other property income 176,000
-----------
Net increase $ 2,220,000
===========
</TABLE>
Rental income increased due to growth in aggregate occupancy and average
rental rates. Expense recoveries increased during the period due to
fluctuations in the amount of estimated recoveries primarily at Parklane
Towers, Fairlane Commerce Park and First Maryland Building. Most of the
variance is the result of unanticipated real estate tax recoveries from tenants
in the state of Michigan. Michigan eliminated certain property taxes as the
major source of school funding in the summer of 1993 and later reinstated them.
INTEREST INCOME increased $14,000 primarily due to an increase in earnings on
overnight cash investments, partially offset by less mortgage interest as the
result of the collection of a substantial mortgage receivable in December 1994.
PROPERTY OPERATING EXPENSES in 1995 increased $782,000, or 3.4%, as compared to
1994, primarily due to increases in air conditioner and parking lot repairs, as
well as certain maintenance personnel costs, property level professional fees
and lease commission amortization, partially offset by decreases in utilities
and real estate taxes. The following table illustrates the components of the
change:
<TABLE>
<S> <C>
Administrative costs $ (27,000)
Management fees 87,000
Marketing and leasing 238,000
Utilities (58,000)
Services, including janitorial 31,000
Repairs and maintenance 676,000
Real estate taxes (194,000)
Insurance 29,000
---------
Net increase $ 782,000
=========
</TABLE>
INTEREST EXPENSE increased $463,000, or 3.0%, primarily due to an increase in
debt during the year. Interest expense in 1995 is net of $338,000 of
amortization of contingent debt forgiveness associated with First Maryland
Building's loan modification (See Note 4 to the Consolidated Financial
Statements contained in Item 8).
DEPRECIATION AND AMORTIZATION EXPENSE decreased $534,000 primarily due to
reduced tenant improvement amortization.
GENERAL AND ADMINISTRATIVE EXPENSES in 1995 increased $387,000, or 15.5%, as
compared to 1994, primarily due to costs related to the Reverse Split and costs
of administering the offer to Unitholders to sell their odd lot HRP holdings.
LOSS ON EARLY EXTINGUISHMENT OF DEBT for 1995 of $765,000 represents
pre-payment penalties incurred with the early pay off of loans associated with
the Nomura Refinancing (see Note 4 to the Consolidated Financial Statements
contained in Item 8) and the write off of certain loan costs.
Page 9 of 32
<PAGE> 122
LIQUIDITY AND CAPITAL RESOURCES
HRP is engaged in diversified real estate activities, including the
acquisition, ownership and operation of commercial office and industrial real
estate and other real estate related assets. While it is the General Partner's
primary intention to operate HRP's existing real estate investments and to
acquire and operate additional real estate investments, HRC also continually
evaluates each of HRP's real estate investments in light of current economic
trends and operations to determine if any should be considered for disposal.
As of December 31, 1996, HRP had cash and cash equivalents of $3,556,000, as
compared to $14,302,000 as of December 31, 1995. Therefore, the Partnership's
cash position decreased $10,746,000 during 1996. The sources of cash for 1996
were $3,597,000 of cash provided by operating activities and $86,000 of
principal collections from a mortgage receivable. Uses of cash for 1996 were
$5,998,000 of tenant and property improvements, $1,532,000 of payments into an
escrow account for tenant improvements that will be constructed in 1997 at
First Maryland Building, $1,699,000 of property acquisition costs, $2,706,000
of mortgage principal payments, $1,805,000 of limited partner Unit purchases
(see Note 6 to the Consolidated Financial Statements contained in Item 8),
$450,000 of loan reserves for Executive Park, and $239,000 of loan fees and
expenses.
Substantially all of the buildings in eleven of HRP's Properties were
encumbered by and pledged as collateral under non-recourse mortgages as of
December 31, 1996. During 1996, HRP and its lenders for the First Maryland
Building and Executive Park successfully completed loan extensions and
modifications for the mortgages that matured during the year (see Note 4 to the
Consolidated Financial Statements contained in Item 8). HRP doesn't have any
mortgage loans maturing or requiring balloon principal payments until the year
2000. Based upon loan amortizations in effect, HRP is required to pay
$3,084,000 of principal payments in 1997.
During 1997, HRP anticipates tenant improvements and lease commissions to
decrease as compared to the higher than usual level incurred in 1996. As of
December 31, 1996, HRP had remaining commitments for construction projects of
about $1,200,000. Additionally, HRP has estimated that 1997 total tenant and
capital improvements (excluding the aforementioned commitments) will equal
approximately $3,700,000 and lease commissions will be about $1,300,000.
For the foreseeable future, the Partnership anticipates that mortgage principal
payments, tenant and capital improvements, and lease commissions will be funded
by net cash from operations. The primary sources of capital to fund any future
Partnership acquisitions will be proceeds from the sale or financing of one or
more of its Properties.
Each quarter HRC, as General Partner, reviews the Partnership's capacity to
make cash distributions.
This Form 10-K contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are intended to be covered by the safe harbors
created thereby. These statements include the plans and objectives of
management for future operations. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve judgments with
respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
HRP. Although HRP believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking staements included
in this Form 10-K will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representative by HRP
or any other person that the objectives and plans of HRP will be achieved.
Page 10 of 32
<PAGE> 123
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: Page
----
<S> <C>
Independent Auditors' Report 12
Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1995 13
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1996 14
Consolidated Statements of Partners' Capital for each of
the three years in the period ended December 31, 1996 15
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1996 16
Notes to Consolidated Financial Statements 17
FINANCIAL STATEMENT SCHEDULE:
Schedule III - Real Estate and Accumulated Depreciation 25
All other schedules have been omitted because they are not
applicable, not required, or the required information is
disclosed in the consolidated financial statements or notes thereto.
</TABLE>
Page 11 of 32
<PAGE> 124
INDEPENDENT AUDITORS' REPORT
To the Partners,
Hallwood Realty Partners, L.P.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Hallwood Realty
Partners, L.P. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedule listed in the Index at Item 8.
These financial statements and financial statement schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based upon 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 Realty Partners, L.P. and
subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 11, 1997
Page 12 of 32
<PAGE> 125
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Real estate:
Land $ 56,820 $ 56,461
Buildings and improvements 257,913 257,706
Tenant improvements 18,578 16,311
--------- ---------
333,311 330,478
Accumulated depreciation and amortization (150,434) (138,212)
--------- ---------
Real estate, net 182,877 192,266
Cash and cash equivalents 3,556 14,302
Accounts receivable 1,606 1,080
Prepaid lease commissions, net 6,959 4,518
Lease concessions 2,354 2,498
Loan reserves and escrows 7,739 4,966
Loan costs, net 3,691 3,905
Prepaid expenses and other assets, net 1,432 1,824
--------- ---------
Total assets $ 210,214 $ 225,359
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 160,732 $ 166,675
Unamortized mortgage payable forgiveness 10,456 8,912
Accounts payable and accrued expenses 4,834 4,940
Prepaid rent and security deposits 2,600 2,685
Payable to affiliates 908 230
--------- ---------
Total liabilities 179,530 183,442
--------- ---------
COMMITMENTS AND CONTINGENCIES
Partners' capital:
Limited partners - 1,672,556 and 1,747,765 Units outstanding,
respectively 30,377 41,498
General partner 307 419
--------- ---------
Total partners' capital 30,684 41,917
--------- ---------
Total liabilities and partners' capital $ 210,214 $ 225,359
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 13 of 32
<PAGE> 126
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Property operations $ 48,847 $ 50,206 $ 48,006
Interest and other 765 623 609
-------- -------- --------
Total revenues 49,612 50,829 48,615
-------- -------- --------
EXPENSES:
Property operations 24,932 23,830 23,048
Interest 13,522 15,721 15,258
Depreciation and amortization 17,086 17,423 17,957
General and administrative 3,500 2,879 2,492
Litigation and settlement costs -- -- 8,198
Minority interest in joint venture and other -- -- (177)
-------- -------- --------
Total expenses 59,040 59,853 66,776
-------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM (9,428) (9,024) (18,161)
Extraordinary item -
Loss on early extinguishment of debt -- (765) --
-------- -------- --------
NET LOSS $ (9,428) $ (9,789) $(18,161)
======== ======== ========
ALLOCATION OF NET LOSS:
Limited partners $ (9,334) $ (9,691) $(17,979)
General partner (94) (98) (182)
-------- -------- --------
Total $ (9,428) $ (9,789) $(18,161)
======== ======== ========
LOSS PER UNIT:
Loss before extraordinary item $ (5.50) $ (5.12) $ (10.38)
Loss on early extinguishment of debt -- (.43) --
-------- -------- --------
Net loss $ (5.50) $ (5.55) $ (10.38)
======== ======== ========
WEIGHTED AVERAGE UNITS OUTSTANDING 1,698 1,745 1,732
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 14 of 32
<PAGE> 127
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
Limited
Partner
General Limited Units
Partner Partners Total Outstanding
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL, JANUARY 1, 1994 $ 697 $ 68,986 $ 69,683 1,732,459
Net loss (182) (17,979) (18,161)
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, DECEMBER 31, 1994 515 51,007 51,522 1,732,459
Purchase of fractional New Units (2) (174) (176) (14,694)
Sale and issuance of New Units to
General Partner 4 356 360 30,000
Net loss (98) (9,691) (9,789) --
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, DECEMBER 31, 1995 419 41,498 41,917 1,747,765
Purchase of Units (18) (1,787) (1,805) (75,209)
Net loss (94) (9,334) (9,428) --
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, DECEMBER 31, 1996 $ 307 $ 30,377 $ 30,684 1,672,556
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 15 of 32
<PAGE> 128
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (9,428) $ (9,789) $(18,161)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 17,086 17,423 17,957
Amortization of mortgage principal forgiveness (1,693) (338) --
Lease concessions 144 688 707
Minority interest and other -- -- (177)
Changes in assets and liabilities:
Receivables (526) 124 362
Prepaid lease commissions, net (2,441) (543) 404
Prepaid expenses and other assets, net (32) 666 1,383
Accounts payable and other liabilities 487 (5,745) (307)
-------- -------- --------
Net cash provided by operating activities 3,597 2,486 2,168
-------- -------- --------
INVESTING ACTIVITIES:
Property and tenant improvements (5,998) (4,477) (3,459)
Tenant improvement escrow (1,532) -- --
Property acquisition (1,699) -- --
Mortgage receivable principal payments 86 79 1,722
-------- -------- --------
Net cash used for investing activities (9,143) (4,398) (1,737)
-------- -------- --------
FINANCING ACTIVITIES:
Mortgage principal payments (2,706) (2,600) (2,642)
Mortgage principal proceeds -- 88,400 --
Mortgage principal refinanced -- (70,171) --
Loan reserves (450) (3,376) --
Loan fees and expenses (239) (4,009) (9)
Purchase of Units (1,805) -- --
Sale of Units to General Partner -- 360 --
Purchase of fractional Units -- (176) --
-------- -------- --------
Net cash provided by (used for) financing activities (5,200) 8,428 (2,651)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,746) 6,516 (2,200)
BEGINNING CASH AND CASH EQUIVALENTS 14,302 7,786 10,006
-------- -------- --------
ENDING CASH AND CASH EQUIVALENTS $ 3,556 $ 14,302 $ 7,786
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
Page 16 of 32
<PAGE> 129
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
1. ORGANIZATION
Hallwood Realty Partners, L.P. ("HRP" or the "Partnership"), a publicly
traded Delaware limited partnership, is engaged in diversified real estate
activities, including the acquisition, ownership and operation of
commercial office, industrial real estate and other real estate related
assets. The Partnership's limited partners' interests ("Units") are traded
on the American Stock Exchange.
As of December 31, 1996, the Partnership owned twelve real estate assets
(the "Properties"), of which seven are office building properties and five
are industrial park properties containing approximately 2,610,000 and
2,557,000 net rentable square feet, respectively. The Properties are
located in six states. The Partnership seeks to maximize the value of the
Properties by making capital and tenant improvements, by executing
marketing programs to attract and retain tenants and by reducing operating
expenses.
Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is responsible for asset management of the Partnership and its
Properties, including the decision making responsibility for financing,
refinancing, acquiring and disposing of properties. In addition, HRC
provides general operating and administrative services to the Partnership.
Hallwood Commercial Real Estate, Inc. ("HCRE", formerly named Hallwood
Management Company), another wholly-owned subsidiary of Hallwood, provides
property management services to the Properties.
2. ACCOUNTING POLICIES
CONSOLIDATION
The Partnership fully consolidates into its financial statements majority
owned entities and reflects a minority interest for those entities not
fully owned. As of December 31, 1996, all entities and Properties of the
Partnership were fully owned. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Partnership considers highly liquid investments with a remaining
maturity of three months or less at the time of purchase to be cash
equivalents.
PROPERTY
Property is stated at cost. Renovations and improvements are capitalized;
maintenance and repairs are expensed. When an asset is sold or otherwise
disposed of, the related cost and accumulated depreciation are removed from
the accounts and any gain or any previously unanticipated loss is
recognized in the year of sale or disposition. The Partnership's management
routinely reviews its investments for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
Depreciation of buildings is computed using the straight-line method over
estimated useful lives ranging from 10 to 43 years. Equipment and other
improvements are depreciated on the straight-line method over estimated
useful lives ranging from 3 to 23 years. Tenant improvements are
capitalized and amortized over the terms of the respective leases.
The Partnership accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably
estimable. Accruals for estimated losses from environmental remediation
obligations generally are recognized no later than completion of a remedial
feasibility study. Such accurals are adjusted as further information
develops or circumstances change. Costs of future expenditures for
environmental remediation obligations are not discounted to their present
value. Recoveries of environmental remediation costs from other parties
are recorded as assets when their receipt is deemed probable.
Partnership's management is not aware of any environmental remediation
obligations which would materially affect the operations, financial
position or cash flows of the Partnership.
Page 17 of 32
<PAGE> 130
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
2. ACCOUNTING POLICIES - CONTINUED
OTHER ASSETS
Lease concessions and commissions are amortized over the terms of the
respective leases. Leases in the Properties expire from 1997 to 2013.
Loan costs are amortized over the terms of the respective loans. The loans
mature between 2000 and 2011. Amortization of lease concessions, included
in property operations revenues, was $144,000, $688,000 and $707,000 in
1996, 1995 and 1994, respectively. Amortization of lease commissions,
included in property operations expense, was $1,880,000, $1,588,000 and
$1,403,000 in 1996, 1995 and 1994, respectively. Amortization of loan
costs, included in interest expense, was $453,000, $1,469,000 and $618,000
in 1996, 1995 and 1994, respectively.
The following table sets forth the components of prepaid expenses and other
assets, net on the balance sheet as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ ------
<S> <C> <C>
Prepaid real estate taxes $ 723 $ 716
Prepaid insurance 472 553
Mortgage receivable 46 132
Other deposits and prepaids 191 423
------ ------
Total $1,432 $1,824
====== ======
</TABLE>
INCOME TAXES
Currently, the Partnership is a non-taxable entity. Federal and state
income taxes, if any, are the responsibility of the individual partners.
Accordingly, the Consolidated Financial Statements do not include a
provision for income taxes. However, certain business and franchise taxes
are the responsibility of the Partnership and subsidiary entities. These
business and franchises taxes, included in general and administrative
expenses, were $206,000, $8,000, and $6,000 in 1996, 1995, and 1994,
respectively. The Partnership's tax returns are subject to examination by
federal and state taxing authorities. If the Partnership's amounts are
ultimately changed by the taxing authorities, the tax liability of the
partners could be changed accordingly. Additionally, no assurance can be
given that the federal or state governments will not pass legislation that
will characterize the Partnership as an association taxable as a
corporation for federal income tax purposes. Such classification may have
an adverse effect on the Partnership.
OTHER
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of certain assets, liabilities,
revenues, and expenses as of and for the reporting periods. Actual results
may differ from such estimates.
Certain reclassifications have been made in the prior year amounts to
conform to the classifications used in the current year. The
reclassifications had no effect on previously reported net losses.
3. TRANSACTIONS WITH RELATED PARTIES
HRC receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and incentive
disposition fees. Specifically, HRC is entitled to receive (i) an asset
management fee equal to 1% of the net aggregate base rents of the
Properties, (ii) acquisition fees equal to 1% of the purchase price of
newly acquired properties, and (iii) incentive fees for performing
disposition services with respect to real estate investments, other than
the properties owned at the time of HRP's formation on November 1, 1990,
equal to 10% of the amount, by which the sales price of a property disposed
of exceeds the purchase price of such property.
Page 18 of 32
<PAGE> 131
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
3. TRANSACTIONS WITH RELATED PARTIES - CONTINUED
HCRE receives compensation in connection with the management of the
Properties, which includes a property management fee, lease commissions and
construction supervision fees. The management contracts expire June 30,
1999 and provide for (i) basic compensation from a property management fee
which is an amount equal to 2.85% of cash receipts collected from the
Properties' tenants, (ii) lease commissions equal to the current market
rate as applied to the net aggregate rent, not to exceed 6% of the net
aggregate rent, and (iii) construction supervision fees for administering
all construction projects equal to 5% of the total contract costs of each
capital expenditure or tenant improvement project.
HRC and HCRE are compensated for services provided to HRP and its
Properties as described above. The following table sets forth such
compensation and reimbursement paid by HRP for the periods presented (in
thousands):
<TABLE>
<CAPTION>
Entity
Paid or
Reimbursed 1996 1995 1994
---------- ---- ---- ----
<S> <C> <C> <C> <C>
Asset management fee HRC $ 450 $ 446 $ 434
Property management fee HCRE 1,433 1,459 1,384
Lease commissions (a) HCRE 2,888 1,501 801
Construction fees HCRE 382 270 259
Acquisition fee HRC 17 - -
Reimbursement of costs (b) HRC 2,321 1,992 2,030
</TABLE>
(a) As of February, 1997, $667,000 of the lease commissions accrued in
1996 had not been paid.
(b) These costs are mostly recorded as General and Administrative
Expenses and represent reimbursement to HRC, at cost, for
Partnership level salaries, employee and director insurance and
certain overhead costs. HRP pays, on a monthly basis, the balance
of its account with HRC.
4. MORTGAGES PAYABLE
Substantially all of the buildings in eleven of the Partnership's
Properties were encumbered and pledged as collateral by six non-recourse
mortgages aggregating $160,732,000 as of December 31, 1996. These
mortgages have interest rates varying from 8.5% to 9.25%, with an effective
average interest rate of 8.8% and mature between 2000 and 2011. Certain
mortgages provide for variable interest rates. Cash interest payments were
$14,947,000, $15,396,000, and $15,113,000 in 1996, 1995 and 1994,
respectively.
Most of the mortgages require monthly principal payments with balloon
payments due at maturity. The following table shows for the periods
presented the principal and balloon payments that are required (in
thousands), excluding First Maryland Building's mortgage principal
forgiveness discussed below:
<TABLE>
<CAPTION>
Total
Principal Balloon Mortgage
Payments Payments Payments
--------- -------- ---------
<S> <C> <C> <C>
1997 $ 3,084 $ - $ 3,084
1998 3,399 - 3,399
1999 3,783 - 3,783
2000 3,998 6,054 10,052
2001 4,306 - 4,306
Thereafter 34,400 101,708 136,108
-------- --------- ---------
Total $ 52,970 $ 107,762 $ 160,732
======== ========= =========
</TABLE>
Page 19 of 32
<PAGE> 132
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
4. MORTGAGES PAYABLE - CONTINUED
NOMURA REFINANCING -
On September 29, 1995, a newly formed limited partnership owned 99.9% by
the Partnership entered into an agreement for an $88,400,000 loan with
Nomura Asset Capital Corporation. The loan has a 25 year principal
amortization period with an interest rate of 8.7% through October 10, 2005
and 13.7% thereafter. The non-recourse loan is secured by cross
collateralized, cross defaulted, perfected first mortgage liens on Airport
Plaza, Bellevue Corporate Plaza, about 65% of Corporate Square, about 92%
of Fairlane Commerce Park, Montrose Office Center, Parklane Towers, and
Raintree Industrial Park.
FIRST MARYLAND BUILDING -
Per the loan modification agreement described below, HRP is required to
spend $2,700,000 for the costs of improvements and the lease commission for
the lease renewal of First Maryland Building's major tenant. The tenant's
previous lease was not scheduled to expire until mid-1997, however the
tenant had been in negotiations with HRP since early 1996 in an effort to
reduce their rental rate of $25 per square foot per annum, which was
substantially above the prevailing market rate in downtown Baltimore,
Maryland. Concurrently with the loan modification, HRP executed a revised
ten-year lease with the tenant which calls for rents ranging from $15 to
$17 per square foot per annum and increases their space from 62% to 71% of
the property's net rentable space of approximately 343,000 square feet.
On October 3, 1996, but effective May 1, 1996, the lender for First
Maryland Building extended the loan to April 30, 2003 with an unchanged
interest rate of LIBOR plus 3.25% (8.75% as of February 1997) and forgave
$3,237,000 of the principal balance in addition to the $9,250,000 of
forgiveness granted in September 1995, resulting in a loan principal
balance of $25,552,000. Under this agreement, 49.9% of the property's net
cash flow must be used to amortize the principal of the loan.
For financial reporting purposes, the mortgage principal forgiveness is
treated as a troubled debt restructuring and accordingly, HRP did not
recognize a gain. Instead, the the mortgage principal forgiveness remains
on the balance sheet and is being amortized over the life of the loan.
Interest expense is computed in such a way that a constant effective
interest rate (currently equal to approximately 1.7%) is applied to the
carrying amount of the loan.
The contingent nature of the forgiveness that was part of the September
1995 loan modification was removed with the October 1996 loan modification.
Accordingly, for federal income tax purposes, the total forgiveness of
$12,487,000 will be reported as a gain to the partners of HRP on their 1996
Schedule K-1s. Based on available records, the General Partner believes
that most individuals who were partners at the time of HRP's formation in
November 1990 and certain other partners possibly have enough prior years'
suspended losses to absorb a part, if not all, of this gain. Partners
should consult their own tax advisor or preparer to assess the tax
consequences of this transaction.
EXECUTIVE PARK -
Executive Park's mortgage notes matured on June 16, 1996. On October 8,
1996, the lender and HRP entered into a renewal and loan modification
agreement, which extended the maturity date fifteen years to November 15,
2011 and set the initial interest rate at 8.87%. The notes are
self-amortizing and include call options every three years for evaluation
of financial performance. The interest rate may be adjusted, within
certain parameters, at the call option dates.
Page 20 of 32
<PAGE> 133
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
5. LEASE AGREEMENTS
The lease provisions generally require tenants to pay fixed rental amounts
plus their proportionate share of certain building operating costs and real
property taxes. In addition, certain leases include provisions for annual
rental adjustments. Revenue from expense recoveries, included in property
operations, was $3,363,000, $3,902,000 and $2,932,000 in 1996, 1995 and
1994, respectively. At December 31, 1996, the Properties, in the
aggregate, were 90% occupied and minimum cash rental payments to be
received under non-cancelable leases with tenants were as follows (in
thousands):
<TABLE>
<S> <C>
1997 $ 41,443
1998 34,466
1999 26,925
2000 20,862
2001 12,820
Thereafter 52,741
---------
Total $ 189,257
=========
</TABLE>
During 1996 and 1995, two tenants leasing space in the Properties each
contributed more than 10% of the total revenues of the Partnership. Ford
Motor Company and affiliates ("Ford") leases space in Parklane Towers and
Fairlane Commerce Park and contributed approximately 16% and 18% of
revenues in 1996 and 1995, respectively. The Centers for Disease Control
and Prevention, an agency of the U.S. Department of Health and Human
Services, ("CDC") leases space in Corporate Square and Executive Park and
contributed approximately 10% of 1996's revenues. First National Bank of
Maryland leases space in the First Maryland Building and contributed 12% of
1995's revenues.
As of December 31, 1996, Ford occupied approximately 283,000 square feet of
office space under 14 separate leases at Parklane Towers and approximately
246,000 square feet of office, technical laboratory and industrial space
under 8 separate leases at Fairlane Commerce Park. These leases expire
between 1997 and 2001 and most contain renewal options, providing for one
to ten year renewals. As of December 31, 1996, CDC occupied approximately
202,000 square feet of office space at Executive Park under 3 leases which
expire between 1999 and 2003. CDC also occupied approximately 158,000
square feet of office space at Corporate Square under a lease which expires
in 2013.
The remaining tenants are not concentrated in any one industry, nor is the
Partnership otherwise dependent on any one tenant or group of tenants for
10% or more of its revenues.
6. PARTNERS' CAPITAL
REVERSE SPLIT
On February 27, 1995, the General Partner approved a one-for-five reverse
split ("Reverse Split") of the outstanding Units of the Partnership ("Old
Units"). The result is that each five Old Units as of the close of
business on the effective date of March 3, 1995 were converted into one new
unit ("New Units"). The New Units began trading on March 6, 1995 at the
post-Reverse Split price. All references in the consolidated financial
statements to the number of Units, per Unit amounts, and market prices of
the Partnership's Units have been restated to reflect the effect of the
Reverse Split.
In anticipation of the need for cash to pay for fractional New Units, the
General Partner purchased 30,000 New Units from the Partnership on March 6,
1995 for $11.875 per Unit. Unitholders received cash in lieu of fractional
New Units as they exchanged their certificates that they held prior to the
Reverse Split for new certificates. The cash paid to Unitholders for their
fractional New Units was $11.875 (based on five times the average closing
price of the Old Units on the American Stock Exchange for the five trading
days preceding the Reverse Split's effective date). The fractional New
Units were purchased by the Partnership. As a result of these
transactions, the number of outstanding units decreased from 8,662,298 Old
Units to 1,747,765 New Units. During the first quarter of 1995, the
General Partner's capital account was adjusted for the above mentioned
transactions in order to maintain its 1% general partner interest, in
accordance with HRP's Partnership Agreement.
Page 21 of 32
<PAGE> 134
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
6. PARTNERS' CAPITAL - CONTINUED
UNIT OPTIONS
In a separate action taken by the Board of Directors of the General Partner
on February 27, 1995, a Unit Option Plan providing for the grants of
options ("Options") to certain executives was approved. The Unit Option
Plan calls for up to an aggregate of 86,000 New Units to be available for
issuance by the Partnership upon the exercise of such Options. As of
December 31, 1996, none of the Options have been exercised. Also approved
was a loan program that provides for the Partnership, under certain limited
conditions, to loan to the optionees the amounts necessary to exercise the
Options. These nonqualified options were granted at an exercise price of
$11.875 (equal to five times the closing price on the American Stock
Exchange on the date before the grant to give effect of the above mentioned
Reverse Split), to vest to 100% by February 27, 1997 and expire after 10
years. The options are considered antidilutive and therefore are not
included in the calculation of loss per Unit amounts.
HRP has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based
Compensation". Accordingly, no compensation cost has been recognized for
the Options. Had compensation costs for the Options been determined based
on the fair value at the grant date for the awards in 1995 consistent with
the provisions of SFAS No. 123, HRP's net loss and net loss per Unit for
1996 and 1995 would have been the pro forma amounts indicated below (in
thousands except per Unit amounts):
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
Net loss - as reported $ (9,428) $ (9,789)
Net loss - pro forma (9,623) (10,146)
Net loss per Unit - as reported (5.50) (5.55)
Net loss per Unit - pro forma (5.61) (5.76)
</TABLE>
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used:
expected volatility of 57.8%, risk-free interest rate of 7.1%, expected
life of 5 years and no distribution yield.
COMMISSION-FREE OFFER
On June 5, 1995, the Partnership announced a commission-free program for
Unitholders to sell their interest in the Partnership for holdings of less
than 100 Units as of the record date of May 31, 1995. The offer allowed
eligible Unitholders to sell all, but not less than all, of their Units to
the Partnership without incurring any brokerage commissions. The offer
will benefit the Partnership by reducing the annual Unitholder servicing
costs incurred for tax reporting, printing, postage and transfer agent
costs.
Units were purchased by the Partnership on the first business day (the
"Purchase Date") on which the Partnership determined that the Unit
certificate was in proper form and that the Letter of Transmittal form was
properly completed. The per Unit price paid by the Partnership was based
on the average of the closing market prices of the Units for the five
trading days immediately preceding the Purchase Date, as reported by The
Wall Street Journal. On July 10, 1995 the offer expired. The Partnership
acquired about 294,000 Units from over 16,600 Unitholders. As planned, the
Partnership resold the acquired Units to Hallwood for the amount that the
Partnership paid for the Units, approximately $4,100,000.
UNIT PURCHASES
HRP purchased, in private transactions, 74,760 Units for $1,776,000 in May
1996 and 449 Units for $12,000 in July 1996. In addition, the General
Partner's capital account was adjusted by $18,000 in order to maintain its
1% general partner interest, in accordance with HRP's Partnership
Agreement. Accordingly, HRP's outstanding Units have decreased from
1,747,765 Units to 1,672,556 Units.
Page 22 of 32
<PAGE> 135
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
7. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107 - "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the estimated fair values of certain financial
instruments. The estimated fair value amounts have been determined using
available market information based upon negotiations held by HRC with
potential lenders or other appropriate valuation methodologies that require
considerable judgment in interpreting market data and developing estimates.
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.
The fair value of financial instruments that are short-term or reprice
frequently and have a history of negligible credit losses is considered to
approximate their carrying value. These include cash and cash equivalents,
short term receivables, accounts payable and other liabilities. Real
estate and other assets consist of nonfinancial instruments, which are
excluded from the scope of SFAS 107.
Management has reviewed the carrying values of its mortgages payable in
connection with interest rates currently available to the Partnership for
borrowings with similar characteristics and maturities (approximately 8.8%)
and has determined that they would equal approximately $159,096,000 and
$166,851,000 (excluding the contingent forgiveness of debt discussed in
Note 4) of estimated fair value as of December 31, 1996 and 1995,
respectively.
As of December 31, 1996 and 1995, the fair value information presented
herein is based on pertinent information available to management. 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,
therefore current estimates of fair value may differ significantly from the
amounts presented herein.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION
On April 14, 1994, the Partnership reached an agreement to settle all
claims arising out of a class action lawsuit originally filed in July 1990.
In 1994, the Partnership incurred $8,198,000 of litigation and settlement
cost expenses. The Partnership is from time to time involved in various
legal proceedings in the ordinary course of its business. Management
believes that the resolution of these matters will not have a material
effect on the financial position, cash flow or operations of the
Partnership.
ASBESTOS
Parklane Towers, as well as certain other properties to a lesser extent,
are known to contain asbestos. Removal of the asbestos at Parklane Towers
is estimated to cost $1,700,000; however, it is not required to be removed
since it is not friable and the Partnership has an Operations and
Maintenance Program in place. Federal and state environmental legislation
or regulations may have an impact on the future operations of Parklane
Towers or certain other properties if such legislation or regulations
require the immediate expenditure of funds to comply with applicable
restrictions or requirements.
RIGHTS PLAN
The Partnership has a Unit Purchase Rights Agreement ("Rights Plan") that
provides for a distribution of one right for each Unit of the Partnership
to holders of record at the close of business as of December 10, 1990. The
rights will become exercisable only in the event, with certain exceptions,
an acquiring party accumulates 15 percent or more of the Partnership's
Units, or if a party commences or announces an intent to commence a tender
offer or exchange offer to acquire 30 percent or more of such Units. The
rights will expire on November 30, 2000. Each right will entitle the
holder to buy one additional Unit at a price of $250. In addition, upon
the occurrence of certain events, holders of the rights will be entitled to
purchase either Partnership Units or shares in an "acquiring entity" at
half of market value. The Partnership will generally be entitled to redeem
the rights at $.01 per right at any time on or prior to the tenth day
following the acquisition of a 15 percent or greater interest in its Units.
Page 23 of 32
<PAGE> 136
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1996
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is selected quarterly financial data for the years ended
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Quarter Ending
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(In thousands except per Unit amounts)
<S> <C> <C> <C> <C>
1995
----
Total revenues $ 12,432 $ 12,258 $ 12,277 $ 12,645
Property operations revenues less property
operations expenses and recurring general
and administrative expenses 5,058 5,230 5,179 4,948
Net loss (2,520) (2,324) (2,103) (2,481)
Net loss per Unit (1.43) (1.35) (1.24) (1.48)
1996
----
Total revenues $ 12,809 $ 12,296 $ 12,837 $ 12,887
Property operations revenues less property
operations expenses and recurring general
and administrative expenses 6,107 5,603 5,996 5,791
Loss before extraordinary item (2,185) (2,654) (2,273) (1,912)
Net loss (2,185) (2,654) (3,038) (1,912)
Loss before extraordinary item per Unit (1.25) (1.50) (1.30) (1.07)
Net loss per Unit (1.25) (1.50) (1.73) (1.07)
</TABLE>
Page 24 of 32
<PAGE> 137
HALLWOOD REALTY PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Costs
capitalized
subsequent to
Initial cost acquisition
------------------ ------------
Buildings Buildings
and and
Description (A) Encumbrances Land improvements improvements
--------------- ------------ ---- ------------ ------------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES:
Airport Plaza $ 790 $ 1,220 $ 4,013 $ 317
Bellevue Corporate Plaza 15,808 7,428 17,617 2,722
Corporate Square 13,461 5,493 14,112 7,545
Executive Park 29,987 15,243 34,982 10,793
First Maryland Building 25,460 2,100 43,772 2,619
Montrose Office Center 6,422 5,096 15,754 3,583
Parklane Towers 23,712 3,420 37,592 3,163
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks 6,530 5,017 15,563 4,358
Fairlane Commerce Park 20,946 5,300 18,080 5,140
Joy Road Distribution Center -- 359 1,340 1,231
Raintree Industrial Park 11,066 1,191 18,208 1,302
Seattle Business Parks 6,550 4,953 8,730 3,871
OFFICE EQUIPMENT -- -- -- 84
-------- -------- -------- --------
TOTAL $160,732 $ 56,820 $229,763 $ 46,728
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which
carried at close of period
-------------------------------
Buildings Accumulated
and depreciation Date
Description (A) Land improvements Total (B) (B)(C) acquired
--------------- --------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Airport Plaza $ 1,220 $ 4,330 $ 5,550 $ 4,701 4/30/87
Bellevue Corporate Plaza 7,428 20,339 27,767 4,215 6/30/88
Corporate Square 5,493 21,657 27,150 12,674 8/2/85 & 10/1/92
Executive Park 15,243 45,775 61,018 32,308 12/19/85
First Maryland Building 2,100 46,391 48,491 25,119 6/29/84
Montrose Office Center 5,096 19,337 24,433 6,833 1/8/88
Parklane Towers 3,420 40,755 44,175 27,922 12/16/84
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks 5,017 19,921 24,938 10,348 9/24/85
Fairlane Commerce Park 5,300 23,220 28,520 9,474 12/30/86 & 7/1/87
Joy Road Distribution Center 359 2,571 2,930 103 2/14/96
Raintree Industrial Park 1,191 19,510 20,701 9,250 7/17/86
Seattle Business Parks 4,953 12,601 17,554 7,455 4/24/86
OFFICE EQUIPMENT -- 84 84 32 various
-------- -------- -------- --------
TOTAL $ 56,820 $276,491 $333,311 $150,434
======== ======== ======== ========
</TABLE>
See notes to Schedule III on following page.
Page 25 of 32
<PAGE> 138
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO SCHEDULE III
DECEMBER 31, 1996
(IN THOUSANDS)
(A) PROPERTY LOCATIONS ARE AS FOLLOWS:
Office Building Properties:
Airport Plaza - San Diego, California
Bellevue Corporate Plaza - Bellevue, Washington
Corporate Square - Atlanta, Georgia
Executive Park - Atlanta, Georgia
First Maryland Building - Baltimore, Maryland
Montrose Office Center - Rockville, Maryland
Parklane Towers - Dearborn, Michigan
Industrial Park Properties:
Bradshaw Business Parks - Sacramento and Rancho Cordova, California
Fairlane Commerce Park - Dearborn, Michigan
Joy Road Distribution Center - Detroit, Michigan
Raintree Industrial Park - Solon, Ohio
Seattle Business Parks - Kent and Tukwila, Washington
(B) RECONCILIATION OF CARRYING COSTS (in thousands):
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation
--------- ------------
<S> <C> <C>
Balance, January 1, 1994 $ 332,333 $ 112,623
Additions 3,459 17,957
Retirements (3,289) (3,289)
--------- ---------
Balance, December 31, 1994 332,503 127,291
Additions 4,477 17,423
Retirements (6,502) (6,502)
--------- ---------
Balance, December 31, 1995 330,478 138,212
Additions 7,697 17,086
Retirements (4,864) (4,864)
--------- ---------
Balance, December 31, 1996 $ 333,311 $ 150,434
========= =========
</TABLE>
(C) COMPUTATION OF DEPRECIATION:
Depreciation of buildings is computed using the straight-line method
over estimated useful lives ranging from 10 to 43 years. Equipment
and other improvements are depreciated on the straight-line method
over estimated useful lives ranging from 3 to 23 years. Tenant
improvements are capitalized and amortized over the term of the
respective leases. Accumulated depreciation also includes loss
reserves established for anticipated losses on future dispositions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
Page 26 of 32
<PAGE> 139
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no officers or directors. HRC, as general partner of the
Partnership, performs all functions ordinarily performed by officers and
directors. HRC was incorporated in Delaware in January 1990.
BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS OF HRC -
ANTHONY J. GUMBINER, 52, CHAIRMAN OF THE BOARD AND DIRECTOR OF HRC
Mr. Gumbiner has served as Chairman of the Board of Directors of Hallwood
since 1981 and as its Chief Executive Officer since April 1984. He has
served as Chairman of the Board of Directors from May 1984 to November 1996
and Chief Executive Officer since February 1987 of the general partner of
Hallwood Energy Partners, L.P. ("HEP"). He has also served as the managing
director of Hallwood Holdings S.A. ("HHSA") since March 1984; as a director
of HRC since 1990; as a director of Hallwood Consolidated Resources
Corporation ("HCRC") since 1992; and as a director of ShowBiz Pizza Time,
Inc. ("ShowBiz") since September 1988. Mr. Gumbiner is also a Solicitor of
the Supreme Court of Judicature of England.
BRIAN M. TROUP, 49, DIRECTOR OF HRC
Mr. Troup has served as a director of Hallwood since 1981 and as President
and Chief Operating Officer of Hallwood since April 1986. Mr. Troup has
served as a director of the general partner of HEP since May 1984. He also
has served as a director of HCRC since 1992; as a director of HHSA since
March 1984; as a director of HRC since 1990; and as a director of ShowBiz
since September 1988. He is an associate of the Institute of Bankers in
Scotland and a member of the Society of Investment Analysts in the United
Kingdom.
WILLIAM L. GUZZETTI, 53, PRESIDENT AND DIRECTOR OF HRC
Mr. Guzzetti has been President and a director of HRC since January 1990.
He has served as Executive-Vice President of Hallwood since October 1989 and
as President and a director of HCRC since 1992. Mr. Guzzetti has been
President and a director of the general partner of HEP since February 1985.
JOHN G. TUTHILL, 53, EXECUTIVE VICE PRESIDENT AND SECRETARY
Mr. Tuthill has been the Executive Vice President and Secretary of HRC since
January 1990. Mr. Tuthill joined Hallwood in October 1989 to head all
property management functions, having previously served as President of
Southmark Commercial Management since November 1986, where he was
responsible for a diversified real estate portfolio of over 18,000,000
square feet.
JEFFREY D. GENT, 49, VICE PRESIDENT - FINANCE
Mr. Gent has been the Vice President-Finance of HRC since March 1990, having
previously served as Vice President - Finance of Southmark Commercial
Management since September 1984, where he was responsible for the financial
functions of a diversified real estate portfolio of over 18,000,000 square
feet.
ALAN G. CRISP, 55, DIRECTOR OF HRC
Mr. Crisp was Chairman and Chief Executive Officer of Atlantic Metropolitan
Holdings (U.K.) plc from 1979 until 1988, when he joined Interallianz Bank
Zurich AG. From 1988 to 1993, he was General Manager of the London Office
of the Bank. He is a Fellow of the Royal Institution of Chartered Surveyors
and holds a B.A. (Hons) Degree.
WILLIAM F. FORSYTH, 47, DIRECTOR OF HRC
Mr. Forsyth has been Chairman of Kildalton & Co., an investment management
consultancy based in Edinburgh, Scotland since 1992. He graduated in law at
Edinburgh University in 1971, and is a member of the Society of Investment
Analysts in the United Kingdom.
EDWARD T. STORY, 53, DIRECTOR OF HRC
Mr. Story has been President and Chief Executive Officer of SOCO
International, Inc., an oil and gas company, since September, 1991. Prior
to September 1991, he was Founder and Chairman of Thaitex Petroleum Company,
Co-founder and Chief Financial Officer of Conquest Exploration Company, the
Chief Financial Officer for Superior Oil Company and Exploration and
Production Controller with Exxon Corporation.
UDO H. WALTHER, 49, DIRECTOR OF HRC
Mr. Walther has been President and Chief Executive Officer of Walther Group,
Inc., a full service design and construction consultancy, and President of
Precept Builders, Inc. since 1991. Previously, Mr. Walther was a Partner at
Trammell Crow Company, Project Manager with HCB Contractors and Marketing
Vice President for Researched Investments, Ltd.
Page 27 of 32
<PAGE> 140
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)
Section 16(a) of the Securities and Exchange Act of 1934 requires a
registrant's officers and directors, if any, and persons who own more than ten
percent of a registered class of the Partnership's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC") and the American Stock Exchange. Officers, directors
and greater than ten percent shareholders are required by the SEC regulations
to furnish the Partnership with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Partnership, or written representations that no Forms 5 were required, the
Partnership believes that during the period January 1, 1996 to December 31,
1996, all Section 16(a) filing requirements applicable to its officers and
directors were complied with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND COMPENSATION OF
DIRECTORS
HRC does not have a compensation committee and compensation decisions are made
by the Board of Directors of HRC. During 1996, Messrs. Gumbiner, Troup and
Guzzetti served on the Board of Directors of HRC and the compensation committee
of Hallwood Energy. Mr. Gumbiner is also Chief Executive Officer of Hallwood,
HRC and the general partner of HEP. Mr. Troup is also President and Chief
Operating Officer of Hallwood. Mr. Guzzetti is also President and Chief
Operating Officer of HRC, Chief Operating Officer and President of the general
partner of HEP, and Executive Vice President of Hallwood. Messrs. Crisp and
Forsyth were each paid $20,000 in each of the three years ended December 31,
1996 for director fees. Messrs. Story and Walther were each paid $20,000 in
1996 and 1995 and $10,000 in 1994 for director fees.
HRC receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and incentive disposition
fees. Specifically, HRC is entitled to receive (i) an asset management fee
equal to 1% of the net aggregate base rents of the Properties, (ii) acquisition
fees equal to 1% of the purchase price of newly acquired properties, and (iii)
incentive fees for performing disposition services with respect to real estate
investments, other than the properties owned at the time of HRP's formation on
November 1, 1990, equal to 10% of the amount, by which the sales price of a
property disposed of exceeds the purchase price of such property.
HCRE receives compensation in connection with the management of the Properties,
which includes a property management fee, lease commissions and construction
supervision fees. The management contracts expire June 30, 1999 and provide for
(i) basic compensation from a property management fee which is an amount equal
to 2.85% of cash receipts collected from the Properties' tenants, (ii) lease
commissions equal to the current market rate as applied to the net aggregate
rent, not to exceed 6% of the net aggregate rent, and (iii) construction
supervision fees for administering all construction projects equal to 5% of the
total contract costs of each capital expenditure or tenant improvement project.
HRC and HCRE are compensated for services provided to HRP and its Properties as
described above. The following table sets forth such compensation and
reimbursement paid by HRP for the periods presented (in thousands):
<TABLE>
<CAPTION>
Entity
Paid or
Reimbursed 1996 1995 1994
---------- -------- ------- -------
<S> <C> <C> <C> <C>
Asset management fee HRC $ 450 $ 446 $ 434
Property management fee HCRE 1,433 1,459 1,384
Lease commissions (a) HCRE 2,888 1,501 801
Construction fees HCRE 382 270 259
Acquisition fee HRC 17 - -
Reimbursement of costs (b) HRC 2,321 1,992 2,030
</TABLE>
(a) As of February, 1997, $667,000 of the lease commissions accrued in
1996 had not been paid.
(b) These costs are mostly recorded as General and Administrative
Expenses and represent reimbursement to HRC, at cost, for
Partnership level salaries, employee and director insurance and
certain overhead costs. HRP pays, on a monthly basis, the balance
of its account with HRC.
Page 28 of 32
<PAGE> 141
ITEM 11. EXECUTIVE COMPENSATION - (CONTINUED)
CASH COMPENSATION OF EXECUTIVE OFFICERS
The Partnership has no executive officers, however, employees of HRC (general
partner of the Partnership) perform all functions ordinarily performed by
executive officers. The following table sets forth annual compensation
information for the Chief Executive Officer and the three other executive
officers with earnings that exceeded $100,000 for the year ended December 31,
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
-----------------------------------------------------------------------------------
Other Annual Securities Underlying
Name and Principal Position Year Salary (a) Bonus Compensation (b) Options/SARs (c)
- --------------------------- ---- ---------- ----- ---------------- -------------------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner 1996 $ - $ - $ - -
Chairman of the Board and 1995 - - - 25,800
Chief Executive Officer 1994 - - - -
William L. Guzzetti 1996 200,000 8,333 - -
President and Chief 1995 200,000 8,333 - 15,000
Operating Officer 1994 200,000 8,333 - -
John G. Tuthill 1996 150,360 46,265 3,345 -
Executive Vice President 1995 150,360 6,265 8,556 13,000
and Secretary 1994 150,000 6,250 8,969 -
Jeffrey D. Gent 1996 90,360 15,648 2,317 -
Vice President - Finance 1995 90,360 5,648 6,356 7,000
</TABLE>
- -------------
(a) Represents executive officers' gross salary before contributions to
the qualified 401(k) Tax Favored Savings Plan.
(b) Represents employer matching contributions to the 401(k) Tax Favored
Savings Plan or payments in lieu thereof made under a special bonus
arrangement.
(c) Represents the number of options granted for Partnership Units under a
February 1995 plan - see Note 6 to the Consolidated Financial
Statements. Other than this plan, HRC and HRP do not have any long
term compensation awards and payouts, such as a stock option plan or
restricted stock awards.
The following table discloses for each of the executive officers of HRC, who
have been granted options to purchase securities of HRP the number of such
options heldby each of the executive officers and the potential realizable
values for their options at December 31, 1996. None of the executive officers
exercised any options during the year ended December 31, 1996 and HRP has not
granted SARs.
AGGREGATED OPTION/SAR EXERCISES IN 1996
AND OPTION/SAR VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options/SARs at Options/SARs at
Units December 31, 1996 December 31, 1996
Acquired --------------------------------- --------------------------------
Name on Exercise Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner 0 17,200 8,600 $421,400 $210,700
William L. Guzzetti 0 10,000 5,000 245,000 122,500
John G. Tuthill 0 8,666 4,334 212,317 106,183
Jeffrey D. Gent 0 4,666 2,334 114,317 57,183
</TABLE>
Page 29 of 32
<PAGE> 142
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 14, 1997 concerning the
number of Units of the Partnership owned beneficially by (l) the persons who,
to the knowledge of the management, beneficially owned more than 5% of the
Units outstanding on such date, (2) each director and (3) the present directors
and executive officers of HRC as a group:
<TABLE>
<CAPTION>
Amount Percent
Name and Address of Beneficially of
Beneficial Owner Owned (a) Class
- --------------------- ------------- -----------
<S> <C> <C>
The Hallwood Group Incorporated
3710 Rawlins, Suite 1500
Dallas, Texas 75219 413,040 24.7%
Gotham Partners, L.P.
237 Park Avenue, 9th Floor
New York, NY 10017 247,994 14.8%
Alan G. Crisp ** - -
William F. Forsyth ** - -
Anthony J. Gumbiner ** 25,800 (b) 1.5% (b)
William L. Guzzetti ** 15,100 (c) * (c)
Edward T. Story ** - -
Brian M. Troup ** 17,200 (d) 1.0% (d)
Udo H. Walther ** - -
All directors and executive officers
as a group (9 persons) 78,100 (e) 4.7% (e)
</TABLE>
- --------------------
* Represents less than l% of the outstanding Units.
** Represents the following address: c/o Hallwood Realty Corporation,
3710 Rawlins, Suite 1500, Dallas, Texas, 75219.
(a) Unless otherwise indicated, each of the persons named has sole voting
and investment power with respect to the Units reported.
(b) Comprised of currently exercisable options to purchase 25,800 Units.
(c) Includes currently exercisable options to purchase 15,000 Units.
(d) Comprised of currently exercisable options to purchase 17,200 Units.
(e) Includes currently exercisable options to purchase 78,000 Units.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information covered by this item, see Notes 3 and 6 to the Registrant's
financial statements included in Item 8 hereof.
Page 30 of 32
<PAGE> 143
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(1) Financial Statements.
See Index contained in Item 8.
(2) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of 1996 or in
1997 prior to the filing of this Form 10-K for the year ended December 31,
1996.
(3) Exhibits and Reports on Form 8-K.
The response to this portion of Item 14 is incorporated by reference as
detailed in the Exhibit Index.
(4) Financial Statement Schedules.
See Index contained in Item 8.
Page 31 of 32
<PAGE> 144
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 REALTY PARTNERS, L.P.
BY: HALLWOOD REALTY CORPORATION
GENERAL PARTNER
DATE: March 14, 1997 BY: /s/ WILLIAM L. GUZZETTI
-------------------------------------
William L. Guzzetti
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K for the year ended December 31, 1996, has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ ANTHONY J. GUMBINER Chairman of the Board and Director,
- ------------------------------------- Hallwood Realty Corporation
Anthony J. Gumbiner (Chief Executive Officer)
/s/ WILLIAM L. GUZZETTI President and Director,
- ------------------------------------- Hallwood Realty Corporation
William L. Guzzetti (Chief Operating Officer)
/s/ JOHN G. TUTHILL Executive Vice President and Secretary,
- ------------------------------------- Hallwood Realty Corporation
John G. Tuthill
/s/ JEFFREY D. GENT Vice President - Finance,
- ------------------------------------- Hallwood Realty Corporation
Jeffrey D. Gent (Chief Accounting Officer)
/s/ALAN G. CRISP Director,
- ------------------------------------- Hallwood Realty Corporation
Alan G. Crisp
/s/ WILLIAM F. FORSYTH Director,
- ------------------------------------- Hallwood Realty Corporation
William F. Forsyth
/s/ EDWARD T. STORY Director,
- ------------------------------------- Hallwood Realty Corporation
Edward T. Story
/s/ BRIAN M. TROUP Director,
- ------------------------------------- Hallwood Realty Corporation
Brian M. Troup
/s/ UDO H. WALTHER Director,
- ------------------------------------- Hallwood Realty Corporation
Udo H. Walther
</TABLE>
Page 32 of 32
<PAGE> 145
HALLWOOD REALTY PARTNERS, L.P.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C> <C>
3.1 (a) Certificate of Limited Partnership of Hallwood Realty Partners, L.P., dated January 10, 1990.
3.2 (a) Amended and Restated Agreement of Limited Partnership of Hallwood Realty Partners, L.P., dated June
7, 1990.
4.1 Unit Purchase Rights Agreement, dated as of November 30, 1990, between the Partnership and The
First National Bank of Boston, as Rights Agent (filed as part of Exhibit 1 to Current Report of
Form 8-K, dated November 30, 1990, and which is incorporated herein by reference - File No.1 -
10643). (4.1)
10.1 (b) Management Agreement between Equitec/San Diego and Hallwood Management Company dated July 1, 1994.
10.2 (b) Management Agreement between Equitec/Bellevue Investors and Hallwood Management Company dated July
1, 1994.
10.3 (b) Management Agreement between BBP General Partnership and Hallwood Management Company dated July 1,
1994.
10.4 (b) Management Agreement between Hallwood Real Estate Investors Fund XV and Hallwood Management Company
dated July 1, 1994.
10.5 (b) Management Agreement between Executive Park Ventures and Hallwood Management Company dated July 1,
1994.
10.6 (b) Management Agreement between Equitec Dearborn Real Estate Investors and Hallwood Management Company
dated July 1, 1994.
10.7 (b) Management Agreement between Hallwood Income Real Estate Investors A and Hallwood Management
Company dated July 1, 1994.
10.8 (b) Management Agreement between Hallwood Real Estate Investors Fund XVI Hallwood Management Company
dated July 1, 1994.
10.9 (b) Management Agreement between First Associates Limited Partnership and Hallwood Management Company
dated July 1, 1994.
10.10 (b) Management Agreement between Montrose Center Limited Partnership and Hallwood Management Company
dated July 1, 1994.
</TABLE>
<PAGE> 146
HALLWOOD REALTY PARTNERS, L.P.
EXHIBIT INDEX - (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
10.11 (b) Management Agreement between Hallwood Real Estate Investors Fund XIV and Hallwood Management
Company dated July 1, 1994.
10.12 (b) Management Agreement between Hallwood Real Estate Investors Fund XVI and Hallwood Management
Company dated July 1, 1994.
10.13 (b) Management Agreement between SBP General and Hallwood Management Company dated July 1, 1994.
10.14 (b) 1995 Unit Option Plan for Hallwood Realty Partners, L.P.
10.15 (b) 1995 Unit Option Plan Loan Program for Hallwood Realty Partners, L.P.
10.16 Loan Agreement between Hallwood 95, L.P. and Nomura Asset Capital Corporation. (Incorporated by
reference from exhibit 2.1 filed with Current Report on Form 8-K dated September 29, 1995.)
10.17 Amended and Restate Agreement of Limited Partnership of Hallwood 95, L.P. (Incorporated by
reference from exhibit 10.17 filed with Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
27 Financial Data Schedule
__________
(a) Filed as an Exhibit to Registration Statement No. 33-35621 on Form S-4 of the Partnership, filed with the
Commission on June 28, 1990, as amended, on June 29, 1990 and incorporated herein by reference.
(b) Incorporated by reference as the exhibit indicated and filed with Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
</TABLE>
<PAGE> 147
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 -- Second Restated Certificate of Incorporation of The
Hallwood Group Incorporated, is incorporated herein by
reference to Exhibit 4.2 to the Company's Form S-8
Registration Statement, File No. 33-63709.
3.2 -- Restated Bylaws of the Company, as currently in effect,
including all amendments thereto, is incorporated herein
by reference to Exhibit 3.4 to the Company's Form 10-K
for the fiscal year ended July 31, 1992, File No. 1-8303.
4.1 -- Indenture Agreement, dated as of April 14, 1983, among
Atlantic Metropolitan Corporation, Atlantic Metropolitan
(U.K.) plc and The Law Debenture Trust Corporation plc,
as Trustee, relating to the 12% Convertible Notes due
July 31, 1997 of Anglo Metropolitan (U.K.) plc is
incorporated herein by reference to Exhibit 4.4 to
Atlantic Metropolitan Corporation's Form 10-K for the
fiscal year ended July 31, 1983, File No. 1-8303.
4.2 -- Indenture Agreement, and related Pledge Agreement, dated
as of March 2, 1993, among Norwest Bank Minnesota,
National Association, Trustee, and the Company, regarding
7% Collateralized Senior Subordinated Debentures due July
31, 2000, is incorporated herein by reference to Exhibit
4.2 to the Company's Form 10-Q for the fiscal quarter
ended January 31, 1993, File No. 1-8303.
4.3 -- Indenture, dated as of May 1, 1989, between the Company
and The Bank of New York, as Trustee, is incorporated
herein by reference to Exhibit T3C to the Company's
Application for Qualification of Indenture on Form T-3,
Registration No. 22-19326.
10.1 -- Consulting Agreement with Robert L. Lynch is incorporated
herein by reference to Exhibit 10.2 to Umet Properties
Corporation's Registration Statement on Form S-11, File
No. 2-73345.
10.2 -- Amendment to Consulting Agreement with Robert L. Lynch,
effective October 1, 1982, is incorporated herein by
reference to Exhibit 10.4 to Umet Properties
Corporation's Form 10-K for the fiscal year ended
November 30, 1982, File No. 1-8384.
10.3 -- Amended and Restated Agreement, dated March 30, 1990,
between the Company and Stanwick Management Company, Inc.
(subsequently merged into its parent, Stanwick Holdings,
Inc.) concerning the allocation of costs and expenses
incurred in connection with the operation and management
of their common offices is incorporated herein by
reference to Exhibit 10.30 to the Company's Form 10-Q for
the fiscal quarter ended April 30, 1990, File No. 1-8303.
10.4* -- Employment Agreement, dated January 1, 1994, between the
Company and Melvin John Melle, as incorporated by
reference to Exhibit 10.9 to the Company's Form 10-K for
the fiscal year ended July 31, 1994, File No. 1-8303.
10.5 -- Agreement, dated December 18, 1987, between the Company,
Grainger Trust plc, Atlantic Metropolitan (U.K.) plc and
Alan George Crisp, relating to the sale by the Company of
Atlantic Metropolitan (U.K.) plc is incorporated herein
by reference to Exhibit 2.1 to the Company's Form 8-K
dated January 6, 1988, File No. 1-8303.
10.6 -- Tax Sharing Agreement, dated as of March 15, 1989,
between the Company and Brookwood Companies Incorporated
is incorporated herein by reference to Exhibit 10.25 to
the Company's Form 10-K for the fiscal year ended July
31, 1989, File No. 1-8303.
10.7 -- Amended Tax-Favored Savings Plan Agreement of the
Company, effective as of February 1, 1992, is
incorporated herein by reference to Exhibit 10.33 to the
Company's Form 10-K for the fiscal year ended July 31,
1992, File No. 1-8303.
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.8 -- Hallwood Special Bonus Agreement, dated as of August 1,
1993, between the Company and all members of its control
group that now, or hereafter, participate in the Hallwood
Tax Favored Savings Plan and its related trust, and those
employees who, during the plan year of reference are
highly-compensated employees of the Company, is
incorporated herein by reference to Exhibit 10.34 to the
Company's Form 10-K for the fiscal year ended July 31,
1994, File No. 1-8303.
10.9 -- Credit Agreement and Guaranty, dated as of December 9,
1992, among Brookwood Companies Incorporated as Borrower,
the Guarantor signatory hereto, the Banks signatory
hereto and The Chase Manhattan Bank, N.A., as Agent; and
the First Amendment to Credit Agreement and Guaranty,
dated as of March 31, 1993, is incorporated herein by
reference to Exhibit 10.55 to the Company's 10-Q for the
quarter ended April 30, 1993, File No. 1-8303.
10.10 -- Second Amendment to Credit and Guaranty, dated as of
September 27, 1994, among Brookwood Companies
Incorporated, as Borrower, Kenyon Industries, Inc., as
Guarantor and The Chase Manhattan Bank, N.A., as Bank and
as Agent for the Banks, is incorporated herein by
reference to Exhibit 10.56 to the Company's Form 10-K for
the fiscal year ended July 31, 1994, File No. 1-8303.
10.11 -- Third Amendment to Credit and Guaranty, dated as of June
23, 1995, among Brookwood Companies Incorporated, as
Borrower, Kenyon Industries, Inc., as Guarantor and The
Chase Manhattan Bank, N.A., as Bank and as Agent for the
Banks, is incorporated herein by reference to Exhibit
10.15 to the Company's Form 10-K for the fiscal year
ended July 31, 1995, File No. 1-8303.
10.12 -- WCMA Note and Loan Agreement and Pledge and Collateral
Assignment of Securities Account and Securities, dated as
of April 19, 1994 between the Company and Merrill Lynch
Business Financial Services, Inc.; and Amendment to Loan
Documents, dated September 8, 1994, is incorporated
herein by reference to Exhibit 10.58 to the Company's
Form 10-K for the fiscal year ended July 31, 1994, File
No. 1-8303.
10.13* -- Employment Agreement, dated as of April 1, 1992, between
the Company's Hallwood Monaco SAM subsidiary and Anthony
J. Gumbiner, is incorporated herein by reference to
Exhibit 10.59 to the Company's Form 10-K for the fiscal
year ended July 31, 1994, File No. 1-8303.
10.14* -- Financial Consulting Agreement, dated as of August 1,
1994, between the Company and Hallwood Financial
Corporation, is incorporated herein by reference to
Exhibit 10.60 to the Company's Form 10-K for the fiscal
year ended July 31, 1994, File No. 1-8303.
10.15* -- Financial Consulting Agreement, dated as of June 30,
1994, between the Company and Hallwood Petroleum, Inc.,
is incorporated herein by reference to Exhibit 10.61 to
the Company's Form 10-K for the fiscal year ended July
31, 1994, File No. 1-8303.
10.16* -- Agreement, dated as of January 1, 1993, between Hallwood
Investment Company and Brian Michael Troup, is
incorporated herein by reference to Exhibit 10.20 to the
Company's Form 10-K for the fiscal year ended July 31,
1995, File No. 1-8303.
10.17 -- Financial and Management Consulting Services Agreement,
between ShowBiz Pizza Time, Inc. and the Company, dated
December 1988, is incorporated herein by reference to
Exhibit 10.21 to the Company's Form 10-K for the fiscal
year ended July 31, 1995, File No. 1-8303.
10.18* -- 1995 Stock Option Plan for The Hallwood Group
Incorporated is incorporated herein by reference to
Exhibit 4.1 of the Company's Form S-8 Registration
Statement, File No. 33-63709.
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.19 -- Fourth Amendment and Waiver of Credit Agreement and
Guaranty, dated as of December 31, 1995, among Brookwood
Companies Incorporated and subsidiaries, as borrower, and
The Chase Manhattan Bank N.A., as Bank and Agents for the
Banks, is incorporated herein by reference to Exhibit
10.16 to the Company's 10-Q for the two months and five
months ended December 31, 1995, File No. 1-8303.
10.20 -- Credit Agreement, dated as of December 10, 1996, among
HEPGP Ltd., as borrower, the Company, as a guarantor,
Hallwood G.P., Inc., as a guarantor, and First Union
National Bank of North Carolina, as lender, is filed
herewith.
10.21 -- Credit Agreement, dated as of January 7, 1997, among
Brookwood Companies Incorporated, Kenyon Industries, Inc.
and Brookwood Laminating, Inc., as borrower, and The Bank
of New York, as Bank, is filed herewith.
10.22* -- Financial Consulting Agreement, dated as of December 31,
1996, between the Company and HSC Financial Corporation,
is filed herewith.
10.23* -- Financial Consulting Agreement, dated as of December 31,
1996, between the Company and Hallwood Petroleum, Inc.,
is filed herewith.
11 -- Statement Regarding Computation of Per Share Earnings.
22 -- Active Subsidiaries of the Registrant as of February 28,
1997.
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Constitutes a compensation plan or agreement for executive officers.
<PAGE> 1
EXHIBIT 10.20
================================================================================
CREDIT AGREEMENT
Dated as of December 10, 1996
AMONG
HEPGP Ltd.
AS BORROWER
AND
THE HALLWOOD GROUP INCORPORATED
AS PARENT GUARANTOR
AND
HALLWOOD G.P., INC.
as a Guarantor
AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
AS LENDER
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
<S> <C> <C>
DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2. Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 1.3. Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE II
TERMS OF FACILITY . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.1. Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.2. The Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.3. Interest on the Loan and Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 2.4. Interest on Overdue Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.5. Principal Payments on the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.6. Voluntary Prepayment of the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.7. Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.8. Change in Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.9. Time, Place and Method of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.10. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE III
CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.1. Conditions Precedent to the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.2. Certain Post-Closing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE IV
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.1. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.2. Organization; Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4.3. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4.4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 4.5. No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.6. Ownership of Properties; Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.7. Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 4.8. No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 4.9. Financial Position; No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 4.10. Litigation; Adverse Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 4.11. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.12. Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
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SECTION 4.13. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 4.14. Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.15. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.16. Subsidiaries; Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.17. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 4.18. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.19. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.20. Licenses, Permits, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.21. Location of the Loan Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.22. Gas Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 4.23. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE V
AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.1. Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 5.2. Payment and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.3. Business of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.4. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.5. Right of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.6. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 5.7. Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.8. Compliance with Laws and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.9. Maintenance of Ownership of Oil and Gas Interests . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.10. Operation of Properties and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 5.11. Environmental Law Compliance and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 5.12. ERISA Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 5.13. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 5.14. Permits, Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 5.15. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 5.16. Title Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 5.17. Performance of Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE VI
NEGATIVE COVENANTS OF THE BORROWER . . . . . . . . . . . . . . . . . . . 37
SECTION 6.1. Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 6.2. Restrictions on Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.3. Liens; Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 6.4. Consolidation, Mergers and Acquisitions; Fundamental Changes . . . . . . . . . . . . . . . . . 38
SECTION 6.5. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 6.6. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 6.7. Certain Contracts; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 6.8 Amendments to Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 6.9. Subsidiaries, Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 6.10. Sales of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
</TABLE>
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<TABLE>
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SECTION 6.11. ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 6.12. Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 6.13. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 6.14. Hedging Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 6.15. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ARTICLE VII
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 7.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 7.2. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 7.3. Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 7.4. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE VIII
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.1. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.2. Notices, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 8.3. No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 8.4. Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 8.5. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 8.6. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8.7. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8.8. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8.9. Participations; Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 8.10. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 8.11. Marshalling; Recapture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 8.12. Representation by the Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 8.13. No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 8.14. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 8.15. Jurisdiction; Consent to Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 8.16. WAIVER OF JURY TRIAL, DAMAGES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 8.17. FINAL AGREEMENT OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
Schedules
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Schedule 3.1(g) - Description of Existing Immaterial Liens
Schedule 4.6 - Description of Title Matters
Schedule 4.10 - Description of Existing Litigation
Schedule 4.13 - Description of Existing Environmental Matters
Schedule 4.16 - Description of Existing Partnerships of the Borrower
Schedule 4.22 - Description of Existing Gas Imbalances
Schedule 6.5 - Description of Existing Investments
Exhibits
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Exhibit A - Form of Compliance Certificate
Exhibit B - Form of Conveyance Agreement
Exhibit C - Form of Deed of Trust
Exhibit D - Form of Note
Exhibit E - Form of Parent Guaranty
Exhibit F - Form of Parent Pledge Agreement
Exhibit G - Form of Security Agreement
Exhibit H - Form of Certificate of Borrower
Exhibit I - Form of Interest Rate Protection Agreement
Exhibit J - Form of GP Guaranty
Exhibit K - Form of GP Pledge Agreement
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[Conformed Copy]
CREDIT AGREEMENT
CREDIT AGREEMENT dated as of December 10, 1996, among HEPGP
LTD., a Colorado limited partnership of which Hallwood G.P., Inc., a Delaware
corporation is the sole general partner and of which the Parent Guarantor, as
hereinafter defined, is the sole limited partner (the "Borrower"), THE HALLWOOD
GROUP INCORPORATED, a Delaware corporation (the "Parent Guarantor"), HALLWOOD
G.P., INC., a Delaware corporation ("Hallwood GP"), and FIRST UNION NATIONAL
BANK OF NORTH CAROLINA, a national banking association (the "Lender").
PRELIMINARY STATEMENTS
WHEREAS, the Parent Guarantor owns a ninety-nine percent (99%) limited
partner interest in the Borrower;
WHEREAS, Hallwood GP owns a one percent (1%) general partner interest
in the Borrower;
WHEREAS, the Parent Guarantor owns one hundred percent (100%) of the
issued and outstanding capital stock of Hallwood GP;
WHEREAS, the Parent Guarantor and the Borrower desire that the Lender
extend certain credit to the Borrower to be used for working capital purposes
and loaned to the Parent Guarantor;
WHEREAS, the obligations of the Borrower with respect to such credit
facility will be (i) guaranteed by the Parent Guarantor and Hallwood GP, and
(ii) secured by certain of the assets of the Borrower;
WHEREAS, the obligations of the Parent Guarantor with respect to its
guaranty will be secured by a pledge of (i) certain limited partner interests
in HEP owned by the Parent Guarantor, (ii) all of the issued and outstanding
capital stock of Hallwood GP and (iii) the entire limited partner interest of
the Borrower (being a ninety-nine percent (99%) limited partner interest); and
WHEREAS, the obligations of the Hallwood GP with respect to its
guaranty will be secured by a pledge of the entire general partner interest of
the Borrower (being a one percent (1%) general partner interest); and
WHEREAS, the Lender has agreed to provide such financing, subject to
the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and other good and valuable consideration hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. Certain Defined Terms. As used in this Credit
Agreement, the following terms shall have the following meanings:
<PAGE> 7
"Accommodation Obligation," as applied to any Person, shall mean any
Contractual Obligation, contingent or otherwise, of such Person with respect to
any Debt or other obligation or liability of another, including, without
limitation, any such Debt, obligation or liability directly or indirectly
guarantied, endorsed (otherwise than for collection or deposit in the ordinary
course of business), co-made or discounted or sold with recourse by such
Person, or in respect of which such Person is otherwise directly or indirectly
liable, including Contractual Obligations (contingent or otherwise) arising
through any agreement to purchase, repurchase, or otherwise acquire such Debt,
obligation or liability or any security therefor, or to provide funds for the
payment or discharge thereof (whether in the form of loans, advances, stock
purchases, capital contributions or otherwise), or to maintain solvency,
Properties, level of income, or other financial condition, or any "keep well,"
"take-or-pay," "throughput" or other similar arrangement or to make payment
other than for value received.
"Affiliate" shall mean, when used with respect to any Person, each
other Person that directly or indirectly controls or is controlled by or is
under common control with such Person and includes any Subsidiary of such
Person and any "affiliate" of such Person within the meaning of Reg. Section
240.12b-2 of the Securities Exchange Act of 1934, as amended, with "control" as
used in this definition meaning the possession, directly or indirectly, of
power to direct or cause the direction of management, policies or action
(whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise) and shall include, without limitation, any
Person who beneficially owns more than fifty percent (50%) of the equity of the
other Person and, as to any general or limited partnership, any general partner
thereof.
"Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978 as
codified under 11 U.S.C. Section 101, et seq.
"Base Rate" shall mean the per annum interest rate announced or
published by the Lender from time to time as its general reference rate of
interest, which Base Rate shall change upon each change in such announced or
published general reference interest rate and which Base Rate may not be the
lowest interest rate charged by the Lender.
"Benefit Plan" shall mean any employee benefit plan which is covered
by ERISA and in respect of which any Loan Party or any ERISA Affiliate is (or
if such Benefit Plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA.
"Board" shall mean the Board of Governors of the Federal Reserve
System of the United States.
"Borrower" shall mean HEPGP Ltd., a Colorado limited partnership whose
sole general partner is Hallwood GP and whose sole limited partner is the
Parent Guarantor.
"Business Day" shall mean any day (other than a day which is a
Saturday, Sunday or legal holiday in the State of North Carolina) on which
banks are open for business in Charlotte, North Carolina and Houston, Texas.
"Capital Lease" shall mean, when used with respect to any Person, any
lease in respect of which the obligations of such Person constitute Capitalized
Lease Obligations.
"Capitalized Lease Obligations" shall mean, when used with respect to
any Person, without duplication, all obligations of such Person to pay rent or
other amounts under any lease of (or other arrangement conveying the right to
use) real or personal property, or a combination thereof, which
<PAGE> 8
obligations shall have been or should be, in accordance with GAAP, capitalized
on the books of such Person.
"Cash Equivalents" shall mean, when used in connection with Person,
such Person's Investments in:
(i) readily marketable direct full faith and credit
obligations of the United States or obligations unconditionally
guaranteed by the full faith and credit of the United States or by any
agency thereof to the extent such obligations are backed by the full
faith and credit of the United States ("Government Securities") due
within 180 days from the date of acquisition thereof;
(ii) readily marketable direct obligations of any State of
the United States or any political subdivision of any such State given
on the date of such investment a credit rating of at least A2 by
Moody's Investors Service, Inc. or A by S&P, in each case due within
180 days from the date of acquisition thereof;
(iii) certificates of deposit issued by, money market deposit
accounts with, eurodollar deposits through, bankers' acceptances of,
and repurchase and reverse repurchase agreements covering Government
Securities executed by the Lender or any other bank doing business in
and incorporated under the laws of the United States or any state
thereof whose deposits are insured through the Federal Deposit
Insurance Corporation or any successor thereto, and having (either
itself or its holding company) on the date of such Investment combined
capital, surplus and undivided profits of at least $250,000,000, or
any offshore branch of such bank, in each case maturing within 180
days from the date of acquisition thereof;
(iv) readily marketable commercial paper of the Lender or the
Lender's holding company or of any other bank or bank holding company
given on the date of such Investment a credit rating of at least P-1
by Moody's Investors Service, Inc. and A-1 by S&P, or of corporations
doing business in and incorporated under the laws of the United States
or any state thereof given on the date of such Investment a credit
rating of at least P-1 by Moody's Investors Service, Inc. and A-1 by
S&P, in each case, maturing within 180 days from the date of
acquisition thereof; and
(v) "money-market mutual funds" investing solely in
instruments of the types described in subparagraphs (i) through (iv)
above.
"Code" shall mean Internal Revenue Code of 1986, as amended from time
to time, and the regulations promulgated thereunder.
"Collateral" shall mean all Property which now or at any time is
subject to a Lien in favor of the Lender to secure the Obligations, or which,
under the terms of any Security Instrument, is purported to be subject to such
Lien.
"Compliance Certificate" shall mean each certificate, substantially in
the form attached hereto as Exhibit A, executed by a Responsible Officer of
each of the Loan Parties and furnished to the Lender in accordance with the
terms hereof.
"Communications" shall have the meaning specified in Section 8.2.
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<PAGE> 9
"Consolidated" shall refer to the consolidation of any Person, in
accordance with GAAP, with its properly consolidated Affiliates. Reference to
a Person's consolidated financial statements, financial position, financial
condition, liabilities, etc. refers to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated Affiliates.
"Contractual Obligation" as applied to any Person, shall mean any
provision of any stock or other securities issued by that Person or any
indenture, mortgage, deed of trust, contract, undertaking, document, instrument
or other agreement or instrument to which that Person is a party or by which it
or any of its Properties is bound, or to which it or any of its Properties is
subject (including, without limitation, any restrictive covenant affecting such
Person or any of its Properties).
"Conveyance Agreement" shall mean that certain Assignment and Bill of
Sale from the Parent Guarantor to the Borrower dated effective as of November
27, 1996, substantially in the form of Exhibit B hereto (with such changes as
may be approved by the Lender), pursuant to which the oil and gas properties
more particularly described therein were transferred to the Borrower.
"Credit Agreement" shall mean this Credit Agreement dated as of the
Effective Date, among the Borrower, the Parent Guarantor, Hallwood GP and the
Lender, as said agreement may be amended, modified, supplemented, and/or
extended from time to time.
"Debt" shall mean as to any Person, all obligations and liabilities of
such Person to any other Person including, without limitation, all debts,
claims and indebtedness, heretofore, now and/or from time to time hereafter
owing, due or payable, however evidenced, created, incurred, acquired or owing
and however arising, whether under written or oral agreement, operation of law,
or otherwise. Debt includes, without limiting the foregoing, (i) indebtedness
for borrowed money (including without duplication obligations to reimburse the
issuer of any letter of credit or any guarantor or surety), (ii) indebtedness
for the deferred purchase price of Property or services, except trade accounts
payable within 90 days and arising in the ordinary course of business, (iii)
indebtedness evidenced by bonds, debentures, notes or other similar instruments
(but shall not include any Debt guaranteed, or bonds posted to state and/or
federal agencies incurred in the ordinary course of business in conjunction
with Person's ongoing business operations but shall include Environmental
Liabilities or liabilities to the PBGC), (iv) obligations and liabilities
secured by a Lien upon Property owned by such Person, whether or not such
Person has assumed such obligations and liabilities and the amount of which
Debt shall not exceed the fair market value of the Property subject to such
Lien if such Person has not assumed such obligations and liabilities, (v)
obligations or liabilities created or arising under any Capital Lease, (vi) all
net payments or amounts owing by such Person in respect of interest rate
protection agreements, foreign currency exchange agreements, commodity swap
agreements or other interest, exchange rate or commodity hedging arrangements,
and (vii) liabilities in respect of unfunded vested benefits under Benefit
Plans. The Debt of a Person shall include all Debt of any partnership or joint
venture in which such Person is a general or venture partner unless the terms
of such Debt expressly state that the Debt is nonrecourse to the general
partner. The Debt of a Person shall not include trade payables and expense
accruals incurred or assumed in the ordinary course of such Person's business
(including trade payables and expense accruals of any partnership or joint
venture in which such Person is a general or venture partner), provided, such
payables have not remained unpaid for a period of ninety (90) days after the
same became due unless such Person is diligently contesting same in good faith.
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<PAGE> 10
"Debtor Relief Laws" shall mean the Bankruptcy Code and all other
applicable dissolution, liquidation, conservatorship, bankruptcy, moratorium,
readjustment of debt, compromise, rearrangement, receivership, insolvency,
reorganization, or similar debtor relief laws from time to time in effect
affecting the rights of creditors generally.
"Deed of Trust" shall mean that certain Deed of Trust, Assignment of
Production, Fixture Filing, Security Agreement and Financing Statement dated as
of the Effective Date, from the Borrower to James M. Kipp, Trustee for the
benefit of the Lender, substantially in the form of Exhibit C hereto, as same
may be amended, supplemented or otherwise modified from time to time.
"Default" shall mean any Event of Default and the occurrence of any
event or condition which would with the giving of any requisite notice and/or
the passage of time or both constitute an Event of Default.
"Default Rate" shall mean the interest rate described in Section 2.4.
"Distribution" shall mean any distribution payable in cash or
Property with respect to any equity interests in the Borrower, including,
without limitation, each class of partnership interest (including, without
limitation, general, limited and preference units) of the Borrower (other than
distributions payable in partnership units of the same class of general,
limited or preference units as the units upon which the distribution is being
paid), any other distribution made with respect to any equity interests of the
Borrower, or any purchase, redemption or retirement of, or other payment with
respect to, any equity interests of the Borrower.
"Dollars" and the symbol "$" shall mean the lawful currency of the
United States.
"EBITDA" shall mean, for a particular period, an amount equal to (i)
all amounts which would be included as income of the Borrower before income
taxes and extraordinary items, if any, for such period, plus (ii) the
Borrower's depreciation, depletion, amortization and other non-cash items
reducing said operating income under subclause (i) during such fiscal period
plus (iii) interest expense during such fiscal period, all determined in
accordance with GAAP applied consistently with those used in the preparation of
the financial statements referred to in Subsection 4.9(a).
"Effective Date" shall mean the date on which all of the conditions
precedent to the making of the Loan set forth in Section 3.1 are first
satisfied or waived by the Lender, and the Loan is made.
"Environmental Laws" shall mean any federal, state, local or tribal
statute, law, rule, regulation, ordinance, code, permit, consent, approval,
license, written policy or rule of common law now or hereafter in effect and in
each case as amended, and any judicial or administrative interpretation
thereof, including any judicial or administrative order, injunction, consent
decree or judgment, or other authorization or requirement whenever promulgated,
issued or modified, including the requirement to register underground storage
tanks, well plugging and abandonment requirements, and oil and gas waste
disposal requirements relating to:
(i) emissions, discharges, spills, migration, movement,
releases or threatened releases of pollutants, contaminants, Hazardous
Substances, or hazardous or toxic materials or wastes into or
-5-
<PAGE> 11
onto soil, land, ambient air, surface water, ground water,
watercourses, publicly owned treatment works, drains, sewer systems,
wetlands or septic systems;
(ii) the use, treatment, storage, disposal, handling,
manufacturing, transportation, or shipment of Hazardous Substances or
hazardous and/or toxic wastes, material, products or by-products
containing Hazardous Substances (or of equipment or apparatus
containing Hazardous Substances); or
(iii) otherwise relating to pollution or the protection of
human health or the environment, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, 42 U.S.C. Sections 9601 et seq., as amended, the Resource
Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq., as
amended, the Hazardous Materials Transportation Act, 49 U.S.C.
Sections 1801 et seq., as amended, the Clean Water Act, 33 U.S.C.
Sections 1251 et seq., as amended, the Toxic Substances Control Act,
15 U.S.C. Sections 2601 et seq., as amended, the Clean Air Act, 42
U.S.C. Sections 7401 et seq., as amended, the federal Water Pollution
Control Act, 33 U.S.C. Section 1251 et seq., as amended, the Safe
Drinking Water Act, 42 U.S.C. Sections 300f et seq., as amended, the
Atomic Energy Act, 42 U.S.C. Sections 2011 et seq., as amended, the
Natural Gas Pipeline Safety Act of 1968, 49 U.S.C. Section 1671 et
seq., as amended, the Federal Insecticide, Fungicide and Rodenticide
Act, 7 U.S.C. Sections 136 et seq., as amended, and the Occupational
Safety and Health Act, 29 U.S.C. Sections 651 et seq., as amended,
and all comparable statutes of any state in which any Loan Party owns
or operates real property, and all comparable local governmental
regulations in such states, and other environmental, conservation or
protection laws in effect in any jurisdiction where any real Property
of a Loan Party or any Subsidiary of such Loan Party is located.
"Environmental Liabilities" shall mean with respect to any Person, any
and all liabilities, responsibilities, losses, sums paid in settlement of
claims, obligations, charges, actions (formal or informal), claims (including,
without limitation, claims for personal injury or for real or personal property
damage), liens, administrative proceedings, damages (including, without
limitation, loss or damage resulting from the occurrence of an Event of
Default), punitive damages, consequential damages, treble damages, penalties,
fines, monetary sanctions, interest, court costs, response and remediation
costs, stabilization costs, encapsulation costs, treatment, storage, or
disposal costs, groundwater monitoring or environmental sampling costs, other
causes of action and any other costs and expenses (including, without
limitation, reasonable attorneys', experts', and consultants' fees, costs of
investigation and feasibility studies and disbursements in connection with any
investigative, administrative or judicial proceeding), whether direct or
indirect, known or unknown, absolute or contingent, past, present or future
arising under, pursuant to or in connection with any Environmental Law, or any
other binding obligation of such Person requiring abatement of pollution or
protection of human health and the environment.
"Environmental Lien" shall mean a Lien in favor of any Governmental
Authority for (i) any liability under Environmental Laws or (ii) damages
arising from, or costs incurred by such Governmental Authority in response to,
a Release or threatened Release of a Hazardous Substance into the environment.
"ERISA" shall mean the United States Employee Retirement Income
Security Act of 1974, as amended from time to time, together with all rules and
regulations promulgated with respect thereto.
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"ERISA Affiliate" shall mean any (i) corporation which is a member of
the same controlled group of corporations (within the meaning of Section 414(b)
of the Code) as any Loan Party, (ii) partnership or other trade or business
(whether or not incorporated) under common control (within the meaning of
Section 414(c) of the Code) with any Loan Party, (iii) member of the same
affiliated service group (within the meaning of Section 414(m) of the Code) as
any Loan Party or (iv) other Person required to be aggregated with any Loan
Party or an ERISA Affiliate thereof, as defined above, pursuant to Section
414(o) of the Code.
"Event of Default" shall have the meaning specified in Section 7.1.
"Existing Litigation" shall mean all material actions, suits,
proceedings, governmental investigations or arbitrations pending or, to the
best knowledge of the Borrower after due inquiry, threatened against any Loan
Party, which Existing Litigation is disclosed in Schedule 4.10 hereto.
"Federal Funds Rate" shall mean the rate per annum (rounded upwards,
if necessary, to the next higher 1/100 of 1%) representing the daily effective
federal funds rate as quoted by the Lender and confirmed in Federal Reserve
Board Statistical Release H.15 (519) or any successor or substitute publication
selected by the Lender. If, for any reason, such rate is not available, then
"Federal Funds Rate" shall mean a daily rate which is determined, in the
reasonable opinion of the Lender, to be the rate at which federal funds are
being offered for sale in the national federal funds market at 9:00 a.m.,
Charlotte, North Carolina time. Rates for weekends or holidays shall be the
same as the rate for the most immediate preceding Business Day.
"Fiscal Year" shall mean a twelve-month period ending on December 31
of any year.
"Floating Rate" shall mean, for any day, an interest rate per annum
equal to the greater of (i) the Base Rate and (ii) the Federal Funds Rate for
such day plus one-half percent (1/2%), but in no event shall such rate exceed
the Highest Lawful Rate.
"GAAP" shall mean generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession, which are consistent with those applied in the
preparation of the financial statements of the Borrower referred to in
Subsection 4.9(a).
"Governmental Approval" shall mean any authorization, consent,
approval, license, franchise, lease, ruling, permit, certification, exemption,
filing for, or registration by or with any Governmental Authority required by
any Loan Party in connection with (i) the execution, delivery and performance
of the Loan Documents by any Loan Party or the borrowing of any funds under
this Credit Agreement, (ii) the validity or enforceability of the Loan
Documents and the exercise by the Lender of its rights and remedies thereunder,
and/or (iii) the acquisition, maintenance, ownership and operation of the
Mortgaged Properties.
"Governmental Authority" shall mean any nation or government, any
federal, state, province, city, town, municipality, county, local or other
political subdivision thereof or thereto and any department,
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commission, board, bureau, instrumentality, agency or other entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"GP Guaranty" shall mean that certain Guaranty dated as of the
Effective Date, executed by Hallwood GP in favor of the Lender, substantially
in the form of Exhibit J hereto, as same may be amended, supplemented, restated
or otherwise modified from time to time.
"GP Pledge Agreement" shall mean the Pledge Agreement dated as of the
Effective Date, executed by Hallwood GP in favor of the Lender, substantially
in the form of Exhibit K hereto, as same may be amended, supplemented, restated
or otherwise modified from time to time.
"Hallwood GP" shall mean Hallwood G.P., Inc., a Delaware corporation,
the sole general partner of the Borrower and a wholly-owned subsidiary of the
Parent Guarantor.
"Hazardous Substances" shall mean (i) hazardous materials, hazardous
wastes, and hazardous substances including, but not limited to, those
substances, materials and wastes listed in the United States Department of
Transportation Hazardous Materials Table, 49 C.F.R. Section 172.101, as
amended, or listed by the federal Environmental Protection Agency as hazardous
substances under or pursuant to 40 C.F.R. Part 302, as amended, or substances,
materials, contaminants or wastes which are or become regulated under any
Environmental Law, including without limitation, those substances, materials,
contaminants or wastes as defined in the following statutes and their
implementing regulations: the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801 et seq., as amended, the Resource Conservation and Recovery Act,
42 U.S.C. Section 6901 et seq., as amended, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as
amended; the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., as
amended; the Clean Air Act, 42 U.S.C. Section 7401 et seq., as amended, the
federal Water Pollution Control Act, 33 U.S.C. Section 1251 et seq., as
amended, the Occupational Safety and Health Act, 2 U.S.C. Section 651 et seq.,
as amended, the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., as
amended and the Natural Gas Pipeline Safety Act of 1968, 49 U.S.C. Section 1671
et seq., as amended; (ii) all substances, materials, contaminants or wastes
listed in all comparable statutes of any state in which any Loan Party owns or
operates real property, and in comparable local Requirements of Law in such
states; (iii) acid gas, sour water streams or sour water vapor streams
containing hydrogen sulfide or other forms of sulphur, sodium hydrosulfide and
ammonia; (iv) Hydrocarbons; (v) natural gas, synthetic gas, and any mixtures
thereof; (vi) asbestos and/or any material which contains 1% or more, by
weight, of any hydrated mineral silicate, including but not limited to
chrysotile, amosite, crocidolite, tremolite, anthophylite and/or actinolite,
whether friable or non-friable; (vii) PCB's, or PCB containing materials or
fluids; (viii) radon; (ix) naturally occurring radioactive material,
radioactive substances or waste; (x) salt water and other oil and gas wastes,
and (xi) any other hazardous or noxious substance, material, pollutant,
emission, or solid, liquid or gaseous waste.
"HEP" shall mean Hallwood Energy Partners, L.P., a Delaware limited
partnership, of which the Borrower is the sole general partner.
"Hedging Agreement" shall mean (a) any interest rate or currency swap,
rate cap, rate floor, rate collar, forward agreement, or other exchange or rate
protection agreement with Lender or any Affiliate of the Lender or any option
with respect to any such transaction and (b) any swap agreement, cap, floor,
collar, exchange transaction, forward agreement, or other exchange or
protection agreement with the
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Lender or any Affiliate of the Lender relating to Hydrocarbons or any option
with respect to any such transaction.
"Highest Lawful Rate" shall mean, as of a particular date, the maximum
nonusurious interest rate that may under applicable law then be contracted for,
charged or received by the Lender in connection with its Loan.
"Hydrocarbons" shall mean oil, gas, casinghead gas, condensate,
distillate, liquid hydrocarbons, gaseous hydrocarbons and all products
separated, settled and dehydrated therefrom and all products refined therefrom,
including, without limitation, kerosene, liquified petroleum gas, refined
lubricating oils, diesel fuel, drip gasoline, natural gasoline, helium, sulphur
and all other minerals.
"Immaterial Oil and Gas Interests" shall have the meaning assigned to
that term in Subsection 4.7 hereof.
"Initial Engineering Report" shall have the meaning assigned to that
term in Section 3.1(c)(iii) hereof.
"Initial Financial Statements" shall mean (i) the audited annual
Consolidated financial statements of the Parent Guarantor and its Consolidated
Subsidiaries dated as of July 31, 1995, (ii) the unaudited Consolidated balance
sheet of the Parent Guarantor and its Consolidated Subsidiaries as September
30, 1996, and the related unaudited Consolidated statements of income and cash
flows for such quarterly period and for the portion of the Fiscal Year then
ended, and (iii) the projected pro forma balance sheet of the Borrower as of
the Effective Date, copies of which Initial Financial Statements, including all
footnotes thereto, have heretofore been delivered by the Loan Parties to the
Lender.
"Interest Rate Protection Agreement" shall mean that certain Interest
Rate Exchange Agreement substantially in the form of Exhibit I hereto, between
the Borrower and the Lender, in its capacity as the "Floating Rate Payor",
dated as of the Effective Date, as the same may be amended, supplemented,
restated or modified from time to time.
"Investment" shall mean, as to any Loan Party, any direct or indirect
purchase or other acquisition by such Loan Party of stock, partnership interest
or other equity interest, or of a beneficial interest therein, of any other
Person, and any direct or indirect loan, advance (other than deposits with
financial institutions available for withdrawal on demand, prepaid expenses,
advances to employees and similar items made or incurred in the ordinary course
of business), or capital contribution by such Loan Party to any other Person,
including all Debt and accounts owed by that other Person which are not current
assets or did not arise from sales of goods or services to such Loan Party in
the ordinary course of business. The amount of any Investment shall be
determined in conformity with GAAP.
"IRS" shall mean the Internal Revenue Service or any successor agency.
"Lien" shall mean, with respect to any Property, (i) any mortgage,
deed of trust, production payment, deposit, lien, charge, pledge, security
interest, claim or encumbrance of any kind (whether voluntary or involuntary,
affirmative or negative, and whether imposed or created by operation of law or
otherwise) upon such Property, (ii) the interest of a vendor or a lessor under
any conditional sale agreement, capital lease or other title retention
agreement relating to such Property and (iii) in the case of
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securities, any purchase option, call or similar right of a third party with
respect to such securities but excluding any right of offset which arises
without agreement in the ordinary course of business.
"Loan" shall mean the term loan made by the Lender to or for the
benefit of the Borrower pursuant to this Credit Agreement.
"Loan Documents" shall mean this Credit Agreement, the Note, the
Parent Pledge Agreement, the Parent Guaranty, the GP Guaranty, the GP Pledge
Agreement, the Deed of Trust, the Security Agreement, the Merger Agreement, the
Conveyance Agreement, the Interest Rate Protection Agreement, all Hedging
Agreements, all Compliance Certificates, and when executed and delivered by the
parties thereto, all other agreements, certificates, instruments and documents
executed in connection with the Credit Agreement, as the same may be amended,
modified, supplemented, renewed, extended and/or restated from time to time.
"Loan Party" shall mean each of the Borrower, Hallwood GP and its
Subsidiaries, and the Parent Guarantor and its Related Energy Affiliates.
"Margin Stock" shall have the meaning given to such term under
Regulation U.
"Material Adverse Effect" shall mean (i) any material adverse effect
on the business, Properties, operations or condition (financial or otherwise)
or prospects of the Borrower, (ii) any material adverse effect on the business,
Properties, operations or condition (financial or otherwise) or prospects of
the Parent Guarantor and Related Energy Affiliates taken as a whole, (iii) any
material adverse effect on the business, Properties, operations or condition
(financial or otherwise) or prospects of Hallwood GP and its Subsidiaries taken
as a whole, (iv) any material impairment of the ability of the Borrower,
Hallwood GP or Parent Guarantor to perform timely any of its respective
Obligations under any Loan Document to which it is or will be a party, (v) any
material adverse effect upon the Collateral, taken as a whole, or (vi) material
impairment of the rights of or benefits available to the Lender under any Loan
Document.
"Maturity Date" shall mean May 31, 1998, or the earlier date of
termination or acceleration in whole of the Loan pursuant to the provisions of
Section 7.1 hereof.
"Merger" shall mean the merger of Hallwood Energy Corporation, a Texas
corporation, into the Parent Guarantor, with the Parent Guarantor surviving the
merger as the surviving entity and the separate existence of Hallwood Energy
Corporation ceasing, all as contemplated by the Merger Agreement.
"Merger Agreement" shall mean that certain Agreement and Plan of
Merger dated as of October 9, 1996, including all exhibits and schedules, if
any, attached thereto by and among the Parent Guarantor and Hallwood Energy
Corporation.
"Mortgaged Properties" shall mean all Oil and Gas Interests of the
Borrower subject to a Lien in favor of the Lender to secure the Obligations, or
which, under the terms of the Deed of Trust, are purported to be subject to
such Lien.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is
making or accruing an obligation to make
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<PAGE> 16
contributions, or has within any of the preceding five (5) plan years made or
accrued an obligation to make contributions.
"Note" shall mean the promissory note of the Borrower dated the
Effective Date payable to the order of the Lender, substantially in the form of
Exhibit D.
"Obligations" shall mean all obligations, liabilities and indebtedness
of every nature of the Loan Parties from time to time owing to the Lender under
any Loan Document to which such Loan Party is a party, including, without
limitation, (i) the due and punctual payment of (x) installments of principal
of and interest on the Loan when and as due, whether at maturity, by
acceleration, upon one or more dates set for prepayment or otherwise,
including, to the extent permitted by applicable law, interest that accrues
after the commencement of any proceeding by or against any of the Loan Parties
under the Bankruptcy Code and all other applicable Debtor Relief Laws, (y) all
other monetary obligations of any of the Loan Parties to the Lender under this
Credit Agreement and each of the other Loan Documents to which such Loan Party
is a party, including any and all fees, costs, expenses and indemnities, and
(z) all monetary obligations of the Loan Parties, or any of them, owing to the
Lender or Affiliate of the Lender under any Hedging Agreement permitted under
Section 6.13, including any and all fees, costs, expenses and indemnities under
such Hedging Agreement, and (ii) the due and punctual performance of all other
obligations of any of the Loan Parties under this Credit Agreement and each
other Loan Document to which such Loan Party is a party. "Obligation" shall
mean any part of the Obligations.
"Oil and Gas Interests" shall mean any and all rights, estates, titles
and fee, leasehold or other interests in or under mineral estates or oil, gas,
sulphur and other mineral leaseholds and fee interests with respect to
Properties situated in the United States or offshore from any State of the
United States, including, without limitation, all overriding royalty interests,
mineral interests, royalty interests, net profits interests, oil payments,
production payments, carried interests and any and all other interests in
Hydrocarbons, whether any of the same be real or personal, now owned or
hereafter acquired by the Borrower, directly or indirectly together with
rights, titles and interests created by or arising under the terms of any
unitization, communitization, and pooling agreements or arrangements, and all
Properties, rights and interests covered thereby, whether arising by contract,
by order, or by operation of laws, which now or hereafter include all or any
part of the foregoing.
"Opinion of the Loan Parties' Counsel" shall mean the favorable
written legal opinion of Jenkens & Gilchrist, a Professional Corporation, legal
counsel to the Loan Parties, dated as of the Effective Date, and in form and
substance satisfactory to the Lender.
"Parent Guarantor" shall mean The Hallwood Group Incorporated, a
Delaware corporation and the owner, directly or indirectly, of 100% of the
issued and outstanding partnership interests in the Borrower.
"Parent Guaranty" shall mean that certain Parent Guaranty dated as of
the Effective Date, executed by the Parent Guarantor in favor of the Lender,
substantially in the form of Exhibit E hereto, as same may be amended,
supplemented or otherwise modified from time to time.
"Parent Pledge Agreement" shall mean the Parent Pledge Agreement dated
as of the Effective Date, executed by the Parent Guarantor in favor of the
Lender, substantially in the form of Exhibit F hereto, as same may be amended,
supplemented or otherwise modified from time to time.
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<PAGE> 17
"Partnership Agreement" shall mean for any Loan Party its governing
Partnership Agreement among its general and limited partners, as such agreement
may be amended, supplemented, restated or otherwise modified from time to time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to all or any of its functions under ERISA.
"Permitted Liens" shall mean with respect to the Borrower and the
Property of the Borrower:
(i) Liens securing the Obligations in favor of the Lender;
(ii) Inchoate Liens incident to construction or maintenance
of real property, or Liens incident to construction or maintenance of
real property now or hereafter filed of record for which adequate
reserves with respect thereto are maintained on its books in
accordance with GAAP and which are being diligently contested in good
faith by appropriate proceedings and have not proceeded to judgment,
provided that, by reason of nonpayment of the obligations secured by
such Liens, no such real property is subject to a material risk of
loss or forfeiture prior to judgment;
(iii) Liens for taxes and assessments on real property which
are not yet past due, or Liens for taxes and assessments on real
property for which adequate reserves with respect thereto are
maintained on its books in accordance with GAAP and which taxes and
assessments are being diligently contested in good faith by
appropriate proceedings and have not proceeded to judgment, provided
that, by reason of nonpayment of the obligations secured by such
Liens, no such real property is subject to a material risk of loss or
forfeiture prior to judgment;
(iv) Imperfections and irregularities in title to any
Property which in the aggregate do not materially impair the
marketability or use of such Property for the purposes for which it is
or may reasonably be expected to be held;
(v) Easements, exceptions, reservations, or other agreements
for the purpose of pipelines, conduits, cables, wire communication
lines, power lines and substations, streets, trails, walkways,
drainage, irrigation, water, and sewerage purposes, dikes, canals,
ditches, the removal of oil, gas, or other minerals, and other like
purposes affecting real property which in the aggregate do not
materially burden or impair the marketability or use of such real
property for the purposes for which it is or may reasonably be
expected to be held;
(vi) Non-consensual Liens imposed by Law, including
carrier's, mechanics', landlord's, warehousemen's or other similar
Liens, other than those described in subclauses (a) or (b) above,
arising in the ordinary course of business with respect to obligations
which are not delinquent or are being diligently contested in good
faith by appropriate proceedings, provided that, if delinquent,
adequate reserves with respect thereto are maintained on its books in
accordance with GAAP and, by reason of nonpayment, no Property is
subject to a material risk of loss or forfeiture prior to judgment;
(vii) Liens consisting of pledges or deposits made in the
ordinary course of business in compliance with workers' compensation,
unemployment insurance and other social security laws or regulations;
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(viii) Liens consisting of deposits of Property to secure the
performance of bids, trade contracts (other than for Debt), leases
(other than Capitalized Lease Obligations), statutory obligations,
surety and appeal bonds, performance bonds and other obligations of a
like nature incurred in the ordinary course of business;
(ix) Liens securing the payment to third parties of
royalties, overriding royalties, net profits interests, production
payments or other payments out of or with respect to the production,
transportation or processing of Hydrocarbons, and which are not
delinquent and are (aa) in existence on the Effective Date and which
were deducted in the calculation of discounted present value in the
Initial Engineering Report; or (bb) reserved by the grantor in an
assignment of an oil and gas lease to Borrower after the date hereof
or reserved by the lessor in any oil and gas lease entered into with
the Borrower after the date hereof, provided, such lease burdens are
payable to third parties, have been disclosed to the Lender in
writing, and are deducted in the calculation of discounted present
value of the Mortgaged Property;
(x) Liens arising under operating agreements, pooling or
unitization agreements, farm out agreements, pooling orders or similar
agreements of a scope and nature customary in the oil and gas
industry, and that are entered into in the ordinary course of business
to the extent such Liens are limited in recourse to (x) the Properties
subject to such interests or agreements, (y) the Hydrocarbons produced
from such Properties and (z) the proceeds of such Hydrocarbons; and
(xi) All other non-consensual Liens arising in the ordinary
course of the Borrower's business or incidental to the ownership of
its Properties;
provided, that no such Lien shall secure the payment of Debt and provided,
further, that no Permitted Lien referred to in subclauses (ii) through (xi)
above shall in the aggregate materially detract from the value or marketability
of the Property subject thereto or materially impair the use or operation
thereof in the operation of the business of the Borrower.
"Person" shall mean an individual, partnership, corporation (including
a business trust), joint stock company, trust, unincorporated association,
joint venture or other entity, or a foreign state or political subdivision
thereof or any agency of such state or subdivision.
"Production Sales Contracts" shall mean all Hydrocarbon sales
agreements and Hydrocarbon or water gathering, treatment and/or transportation
agreements now existing or hereafter entered into by or on behalf of the
Borrower covering the Mortgaged Properties.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Regulation D" shall mean Regulation D of the Board (respecting
reserve requirements), as the same is from time to time in effect, and all
official rulings and interpretations thereunder or thereof.
"Regulation G" shall mean Regulation G of the Board (respecting margin
credit extended by Persons other than banks, brokers and dealers), as the same
is from time to time in effect, and all official rulings and interpretations
thereunder or thereof.
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"Regulation U" shall mean Regulation U of the Board (respecting margin
credit extended by banks), as the same is from time to time in effect, and all
official rulings and interpretations thereunder or thereof.
"Regulation X" shall mean Regulation X of the Board (respecting
borrowers who obtain margin credit), as the same is from time to time in
effect, and all official rulings and interpretations thereunder or thereof.
"Related Energy Affiliates" shall mean HEP, EDP Operating, Ltd., a
Colorado limited partnership, HEP Operating Partners, L.P., a Delaware limited
partnership, EM Nominee Partnership Company, a Colorado general partnership,
Concise Oil and Gas Partnership, a Colorado general partnership, and May Energy
Partners Operating Partnership Ltd., a Texas limited partnership.
"Release" shall mean any release, spill, emission, leak, injection,
deposit, disposal, discharge, dispersal, leaching or migration of any Hazardous
Substance into the environment, including without limitation the movement of
Hazardous Substances through or in the air, soil, surface water, groundwater
and/or land in violation of Environmental Laws.
"Remedial Action" shall mean actions required by a Governmental Agency
to (i) clean up, remove, treat or in any other way address Hazardous Substances
in the environment, (ii) prevent the Release or threat of Release or minimize
the further Release of Hazardous Substances so they do not migrate or endanger
or threaten to endanger public health or welfare or the environment or (iii)
perform pre-remedial studies and investigations and post-remedial monitoring
and care.
"Reportable Event" shall mean any of the events described in Section
4043 or Section 4068(f) of ERISA for which the thirty (30) day notice
requirement of 29 C.F.R. Section 2615.3 has not been waived.
"Requirements of Law" shall mean, as to any Person, any applicable
law, treaty, ordinance, order, judgment, rule, decree, regulation or
determination of an arbitrator, court, or other Governmental Authority,
including, without limitation, rules, regulations, orders, and requirements for
Governmental Approvals, in each case as such now exist or may be hereafter
amended and are applicable to or binding upon such Person or any of its
Property or to which such Person or any of its Property is subject.
"Responsible Officer" shall mean (i) with respect to the Borrower, the
President, any Vice President, or the Chief Financial Officer of Hallwood GP
acting in its capacity as the general partner of the Borrower, and (ii) with
respect to the Parent Guarantor or Hallwood GP, the President, any Vice
President or the Chief Financial Officer of such Loan Party.
"S&P" shall mean Standard & Poor's Corporation.
"Security Agreement" shall mean the Security Agreement dated as of the
Effective Date, executed by the Borrower in favor of the Lender, substantially
in the form of Exhibit G hereto, as same may be amended, supplemented or
otherwise modified from time to time.
"Security Instruments" shall mean the Deed of Trust, the Security
Agreement, the Parent Pledge Agreement, the GP Pledge Agreement, and all other
documents and instruments at any time executed as
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security for all or any portion of the Obligations, as such instruments may be
amended, restated, or supplemented from time to time.
"Subsidiary" shall mean as of any date of determination and with
respect to any Person, any corporation, partnership, joint venture or other
entity whether now existing or hereafter organized or acquired of which the
securities, partnership units or other ownership interests having ordinary
voting power, in the absence of contingencies, to elect a majority of the board
of directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person and/or one or more Subsidiaries of
such Person.
"Termination Event" shall mean (i) a Reportable Event with respect to
any Benefit Plan (other than a "reportable event" that is not subject to the
provision for 30 days notice to the PBGC); (ii) the withdrawal of the Borrower
from a Benefit Plan during a plan year in which the Borrower was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA; (iii) the imposition of an
obligation on the Borrower under Section 4041 of ERISA to provide affected
parties written notice of intent to terminate a Benefit Plan in a distress
termination described in Section 4041(c) of ERISA; (iv) the institution by the
PBGC of proceedings to terminate a Benefit Plan; (v) any other event or
condition which would constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Benefit
Plan; or (vi) the occurrence of an event described in Section 4068(f) of ERISA
with respect to a Benefit Plan.
"United States" and "U.S." each shall mean United States of America.
SECTION 1.2. Accounting Terms. All terms of an accounting or
financial nature shall be construed in accordance with GAAP, as in effect from
time to time; provided, however, that, for purposes of determining compliance
with any covenant set forth in Article VI, such terms shall be construed in
accordance with GAAP as in effect on the date of this Credit Agreement, applied
on a basis consistent with the application used in the audited financial
statements referred to in Subsection 4.9(a).
SECTION 1.3. Interpretation.
(a) In this Credit Agreement, unless a clear contrary intention
appears:
(i) the singular number includes the plural number and vice
versa;
(ii) reference to any gender includes each other gender;
(iii) the words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Credit Agreement as a whole and
not to any particular Article, Section or other subdivision;
(iv) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and
assigns are permitted by this Credit Agreement, and reference to a
Person in a particular capacity excludes such Person in any other
capacity or individually, provided that nothing in this subclause (iv)
is intended to authorize any assignment not otherwise permitted by
this Credit Agreement;
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(v) reference to any agreement, document or instrument means
such agreement, document or instrument as amended, supplemented or
modified and in effect from time to time in accordance with the terms
thereof and, if applicable, the terms hereof, and reference to any
Note includes any Note issued pursuant hereto in extension or renewal
thereof and in substitution or replacement therefor;
(vi) unless the context indicates otherwise, reference to any
Article, Section, Schedule or Exhibit means such Article or Section
hereof or such Schedule or Exhibit hereto;
(vii) the words "including" (and with correlative meaning
"include") means including, without limiting the generality of any
description preceding such term;
(viii) with respect to the determination of any period of
time, the word "from" means "from and including" and the word "to"
means "to but excluding;" and
(ix) reference to any law means such as amended, modified,
codified or reenacted, in whole or in part, and in effect from time to
time.
(b) The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction of this
Credit Agreement.
(c) The Schedules and Exhibits attached to this Credit Agreement
are incorporated herein and shall be considered a part of this Credit Agreement
for all purposes.
(d) No provision of this Credit Agreement shall be interpreted or
construed against any Person solely because that Person or its legal
representative drafted such provision.
ARTICLE II
TERMS OF FACILITY
SECTION 2.1. Term Loan. Subject to the terms and conditions and
relying upon the representations and warranties set forth herein and in the
other Loan Documents, the Lender agrees to make a term loan to the Borrower in
the principal sum of $2,500,000 (the "Loan"), on the Effective Date. Except as
otherwise provided in this Credit Agreement, the Loan shall mature and be due
and payable in full on the Maturity Date. The Loan is not revolving in nature,
and amounts repaid or prepaid may not be reborrowed.
SECTION 2.2. The Note. The Loan made by the Lender shall be
evidenced by a single promissory note of the Borrower duly executed and
delivered by the Borrower, dated the Effective Date, with the blanks
appropriately completed, payable to the order of the Lender in the principal
sum of $2,500,000. The Lender is hereby authorized by the Borrower, at its
option, to endorse on the schedule attached to its Note (or on a continuation
of such schedule attached to its Note and made a part thereof) or in its
internal records relating to its Note an appropriate notation evidencing the
date and amount of each payment of principal or interest in respect thereof and
such other information provided for on such schedule. The aggregate unpaid
principal amount so recorded shall be presumptive evidence of the principal
amount owing by the Borrower to the Lender and unpaid under the Note. The
failure of the
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Lender to make such a notation or any error therein shall not in any manner
affect the obligation of the Borrower to repay the Loan in accordance with the
terms of the Note and this Credit Agreement.
SECTION 2.3. Interest on the Loan and Payment Dates.
(a) Subject to the provisions of Section 2.4, the unpaid principal
amount of the Loan shall bear interest at a rate per annum equal to the lesser
of (i) the Highest Lawful Rate, and (ii) the Floating Rate plus one percent
(1%) (if the Floating Rate is based on the Base Rate, computed on the basis of
the actual number of days elapsed over a year of 365 or 366 days, as the case
may be; if the Floating Rate is based on the Federal Funds Rate, computed on
the basis of the actual number of days elapsed over a year of 360 days).
(b) Accrued and unpaid interest on the Loan shall be due and
payable by the Borrower monthly on the last Business Day of each calendar
month, provided, that after maturity, whether by acceleration or otherwise,
accrued interest on the Loan shall be payable on demand.
(c) Interest in respect of the unpaid principal amount of the Loan
shall accrue from (and including) the date of the making of the Loan to (but
not including) maturity (whether by acceleration or otherwise).
SECTION 2.4. Interest on Overdue Amounts. If the Borrower shall
fail to pay any installment of principal of or interest on the Loan or any
other amount when due hereunder (after the expiration of any applicable grace
period), the Borrower shall on demand from time to time pay interest, to the
extent permitted by law, on such defaulted amount from the date of such Event
of Default up to (but not including) the date of actual payment (after as well
as before judgment) at a rate per annum (the "Default Rate") equal to the
lesser of (i) the Highest Lawful Rate and (ii) the Floating Rate plus five
percent (5%) per annum computed on the basis of the actual number of days
elapsed over a year of 365 or 366 days, as the case may be.
SECTION 2.5. Principal Payments on the Loan.
(a) If not sooner paid, the principal indebtedness of the Loan
evidenced by the Note shall be repaid in eighteen (18) monthly installments on
the last Business Day of each calendar month during the term of this Credit
Agreement as follows:
(i) $139,000 on December 31, 1996 and on the last
Business Day of each successive calendar month thereafter to and
including April 30, 1998; and
(ii) a final payment of all outstanding principal on the
Note shall be due in full on the Maturity Date.
SECTION 2.6. Voluntary Prepayment of the Loan.
(a) The Borrower shall have the right at any time and from time to
time to prepay the Loan, in whole or in part, upon at least two (2) Business
Day's prior written or telecopy notice or telephone notice promptly confirmed
in writing) to the Lender; provided, however, that each such partial prepayment
shall be in a minimum principal amount of $100,000 and in integral multiples of
$50,000.
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(b) Each notice of prepayment under subsection (a) above shall (i)
specify the prepayment date and the principal amount of such prepayment, (ii)
be irrevocable and (iii) commit the Borrower to prepay the Loan by the amount
stated therein on the date stated therein. All prepayments under this Section
2.6 shall be without premium or penalty. All prepayments under this Section
2.6 shall be accompanied by accrued interest on the principal amount being
prepaid to the date of payment. Such voluntary prepayments shall be applied to
reduce the remaining installments of principal in the inverse order of their
maturity.
SECTION 2.7. Facility Fee. The Borrower will pay to the Lender on
the Effective Date in immediately available funds a facility fee in the amount
of $125,000.
SECTION 2.8. Change in Circumstances.
(a) If the Lender shall have determined that the applicability of
any law, rule, regulation or guideline adopted pursuant to or arising out of
the July 1988 report of the Basle Committee on Banking Regulations and
Supervisory Practices entitled "International Convergence of Capital
Measurement and Capital Standards" or the adoption or effectiveness after the
date hereof of any law, rule, regulation or guideline regarding capital
adequacy, or any change in any of the foregoing, or any change in the
interpretation or administration in any of the foregoing by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Lender with any request or
directive regarding capital adequacy (whether or not having the force of law)
of any such Governmental Authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on the Lender's capital,
as a consequence of its obligations under this Credit Agreement to a level
below that which the Lender could have achieved but for such adoption, change
or compliance (taking into consideration the Lender's policies with respect to
capital adequacy) by an amount deemed in good faith by the Lender to be
material, then the Lender shall give the Borrower written notice thereof.
Within thirty (30) days of the date on which the Borrower receives such notice,
the Borrower shall pay to the Lender an amount that will, in Lender's
reasonable determination, provide adequate compensation to the Lender for any
such reduction in accordance with subparagraph (b) below. Notwithstanding the
foregoing, in no event shall the Lender be permitted to receive any
compensation hereunder constituting interest in excess of the Highest Lawful
Rate.
(b) The Lender shall deliver to the Borrower a written statement
setting forth such amount or amounts as shall be necessary to compensate the
Lender as specified in subparagraph (a) above, and such statement shall be
prima facie evidence that such amount(s) are due and owing. In preparing such
statement, the Lender may employ such assumptions and allocations of costs and
expenses as it shall in good faith deem reasonable and may be determined by any
reasonable averaging and attribution method. The Borrower shall pay to the
Lender the amount shown as due on any such statement within thirty (30)
calendar days after the Borrower's receipt of the same.
SECTION 2.9. Time, Place and Method of Payments.
(a) The Borrower shall make each payment hereunder and under the
Note delivered hereunder not later than 2:00 p.m., Charlotte, North Carolina
time, on the day when due in lawful money of the United States (in freely
transferable Dollars) to the Lender at the Principal Office in immediately
available funds and any funds received by the Lender after such time shall, for
all purposes hereof (including the following sentence), be deemed to have been
paid on the next succeeding Business Day.
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<PAGE> 24
(b) Whenever any payment hereunder or under the Note (including
principal of or interest on the Loan or any fees or other amounts), shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest, fee or other
amount, as the case may be.
SECTION 2.10. Use of Proceeds.
(a) The proceeds of the Loan shall be used for working capital
purposes and to make loans or advances to the Parent Guarantor. In no event
shall the funds from the Loan be used directly or indirectly by any Person for
personal, family, household or agricultural purposes.
(b) No portion of the proceeds of the Loan under this Credit
Agreement shall be used by the Borrower in any manner that might cause the
borrowing or the application of such proceeds to violate Regulation G,
Regulation U, Regulation T, or Regulation X or any other regulation of the
Board or to violate the Securities Exchange Act of 1934, in each case as in
effect on the date or dates of such borrowing and such use of proceeds.
ARTICLE III
CONDITIONS PRECEDENT
SECTION 3.1. Conditions Precedent to the Loan. The obligation of
the Lender to make the Loan on the Effective Date is subject to the
satisfaction of the following conditions precedent:
(a) The Lender shall have received, duly authorized, executed and
delivered by each Person that is a party thereto, in form and substance
satisfactory to the Lender, each of the following:
(i) each of the following Loan Documents (together with all
schedules and exhibits thereto) dated on or as of the Effective Date:
(aa) this Credit Agreement,
(bb) the Note,
(cc) the Parent Guaranty,
(dd) the Parent Pledge Agreement, together with
(1) a letter duly executed by the Parent
Guarantor addressed to the transfer agent
requesting that (and enclosing) the
certificates evidencing the units (Class A
and C) of limited partnership interests in
HEP be transferred to and registered in the
name of the Parent Guarantor and, upon such
transfer, that said certificates be delivered
directly to the Lender together with the
associated assignments executed in blank, (2)
the certificates evidencing all of the issued
and outstanding capital stock of Hallwood GP
together with the associated stock powers
executed in blank,
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(ee) in multiple counterparts as requested by the
Lender, Financing Statements from the Parent
Guarantor, as debtor constituent to the
instrument described in subclause (dd) above,
(ff) the GP Guaranty,
(gg) the GP Pledge Agreement,
(hh) in multiple counterparts as requested by the
Lender, Financing Statements from Hallwood
GP, as debtor constituent to the instrument
described in subclause (gg) above,
(ii) in multiple counterparts as requested by the
Lender, the Deed of Trust,
(jj) in multiple counterparts as requested by the
Lender, Financing Statements from the
Borrower, as debtor constituent to the
instrument described in subclause (ii) above,
(kk) the Security Agreement,
(ll) in multiple counterparts as requested by the
Lender, Financing Statements from the
Borrower, as debtor constituent to the
instrument described in subclause (kk) above,
(mm) the Interest Rate Protection Agreement, and
(nn) in multiple counterparts as requested by the
Lender, the Conveyance Agreement;
(ii) a certificate of the Borrower, dated the Effective Date,
substantially in the form of Exhibit H hereto, duly executed and
delivered by its sole general partner, Hallwood GP;
(iii) a certificate of the Secretary of Hallwood GP, dated
the Effective Date and certifying as to (aa) the adoption and
continuing effect of resolutions of the board of directors of Hallwood
GP authorizing, individually and in its capacity as the sole general
partner of the Borrower, the transactions contemplated hereby and by
the other Loan Documents to which the Borrower or Hallwood GP is a
party, (bb) the Certificate of Incorporation of Hallwood GP and all
amendments thereto, (cc) the Bylaws of Hallwood GP and all amendments
thereto, and (dd) the incumbency of all officers of Hallwood GP who
will execute or have executed on behalf of Hallwood GP individually
and in its capacity as general partner of the Borrower any document or
instrument required to be delivered hereunder, containing the
signature of same;
(iv) a certificate of the Secretary of the Parent Guarantor,
dated the Effective Date and certifying as to (aa) the adoption and
continuing effect of resolutions of the board of directors of the
Parent Guarantor authorizing the transactions contemplated hereby and
by the other Loan Documents to which the Parent Guarantor is a party,
(bb) the Certificate of Incorporation of the Parent Guarantor and all
amendments thereto, (cc) the Bylaws of the Parent Guarantor and all
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amendments thereto, and (dd) the incumbency of all officers of the
Parent Guarantor who will execute or have executed any document or
instrument required to be delivered hereunder by the Parent Guarantor,
containing the signature of same;
(v) a copy of the filed stamped Certificate of Limited
Partnership filed with the Office of the Secretary of State for the
State of Colorado with respect to the Borrower;
(vi) with respect to Hallwood GP, a certificate of existence
and good standing from the Secretary of State of Delaware dated no
more than fifteen (15) calendar days prior to the Effective Date and
certificates of authorization to do business and good standing in the
States of Colorado and Texas;
(vii) with respect to the Parent Guarantor, a certificate of
existence and good standing from the Secretary of State of Delaware
dated no more than fifteen (15) calendar days prior to the Effective
Date and certificates of authorization to do business and good
standing in the State of Texas;
(viii) the Opinion of the Loan Parties' Counsel;
(ix) certificates of insurance coverage or insurance binders
evidencing that all insurance required to be obtained and/or
maintained by the Loan Parties as of the Effective Date pursuant to
any of the Loan Documents is in full force and effect;
(x) (aa) the Initial Financial Statements and (bb) such other
financial information, regarding the Loan Parties as the Lender may
reasonably request. All of such financial statements and financial
information shall be satisfactory to the Lender;
(xi) duly executed and delivered copies of the Merger
Agreement and all other agreements, certificates, documents,
instruments and writings executed in connection therewith consummating
the Merger;
(xii) all fees and expenses due and payable hereunder on or
before the Effective Date and invoiced to the Loan Parties in writing
prior to the Effective Date; and
(xii) such other certificates, opinions, documents and
instruments relating to the transactions contemplated hereby as may
have been reasonably requested by the Lender.
(b) The Merger contemplated by the Merger Agreement shall have
been consummated (and, except as set forth in Schedule 4.10, not subject to any
challenge in any proceeding) pursuant to the terms thereof.
(c) The Lender shall have received the following, in form and
substance satisfactory to the Lender:
(i) favorable title opinions and/or due diligence reviews and
lien and judgment searches prepared by special counsel acceptable to
the Lender showing acceptable title in the Borrower to at least 80% by
reserve value of the Mortgaged Properties;
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(ii) if available, sufficient counterparts of the
Certificate of Merger and the Articles of Merger to be filed in each
county in which Mortgaged Property is situated; and
(iii) an engineering report prepared by personnel of the Loan
Parties, which report (aa) reviews the Mortgaged Properties, (bb) sets
forth and evaluates the proven and producing, shut-in, behind-pipe and
undeveloped oil and gas reserves (separately classified as such)
attributable to the Mortgaged Properties as of July 1, 1996, (cc)
evaluates the productivity and the economic life of all wells included
in the Mortgaged Properties; the quantity of the proved reserves
recoverable therefrom; the projected rate of production, net income
and expenses attributable to such proved reserves; the minimum
development costs which are needed to develop the proved reserves to
their economic life; and the expediency of any change in methods of
treatment or operation of any well included in the Mortgaged
Properties, and (dd) contains such additional information as the
Lender may reasonably require, as of the date of such engineering
report (the "Initial Engineering Report").
(d) Evidence satisfactory to the Lender that all Liens covering
any of the Collateral have been released and appropriate termination statements
have been recorded or delivered to the Lender, including without limitation,
Liens in favor of The First National Bank of Chicago and Liens in favor of
Smith Barney.
(e) The Lender shall have received a certificate of a Responsible
Officer of Hallwood GP, dated the Effective Date, certifying on behalf of the
Borrower that (i) the representations and warranties of the Borrower contained
in Article IV hereof and, in all material respects, in each of the other Loan
Documents to which the Borrower is a party are true, correct and complete on
the Effective Date both before and after giving effect to the making of the
Loan, (ii) no Default or Event of Default has occurred and is continuing on the
Effective Date either before or after giving effect to the making of the Loan,
(iii) no material litigation (other than Existing Litigation) is pending or, to
the best knowledge of the Borrower after due inquiry, threatened against the
Borrower and no material adverse development has occurred in any Existing
Litigation, as of the Effective Date, and (iv) no events or state of affairs
which could reasonably be expected to result in a Material Adverse Effect have
occurred since July 31, 1995;
(f) The Lender shall have received a certificate of a Responsible
Officer of the Parent Guarantor, dated the Effective Date, certifying on behalf
of the Parent Guarantor that (i) the representations and warranties of the Loan
Parties contained herein, and, in all material respects, in each of the other
Loan Documents are true, correct and complete on the Effective Date both before
and after giving effect to the making of the Loan, (ii) no Default or Event of
Default has occurred and is continuing on the Effective Date either before or
after giving effect to the making of the Loan, (iii) no material litigation
(other than Existing Litigation) is pending or, to the best knowledge of the
Parent Guarantor after due inquiry, threatened against any Loan Party and no
material adverse development has occurred in any Existing Litigation, as of the
Effective Date, and (iv) no events or state of affairs which could reasonably
be expected to result in a Material Adverse Effect have occurred since July 31,
1995;
(g) A search, made no more than 30 days prior to the Effective
Date, of the Uniform Commercial Code filing offices in each relevant
jurisdiction shall have revealed no filings or recordings with respect to the
Collateral (except, with respect to the Mortgaged Properties, Permitted Liens,
and Liens in favor of The First National Bank of Chicago, which Liens are being
released and immaterial Liens described on Schedule 3.1(g)) in favor of any
Person. The Lender shall have received a copy of the search
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reports received as a result of such search and fully executed releases
effectuating the termination of any and all Liens (other than Permitted Liens)
pertaining to any of the Collateral;
(h) The Lender shall have received payment in full of the facility
fee pursuant to the provisions of Section 2.7 hereof; and
(i) Such other conditions precedent which the Lender may
reasonably have requested or required.
SECTION 3.2. Certain Post-Closing Requirements.
(a) The Loan Parties shall cause the transfer agent to deliver the
certificates evidencing the units (Class A and C) of limited partnership
interests in HEP owned by the Parent Guarantor to the Lender within fifteen
(15) Business Days of the Effective Date.
(b) With respect to the Borrower, the Loan Parties shall cause to
be delivered to the Lender within thirty (30) Business Days of the Effective
Date a certificate of existence and good standing from the Secretary of State
of the State of Colorado and certificates of authorization to do business and
good standing in the State of Texas.
(c) With respect to Hallwood GP, the Loan Parties shall cause to
be delivered to the Lender within fifteen (15) Business Days of the Effective
Date certificates of authorization to do business and good standing in the
States of Colorado, Delaware, Kansas, Louisiana, Mississippi, Montana, New
Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming.
(d) With respect to the Parent Guarantor, the Loan Parties shall
cause to be delivered to the Lender within fifteen (15) Business Days of the
Effective Date certificates of authorization to do business and good standing
in the States of California, Florida, New York and Texas.
(e) Within thirty (30) calendar days of the Effective Date, the
Loan Parties shall have delivered to the Lender evidence that the Borrower has
been added as an additional insured to the insurance policies described in the
certificates or binders of insurance coverage delivered to the Lender on the
Effective Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Credit Agreement and
to make the Loan, the Parent Guarantor represents and warrants as to itself and
its Related Energy Affiliates, Hallwood GP represents as to itself and its
Subsidiaries and the Borrower represents and warrants as to itself, to the
Lender that the following statements are true, correct and complete.
SECTION 4.1. Organization. (a) The Parent Guarantor is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware, and has all corporate powers and all material Governmental
Approvals required to carry on its business as now conducted.
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(b) The Borrower is a limited partnership duly formed pursuant to
the Colorado Uniform Limited Partnership Act of 1981, and has full power and
all material Governmental Approvals required to carry on its business as now
conducted. Hallwood GP is the sole general partner of the Borrower and the
Parent Guarantor is the sole limited partner of the Borrower.
(c) HEP is a limited partnership duly formed pursuant to the
Uniform Limited Partnership Act of the State of Delaware, and has full power
and all material Governmental Approvals required to carry on its business as
now conducted. The Borrower is the sole general partner of HEP.
(d) Hallwood GP is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, and has
all corporate powers and all material Governmental Approvals required to carry
on its business as now conducted.
(e) Each Loan Party is duly authorized to do business as a foreign
partnership or corporation, as the case may be, wherever the nature of its
Properties or of its activities requires such authorization, except where the
failure to so qualify would not result in a Material Adverse Effect.
SECTION 4.2. Organization; Powers (Related Energy Affiliates). Each
Related Energy Affiliate of the Parent Guarantor and each Subsidiary of
Borrower and each general partner of each such Person which is a partnership
(i) is a corporation, limited liability company, or partnership duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, (ii) is duly qualified to conduct business as a
foreign corporation, foreign limited liability company, or foreign limited
partnership (as applicable), and is in good standing, in each other
jurisdiction in which such qualification and good standing are reasonably
necessary in order for it to conduct its business and own or lease its
Properties as conducted and owned except where the failure to so qualify would
not result in a Material Adverse Effect and (iii) has all corporate, limited
liability company or partnership power (as applicable) and all material
Governmental Approvals required to own or lease its Properties and to carry on
its business as now conducted and as proposed to be conducted.
SECTION 4.3. Authority. Each of the Loan Parties has the corporate
or partnership power and authority (as applicable) and legal right under its
respective certificate of incorporation, by-laws, Partnership Agreement and the
laws of the jurisdiction of its organization to execute, deliver and perform
each of the Loan Documents executed by, or to be executed by, such Loan Party
and each other agreement or instrument contemplated thereby to which it is or
will be a party and, with respect to the Borrower, to borrow hereunder. The
execution, delivery and performance of each of the Loan Documents to which any
Loan Party is or will be a party and the consummation of the transactions
contemplated thereby, and, with respect to the Borrower, the borrowing of funds
under this Credit Agreement, have been duly authorized by all necessary
corporate or partnership action (as applicable) on the part of each Loan Party
and each general partner of each Loan Party (as applicable) and require no
action by or in respect of, or filing with, any Governmental Authority which
has not been made or obtained. No action or consent is required of the limited
partners, if any, of any Loan Party in connection with the due execution,
delivery and performance of the Loan Documents, including this Credit
Agreement. This Credit Agreement constitutes, and each of the other Loan
Documents to which any Loan Party is a party when executed and delivered by
such Loan Party, will constitute the legal, valid and binding obligation of
such Loan Party, enforceable against such Loan Party in accordance with its
terms, except as enforceability thereof may be limited by Debtor Relief Laws
and by general principles of equity which may limit the right to obtain
equitable remedies (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
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SECTION 4.4. Use of Proceeds. The Borrower's uses of the proceeds
of the Loan shall be as set forth in Section 2.10. No Loan Party is engaged
principally, or as one of such Loan Party's important activities, in the
business of extending credit to others for the purpose of purchasing or
carrying such Margin Stock, and no part of the proceeds of the Loan will be
used to purchase or carry any Margin Stock or to extend credit to others for
the purpose of purchasing or carrying any Margin Stock. None of the assets of
the Borrower are Margin Stock. None of the Loan Parties nor any agent acting on
their behalf, have taken or will knowingly take any action which would cause
this Credit Agreement or any other Loan Document to violate Regulation U or
Regulation X or to violate the Securities Exchange Act of 1934, as amended.
SECTION 4.5. No Conflict. The execution, delivery and performance
by each Loan Party of the Loan Documents to which such Loan Party is a party,
the compliance by any Loan Party with the terms and provisions thereof and the
consummation of each of the transactions contemplated thereby, do not and will
not (i) require any consent or approval of the stockholders or partners of any
Loan Party, or any Governmental Approval or any other Person which has not been
obtained, (ii) by the lapse of time, the giving of notice or otherwise, (aa)
constitute a violation of any Requirement of Law binding on any Loan Party or a
breach of any provision contained in the certificate of incorporation, bylaws
or Partnership Agreement of any Loan Party, (bb) constitute a breach of any
material provision contained in any material contract to which such Loan Party
is a party or by which such Loan Party is bound, or (cc) result in or require
the creation or imposition of any Lien whatsoever upon any of the Properties of
such Loan Party (other than Liens permitted pursuant to the Loan Documents).
SECTION 4.6. Ownership of Properties; Liens. (a) Except as
disclosed on Schedule 4.6 attached hereto, the Borrower has good and marketable
title to all material Properties purported to be owned by the Borrower,
including, without limitation, all Mortgaged Properties and all other Property
reflected in the pro forma balance sheet referred to in Subsection 4.9(b) and
all Properties which are used by the Borrower in the operation of its business,
and none of such Properties is subject to any Lien other than Permitted Liens.
(b) The Parent Guarantor has good and marketable title to all material
Properties purported to be owned by the Parent Guarantor, including, without
limitation, all Property reflected in the financial statements referred to in
Subsection 4.9(a) and all Collateral described in the Parent Pledge Agreement,
and none of such Collateral is subject to any Lien.
SECTION 4.7. Mortgaged Properties. Except as disclosed on Schedule
4.6 attached hereto, the Borrower has good, marketable, and record title to all
of the Oil and Gas Interests described in the Initial Engineering Report other
than Immaterial Oil and Gas Interests, free and clear of all Liens except
Permitted Liens. With the exception of Immaterial Oil and Gas Interests, all
oil, gas, and other mineral leaseholds and fee interests comprising or
affecting the Oil and Gas Interests described in the Initial Engineering Report
are valid, subsisting, and in full force and effect, and all rentals,
royalties, and other amounts due and payable in respect thereof have been duly
paid. Except with respect to Immaterial Oil and Gas Interests, but without
regard to any consent or non-consent provisions of any joint operating
agreement covering any of the Proved Reserves of the Borrower, the Borrower's
share of (i) the costs for each of the Proved Reserves described in the Initial
Engineering Report is not greater than the decimal fraction set forth in the
Initial Engineering Report, before and after payout, as the case may be, and
described therein by the respective designations "working interests", "WI",
"gross working interest", "GWI", or similar terms, and (ii) production from,
allocated to, or attributed to each such Proved Reserves
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<PAGE> 31
is not less than the decimal fraction set forth in the Initial Engineering
Report, before and after payout, as the case may be, and described therein by
the designations "net revenue interest", "NRI", or similar terms. Except with
respect to Immaterial Oil and Gas Interests, each well drilled in respect of
Oil and Gas Interests described in the Initial Engineering Report (i) is
capable of, and is presently, producing Hydrocarbons in commercially profitable
quantities, and the Borrower is currently receiving payments for its share of
production, with no material funds in respect of any thereof being presently
held in suspense, other than any such funds being held in suspense pending
delivery of appropriate division orders, and (ii) has been drilled, bottomed,
completed, and operated in compliance with all applicable Requirements of Law
and no such well which is currently producing Hydrocarbons is subject to any
penalty in production by reason of such well having produced in excess of its
allowable production. For purposes of this Subsection 4.7, "Immaterial Oil &
Gas Interests" means Oil and Gas Interests which, in the aggregate, do not
represent more than two percent (2%) of the discounted present value of all Oil
and Gas Interests as set forth in the Initial Engineering Report delivered to
the Lender pursuant to Section 3.1(c)(iii).
SECTION 4.8. No Defaults.
(a) None of the Loan Parties is a party to any material
Contractual Obligation that has resulted or could reasonably be expected to
result in a Material Adverse Effect.
(b) (i) No Default or Event of Default exists, and (ii) none of
the Loan Parties is in default in any material respect under any material
Contractual Obligation.
SECTION 4.9. Financial Position; No Material Adverse Change.
(a) The Parent Guarantor has heretofore furnished to the Lender
its (i) Consolidated balance sheet, and the related consolidated statements of
income, cash flows and shareholders' equity as of and for the Fiscal Year ended
July 31, 1995, audited by and accompanied by the unqualified opinion of
Deloitte Touche and (ii) the unaudited Consolidated balance sheet of the Parent
Guarantor and its Consolidated Subsidiaries as September 30, 1996, and the
related unaudited Consolidated statements of income and cash flows for such
quarterly period and for the portion of the Fiscal Year then ended. Such
financial statements present fairly the Consolidated financial condition and
results of operations and cash flows of the Parent Guarantor and its
Consolidated Subsidiaries as of such dates. Such financial statements were
prepared in accordance with GAAP applied on a consistent basis.
(b) The Borrower has heretofore furnished to the Lender its
projected pro forma balance sheet (together with all footnotes thereto) as of
the Effective Date. Such projected pro forma balance sheet of the Borrower
accurately reflects the best available projections of the financial position of
the Borrower (after giving effect to the Merger, the Conveyance and the Loan),
which projections were made after reasonable investigations, were made in good
faith, were believed to be reasonable when made and were based upon assumptions
which were believed to be reasonable when made. The principal assumptions used
in preparing such projected financial statements are as stated in the footnotes
accompanying such statements.
(c) No Loan Party has any material contingent liabilities,
material liabilities for taxes, unusual and material forward or long-term
commitments or material unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in the
Consolidated balance sheet of the Parent Guarantor or as otherwise disclosed to
the Lender in writing.
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(d) The Loan Parties have disclosed to the Lender in writing any
and all facts which, in the reasonable good faith judgment of such Loan
Parties, could result in a Material Adverse Effect.
SECTION 4.10. Litigation; Adverse Effects.
(a) Except for Existing Litigation, there are no actions, suits,
proceedings, governmental investigations or arbitrations, at law or in equity,
before or by any Governmental Authority, pending or, to the best knowledge of
the Parent Guarantor, threatened against the Parent Guarantor or any Subsidiary
of the Parent Guarantor or any material Property of the Parent Guarantor or any
Subsidiary of the Parent Guarantor, which could reasonably be expected to
result in a Material Adverse Effect. There are no outstanding judgments,
injunctions, writs, rulings or orders by any Governmental Authority against any
Loan Party or any such Loan Party's stockholders, partners, directors or
officers which have or could reasonably be expected to result in a Material
Adverse Effect.
(b) Except Existing Litigation, there are no actions, suits,
proceedings, governmental investigations or arbitrations, at law or in equity,
before or by any Governmental Authority, pending or, to the best knowledge of
the Borrower, threatened against the Borrower or any material Property of the
Borrower.
(c) None of the business, Properties, or operations of any Loan
Party are materially and adversely affected by any fire, explosion, accident,
strike, lockout or other labor dispute, drought, storm, hail, earthquake,
embargo, act of God, or of the public enemy or other casualty (whether or not
covered by insurance).
SECTION 4.11. ERISA. Each Loan Party is in compliance in all
material respects with the applicable provisions of ERISA and the regulations
and published interpretations thereunder. No Reportable Event has occurred as
to which such Loan Party was required to file a report with the PBGC, and the
present value of all benefit liabilities under each Benefit Plan (based on
those assumptions used to fund such Benefit Plan) did not, as of the last
annual valuation date applicable thereto, exceed the value of the Properties of
such Benefit Plans. No Loan Party has any ERISA Affiliates (other than the
Loan Parties) or Multiemployer Plans. The Borrower has no Benefit Plans.
SECTION 4.12. Payment of Taxes. Each Loan Party has filed all
federal, state and local tax returns and other reports required by Requirements
of Law to have been filed by such Loan Party and has paid (prior to
delinquency) all taxes and other similar charges and assessments that are due
and payable, including extensions, except taxes, charges and assessments which
are being diligently contested in good faith by appropriate proceedings and any
Lien arising thereunder constitutes a Permitted Lien. No Responsible Officer
of the Parent Guarantor has knowledge of any proposed tax assessment against
any Loan Party that is likely to result in a Material Adverse Effect.
SECTION 4.13. Environmental Matters. Except as disclosed on Schedule
4.13 or as could not reasonably be expected to result in a liability in excess
of $50,000:
(a) Each Loan Party and each operator of the Mortgaged Properties
is in compliance with all applicable Environmental Laws;
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(b) Each Loan Party has obtained, all Governmental Approvals
required under applicable Environmental Laws to operate its business as
presently conducted or as proposed to be conducted and all such Governmental
Approvals are in full force and effect and each Loan Party is in compliance
with all terms and conditions of such Governmental Approvals;
(c) None of the Loan Parties nor any of the present Property or
operations (including without limitation, the Mortgaged Properties) or the past
Property or operations of any Loan Party is subject to any order from or
agreement with any Governmental Authority or private party respecting (i)
failure to comply with any Environmental Law or any Remedial Action, or (ii)
any Environmental Liabilities arising from the Release or threatened Release of
a Hazardous Substance into the environment except those orders and agreements
with which such Loan Party has complied;
(d) None of the operations of any Loan Party is subject to any
judicial or administrative proceeding alleging a violation of, or liability
under, any Environmental Law;
(e) To the knowledge and belief of the Loan Parties after
reasonable and good faith inquiry with respect thereto, none of the operations
of any Loan Party is the subject of any investigation by any Governmental
Authority evaluating whether any Remedial Action is needed to respond to a
Release or threatened Release of a Hazardous Substance into the environment;
(f) No Loan Party has filed any notice under any Environmental Law
indicating past or present treatment, storage or disposal of a Hazardous
Substance under 40 CFR Part 261 or any state or local equivalent;
(g) No Loan Party has filed any notice under any applicable
Environmental Law reporting a Release of a Hazardous Substance (other than
minor or de minimis emissions or releases) into the environment;
(h) There is not now, nor, to the knowledge and belief of the Loan
Parties (after reasonable and good faith inquiry with respect thereto) has
there ever been, on or in any Property of any Loan Party (including without
limitation, the Mortgaged Properties):
(i) any generation, treatment, recycling, storage or disposal
of any Hazardous Substance under 40 CFR Part 261 or any state or local
equivalent, except the storage of Hazardous Substances in compliance
with all applicable Environmental Laws,
(ii) any underground storage tanks or surface impoundments,
except pits incidental to oil and gas wells which are in compliance
with all applicable Environmental Laws,
(iii) any asbestos-containing material, or
(iv) any polychlorinated biphenyls (PCBs) used in hydraulic
oils, electrical transformers or other equipment;
(i) There have been no written commitments or agreements involving
a Loan Party from or with any Governmental Authority or any private entity
(including, without limitation, the owner of the Property or any portion
thereof) relating to the generation, storage, treatment, presence, Release, or
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threatened Release of any Hazardous Substance on or into any of the Properties
of the such Loan Party (including without limitation, the Mortgaged Properties)
or the environment (including off-site disposal of toxic wastes or Hazardous
Substances) or any Remedial Action with respect thereto;
(j) No Loan Party has received any written notice or claim to the
effect that it is or may be liable to any Person as a result of the Release or
threatened Release of a Hazardous Substance into the environment;
(k) No Loan Party has any known liability in connection with any
material Release or material threatened Release of any Hazardous Substances
into the environment; and
(l) After due inquiry, no Environmental Lien has attached to any
Properties of any Loan Party (including without limitation, the Mortgaged
Properties).
SECTION 4.14. Governmental Regulation. No Loan Party is subject to
regulation under the Interstate Commerce Act, as amended, the Investment
Company Act of 1940, as amended, the Public Utility Holding Company Act of
1935, as amended, the Federal Power Act, as amended, or any other Requirements
of Law such that its ability to incur indebtedness is limited or its ability to
consummate the transactions contemplated by this Credit Agreement and the other
Loan Documents or any document executed in connection therewith is impaired.
SECTION 4.15. Disclosure.
(a) All information contained in any financial statements,
certificates, exhibits, schedules, operating statements and any other
statements and written information (excluding estimates and forecasts)
furnished by or on behalf of any Loan Party to the Lender, (taken as a whole)
in connection with any transaction contemplated hereby or by any other Loan
Document on or prior to the date this representation is made or deemed made,
were, and will be, true, complete and correct in all material respects and do
not, and will not, contain any material misstatement of fact or omit to state a
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which they were made, not misleading.
(b) The Initial Engineering Report accurately reflects in all
material respects, the ownership interests in the oil and gas properties
referred to therein (including all before and after payout calculations).
SECTION 4.16. Subsidiaries; Partnerships. The Borrower has no
Subsidiaries. Except as disclosed on Schedule 4.16, the Borrower is not a
partner or member in any limited liability company, joint venture, partnership
or unincorporated association. For purposes of this Section, it is understood
and agreed that the Borrower's participation in joint ownership and development
of Oil and Gas Interests as an undivided interest owner pursuant to the terms
of a joint operating agreement or other similar agreement entered into in the
ordinary course of business of the Borrower shall not constitute the Borrower
being a venturer or partner in any joint venture or partnership, provided that
each such operating agreement or similar agreement specifically states that no
partnership or joint venture is created or intended to be created pursuant to
such agreement.
SECTION 4.17. Security. (a) The Security Agreement contains a
description of all of the material assets and properties of the Borrower (other
than the general partner interest owned by the Borrower in
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HEP) sufficient to grant to the Lender, a legal, valid, and enforceable Lien in
all right, title and interest of the Borrower in said Collateral pursuant to
applicable law.
(b) The provisions of the Parent Pledge Agreement are effective to
grant to the Lender, a legal, valid, and enforceable Lien in all right, title
and interest of the Parent Guarantor in the Collateral described therein.
(c) The provisions of the GP Pledge Agreement are effective to grant
to the Lender, a legal, valid, and enforceable Lien in all right, title and
interest of Hallwood GP in the Collateral described therein.
SECTION 4.18. Solvency. No Loan Party (i) is "insolvent" (within the
meaning of Section 101(32) of the Bankruptcy Code, Section 2 of the Uniform
Fraudulent Conveyance Act or Section 2 of the Uniform Fraudulent Transfer Act)
or will become insolvent as a result of the incurrence of any obligation under
any Loan Document to which it is a party; (ii) has unreasonably small capital
(after giving effect to the transactions contemplated in any Loan Document to
which it is a party) for the conduct of its existing and contemplated business;
or (iii) is able to perform its contingent obligations and other commitments as
they mature in the normal course of business.
SECTION 4.19. Business; Compliance with Laws. None of the Borrower,
Hallwood Energy Corporation, HEP and Hallwood GP has conducted and is now
conducting any business other than business relating to the exploration,
development, financing, acquisition, ownership, operation, maintenance,
storage, transporting, processing and marketing of Hydrocarbons and other Oil
and Gas Interests as currently conducted. Each Loan Party has conducted its
business and affairs in compliance with all Requirements of Law applicable
thereto.
SECTION 4.20. Licenses, Permits, Etc. Each Loan Party possess such
Governmental Approvals as are necessary to carry on their respective businesses
as now conducted and as proposed to be conducted, except to the extent a
failure to obtain any such item would not result in a Material Adverse Effect.
SECTION 4.21. Location of the Loan Parties. The principal place of
business of each of the Borrower and Hallwood GP is Denver, Colorado and the
Borrower's chief executive office is located at 4582 South Ulster Parkway,
Suite 1700, Denver, Colorado 80237. The Parent Guarantor's principal place of
business Dallas, Texas and the chief executive office of Hallwood GP and the
Parent Guarantor is located at 3710 Rawlins, Suite 1500, Dallas, Texas
75219-4236.
SECTION 4.22. Gas Imbalances. Except as set forth on Schedule 4.22
or specifically disclosed in the consolidated financial statements of the
Parent Guarantor and its Consolidated Subsidiaries or the Initial Engineering
Report, there are no gas imbalances, take or pay or other prepayments with
respect to the Borrower's Oil and Gas Interests which would require the
Borrower to deliver Hydrocarbons produced from any of the Borrower's Oil and
Gas Interests at some future time without then or thereafter receiving full
payment therefor which would exceed $25,000 in the aggregate.
SECTION 4.23. Fiscal Year. The Borrower's Fiscal Year is January 1
through December 31.
ARTICLE V
AFFIRMATIVE COVENANTS
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So long as this Credit Agreement shall remain in effect or the
principal of or interest on the Loan, or any fee, expense, compensation or any
other amount payable under any Loan Document shall remain unpaid or
outstanding, unless the Lender shall otherwise consent in writing, each of the
Loan Parties covenants and agrees that:
SECTION 5.1. Information. The Loan Parties shall deliver, or cause
to be delivered, to the Lender:
(i) as soon as available, and in any event within sixty (60)
days after the end of the first three (3) fiscal quarters in each
Fiscal Year of the Parent Guarantor, the unaudited Consolidated and
consolidating balance sheet of the Parent Guarantor and its
Consolidated Subsidiaries as at the end of such quarterly period and
year to date period then ended, and the related unaudited Consolidated
and consolidating statements of income and cash flows for such
quarterly period and for the portion of the Fiscal Year ended with the
last day of such quarterly period, and in each case setting forth
comparative figures for the related periods in the prior Fiscal Year,
all in reasonable detail prepared in a manner satisfactory to the
Lender, and certified by a Responsible Officer of the Parent Guarantor
responsible for the administration of the finances and accounting
practices of the Parent Guarantor that such financial statements
fairly present the Consolidated financial condition and results of
operations of, respectively, the Parent Guarantor and its Consolidated
Subsidiaries in accordance with GAAP for the Fiscal Quarter and year
to date period then ended, subject to changes resulting from normal
year-end audit adjustments.
(ii) as soon as available, and in any event within one hundred
twenty (120) days after the close of each Fiscal Year of the Parent
Guarantor, the audited Consolidated balance sheet of the Parent
Guarantor as of the end of such Fiscal Year and the related audited
Consolidated statements of income, cash flows and shareholders' equity
of the Parent Guarantor for such Fiscal Year, setting forth the
comparative figures for the preceding Fiscal Year all audited by
Deloitte Touche or other independent certified public accountants of
recognized national standing satisfactory to the Lender and
accompanied by an unqualified opinion of such accountants to the
effect that such Consolidated financial statements present fairly, in
all material respects, the financial position and results of
operations and cash flows of the Parent Guarantor and its Consolidated
Subsidiaries, on a Consolidated basis, in accordance with GAAP.
(iii) as soon as practicable, and in any event within sixty
(60) days after the end of each Fiscal Quarter in each Fiscal Year of
the Borrower, the unaudited balance sheet of the Borrower as at the
end of such quarterly period and year to date period then ended, and
the related unaudited statements of income and cash flows for such
quarterly period and for the portion of the Fiscal Year ended with the
last day of such quarterly period, and in each case setting forth
comparative figures for the related periods in the prior Fiscal Year,
all in reasonable detail prepared in a manner satisfactory to the
Lender, and certified by a Responsible Officer of the Borrower
responsible for the administration of the finances and accounting
practices of the Borrower that such financial statements fairly
present the financial condition and results of operations of the
Borrower in accordance with GAAP for the Fiscal Quarter and year to
date period then ended, subject to changes resulting from normal
year-end audit adjustments.
(iv) together with the delivery of statements referred to in
subclauses (i), (ii), and (iii) above, a Compliance Certificate, in
form and substance satisfactory to the Lender, signed by a
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Responsible Officer of the Parent Guarantor responsible for the
administration of the finances and accounting practices of the Parent
Guarantor, stating that the signer has reviewed the terms of this
Credit Agreement and the other Loan Documents and stating whether or
not he has knowledge of any such Default or Event of Default and, if
so, specifying each such condition or event of which he has knowledge
and the nature thereof and any corrective action taken or proposed to
be taken with respect thereto. Such Compliance Certificate shall set
forth the calculations required to establish compliance with the
financial covenants set forth in Section 6.14 for the fiscal period
covered by such financial statements.
(v) promptly and in any event within five (5) Business Days
after any Responsible Officer of any Loan Party obtains knowledge
thereof, notice of (aa) the institution of or threat in writing of,
any material action, suit, proceeding, governmental investigation or
arbitration against or affecting any Loan Party not previously
disclosed in writing to the Lender, which if adversely determined,
could reasonably be expected to result in a Material Adverse Effect,
or any material adverse development in any Existing Litigation, or
(bb) the occurrence of any event which constitutes a Default or Event
of Default, such notice to specify the nature and period of existence
of such Default or Event of Default, and what action the Loan Parties
have taken, are taking or propose to take with respect thereto.
(vi) promptly upon receipt thereof, one copy of each other
report submitted to the Parent Guarantor or to the Borrower by
independent accountants in connection with any annual, interim or
special audit made by them of the books of such Person.
(vii) promptly upon their becoming available, one copy of
each financial statement and proxy statement sent or made available by
any Loan Party to its security holders, of each regular or periodic
report and any registration statement, prospectus or written
communication (other than transmittal letters) in respect thereof
filed by such Loan Party with any securities exchange or the
Securities and Exchange Commission or any successor agency, and of all
press releases and other statements made available generally by each
Loan Party to the public concerning material developments in the
business of such Loan Party.
(viii) promptly upon request therefor by the Lender, copies
of such title opinions and other information in the Borrower's
possession, control or direction regarding title to the Mortgaged
Properties as are appropriate to determine the status of title with
respect thereto.
(ix) promptly upon receipt of same, copies of any notice or
other information received by any Loan Party indicating any potential,
actual or alleged (aa) non-compliance with or violation of the
requirements of any Environmental Law which could reasonably be
expected to result in liability to such Loan Party for fines, clean up
or any other remediation obligations or any other liability in excess
of $50,000, individually or in the aggregate; (bb) release or
threatened release of any toxic or hazardous waste, substance, or
constituent, or other substance into the environment which release
would impose on such Loan Party a duty to report to a Governmental
Authority or to pay cleanup costs or to take remedial action under any
Environmental Law which is likely to result in liability to such Loan
Party for fines, clean up and other remediation obligations or any
other liability in excess of $50,000 in the aggregate; or (cc) the
existence of any Lien arising under any Environmental Law securing any
obligation to pay fines, clean up or other remediation costs or any
other liability in excess of $50,000 in the aggregate.
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(x) promptly (but in all events within five (5) Business
Days) after any Responsible Officer of any Loan Party becomes aware of
the occurrence of any Default, a certificate of such Responsible
Officer setting forth the details thereof and the action which the
Loan Parties are taking or propose to take with respect thereto.
(xi) by April 1 and August 1 of each year, an engineering
report in form and substance reasonably satisfactory to the Lenders
which may be prepared by or under the supervision of a petroleum
engineer who may be an employee of the Loan Parties, which shall
evaluate the Mortgaged Property as of the preceding December 31 or
June 30, respectively, together with reports prepared by the personnel
of the Loan Parties setting forth the production volumes, revenue,
prices received, and expenses for all Oil and Gas Interests owned by
the Borrower for the most recent six (6) month period ending December
31 or June 30, as the case may be. Such reports shall be prepared on a
cash basis and shall be reported on a well by well, lease by lease or
field by field basis or on such other basis for which such Properties
are normally reported in the Borrower's ordinary course of business.
(xii) promptly notify the Lender of any material adverse
change in the business, financial condition, operations or prospects
of the any Loan Party.
(xiii) from time to time promptly furnish such additional
information regarding the financial position or business of the Loan
Parties as the Lender may reasonably request.
SECTION 5.2. Payment and Performance. Each of the Loan Parties will
pay all amounts due under each Loan Document to which it is a party in
accordance with the terms thereof and will observe, perform and comply with
every covenant, term and condition expressed or implied therein.
SECTION 5.3. Business of the Borrower. The primary business of the
Borrower is and will continue to be the acquisition, exploration for,
development, production, transportation, processing and marketing of
Hydrocarbons and accompanying elements and serving as the general partner of
HEP.
SECTION 5.4. Existence. Each Loan Party shall maintain its (i)
partnership or corporate, as applicable, existence, rights and franchises and
good standing in the jurisdiction of its organization or incorporation, and
(ii) qualification and good standing in all jurisdictions in which such
qualification and good standing are necessary in order for the such Loan Party
or such Subsidiary to conduct its business and own its Property as conducted
and owned in such jurisdiction except where the failure to be so qualified or
in good standing would not, individually or in the aggregate, result in a
Material Adverse Effect.
SECTION 5.5. Right of Inspection. Each Loan Party will permit, and
will cause each Subsidiary of such Loan Party to permit, any officer, employee
or agent of the Lender to visit and inspect any of the Properties of such Loan
Party (including without limitation, the Mortgaged Properties), examine such
Loan Party's books of record and accounts, take copies and extracts therefrom,
and discuss the affairs, finances and accounts of such Loan Party with such
Loan Party's officers, accountants and auditors, all at such reasonable times
and during normal business hours and as often as the Lender may reasonably
desire.
SECTION 5.6. Maintenance of Insurance. Each Loan Party maintains
and will cause to be maintained with financially sound and reputable insurers,
insurance with respect to the Property and
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business of such Loan Party against such liabilities, casualties, risks and
contingencies and in such types and amounts as is customary in the case of
Persons engaged in the same or similar businesses and similarly situated. Upon
request of the Lender, the Loan Parties will furnish or cause to be furnished
to the Lender from time to time a summary of such insurance in form and
substance satisfactory to the Lender. In the case of any fire, accident or
other casualty causing loss or damage to any Collateral, the proceeds of such
policies shall be used (i) to repair or replace the damaged Collateral, or (ii)
to prepay the Obligations.
SECTION 5.7. Payment of Taxes and Claims. Each Loan Party will pay
(i) all taxes imposed upon it or any of its Properties or with respect to any
of its franchises, business, income or profits before any material penalty or
interest accrues thereon and (ii) all material claims (including, without
limitation, claims for labor, services, materials and supplies) for sums which
have become due and payable and which by law have or might become a Lien (other
than a Permitted Lien) on any of its Properties; provided, however, no payment
of taxes or claims shall be required if (i) the amount, applicability or
validity thereof is currently being contested in good faith by appropriate
action promptly initiated and diligently conducted in accordance with good
business practices and no material part of the Properties of such Loan Party
are subject to levy or execution, (ii) such Loan Party as and to the extent
required in accordance with GAAP, shall have set aside on its books reserves
(segregated to the extent required by GAAP) deemed by it to be adequate with
respect thereto, and (iii) to the extent the amount of the contested taxes or
claims are in excess of $50,000 (in the aggregate), such Loan Party has
notified the Lender of such circumstances, in detail satisfactory to the
Lender.
SECTION 5.8. Compliance with Laws and Documents. Each Loan Party
will comply with all Requirements of Law, its certificate (or articles) of
incorporation, bylaws, certificate of limited partnership, Partnership
Agreement and similar organizational documents and all material Contractual
Obligations to which such Loan Party is a party, if a violation, alone or when
combined with all other such violations, could reasonably be expected to result
in a Material Adverse Effect.
SECTION 5.9. Maintenance of Ownership of Oil and Gas Interests.
Except as expressly permitted by the terms of this Credit Agreement and except
for Immaterial Oil and Gas Interests, the Borrower shall maintain at all times
(i) a net revenue interest in the Mortgaged Properties not less than the net
revenue interest set forth in Initial Engineering Report, and (ii) a working
interest in the Mortgaged Properties not greater than the working interest set
forth in the Initial Engineering Report.
SECTION 5.10. Operation of Properties and Equipment.
(a) Each Loan Party will maintain and operate its Properties
(including without limitation, the Mortgaged Properties) in a good and
workmanlike manner, and, with respect to the Mortgaged Properties, observe and
comply, in all material respects, with all of the terms and provisions, express
or implied, of all oil and gas leases relating to such Mortgaged Properties so
long as such Mortgaged Properties are capable of producing Hydrocarbons and
accompanying elements in paying quantities.
(b) The Borrower will comply, and will use its best efforts to
cause the operator of the Mortgaged Properties to comply, in all material
respects with all material Contractual Obligations applicable to or relating to
the Mortgaged Properties.
(c) Each Loan Party will maintain, preserve and keep at all times,
all equipment used with respect to their respective businesses in proper
repair, working order and condition, and make all necessary
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or appropriate repairs, renewals, replacements, additions and improvements
thereto so that the efficiency of such operating equipment shall at all times
be properly preserved and maintained; provided that no item of operating
equipment need be so repaired, renewed, replaced, added to or improved, if the
Borrower shall in good faith determine that such action is not necessary or
desirable for the continued efficient and profitable operation of the business
of such Loan Party.
(d) The Loan Parties shall make all reasonable efforts to provide
to Lender within ninety days after the Effective Date the information or
documentation set forth in that certain Memorandum dated December 2, 1996 from
D. Dale Gillette to Lender, all in form and substance satisfactory to Lender
and its counsel.
SECTION 5.11. Environmental Law Compliance and Indemnity. Each Loan
Party will comply in all material respects with all Environmental Laws binding
on such Loan Party or such Subsidiary, including, without limitation, (i) all
licensing, permitting, notification and similar requirements of Environmental
Laws, and (ii) all provisions of all Environmental Laws regarding storage,
discharge, release, transportation, treatment and disposal of Hazardous
Substances. Each Loan Party will promptly pay and discharge when due, all
debts, claims, liabilities and obligations with respect to any clean-up or
remediation measures necessary to comply with Environmental Laws binding on
such Loan Party. Each Loan Party hereby indemnifies, and agrees to defend and
hold harmless the Lender and its agents, affiliates, officers, directors, and
employees from and against any and all claims, losses, demands, actions, causes
of action, and liabilities whatsoever (including without limitation reasonable
attorney's fees and expenses, and costs and expenses reasonably incurred in
investigating, preparing or defending against any litigation or claim, action,
suit, proceeding or demand of any kind or character) arising out of or
resulting from the contamination by any Hazardous Substance or environmental
pollutant in violation of any federal, state or local Environmental Laws,
including without limitation violation of the Comprehensive Environmental
Response, Compensation and Liability Act, as amended from time to time, or of
the Resource Conservation and Recovery Act, as amended from time to time; but
excluding any such losses, liabilities, claims, damages, expenses, penalties,
actions, judgments, suits, costs or disbursements resulting from the gross
negligence or willful misconduct of such indemnitee.
SECTION 5.12. ERISA Reporting Requirements. Each Loan Party shall
furnish or cause to be furnished to Lender:
(a) Promptly and in any event (i) within fifteen (15) days after
such Loan Party or any ERISA Affiliate knows or has reason to know that any
Reportable Event described in clause (a) of the definition of Reportable Event
or any event described in section 4063(a) of ERISA with respect to any Benefit
Plan of such Loan Party or any ERISA Affiliate has occurred, and (ii) within
ten (10) days after such Loan Party or any ERISA Affiliate knows or has reason
to know that any other Reportable Event with respect to any Benefit Plan of
such Loan Party or any ERISA Affiliate has occurred or a request for minimum
funding waiver under section 412 of the Code with respect to any Benefit Plan
of such Loan Party or any ERISA Affiliate has been made, a written notice
describing such event and describing what action is being taken or is proposed
to be taken with respect thereto, together with a copy of any notice of event
that is given to the PBGC;
(b) Promptly and in any event within five (5) Business Days after
receipt thereof by any Loan Party or any ERISA Affiliate from the PBGC, copies
of each notice received by such Loan Party or any
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ERISA Affiliate of the PBGC's intention to terminate any Benefit Plan or to
have a trustee appointed to administer any Benefit Plan;
(c) Promptly and in any event within fifteen (15) days after the
receipt by any Loan Party of a request therefor by the Lender, copies of any
annual and other report (including Schedule B thereto) with respect to a
Benefit Plan filed by such Loan Party or any ERISA Affiliate with the United
States Department of Labor, the IRS or the PBGC;
(d) Promptly, and in any event within ten (10) Business Days after
receipt thereof, a copy of any correspondence any Loan Party or any ERISA
Affiliate receives from the Plan Sponsor (as defined by section 4001(a)(10) of
ERISA) of any Benefit Plan asserting withdrawal liability pursuant to section
4219 or 4202 of ERISA upon such Loan Party or any ERISA Affiliate, and a
statement from a Responsible Officer of such Loan Party or such ERISA Affiliate
setting forth details as to the events giving rise to such withdrawal liability
and the action which such Loan Party or such ERISA Affiliate is taking or
proposes to take with respect thereto;
(e) Notification within three (3) Business Days after any Loan
Party or any ERISA Affiliate knows or has reason to know that such Loan Party
or any such ERISA Affiliate has or intends to file a notice of intent to
terminate any Benefit Plan under a distress termination within the meaning of
section 4041(c) of ERISA and a copy of such notice; and
(f) Promptly after receipt of written notice of commencement
thereof, notice of all (i) claims made by participants or beneficiaries with
respect to any Benefit Plan and (ii) actions, suits and proceedings before any
Governmental Authority affecting any Loan Party or any ERISA Affiliate with
respect to any Benefit Plan, except those which, in the aggregate, if adversely
determined could not result in a Material Adverse Effect.
SECTION 5.13. Security.
(a) The Obligations will be secured by the Security Instruments
and any additional Security Instruments hereafter delivered by any Loan Party
and accepted by Lender. The Loan Parties will at all times cause (i) all of the
Oil and Gas Interests of the Borrower, (ii) all of the outstanding capital
stock of Hallwood GP, (iii) all of the outstanding partnership interests in the
Borrower, (iii) all of issued and outstanding Class A and Class C limited
partnership interests in HEP owned by any Loan Party, to be subject to valid
first-priority Liens in favor of the Lender pursuant to the Security
Instruments.
(b) The Loan Parties will from time to time deliver to the Lender
any financing statements, continuation statements, extension agreements and
other documents, properly completed and executed (and acknowledged when
required) by such Loan Party in form and substance satisfactory to the Lender,
which the Lender reasonably requests for the purpose of perfecting, confirming,
or protecting any Liens or other rights in Collateral securing any Obligations.
(c) Notwithstanding that, by the terms of the Deed of Trust, the
Borrower is and will be assigning to the Lender all of the "Production
Proceeds" (as defined therein) accruing to the property covered thereby, so
long as no Default has occurred the Borrower may continue to receive from the
purchasers of production all such Production Proceeds, subject, however, to the
Liens created under the Deed of Trust, which Liens are hereby affirmed and
ratified. Upon the occurrence of a Default, the Lender
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may exercise all rights and remedies granted under the Deed of Trust, including
the right to obtain possession of all Production Proceeds then held by the
Borrower or to receive directly from the purchaser of production all other
Production Proceeds. In no case shall any failure, whether purposed or
inadvertent, by the Lender to collect directly any such Production Proceeds
constitute in any way a waiver, remission or release of any of its rights under
the Deed of Trust, nor shall any release of any Production Proceeds by the
Lender to the Borrower constitute a waiver, remission, or release of any other
Production Proceeds or of any rights of the Lender to collect other Production
Proceeds thereafter.
(d) Upon the request of the Lender at any time after the Parent
Guarantor has repaid its existing $4,000,000 promissory note issued payable to
the order of the Integra Unsecured Creditors' Trust (the "Trust") and such
Trust has returned the 517,242 shares of the common stock of ShowBiz Pizza
Time, Inc. ("ShowBiz"), or any part thereof, to the Parent Guarantor, the
Parent Guarantor shall amend the Parent Pledge Agreement to include such of the
shares of ShowBiz stock returned to the Parent Guarantor by the Trust having a
market value on the date of such amendment of $1,000,000, and subject such
shares to a valid first-priority Lien in favor of the Lender pursuant to the
provisions of the Parent Pledge Agreement.
SECTION 5.14. Permits, Licenses. Each Loan Party shall maintain all
material Properties, Governmental Approvals, and other third party consents,
licenses, patents, copyrights, trademarks, service marks, trade names, permits
and other approvals and authorizations necessary to conduct its business,
including, without limitation all Governmental Approvals and third party
consents, permits, licensees and agreements relating to the Mortgaged
Properties.
SECTION 5.15. Further Assurances. Each Loan Party will promptly cure
any defects in the execution and delivery of the Loan Documents. Each Loan
Party at its expense will promptly execute and deliver to the Lender all such
other and further documents, agreements and instruments in compliance with or
accomplishment of the covenants and agreements of such Loan Party in the Loan
Documents, or to further evidence and more fully describe the Collateral
intended as security for the Obligations, or to correct any omissions in the
Security Instruments, or more fully to state the security obligations set out
herein or in any of the Security Instruments, or to perfect, protect or
preserve any Liens created pursuant to any of the Security Instruments, or to
make any recordings, to file any notices, or obtain any consents, all as may be
necessary or appropriate in connection therewith.
SECTION 5.16. Title Assurances. The Borrower shall furnish or cause
to be furnished to the Lender such information in its possession or reasonably
available to it with respect to title to the Mortgaged Properties as the Lender
may reasonably request and shall cooperate with the Lender and its counsel in
analyzing and, where appropriate in the reasonable opinion of the Lender,
correcting defects in such title.
SECTION 5.17. Performance of Partnership Agreement. The Borrower will
perform and observe in all material respects the provisions of its Partnership
Agreement on its part to be performed or observed prior to the termination
thereof. The Parent Guarantor will cause HEP to perform and observe in all
material respects the provisions of its Partnership Agreement on its part to be
performed or observed prior to the termination thereof, unless and to the
extent only that the same shall be contested in good faith by appropriate
action by or on behalf of HEP.
ARTICLE VI
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NEGATIVE COVENANTS OF THE BORROWER
So long as this Credit Agreement shall remain in effect or the
principal of or interest on the Loan, or any fee, expense, compensation or any
other amount payable under any Loan Document shall remain unpaid or
outstanding, unless the Lender shall otherwise consent in writing, each of the
Loan Parties covenants and agrees that:
SECTION 6.1. Debt. The Borrower will not create, incur, assume,
suffer to exist or otherwise become or remain liable with respect to, any Debt
or Accommodation Obligation, except for:
(a) Debt and Accommodation Obligations arising hereunder and under
the other Loan Documents;
(b) Endorsements of negotiable instruments for collection in the
ordinary course of business;
(c) Unsecured accounts payable and expense accruals incurred or
assumed in the ordinary course of business, provided such accounts payable have
not remained unpaid for a period of thirty (30) days after the same became due
unless currently being contested in good faith or by appropriate proceedings
and as to which such reserve as is required by GAAP has been made;
(d) Liabilities for taxes, assessments, governmental charges or
levies;
(e) Obligations under the Interest Rate Protection Agreement; and
(f) General Partner liability of the Borrower for the Debt of HEP
or HEP Operating Partners, L.P. arising solely as a result of its being the
general partner of HEP and of HEP Operating Partners, L.P.
SECTION 6.2. Restrictions on Distributions. The Borrower will not
directly or indirectly declare or make or incur any liability to make
Distributions, nor will the Borrower directly or indirectly make any capital
contribution to or purchase, redeem, acquire or retire any partnership
interests in the Borrower (whether such interests are now or hereafter issued,
outstanding or created), or cause or permit any reduction or retirement of the
partnership interests of Borrower.
SECTION 6.3. Liens; Negative Pledge. The Borrower will not create,
incur, assume or suffer to exist any Lien on any Property of the Borrower
(including without limitation, the Mortgaged Properties), other than Permitted
Liens. The Borrower will not enter into or become subject to any agreement
(other than this Credit Agreement) that prohibits or otherwise restricts the
right of the Borrower to create, incur, assume or suffer to exist Liens on any
of its Property. The Parent Guarantor will not create, incur, assume or suffer
to exist any Lien on any Collateral of the Parent Guarantor. The Parent
Guarantor will not create, incur, assume or suffer to exist any Lien on 413,794
shares of ShowBiz stock pledged as of the Effective Date to the Trust (the
"Designated Showbiz Stock") other than the Lien in favor of the Trust or Liens
in favor of the Lender. Neither Hallwood GP nor the Parent Guarantor will enter
into or become subject to any agreement (other than Contractual Obligations in
existence on the Effective Date and this Credit Agreement) that prohibits or
otherwise restricts the right of Hallwood GP or the Parent Guarantor to create,
incur, assume or suffer to exist Liens on any of its Property.
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SECTION 6.4. Consolidation, Mergers and Acquisitions; Fundamental
Changes. The Borrower shall not merge or consolidate with or acquire
substantially all of the outstanding capital stock or Properties of any other
Person or liquidate, wind up or dissolve (or suffer any liquidation or
dissolution), or convey, lease, sell, transfer or otherwise dispose of, in one
transaction or series of transactions, all or any substantial part of its
business, Properties, whether now or hereafter acquired, except for
transactions in the nature of a consolidation and/or merger involving the
Borrower in which the Borrower is the surviving entity, subject to the
condition that immediately after such merger or consolidation and after giving
effect and pro forma effect thereto for the immediately preceding twelve-month
period, no Event of Default or Default shall have occurred, exist or be
continuing. The Borrower shall not purchase, redeem, retire or otherwise
acquire for value any of its partnership interests now or hereafter
outstanding.
SECTION 6.5. Investments. The Borrower shall not make, directly or
indirectly, any Investments, except:
(a) Investments existing on the date hereof and disclosed on
Schedule 6.5;
(b) Investments consisting of Cash Equivalents;
(c) Loans made to the Parent Guarantor, provided (i) no payment of
principal, interest, or other amounts required hereunder or under the Loan
Documents has become due and has not been paid, (ii) no Default or Event of
Default has occurred, is continuing and has not been waived by the Lender or
would occur as a result of the making of such loan, and (iii) after giving
effect to the proposed loan the Borrower is in compliance with covenants
contained in Section 6.15 as of (and as if the most recently ended fiscal
quarter of the Borrower had ended on) the date such loan made;
(d) Accounts receivable from customers in the ordinary course of
business;
(e) Investments in connection with or related to farm-out,
farm-in, joint operating, joint venture or area of mutual interest agreements,
gathering systems, pipelines or other similar or customary arrangements, and
the performance of Borrower's obligations thereunder in accordance with prudent
operating standards and in the ordinary course of business, but only insofar as
they do not (i) reduce the net revenue interest of the Borrower in any
Mortgaged Property below the undivided net revenue interest specified for the
Borrower in Exhibit A to the Deed of Trust, and/or (ii) increase the undivided
working interest specified for the Borrower in Exhibit A to the Deed of Trust.
SECTION 6.6. Transactions with Affiliates. The Borrower shall not
enter into, or be a party to any transaction with any of Affiliate or partner,
except for (i) the transactions provided for in the Loan Documents, (ii)
Investments permitted pursuant to Section 6.5(c), or (iii) transactions entered
into in the ordinary course of business and pursuant to the reasonable
requirements of the Borrower's business and upon such fair and reasonable terms
as could reasonably be obtained in a arm's length transaction with an
unaffiliated Person in accordance with prevailing industry customs and
practices.
SECTION 6.7. Certain Contracts; Amendments. The Borrower shall not
enter into any "take-or-pay" contract or other contract or arrangement for the
purchase of goods or services which is a material Contractual Obligation and
obligates it to pay for such goods or service regardless of whether they are
delivered or furnished to it. The Borrower shall not amend or permit any
amendment to any material
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Contractual Obligation or lease which releases, qualifies, limits, makes
contingent or otherwise detrimentally affects any material right or benefit of
the Lender under or acquired pursuant to any Loan Document. The Borrower shall
not enter into any contract, agreement or transaction which at the time such
contract, agreement or transaction was entered into could reasonably be
expected to result in a Material Adverse Effect.
SECTION 6.8 Amendments to Organizational Documents. The Borrower
shall not enter into or permit any modification or amendment of, or waive any
material right or obligation of any Person under, or terminate its Certificate
of Limited Partnership, Partnership Agreement, or other organizational document
other than amendments, modifications and waivers which are not, individually or
in the aggregate, material. The Parent Guarantor shall not enter into or permit
any modification or amendment of, or waive any material right or obligation of
any Person under, or terminate the Certificate of Limited Partnership,
Partnership Agreement, or other organizational documents of HEP other than
amendments, modifications and waivers which are not, individually or in the
aggregate, material.
SECTION 6.9. Subsidiaries, Partnerships. (a) The Borrower will not
form, create or otherwise have any Subsidiaries or become a general partner in
any partnership or joint venture other than those set forth on Schedule 4.16.
(b) The Borrower will at all times remain the sole general partner
of HEP and HEP Operating Partners, L.P.
SECTION 6.10. Sales of Properties. (a) The Borrower shall not sell,
assign, transfer, lease, convey or otherwise dispose of any of its Properties,
whether now owned or hereafter acquired, or any income or profits therefrom, or
enter into any agreement to do so, except:
(i) Sales of Hydrocarbons or inventory in the ordinary course of
its business provided that no contract for the sale of Hydrocarbons shall
obligate the Borrower to deliver Hydrocarbons produced from any of the
Mortgaged Properties at some future date without receiving full payment
therefor within 90 days of delivery; or
(ii) Sales or dispositions of worn out or obsolete tools or
equipment no longer used or useful in the business of the Borrower; or
(iii) Oil and Gas Interests not constituting, individually or in the
aggregate, all or substantially all of its Property for consideration not less
than the fair market value of such Oil and Gas Interests so long as the
aggregate net proceeds of all such sales by the Borrower do not exceed $50,000.
The Borrower shall not discount, sell, pledge or assign any notes payable to
it, accounts receivable or future income except to the extent expressly
permitted under the Loan Documents.
(b) The Parent Guarantor shall not sell, assign, transfer, lease,
convey or otherwise dispose of any of the Designated Showbiz Stock, whether now
owned or hereafter acquired, or any income or profits therefrom, or enter into
any agreement to do so.
SECTION 6.11. ERISA Compliance. The Borrower shall not engage in a
"prohibited transaction", as defined in Section 406 of ERISA or Section 4975 of
the Code, with respect to any Benefit
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Plan or knowingly consent to any other "interested party" or any "disqualified
person", as such terms are defined in Section 3(14) of ERISA and Section
4975(e)(2) of the Code, respectively, engaging in any "prohibited transaction",
with respect to any Benefit Plan maintained by the Borrower or any ERISA
Affiliate, or permit any Benefit Plan maintained by the Borrower or such ERISA
Affiliate of the Borrower to incur any "accumulated funding deficiency", as
defined in Section 302 of ERISA or Section 412 of the Code, unless such
incurrence shall have been waived in advance by the IRS; or terminate any
Benefit Plan in a manner which could result in the imposition of a Lien on any
Property of the Borrower pursuant to Section 4068 of ERISA; or breach any
fiduciary responsibility imposed under Title I of ERISA with respect to any
Benefit Plan; engage in any transaction which would result in the incurrence of
a liability under Section 4069 of ERISA; or fail to make contributions to a
Benefit Plan which results in the imposition of a Lien on any Property of the
Borrower pursuant to Section 302(f) of ERISA or Section 412(n) of the Code, if
the occurrence of any of the foregoing events would constitute a Material
Adverse Effect. The Borrower shall not (nor will any trade or business,
whether or not incorporated, that is a member of a group of which the Borrower
is a member and which is treated as a single employer under Section 414 of the
Code) sponsor, maintain or contribute to any Multiemployer Plan(s). The
Borrower shall not become a member of any other group which is treated as a
single employer under Section 414 of the Code.
SECTION 6.12. Sales and Leasebacks. The Borrower shall not become
liable, directly or by way of Accommodation Obligation, with respect to any
lease or any Property (whether real or personal or mixed) whether now owned or
hereafter acquired, (i) which the Borrower has sold or transferred or is to
sell or transfer to any other Person, or (ii) which the Borrower intends to use
for substantially the same purposes as any other Property which has been or is
to be sold or transferred by the Borrower to any other Person in connection
with such lease.
SECTION 6.13. Fiscal Year. The Borrower shall not change its Fiscal
Year.
SECTION 6.14. Hedging Agreements. The Borrower will not at any time
become a party to a Hedging Agreement for any purpose except for bona fide
hedging purposes. Without limiting the generality of the foregoing, at any time
during any calendar year, the Borrower will not enter into any Hedging
Agreement with respect to natural gas or crude oil if, immediately after giving
effect to such transaction, the aggregate reference quantity of Hydrocarbons
with respect to all Hedging Agreements with respect to natural gas or crude oil
which the Borrower shall have entered into during such year exceeds 65% of the
aggregate natural gas and crude oil production of the Borrower for such year
(calculated on the basis of actual natural gas and crude oil production for
such year to date and a good faith estimate of the aggregate amount of such
production for the remainder of such year).
SECTION 6.15. Financial Covenants. From and after the Effective
Date, the Borrower shall not:
(a) Current Ratio. Permit the ratio of the Borrower's
Consolidated current assets (as determined in conformity with GAAP) to the
Borrower's Consolidated current liabilities (as determined in conformity with
GAAP) as of the end of any Fiscal Quarter to be less than 1.0 to 1.0. For
purposes of this subsection, "Borrower's Consolidated current liabilities" will
be calculated without including any payments of principal on the Note which are
required to be repaid within one year from the time of calculation.
(b) Cash Flow. Permit as of the end of any fiscal quarter the sum
of (i) EBITDA of the Borrower for such fiscal quarter plus (ii) Distributions
received by the Parent Guarantor in respect of its
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units of limited partner interests in HEP during such fiscal quarter to be less
than 110% of scheduled interest and principal payments on the Obligations due
and payable during such fiscal quarter.
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ARTICLE VII
EVENTS OF DEFAULT
SECTION 7.1. Events of Default. If any of the following events,
acts, occurrences or conditions (each an "Event of Default") shall occur and be
continuing:
(a) The Borrower shall fail to pay when due any principal of the
Loan. The Borrower shall fail to pay when due any accrued interest on the Loan
and such failure shall continue for two (2) Business Days; or
(b) Any Loan Party shall fail to pay when due the payment of any
fee, expense, compensation, reimbursement or other amount when due under this
Credit Agreement, the Note or any other Loan Document or other agreement or
document contemplated by or delivered pursuant to or in connection with this
Credit Agreement or such Loan Document or any material document executed in
connection therewith and, in any event, such failure shall continue for two (2)
Business Days after written notice thereof from the Lender to such Loan Party;
or
(c) Any Loan Party shall fail to perform or observe any term,
covenant or agreement contained in Section 3.2, or Article VI of this Credit
Agreement; or
(d) Any Loan Party shall fail to perform or observe any term,
covenant or agreement contained in Subsections 5.1(iv) or 5.1(v) of this
Credit Agreement and, in the case of any such failure that is capable of being
remedied, such failure shall not have been remedied within fifteen (15) days
after the earlier of (i) notice thereof from the Lender to such Loan Party and
(ii) discovery thereof by a Responsible Officer of such Loan Party; or
(e) Any Loan Party shall fail to perform any term, covenant or
agreement contained in this Credit Agreement other than those referenced in
Subsections 7.1(a), (b), (c) or (d), or in any other Loan Document to which
such Loan Party is a party and, in the case of any such failure that is capable
of being remedied, such failure shall not have been remedied within thirty (30)
days after the earlier of (i) notice thereof from the Lender to such Loan Party
and (ii) discovery thereof by a Responsible Officer of such Loan Party; or
(f) Any Termination Event occurs which would subject the Borrower
or Hallwood GP, to a liability in excess of $50,000, or the plan administrator
of any Benefit Plan applies under Section 412(d) of the Code for a waiver of
the minimum funding standards of Section 412(a) of the Code which would subject
the Borrower or Hallwood GP to a liability in excess of $50,000; or
(g) Any Termination Event occurs which would subject the Parent
Guarantor to a liability in excess of $500,000, or the plan administrator of
any Benefit Plan applies under Section 412(d) of the Code for a waiver of the
minimum funding standards of Section 412(a) of the Code which would subject the
Parent Guarantor to a liability in excess of $500,000; or
(h) Any representation, warranty, certificate or statement made or
incorporated by any Loan Party in any Loan Document to which such Loan Party is
a party or in any certificate, agreement or
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instrument delivered in connection with, any Loan Document shall prove to have
been incorrect or misleading in any material respect when made or deemed made;
or
(i) (a) Either of the Borrower or Hallwood GP shall (i) fail
to pay any Debt having a principal amount in excess of $50,000 owing
by the Borrower, or any interest or premium thereon, when due (or, if
permitted by the terms of the relevant document, within any applicable
grace period), whether such Debt shall become due by scheduled
maturity, by required prepayment, by acceleration, by demand or
otherwise unless effectively waived or consented to in accordance with
the documents evidencing such Debt or (ii) fail to observe or perform
any material term, covenant or condition on its respective part to be
performed under any agreement or instrument evidencing, securing or
relating to any such Debt, when required to be performed, and such
failure shall continue after the applicable grace period, if any,
specified in such agreement or instrument if the effect of any failure
is to cause, or to permit the holder or holders of such Debt or a
trustee on its or their behalf (with or without the giving of notice,
the lapse of time, or both), to cause such Debt to become due prior to
its stated maturity; or
(b) The Parent Guarantor shall (i) fail to pay any Debt
having a principal amount in excess of $500,000 owing by the Parent
Guarantor, or any interest or premium thereon, when due (or, if
permitted by the terms of the relevant document, within any applicable
grace period), whether such Debt shall become due by scheduled
maturity, by required prepayment, by acceleration, by demand or
otherwise unless effectively waived or consented to in accordance with
the documents evidencing such Debt or (ii) fail to observe or perform
any material term, covenant or condition on its respective part to be
performed under any agreement or instrument evidencing, securing or
relating to any such Debt, when required to be performed, and such
failure shall continue after the applicable grace period, if any,
specified in such agreement or instrument if the effect of any failure
is to cause, or to permit the holder or holders of such Debt or a
trustee on its or their behalf (with or without the giving of notice,
the lapse of time, or both), to cause such Debt to become due prior to
its stated maturity; or
(j) Any Loan Document shall, at any time after its execution and
delivery and for any reason, cease to be in full force and effect or shall be
declared to be null and void, or the validity or enforceability thereof shall
be contested by any Person party thereto (other than the Lender) or any such
Person party thereto (other than the Lender) shall deny that it has any or
further liability or obligation thereunder, or the rights and/or benefits
afforded to the Lender thereunder are materially impaired. Any Security
Instrument shall for any reason not, or shall cease to, create valid and
perfected first-priority Liens against the Collateral purportedly covered
thereby other than as a result of the failure by the Lender to file
continuation statements as and when required by applicable Requirements of Law;
or
(k) Any Loan Party shall be adjudicated insolvent, or shall
generally not pay, or admit in writing its inability to pay, its debts as they
mature, or make a general assignment for the benefit of creditors, or any
proceeding shall be instituted by any such Person seeking to adjudicate it
insolvent, seeking liquidation, dissolution, winding-up, reorganization,
arrangement, adjustment, protection, relief or composition of it or its debts
under any Debtor Relief Law, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, or other similar official for it or for any
substantial part of its Property, or any such Person shall take any corporate
action in furtherance of any of the actions set forth above in this Subsection
7.1(k); or
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(l) Any proceeding of the type referred to in Subsection 7.1(k) is
filed, or any such proceeding is commenced against any Loan Party, or any such
Loan Party by any act indicates its approval thereof, consent thereto or
acquiescence therein, or an order for relief is entered in an involuntary case
under the bankruptcy law of the United States, or an order, judgment or decree
is entered appointing a trustee, receiver, custodian, liquidator or similar
official or adjudicating any such Person insolvent, or approving the petition
in any such proceedings, and such order, judgment or decree remains in effect
for thirty (30) days; or
(m) (a) Final judgments or orders involving liabilities in
excess of $50,000 in the aggregate which are not otherwise covered by
insurance shall be rendered against the Borrower or against Hallwood
GP and the same shall not be discharged (or provision shall not be
made for such discharge), or a stay of execution thereof shall not be
procured, within sixty (60) days from the date of entry thereof, or
the Borrower or Hallwood GP or both, as the case may be, shall not,
within said period of sixty (60) days or such longer period during
which execution of the same shall have been stayed, appeal therefrom
and cause the execution thereof to be stayed during such appeal; or
(b) Final judgments or orders involving liabilities in excess of
$500,000 in the aggregate which are not otherwise covered by insurance
shall be rendered against the Parent Guarantor and its Subsidiaries on
a Consolidated basis and the same shall not be discharged (or
provision shall not be made for such discharge), or a stay of
execution thereof shall not be procured, within sixty (60) days from
the date of entry thereof, or such Person shall not, within said
period of sixty (60) days or such longer period during which execution
of the same shall have been stayed, appeal therefrom and cause the
execution thereof to be stayed during such appeal; or
(n) Environmental Liabilities in excess of $ 50,000 in the
aggregate shall have been assessed under any applicable Environmental Law
against any Loan Party or (ii) Releases of any Hazardous Substance shall have
occurred, and such event(s) could reasonably be expected to form the basis of
Environmental Liabilities against any Loan Party in excess of $50,000 in the
aggregate; or
(o) The Parent Guarantor shall cease to own (x) all of the issued
and outstanding limited partnership interests in the Borrower, or (y) all of
the issued and outstanding shares of capital stock of Hallwood GP or (z)
directly or indirectly, all of the issued and outstanding general partner
interest in the Borrower; or
(p) The Borrower shall cease to be the sole general partner of
HEP; or HEP shall suffer to exist, directly or indirectly, any material change
in its ownership or control; or
(q) Either of the Borrower or HEP shall began winding up its
business or affairs as described in the Uniform Limited Partnership Act,
Uniform Partnership Act or the laws of general application, as applicable, in
state of its organization.
THEN, (x) upon the occurrence of any Event of Default described in Subsection
7.1(k) or Subsection 7.1(l) with respect to any Loan Party the entire unpaid
amount of all Obligations shall automatically become immediately due and
payable, without presentment for payment, demand, protest, notice of intent to
accelerate, notice of acceleration or further notice of any kind, all of which
are hereby expressly waived by each Loan Party and (y) upon the occurrence of
any other Event of Default, the Lender may by written
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notice to the Loan Parties declare the entire unpaid amount of all Obligations
to be forthwith due and payable, whereupon all Obligations shall become and be
forthwith due and payable, without presentment for payment, demand, protest,
notice of intent to accelerate, notice of acceleration or further notice of any
kind, all of which are hereby expressly waived by each of the Loan Parties.
SECTION 7.2. Remedies. If any Event of Default shall occur, the
Lender may protect and enforce the Lender's rights and remedies under the Loan
Documents by any appropriate proceedings, including proceedings for specific
performance of any covenant or agreement contained in any Loan Document, and
the Lender may enforce the payment of any Obligations due or enforce any other
legal or equitable right. All rights and remedies and powers conferred upon the
Lender under the Loan Documents shall be deemed cumulative and not exclusive of
any other rights, remedies or powers available under the Loan Documents or at
law or in equity.
SECTION 7.3. Right of Setoff. In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance
of any Event of Default the Lender is hereby authorized at any time or from
time to time, to the fullest extent permitted by law and without presentment,
demand, protest or other notice of any kind to any Loan Party or to any other
Person, any such notice being hereby expressly waived, to set off and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held, and other Debt at any time owing, by the Lender (including,
without limitation, by Affiliates, branches or agencies of the Lender wherever
located) to or for the credit or the account of any Loan Party against any of
and all the Obligations, and all other claims of any nature or description
arising out of or in connection with this Credit Agreement or any other Loan
Document, irrespective of whether or not the Lender shall have made any demand
under this Credit Agreement or the Note or other Loan Documents and although
such Obligations, liabilities or claims, or any of them, shall be contingent or
unmatured. The Lender agrees promptly to notify such Loan Party, as the case
may be, after any such setoff and application made by the Lender, but the
failure to give such notice shall not affect the validity of such setoff and
application. The rights of the Lender under this Section 7.3 are in addition
to other rights and remedies (including, without limitation, other rights of
setoff) which the Lender may have.
SECTION 7.4. Indemnity. Each of the Loan Parties hereby indemnifies
the Lender, each Affiliate of the Lender and its respective directors,
officers, employees, shareholders and agents (each an "Indemnitee") from, and
hold each of them harmless against, any and all losses, liabilities, claims,
damages, expenses, penalties, actions, judgments, suits, costs or disbursements
of any kind or nature whatsoever that are asserted against an Indemnitee by any
Person if such losses, liabilities, claims, damages, expenses, penalties,
actions, judgments, suits, costs or disbursements arise out of or result from
(i) any use by the Borrower of the proceeds of any extension of credit by the
Lender hereunder or (ii) any investigation, litigation or other proceeding
(including any threatened investigation or proceeding) relating to the
foregoing or arising out of or based upon any Loan Document or any of the
transactions contemplated by any Loan Document, and the Loan Parties shall
reimburse such Indemnitee, within ten (10) Business Days after receipt of a
composite statement of account for any reasonable expenses (including
reasonable legal fees) incurred in connection with any such investigation or
proceeding; but excluding any such losses, liabilities, claims, damages,
expenses, penalties, actions, judgments, suits, costs or disbursements
resulting from the gross negligence or willful misconduct of such Indemnitee.
IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH INDEMNITEE TO BE
INDEMNIFIED HEREUNDER OR THEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS
AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, EXPENSES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS OR DISBURSEMENTS ARISING OUT OF OR FROM
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THE ORDINARY NEGLIGENCE OF SUCH INDEMNITEE. Without prejudice to the survival
of any other Obligations of the Loan Parties hereunder and the other Loan
Documents, the Obligations of the Loan Parties under this Section 7.4 shall
survive the termination of this Credit Agreement, the payment in full of the
Obligations and/or assignment of the Note.
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ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. Amendments and Waivers.
(a) Neither this Credit Agreement or any other Loan Document to
which any Loan Party is a party nor any terms hereof or thereof may be amended,
supplemented, waived or otherwise modified except in accordance with the
provisions of this subsection. Any provision of this Credit Agreement or any
other Loan Document may be amended, supplemented, waived, or otherwise modified
if and only if such amendment, supplement, waiver or other modification (i) is
in writing, (ii) is signed by the Lender and (iii) is signed by each other
party thereto except that in the case of a waiver, the party whose performance
is being waived need not be a signatory. Any such amendment, supplement,
modification or waiver shall be binding upon the Lender, all future holders of
the Note and Obligations, and all parties to the Loan Document so amended,
supplemented, waived or otherwise modified.
(b) Acknowledgements and Admissions. Each Loan Party hereby
represents, warrants, acknowledges and admits that (i) it has been advised by
counsel in the negotiation, execution and delivery of the Loan Documents to
which it is a party, (ii) it has made an independent decision to enter into
this Credit Agreement and the other Loan Documents to which it is a party,
without reliance on any representation, warranty, covenant or undertaking by
the Lender, whether written, oral or implicit, other than as expressly set out
in this Credit Agreement or in another Loan Document delivered on or after the
date hereof, (iii) there are no representations, warranties, covenants,
undertakings or agreements by the Lender as to the Loan Documents except as
expressly set out in a letter agreement dated November 5, 1996 from the Parent
Guarantor to the Lender regarding legal fees, this Agreement or in another Loan
Document delivered on or after the date hereof, (iv) the Lender owes no
fiduciary duty to any Loan Party with respect to any Loan Document or the
transactions contemplated thereby, (v) the relationship pursuant to the Loan
Documents between Loan Parties, on one hand, and the Lender, on the other hand,
is and shall be solely that of debtor and creditor, respectively, (vi) no
partnership or joint venture exists with respect to the Loan Documents between
any Loan Party and the Lender, (vii) should an Event of Default or Default
occur or exist the Lender will determine in its sole discretion and for its own
reasons what remedies and actions it will or will not exercise or take at that
time, (viii) without limiting any of the foregoing, no Loan Party is relying
upon any representation or covenant by the Lender, or any representative
thereof, and no such representation or covenant has been made, that the Lender
will, at the time of an Event of Default or Default, or at any other time,
waive, negotiate, discuss, or take or refrain from taking any action permitted
under the Loan Documents with respect to any such Event of Default or Default
or any other provision of the Loan Documents, and (ix) the Lender has relied
upon the truthfulness of the acknowledgements in this section in deciding to
execute and deliver this Credit Agreement and to make the Loan.
SECTION 8.2. Notices, Etc.
(a) Notices, consents, requests, approvals, demands and other
communications (collectively "Communications") provided for herein shall be in
writing (including telecopy, telegraphic, telex or cable communications) and
mailed, telecopied, telegraphed, telexed, cabled or delivered:
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If to the Borrower, to it at:
HEPGP Ltd.
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
Telephone Number: (303) 850-7373
Telecopy Number: (303) 850-6507
Attention: Legal Department
If to the Parent Guarantor, to it at:
The Hallwood Group Incorporated
3710 Rawlins, Suite 1500
Dallas, Texas 75219-4236
Telephone Number: (214) 528-5588
Telecopy Number: (214) 522-9254
Attention: Melvin J. Melle, Vice President
If to Hallwood GP to it at:
Hallwood G.P., Inc.
4582 South Ulster Street Parkway
Suite 1700
Denver, Colorado 80237
Telephone Number: (303) 850-7373
Telecopy Number: (303) 850-6507
Attention: Legal Department
If to the Lender, to it at:
First Union National Bank of North Carolina
c/oFirst Union Corporation of North Carolina
1001 Fannin Street, Suite 2255
Houston, Texas 77002
Telephone Number: (713) 650-0452
Telecopy Number: (713) 650-6354
Attention: Jay Chernosky
If such notice to the Lender relates to fundings or payments,
with a copy to:
First Union National Bank of North Carolina
c/oFirst Union Corporation of North Carolina
1001 Fannin Street, Suite 2255
Houston, Texas 77002
Telephone Number: (713) 650-0452
Telecopy Number: (713) 650-6354
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<PAGE> 55
Attention: Debbie Blank
(b) All Communications, except as otherwise expressly provided in
the Loan Documents, must be in writing and must be mailed, telecopied or
delivered, to the appropriate party at the address set forth herein or other
applicable Loan Document or, as to any party to any Loan Document, at any other
address as may be designated by it in a written notice sent to all other
parties to such Loan Document in accordance with this Section 8.2.
(c) Any Communication given by telecopier must be confirmed within
48 hours by letter mailed or delivered to the appropriate party at its
respective address. Except as otherwise expressly provided in any Loan
Document, any Communication required or permitted by any Loan Document given in
compliance with this Section 8.2 shall be effective when received or delivered.
SECTION 8.3. No Waiver; Remedies Cumulative. No failure on the part
of the Lender or any holder of the Note to exercise, and no delay in
exercising, any right, power or privilege hereunder or under any other Loan
Document and no course of dealing between the Loan Parties or any of them and
the Lender or any holder of the Note shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power or privilege, or
any abandonment or discontinuance of any steps to enforce such right, power or
privilege, preclude any other or further exercise thereof or the exercise of
any other right, power or privilege. No notice to or demand on any Loan Party
in any case shall entitle such Loan Party to any other or further notice or
demand in similar or other circumstances. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
SECTION 8.4. Costs, Expenses and Taxes.
(a) The Loan Parties agree to pay within ten (10) Business Days
after presentation of a composite statement of account: (i) all reasonable
costs and expenses of the Lender in connection with the negotiation,
preparation, distribution, execution and delivery of this Credit Agreement, the
Note and the other Loan Documents and the documents and instruments referred to
therein, and (ii) the negotiation, preparation, distribution, execution and
delivery of any amendment, supplement, modification, waiver or consent,
including the Lender's review and due diligence with respect to any such
amendment, supplement, modification, waiver or consent or the addition of
Mortgaged Properties not engineered in connection with the initial funding
under this Credit Agreement relating to any of the Loan Documents (including,
without limitation, as to each of the foregoing, the reasonable fees and
disbursements of legal counsel to the Lender;
(b) The Loan Parties shall pay all reasonable out-of-pocket costs
and expenses of the Lender in connection with (i) the preservation of its
rights under, and enforcement of, the Loan Documents and the documents and
instruments referred to therein and (ii) any workout, restructuring or
rescheduling of the Obligations or any proceeding under any Debtor Relief Law
with respect to any Loan Party (including, without limitation, in each case,
the reasonable fees and disbursements of counsel for the Lender).
(c) The Loan Parties shall pay, and hold the Lender harmless from
and against, any and all present and future stamp, excise, and other similar
taxes and fees with respect to the foregoing matters and hold the Lender
harmless from and against any and all liabilities with respect to or resulting
from any delay or omission (other than to the extent attributable to the
Lender) to pay such taxes.
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(d) Without prejudice to the survival of any other obligations of
the Loan Parties hereunder, under the other Loan Documents, the obligations of
the Loan Parties under this Section 8.4 shall survive the termination of this
Credit Agreement and/or the payment or assignment of the Note.
SECTION 8.5. Governing Law. This Credit Agreement, the Note and,
unless otherwise specified therein, all other Loan Documents and all other
documents executed in connection herewith or therewith, shall be deemed to be
contracts and agreements executed by the Borrower, the Parent Guarantor,
Hallwood GP and the Lender under the laws of the State of North Carolina and of
the United States and for all purposes shall be construed in accordance with,
and governed by, the laws of said State and of the United States. Without
limitation of the foregoing, nothing in this Credit Agreement, the Note or any
other Loan Document shall be deemed to constitute a waiver of any rights which
the Lender may have under applicable federal legislation relating to the amount
of interest which the Lender may contract for, take, receive or charge in
respect of the Loan, including any right to take, receive, reserve and charge
interest at the rate allowed by the law of the state where the Lender is
located.
SECTION 8.6. Interest. Each provision in this Credit Agreement and
each other Loan Document is expressly limited so that in no event whatsoever
shall the amount paid, or otherwise agreed to be paid, to the Lender for the
use, forbearance or detention of the money to be loaned under this Credit
Agreement or any Loan Document or otherwise (including any sums paid as
required by any covenant or obligation contained herein or in any other Loan
Document which is for the use, forbearance or detention of such money), exceed
that amount of money which would cause the effective rate of interest to exceed
the Highest Lawful Rate, and all amounts owed under this Credit Agreement and
each other Loan Document shall be held to be subject to reduction to the effect
that such amounts so paid or agreed to be paid which are for the use,
forbearance or detention of money under this Credit Agreement or such Loan
Document shall in no event exceed that amount of money which would cause the
effective rate of interest to exceed the Highest Lawful Rate. Anything in this
Credit Agreement, the Note or any other Loan Document to the contrary
notwithstanding, with respect to the Note the Borrower shall never be required
to pay unearned interest on the Note or ever be required to pay interest on the
Note at a rate in excess of the Highest Lawful Rate, and if the effective rate
of interest which would otherwise be payable with respect to the Note would
exceed the Highest Lawful Rate, or if the holder of the Note shall receive any
unearned interest or shall receive monies that are deemed to constitute
interest which would increase the effective rate of interest payable by the
Borrower with respect to the Note to a rate in excess of the Highest Lawful
Rate, then (i) the amount of interest which would otherwise be payable by the
Borrower with respect to the Note shall be reduced to the amount allowed under
applicable law and (ii) any unearned interest paid by the Borrower or any
interest paid by the Borrower in excess of the Highest Lawful Rate shall be in
the first instance credited on the principal of the Note with the excess
thereof, if any, refunded to the Borrower. It is further agreed that, without
limitation of the foregoing, all calculations of the rate of interest
contracted for, charged or received by the Lender under the Note, or under this
Credit Agreement or the other Loan Documents, are made for the purpose of
determining whether such rate exceeds the Highest Lawful Rate applicable to the
Lender (such Highest Lawful Rate being the Lender's "Maximum Permissible
Rate"), shall be made, to the extent permitted by usury laws applicable to the
Lender (now or hereafter enacted), by (i) characterizing any non-principal
payment as an expense, fee or premium rather than as interest and (ii)
amortizing, prorating and spreading in equal parts during the period of the
full stated term of the Loan evidenced by the Note all interest at any time
contracted for, charged or received by the Lender in connection therewith.
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SECTION 8.7. Survival of Representations and Warranties. All
representations, warranties and covenants contained or incorporated herein or
made in writing by any Loan Party in connection herewith shall survive the
execution and delivery of this Credit Agreement, the Note and the other Loan
Documents.
SECTION 8.8. Binding Effect. This Credit Agreement shall become
effective on the Effective Date and shall be binding upon and inure to the
benefit of the Loan Parties and the Lender and their respective successors and
assigns, whether so expressed or not, provided, that no Loan Party may assign
or transfer any of its rights or delegate any of its duties or obligations
under any Loan Document without the prior consent of Lender.
SECTION 8.9. Participations; Assignments. The Lender shall have the
right to sell assign or transfer all or any part of its Note, the Loan and the
associated rights and obligations under all Loan Documents to one or more
financial institutions, pension plans, investment funds, or similar purchasers,
and the assignee, transferee or recipient shall have, to the extent of such
sale, assignment, or transfer, the same rights, benefits and obligations as it
would if it were such Lender and a holder of such Note. Within three (3)
Business Days after its receipt of notice that the Lender has made any such
sale, assignment or transfer, the Borrower shall execute and deliver to such
assignee a new Note evidencing such assignee's assigned portion of the Loan
and, if the Lender has retained a portion of the Loan, a replacement Note in
the principal amount of the portion of the Loan retained by the Lender (such
Notes to be in exchange for, but not in payment of, the Note held by such
Lender). The Lender shall have the right to grant participations in all or any
part of its Note, the Loan and the associated rights and obligations under all
Loan Documents to one or more pension plans, investment funds, financial
institutions or similar purchasers. The Lender may at any time assign all or
any portion of its rights under this Credit Agreement and the Note to a Federal
Reserve Bank. No such assignment shall release the Lender from its obligation
hereunder.
SECTION 8.10. Separability. Should any clause, sentence, paragraph
or section of this Credit Agreement or any other Loan Document be judicially
declared to be invalid, unenforceable or void, such decision will not have the
effect of invalidating or voiding the remainder of this Credit Agreement or
such other Loan Document, as the case may be, and the parties hereto agree that
the part or parts of this Credit Agreement or such Loan Document so held to be
invalid, unenforceable or void will be deemed to have been stricken here from
or therefrom and the remainder will have the same force and effectiveness as if
such part or parts had never been included herein or therein.
SECTION 8.11. Marshalling; Recapture. The Lender shall be under no
obligation to marshal any Properties in favor of any Loan Party or any other
Person or against or in payment of any or all of the Obligations. To the
extent the Lender receives any payment by or on behalf of any Loan Party which
payment or any part thereof is subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to such Loan
Party, as the case may be, or such Loan Party's estate, trustee, receiver,
custodian or any other party under any Debtor Relief Law, state or federal law,
common law or equitable cause, then to the extent of such payment or repayment,
the obligation or part thereof which has been paid, reduced or satisfied by the
amount so repaid shall be reinstated by the amount so repaid and shall be
included within the liabilities of such Loan Party, as the case may be, to the
Lender as of the date such initial payment, reduction or satisfaction occurred.
SECTION 8.12. Representation by the Lender. The Lender represents that
it is the present intention of the Lender to acquire the Note for its own
account or for the account of its Affiliates and not
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with a view to the distribution or sale thereof, subject, nevertheless to the
necessity that the Lender remain in control at all times of the disposition of
Property held by it for its own account; it being understood that the foregoing
representations shall not affect the characterization of the Loan as a
commercial lending transaction.
SECTION 8.13. No Third Party Beneficiaries. The agreement of the
Lender to make the Loan on the terms and conditions set forth in this Credit
Agreement, is solely for the benefit of the Loan Parties, and no other Person
(including any obligor, contractor, subcontractor, supplier or materialman
furnishing supplies, goods or services to or for the benefit of any Loan Party)
shall have any rights hereunder, as against the Lender, under any other Loan
Document, or with respect to the Loan or the proceeds thereof.
SECTION 8.14. Execution in Counterparts. This Credit Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement.
SECTION 8.15. Jurisdiction; Consent to Service of Process.
(a) Each Loan Party hereby irrevocably and unconditionally submits,
for itself and its Property, to the nonexclusive jurisdiction of any North
Carolina State court or Federal court of the United States of America sitting
in Mecklenburg County, North Carolina in any action or proceeding arising out
of or relating to this Credit Agreement or the Loan Documents, or for
recognition or enforcement of any order or judgment, and each of the parties
hereto hereby irrevocably and unconditionally agrees that all claims in respect
of any such action or proceeding may be heard and determined in such North
Carolina State court, or to the extent permitted by law, in such Federal court
in Mecklenburg County, North Carolina. Each party to this Credit Agreement
irrevocably consents to the service of process out of any North Carolina State
court or Federal court of the United States of America sitting in Mecklenburg
County, North Carolina in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address referred to in Section 8.2. Each of the Borrower, Hallwood GP
and the Parent Guarantor agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. Nothing in this
Credit Agreement shall affect any right that the Lender may otherwise have to
bring any action or proceeding relating to this Credit Agreement or the Loan
Documents against the Borrower, Hallwood GP or the Parent Guarantor or their
respective Properties in the courts of any other jurisdiction.
(b) Each of the Borrower, Hallwood GP and the Parent Guarantor hereby
irrevocably and unconditionally waives, to the fullest extent it may legally
and effectively do so, any objection which it may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to
this Credit Agreement or the Loan Documents in any North Carolina State or
Federal court sitting in Mecklenburg County, North Carolina. Each of the
Borrower, Hallwood GP and the Parent Guarantor hereby irrevocably waives, to
the fullest extent permitted by law, the defense of an inconvenient forum to
the maintenance of such action or proceeding in any such court.
SECTION 8.16. WAIVER OF JURY TRIAL, DAMAGES, ETC. TO THE EXTENT
PERMITTED BY LAW, EACH OF THE LENDER, THE PARENT GUARANTOR, HALLWOOD GP AND THE
BORROWER HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVE
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ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER, OR IN CONNECTION WITH,
THIS CREDIT AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF SUCH
PERSONS, THE PARENT GUARANTOR, HALLWOOD GP OR THE BORROWER. THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE LENDER'S ENTERING INTO THIS CREDIT AGREEMENT AND
THE OTHER LOAN DOCUMENTS. EACH OF THE BORROWER, HALLWOOD GP, THE PARENT
GUARANTOR AND THE LENDER HEREBY FURTHER (a) IRREVOCABLY WAIVES, TO THE MAXIMUM
EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY
SUCH LITIGATION ANY SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, OR DAMAGES
OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (b) CERTIFIES THAT NO PARTY
HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (C)
ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS CREDIT AGREEMENT, THE
OTHER LOAN DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS
SECTION.
SECTION 8.17. FINAL AGREEMENT OF THE PARTIES. THIS CREDIT AGREEMENT
(INCLUDING THE EXHIBITS AND SCHEDULES HERETO), THE NOTE AND THE OTHER LOAN
DOCUMENTS TO WHICH ANY LOAN PARTY IS A PARTY CONSTITUTE A "LOAN AGREEMENT" AS
DEFINED IN SECTION 26.02(A) OF THE TEXAS BUSINESS AND COMMERCE CODE, AND
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
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IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
THE LOAN PARTIES:
HEPGP LTD.,
a Colorado limited partnership
By: HALLWOOD G.P., INC., its sole general partner
By:/s/ William L. Guzzetti
Name: William L. Guzzetti
Title: President
THE HALLWOOD GROUP INCORPORATED
By:/s/ Willliam L. Guzzetti
Name: William L. Guzzetti
Title: Executive Vice President
HALLWOOD G.P., INC.
By:/s/ William L. Guzzetti
Name: William L. Guzzetti
Title: President
THE LENDER
FIRST UNION NATIONAL BANK OF NORTH
CAROLINA
By:/s/ Michael J. Kolosowsky
Name: Michael J. Kolosowsky
Title: Vice President
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<PAGE> 1
EXHIBIT 10.21
CREDIT AGREEMENT
Dated as of January 7, 1997
among
BROOKWOOD COMPANIES INCORPORATED,
KENYON INDUSTRIES, INC.,
BROOKWOOD LAMINATING, INC.,
as Borrowers
and
THE BANK OF NEW YORK,
as Bank
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Other Definitional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 2. AMOUNT AND TERMS OF COMMITMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.1 Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Procedure for Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.3 Issuance of Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.4 Procedure for Opening Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.5 Payments in Respect of Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.6 Creation of Acceptances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.7 Termination or Reduction of Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2.8 Repayment of Loans; Evidence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.9 Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.10 Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.11 Conversion and Continuation Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.12 Minimum Amounts And Maximum Number of Tranches . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.13 Interest Rates and Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.14 Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.15 Letter of Credit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.16 Computation of Interest and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.17 Letter of Credit Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.18 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.19 Borrowing Base Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.20 Inability to Determine Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.21 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.22 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.23 Requirements of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.24 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.25 Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.26 Reliance by Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 3. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.1 Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3.2 No Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.3 Corporate Existence; Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
3.4 Corporate Power; Authorization; Enforceable Obligations . . . . . . . . . . . . . . . . . . . . . . 30
3.5 No Legal Bar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.6 No Material Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.7 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
3.8 Ownership of Property; Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.9 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
3.10 No Burdensome Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.12 Federal Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.13 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3.14 Investment Company Act; Other Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.15 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.16 Purpose of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.17 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 4. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.1 Conditions to Initial Loans, Letters of Credit and Acceptances . . . . . . . . . . . . . . . . . . . 35
4.2 Conditions to Each Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 5. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.2 Certificates; Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.3 Payment of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.4 Conduct of Business and Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.5 Maintenance of Property; Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.6 Inspection of Property; Books and Records; Discussions . . . . . . . . . . . . . . . . . . . . . . . 41
5.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.8 Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.9 Subsidiary Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 6. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.1 Financial Condition Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.2 Limitation on Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
6.3 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.4 Limitation on Guarantee Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.5 Limitation on Fundamental Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.6 Limitation on Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.7 Limitation on Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.8 Limitation on Consolidated Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.9 Limitation on Investments, Loans and Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.10 Limitation on Optional Payments and Modifications of Debt Instruments . . . . . . . . . . . . . . . 47
6.11 Limitation on Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.12 Limitation on Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.13 Limitation on Changes in Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.14 Limitation on Negative Pledge Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.15 Limitation on Lines of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.16 Limitation on Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.17 Limitation on Receivables From Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.18 Limitation on Tax Sharing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
6.19 Amendments to Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 7. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 8. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.1 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.3 No Waiver; Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.4 Survival of Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.5 Payment of Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.6 Successors and Assigns; Participation and Assignments. . . . . . . . . . . . . . . . . . . . . . . . 54
8.7 Adjustments; Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.10 Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.12 Submission To Jurisdiction; Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.13 Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.14 WAIVERS OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.15 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>
EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Borrowing Base Compliance Certificate
Exhibit C - Form of Brookwood Pledge Agreement
Exhibit D - Form of Parent Pledge Agreement
Exhibit E - Form of Security Agreement
Exhibit F - Form of Subsidiary Guarantee
Exhibit G - Form of Bankers Acceptance Confirmation
Exhibit H - Form of Draft
Exhibit I-1 - Form of Opinion of Counsel to Borrowers
Exhibit I-2 - Form of Opinion of Counsel to Parent
Exhibit J - Form of Assignment and Acceptance
Exhibit K - Form of Assignment of Factor Balances
Exhibit L - Form of Notice of Assignment
SCHEDULES
Schedule 3.17 - Environmental Matters
Schedule 4.1(j) - Indebtedness to be Repaid
Schedule 6.2 - Indebtedness
Schedule 6.3 - Liens
Schedule 6.4 - Guarantee Obligations
</TABLE>
iii
<PAGE> 5
CREDIT AGREEMENT, dated as of January 7, 1997, among BROOKWOOD
COMPANIES INCORPORATED, a Delaware corporation ("Brookwood"), KENYON
INDUSTRIES, INC., a Delaware corporation ("Kenyon"), and BROOKWOOD LAMINATING,
INC., a Delaware corporation ("Laminating"; and together with Brookwood and
Kenyon, the "Borrowers"), and THE BANK OF NEW YORK (the "Bank").
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:
"Acceptance": a banker's acceptance created by the Bank pursuant to
the terms of subsection 2.6.
"Acceptance Commission": as defined in subsection 2.6(d).
"Acceptance Proceeds": as defined in subsection 2.6(d).
"Affiliate": as to any Person, any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with, such Person. For purposes of this definition,
"control" of a Person means the power, directly or indirectly, either to (a)
vote 10% or more of the securities having ordinary voting power for the
election of directors of such Person or (b) direct or cause the direction of
the management and policies of such Person, whether by contract or otherwise.
"Agreement": this Credit Agreement, as amended, supplemented or
otherwise modified from time to time.
"Alternate Base Rate": for any day, a rate per annum (rounded upwards,
if necessary, to the next 1/16 of 1%) equal to the higher of (a) the Prime Rate
in effect on such day and (b) the Federal Funds Rate in effect on such day plus
1/2 of 1%. For purposes hereof: "Prime Rate" means the rate of interest per
annum publicly announced from time to time by the Bank as its prime commercial
lending rate in effect at its principal office in New York City (the Prime Rate
not being intended to be the lowest rate of interest charged by the Bank in
connection with extensions of credit to debtors); and "Federal Funds Rate"
means, for any day, the weighted average of the rates on overnight federal
funds transactions with members of the Federal Reserve System arranged by
federal funds brokers, as published for such day by the Federal Reserve Bank of
New York, or, if such rate is not so published for any day which is a Business
Day, the average of the quotations for such day on such transactions received
by the
<PAGE> 6
Bank from three federal funds brokers of recognized standing selected by it.
Any change in the Alternate Base Rate due to a change in the Prime Rate or the
Federal Funds Rate shall be effective as of the opening of business on the
effective day of such change in the Prime Rate or the Federal Funds Rate,
respectively.
"Alternate Base Rate Loans": Loans the rate of interest applicable to
which is based upon the Alternate Base Rate.
"Applicable Margin": for each Type of Loan, the rate per annum set
forth under the relevant column heading below:
<TABLE>
<CAPTION>
Alternate Base Eurodollar
Rate Loans Loans
------------------------------------------------------------------
<S> <C>
0.25% 2.25%
</TABLE>
"Assignee": as defined in subsection 8.6(c).
"Assignment of Factor Balances": an Assignment of Factor Balances to
be executed and delivered by the applicable factor in respect of any Eligible
Factor Credit Balance, substantially in the form of Exhibit K, as the same may
be amended, supplemented or otherwise modified from time to time.
"Available Commitment": at any time, an amount equal to the excess, if
any, of the lesser of (a) the Maximum Amount and (b) the sum of (i) the
Borrowing Base minus (ii) the aggregate principal amount of all Loans then
outstanding minus (iii) the aggregate L/C Obligations at such time.
"Bank": as defined in the preamble hereto.
"Borrowers": as defined in the preamble hereto.
"Borrowing Base": as defined in subsection 2.1.
"Borrowing Base Compliance Certificate": a certificate signed by the
chief financial officer of Brookwood, substantially in the form of Exhibit B
hereto and appropriately completed, and containing such other supporting
documents and attachments as may be necessary to support the information
contained therein to the reasonable satisfaction of the Bank.
"Borrowing Date": any Business Day specified in a notice pursuant to
(a) subsection 2.2 or 2.11 as a date on which Brookwood requests the Bank to
make Loans, (b) subsection 2.3 as a date on which Brookwood requests the Bank
to issue a Letter of Credit or (c) subsection 2.6 as a date on which Brookwood
requests the Bank to create an Acceptance.
2
<PAGE> 7
"Brookwood": as defined in the preamble hereto.
"Brookwood Pledge Agreement": the Pledge Agreement dated as of the
date hereof to be executed and delivered by Brookwood, substantially in the
form of Exhibit C, as the same may be amended, supplemented or otherwise
modified from time to time.
"Business": as defined in subsection 3.17(d).
"Business Day": a day other than a Saturday, Sunday or other day on
which commercial banks in New York City are authorized or required by law to
close; provided, however, that when used in connection with a Eurodollar Loan,
the term "Business Day" shall also exclude any day on which banks are not open
for dealings in dollar deposits in the London interbank market.
"Capital Stock": any and all shares, interests, participation or other
equivalents (however designated) of capital stock (including preferred stock)
of a corporation, any and all equivalent ownership interests in a Person (other
than a corporation) and any and all warrants or options to purchase any of the
foregoing.
"Cash Equivalents": (a) direct obligations of the United States of
America, or of any agency thereof, or obligations guaranteed as to principal
and interest by the United States of America, or of any agency thereof, in
either case maturing not more than 90 days from the date of acquisition
thereof; (b) certificates of deposit issued by any bank or trust company
organized under the laws of the United States of America or any state thereof,
and having capital, surplus and undivided profits of at least $500,000,000,
maturing not more than 90 days from the date of acquisition thereof; and (c)
commercial paper issued by the Bank, the parent corporation of the Bank or any
Subsidiary of the Bank's parent corporation and commercial paper rated A-1 or
better or P-1 by Standard & Poor's Ratings Group, a Division of McGraw Hill,
Inc., or Moody's Investors Services, Inc., respectively, maturing not more than
90 days from the date of acquisition thereof; in each case so long as the same
(x) provide for the payment of principal and interest (and not principal alone
or interest alone) and (y) are not subject to any contingency regarding the
payment of principal or interest.
"Change in Law": the adoption of any law, rule, regulation, policy,
guideline or directive (whether or not having the force of law) or any change
therein or in the interpretation or application thereof by any Governmental
Authority, including, without limitation, the issuance of any final rule,
regulation or guideline by any regulatory agency having jurisdiction over the
Bank or, in the case of subsection 2.17 or 2.23, any corporation controlling
the Bank.
"Closing Date": the date on which the conditions precedent set forth
in subsection 4.1 shall be satisfied.
"Code": the Internal Revenue Code of 1986, as amended from time to
time.
3
<PAGE> 8
"Collateral": all assets of the Loan Parties, now owned or hereinafter
acquired, upon which a Lien is purported to be created by any Security
Document.
"Commercial L/C": a commercial documentary letter of credit under
which the Bank agrees to make payment in Dollars for the account of a Borrower
in respect of obligations of such Borrower or a Subsidiary thereof in
connection with the purchase of goods or services in the ordinary course of
business.
"Commitment": the obligation of the Bank to make Loans, issue Letters
of Credit and create Acceptances to or for the account of the Borrowers
hereunder in an aggregate principal amount at any one time outstanding not to
exceed the Maximum Amount, as such amount may be reduced from time to time in
accordance with the provisions of this Agreement.
"Commitment Period": the period from and including the date hereof to
but not including the Termination Date or such earlier date on which the
Commitment shall terminate as provided herein.
"Commonly Controlled Entity": an entity, whether or not incorporated,
which is under common control with the Borrowers within the meaning of Section
4001 of ERISA or is part of a group which includes the Borrowers and which is
treated as a single employer under Section 414 of the Code.
"Consolidated Capital Expenditures": for any period, all amounts which
are set forth on the consolidated statement of cash flows of Brookwood and its
Subsidiaries for such period as the "purchase of property and equipment," in
accordance with GAAP.
"Consolidated EBITDA": for any period, the sum, for the Borrowers and
their Subsidiaries (determined on a consolidated basis in accordance with GAAP)
of (a) net income (before extraordinary and unusual items), plus (b) interest
expense, plus (c) tax expense, plus (d) depreciation expense (to the extent
deducted in determining net income), plus (e) amortization expense (to the
extent deducted in determining net income).
"Consolidated Fixed Charges": for any period, the sum, for the
Borrowers and their Subsidiaries (determined on a consolidated basis in
accordance with GAAP) of (a) interest expense, plus (b) cash taxes paid, plus
(c) scheduled principal amortization of Indebtedness (including the principal
portion of lease payments under Financing Leases), plus (d) Consolidated
Capital Expenditures, plus (e) Restricted Payments made to the Parent.
"Consolidated Indebtedness for Borrowed Money": for any period, the
aggregate amount of Indebtedness of Brookwood and its Subsidiaries described in
clauses (a)-(e) of the definition of "Indebtedness" contained in this
subsection 1.1.
"Consolidated Tangible Net Worth": as of any date of determination,
all items which in conformity with GAAP would be included under shareholders'
equity on a consolidated balance sheet of Brookwood and its Subsidiaries, after
deducting therefrom the following: (a)
4
<PAGE> 9
any surplus resulting from the write-up of assets after the date hereof, (b)
intangible assets, including (i) goodwill, including any amounts (however
designated on the balance sheet) representing the cost of acquisitions of
Subsidiaries in excess of underlying tangible assets, (ii) patents, trademarks
and copyrights and (iii) deferred charges (including, but not limited to,
unamortized debt discount and expense) and (c) leasehold improvements not
recoverable at the expiration of a lease.
"Consolidated Total Liabilities": for any period, all amounts which,
in accordance with GAAP, would appear as liabilities on the consolidated
balance sheet of Brookwood and its Subsidiaries.
"Contractual Obligation": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Default": any of the events specified in Section 7, whether or not
any requirement for the giving of notice, the lapse of time, or both, or any
other condition, has been satisfied.
"Discount Charge": as defined in subsection 2.6(d).
"Dollars" and "$": dollars in lawful currency of the United States of
America.
"Draft": a draft drawn by a Borrower in the form of Exhibit H hereto,
or such other form as may be acceptable to the Borrowers and the Bank.
"Drawing": a drawing of one or more Drafts.
"Drawing Date": as defined in subsection 2.6(c).
"Eligible Factor Credit Balance": a Factor Credit Balance owing to a
Borrower as to which the following requirements have been fulfilled to the
satisfaction of the Bank: (i) such Factor Credit Balance is payable to a
Borrower and such Borrower has lawful and absolute title thereto; (ii) such
Factor Credit Balance shall have excluded therefrom (x) any portion that is
subject to any dispute, offset, reserve, counterclaim or any other claim or
defense on the part of the applicable factor or other obligor or to any claim
on the part of the applicable factor or other obligor denying liability under
such Factor Credit Balance known to any of the Borrowers and (y) discounts,
claims, credits and allowances; (iii) such Factor Credit Balance is evidenced
by a statement of account rendered to a Borrower by the applicable factor or
other obligor and none of such Factor Credit Balance is evidenced by any
chattel paper, promissory note or other instrument; (iv) none of such Factor
Credit Balance is subject to any Lien in favor of any Person other than the
Liens of the Bank hereunder; (v) none of the Borrowers is aware or has reason
to be aware of any reorganization, bankruptcy, receivership, custodianship,
insolvency or other like condition in respect of the applicable factor or other
obligor; (vi) such Factor Credit Balance is payable in Dollars and is due from
a factor or other obligor located in the United States; (vii) such Factor
Credit Balance is due from a factor that
5
<PAGE> 10
has executed and delivered to the Bank a Factor Intercreditor Agreement
covering such Factor Credit Balance; (viii) such Factor Credit Balance has not
been outstanding more than 90 days from the due date thereof; (ix) such Factor
Credit Balance is subject to a fully perfected first priority security interest
in favor of the Bank pursuant to the Security Agreement and the applicable
Assignment of Factor Balances; and (x) such Factor Credit Balance is a good and
valid account representing an undisputed bona fide indebtedness of the
applicable factor or other obligor, for a fixed sum as set forth in the
statement relating thereto.
"Eligible Inventory": as at any date, finished goods Inventory of
Brookwood's Roll Goods Division located at the Borrowers' premises at 445 West
Walnut Street, City of Carson, Gardena, California or 36 Sherman Avenue,
Building 14, Kenyon, Rhode Island, valued at the lower of cost or market value,
determined on a first-in-first-out basis, which is not, in the good faith
exercise of the Bank's reasonable judgment, obsolete, slow moving or
unmerchantable and which the Bank, in the good faith exercise of its reasonable
discretion, shall not deem ineligible Inventory, based on such considerations
as the Bank may from time to time deem appropriate, including, without
limitation, whether the Inventory is subject to a perfected, first priority
security interest in favor of the Bank and whether the Inventory conforms to
all standards imposed by any Governmental Authority, division or department
thereof which has regulatory authority over such goods or the use or sale
thereof.
"Eligible Receivables": each Receivable arising in the ordinary course
of the Borrowers' businesses and which the Bank shall deem to be an Eligible
Receivable, based on such considerations as the Bank may from time to time deem
appropriate. A Receivable shall not be deemed eligible unless such Receivable
is subject to the Bank's perfected security interest and no other Lien, and is
evidenced by an invoice or other documentary evidence customarily issued by the
Borrowers in the ordinary course of business. In addition, no Receivable shall
be an Eligible Receivable if:
(a) it arises out of a sale made by a Borrower to an
Affiliate of such Borrower or to a Person controlled by an Affiliate of a
Borrower;
(b) the payment associated with such Receivable is unpaid
more than (i) 90 days after the due date or (ii) 150 days after the invoice
date.
(c) the account debtor shall (i) apply for, suffer, or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee or liquidator of itself or of all or a substantial part of
its property or call a meeting of its creditors, (ii) admit in writing its
inability, or be generally unable, to pay its debts as they become due or cease
operations of its present business, (iii) make a general assignment for the
benefit of creditors, (iv) commence a voluntary case under any state or federal
bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a bankrupt
or insolvent, (vi) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesce to, or fail to have
dismissed, any petition which is filed against it in any involuntary case under
such bankruptcy laws or (viii) take any action for the purpose of effecting any
of the foregoing;
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(d) the sale is to an account debtor outside the
continental United States of America, unless the sale is on letter of credit,
guaranty or acceptance terms, in each case acceptable to the Bank in its sole
discretion;
(e) fifty percent (50%) or more of the Receivables from
such account debtor are deemed ineligible pursuant to clause (b) above;
(f) the Bank believes that collection of such Receivable
is insecure or that such Receivable may not be paid by reason of the account
debtor's financial inability to pay;
(g) the purchaser is the United States of America, any
state thereof or any department, agency or instrumentality of any of them,
unless the applicable Borrower assigns its right to payment of such Receivable
to the Bank pursuant to the Assignment of Claims Act of 1940, as amended (31
U.S.C. Sub-Section 3727 et seq. and 41 U.S.C. Sub- Section 15 et seq.) or has
otherwise complied with other applicable statutes or ordinances;
(h) the goods giving rise to such Receivable have not
been shipped and delivered to and accepted by the account debtor or the
services giving rise to such Receivable have not been performed by the
applicable Borrower and accepted by the account debtor or the Receivable
otherwise does not represent a final sale;
(i) the Receivable is subject to any offset, deduction,
defense, dispute, or counterclaim, to the extent of such offset, deduction,
defense, dispute or counterclaim, or the Receivable is contingent in any
respect or for any reason;
(j) the Borrowers have made any agreement as to any
deduction therefrom, except for discounts or allowances made in the ordinary
course of business, all of which discounts or allowances are reflected in the
calculation of the face value of each respective invoice related thereto;
(k) shipment of the merchandise or the rendition of
services has not been completed;
(l) any return, rejection or repossession of the
merchandise has occurred, to the extent of such return, rejection or
repossession;
(m) such Receivable is not payable to one or more of the Borrowers; or
(n) such Receivable is not otherwise satisfactory to the
Bank as determined in good faith by the Bank.
"Environmental Laws": any and all foreign, Federal, state, local or
municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, permits, guidelines or requirements of any Governmental Authority or
other Requirements of Law (including
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common law) regulating, relating to or imposing liability or standards of
conduct concerning protection of human health or the environment, now, or as
hereafter may be, in effect.
"Equipment": all of the Borrowers' goods (other than Inventory)
whether now owned or hereafter acquired and wherever located, including,
without limitation, all equipment, machinery, apparatus, motor vehicles,
fittings, furniture, furnishings, fixtures, parts, accessories and all
replacements and substitutions therefor or accessions thereto.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Eurocurrency Reserve Requirements": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as
a decimal) of reserve requirements in effect on such day (including, without
limitation, basic, supplemental, marginal and emergency reserves under any
regulations of the Board of Governors of the Federal Reserve System or other
Governmental Authority having jurisdiction with respect thereto) dealing with
reserve requirements prescribed for eurocurrency funding (currently referred to
as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a
member bank of such System.
"Eurodollar Lending Office": the office of the Bank which shall be
making or maintaining its Eurodollar Loans.
"Eurodollar Loans": loans the rate of interest applicable to which is
based upon the LIBOR Rate.
"Event of Default": any of the events specified in Section 7, provided
that any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.
"Existing Facility": as defined in subsection 3.16.
"Factor Credit Balance": as of any date, an amount equal to the stated
value of all monies, credit balances, reserves or other amounts held by any
factor on such date for the account of a Borrower, determined in accordance
with GAAP and in accordance with the agreements between such Borrower and such
factor.
"Factor Intercreditor Agreement": any intercreditor agreement
executed and delivered on the Closing Date by the Bank and a factor party to a
factoring agreement with any Borrower, as the same may be amended, supplemented
or otherwise modified from time to time.
"Financing Lease": any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.
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"GAAP": generally accepted accounting principles in the United States
of America in effect from time to time.
"Governmental Authority": any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government.
"Guarantee Obligation": as to any Person (the "guaranteeing person"),
any obligation of (a) the guaranteeing person or (b) another Person (including,
without limitation, any bank under any letter of credit) to induce the creation
of which the guaranteeing person has issued a reimbursement, counter indemnity
or similar obligation, in either case guaranteeing or in effect guaranteeing
any Indebtedness, leases, dividends or other obligations (the "primary
obligations") of any other third Person (the "primary obligor") in any manner,
whether directly or indirectly, including, without limitation, any obligation
of the guaranteeing person, whether or not contingent, (i) to purchase any such
primary obligation or any property constituting direct or indirect security
therefor, (ii) to advance or supply funds (1) for the purchase or payment of
any such primary obligation or (2) to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (iii) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner of
any such primary obligation against loss in respect thereof; provided, however,
that the term Guarantee Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any Guarantee Obligation of any guaranteeing person shall be deemed
to be the lower of (a) an amount equal to the stated or determinable amount of
the primary obligation in respect of which such Guarantee Obligation is made
and (b) the maximum amount for which such guaranteeing person may be liable
pursuant to the terms of the instrument embodying such Guarantee Obligation,
unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by
such guaranteeing person in good faith.
"Guarantor": any Person delivering a Subsidiary Guarantee pursuant to
this Agreement.
"Indebtedness": of any Person at any date, (a) all indebtedness of
such Person for borrowed money or for the deferred purchase price of property
or services (other than current trade liabilities incurred in the ordinary
course of business and payable in accordance with customary practices), (b) any
other indebtedness of such Person which is evidenced by a note, bond, debenture
or similar instrument, (c) all obligations of such Person under Financing
Leases, (d) all obligations of such Person upon which interest charges are
customarily paid, (e) all obligations of such Person in respect of letters of
credit or banker's acceptances issued or created for the account of such
Person, (f) all liabilities secured by any Lien on any property owned by such
Person even though such Person has not assumed or otherwise become liable
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for the payment thereof and (g) all Guarantee Obligations of such Person in
respect of Indebtedness of others.
"Insolvency": with respect to any Multiemployer Plan, the condition
that such Plan is insolvent within the meaning of Section 4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
"Intellectual Property": as defined in subsection 3.9.
"Interest Payment Date": (a) as to any Alternate Base Rate Loan, the
last day of each March, June, September and December to occur while such Loan
is outstanding, (b) as to any Eurodollar Loan having an Interest Period of
three months or less, the last day of such Interest Period,and (c) as to any
Eurodollar Loan having an Interest Period of six months, the day which is three
months after the first day of such Interest Period, and the last day of such
Interest Period.
"Interest Period": with respect to any Eurodollar Loan,
(a) initially, the period commencing on the borrowing or
conversion date, as the case may be, with respect to such Eurodollar
Loan and ending one, two, three or six months thereafter, as selected
by Brookwood in its notice of borrowing or notice of conversion, as
the case may be, given with respect thereto; and
(b) thereafter, each period commencing on the last day
of the next preceding Interest Period applicable to such Eurodollar
Loan and ending one, two, three or six months thereafter, as selected
by Brookwood by irrevocable notice to the Bank not less than three
Business Days prior to the last day of the then current Interest
Period with respect thereto;
provided that all of the foregoing provisions relating to Interest Periods are
subject to the following:
(i) if any Interest Period would otherwise end on a day
that is not a Business Day, such Interest Period shall be extended to
the next succeeding Business Day unless the result of such extension
would be to carry such Interest Period into another calendar month, in
which event such Interest Period shall end on the immediately
preceding Business Day;
(ii) any Interest Period that would otherwise extend
beyond the Termination Date shall end on the Termination Date;
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(iii) any Interest Period that begins on the last day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month; and
(iv) if Brookwood shall fail to give notice as provided in
clause (b) above, it shall be deemed to have selected a conversion of
a Eurodollar Loan to an Alternate Base Rate Loan (which conversion
shall occur automatically and without need for compliance with the
conditions for conversion set forth in subsection 2.11).
"Inventory": shall mean all of the Borrowers' now owned or hereafter
acquired goods, merchandise and other personal property, wherever located, to
be furnished under any contract of service or held for sale or lease, all raw
materials, work in process, finished goods and materials and supplies of any
kind, nature or description which are or might be used or consumed in the
Borrowers' businesses or used in selling or furnishing such goods, merchandise
and other personal property, and all documents of title or other documents
representing them.
"Kenyon": as defined in the preamble hereto.
"L/C Application": a letter of credit application in the Bank's then
customary form for the type of letter of credit requested.
"L/C Obligations": the aggregate outstanding face amount of all
Letters of Credit and Acceptances issued or created by the Bank hereunder plus
the aggregate outstanding Reimbursement Obligations.
"Laminating": as defined in the preamble hereto.
"Letter of Credit": a Commercial L/C or Standby L/C issued by the Bank
pursuant to the terms of subsection 2.3.
"LIBOR Rate": with respect to each Interest Period for a Eurodollar
Loan, the rate per annum (rounded upwards, if necessary, to the nearest 1/100
of 1% determined by the Bank to be equal to the quotient obtained by dividing
(a) the London Interbank Offered Rate for the selected Interest Period by (b) a
fraction equal to 1.00 minus the Eurocurrency Reserve Requirements as
determined on the date the LIBOR Rate is determined.
"Lien": any mortgage, deed of trust, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other), charge
or other security interest or any preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any Financing Lease, and the filing of any financing statement under
the Uniform Commercial Code or comparable law of any jurisdiction in respect of
any of the foregoing).
"Loan": as defined in subsection 2.1.
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"Loan Documents": this Agreement, the Revolving Credit Note, the
Security Documents and any Subsidiary Guarantees.
"Loan Parties": the Borrowers, the Parent and any Guarantors.
"London Interbank Offered Rate": with respect to each Interest Period
for a Eurodollar Loan, the rate per annum (rounded upwards, if necessary, to
the nearest 1/10 of 1%, quoted at approximately 11:00 A.M., London time, by the
Bank two Business Days prior to the first day of such Interest Period, for the
offering by the Bank to prime commercial banks in the London interbank market
of dollar deposits in immediately available funds for a period, and in an
amount, comparable to the Interest Period and principal amount, respectively,
of the Loan to bear interest at the LIBOR Rate.
"Material Adverse Effect": a material adverse effect on (a) the
business, operations, property, condition (financial or otherwise), results of
operations or prospects of the Borrowers and their respective Subsidiaries or
(b) the validity or enforceability of this or any of the other Loan Documents
or the rights or remedies of the Bank hereunder or thereunder.
"Materials of Environmental Concern": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products or any
pollutant, contaminant or hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Law, including,
without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde
insulation.
"Maximum Amount": $14,000,000; except that between April 1st and June
30th of any year, such amount shall be $15,000,000.
"Multiemployer Plan": a Plan which is a multiemployer plan as defined
in Section 4001(a)(3) of ERISA.
"Non-Excluded Taxes": as defined in subsection 2.24.
"Notice of Assignment": a Notice of Assignment to be delivered to the
applicable factor in respect of any Eligible Factor Credit Balance,
substantially in the form of Exhibit L, as the same may be amended,
supplemented or otherwise modified from time to time.
"Obligations": the unpaid principal of and interest on the Loans, the
L/C Obligations and all other obligations and liabilities of the Borrowers to
the Bank (including, without limitation, interest accruing after the maturity
of the Loans and interest accruing after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, related to any Borrower, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter incurred, which may arise under, out of, or in connection with, this
Agreement, the Loans, the other Loan Documents, any Letter of Credit or L/C
Application, any Acceptance or any Acceptance Application or Draft, or any
other
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document made, delivered or given in connection therewith, whether on account
of principal, interest, reimbursement obligations, fees, indemnities, costs,
expenses (including, without limitation, all fees and disbursements of counsel
to the Bank) or otherwise.
"Parent": The Hallwood Group Incorporated, a Delaware corporation.
"Parent Pledge Agreement": the Pledge Agreement dated as of the date
hereof to be executed and delivered by the Parent, substantially in the form of
Exhibit D, as the same may be amended, supplemented or otherwise modified from
time to time.
"Participant": as defined in subsection 8.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA.
"Person": an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan which is
covered by ERISA and in respect of which any of the Borrowers or a Commonly
Controlled Entity is (or, if such plan were terminated at such time, would
under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"Pledge Agreements": the collective reference to the Brookwood Pledge
Agreement and the Parent Pledge Agreement.
"Properties": as defined in subsection 3.17.
"Receivables": shall mean and include all of the Borrowers' accounts,
contract rights, instruments (including those evidencing indebtedness between
any Borrower and its respective Affiliates), documents, chattel paper, general
intangibles relating to accounts, drafts and acceptances, and all other forms
of obligations owing to any Borrower arising out of or in connection with the
sale or lease of Inventory or the rendition of services, all guarantees and
other security therefor, whether secured or unsecured, now existing or
hereafter created, and whether or not specifically sold or assigned to the Bank
hereunder.
"Register": as defined in subsection 8.6(d).
"Regulation U": Regulation U of the Board of Governors of the Federal
Reserve System as in effect from time to time.
"Reimbursement Obligations": the aggregate obligations of the
Borrowers to reimburse the Bank for any payments made by the Bank under any
Letter of Credit that have not been reimbursed by the Borrowers in accordance
with subsection 2.5(a) plus the aggregate
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obligations of the Borrowers to pay the face amount of all Drafts drawn under
Acceptances created hereunder which have not been paid by the Borrowers on the
respective maturity dates thereof in accordance with subsection 2.6(i).
"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section
4241 of ERISA.
"Reportable Event": any of the events set forth in Section 4043(c) of
ERISA, other than those events as to which the thirty day notice period is
waived under subsections .13, .14, .16, .18, .19 or .20 of PBGC. Reg. Section
2615.
"Requirement of Law": as to any Person, the articles or certificate of
incorporation and by-laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person
or any of its property is subject.
"Responsible Officer": the chief executive officer and the president
of the respective Borrower or, with respect to financial matters, the chief
financial officer of the respective Borrower.
"Restricted Payments": as defined in subsection 6.7.
"Revolving Credit Note": as defined in subsection 2.8(b).
"Security Agreement": the Security Agreement dated as of the date
hereof to be executed and delivered by the Borrowers, substantially in the form
of Exhibit E, as the same may be amended, supplemented or otherwise modified
from time to time.
"Security Documents": the collective reference to the Security
Agreement, the Pledge Agreements, the Assignments of Factor Balances, the
Notices of Assignment and the Factor Intercreditor Agreements, and all other
security documents hereafter delivered to the Bank granting a Lien on any asset
or assets of any Person to secure the obligations and liabilities of the
Borrowers hereunder and under any of the other Loan Documents or to secure any
guarantee of any such obligations and liabilities.
"Single Employer Plan": any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"Standby L/C": an irrevocable standby or direct pay letter of credit
under which the Bank agrees to make payments in Dollars for the account of a
Borrower in respect of obligations of such Borrower or a Subsidiary thereof
incurred pursuant to contracts made or performance undertaken, or to be
undertaken, or like matters relating to contracts to which such Borrower or a
Subsidiary thereof is or proposes to become a party in the ordinary course
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of such Borrower's or such Subsidiary's business, including, without
limitation, for insurance purposes or in respect of advance payments or as bid
or performance bonds.
"Subsidiary": as to any Person, a corporation, partnership or other
entity of which shares of stock or other ownership interests having ordinary
voting power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise qualified, all references to a "Subsidiary"
or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or
Subsidiaries of a Borrower.
"Subsidiary Guarantee": the Guarantee to be executed and delivered by
each Subsidiary of any Borrower formed or acquired after the date of this
Agreement, substantially in the form of Exhibit F, as the same may be amended,
supplemented or otherwise modified from time to time.
"Termination Date": January 7, 2000.
"Tranche": the collective reference to Eurodollar Loans the then
current Interest Periods with respect to all of which begin on the same date
and end on the same later date (whether or not such Loans shall originally have
been made on the same day).
"Transferee": as defined in subsection 8.6(f).
"Type": as to any Loan, its nature as an Alternate Base Rate Loan or a
Eurodollar Loan.
1.2 Other Definitional Provisions. (a) Unless otherwise
specified therein, all terms defined in this Agreement shall have the defined
meanings when used in any other Loan Document or any certificate or other
document made or delivered pursuant hereto or thereto.
(b) As used herein and in any other Loan Document, and
any certificate or other document made or delivered pursuant hereto or thereto,
accounting terms not defined in subsection 1.1 and accounting terms partly
defined in subsection 1.1, to the extent not defined, shall have the respective
meanings given to them under GAAP, as in effect from time to time; provided,
however, that for purposes of determining compliance with the covenants
contained in subsection 6.1, all accounting terms herein shall be interpreted
and all accounting determinations hereunder (in each case, unless otherwise
provided for or defined herein) shall be made in accordance with GAAP as in
effect on the date of this Agreement and applied on a basis consistent with the
application used in the financial statements referred to in subsection 3.1; and
provided, further, that if Brookwood notifies the Bank that the Borrowers wish
to amend any covenant in subsection 6.1 or any related definition to eliminate
the effect of any change in GAAP occurring after the date of this Agreement on
the operation of such covenant
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(or if the Bank notifies Brookwood that the Bank wishes to amend subsection 6.1
or any related definition for such purpose), then (i) Brookwood and the Bank
shall negotiate in good faith to agree upon an appropriate amendment to such
covenant and (ii) the Borrowers' compliance with such covenant shall be
determined on the basis of GAAP in effect immediately before the relevant
change in GAAP became effective until such covenant is amended in a manner
satisfactory to the Borrowers and the Bank.
(c) The words "hereof", "herein" and "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement, and
Section, subsection, Schedule and Exhibit references are to this Agreement
unless otherwise specified.
(d) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF COMMITMENT
2.1 Commitment. (a) Subject to the terms and conditions
hereof, the Bank agrees to make revolving credit loans ("Loans") to the
Borrowers from time to time during the Commitment Period in an aggregate
principal amount at any one time outstanding not to exceed the lesser of (i)
the Maximum Amount minus the aggregate L/C Obligations at such time and (ii) an
amount equal to the sum of:
(A) up to 90% of Eligible Factor Credit Balances; plus
(B) up to 80% of Eligible Receivables; plus
(C) up to 50% of the value of Eligible Inventory;
provided, however, that the maximum amount of outstanding
Loans and L/C Obligations against Eligible Inventory shall not
exceed $2,000,000 in the aggregate at any time; plus
(D) up to 75% of the orderly liquidation value of
Equipment, as set forth in the appraisal delivered to the Bank
under subsection 4.1(q) or, from and after the date of
delivery thereof, the most recent appraisal delivered to the
Bank under subsection 5.2 (g); provided, however, that the
maximum amount of outstanding Loans and L/C Obligations
against Equipment shall not exceed $1,500,000 in the aggregate
at any time; minus
(E) the aggregate L/C Obligations at such time; minus
(F) such reserves as the Bank may reasonably deem proper
and necessary from time to time.
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The amount derived from (x) the sum of subsections 2.1(a)(ii) (A), (B), (C),
and (D) minus (y) subsection 2.1(a) (ii)(F) at any time and from time to time
shall be referred to as the "Borrowing Base". During the Commitment Period the
Borrowers may use the Commitment by borrowing, prepaying the Loans in whole or
in part, and reborrowing, all in accordance with the terms and conditions
hereof.
(b) The Loans may from time to time be (i) Eurodollar
Loans, (ii) Alternate Base Rate Loans or (iii) a combination thereof, as
determined by the Borrowers and notified to the Bank in accordance with
subsections 2.2 and 2.11, provided that no Loan shall be made as a Eurodollar
Loan after the day that is one month prior to the Termination Date.
2.2 Procedure for Borrowing. The Borrowers may borrow
under the Commitment during the Commitment Period on any Business Day, provided
that Brookwood shall give the Bank irrevocable notice (which notice must be
received by the Bank prior to 11:00 A.M., New York City time, (a) three
Business Days prior to the requested Borrowing Date, if all or any part of the
requested Loans are to be initially Eurodollar Loans or (b) the same Business
Day as the requested Borrowing Date if the borrowing is to be solely of
Alternate Base Rate Loans), specifying (i) the amount to be borrowed, (ii) the
requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar
Loans, Alternate Base Rate Loans or a combination thereof and (iv) if the
borrowing is to be entirely or partly of Eurodollar Loans, the respective
amounts of each such Type of Loan and the length of the initial Interest Period
therefor. Each borrowing under the Commitment shall be in an amount equal to
(x) in the case of Alternate Base Rate Loans, $50,000 or a whole multiple of
$10,000 in excess thereof (or, if the then Available Commitment is less than
$50,000, such lesser amount) and (y) in the case of Eurodollar Loans, $300,000
or a whole multiple of $100,000 in excess thereof. Each Loan will be made
available to the Borrowers by the Bank crediting the account of Brookwood on
its books with the amount of the Loan.
2.3 Issuance of Letters of Credit. (a) Subject to the
terms and conditions hereof, Brookwood may from time to time during the
Commitment Period request the Bank to issue a Letter of Credit, which may be
either a Standby L/C or a Commercial L/C, for the account of any Borrower by
delivering to the Bank at its address specified in subsection 8.2 an L/C
Application completed to the satisfaction of the Bank, together with the
proposed form of the Letter of Credit (which shall comply with the applicable
requirements of paragraph (b) below) and such other certificates, documents and
other papers and information as the Bank may reasonably request.
(b) Each Letter of Credit issued hereunder shall,
among other things, (i) be in such form requested by Brookwood as shall be
acceptable to the Bank in its sole discretion, (ii) provide for (A) the payment
of sight drafts when presented for honor thereunder in accordance when the
terms thereof or (B) the acceptance and payment of Drafts drawn on the Bank in
accordance with subsection 2.6, and when accompanied by the documents described
therein and (iii) have an expiry date not later than (A) six months after the
date of issuance, in the case of a Commercial L/C (provided that, at the
request of Brookwood and upon the consent, in its sole and absolute discretion,
of the Bank, such expiry date may be up
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to 12 months after the date of issuance of such Commercial L/C), and (B) 12
months after the date of issuance, in the case of a Standby L/C (provided that,
at the request of Brookwood, any Standby L/C may contain terms providing for
its automatic renewal for an additional terms not to exceed the shorter of the
original term of such Standby L/C or 12 months unless that Bank provides to
Brookwood written notice of its intention not to renew such Standby L/C at
least 60 days prior to the expiration of the original term thereof), but in no
event shall any Letter of Credit have an expiry date later than the Termination
Date. Each L/C Application and each Letter of Credit shall be subject to the
Uniform Customs and Practice for Documentary Credits (1993 Revision)
International Chamber of Commerce Publication No. 500, and any amendments or
revision thereof and, to the extent not inconsistent therewith, the laws of the
State of New York.
2.4 Procedure for Opening Letters of Credit. Upon
receipt of any L/C Application from Brookwood in respect of a Letter of Credit,
the Bank will process such L/C Application, and the other certificates,
documents and other papers delivered to the Bank in connection therewith, in
accordance with its customary procedures and, subject to the terms and
conditions hereof, promptly open such Letter of Credit by issuing the original
of such Letter of Credit to the beneficiary thereof and by furnishing a copy
thereof to Brookwood; provided that no such Letter of Credit shall be issued if
(a) the amount of such requested Letter of Credit, together with the amount of
the L/C Obligations outstanding at the time of such request, would exceed
$1,500,000, (b) the aggregate outstanding principal amount of the Loans plus
the outstanding L/C Obligations (after giving effect to the issuance of the
requested Letter of Credit) would exceed the lesser of (i) the Maximum Amount
and (ii) the Borrowing Base then in effect or (c) subsection 2.1 would be
violated thereby.
2.5 Payments in Respect of Letters of Credit. (a) Each
Borrower jointly and severally agrees, forthwith upon demand by the Bank and
otherwise in accordance with the terms of the L/C Application relating thereto
(i) to reimburse the Bank for any payment made by the Bank under any Letter of
Credit and (ii) to pay interest on the unreimbursed portion of any such payment
from the date of such payment until reimbursement in full thereof at a rate per
annum equal to (A) prior to the date which is one Business Day after the day on
which the Bank demands reimbursement from the Borrowers for such payment, the
Alternate Base Rate plus the Applicable Margin for Alternate Base Rate Loans
and (B) on such date and thereafter, the Alternate Base Rate plus the
Applicable Margin for Alternate Base Rate Loans plus 2.00%.
(b) The Borrowers shall be bound by the Bank's
(or any negotiating bank's or other correspondent's) regulations and good faith
interpretations of any Letter of Credit issued hereunder, notwithstanding that
such interpretation may be different from any Borrower's own interpretation
thereof. The payment obligations of the Borrowers under this Agreement with
respect to the Letters of Credit shall be unconditional and irrevocable and
shall be paid strictly in accordance with the terms of this Agreement under all
circumstances, including, without limitation, the following circumstances:
(i) the existence of any claim, set-off,
defense or other right which any Borrower or any Subsidiary may have at any
time against any beneficiary, or any
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transferee, of any Letter of Credit (or any Persons for whom any such
beneficiary or transferee may be acting), the Bank or any other Person, whether
in connection with this Agreement, the other Loan Documents, the transactions
contemplated herein or therein, or any unrelated transaction;
(ii) any statement or any other document
presented under any Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iii) payment by the Bank under any Letter
of Credit against presentation of a draft or certificate which does not comply
with the terms of such Letter of Credit, except where such payment constitutes
gross negligence or wilful misconduct on the part of the Bank; or
(iv) any other circumstances or happening
whatsoever, whether or not similar to any of the foregoing, except for any such
circumstances or happening constituting gross negligence or wilful misconduct
on the part of the Bank.
2.6 Creation of Acceptances. (a) Subject to the terms
and conditions hereof, Brookwood may from time to time during the Commitment
Period request the Bank to create an Acceptance for the account of any
Borrower. Each Acceptance shall be created by the Bank's acceptance and
discounting of Drafts drawn on it in accordance with the terms of this
Agreement; provided that no such Acceptance shall be created if (i) the amount
of such requested Acceptance, together with the amount of the L/C Obligations
outstanding at the time of such request, would exceed $1,500,000, (ii) the
aggregate outstanding principal amount of the Loans plus the outstanding L/C
Obligations (after giving effect to the creation of the requested Acceptance)
would exceed the lesser of (1) the Maximum Amount and (2) the Borrowing Base
then in effect, or (iii) subsection 2.1 would be violated thereby.
(b) Whenever a Borrower desires that the Bank accept and
discount a Draft, Brookwood shall make such request to the Bank by telephone,
specifying (i) the face amount of such Draft, (ii) the maturity date of such
Draft, which shall be a Business Day not less than 30 days or more than 180
days after the date of drawing (provided that no Acceptance shall mature later
than the Termination Date), (iii) the day on which the acceptance and
discounting of such Draft is to occur, and (iv) the date, type, purchase price
and location of shipment and of destination of the goods, the importation,
exportation or domestic shipment of which is being financed by such Draft.
Each such request shall be confirmed by the delivery to the Bank, within one
Business Day of such request, of a written confirmation in the form of Exhibit
G hereto, with all the blanks and other information appropriately completed;
provided, however, that in the event of any conflict between any request and
the written confirmation thereof, such request shall govern if the Bank has
acted in reliance thereon.
(c) To facilitate the creation of Acceptances, the
Borrowers shall deliver to the Bank a supply of Drafts duly executed on behalf
of the applicable Borrower but with the face amount, maturity date and other
details left blank. In the event that any signatory whose
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signature appears on any Draft accepted and discounted by the Bank shall cease
to be an authorized signatory on or prior to the date on which such Draft is
accepted and discounted by the Bank, the obligations of the Borrowers hereunder
and with respect to such Draft shall nevertheless be valid and enforceable for
all purposes as if such signatory had been an authorized signatory on such
date.
(d) Upon the Bank's receipt of a request, pursuant to
paragraph (b) above, to accept and discount a Draft, the Bank is hereby
authorized and directed to (i) fill in the face amount and maturity date of
such Draft and other necessary information, (ii) if the supply of Drafts
delivered to the Bank by the Company pursuant to paragraph (c) above has been
exhausted, execute such Draft pursuant to the power of attorney granted to the
Bank pursuant to paragraph (e) below, (iii) accept and discount such Draft, and
(iv) credit the account of the Borrowers maintained at the Bank in immediately
available funds in an amount equal to the Acceptance Proceeds (as defined
below) of such Draft.
The Borrowers understand and agree that the actual
crediting of the account of the Borrowers maintained at the Bank with the
Acceptance Proceeds of any Draft shall constitute conclusive evidence that such
Draft was accepted and discounted by the Bank, and the failure of the Bank to
send to the applicable Borrower an advice of such credit or to note such credit
in the monthly statement sent to the Borrowers in connection with such account
shall not affect any obligation of the Borrowers under this Agreement.
"Acceptance Proceeds" shall mean, in respect of any
Draft, an amount equal to the face amount thereof less the sum of (i) the
banker's acceptance discount rate for such maturity then being generally quoted
by the Bank (unless a different discount rate was quoted by the Bank in
connection with such request and was accepted by Brookwood, in which case such
quoted rate shall control) (the "Discount Charge"), the Discount Charge being
calculated on the face amount of each Draft so accepted for the actual number
of days in the period from the date thereof to the date of its maturity and on
the basis of a year of 360 days and (ii) a per annum acceptance commission (the
"Acceptance Commission") equal to 2.0% of the face amount of each Draft.
(e) The Borrowers hereby make, constitute and appoint the
Bank, and any successor thereto, acting singly, with full power of
substitution, as the true and lawful attorney-in-fact of the Borrowers in the
Borrowers' name, place and stead, if the supply of Drafts delivered to the Bank
by the Borrowers pursuant to paragraph (c) above has been exhausted, to execute
Drafts which any Borrower has requested, and the Bank has agreed, to accept and
discount. The power of attorney set forth in this paragraph (e) shall be
deemed coupled with an interest and shall be irrevocable. Each Borrower hereby
(i) ratifies and confirms all that its attorney-in-fact may do pursuant to the
power of attorney granted pursuant to this paragraph (e) and (ii) agrees that
the obligations of such Borrower hereunder and with respect to each Draft
executed by its attorney-in-fact pursuant to such power of attorney shall be
valid and enforceable as if each such Draft had been executed on behalf of such
Borrower by an authorized signatory thereof.
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(f) The applicable Borrower shall provide to the Bank,
with respect to each Draft, such additional information as the Bank shall
request, including, without limitation, shipping documents (or copies thereof)
covering the goods, the importation, exportation or domestic shipment of which
is being financed by such Draft.
(g) Notwithstanding the foregoing, the Bank shall not be
obligated to create any Acceptance hereunder if such Acceptance would not be
eligible for discount at a Federal Reserve Bank under applicable rules or
regulations, would not meet the requirements of paragraph 7 of Section 13 of
the Federal Reserve Act, as amended, or any liability of the Bank that would
arise from the creation of such Acceptance would constitute a deposit for which
the Bank would be required to maintain reserves under Regulation D of the
Federal Reserve Board as from time to time in effect. The Borrowers
acknowledge that the Bank's decision to accept and discount any Draft offered
for acceptance and discount hereunder will be made in reliance upon the truth
of the representations made by the applicable Borrower in paragraph (h) below
establishing the eligibility for discount of any such Acceptance. The
Borrowers will jointly and severally indemnify and hold the Bank harmless from
any loss or liability incurred by the Bank, directly or indirectly, if any
Acceptance is determined to be ineligible for discount or subject to reserves
by reason of any misrepresentation made by such Borrower (including, without
limitation, any costs or expenses arising in any manner from the illiquidity of
the market for ineligible bankers' acceptances).
(h) With respect to each Draft which any Borrower shall
request the Bank to accept and discount, (i) such Draft shall grow out of one
or more transactions involving the importation, exportation or domestic
shipment of goods, (ii) prior to any request that the Bank accept and discount
such Draft, such Borrower shall have entered into a contract or contracts
specifically providing for the transaction or transactions to which such Draft
relates having an aggregate value not less than the face amount of such Draft,
(iii) completion of the transaction or transactions to which such Draft relates
shall be scheduled to occur on or before the maturity date of such Draft, (iv)
the maturity of such Draft shall be consistent with the period usually and
reasonably necessary to finance transactions similar to the transaction or
transactions to which such Draft relates, and the proceeds of such transaction
or transactions shall be used to liquidate the credit created by the Bank's
acceptance and discounting of such Draft, (v) no Borrower shall have
outstanding any other financing of the transaction or transactions to which
such Draft relates, and (vi) such Borrower will be either (A) the importer or
exporter of the goods, the importation or exportation of which is being
financed by such Draft or (B) the buyer or seller of the goods, the domestic
shipment of which is being financed by such Draft.
(i) Each Borrower jointly and severally unconditionally
agrees to pay to the Bank the face amount of each Draft as to which an
Acceptance was created on the maturity date thereof, or on such earlier date as
may be required pursuant to the provisions of this Agreement. Acceptances may
not be prepaid.
(j) If any payment of principal of or interest (to the
extent permitted by law) on any Acceptance is not made when due (whether by
acceleration or otherwise), such overdue
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amount shall bear interest (computed on the basis of a year of 360 days and
actual days elapsed) from the date such overdue amount was due until paid in
full, payable on demand, at a rate per annum equal to the sum of (i) the
Alternate Base Rate, plus (ii) the Applicable Margin for Alternate Base Rate
Loans plus (iii) two percent (2%).
2.7 Termination or Reduction of Commitment. The
Borrowers shall have the right, upon not less than three Business Days' notice
by Brookwood to the Bank, to terminate the Commitment or, from time to time, to
reduce the amount of the Commitment. Upon such termination, the Borrowers
shall prepay the aggregate outstanding principal balance of the Loans. The
Borrowers may not terminate the Commitment if there are at such time any
outstanding L/C Obligations. Any such reduction shall be in an amount equal to
$500,000 or a whole multiple of $100,000 in excess thereof and shall reduce
permanently the Commitment then in effect. Upon such reduction, the Borrowers
shall prepay the excess, if any, of the outstanding principal amount of the
Loans and outstanding L/C Obligations over the amount of the Commitment as so
reduced; provided, however, that in no event may the Commitment be reduced to
an amount less than the outstanding L/C Obligations.
2.8 Repayment of Loans; Evidence of Debt. (a) The
Borrowers jointly and severally unconditionally promise to pay to the Bank the
then unpaid principal amount of each Loan on the Termination Date (or such
earlier date on which the Loans become due and payable pursuant to Section 7).
The Borrowers jointly and severally further agree to pay interest on the unpaid
principal amount of the Loans from time to time outstanding from the date
hereof until payment in full thereof at the rates per annum, and on the dates,
set forth in subsection 2.13.
(b) The Loans made by the Bank shall be evidenced by a
promissory note of the Borrowers, substantially in the form of Exhibit A (the
"Revolving Credit Note"), payable to the order of the Bank and evidencing the
obligation of the Borrowers to pay a principal amount equal to the lesser of
(i) the amount of the initial Commitment of the Bank and (ii) the aggregate
unpaid principal amount of all Loans made by the Bank. The Bank is hereby
authorized to record the date and amount of each Loan made by the Bank and the
date and amount of each payment or prepayment of principal thereof on the
schedule annexed to and constituting a part of the Revolving Credit Note, and
any such recordation shall constitute prima facie evidence of the accuracy of
the information so recorded. The Revolving Credit Note shall (x) be dated the
Closing Date, (y) be stated to mature on the Termination Date and (z) provide
for the payment of interest in accordance with subsection 2.13.
(c) Upon and after the occurrence and declaration of an
Event of Default and during the continuation thereof, the Borrowers will cause
cash to be deposited and maintained in an account with the Bank, as cash
collateral, in an amount equal to the L/C Obligations at such time, and the
Borrowers hereby irrevocably authorize the Bank, in its discretion, on the
Borrowers' behalf and in the Borrowers' names to open such an account and to
make and maintain deposits therein, or in an account opened by the Borrowers in
the amounts required to be made by the Borrowers, out of the proceeds of
Receivables or out of any other funds of the Borrowers coming into the Bank's
possession at any time. The Bank will invest such cash
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collateral (less applicable reserves) in such short-term money-market items as
to which the Bank and the Borrowers mutually agree and the net return on such
investments shall be credited to such account and constitute additional cash
collateral. The Borrowers may not withdraw amounts credited to any such
account except upon payment and performance in full of all such obligations and
termination of this Agreement or, if earlier, the date such Event of Default is
no longer continuing.
2.9 Optional Prepayments. The Borrowers may at any time
and from time to time prepay Loans, in whole or in part, without premium or
penalty, upon notice given by Brookwood to the Bank three Business Days prior
to the prepayment date, in the case of Eurodollar Loans, or prior to 10:00
A.M., New York City time, on the same Business Day, in the case of Alternate
Base Rate Loans; provided, however, that Eurodollar Loans may only be prepaid
on the last day of the applicable Interest Period. Each notice of prepayment
shall be irrevocable and shall specify the date and amount of prepayment and
whether the prepayment is of Eurodollar Loans, Alternate Base Rate Loans or a
combination thereof, and, if of a combination thereof, the amount allocable to
each. If any such notice is given, the amount specified in such notice shall
be due and payable on the date specified therein, together with (a) all accrued
interest on the amount being prepaid through the date of prepayment and (b) any
amounts payable pursuant to subsection 2.25.
2.10 Mandatory Prepayments. The Borrowers shall prepay
the Loans from time to time by the amount equal to the excess, if any, of the
outstanding principal amount of the Loans and the aggregate L/C Obligations at
such time over the Borrowing Base set forth in the most recently delivered
Borrowing Base Compliance Certificate. Such amount shall be due and payable on
the date that such excess arises, and such mandatory prepayment shall include
all accrued interest on the amount being prepaid through the date of prepayment
and any amounts payable pursuant to subsection 2.25.
2.11 Conversion and Continuation Options. (a) The
Borrowers may elect from time to time to convert Eurodollar Loans by giving the
Bank at least two Business Days' prior irrevocable notice of such election,
provided that any such conversion of Eurodollar Loans may only be made on the
last day of an Interest Period with respect thereto. The Borrowers may elect
from time to time to convert Alternate Base Rate Loans to Eurodollar Loans by
giving the Bank at least three Business Days' prior irrevocable notice of such
election. Any such notice of conversion to Eurodollar Loans shall specify the
length of the initial Interest Period or Interest Periods therefor. All or any
part of outstanding Eurodollar Loans and Alternate Base Rate Loans may be
converted as provided herein, provided that (i) no Loan may be converted into a
Eurodollar Loan when any Event of Default has occurred and is continuing and
the Bank has determined that such a conversion is not appropriate and (ii) no
Loan may be converted into a Eurodollar Loan after the date that is one month
prior to the Termination Date.
(b) Any Eurodollar Loan may be continued as such upon the
expiration of the then current Interest Period with respect thereto by
Brookwood giving notice to the Bank, in accordance with the applicable
provisions of the term "Interest Period" set forth in
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subsection 1.1, of the length of the next Interest Period to be applicable to
such Loan, provided that no Eurodollar Loan may be continued as such (i) when
any Event of Default has occurred and is continuing and the Bank has determined
that such a continuation is not appropriate or (ii) after the date that is one
month prior to the Termination Date and, provided, further, that if Brookwood
shall fail to give such notice or if such continuation is not permitted, such
Loan shall be automatically converted to an Alternate Base Rate Loan on the
last day of such then expiring Interest Period.
2.12 Minimum Amounts And Maximum Number of Tranches. All
borrowings, conversions and continuations of Loans hereunder and all selections
of Interest Periods hereunder shall be in such amounts and be made pursuant to
such elections so that, after giving effect thereto, the aggregate principal
amount of each Eurodollar Loan Tranche shall be equal to $250,000 or a whole
multiple of $50,000 in excess thereof. In no event shall there be more than
six Eurodollar Loan Tranches.
2.13 Interest Rates and Payment Dates. (a) Each
Eurodollar Loan shall bear interest for each day during each Interest Period
with respect thereto at a rate per annum equal to the LIBOR Rate determined for
such day plus the Applicable Margin for Eurodollar Loans.
(b) Each Alternate Base Rate Loan shall bear interest at
a rate per annum equal to the Alternate Base Rate plus the Applicable Margin
for Alternate Base Rate Loans.
(c) Upon and after the occurrence of an Event of Default,
and during the continuation thereof, the outstanding Obligations shall bear
interest at a rate per annum equal to the sum of (i) the Alternate Base Rate,
plus (ii) the Applicable Margin for Alternate Base Rate Loans plus (iii) two
percent (2.00%).
(d) Interest shall be payable in arrears on each Interest
Payment Date, provided that interest accruing pursuant to paragraph (c) of this
subsection shall be payable from time to time on demand.
2.14 Commitment Fee. The Borrowers jointly and severally
agree to pay to the Bank a commitment fee for the period from and including the
first day of the Commitment Period to the Termination Date, computed at the
rate of 3/8ths of 1% per annum on the average daily amount of the Available
Commitment during the period for which payment is made, payable (a) quarterly
in arrears on the last day of each March, June, September and December, (b) on
the date of each reduction of the Commitment and (c) on the Termination Date or
such earlier date as the Commitment shall terminate as provided herein,
commencing on the first of such dates to occur after the date hereof.
2.15 Letter of Credit Fees. (a) The Borrowers jointly
and severally agree to pay to the Bank a Letter of Credit fee, (i) with respect
to each Standby L/C, on the average outstanding amount available to be drawn
under each Standby L/C at a rate per annum equal to two percent (2.00%),
payable in arrears, on the last day of each fiscal quarter of the Borrowers and
on the Termination Date and (ii) with respect to each Commercial L/C, the
standard fees,
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commissions and charges of the Bank, which fees, commissions and charges shall
be payable on the date such Commercial L/C is issued.
(b) In addition to the foregoing fees, charges
and commissions, the Borrowers shall pay or reimburse the Bank for such normal
and customary costs and expenses as are incurred or charged by the Bank in
issuing, effecting payment under, amending or otherwise administering any
Letter of Credit.
2.16 Computation of Interest and Fees. (a) Commitment
fees, Letter of Credit fees, interest on the Loans and the Acceptance
Commission with respect to Acceptances shall be calculated on the basis of a
360-day year for the actual days elapsed. The Bank shall as soon as
practicable notify Brookwood of each determination of a LIBOR Rate. Any change
in the interest rate on a Loan resulting from a change in the Alternate Base
Rate or the Eurocurrency Reserve Requirements shall become effective as of the
opening of business on the day on which such change becomes effective. The
Bank shall as soon as practicable notify Brookwood of the effective date and
the amount of each such change in interest rate.
(b) Each determination of an interest rate by the Bank
pursuant to any provision of this Agreement shall be conclusive and binding on
the Borrowers in the absence of manifest error. The Bank shall, at the request
of the Borrowers, deliver to Brookwood a statement showing the quotations used
by the Bank in determining any interest rate pursuant to paragraph (a) above.
2.17 Letter of Credit Reserves. (a) If any Change in Law
after the date of this Agreement shall either (i) impose, modify, deem or make
applicable any reserve, special deposit, assessment or similar requirement
against Letters of Credit issued by the Bank or (ii) impose on the Bank any
other condition regarding this Agreement or any Letter of Credit, and the
result of any event referred to in clause (i) or (ii) above shall be to
increase the cost to the Bank of issuing or maintaining any Letter of Credit
(which increase in cost shall be the result of the Bank's reasonable allocation
of the aggregate of such cost increase resulting from such events), then, upon
demand by the Bank, the Borrowers shall immediately pay to the Bank, from time
to time as specified by the Bank, additional amounts which shall be sufficient
to compensate the Bank for such increased cost, together with interest on each
such amount from the date demanded until payment in full thereof at a rate per
annum equal to the Alternate Base Rate plus the Applicable Margin for Alternate
Base Rate Loans. A certificate setting forth any amount which the Bank is
entitled to receive pursuant to this subsection 2.17(a) shall be conclusive,
absent manifest error, as to the amount thereof. The agreements in this
subsection shall survive the termination of this Agreement and the payment of
the Letters of Credit and all other amounts payable hereunder.
(b) If any Change in Law after the date of this
Agreement shall, in the opinion of the Bank, require that any obligation under
any Letter of Credit be treated as an asset or otherwise be included for
purposes of calculating the appropriate amount of capital to be maintained by
the Bank or any corporation controlling the Bank, and such Change in Law shall
have the effect of reducing the rate of return on the Bank's or such
corporation's capital,
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as the case may be, as a consequence of the Bank's obligations under such
Letter of Credit to a level below that which the Bank or such corporation, as
the case may be, could have achieved but for such Change in Law (taking into
account the Bank's or such corporation's, as the case may be, policies with
respect to capital adequacy) by an amount deemed by the Bank to be material,
then from time to time following notice by the Bank to Brookwood of such Change
in Law, within 15 days after demand by the Bank, the Borrowers shall pay to the
Bank such additional amount or amounts as will compensate the Bank or such
corporation, as the case may be, for such reduction. If the Bank becomes
entitled to claim any additional amounts pursuant to this subsection 2.17(b),
it shall promptly notify Brookwood of the event by reason of which it has
become so entitled. A certificate setting forth any amounts which the Bank is
entitled to receive pursuant to this subsection 2.17(b) shall be conclusive,
absent manifest error, as to the amount thereof. The agreements in this
subsection shall survive the termination of this Agreement and the payment of
the Letters of Credit and all other amounts payable hereunder.
2.18 Further Assurances. The Borrowers hereby agree, from
time to time, to do and perform any and all acts and to execute any and all
further instruments reasonably requested by the Bank to effect more fully the
purposes of this Agreement and the issuance of Letters of Credit hereunder.
2.19 Borrowing Base Compliance. The Bank or another
financial institution satisfactory to the Bank (including any Affiliate of the
Bank) shall, as it reasonably deems to be necessary from time to time during
the Commitment Period, review and confirm the information set forth in each
Borrowing Base Compliance Certificate delivered by Brookwood in order to
determine whether, at such time, the Borrowers are in compliance with the
requirements in respect of the Borrowing Base under this Agreement, and the
Borrowers shall reimburse the Bank for its reasonable out- of-pocket expenses
in respect thereof. If the Borrowers are not in compliance with such
requirements, the Bank shall promptly notify Brookwood of such noncompliance
and the Borrowers shall immediately (and in any event within one Business Day
of receipt of such notice) make all mandatory prepayments required pursuant to
subsection 2.10.
2.20 Inability to Determine Interest Rate. If prior to
the first day of any Interest Period:
(a) the Bank shall have determined (which determination
shall be conclusive and binding upon the Borrowers) that, by reason of
circumstances affecting the interbank eurodollar market generally,
adequate and reasonable means do not exist for ascertaining the LIBOR
Rate for such Interest Period, or
(b) the Bank shall have determined that the LIBOR Rate
determined or to be determined for such Interest Period will not
adequately and fairly reflect the cost (as conclusively certified by
the Bank) of making or maintaining the affected Loans during such
Interest Period by reason of circumstances affecting the interbank
eurodollar market generally, or
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(c) dollar deposits in the relevant amount and for the
relevant period with respect to any such Eurodollar Loan are not
available to the Bank in its Eurodollar Lending Office's interbank
eurodollar market,
the Bank shall give telecopy or telephonic notice thereof to Brookwood as soon
as practicable thereafter. If such notice is given (x) any Eurodollar Loans
requested to be made on the first day of such Interest Period shall be made as
Alternate Base Rate Loans, (y) any Loans that were to have been converted on
the first day of such Interest Period to Eurodollar Loans shall be converted to
or continued as Alternate Base Rate Loans and (z) any outstanding Eurodollar
Loans shall be converted, on the first day of such Interest Period, to
Alternate Base Rate Loans. Until such notice has been withdrawn by the Bank,
no further Eurodollar Loans shall be made or continued as such, nor shall the
Borrowers have the right to convert Loans to Eurodollar Loans.
2.21 Payments. All payments (including prepayments) to be
made by the Borrowers hereunder, whether on account of principal, interest,
fees or otherwise, shall be made without set-off or counterclaim and shall be
made prior to 12:00 Noon, New York City time, on the due date thereof to the
Bank, at the Bank's office specified in subsection 8.2, in Dollars and in
immediately available funds. If any payment hereunder becomes due and payable
on a day other than a Business Day, such payment shall be extended to the next
succeeding Business Day, and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension.
All of the Obligations are joint and several obligations of each Borrower.
2.22 Illegality. Notwithstanding any other provision
herein, if the adoption of or any change in any Requirement of Law or in the
interpretation or application thereof shall make it unlawful for the Bank to
make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the
commitment of the Bank hereunder to make Eurodollar Loans, continue Eurodollar
Loans as such and convert Alternate Base Rate Loans to Eurodollar Loans shall
forthwith be canceled and (b) the Bank's Loans then outstanding as Eurodollar
Loans, if any, shall be converted automatically to Alternate Base Rate Loans on
the respective last days of the then current Interest Periods with respect to
such Loans or within such earlier period as required by law. If any such
conversion of a Eurodollar Loan occurs on a day which is not the last day of
the then current Interest Period with respect thereto, the Borrowers shall pay
to the Bank such amounts, if any, as may be required pursuant to subsection
2.25.
2.23 Requirements of Law. (a) If any Change in Law after
the date of this Agreement or compliance by the Bank with any request or
directive (whether or not having the force of law) from any central bank or
other Governmental Authority made subsequent to the date hereof:
(i) shall subject the Bank to any tax of any kind whatsoever
with respect to this Agreement, the Revolving Credit Note or
any Eurodollar Loan made by it, or change the basis of
taxation of payments to the Bank in respect thereof (except
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for Non-Excluded Taxes covered by subsection 2.24 and changes
in the rate of tax on the overall net income of the Bank);
(ii) shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar requirement
against assets held by, deposits or other liabilities in or
for the account of, advances, loans or other extensions of
credit by, or any other acquisition of funds by, any office of
the Bank which is not otherwise included in the determination
of the LIBOR Rate hereunder; or
(iii) shall impose on the Bank any other condition;
and the result of any of the foregoing is to increase the cost to the Bank, by
an amount which the Bank deems to be material, of making, converting into,
continuing or maintaining Eurodollar Loans or to reduce any amount receivable
hereunder in respect thereof, then, in any such case, the Borrowers shall
promptly pay the Bank such additional amount or amounts as will compensate the
Bank for such increased cost or reduced amount receivable.
(b) If the Bank shall have determined that any Change in
Law regarding capital adequacy or in the interpretation or application thereof
or compliance by the Bank or any corporation controlling the Bank with any
request or directive regarding capital adequacy (whether or not having the
force of law) from any Governmental Authority made subsequent to the date
hereof shall have the effect of reducing the rate of return on the Bank's or
such corporation's capital as a consequence of its obligations hereunder to a
level below that which the Bank or such corporation could have achieved but for
such Change in Law, (taking into consideration the Bank's or the corporation's,
as the case may be, policies, with respect to capital adequacy) by an amount
deemed by the Bank to be material, then from time to time following notice by
the Bank to Brookwood of such Change in Law, within 15 days after demand by the
Bank, the Borrowers shall pay to the Bank such additional amount or amounts as
will compensate the Bank or such corporation, as the case may be, for such
reduction.
(c) If the Bank becomes entitled to claim any additional
amounts pursuant to this subsection, it shall promptly notify Brookwood of the
event by reason of which it has become so entitled. A certificate setting
forth any additional amounts payable pursuant to this subsection shall be
conclusive, absent manifest error, as to the amount thereof. The agreements in
this subsection shall survive the termination of this Agreement and the payment
of the Loans and all other amounts payable hereunder.
2.24 Taxes. All payments made by the Borrowers under this
Agreement and the Revolving Credit Note shall be made free and clear of, and
without deduction or withholding for or on account of, any present or future
income, stamp or other taxes, levies, imposts, duties, charges, fees,
deductions or withholdings, now or hereafter imposed, levied, collected,
withheld or assessed by any Governmental Authority, excluding net income taxes
and franchise taxes (imposed in lieu of net income taxes) imposed on the Bank
as a result of a present or former connection between the Bank and the
jurisdiction of the Governmental Authority imposing such tax or any political
subdivision or taxing authority thereof or therein
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(other than any such connection arising solely from the Bank having executed,
delivered or performed its obligations or received a payment under, or
enforced, this Agreement or the Revolving Credit Note). If any such
non-excluded taxes, levies, imposts, duties, charges, fees deductions or
withholdings ("Non-Excluded Taxes") are required to be withheld from any
amounts payable to the Bank hereunder or under the Revolving Credit Note, the
amounts so payable to the Bank shall be increased to the extent necessary to
yield to the Bank (after payment of all Non-Excluded Taxes) interest or any
such other amounts payable hereunder at the rates or in the amounts specified
in this Agreement. Whenever any Non-Excluded Taxes are payable by the
Borrowers, as promptly as possible thereafter Brookwood shall send to the Bank
a certified copy of an original official receipt received by the Borrowers
showing payment thereof. If the Borrowers fail to pay any Non-Excluded Taxes
when due to the appropriate taxing authority or fail to remit to the Bank the
required receipts or other required documentary evidence, the Borrowers shall
indemnify the Bank for any incremental taxes, interest or penalties that may
become payable by the Bank as a result of any such failure. The agreements in
this subsection shall survive the termination of this Agreement and the payment
of the Loans and all other amounts payable hereunder.
2.25 Indemnity. The Borrowers agree to indemnify the Bank
and to hold the Bank harmless from any loss or expense which the Bank may
sustain or incur as a consequence of (a) default by the Borrowers in making a
borrowing of, conversion into or continuation of Eurodollar Loans after
Brookwood has given a notice requesting the same in accordance with the
provisions of this Agreement, (b) default by the Borrowers in making any
prepayment after Brookwood has given a notice thereof in accordance with the
provisions of this Agreement or (c) the making of a prepayment of Eurodollar
Loans on a day which is not the last day of an Interest Period with respect
thereto. Such indemnification may include an amount equal to the excess, if
any, of (i) the amount of interest which would have accrued on the amount so
prepaid, or not so borrowed, converted or continued, for the period from the
date of such prepayment or of such failure to borrow, convert or continue to
the last day of such Interest Period (or, in the case of a failure to borrow,
convert or continue, the Interest Period that would have commenced on the date
of such failure) in each case at the applicable rate of interest for such Loans
provided for herein (excluding, however, the Applicable Margin included
therein, if any) over (ii) the amount of interest (as reasonably determined by
the Bank) which would have accrued to the Bank on such amount by placing such
amount on deposit for a comparable period with leading banks in the interbank
eurodollar market. This covenant shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
2.26 Reliance by Bank. The Borrowers agree that the Bank
may rely on any telephonic or telecopy notice given by any Person, relating to
any Loan, Letter of Credit, Acceptance or any other matter to which the
Borrowers may give notice to the Bank under the provisions of this Section,
that the Bank in good faith believes is an authorized representative of any of
the Borrowers without the necessity of independent investigation, and in the
event any such notice by telephone conflicts with any written confirmation,
such telephonic notice shall govern if the Bank has acted in reliance thereon.
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SECTION 3. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement and to make
Loans, issue Letters of Credit and create Acceptances, each of the Borrowers
hereby represents and warrants to the Bank that:
3.1 Financial Condition. The consolidated balance sheet
of Brookwood and its consolidated Subsidiaries as at July 31, 1995 and the
related consolidated statements of income and of cash flows for the fiscal year
ended on such date, reported on by Deloitte & Touche, copies of which have
heretofore been furnished to the Bank, are complete and correct and present
fairly the consolidated financial condition of Brookwood and its consolidated
Subsidiaries as at such date, and the consolidated results of their operations
and their consolidated cash flows for the fiscal year then ended. The
unaudited consolidated balance sheet of Brookwood and its consolidated
Subsidiaries as at September 30, 1996 and the related unaudited consolidated
statements of income and of cash flows for the nine-month period ended on such
date, certified by a Responsible Officer, copies of which have heretofore been
furnished to the Bank, are complete and correct and present fairly the
consolidated financial condition of Brookwood and its consolidated Subsidiaries
as at such date, and the consolidated results of their operations and their
consolidated cash flows for the nine-month period then ended (subject to normal
year-end audit adjustments). All such financial statements, including the
related schedules and notes thereto, have been prepared in accordance with GAAP
applied consistently throughout the periods involved (except as approved by
such accountants or Responsible Officers, as the case may be, and as disclosed
therein). Neither Brookwood nor any of its consolidated Subsidiaries had, at
the date of the most recent balance sheet referred to above, any material
Guarantee Obligation, contingent liability or liability for taxes, or any
long-term lease or unusual forward or long-term commitment, including, without
limitation, any interest rate or foreign currency swap or exchange transaction,
which is not reflected in the foregoing statements or in the notes thereto.
During the period from September 30, 1996 to and including the date hereof
there has been no sale, transfer or other disposition by either Brookwood or
any of its consolidated Subsidiaries of any material part of its business or
property and no purchase or other acquisition of any business or property
(including any capital stock of any other Person) material in relation to the
consolidated financial condition of Brookwood and its consolidated Subsidiaries
at September 30, 1996.
3.2 No Change. (a) Since July 31, 1995 there has been
no development or event which has had or could have a Material Adverse Effect,
and (b) except as permitted by subsection 6.7(a), during the period from July
31, 1995 to and including the date hereof no dividends or other distributions
have been declared, paid or made upon the Capital Stock of any of the Borrowers
nor has any of the Capital Stock of any of the Borrowers been redeemed,
retired, purchased or otherwise acquired for value by any of the Borrowers or
any of their Subsidiaries.
3.3 Corporate Existence; Compliance with Law. Each of
the Borrowers and their Subsidiaries (a) is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization,
(b) has the corporate power and authority, and the legal right,
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to own and operate its property, to lease the property it operates as lessee
and to conduct the business in which it is currently engaged, (c) is duly
qualified as a foreign corporation and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct
of its business requires such qualification and (d) is in compliance with all
Requirements of Law, except to the extent that the failure to comply therewith
could not, individually or in the aggregate, have a Material Adverse Effect.
3.4 Corporate Power; Authorization; Enforceable
Obligations. Each of the Borrowers has the corporate power and authority, and
the legal right, to make, deliver and perform the Loan Documents to which it is
a party and to borrow and obtain the other credit accommodations hereunder and
has taken all necessary corporate action to authorize such borrowings and other
credit accommodations on the terms and conditions of this Agreement and the
Revolving Credit Note and to authorize the execution, delivery and performance
of the Loan Documents to which it is a party. No consent or authorization of,
filing with, notice to or other act by or in respect of any Governmental
Authority or any other Person is required in connection with the borrowings,
issuance of Letters of Credit or creation of Acceptances hereunder or with the
execution, delivery, performance, validity or enforceability of the Loan
Documents to which any of the Borrowers is a party. This Agreement has been,
and each other Loan Document to which it is a party will be, duly executed and
delivered on behalf of each of the Borrowers. This Agreement constitutes, and
each other Loan Document to which it is a party, will constitute, when executed
and delivered, the legal, valid and binding obligations of each of the
Borrowers enforceable against each of the Borrowers in accordance with its
terms.
3.5 No Legal Bar. The execution, delivery and
performance of the Loan Documents to which any of the Borrowers is a party, the
borrowings, issuance of Letters of Credit and creation of Acceptances hereunder
and the use of the proceeds thereof will not violate any Requirement of Law or
Contractual Obligation of any of the Borrowers or of any of their Subsidiaries
and will not result in, or require, the creation or imposition of any Lien on
any of the Borrowers' or any of their Subsidiaries' respective properties or
revenues pursuant to any such Requirement of Law or Contractual Obligation.
3.6 No Material Litigation. No litigation, investigation
or proceeding of or before any arbitrator or Governmental Authority is pending
or, to the knowledge of the Borrowers, threatened by or against any of the
Borrowers or any of their Subsidiaries or against any of the Borrowers' or any
of their Subsidiaries' respective properties or revenues (a) with respect to
any of the Loan Documents or any of the transactions contemplated hereby or
thereby, or (b) which could have a Material Adverse Effect.
3.7 No Default. None of the Borrowers nor any of their
Subsidiaries is in default under or with respect to any of its Contractual
Obligations in any respect which could have a Material Adverse Effect. No
Default or Event of Default has occurred and is continuing.
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3.8 Ownership of Property; Liens. Each of the Borrowers
and its respective Subsidiaries has good record and marketable title in fee
simple to, or a valid leasehold interest in, all of its real property, and good
title to, or a valid leasehold interest in, all its other property, and none of
such property is subject to any Lien except as permitted by subsection 6.3.
3.9 Intellectual Property. The Borrowers and each of
their Subsidiaries own, or are licensed to use, all trademarks, tradenames,
copyrights, technology, know-how and processes necessary for the conduct of
their respective businesses as currently conducted, except for those the
failure to own or license which could not have a Material Adverse Effect (the
"Intellectual Property"). No claim has been asserted and is pending by any
Person challenging or questioning the use of any such Intellectual Property or
the validity or effectiveness of any such Intellectual Property, nor do the
Borrowers know of any valid basis for any such claim. The use of such
Intellectual Property by the Borrowers and their Subsidiaries does not infringe
on the rights of any Person, except for such claims and infringements that,
individually or in the aggregate, do not have a Material Adverse Effect.
3.10 No Burdensome Restrictions. No Requirement of Law or
Contractual Obligation of the Borrowers or any of their Subsidiaries could
reasonably be expected to have a Material Adverse Effect. None of Kenyon or
Laminating, or any of their respective Subsidiaries, is subject to any
Requirement of Law or Contractual Obligation (including any provision of its
certificate or articles of incorporation or by-laws) which restricts its
ability to pay cash dividends to its respective shareholders.
3.11 Taxes. Each of the Borrowers and their Subsidiaries
has filed or caused to be filed all tax returns which, to the knowledge of the
Borrowers, are required to be filed, and has paid all taxes shown to be due and
payable on said returns or on any assessments made against it or any of its
property and all other taxes, fees or other charges imposed on it or any of its
property by any Governmental Authority (other than any the amount or validity
of which are currently being contested in good faith by appropriate proceedings
and with respect to which reserves in conformity with GAAP have been provided
on the books of the Borrowers or their Subsidiaries, as the case may be); no
tax Lien has been filed, and, to the knowledge of the Borrowers, no claim is
being asserted, with respect to any such tax, fee or other charge.
3.12 Federal Regulations. No part of the proceeds of any
Loans will be used for "purchasing" or "carrying" any "margin stock" within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect. If requested by the Bank, the Borrowers will furnish to
the Bank a statement to the foregoing effect in conformity with the
requirements of FR Form U-1 referred to in said Regulation U.
3.13 ERISA. Neither a Reportable Event nor an
"accumulated funding deficiency" (within the meaning of Section 412 of the Code
or Section 302 of ERISA) has occurred during the five-year period prior to the
date on which this representation is made or deemed made with respect to any
Plan, and each Plan has complied in all material respects
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with the applicable provisions of ERISA and the Code. No termination of a
Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan
has arisen, during such five-year period. The present value of all accrued
benefits (whether or not vested) under each Single Employer Plan (based on
those assumptions used to fund such Plans) did not, as of the last annual
valuation date prior to the date on which this representation is made or deemed
made, exceed the value of the assets of such Plan allocable to such accrued
benefits. None of the Borrowers nor any Commonly Controlled Entity has had a
complete or partial withdrawal from any Multiemployer Plan, and none of the
Borrowers nor any Commonly Controlled Entity would become subject to any
liability under ERISA if any of the Borrowers or any such Commonly Controlled
Entity were to withdraw completely from all Multiemployer Plans as of the
valuation date most closely preceding the date on which this representation is
made or deemed made. No such Multiemployer Plan is in Reorganization or
Insolvent. The present value (determined using actuarial and other assumptions
which are reasonable in respect of the benefits provided and the employees
participating) of the liability of the Borrowers and each Commonly Controlled
Entity for post retirement benefits to be provided to their current and former
employees under Plans which are welfare benefit plans (as defined in Section
3(1) of ERISA) does not, in the aggregate, exceed the assets under all such
Plans allocable to such benefits by an amount in excess of $0.
3.14 Investment Company Act; Other Regulations. None of
the Borrowers is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended. None of the Borrowers is subject to regulation under any Federal
or State statute or regulation (other than Regulation X of the Board of
Governors of the Federal Reserve System) which limits its ability to incur
Indebtedness.
3.15 Subsidiaries. Kenyon and Laminating are the only
Subsidiaries of Brookwood at the date hereof.
3.16 Purpose of Loans. The proceeds of the initial Loans
hereunder will be used (a) to repay the balance owed under the $13,500,000
revolving credit facility provided by The Chase Manhattan Bank to Brookwood
(the "Existing Facility") and (b) to pay transaction costs and expenses
incurred in connection with the closing of this Agreement. The proceeds of all
subsequent Loans will be used for the Borrowers' working capital and general
corporate purposes.
3.17 Environmental Matters. Except as set forth on
Schedule 3.17 attached hereto, (a) the facilities and properties owned, leased
or operated by the Borrowers or any of their Subsidiaries (the "Properties") do
not contain, and have not previously contained, any Materials of Environmental
Concern which (i) constitute or constituted a violation of, or (ii) could give
rise to liability under, any Environmental Law, except (x) in either case
insofar as such violation or liability, or any aggregation thereof, could not
have a Material Adverse Effect and (y) in the case of (ii) as necessary for the
operation of Business, provided that such Materials are managed in accordance
with all applicable Environmental Laws.
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(b) The Properties and all operations at the Properties
are in compliance with all applicable Environmental Laws, except for such
non-compliance as does not have a Material Adverse Effect, and there is no
Material of Environmental Concern on, at, under or about the Properties in
violation of any Environmental Laws.
(c) To the best of the Borrowers' knowledge, neither the
Borrowers nor any of their Subsidiaries, nor any other person or entity for
whose conduct they are or may be held responsible, have any accrued or
contingent liability under any Environmental Laws except insofar as such
liability could not have a Material Adverse Effect. The Borrowers and their
Subsidiaries have at all times applied for, obtained and presently have in
effect all permits, licenses, registrations, approvals, consents and
authorizations required by Environmental Laws in connection with the ownership
and operation of the Properties.
(d) None of the Borrowers nor any of their Subsidiaries
have received any notice of violation, alleged violation, non-compliance,
liability or potential liability regarding environmental matters or compliance
with Environmental Laws with respect to any of the Properties or the business
operated by any Borrower or any of their Subsidiaries (the "Business"), nor do
the Borrowers have knowledge or reason to believe that any such notice will be
received or is being threatened except insofar as such notice or threatened
notice, or any aggregation thereof, does not involve a matter or matters that
could have a Material Adverse Effect.
(e) To the best of the Borrowers' knowledge, materials of
Environmental Concern have not been transported or disposed of from the
Properties in violation of, or in a manner or to a location which could give
rise to liability under, any Environmental Law. Neither the Borrowers nor any
of their Subsidiaries have arranged for disposal of Materials of Environmental
Concern from the Properties in violation of, or in a manner which could give
rise to liability, under any Environmental Laws. No Materials of Environmental
Concern have been generated, manufactured, refined, handled, recycled,
released, created a threat of release, treated, stored or disposed of in, on or
under any of the Properties in violation of, or in a manner that could give
rise to liability under, any applicable Environmental Law except insofar as any
such violation or liability referred to in this paragraph, or any aggregation
thereof, could not have a Material Adverse Effect.
(f) No judicial proceeding, governmental or
administrative action, citizen action or enforcement action or any other formal
or informal complaint or claim is pending or, to the knowledge of any of the
Borrowers, threatened, under any Environmental Law or relating to any Material
of Environmental Concern to which any of the Borrowers or any of their
Subsidiaries are or will be named as a party or respondent with respect to the
Properties or the Business, nor are there any consent decrees or other decrees,
consent orders, administrative orders or other orders, or other administrative
or judicial directives or requirements outstanding under any Environmental Law
with respect to the Properties or the Business except insofar as such
proceeding, action, decree, order or other requirement, or any aggregation
thereof, could not have a Material Adverse Effect.
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(g) Neither the Borrowers nor any of their Subsidiaries
have (i) received any request for information, notice, demand letter or
administrative inquiry, relating to any Environmental Laws, or (ii) received
any communication indicating potential responsibility for response costs or
remediation with respect to a release or threatened release of any Material of
Environmental Concern, or (iii) been or are subject to any reporting, cleanup,
remediation or corrective action requirements under any Environmental Laws; and
the Borrowers and their Subsidiaries have no knowledge of any facts which could
form the basis of any of the above, except insofar as such conditions could not
have a Material Adverse Effect.
(h) To the best of the Borrowers' knowledge, there has
been no release or threat of release of Materials of Environmental Concern in,
on, under, about or from the Properties, or arising from or related to the
operations of any of the Borrowers or their Subsidiaries in connection with the
Properties or otherwise in connection with the Business, in violation of or in
a manner that could give rise to liability under Environmental Laws except
insofar as any such violation or liability referred to in this paragraph, or
any aggregation thereof, could not have a Material Adverse Effect.
(i) No lien has been (or with the passage of time and/or
the giving of notice could be) imposed on the Properties by any Governmental
Authority under any Environmental Laws in connection with any Material of
Environmental Concern.
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions to Initial Loans, Letters of Credit and
Acceptances. The agreement of the Bank to make the initial Loan, issue the
initial Letter of Credit or create the initial Acceptance requested to be made,
issued or created by it is subject to the satisfaction, immediately prior to or
concurrently with the making of such Loan, issuance of such Letter of Credit or
creation of such Acceptance on the Closing Date, of the following conditions
precedent:
(a) Loan Documents. The Bank shall have received this
Agreement and each other Loan Document, executed and delivered by a duly
authorized officer of each Loan Party that is a party thereto.
(b) Material Agreements. The Bank shall have received
true and correct copies, certified as to authenticity by the Borrowers, of all
factoring agreements to which any of the Borrowers is a party and such other
documents or instruments as may be reasonably requested by the Bank, including,
without limitation, a copy of any debt instrument, security agreement or other
material contract to which any of the Borrowers or any of their Subsidiaries
may be a party, and the Bank shall have satisfactorily completed its review of
such documents.
(c) Borrowing Base Compliance Certificate. The Bank
shall have received an initial Borrowing Base Compliance Certificate as of a
recent date approved by the Bank.
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(d) Corporate Proceedings of the Borrowers. The Bank
shall have received a copy of the resolutions, in form and substance
satisfactory to the Bank, of the Board of Directors of each Borrower
authorizing (i) the execution, delivery and performance of this Agreement and
the other Loan Documents to which it is a party, (ii) the borrowings and other
credit accommodations contemplated hereunder and (iii) the granting by it of
the Liens created pursuant to any of the Security Documents, certified by the
Secretary or an Assistant Secretary of such Borrower as of the Closing Date,
which certificate shall be in form and substance satisfactory to the Bank and
shall state that the resolutions thereby certified have not been amended,
modified, revoked or rescinded.
(e) Borrower Incumbency Certificates. The Bank shall
have received a certificate of each Borrower, dated the Closing Date, as to the
incumbency and signature of the officers of such Borrower executing any Loan
Document on behalf of such Borrower, satisfactory in form and substance to the
Bank, executed by the President or any Vice President and the Secretary or any
Assistant Secretary of such Borrower.
(f) Corporate Proceedings of the Parent. The Bank shall
have received a copy of the resolutions, in form and substance satisfactory to
the Bank, of the Board of Directors of the Parent authorizing (i) the
execution, delivery and performance of the Loan Documents to which the Parent
is a party and (ii) the granting by it of the Liens created pursuant to the
Parent Pledge Agreement, certified by the Secretary or an Assistant Secretary
of the Parent as of the Closing Date, which certificate shall be in form and
substance satisfactory to the Bank and shall state that the resolutions thereby
certified have not been amended, modified, revoked or rescinded.
(g) Parent Incumbency Certificate. The Bank shall have
received a certificate of the Parent, dated the Closing Date, as to the
incumbency and signature of the officers of the Parent executing any Loan
Document on behalf of the Parent, satisfactory in form and substance to the
Bank, executed by the President or any Vice President and the Secretary or any
Assistant Secretary of the Parent.
(h) Corporate Documents. The Bank shall have received
true and complete copies of the certificate or articles of incorporation and
by-laws of each Loan Party, certified as of the Closing Date as complete and
correct copies thereof by the Secretary or an Assistant Secretary of such Loan
Party.
(i) Consents, Licenses and Approvals. The Bank shall
have received a certificate of a Responsible Officer of each Borrower (i)
attaching copies of all consents, authorizations and filings referred to in
subsection 3.4, and (ii) stating that such consents, licenses and filings are
in full force and effect, and each such consent, authorization and filing shall
be in form and substance satisfactory to the Bank.
(j) Repayment of Existing Indebtedness. The Borrowers
shall deliver evidence that the principal of and interest on, and all other
amounts owing in respect of the Indebtedness (including, without limitation,
any contingent or other amounts payable in respect
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of letters of credits or banker's acceptances, or arising from the Existing
Facility) indicated on Schedule 4.1(j) hereto that is to be repaid on the
Closing Date shall have been (or shall be simultaneously) paid in full or, with
respect to outstanding letters of credit and banker's acceptances, indemnified
against in a manner satisfactory to the Bank (including by the Bank issuing an
indemnity in favor of the bank obligated on such letter of credit or banker's
acceptance and reserving against such indemnity obligation under the Borrowing
Base), that any commitments to extend credit under the agreements relating to
such Indebtedness shall have been canceled or terminated and that all Guarantee
Obligations in respect of, and all Liens securing, any such Indebtedness shall
have been released. In addition, the Bank shall have received from any Person
holding any Lien securing any such Indebtedness such Uniform Commercial Code
termination statements, mortgage releases or other instruments, in each case in
proper form for recording, as the Bank shall have requested to release and
terminate of record the Liens securing such Indebtedness.
(k) Fees. The Bank shall have received from the
Borrowers on the Closing Date a closing fee of $52,500.
(l) Legal Opinions. The Bank shall have received the
executed legal opinions of Roger Barzun, Esq., counsel to the Borrowers, and
Jenkens & Gilchrist, counsel to the Parent, substantially in the form of
Exhibit I-1 and I-2, respectively. Such legal opinions shall cover such other
matters incident to the transactions contemplated by this Agreement as the Bank
or its counsel may reasonably require.
(m) Pledged Stock; Stock Powers. The Bank shall have
received the certificates representing the shares pledged pursuant to the
Parent Pledge Agreement and the Brookwood Pledge Agreement, together with an
undated stock power for each such certificate executed in blank by a duly
authorized officer of the pledgor thereof.
(n) Actions to Perfect Liens. The Bank shall have
received evidence in form and substance satisfactory to it that all filings,
recordings, registrations and other actions, including, without limitation, the
filing of duly executed financing statements on form UCC-1, necessary or, in
the opinion of the Bank, desirable to perfect the Liens created by the Security
Documents shall have been completed.
(o) Lien Searches. The Bank shall have received the
results of a recent search by a Person satisfactory to the Bank of the Uniform
Commercial Code, judgment and tax lien filings which may have been filed with
respect to personal property of any of the Borrowers, and the results of such
search shall be satisfactory to the Bank.
(p) Audit. The Bank shall have received copies of an
audit, in form and substance satisfactory to it, of the Receivables and
Inventory of the Borrowers, prepared by an auditing firm satisfactory to the
Bank.
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(q) Appraisals. The Bank shall have received an
appraisal, in form and substance satisfactory to it, of all Equipment of the
Borrowers, prepared by an appraisal firm satisfactory to the Bank.
(r) No Material Adverse Change. (i) Since July 31,
1995, there shall not have occurred (x) any material adverse change in the
business, operations, property, condition (financial or otherwise), results of
operations or prospects of Brookwood and its Subsidiaries taken as a whole, (y)
any material damage or destruction to any of the Collateral or any material
depreciation in the value thereof and (z) any event, condition or state of
facts which would reasonably be expected to have a Material Adverse Effect and
(ii) no representations made or information supplied to the Bank shall have
been proven to be inaccurate or misleading in any material respect.
(s) Insurance. The Bank shall have received evidence in
form and substance satisfactory to it that all of the requirements of
subsection 5.5 and Section 4.3 of the Security Agreement shall have been
satisfied.
(t) Financial Reports. The Bank shall have received all
such financial statements, projections and other information from the Borrowers
as the Bank shall reasonably request, and which shall be in all respects
satisfactory to the Bank.
(u) Environmental Liabilities. The Bank shall have
received all environmental audits, reports, opinions, certificates and other
similar documents from the Borrowers as the Bank shall reasonably request, all
in form and substance satisfactory to the Bank, and the Bank shall be
satisfied, in its sole and absolute discretion, with the amount and nature of
all potential, contingent and fixed environmental liabilities of the Borrowers
and their Subsidiaries.
(v) Tax Sharing Agreements. The Bank shall have received
copies of all tax sharing agreements to which any Borrower is a party and shall
be satisfied in its sole and absolute discretion with all of the terms and
conditions contained therein.
(w) Other Documents; Due Diligence. The Bank shall have
received such other documents, reports, approvals or consents as it may have
reasonably requested and shall have otherwise completed its due diligence in a
manner satisfactory to it.
4.2 Conditions to Each Loan. The agreement of the Bank to
make any Loan, issue any Letter of Credit or create any Acceptance requested to
be made, issued or created by it on any date (including, without limitation,
its initial Loan, Letter of Credit or Acceptance) is subject to the
satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the
representations and warranties made by the Borrowers in or pursuant to
the Loan Documents shall be true and correct in all material respects
on and as of such date as if made on and as of such date.
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<PAGE> 43
(b) No Default. No Default or Event of Default shall
have occurred and be continuing on such date or after giving effect to
the Loan, Letter of Credit or Acceptance requested to be made, issued
or created on such date.
(c) Additional Matters. All corporate and other
proceedings, and all documents, instruments and other legal matters in
connection with the transactions contemplated by this Agreement and
the other Loan Documents shall be satisfactory in form and substance
to the Bank and its counsel, and the Bank shall have received such
other documents and legal opinions in respect of any aspect or
consequence of the transactions contemplated hereby or thereby as it
shall reasonably request.
Each borrowing and each request for a Letter of Credit or Acceptance by any of
the Borrowers hereunder shall constitute a representation and warranty by such
Borrower as of the date thereof that the conditions contained in this
subsection have been satisfied.
SECTION 5. AFFIRMATIVE COVENANTS
The Borrowers hereby agree that, so long as the Commitment
remains in effect or any amount is owing to the Bank hereunder or under any
other Loan Document, the Borrowers shall, and shall cause (except in the case
of delivery of financial information, reports and notices) each of their
Subsidiaries to:
5.1 Financial Statements. Furnish to the Bank:
(a) as soon as available, but in any event within 120
days after the end of each fiscal year of the Borrowers, a copy of the
consolidated and consolidating balance sheets of Brookwood and its
consolidated Subsidiaries as at the end of such year and the related
consolidated and consolidating statements of income and retained
earnings and of cash flows for such year, setting forth in each case
in comparative form the figures for the previous year, reported on
without a "going concern" or like qualification or exception, or
qualification arising out of the scope of the audit, by Deloitte &
Touche or other independent certified public accountants of nationally
recognized standing acceptable to the Bank; and
(b) as soon as available, but in any event not later than
60 days after the end of each of the first three quarterly periods of
each fiscal year of the Borrowers, the unaudited consolidated and
consolidating balance sheets of the Brookwood and its consolidated
Subsidiaries as at the end of such quarter and the related unaudited
consolidated and consolidating statements of income and retained
earnings and of cash flows of each of Brookwood and its consolidated
Subsidiaries for such quarter and the portion of the fiscal year
through the end of such quarter, setting forth in each case in
comparative form the figures for the previous year, certified by the
chief financial officer of Brookwood as being fairly stated in all
material respects (subject to normal year-end audit adjustments);
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<PAGE> 44
all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
5.2 Certificates; Other Information. Furnish to the
Bank:
(a) concurrently with the delivery of the financial
statements referred to in subsections 5.1(a) and (b), a certificate of
the chief financial officer of Brookwood, on behalf of each Borrower
and its Subsidiaries (i) stating that, to the best of such officer's
knowledge, each Borrower and its Subsidiaries have observed or
performed all of their covenants and other agreements, and satisfied
every applicable condition, contained in this Agreement, the Revolving
Credit Note and the other Loan Documents to be observed, performed or
satisfied by it, and that such officer has obtained no knowledge of
any Default or Event of Default, except as specified in such
certificate, (ii) showing in detail as of the end of the related
fiscal period the figures and calculations supporting such statement
in respect of the financial covenants contained in subsection 6.1,
(iii) if not specified in the financial statements delivered pursuant
to subsection 5.1, specifying on a consolidated basis the aggregate
amount of interest paid or accrued by each Borrower and its
Subsidiaries, and the aggregate amount of depreciation and
amortization charged on the books of each Borrower and its
Subsidiaries, during such fiscal period and (iv) listing all
Indebtedness (other than Indebtedness hereunder) in each case incurred
since the date of the previous consolidated balance sheet of Brookwood
delivered pursuant to subsection 5.1(a) or (b);
(b) not later than thirty days prior to the end of each
fiscal year of the Borrowers, a copy of the projections by each
Borrower of the operating budget and cash flow budget of such Borrower
and its Subsidiaries, such projections to be provided separately for
each such entity for the succeeding fiscal year on a month-by-month
basis, and to be accompanied by a certificate of the chief financial
officer of Brookwood, on behalf of each Borrower and its Subsidiaries,
to the effect that such projections have been prepared on the basis of
sound financial planning practice and that such officer has no reason
to believe they are incorrect or misleading in any material respect;
(c) as soon as practicable and in any event within 30
days after the end of each month, a Borrowing Base Compliance
Certificate showing the Borrowing Base as of the close of business on
the last day of the immediately preceding accounting month, each such
Borrowing Base Compliance Certificate to be certified as complete and
correct on behalf of the Borrowers by the chief financial officer of
Brookwood, on behalf of each Borrower and its Subsidiaries, and such
other supporting documentation and additional reports with respect to
the Borrowing Base as the Bank shall reasonably request;
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<PAGE> 45
(d) within five days after the same are sent, copies of
all financial statements and reports which Brookwood sends to its
stockholders, and within five days after the same are filed, copies of
all financial statements and reports which the Borrowers or the Parent
may make to, or file with, the Securities and Exchange Commission or
any successor or analogous Governmental Authority;
(e) as soon as available, but in no event later than 30
days after the end of each fiscal quarter of the Borrowers, accounts
receivable aging reports for each Borrower, certified by the chief
financial officer of Brookwood on behalf of such Borrower and its
Subsidiaries as being fairly stated in all material respects;
(f) at the request of the Bank, which request shall be
made not more often than once per calendar year, a copy of an audit,
in form and substance satisfactory to the Bank, of the Receivables and
Inventory of the Borrowers, prepared by an auditing firm satisfactory
to the Bank;
(g) at the request of the Bank, which request shall be
made not more often than once per calendar year, a copy of an
appraisal, in form and substance satisfactory to the Bank, of all
Equipment of the Borrowers, prepared by an appraisal firm satisfactory
to the Bank; and
(h) promptly, such additional financial and other
information, including annual management letters from the Borrowers'
independent accountants, as the Bank may from time to time reasonably
request.
5.3 Payment of Obligations. Pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all of its obligations of whatever nature, except where the amount or
validity thereof is currently being contested in good faith by appropriate
proceedings and reserves in conformity with GAAP with respect thereto have been
provided on the books of the applicable Borrower or Subsidiary.
5.4 Conduct of Business and Maintenance of Existence.
Continue to engage in business of the same general type as now conducted by it
and preserve, renew and keep in full force and effect its corporate existence
and take all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal conduct of its business, except
as otherwise permitted pursuant to subsection 6.5; and comply with all
Contractual Obligations and Requirements of Law, except to the extent that
failure to comply therewith could not, individually or in the aggregate, have a
Material Adverse Effect.
5.5 Maintenance of Property; Insurance. Keep all
property useful and necessary in its business in good working order and
condition; maintain with financially sound and reputable insurance companies
insurance on all its property, including all of the Collateral, in at least
such amounts and against at least such risks (but including in any event public
liability, product liability and business interruption) as are usually insured
against in the same
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<PAGE> 46
general area by companies engaged in the same or a similar business; and
furnish to the Bank, upon written request, full information as to the insurance
carried.
5.6 Inspection of Property; Books and Records;
Discussions. Keep proper books of record and account in which full, true and
correct entries in conformity with GAAP and all Requirements of Law shall be
made of all dealings and transactions in relation to its business and
activities; and permit representatives of the Bank to visit and inspect any of
its properties and examine and make abstracts from any of its books and records
at any reasonable time and as often as may reasonably be desired and to discuss
the business, operations, properties and financial and other condition of the
Borrowers and their Subsidiaries with officers and employees of the Borrowers
and their Subsidiaries and with Brookwood's independent certified public
accountants.
5.7 Notices. Promptly give notice to the Bank of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any
Contractual Obligation of any of the Borrowers or any of their
Subsidiaries or (ii) litigation, investigation or proceeding which may
exist at any time between any of the Borrowers or any of their
Subsidiaries and any Governmental Authority, which in either case, if
not cured or if adversely determined, as the case may be, could have a
Material Adverse Effect;
(c) any litigation or proceeding affecting any of the
Borrowers or any of their Subsidiaries in which the amount involved is
$100,000 or more and not covered by insurance or in which injunctive
or similar relief is sought;
(d) the following events, as soon as possible and in a
any event within 30 days after any of the Borrowers knows or has
reason to know thereof: (i) the occurrence or expected occurrence of
any Reportable Event with respect to any Plan, a failure to make any
required contribution to a Plan, the creation of any Lien in favor of
the PBGC or a Plan or any withdrawal from, or the termination,
Reorganization or Insolvency of, any Multiemployer Plan or (ii) the
institution of proceedings or the taking of any other action by the
PBGC or any of the Borrowers or any Commonly Controlled Entity or any
Multiemployer Plan with respect to the withdrawal from, or the
termination, Reorganization or Insolvency of, any Plan; and
(e) any material adverse change in the business,
operations, property, condition (financial or otherwise), results of
operations or prospects of the Borrowers and their Subsidiaries taken
as a whole which could have a Material Adverse Effect.
Each notice pursuant to this subsection shall be accompanied by a statement of
a Responsible Officer setting forth details of the occurrence referred to
therein and stating what action such Borrower proposes to take with respect
thereto.
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<PAGE> 47
5.8 Environmental Laws. (a) Comply with, and ensure
compliance by all tenants and subtenants and contractors and subcontractors
retained by the Borrowers, with all applicable Environmental Laws and obtain
and comply with and maintain, and ensure that all tenants and subtenants and
contractors and subcontractors retained by the Borrowers, if any, obtain and
comply with and maintain, any and all licenses, approvals, notifications,
registrations or permits required by applicable Environmental Laws, except to
the extent that failure to do so could not have a Material Adverse Effect.
(b) Conduct and complete all investigations, studies,
sampling testing, and reporting, and all remedial, removal and other actions
required of the Borrowers or any of their Subsidiaries under Environmental Laws
and promptly comply with all lawful orders and directives of and agreements
with all Governmental Authorities issued to the Borrowers or to which the
Borrowers are a party regarding Environmental Laws, except to the extent that
the same are being contested in good faith by appropriate proceedings and the
pendency of such proceedings could not have a Material Adverse Effect.
5.9 Subsidiary Guarantee. Cause any Subsidiary of any
Borrower hereafter acquired or formed to, jointly and severally with all other
such Subsidiaries, guarantee the payment of all principal, interest, fees and
other Obligations of the Borrowers under the Loan Documents pursuant to a
Subsidiary Guarantee to be executed and delivered by such Subsidiary.
SECTION 6. NEGATIVE COVENANTS
The Borrowers hereby agree that, so long as the Commitment
remains in effect or any amount is owing to the Bank hereunder or under any
other Loan Document, none of the Borrowers shall, and shall not permit any of
their respective Subsidiaries to, directly or indirectly:
6.1 Financial Condition Covenants.
(a) Maintenance of Consolidated Tangible Net Worth.
Permit Consolidated Tangible Net Worth at any time during any period
set forth below to be less than the amount set forth below opposite
such period:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Closing - 12/31/97 $19,000,000
1/1/98 and thereafter $20,000,000
</TABLE>
(b) Consolidated Total Liabilities to Consolidated
Tangible Net Worth. Permit the ratio of Consolidated Total
Liabilities to Consolidated Tangible Net Worth at any time to be
greater than 1.25:1.00.
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<PAGE> 48
(c) Consolidated EBITDA to Consolidated Fixed Charges.
Permit the ratio of Consolidated EBITDA to Consolidated Fixed Charges
for (i) the period of four consecutive fiscal quarters ending at
December 31, 1996 to be less than 0.80:1.00 or (ii) any period of four
consecutive fiscal quarters ending thereafter to be less than
1.00:1.00.
6.2 Limitation on Indebtedness. Create, incur, assume or
suffer to exist any Indebtedness, except:
(a) Indebtedness under this Agreement;
(b) Indebtedness of any Borrower to any Subsidiary and of
any wholly owned Subsidiary to any Borrower or any other Subsidiary;
(c) Indebtedness of any Borrower or any Subsidiary
incurred to finance the acquisition of fixed or capital assets
(whether pursuant to a loan, a Financing Lease or otherwise) in an
aggregate principal amount not exceeding as to all of the Borrowers
and their Subsidiaries $1,000,000 at any time outstanding;
(d) Indebtedness outstanding on the date hereof and
listed on Schedule 6.2.
6.3 Limitation on Liens. Create, incur, assume or suffer
to exist any Lien upon any of such Borrower's or its Subsidiary's property,
assets or revenues, whether now owned or hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being
contested in good faith by appropriate proceedings, provided that
adequate reserves with respect thereto are maintained on the books of
the applicable Borrower or Subsidiary, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business which are not overdue or which are being contested in good
faith by appropriate proceedings;
(c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance carriers
under insurance or self- insurance arrangements;
(d) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of
business;
(e) easements, rights-of-way, restrictions and other
similar encumbrances incurred in the ordinary course of business
which, in the aggregate, are not substantial in amount and which do
not in any case materially detract from the value of the
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<PAGE> 49
property subject thereto or materially interfere with the ordinary
conduct of the business of any of the Borrowers or their Subsidiaries;
(f) Liens in existence on the date hereof listed on
Schedule 6.3 securing Indebtedness permitted by subsection 6.2(d),
provided that no such Lien is spread to cover any additional property
after the Closing Date and that the amount of Indebtedness secured
thereby is not increased;
(g) Liens securing Indebtedness of the Borrowers and
their Subsidiaries permitted by subsection 6.2(c) incurred to finance
the acquisition of fixed or capital assets, provided that (i) such
Liens shall be created substantially simultaneously with the
acquisition of such fixed or capital assets, (ii) such Liens do not at
any time encumber any property other than the property financed by
such Indebtedness and (iii) the amount of Indebtedness secured thereby
is not increased; and
(h) Liens created pursuant to the Security Documents.
6.4 Limitation on Guarantee Obligations. Create, incur,
assume or suffer to exist any Guarantee Obligation except:
(a) Guarantee Obligations in existence on the date hereof
and listed on Schedule 6.4;
(b) guarantees made in the ordinary course of business by
the Borrowers of obligations of any of their wholly owned
Subsidiaries, which obligations are otherwise permitted under this
Agreement; and
(c) any Subsidiary Guarantees required under the terms of
this Agreement.
6.5 Limitation on Fundamental Changes. Enter into any
merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself
(or suffer any liquidation or dissolution), or convey, sell, lease, assign,
transfer or otherwise dispose of, all or substantially all of its property,
business or assets, or make any material change in its present method of
conducting business, except:
(a) any Subsidiary may be merged or consolidated with or
into any Borrower (provided that such Borrower shall be the continuing
or surviving corporation) or with or into any one or more wholly owned
Subsidiaries of a Borrower (provided that the wholly owned Subsidiary
or Subsidiaries shall be the continuing or surviving corporation);
(b) any Subsidiary may sell, lease, transfer or otherwise
dispose of any or all of its assets (upon voluntary liquidation or
otherwise) to one or more Borrowers or any other wholly owned
Subsidiary; and
45
<PAGE> 50
(c) any acquisition (i) in the ordinary course of
business or (ii) to which the Bank, in its sole and absolute
discretion, consents.
6.6 Limitation on Sale of Assets. Convey, sell, lease,
assign, transfer or otherwise dispose of any of its property, business or
assets (including, without limitation, Receivables and leasehold interests),
whether now owned or hereafter acquired, or, in the case of any Subsidiary,
issue or sell any shares of such Subsidiary's Capital Stock to any Person other
than one or more Borrowers or any wholly owned Subsidiary, except:
(a) the sale or other disposition of obsolete or worn-
out property in the ordinary course of business;
(b) the sale or other disposition of any property in the
ordinary course of business;
(c) the sale of Inventory in the ordinary course of
business;
(d) the sale or discount without recourse of Receivables
arising in the ordinary course of business in connection with the
compromise or collection thereof; and
(e) as permitted by subsection 6.5(b).
6.7 Limitation on Dividends. Declare or pay any dividend
(other than dividends payable solely in common stock of any Borrower or any
Subsidiary) on, or make any payment on account of, or set apart assets for a
sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of Capital Stock of
any Borrower or any Subsidiary or any warrants or options to purchase any such
Capital Stock, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly, whether in cash
or property or in obligations of any Borrower or any Subsidiary (such
declarations, payments, setting apart, purchases, redemptions, defeasances,
retirements, acquisitions and distributions being herein called "Restricted
Payments"); provided that nothing herein shall prohibit Kenyon, Laminating or
any other wholly owned Subsidiary from making any Restricted Payments; and
provided, further, that (a) Brookwood may declare and make Restricted Payments
in respect of the fiscal year ending on December 31, 1996 in an aggregate
amount not to exceed $1,000,000 and (b) in respect of any fiscal year ending
after 1996, Brookwood may declare and make Restricted Payments subject to the
satisfaction of each of the following conditions on the date of such Restricted
Payment and after giving effect thereto:
(i) no Default shall have occurred and be continuing;
(ii) the aggregate amount of Restricted Payments made
during or in respect of any fiscal year of Brookwood may not exceed an
amount equal to 80% of the amount, if positive, of (x) the sum of (1)
consolidated net income (before extraordinary
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<PAGE> 51
gains) of Brookwood and its Subsidiaries for the immediately preceding
fiscal year (the "Subject Year") plus (2) consolidated depreciation
and amortization expense of Brookwood and its Subsidiaries for the
Subject Year, minus (y) the sum of (1) Consolidated Capital
Expenditures for the Subject Year, plus (2) all scheduled payments
during the Subject Year in respect of Consolidated Indebtedness for
Borrowed Money;
(iii) the availability of the Commitment under the Borrowing
Base was not less than $500,000 at any time during the immediately
preceding 12-month period; and
(iv) the Bank shall have received the Borrowers' audited
financial statements for the relevant fiscal year at least ten
Business Days prior to the declaration or payment of any such
Restricted Payment.
6.8 Limitation on Consolidated Capital Expenditures.
Make or commit to make (by way of the acquisition of securities of a Person or
otherwise) any expenditure in respect of the purchase or other acquisition of
fixed or capital assets (excluding any such asset acquired in connection with
normal replacement and maintenance programs properly charged to current
operations) except for expenditures in the ordinary course of business which
shall result in Consolidated Capital Expenditures not exceeding, for any fiscal
year of Brookwood, the amount set forth below opposite such fiscal year:
<TABLE>
<CAPTION>
Maximum Consolidated
Fiscal Year Capital Expenditures
----------- --------------------
<S> <C>
Ended December 31, 1996 $1,300,000.00
Ended December 31, 1997 $1,500,000.00
Ended December 31, 1998 $1,750,000.00
Ended December 31, 1999 $1,750,000.00
</TABLE>
provided, that the amount of Consolidated Capital Expenditures for any fiscal
year shall not be less than 75% of the amount set forth above for such fiscal
year.
6.9 Limitation on Investments, Loans and Advances. Make
any advance, loan, extension of credit or capital contribution to, or purchase
any stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment in, any Person,
except:
(a) extensions of trade credit in the ordinary course of
business;
(b) investments in Cash Equivalents;
(c) loans and advances to employees of the Borrowers or
their Subsidiaries for travel, entertainment and relocation expenses
in the ordinary course of business; and
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<PAGE> 52
(d) investments by the Borrowers in their wholly-owned
Subsidiaries and investments by such Subsidiaries in the Borrowers and
in other wholly-owned Subsidiaries.
6.10 Limitation on Optional Payments and Modifications of
Debt Instruments. (a) Make any optional payment or prepayment on or
redemption or purchase of any Indebtedness or (b) amend, modify or change, or
consent or agree to any amendment, modification or change to any of the terms
of any such Indebtedness (other than any such amendment, modification or change
which would extend the maturity or reduce the amount of any payment of
principal thereof or which would reduce the rate or extend the date for payment
of interest thereon).
6.11 Limitation on Transactions with Affiliates. Enter
into any transaction, including, without limitation, any purchase, sale, lease
or exchange of property or the rendering of any service, with any Affiliate
unless such transaction is (a) otherwise permitted under this Agreement, (b) in
the ordinary course of a Borrower's or Subsidiary's business and (c) upon fair
and reasonable terms no less favorable to such Borrower or such Subsidiary, as
the case may be, than it would obtain in a comparable arm's length transaction
with a Person which is not an Affiliate.
6.12 Limitation on Sales and Leasebacks. Enter into any
arrangement with any Person providing for the leasing by any Borrower or any
Subsidiary of real or personal property which has been or is to be sold or
transferred by such Borrower or such Subsidiary to such Person or to any other
Person to whom funds have been or are to be advanced by such Person on the
security of such property or rental obligations of such Borrower or such
Subsidiary.
6.13 Limitation on Changes in Fiscal Year. Permit the
fiscal year of the Borrowers to end on a day other than December 31.
6.14 Limitation on Negative Pledge Clauses. Enter into
with any Person any agreement, other than (a) this Agreement, and (b) any
industrial revenue bonds, purchase money mortgages or Financing Leases
permitted by subsections 6.2(c) and 6.3(g) (in which cases, any prohibition or
limitation shall only be effective against the assets financed thereby), which
prohibits or limits the ability of any Borrower or Subsidiary to create, incur,
assume or suffer to exist any Lien upon any of its property, assets or
revenues, whether now owned or hereafter acquired.
6.15 Limitation on Lines of Business. Enter into any
business, either directly or through any Subsidiary, except for those
businesses in which the Borrowers and their Subsidiaries are engaged on the
date of this Agreement or which are directly related thereto.
6.16 Limitation on Management Fees. Permit the aggregate
amount of management fees paid to any Affiliate to be in excess of $10,000 per
month or $120,000 per annum in the aggregate for all of the Borrowers and their
Subsidiaries.
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<PAGE> 53
6.17 Limitation on Receivables From Affiliates. Permit
Receivables due to any Borrower or Subsidiary from any Affiliate (excluding
intercompany items among the Borrowers and their wholly-owned Subsidiaries) to
exceed $100,000 in the aggregate for all of the Borrowers and their
Subsidiaries at any one time.
6.18 Limitation on Tax Sharing Agreements. Enter into any
tax sharing agreements or similar arrangements with the Parent or any Affiliate
or any amendment thereto without the prior written consent of the Bank.
6.19 Amendments to Certificate of Incorporation.
Brookwood shall not amend its Certificate of Incorporation, including, without
limitation, any amendment to the terms of its Series A Cumulative Preferred
Stock, without the prior written consent of the Bank.
SECTION 7. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) The Borrowers shall fail to pay any principal of any
Loan, or any L/C Obligation, when due in accordance with the terms
hereof; or the Borrowers shall fail to pay any interest on any Loan,
or any other amount payable hereunder, including, without limitation,
any fees, commissions or expenses, within five days after any such
interest or other amount becomes due in accordance with the terms
hereof; or
(b) Any representation or warranty made or deemed made by
any Borrower or any other Loan Party herein or in any other Loan
Document or which is contained in any certificate, document or
financial or other statement furnished by it at any time under or in
connection with this Agreement or any such other Loan Document shall
prove to have been incorrect in any material respect on or as of the
date made or deemed made; or
(c) Any Borrower or any other Loan Party shall default in
the observance or performance of any agreement contained in Section 6
or in any Security Document; or
(d) Any Borrower or any other Loan Party shall default in
the observance or performance of any other agreement contained in this
Agreement or any other Loan Document (other than as provided in
paragraphs (a) through (c) of this Section), and such default shall
continue unremedied for a period of 30 days; or
(e) Any Borrower or any Subsidiary shall (i) default in
any payment of principal of or interest on any Indebtedness (other
than the Loans) or in the payment of any Guarantee Obligation, beyond
the period of grace (not to exceed 30 days), if any, provided in the
instrument or agreement under which such Indebtedness or Guarantee
Obligation was created, if the aggregate amount of the Indebtedness
and/or Guarantee
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<PAGE> 54
Obligations in respect of which such default or defaults shall have
occurred is at least $100,000; or (ii) default in the observance or
performance of any other agreement or condition relating to any such
Indebtedness or Guarantee Obligation or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event
shall occur or condition shall exist, the effect of which default or
other event or condition is to cause, or to permit the holder or
holders of such Indebtedness or beneficiary or beneficiaries of such
Guarantee Obligation (or a trustee or agent on behalf of such holder
or holders or beneficiary or beneficiaries) to cause, with the giving
of notice if required, such Indebtedness to become due prior to its
stated maturity or such Guarantee Obligation to become payable; or
(f) (i) Any Borrower or any Subsidiary shall commence
any case, proceeding or other action (A) under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an
order for relief entered with respect to it, or seeking to adjudicate
it a bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment, winding-up, liquidation, dissolution, composition or other
relief with respect to it or its debts, or (B) seeking appointment of
a receiver, trustee, custodian, conservator or other similar official
for it or for all or any substantial part of its assets, or any
Borrower or any Subsidiary shall make a general assignment for the
benefit of its creditors; or (ii) there shall be commenced against any
Borrower or any Subsidiary any case, proceeding or other action of a
nature referred to in clause (i) above which (A) results in the entry
of an order for relief or any such adjudication or appointment or (B)
remains undismissed, undischarged or unbonded for a period of 60 days;
or (iii) there shall be commenced against any Borrower or any
Subsidiary any case, proceeding or other action seeking issuance of a
warrant of attachment, execution, distraint or similar process against
all or any substantial part of its assets which results in the entry
of an order for any such relief which shall not have been vacated,
discharged, or stayed or bonded pending appeal within 60 days from the
entry thereof; or (iv) any Borrower or any Subsidiary shall take any
action in furtherance of, or indicating its consent to, approval of,
or acquiescence in, any of the acts set forth in clause (i), (ii), or
(iii) above; or (v) any Borrower or any Subsidiary shall generally
not, or shall be unable to, or shall admit in writing its inability
to, pay its debts as they become due; or
(g) (i) Any Person shall engage in any "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of
the Code) involving any Plan, (ii) any "accumulated funding
deficiency" (as defined in Section 302 of ERISA or Section 412 of the
Code), whether or not waived, shall exist with respect to any Plan or
any Lien in favor of the PBGC or a Plan shall arise on the assets of
any Borrower or any Commonly Controlled Entity, (iii) a Reportable
Event shall occur with respect to, or proceedings shall commence to
have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate, any Single Employer Plan, which Reportable
Event or commencement of proceedings or appointment of a trustee is,
in the reasonable opinion of the Bank, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, (iv) any
Single Employer Plan shall terminate for purposes of Title IV of
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ERISA, (v) a Borrower or any Commonly Controlled Entity shall, or in
the reasonable opinion of the Bank, be likely to, incur any liability
in connection with a withdrawal from, or the Insolvency or
Reorganization of, a Multiemployer Plan or (vi) any other event or
condition shall occur or exist with respect to a Plan; and in each
case in clauses (i) through (vi) above, such event or condition,
together with all other such events or conditions, if any, could have
a Material Adverse Effect; or
(h) One or more judgments or decrees shall be entered
against the Borrowers or their Subsidiaries involving in the aggregate
a liability (not paid or fully covered by insurance) of $100,000 or
more, and all such judgments or decrees shall not have been vacated,
discharged, stayed or bonded pending appeal within 60 days from the
entry thereof; or
(i) Any Security Document shall cease, for any reason, to
be in full force and effect, or any Borrower or any other Loan Party
which is a party to any Security Document shall so assert, or the Lien
created by any Security Document shall cease to be enforceable and of
the same effect and priority purported to be created thereby; or
(j) Any Subsidiary Guarantee shall cease, for any reason,
to be in full force and effect or any Guarantor shall so assert; or
(k) (i) Any Person or "group" (within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended) (A) shall have acquired beneficial ownership of 20% or more
of any outstanding class of Capital Stock having ordinary voting power
in the election of directors of any Borrower or (B) shall obtain the
power (whether or not exercised) to elect a majority of any Borrower's
directors or (ii) the Board of Directors of any Borrower shall not
consist of a majority of Continuing Directors; "Continuing Directors"
shall mean the directors of the Borrowers on the Closing Date and each
other director, if such other director's nomination for election to
the Board of Directors of a Borrower is recommended by a majority of
the then Continuing Directors;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) of this Section, automatically the
Commitment shall immediately terminate and the Loans and outstanding L/C
Obligations and Acceptances hereunder (with accrued interest thereon) and all
other amounts owing under this Agreement shall immediately become due and
payable, and (B) if such event is any other Event of Default, either or both of
the following actions may be taken: (i) the Bank may, by notice to Brookwood
declare the Commitment to be terminated forthwith, whereupon the Commitment
shall immediately terminate; and (ii) the Bank may, by notice to Brookwood, (A)
declare the Loans (with accrued interest thereon) and outstanding Acceptances
hereunder and all other amounts owing under this Agreement to be due and
payable forthwith, whereupon the same shall immediately become due and payable,
and (B) declare all or a portion of the obligations of the Borrowers in respect
of the Letters of Credit, although contingent and unmatured, to be due and
payable forthwith, whereupon the same shall immediately become due and payable
and/or demand that
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the Borrowers discharge any or all of the obligations supported by the L/C
Obligations by paying or prepaying any amount due or to become due in respect
of such obligations. All payments under this Section 7 on account of undrawn
Letters of Credit shall be made by the Borrowers directly to the cash
collateral account established by the Bank pursuant to subsection 2.8(c) for
such purpose for application to the Borrowers' reimbursement obligations under
subsection 2.5, with the balance, if any, to be applied to the Borrowers' other
obligations under this Agreement as the Bank shall determine. Except as
expressly provided above in this Section, presentment, demand, protest and all
other notices of any kind are hereby expressly waived.
SECTION 8. MISCELLANEOUS
8.1 Amendments and Waivers. This Agreement is intended
by the Borrowers and the Bank to be the final, complete, and exclusive
expression of the agreement among them. This Agreement supersedes any and all
prior oral or written agreements relating to the subject matter hereof and may
not be contradicted by evidence of prior, contemporaneous or subsequent oral
agreements of the parties. There are no oral agreements between the parties.
No modification, rescission, waiver, release, or amendment of any provision of
this Agreement shall be made, except by a written agreement signed by the
Borrowers and a duly authorized officer of the Bank. No act, failure or delay
by the Bank shall constitute a waiver of any of its rights and remedies. No
single or partial waiver by the Bank of any provision of this Agreement or any
other Loan Document, or of any breach or default hereunder or thereunder, or of
any right or remedy which the Bank may have, shall operate as a waiver of any
other provision, breach, default, right or remedy or of the same provision for
any breach, default, right or remedy on a future occasion. No waiver by the
Bank shall affect its rights to require strict performance of this Agreement.
8.2 Notices. All notices, requests and demands to or
upon the respective parties hereto to be effective shall be in writing
(including by facsimile transmission), and, unless otherwise expressly provided
herein, shall be deemed to have been duly given or made when delivered, or
three (3) days after being deposited in the mail, postage prepaid, or, in the
case of telecopy notice, when received, addressed as follows in the case of the
Borrowers and the Bank, or to such other address as may be hereafter notified
by the respective parties hereto:
The Borrowers: Brookwood Companies Incorporated
Address: 232 Madison Avenue
New York, New York 10016
Attention: President
Telecopy No.: (212) 686-5626
with a copy to: Roger Barzun, Esq.
60 Hubbard Street
Concord, Massachusetts 01742
52
<PAGE> 57
The Bank: The Bank of New York
530 Fifth Avenue, Third Floor
New York, New York 10036
Attention: Ronald R. Pagoto
Vice President
Telecopy No.: (212) 852-4252
with a copy to: Jones, Day, Reavis & Pogue
599 Lexington Avenue
New York, New York 10022
Attention: Michael R. Bassett, Esq.
Telecopy No.: (212) 755-7306
provided that any notice, request or demand to or upon the Bank pursuant to
subsection 2.2, 2.3, 2.4, 2.6, 2.7, 2.9, 2.11, or 2.24 shall not be effective
until received.
8.3 No Waiver; Cumulative Remedies. No failure to
exercise and no delay in exercising, on the part of the Bank, any right,
remedy, power or privilege hereunder or under the other Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
8.4 Survival of Representations and Warranties. All
representations and warranties made hereunder, in the other Loan Documents and
in any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement
and the making of the Loans hereunder.
8.5 Payment of Expenses and Taxes. The Borrowers jointly
and severally agree (a) to pay or reimburse the Bank for all its out-of-pocket
costs and expenses incurred in connection with the development, preparation and
execution of, and any amendment, supplement or modification to, this Agreement
and the other Loan Documents and any other documents prepared in connection
herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby, including, without limitation,
the reasonable fees and disbursements of counsel to the Bank, (b) to pay or
reimburse the Bank for all its costs and expenses incurred in connection with
the enforcement or preservation of any rights under this Agreement, the other
Loan Documents and any such other documents, including, without limitation, the
fees and disbursements of counsel (including the allocated fees and expenses of
in- house counsel) to the Bank, (c) to pay, indemnify, and hold the Bank
harmless from, any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation or
administration of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent
53
<PAGE> 58
under or in respect of, this Agreement, the other Loan Documents and any such
other documents, and (d) to pay, indemnify, and hold the Bank harmless from and
against any and all other liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Agreement, the other Loan Documents and
any such other documents, including, without limitation, any of the foregoing
relating to the (i) the release, threatened release, presence or migration of
any Materials of Environmental Concern in, on, under or about the Properties
during, or otherwise resulting from, the Borrowers' ownership or operation of
the Properties or (ii) any violation of or liability for costs under any
Environmental Laws resulting directly or indirectly from the Borrowers' or any
of their Subsidiaries' operations (all the foregoing in this clause (d),
collectively, the "indemnified liabilities"), provided, that the Borrowers
shall have no obligation hereunder to the Bank with respect to indemnified
liabilities arising from the gross negligence or willful misconduct of the
Bank. The agreements in this subsection shall survive repayment of the Loans
and all other amounts payable hereunder.
8.6 Successors and Assigns; Participation and
Assignments. (a) This Agreement shall be binding upon and inure to the
benefit of the Borrowers, the Bank, and their respective successors and
assigns, except that the Borrowers may not assign or transfer any of their
rights or obligations under this Agreement without the prior written consent of
the Bank.
(b) The Bank may, in the ordinary course of its
commercial banking business and in accordance with applicable law, at any time
sell to one or more banks or other entities (the "Participants") participating
interests in any Loan, any L/C Obligation or any Acceptance owing to the Bank,
any Commitment of the Bank or any other interest of the Bank hereunder and
under the other Loan Documents. In the event of any such sale by the Bank of a
participating interest to a Participant, the Bank's obligations under this
Agreement to the other parties to this Agreement shall remain unchanged, the
Bank shall remain solely responsible for the performance thereof, the Bank
shall remain the holder of any such Loan, L/C Obligation or Acceptance for all
purposes under this Agreement and the other Loan Documents, and the Borrowers
shall continue to deal solely and directly with the Bank in connection with the
Bank's rights and obligations under this Agreement and the other Loan
Documents. The Borrowers agree that if amounts outstanding under this
Agreement are due or unpaid, or shall have been declared or shall have become
due and payable upon the occurrence of an Event of Default, each Participant
shall, to the maximum extent permitted by applicable law, be deemed to have the
right of set-off in respect of its participating interest in amounts owing
under this Agreement to the same extent as if the amount of its participating
interest were owing directly to it as a Bank under this Agreement, provided
that, in purchasing such participating interest, such Participant shall be
deemed to have agreed to share with the Bank the proceeds thereof as provided
in subsection 8.7(a) as fully as if it were the Bank hereunder. The Borrowers
also agree that each Participant shall be entitled to the benefits of
subsections 2.23, 2.24, 2.25 (Requirements of Law, Taxes and Indemnity) with
respect to its participation in the Commitment and the Loans, L/C Obligations
and Acceptances outstanding from time to time as if it was a Bank; provided
that, in the case of subsection 2.24 (Taxes), such Participant shall have
complied with the requirements of said subsection and provided, further, that
no
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Participant shall be entitled to receive any greater amount pursuant to any
such subsection than the Bank would have been entitled to receive in respect of
the amount of the participation transferred by the Bank to such Participant had
no such transfer occurred.
(c) The Bank may, in the ordinary course of its
commercial banking business and in accordance with applicable law, with the
consent of Brookwood, which shall not be unreasonably withheld, at any time and
from time to time assign to another bank or financial institution (an
"Assignee") all or any part of its rights and obligations under this Agreement
and the other Loan Documents pursuant to an Assignment and Acceptance,
substantially in the form of Exhibit J executed by such Assignee, and delivered
to the Bank for its acceptance and recording in the Register. Upon such
execution, delivery, acceptance and recording, from and after the effective
date determined pursuant to such Assignment and Acceptance, (x) the Assignee
thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of the Bank
hereunder with a portion of the Commitment as set forth therein, and (y) the
Bank shall, to the extent provided in such Assignment and Acceptance, be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of the Bank's
rights and obligations under this Agreement, the Bank shall cease to be a party
hereto).
(d) The Bank, on behalf of the Borrowers, shall maintain
at the address of the Bank referred to in subsection 8.2 a copy of each
Assignment and Acceptance and a register (the "Register") for the recordation
of the principal amounts of the Loans and other obligations hereunder owing to
the Bank and any Assignees from time to time. The entries in the Register
shall be conclusive, in the absence of manifest error, and the Borrowers and
the Bank may treat each Person whose name is recorded in the Register as the
owner of a Loan or other obligation hereunder as the owner thereof for all
purposes of this Agreement and the other Loan Documents, notwithstanding any
notice to the contrary. The Register shall be available for inspection by the
Borrowers at any reasonable time and from time to time upon reasonable prior
notice.
(e) Upon its receipt of an Assignment and Acceptance
executed by the Bank and an Assignee, the Bank shall on the effective date
determined pursuant thereto record the information contained therein in the
Register and give notice of such recordation to the Borrowers.
(f) The Borrowers authorize the Bank to disclose to any
Participant or Assignee (each, a "Transferee") and any prospective Transferee
any and all financial information in the Bank's possession concerning the
Borrowers and their Affiliates which has been delivered to the Bank by or on
behalf of the Borrowers pursuant to this Agreement or which has been delivered
to the Bank by or on behalf of the Borrowers in connection with the Bank's
credit evaluation of the Borrowers and its Affiliates prior to becoming a party
to this Agreement.
(g) For avoidance of doubt, the parties to this Agreement
acknowledge that the provisions of this subsection concerning assignments of
Loans and other obligations
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<PAGE> 60
hereunder relate only to absolute assignments and that such provisions do not
prohibit assignments creating security interests, including, without
limitation, any pledge or assignment by the Bank of any Loan or the Revolving
Credit Note to any Federal Reserve Bank in accordance with applicable law.
8.7 Adjustments; Set-off. In addition to any rights and
remedies of the Bank provided by law, the Bank shall have the right, without
prior notice to the Borrowers, any such notice being expressly waived by the
Borrowers to the extent permitted by applicable law, upon any amount becoming
due and payable by the Borrowers hereunder (whether at the stated maturity, by
acceleration or otherwise) to set-off and appropriate and apply against such
amount any and all deposits (general or special, time or demand, provisional or
final), in any currency, and any other credits, indebtedness or claims, in any
currency, in each case whether direct or indirect, absolute or contingent,
matured or unmatured, at any time held or owing by the Bank or any branch or
agency thereof to or for the credit or the account of the Borrowers. The Bank
agrees promptly to notify the Borrowers after any such set-off and application
made by the Bank, provided that the failure to give such notice shall not
affect the validity of such set-off and application.
8.8 Counterparts. This Agreement may be executed by one
or more of the parties to this Agreement on any number of separate counterparts
(including by facsimile transmission), and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
8.9 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.
8.10 Integration. This Agreement and other Loan Documents
represent the agreement of the Borrowers and the Bank with respect to the
subject matter hereof, and there are no promises, undertakings, representations
or warranties by the Bank relative to subject matter hereof not expressly set
forth or referred to herein or in the other Loan Documents.
8.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT
REGARD TO CONFLICT OF LAW PRINCIPLES.
8.12 Submission To Jurisdiction; Waivers. Each Borrower
hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal
action or proceeding relating to this Agreement and the other Loan
Documents to which it is a party, or for recognition and enforcement
of any judgment in respect thereof, to the non-exclusive
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<PAGE> 61
general jurisdiction of the courts of the State of New York located in
New York City, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be
brought in such courts and waives any objection that it may now or
hereafter have to the venue of any such action or proceeding in any
such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such Borrower at the address set forth in subsection 8.2
or at such other address of which the Bank shall have been notified
pursuant there to;
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or
shall limit the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or
proceeding referred to in this subsection any special, exemplary,
punitive or consequential damages.
8.13 Acknowledgments. Each Borrower hereby acknowledges
that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the other Loan Documents;
(b) the Bank has no fiduciary relationship with or duty
to the Borrowers arising out of or in connection with this Agreement
or any of the other Loan Documents, and the relationship between the
Bank, on one hand, and the Borrowers, on the other hand, in connection
herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other
Loan Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Bank and the Borrowers.
8.14 WAIVERS OF JURY TRIAL. THE BORROWERS AND THE BANK
HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION
OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN.
8.15 Confidentiality. The Bank agrees to keep
confidential any written or oral information (a) provided to it by or on behalf
of any of the Borrowers or any of their
57
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Subsidiaries pursuant to or in connection with this Agreement or (b) obtained
by the Bank based on a review of the books and records of the Borrowers or any
of their Subsidiaries; provided that nothing herein shall prevent the Bank from
disclosing any such information (i) to any Transferee which receives such
information having been made aware of the confidential nature thereof, (ii) to
its employees, directors, agents, attorneys, accountants and other professional
advisors, (iii) upon the request or demand of any Governmental Authority having
jurisdiction over the Bank, (iv) in response to any order of any court or other
Governmental Authority or as may otherwise be required pursuant to any
Requirement of Law, (v) which has been publicly disclosed other than in breach
of this Agreement, or (vi) in connection with the exercise of any remedy
hereunder.
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<PAGE> 63
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
THE BORROWERS:
-------------
BROOKWOOD COMPANIES INCORPORATED
By: /s/ Duane O. Schmidt
------------------------------
Name: Duane O. Schmidt
Title: V.P. Finance
KENYON INDUSTRIES, INC.
By: /s/ Duane O. Schmidt
------------------------------
Name: Duane O. Schmidt
Title: Treasurer
BROOKWOOD LAMINATING, INC.
By: /s/ Duane O. Schmidt
------------------------------
Name: Duane O. Schmidt
Title: Treasurer
THE BANK:
--------
THE BANK OF NEW YORK
By: /s/ Ronald Pagoto
------------------------------
Name: Ronald Pagoto
Title: Vice President
59
<PAGE> 1
EXHIBIT 10.22
FINANCIAL CONSULTING AGREEMENT
THIS FINANCIAL CONSULTING AGREEMENT (the "Agreement"), made and
entered into as of the 31st day of December, 1996, by and between THE HALLWOOD
GROUP INCORPORATED, a Delaware corporation ("Hallwood Group") and HSC FINANCIAL
CORPORATION, a Liberian corporation (the "Consultant").
RECITALS
Hallwood Group is engaged in numerous international activities and
shall from time to time require the financial knowledge and expertise of the
Consultant or its agents in regard to various transactions between Hallwood
Group and its affiliates, and any third parties (Hallwood Group and its
affiliated entities are sometimes referred to in this Agreement as the
"Hallwood Companies");and
The Hallwood Companies desire to draw upon and benefit from the
financial knowledge and expertise of Consultant or its agents, and the
Consultant desires to consult with the Hallwood Companies and be available
therefor and the Consultant is willing to undertake and to perform various
duties for the Hallwood Companies.
AGREEMENT
In consideration of the mutual undertakings and agreements contained
in this Agreement and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Appointment. Hallwood Group agrees to appoint the Consultant
and the Consultant agrees to accept such appointment and undertakes to advise
and consult with Hallwood Group upon the terms and conditions set forth in this
Agreement.
2. Duties of the Consultant.
2.1 General Duties. The Consultant shall furnish and
perform international consulting and advisory services to the Hallwood
Companies to enable such entities to: (i) render assistance in strategic
planning; and (ii) effect acquisitions by the Hallwood Companies of assets or
mergers of the Hallwood Companies with other entities and shall perform such
services in or from Monaco, Antigua, or such other jurisdictions as Consultant
or its agents may, in their sole discretion, deem appropriate, and neither
Consultant nor any agent of Consultant shall be obligated to provide any such
services, or otherwise engage in any business of any nature whatsoever, in the
United States or the United Kingdom. In particular, the Consultant's duties
and obligations hereunder shall include: (a) performing such duties at such
times and in such manner as shall be mutually agreeable to Hallwood Group and
the Consultant, although at all times the Consultant will retain control over
how such services are performed and who the Consultant will hire to
<PAGE> 2
perform such services; (b) reporting to Hallwood Group and any other entity
designated by Hallwood Group, as needed, to fulfill its obligations regarding
the rendition of international strategic and consulting advice; and (c)
observing and complying with all resolutions, regulations and directions from
time to time made or given by Hallwood Group as long as such resolutions,
regulations and directions do not interfere with the manner in which Consultant
performs its duties.
2.2 Relationship of the Parties. In performing its
services under this Agreement, the Consultant shall be an independent
contractor and, as between Hallwood Group and the Consultant, neither Hallwood
Group nor any other of the Hallwood Companies shall be responsible for
withholding, collection or payment of income taxes or for other taxes of any
nature on behalf of the Consultant or any agent of Consultant. Nothing
contained in this Agreement shall make the Consultant the agent, employee,
joint venturer or partner of the Hallwood Companies or provide the Consultant
with the power or authority to bind the Hallwood Companies to any contract,
agreement or arrangement with any individual or entity except with the prior
written approval of such entities.
3. Nondisclosure and Confidentiality. The Consultant understands
that it has developed and been exposed to, or may develop or be exposed to
highly confidential information and trade secrets of the Hallwood Companies,
including, without limitation, geological and geophysical data and analysis,
discoveries, well logs, drilling techniques, drilling locations, drilling
results, acquisitions, technical studies, appraisals, future plans and
strategies, tenants, rent rolls, business procedures, agreements, financial
data and records (collectively, "Confidential Information"), and that
maintenance by the Hallwood Companies of their proprietary Confidential
Information to the fullest extent possible is extremely important.
Accordingly, the Consultant covenants that, except with the prior written
consent of Hallwood Group, it shall at all times keep confidential and not
divulge, furnish or make accessible to anyone (except Hallwood Group's
authorized representatives), any confidential information to which the
Consultant has been or shall become privy relating to the business of Hallwood
Group, or any of its affiliates. The provisions of this Section 3 shall not
apply to any information to the extent (i) it is or shall become generally
known to the public or the trade (without the commission of a tortious act),
(ii) it is or shall become available in trade or other publications, (iii) the
Consultant is required by law to disclose such information to any person, or
(iv) that agents of Consultant need such information to assist Consultant with
the performance of its duties hereunder. With respect to clause (iv), however,
Consultant agrees to indemnify the Energy Companies to the extent any agent of
Consultant violates any provision contained in this Section 3. Upon
termination of the Consultant's appointment for any reason, or if earlier
required by the Hallwood Companies, the Consultant agrees to return to the
Hallwood Companies all copies of any documents or items previously provided to
Consultant and/or its agents containing any Confidential Information.
4. Certain Payments. The Consultant acknowledges that it is
aware of the provision of United States law relating to prohibitions of any
person representing a United States company from, directly or indirectly,
giving anything of value to any foreign official to influence the foreign
official in directing or agreeing to do business with the United States firm.
In addition, the Consultant acknowledges that it has read the Statement of
Company Policy of the Hallwood
2
<PAGE> 3
Entities regarding payment of gifts to foreign officials that has previously
been supplied to the Consultant. The Consultant hereby undertakes to abide by
such laws and policy and will not use any part of the amounts paid under this
Agreement or any payments that are prohibited under such laws or policy.
5. Term. The services of the Consultant under this Agreement
shall commence on the date of execution of this Agreement (the "Commencement
Date") and shall continue thereafter until July 31, 1998, unless earlier
terminated as provided in this Agreement (the "Term"); provided, however, that
this Agreement shall automatically renew for an additional one (1) year period
(the "Renewal Term") commencing on the expiration of the Term or any Renewal
Term, as the case may be, on the same terms and conditions provided for in this
Agreement, except as may otherwise be agreed upon in writing by the parties,
until this Agreement is terminated pursuant to its terms. Either party may
give written notice to the other of its election not to renew this Agreement,
which written election must be given not less than 30 days prior to the
expiration of the Term or any Renewal Term, as the case may be.
6. Compensation.
A. As compensation for the Consultant's services, Hallwood Group
agrees to pay to the Consultant an annual fee of Eight Hundred Twenty Five
Thousand Dollars ($825,000), payable in monthly installments of Sixty Eight
Thousand Seven Hundred Fifty Dollars ($68,750) on the first day of each month.
B. The amounts paid pursuant to paragraph A of this section shall
be a nonrefundable advance against any fees, commissions or other payments
payable to Consultant in the future for services rendered by Consultant in
connection with any transactions between the Hallwood Companies and any third
party.
C. Hallwood Group and the Consultant hereby acknowledge and agree
that all amounts payable pursuant to paragraph A of this section are to be paid
as a retainer to secure, for the benefit of the Hallwood Companies, the
availability of the Consultant to perform the services referred to in Section 3
of this Agreement. Consequently, all amounts so payable shall be so payable,
without offset, withholding or any deduction of any nature whatsoever, whether
or not any services are performed at any time, except as provided in paragraph
B of this section.
D. Hallwood Group shall reimburse Consultant for all reasonable
and ordinary out-of-pocket business expenses Consultant reasonably incurs in
the performance of its duties under this Agreement.
7. Termination. Either party may terminate this Agreement at any
time upon the following events: (i) any act of dishonesty on the part of one
party resulting or intended to result directly or indirectly in personal gain
or benefit at the expense of the other party or material damage of or to
property of the other party; (ii) any act of fraud, misappropriation,
embezzlement or willful misconduct by either party or (iii) the willful breach
or repeated, habitual neglect by
3
<PAGE> 4
either party of its duties under this Agreement. In all other events, this
Agreement may not be terminated at the will of either party until the projects
assigned under this Agreement have been completed.
8. Assignment. Neither party hereto may assign, without the
other party's prior written consent, this Agreement, or any right or obligation
hereunder, and any and all assignments without such prior written consent shall
be null and void, except that with the consent of Hallwood Group the Consultant
may designate agents to perform its obligations under this Agreement.
9. Miscellaneous.
(a) Notices. Any notice to be given hereunder is to be given in
writing by either party to the other and delivered or sent by prepaid airmail
post or facsimile transmission addressed to the address of the addresses set
forth opposite each party's name below or such other address as may be notified
by one party to the other for such purposes and shall be deemed to be served in
the case of airmail post three days after posting and in the case of facsimile
transmission immediately upon successful transmission.
(b) Headings; Pronouns. The headings of the paragraphs of this
Agreement are for convenience of reference only and are not to be considered
and construed in this Agreement. When the context so requires in this
Agreement, the masculine gender includes the feminine and neuter, and the
singular number includes the plural, and vice versa.
(c) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
(d) Governing Law; Venue. This Agreement shall be governed by and
construed in accordance with the laws of Texas and the parties agree to submit
themselves to the jurisdiction of Texas.
(e) Counterparts. This Agreement may be executed in multiple
counterparts, all of which shall be deemed originals, but which counterparts
shall constitute one and the same instrument.
(f) Binding Agreement. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective successors and assigns.
Whenever a reference to any party is made herein, such reference shall be
deemed to include a reference to the heirs, executors, legal representatives,
successors and assigns of such party.
4
<PAGE> 5
(g) Entire Agreement. This Agreement contains the entire
agreement between the parties hereto with respect to the subject matter hereof.
No variations, modifications or changes herein or hereof shall be binded upon
any party unless set forth in a document duly executed by or on behalf of such
party.
(h) Amendments. This Agreement may not be modified, altered,
amended, waived or terminated orally, unless in writing signed by the parties
hereto.
* * * * *
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement as of the date first above written.
HALLWOOD GROUP:
Address: THE HALLWOOD GROUP INCORPORATED
3710 Rawlins
Suite 1500
Dallas, Texas 75219 By: /s/ Melvin J. Melle
-------------------------------------
Name: Melvin J. Melle
-----------------------------------
Title: Vice-President
----------------------------------
CONSULTANT:
Address: HSC FINANCIAL CORPORATION
24, Avenue Princesse Grace
Monte-Carlo MC98000
Principality of Monaco By: /s/ Anthony J. Gumbiner
-------------------------------------
Name: Anthony J. Gumbiner
-----------------------------------
Title: President
----------------------------------
6
<PAGE> 1
EXHIBIT 10.23
FINANCIAL CONSULTING AGREEMENT
This Financial Consulting Agreement ("Agreement"), is made and entered
into as of December 31, 1996 by and between Hallwood Petroleum, Inc. ("HPI"),
and The Hallwood Group Incorporated ("Consultant").
RECITALS
HPI is engaged in numerous international activities and shall from
time to time require the financial knowledge and expertise of the Consultant or
its agents in regard to various transactions between Hallwood Energy Partners,
L.P., a Delaware limited partnership (the "Partnership"), HEPGP Ltd.("HEPGP"),
the general partner of the Partnership, Hallwood Consolidated Resources
Corporation, a Delaware corporation ("HCRC"), or their affiliates, and any
third parties (collectively, the "Energy Companies"); and
The Energy Companies desire to draw upon and benefit from the
international financial knowledge and expertise of Consultant or its agents,
the Consultant desires to consult with the Energy Companies and be available
therefor, and the Consultant is willing to undertake and to perform various
duties for HPI.
AGREEMENT
In consideration of the mutual benefits to be derived from this
Agreement and the covenants and agreements set forth herein, the receipt and
sufficiency of which are acknowledged by the execution and delivery hereof, the
parties agree as follows:
1. Appointment. HPI agrees to appoint the Consultant and the
Consultant agrees to accept such appointment and undertakes to advise and
consult with HPI upon the terms and conditions set forth in this Agreement.
2. Duties of the Consultant.
2.1 General Duties. The Consultant shall furnish and
perform international consulting and advisory services to the Energy
Companies to enable such entities to: (i) render assistance in
strategic planning; and (ii) effect acquisitions by the Energy
Companies of oil and gas interests or mergers of the Energy Companies
with other entities and shall perform such services in or from Monaco
or Antigua, or such other jurisdiction(s) as Consultant or its agents
may, in their sole discretion, deem appropriate, and neither
Consultant nor any agent of Consultant shall be obligated to provide
any such services, or otherwise engage in any business of any nature
whatsoever, in the United States or the United Kingdom. In
particular, the Consultant's duties and obligations hereunder shall
include: (a) performing such duties at such times and in such manner
as shall be mutually agreeable to HPI and the Consultant, although at
all times the Consultant
<PAGE> 2
will retain control over how such services are performed and who the
Consultant will hire to perform such services; (b) reporting to HPI
and any other entity designated by HPI, as needed, to fulfill its
obligations regarding the rendition of international strategic and
consulting advice; and (c) observing and complying with all
resolutions, regulations and directions from time to time made or
given by HPI as long as such resolutions, regulations and directions
do not interfere with the manner in which Consultant performs its
duties.
2.2 Relationship of the Parties. In performing its
services under this Agreement, the Consultant shall be an independent
contractor and, as between HPI and the Consultant, neither HPI nor any
other of the Energy Companies shall be responsible for withholding,
collection or payment of income taxes or for other taxes of any nature
on behalf of the Consultant or any agent of Consultant. Nothing
contained in this Agreement shall make the Consultant the agent,
employee, joint venturer or partner of the Energy Companies or provide
the Consultant with the power or authority to bind the Energy
Companies to any contract, agreement or arrangement with any
individual or entity except with the prior written approval of such
entities.
3. Nondisclosure and Confidentiality. The Consultant understands
that it has developed and been exposed to, or may develop or be exposed to
highly confidential information and trade secrets of HPI and the other Energy
Companies and, including, without limitation, geological and geophysical data
and analysis, discoveries, well logs, drilling techniques, drilling locations,
drilling results, land acquisitions, technical studies, future plans and
strategies (collectively, "Confidential Information"), and that maintenance by
HPI and the other Energy Companies of their proprietary Confidential
Information to the fullest extent possible is extremely important.
Accordingly, the Consultant covenants that, (a) except with the prior written
consent of the Partnership, it shall at all times keep confidential and not
divulge, furnish or make accessible to anyone (except HEPGP's or the
Partnership's authorized representatives), any confidential information to
which the Consultant has been or shall become privy relating to the business of
the Partnership, the Partnership or any of its affiliates and, (b) except with
the prior written consent of HCRC, it shall at all times keep confidential and
not divulge, furnish or make accessible to anyone (except HCRC's authorized
representatives), any confidential information to which the Consultant has been
or shall become privy relating to the business of HCRC or any of its
affiliates. The provisions of this Section 3 shall not apply to any
information to the extent (i) it is or shall become generally known to the
public or the trade (without the commission of a tortious act), (ii) it is or
shall become available in trade or other publications, (iii) the Consultant is
required by law to disclose such information to any person, or (iv) that agents
of Consultant need such information to assist Consultant with the performance
of its duties hereunder. With respect to clause (iv), however, Consultant
agrees to indemnify the Energy Companies to the extent any agent of Consultant
violates any provision contained in this Section 3. Upon termination of the
Consultant's appointment for any reason, or if earlier required by HPI, the
Consultant agrees to return to HPI all copies of any documents or items
previously provided to Consultant and/or its agents containing any Confidential
Information.
4. Certain Payments. The Consultant acknowledges that it is
aware of the provision of United States law relating to prohibitions of any
person representing a United States company
2
<PAGE> 3
from, directly or indirectly, giving anything of value to any foreign official
to influence the foreign official in directing or agreeing to do business with
the United States firm. In addition, the Consultant acknowledges that it has
read the Statement of Company Policy of HPI regarding payment of gifts to
foreign officials that has previously been supplied to the Consultant. The
Consultant hereby undertakes to abide by such laws and policy and will not use
any part of the amounts paid under this Agreement or any payments that are
prohibited under such laws or policy.
5. Term. The services of the Consultant under this Agreement
shall commence on the date of execution of this Agreement (the "Commencement
Date") and shall continue thereafter until June 30, 2000, unless earlier
terminated as provided in this Agreement (the "Term"); provided, however, that
this Agreement shall automatically renew for successive additional three (3)
year periods (each, a "Renewal Term") commencing on the expiration of the Term
or any Renewal Term, as the case may be, on the same terms and conditions
provided for in this Agreement, except as may otherwise be agreed upon in
writing by the parties, until this Agreement is terminated pursuant to its
terms. Either party may give written notice to the other of its election not
to renew this Agreement, which written election must be given not less than 30
days prior to the expiration of the Term or any Renewal Term, as the case may
be.
6. Compensation.
A. As compensation for services rendered by the Consultant
hereunder, HPI shall pay to the Consultant an annual fee of Five Hundred Fifty
Thousand Dollars ($550,000), due and payable in installments of Forty Five
Thousand Eight Hundred Thirty Three Dollars and Thirty Three Cents on the first
day of each month.
B. The amounts paid pursuant to paragraph A of this section shall
be a nonrefundable advance against any fees, commissions or other payments
payable to Consultant in the future for services rendered by Consultant in
connection with any transactions between the HPI and any third party.
C. HPI and the Consultant hereby acknowledge and agree that all
amounts payable pursuant to paragraph A of this section are to be paid as a
retainer to secure, for the benefit of the Hallwood Companies, the availability
of the Consultant to perform the services referred to in Section 3 of this
Agreement. Consequently, all amounts so payable shall be so payable, without
offset, withholding or any deduction of any nature whatsoever, whether or not
any services are performed at any time, except as provided in paragraph B of
this section.
D. HPI shall reimburse Consultant for all reasonable and ordinary
out-of-pocket business expenses Consultant reasonably incurs in the performance
of its duties under this Agreement.
7. Termination. Either party may terminate this Agreement at any
time upon the following events: (i) any act of dishonesty on the part of one
party resulting or intended to result directly or indirectly in personal gain
or benefit at the expense of the other party or material damage of or to
property of the other party; (ii) any act of fraud, misappropriation,
embezzlement
3
<PAGE> 4
or willful misconduct by either party or (iii) the willful breach or repeated,
habitual neglect by either party of its duties under this Agreement. In all
other events, this Agreement may not be terminated at the will of either party
until the projects assigned under this Agreement have been completed.
8. Assignment. Neither party hereto may assign, without the
other party's prior written consent, this Agreement, or any right or obligation
hereunder, and any and all assignments without such prior written consent shall
be null and void, except that with the consent of Hallwood Group the Consultant
may designate agents to perform its obligations under this Agreement.
9. Miscellaneous.
(a) Notices. Any notice to be given hereunder is to be given in
writing by either party to the other and delivered or sent by prepaid airmail
post or facsimile transmission addressed to the address of the addresses set
forth opposite each party's name below or such other address as may be notified
by one party to the other for such purposes and shall be deemed to be served in
the case of airmail post three days after posting and in the case of facsimile
transmission immediately upon successful transmission.
(b) Headings; Pronouns. The headings of the paragraphs of this
Agreement are for convenience of reference only and are not to be considered
and construed in this Agreement. When the context so requires in this
Agreement, the masculine gender includes the feminine and neuter, and the
singular number includes the plural, and vice versa.
(c) Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provisions had never been contained herein.
(d) Governing Law; Venue. This Agreement shall be governed by and
construed in accordance with the laws of Texas and the parties agree to submit
themselves to the jurisdiction of Texas.
(e) Counterparts. This Agreement may be executed in multiple
counterparts, all of which shall be deemed originals, but which counterparts
shall constitute one and the same instrument.
(f) Binding Agreement. This Agreement shall inure to the benefit
of and be binding upon the parties and their respective successors and assigns.
Whenever a reference to any party is made herein, such reference shall be
deemed to include a reference to the heirs, executors, legal representatives,
successors and assigns of such party.
4
<PAGE> 5
(g) Entire Agreement. This Agreement contains the entire
agreement between the parties hereto with respect to the subject matter hereof.
No variations, modifications or changes herein or hereof shall be binded upon
any party unless set forth in a document duly executed by or on behalf of such
party.
(h) Amendments. This Agreement may not be modified, altered,
amended, waived or terminated orally, unless in writing signed by the parties
hereto.
* * * * *
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and date above first written.
CONSULTANT:
Address: THE HALLWOOD GROUP INCORPORATED
3710 Rawlins
Suite 1500
Dallas, Texas 75219 By: /s/ Melvin J. Melle
-------------------------------
Melvin J. Melle, Vice President
HPI:
Address: HALLWOOD PETROLEUM, INC.
4582 S. Ulster Street Parkway
Suite 1700
Denver, Colorado 80237 By: /s/ William L. Guzzetti
------------------------------
William L. Guzzetti, President
6
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR FIVE MONTHS
ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ---------------------
1996 1995 1995 1994
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
PRIMARY
AVERAGE COMMON SHARES OUTSTANDING................ 1,329 1,331 1,374 1,372
INCOME (LOSS):
Income (loss) before extraordinary gain........ $6,523 $(3,290) $(4,947) $(5,038)
Extraordinary gain from extinguishment of
debt........................................ -- 25 143 648
------ ------- ------- -------
Net Income (Loss).............................. 6,523 (3,265) (4,804) (4,390)
Less: Dividends on redeemable preferred
stock....................................... (50) -- -- --
------ ------- ------- -------
Net Income (Loss) available to common
stockholders................................ $6,473 $(3,265) $(4,804) $(4,390)
====== ======= ======= =======
PER COMMON SHARE:
Income (loss) before extraordinary gain........ $ 4.87 $ (2.47) $ (3.60) $ (3.67)
Extraordinary gain from extinguishment of
debt........................................ -- 0.02 0.10 0.47
------ ------- ------- -------
Net Income (Loss).............................. $ 4.87 $ (2.45) $ (3.50) $ (3.20)
====== ======= ======= =======
</TABLE>
FULLY DILUTED
Same as Primary Per Share Earnings
<PAGE> 1
EXHIBIT 22
ACTIVE SUBSIDIARIES OF THE REGISTRANT
AS OF FEBRUARY 28, 1997
<TABLE>
<CAPTION>
NAME STATE OR COUNTRY
---- ----------------
<S> <C>
Brookwood Companies Incorporated and subsidiaries........... Delaware
HEPGP Ltd................................................... Colorado
HSC Securities Corporation.................................. Delaware
HWG Realty Investors, Inc. and subsidiary................... Delaware
Hallwood Commercial Real Estate, Inc........................ Delaware
Hallwood G.P., Inc.......................................... Delaware
Hallwood Hotels, Inc........................................ Delaware
Hallwood-Integra Holding Company and subsidiaries........... Delaware
Hallwood Investment Company................................. Grand Cayman Island
Hallwood Realty Corporation................................. Delaware
Integra Resort Management, Inc.............................. Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,495
<SECURITIES> 23,952
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 17,188
<CURRENT-ASSETS> 0
<PP&E> 154,580
<DEPRECIATION> (121,254)
<TOTAL-ASSETS> 116,796
<CURRENT-LIABILITIES> 0
<BONDS> 50,564
1,000
0
<COMMON> 160
<OTHER-SE> 5,624
<TOTAL-LIABILITY-AND-EQUITY> 116,796
<SALES> 0
<TOTAL-REVENUES> 115,401
<CGS> 0
<TOTAL-COSTS> 105,094
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (21)
<INTEREST-EXPENSE> 8,330
<INCOME-PRETAX> 1,998
<INCOME-TAX> (4,525)
<INCOME-CONTINUING> 6,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,523
<EPS-PRIMARY> 4.87
<EPS-DILUTED> 4.87
</TABLE>
