<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, 1997 Commission File Number: 1-8303
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
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)
Registrant's telephone number, including area code: (214) 528-5588
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock ($.10 par value) New York Stock Exchange
7% Collateralized Senior Subordinated Debentures Due New York Stock Exchange
July 31, 2000
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
$33.25 per share on March 13, 1998 on the New York Stock Exchange, was
$16,333,000.
1,255,000 shares of Common Stock, $.10 par value per share, were
outstanding at March 13, 1998.
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, 1997.
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FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I
<S> <C> <C>
Item 1. Business............................................................................... 2
Item 2. Properties............................................................................. 5
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 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..................................... 17
Item 11. Executive Compensation................................................................. 17
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 17
Item 13. Certain Relationships and Related Transactions......................................... 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 18
</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
its initial real estate portfolio and, through its merchant banking activities,
acquired substantial investment positions in a number of previously unaffiliated
enterprises. By the early 1990's the Company had become a diversified holding
company engaged in three principal activities: asset management, operating
subsidiaries and investments in associated companies. In March 1997, the Company
sold its investment in ShowBiz Pizza Time, Inc. ("ShowBiz"), which was its
remaining investment in the associated company segment. Accordingly, the Company
and its operating subsidiaries are currently engaged in the commercial and
industrial real estate, energy, textile products and hotel businesses and for
financial reporting purposes considers itself to operate in four business
segments: real estate, energy, textile products and hotels. 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. Financial
information for each industry segment in which the Company operates is set forth
in Note 18 to the Company's consolidated financial statements.
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"). 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 25% limited partner interest in HRP. HRC is responsible for
asset management of HRP and its properties, including the decision making
responsibility for financing, acquiring and disposing of properties. In
addition, HRC provides general operating and administrative services to HRP. At
December 31, 1997, HRP owned twelve commercial properties in six states, of
which seven are office building properties and five are industrial park
properties containing approximately 2,608,000 and 2,554,000 net rentable square
feet, respectively. HCRE is responsible for on-site property management at all
HRP properties and properties it manages for third parties for which it receives
managing, leasing and construction supervision fees.
The Company and its subsidiaries account for their ownership in HRP using
the equity method of accounting, recording their proportionate share of net
income (loss) and partners capital transactions reported by HRP. The December
31, 1997 financial statements of HRP are included elsewhere within this
document.
Real estate accounted for 5% of the Company's total revenues in the year
ended December 31, 1997, compared to 3% in the year ended December 31, 1996, 3%
in the five months ended December 31, 1995, and 4% in the year ended July 31,
1995.
See Note 12 to the Company's consolidated financial statements.
Energy. Energy operations were consolidated beginning in May 1990, when the
Company increased its ownership of Hallwood Energy Corporation ("HEC") from 11%
to 53%, and thereafter, accounted for HEC 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,
and consists of the development, production and sale of oil and gas, and 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
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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%. At December 31, 1997, the Company also held
an approximate 6.5% ownership of HEP, consisting of 5.1% of HEP's Class A
limited partner units and 100% of HEP's Class B limited partner units.
Additionally, the Company held 6.6% of HEP's preferential Class C limited
partner units (1.8% following a public offering of Class C units completed in
February 1998).
HEP owns interests in approximately 1,300 wells, the most significant of
which are located in West Texas, South Louisiana, New Mexico and the Rocky
Mountain region. 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.
Energy accounted for 4% of the Company's total revenues in the year ended
December 31, 1997, compared to 7% in the year ended December 31, 1996, 8% in the
five months ended December 31, 1995, and 5% in the year ended July 31, 1995.
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.
Textile products accounted for 62% of the Company's total revenues in the
year ended December 31, 1997, compared to 67% in the year ended December 31,
1996, 69% in the five months ended December 31, 1995, and 69% in the year ended
July 31, 1995.
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
the Longboat Key Holiday Inn, Sarasota, Florida and the Airport Embassy Suites,
Oklahoma City, Oklahoma, (ii) fee interests in Residence Inns located in Tulsa,
Oklahoma and Greenville, South Carolina, and (iii) 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 fiscal 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 such standards.
Hotel revenues accounted for 14% of the Company's total revenues in the
year ended December 31, 1997, compared to 18% in the year ended December 31,
1996, 20% in the five months ended December 31, 1995, and 22% in the year ended
July 31, 1995.
Associated Company. The Company is no longer engaged in the associated
company segment, as its entire remaining ShowBiz investment was sold in March
1997 through a secondary public offering by ShowBiz for $41,285,000 in cash
resulting in an $18,277,000 gain. The Company had accounted for its investment
in ShowBiz on the equity method. At December 31, 1996, Hallwood's investment in
associated company consisted solely of its stock investment in ShowBiz.
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Associated company income accounted for 13% of the Company's total revenues
in the year ended December 31, 1997, compared to 4% in the year ended December
31, 1996 and net losses in the five months ended December 31, 1995 and fiscal
year ended July 31, 1995.
See Note 2 to the Company's consolidated financial statements.
Competition. The Company's real estate operations are subject to
substantial competition from other entities which own similar properties in the
vicinity in which HRP's properties 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 the Company and
HRP will compete, including companies substantially larger and with 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 Company and its energy affiliates encounter competition from other oil
and gas companies in all areas of their operations, including the acquisition of
exploratory prospects and proven properties. Competitors include major
integrated oil and gas companies and numerous independent oil and gas companies,
individuals and drilling and income programs. 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. In
addition, oil and gas must compete with coal, atomic energy, hydro-electric
power and other forms of energy. In response to volatility, the Company enters
into financial contracts for hedging the price of a portion of its oil and gas
production.
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 weak 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, 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.
Number of Employees. The Company had 994 and 1,020 employees as of February
28, 1998 and 1997, respectively, comprised as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1998 1997
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<S> <C> <C>
Hallwood.......................................................... 5 4
Brookwood......................................................... 387 389
Hotel subsidiaries................................................ 373 392
HPI............................................................... 123 127
HCRE.............................................................. 88 88
HRC............................................................... 18 20
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Total........................................................ 994 1,020
=== =====
</TABLE>
A substantial amount of the salaries and related costs for the employees of
HCRE, HRC and Hallwood Petroleum, Inc. ("HPI"), an affiliate of HEPGP, are
reimbursed by the respective real estate and energy partnership affiliates.
4
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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, 1997
----------------------------------------------------
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) 8,299 -- 8,299 28
Residence Inn - Greenville, SC (2) ........... 7,351 -- 7,351 25
Residence Inn - Tulsa, OK (2) ................ 5,801 -- 5,801 20
Embassy Suites - Oklahoma City, OK (2) ....... 2,082 -- 2,082 7
Residence Inn - Huntsville, AL (1) ........... 1,385 -- 1,385 4
Parking lot - Irving, TX ..................... -- 50 50 *
---------- ---------- ------- ----------
Subtotal ................................ 24,918 50 24,968 84
---------- ---------- ------- ----------
Total ................................... $ 29,623 $ 50 $29,673 100 %
========== ========== ======= ==========
</TABLE>
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* 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------
NUMBER OF
GEOGRAPHIC DISTRIBUTION INVESTMENTS AMOUNT PERCENTAGE
- -------------------------------------------- ----------- ------- ----------
United States
<S> <C> <C> <C>
Florida ....................................... 1 $ 8,299 28 %
Oklahoma ...................................... 2 7,883 27
South Carolina ................................ 1 7,351 25
Rhode Island .................................. 1 4,705 16
Alabama ....................................... 1 1,385 4
Texas ......................................... 1 50 *
----------- ------- ----------
Total .................................... 7 $29,673 100%
=========== ======= ==========
</TABLE>
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* Less than 1%.
As of December 31, 1997, 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 a
multi-shift facility well-suited for that particular business. The development
of new products requires the plant to be constantly upgraded, along with various
levels of utilization.
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Hotel properties are operated under license and, as such, must meet and
maintain standards established by the licensor. At any time during the term of
the license, the licensor may require modernization, renovation and other
upgrading of the hotel. The Company has recently renovated the Longboat Key
Holiday Inn hotel with part of the financing provided by the owner, and has been
informed by Marriott that substantial renovations will have to be made to each
of the three Residence Inn hotels prior to the renewal of their franchise in
January 2000.
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 four regions 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,
-------------------
1997 1996
------ -----
<S> <C> <C>
Net mineral interests, includes $278 and $157, of unproved mineral
interests at December 31, 1997 and 1996, respectively.............. $9,167 $8,524
Net other property and equipment...................................... 422 404
------ ------
Oil and gas properties, net........................................... $9,589 $8,928
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
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<S> <C> <C> <C>
Development costs..................................................... $1,136 $1,321 $979
Exploration cost...................................................... 834 100 166
Property acquisition cost............................................. 354 366 247
</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 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. 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.
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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 1,242 stockholders of record as of March 13, 1998.
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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996
------------------ ------------------
QUARTERS HIGH LOW HIGH LOW
-------- ------- ------- ------ -------
<S> <C> <C> <C> <C>
First............................................ $28 3/4 $16 3/8 $14 3/8 $ 9 1/8
Second........................................... 27 3/4 24 3/8 14 5/8 13 1/4
Third............................................ 28 3/4 23 1/4 14 1/4 11 3/8
Fourth........................................... 40 1/2 29 1/8 15 7/8 13 1/2
</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 13, 1998 was $33.25.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS
DECEMBER 31, ENDED YEARS ENDED JULY 31,
------------------- DECEMBER 31, -----------------------------------
1997 1996 1995 1995 1994 1993
------- --------- --------- --------- ---------- ---------
REVENUES (IN THOUSANDS, EXCEPT PER SHARE DATA)
Asset Management
<S> <C> <C> <C> <C> <C> <C>
Real estate ............................... $ 6,922 $ 3,947 $ 1,211 $ 4,595 $ 4,399 $ 6,586
Energy (a) ................................ 6,350 7,515 3,149 5,359 6,234 8,455
Operating Subsidiaries
Textile products .......................... 91,552 77,583 28,229 77,808 71,624 70,185
Hotels (b) ................................ 21,038 20,948 8,073 24,898 20,896 17,818
Associated Companies (c) ..................... 19,416 4,448 (88) (171) 1,356 12,232
Other ........................................ 3,491 960 233 737 2,193 854
--------- --------- --------- --------- --------- ---------
148,769 115,401 40,807 113,226 106,702 116,130
EXPENSES
Asset Management
Real estate ............................... 3,351 2,329 1,343 3,244 4,287 3,969
Energy (a) ................................ 4,518 5,233 2,873 5,575 5,412 6,763
Operating Subsidiaries
Textile products........................... 89,575 76,361 28,222 77,604 70,761 68,678
Hotels (b) ................................ 21,275 20,948 8,326 22,075 20,330 17,583
Associated Companies (c) ..................... 607 1,558 310 687 486 5,057
Other ........................................ 6,888 6,974 3,322 8,158 7,737 10,007
--------- --------- --------- --------- --------- ---------
126,214 113,403 44,396 117,343 109,013 112,057
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary gain .................... 22,555 1,998 (3,589) (4,117) (2,311) 4,073
Income taxes (benefit) ....................... 9,908 (4,525) (299) 830 2,727 5,498
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary gain ...... 12,647 6,523 (3,290) (4,947) (5,038) (1,425)
Extraordinary gain from extinguishment of debt 200 -- 25 143 648 --
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) ............................ $ 12,847 $ 6,523 $ (3,265) $ (4,804) $ (4,390) $ (1,425)
========= ========= ========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE (D)
Basic ..................................... $ 9.10 $ 4.93 $ (2.45) $ (3.50) $ (3.20) $ (1.04)
Assuming dilution ......................... 8.77 4.89 (2.45) (3.50) (3.20) (1.04)
DIVIDENDS PER COMMON SHARE ................... -- -- -- -- -- --
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ..................................... 1,406 1,314 1,331 1,369 1,372 1,369
Assuming dilution ......................... 1,460 1,324 1,331 1,369 1,372 1,369
FINANCIAL CONDITION
Total assets .............................. $ 89,758 $ 116,796 $ 98,223 $ 112,375 $ 127,325 $ 138,378
Subordinated debentures ................... 24,292 50,564 48,324 48,605 49,768 52,513
Loans payable ............................. 30,186 37,342 24,794 32,731 38,054 29,323
Redeemable preferred stock ................ 1,000 1,000 1,000 1,000 -- --
Common stockholders' equity (deficit) ..... 14,171 5,784 (391) 3,323 7,977 13,760
</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 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) During Calendar 1997 the Company sold its remaining investment in ShowBiz
which constituted its associated company segment.
(d) Per share information has been adjusted for the one-for-four reverse split
of the Company's Common Stock effective June 1995 and reflects the
Company's adoption of Statement of Financial Accounting Standards No. 128
- Earnings Per Share.
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. Comparisons to the five month period ended December 31, 1995
are not meaningful, therefore management's discussion and analysis focuses on
the years ended December 31, 1997 and 1996 and the year ended July 31, 1995.
However, significant items occurring in the five month period ended December 31,
1995 are noted herein.
Results of Operations. The Company reported net income of $12,847,000 for
the year ended December 31, 1997 ("Calendar 1997"), compared to net income of
$6,523,000 for the year ended December 31, 1996 ("Calendar 1996"), and net
losses of $3,265,000 for the five months ended December 31, 1995 and $4,804,000
for the year ended July 31, 1995 ("Fiscal 1995").
Total revenue for Calendar 1997 was $148,769,000, compared to $115,401,000
for Calendar 1996, $40,807,000 for the five months ended December 31, 1995 and
$113,226,000 for Fiscal 1995.
Following is an analysis of the results of operations by asset management,
operating subsidiaries and associated company 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 $6,922,000 for Calendar 1997, $3,947,000
for Calendar 1996, $1,211,000 for the five months ended December 31, 1995 and
$4,595,000 for Fiscal 1995, respectively, include fee income, equity income
(loss) from the Company's investments in HRP, interest and discounts on the
mortgage loan portfolio and rentals.
Fee income of $6,017,000 in Calendar 1997 increased by 6%, compared to
$5,672,000 in Calendar 1996, $1,744,000 for the five months ended December 31,
1995 and $3,906,000 for Fiscal 1995. The Company's HRC subsidiary is the general
partner of HRP and earns an asset management fee and certain related fees from
HRP properties, which amounted to $465,000 for Calendar 1997, $467,000 for
Calendar 1996 and $446,000 for Fiscal 1995. The Company's HCRE subsidiary is
responsible for day-to-day on-site property management at all of HRP's
properties and properties it manages for third parties, for which HCRE receives
management fees, leasing commissions and certain other fees. HCRE's revenue was
$5,551,000 for Calendar 1997, $5,205,000 for Calendar 1996 and $3,470,000 for
Fiscal 1995. The 7% increase during Calendar 1997 was primarily due to increased
management fees from third party contracts, while the increase during Calendar
1996 compared to Fiscal 1995, was due primarily to the long term renewal of a
lease for a major tenant.
The equity income (loss) from investments in HRP represents the Company's
recognition of its pro-rata share of the income (loss) reported by HRP and
amortization of negative goodwill. The Company recorded equity income of
$900,000 in Calendar 1997, compared to equity losses of $1,731,000 for Calendar
1996, $833,000 for the five months ended December 31, 1995 and $211,000 for
Fiscal 1995. The improvement in Calendar 1997 resulted principally from HRP's
substantially lower depreciation expense, as a result of an extension of the
useful economic lives of certain building costs, effective from January 1, 1997.
The increased loss for Calendar 1996 resulted from recording its pro rata share
of losses relating to newly-acquired limited partner units in Fiscal 1995. See
Note 2 to the Company's consolidated financial statements.
Interest and discounts from mortgage loans decreased to $5,000 in Calendar
1997 and $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.
As a result of the December 1995 sale of the United Kingdom office-retail
property, the Company reported no rental income in Calendar 1997 or Calendar
1996. In the five months ended December 31, 1995 it reported $298,000, compared
to $702,000 in Fiscal 1995.
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Expenses. Real estate expenses were $3,351,000 for Calendar 1997, compared
to $2,329,000 for Calendar 1996, $1,343,000 for the five months ended December
31, 1995 and $3,244,000 for Fiscal 1995. This category includes administration
expenses, depreciation and amortization, interest, provision for losses
(recovery) and operating expenses.
Administrative expenses of $2,436,000 for Calendar 1997 increased by
$1,049,000 from $1,387,000 for Calendar 1996. Calendar 1996 administrative
expenses increased by $213,000 from $1,174,000 in Fiscal 1995. These increases
were attributable to the payment of higher leasing commissions to third party
brokers associated with leasing fee income and increased payments under HCRE's
incentive plan.
Depreciation and amortization of $674,000 for Calendar 1997 was comparable
to the Calendar 1996 amount of $673,000. The decrease from the Fiscal 1995
amount of $972,000 was due to the December 1995 sale of the office-retail
property located in the United Kingdom. Amortization expense of $672,000 for
Calendar 1997, Calendar 1996 and Fiscal 1995 relates to HRC's general partner
interest in HRP to the extent allocated to management rights.
Interest expense of $160,000, $281,000 and $639,000 for Calendar 1997,
Calendar 1996 and Fiscal 1995, respectively, relates to a $500,000 promissory
note secured by 89,269 HRP limited partner units, a promissory note in the
original amount of $1,500,000 and a term loan secured by the office-retail
property which was repaid in December 1995.
In Calendar 1997, the Company recorded a provision for loss of $81,000 in
connection with the uncollectibility of a tenant receivable deposit from the
sale of the office-retail property. The recovery of $21,000 in Calendar 1996
relates to 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. 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; 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. Energy revenues were $6,350,000 for Calendar 1997, $7,515,000 for
Calendar 1996, $3,149,000 for the five months ended December 31, 1995 and
$5,359,000 for Fiscal 1995.
After the Company's successful completion of the tender offer for the
minority shares of HEC and the subsequent merger of HEC in November 1996, 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 properties
ranging from 2% to 25%. The Company also held an approximate 6.5% interest in
HEP limited partner units at December 31, 1997. 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. HEP owns approximately 46% of
its affiliate, Hallwood Consolidated Resources Corporation ("HCRC") and accounts
for its investment in HCRC under the equity method.
Oil and gas revenues of $6,013,000 for Calendar 1997, compares to
$7,066,000 for Calendar 1996, $2,980,000 for the five months ended December 31,
1995 and $5,343,000 for Fiscal 1995. Calendar 1997 production volumes decreased
13% from Calendar 1996, due to normal production declines and the temporary
shut-in of two wells in Louisiana during the second quarter of 1997 while
workover procedures were performed. Calendar 1996 production volumes decreased
5% from Fiscal 1995 due to normal production declines. Oil prices averaged
$19.93 per barrel in Calendar 1997, compared to an average price of $20.64 in
Calendar 1996 and $16.45 in Fiscal 1995. Gas prices averaged $2.51 per mcf in
Calendar 1997, compared to $2.49 in Calendar 1996 and $1.70 in Fiscal 1995.
Other income of $337,000 for Calendar 1997, compares to $449,000 for
Calendar 1996, $169,000 for the five months ended December 31, 1995 and $16,000
for Fiscal 1995. The decrease in Calendar 1997 is due to a decrease
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in acquisition fee income, partially offset by an increase in saltwater disposal
income. The increase in Calendar 1996 is attributable to a $298,000 acquisition
fee related to HEP's operations, as well as an increase in the equity income of
HCRC, due to an increase in HEP's ownership by an additional 6% in 1996. Fiscal
1995 included a provision for impairment of oil and gas properties.
Expenses. Energy expenses of $4,518,000 for Calendar 1997, compares to
$5,233,000 for Calendar 1996, $2,873,000 for the five months ended December 31,
1995 and $5,575,000 for Fiscal 1995.
Operating expenses, which are comprised of the costs of operating wells and
production-related taxes were $1,401,000 for Calendar 1997, which represents a
$108,000 decline, or 7%, from the Calendar 1996 amount of $1,509,000. The
Calendar 1996 expenses increased by $173,000, or 13%, from the Fiscal 1995
amount of $1,336,000. The decrease in Calendar 1997 is attributable to decreased
production taxes due to the 15% decline in oil and gas revenue during 1997,
while the increase in Calendar 1996 is due to higher production taxes resulting
from the increase in oil and gas revenue.
Depreciation, depletion, amortization and impairment of properties
decreased 9% in Calendar 1997 to $1,387,000 from $1,532,000 in Calendar 1996.
The decrease is attributable to lower depletion in 1997 due to the decline in
production previously discussed. The 36% decrease in Calendar 1996 from
$2,403,000 in Fiscal 1995, resulted from lower capitalized costs during Calendar
1996 and an impairment expense of $464,000, representing HEC's pro-rata share of
HEP's write-off of its Indonesian operations in Fiscal 1995.
Administrative expenses for Calendar 1997 of $1,317,000 were comparable to
the Calendar 1996 amount of $1,314,000. Administrative expenses for Calendar
1996 decreased $211,000, or 14%, 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.
Interest expense in Calendar 1997 decreased by $43,000, or 9%, to $413,000
from the Calendar 1996 amount of $456,000, due to a decrease in the average
outstanding debt balance and a decrease in its pro rata share of HEP's interest
expense resulting from a lower debt balance. Interest expense in Calendar 1996
increased by $81,000, or 22% , from the Fiscal 1995 amount of $375,000, due to
the procurement of the Company's $2,500,000 loan in December 1996, which was
amended, restated and increased to $4,000,000 in November 1997.
Minority interest, which represented the interest of other common and
preferred shareholders in the net income (loss) of HEC, of $-0-, $422,000 and
$(64,000) for Calendar 1997, Calendar 1996 and Fiscal 1995, respectively,
fluctuated depending upon HEC's net income (loss) and percentage of minority
ownership. The minority interest was eliminated in 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.
TEXTILE PRODUCTS
Revenues. Sales of $91,552,000 increased by $13,969,000, or 18%, in
Calendar 1997, compared to $77,583,000 in Calendar 1996. The sales increase
occurred in all divisions, but principally in the distribution businesses.
Demand for Brookwood's products was much higher in Calendar 1997, compared to
lower demand in Calendar 1996. Sales decreased $225,000 in Calendar 1996,
compared to $77,808,000 in Fiscal 1995. This decrease resulted from lower
revenue at Brookwood Laminating due to weak market conditions, partially offset
by higher revenues due to continued growth of the distribution businesses.
Expenses. Total expenses increased to $89,575,000, or 17% for Calendar 1997
from $76,361,000 in Calendar 1996 and $77,604,000 in Fiscal 1995. Cost of sales
of $79,473,000 increased by $12,217,000, or 18%, in Calendar 1997, principally
due to the aforementioned sales increase. The gross profit margin was 13.2% in
Calendar 1997 compared to 13.3% in Calendar 1996. Cost of sales of $67,256,000
decreased $1,541,000, or 2%, 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. The lower gross profit margin of 11.6% in Fiscal 1995 was the
result of inefficiencies at the Kenyon finishing plant.
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Administrative and selling expenses for Calendar 1997 of $9,072,000,
increased $590,000, or 7%, compared to the Calendar 1996 amount of $8,482,000.
The increase was attributable to increased operating expenses associated with
the 18% increase in sales revenue. The Calendar 1996 amount increased by
$509,000 from the Fiscal 1995 amount of $7,973,000, 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 $407,000 increase in interest expense for Calendar 1997 to $1,030,000,
from the Calendar 1996 amount of $623,000 was the result of higher average
borrowings. Interest expense decreased $211,000 in Calendar 1996, from $834,000
in Fiscal 1995 as a result of lower average borrowings and interest rates.
HOTELS
Revenues. Sales of $21,038,000 in Calendar 1997 increased by $90,000, or
0.4%, from the Calendar 1996 amount of $20,948,000. Calendar 1997 sales were
negatively impacted by a franchise-mandated core modernization program at the
Longboat Key Holiday Inn hotel, which commenced in September 1997 and was
completed in March 1998. In Calendar 1997 hotel properties achieved a higher
average daily rate of 3.4%, while occupancy levels decreased by an average of
3.8%. Calendar 1996 sales decreased by $1,554,000, or 7%, compared to Fiscal
1995 sales of $22,502,000. The decrease was primarily attributable to the
January 1995 sale of the full service Lido Beach Holiday Inn hotel.
During Fiscal 1995 the Company sold both its fee interest in the Lido Beach
Holiday Inn hotel and two management contracts resulting in a combined gain of
$2,396,000.
Expenses. Hotel expenses were $21,275,000 for Calendar 1997, $20,948,000
for Calendar 1996, $8,326,000 for the five month period ended December 31, 1995
and $22,075,000 for Fiscal 1995, respectively.
Operating expenses of $16,990,000 for Calendar 1997 decreased by $147,000,
or 0.9%, from the Calendar 1996 amount of $17,137,000. The decline is
attributable to reduced rent for the Greenville, South Carolina Residence Inn
which was then a leasehold. Operating expenses for Calendar 1996 decreased by
$1,607,000, or 9%, from the Fiscal 1995 amount of $18,744,000. The decrease was
primarily attributable to the aforementioned sale of the Lido Beach Holiday Inn
hotel.
Depreciation and amortization expense of $2,841,000 for Calendar 1997
increased by $184,000, or 7%, from the Calendar 1996 amount of $2,657,000. The
increase is attributable to additional depreciation resulting from the May 1996
purchase of the fee interest in the Greenville Residence Inn, recent capital
expenditures at the remaining properties and the amortization of pre-operating
costs associated with activities involving management of condominium hotel
properties, offset by the full amortization of the leasehold interest for the
Oklahoma City Embassy Suite in June 1997. Depreciation and amortization
increased $228,000, or 9%, for Calendar 1996 from $2,429,000 in Fiscal 1995, due
to the aforementioned purchase of the fee interest for the Greenville Residence
Inn and significant capital improvements. Amortization expense 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
the two former management contracts.
Interest expense of $1,444,000 for Calendar 1997 increased by $290,000, or
25%, from the Calendar 1996 amount of $1,154,000, due to the procurement of a
term loan on the Greenville Residence Inn hotel in May 1996. The Company
refinanced the Tulsa and Greenville loans in the fourth quarter of Calendar 1997
at favorable interest rates. Interest expense increased $252,000, or 28%, for
Calendar 1996, from $902,000 in Fiscal 1995, due to the procurement of the
Greenville term loan, partially offset by the January 1995 payoff of the Lido
Beach Holiday Inn hotel term loan.
ASSOCIATED COMPANY
Revenues. Associated company income for Calendar 1997 of $19,416,000,
compares to the Calendar 1996 amount of $4,448,000 and a loss of $171,000 for
Fiscal 1995. Results include the Company's pro-rata share of ShowBiz results
using the equity method of accounting and gains from the sale of ShowBiz shares.
Calendar 1997 includes equity income of $1,139,000 and a gain of $18,277,000
from the March 1997 sale of the Company's remaining investment in ShowBiz. The
Company sold its 2,632,983 remaining ShowBiz shares as part of a
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ShowBiz secondary common stock offering, the proceeds of which were used to
repay debt, utilize expiring federal income tax loss carryforwards and to focus
on core investments. Calendar 1996 included equity income of $2,017,000 and a
gain of $2,431,000 from the sale of 262,500 ShowBiz common shares.
Expenses. Interest expense for Calendar 1997 was $607,000, compared to the
Calendar 1996 amount of $1,558,000 and the Fiscal 1995 amount of $687,000. The
$951,000 decline in Calendar 1997 is due to the repayment of a $7,000,000 margin
loan and a $4,000,000 promissory note which had been collateralized by the
ShowBiz investment, including the resolution of litigation involving a
participation provision (the "ShowBiz Participation Amount") contained in the
promissory note. The Company recognized $419,000 of expense in Calendar 1997 and
$755,000 in Calendar 1996 for the ShowBiz Participation Amount. The $871,000
increase in Calendar 1996 is attributable to (i) the recognition of additional
expense for the ShowBiz Participation Amount, and (ii) additional borrowings
under the margin loan. See Notes 2 and 6 to the Company's consolidated financial
statements.
OTHER
Revenues. Total revenues were $3,491,000 in Calendar 1997, $960,000 in
Calendar 1996 and $737,000 in Fiscal 1995.
During Calendar 1997 the Company settled a 1992 insurance claim involving
issues relating to directors and officers liability coverage and, in November
1997, recorded revenue of $1,508,000, net of associated legal costs.
Interest on short-term investments and other income in Calendar 1997 of
$1,423,000, increased $888,000 compared to the Calendar 1996 amount of $535,000.
The increase is primarily attributable to higher cash and investment balances
and higher rental income from the subleasing of executive office space formerly
occupied by the Company's affiliated entity, Integra-A Hotel and Restaurant
Company. The increase of $223,000 in Calendar 1996 from the Fiscal 1995 amount
of $312,000 was also attributable to increased rental income from subleasing
activities.
Fee income for Calendar 1997 was $560,000, compared to the Calendar 1996
and Fiscal 1995 amount of $425,000, which income is derived from financial
consulting contracts with an HEP affiliate and ShowBiz. The consulting contract
with the HEP affiliate, 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.
Expenses. Interest expense for Calendar 1997, Calendar 1996 and Fiscal 1995
relates primarily to the Company's 13.5% Subordinated Debentures and 7%
Collateralized Senior Subordinated Debentures. Interest expense in Calendar 1997
declined $661,000, or 16%, to $3,597,000, from the Calendar 1996 expense of
$4,258,000. The decrease was due to the Company's repurchase of $12,875,000 of
its 13.5% Debentures pursuant to a self-tender offer completed in June 1997,
partially offset by increased interest costs associated with the August 1996 and
August 1997 issuance of additional 13.5% Debentures as payment of annual
interest in-kind. In December 1997, the Company redeemed the remaining
$14,287,000 balance of its outstanding 13.5% Debentures. The redemption price
was 100% of the principal amount plus accrued interest to the redemption date of
December 19, 1997. Interest expense in Calendar 1996 decreased slightly from the
Fiscal 1995 amount of $4,304,000. See Note 7 to the Company's consolidated
financial statements.
Administrative expenses of $3,291,000 in Calendar 1997 compares to
$2,724,000 for Calendar 1996 and to $3,841,000 for Fiscal 1995. The increase of
$567,000, or 21%, in Calendar 1997, compared to Calendar 1996, is attributable
to higher consulting and accounting fees and shareholder relations costs. 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.
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.
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Income Taxes. The Company recognizes 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 $12,468,000 at December 31, 1997) and tax net operating loss
carryforwards ("NOLs") (approximately $103,194,000 at December 31, 1997) and tax
credit carryforwards (approximately $2,186,000 at December 31, 1997), to the
extent that realization of such benefits is "more likely than not", as defined
in Statement of Financial Accounting Standards No. 109 - Accounting for Income
Taxes ("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. Accordingly, 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.
In Calendar 1997, concurrent with the sale of the ShowBiz investment, the
Company recorded an $8,960,000 non-cash federal deferred tax charge and a
federal current charge of $535,000 for alternative minimum tax. Additionally,
the Company recorded current federal and state tax expense of $117,000 and
$296,000, respectively, for Calendar 1997.
The Company's NOLs expire as follows: 1998 - $42,944,000; 1999 to 2004 -
$1,847,000; and 2005 to 2010 - $58,403,000. 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, management has
determined that taxable income will more likely than not be sufficient to
utilize approximately $6,000,000 of the NOLs prior to their ultimate expiration
in the year 2010 and therefore, as of December 31, 1997, the deferred tax asset
was $2,040,000.
Management believes that the Company has certain tax planning strategies
available, which include the potential sale of 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, more
likely than not, taxable income will be sufficient to utilize a 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. Management
periodically re-evaluates its tax planning strategies based upon changes in
facts and circumstances and, accordingly, considers potential adjustments to the
valuation allowance of the deferred tax asset. 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 limitations.
Extraordinary Gain from Extinguishment of Debt. In Calendar 1997, the
Company recognized an extraordinary gain from debt extinguishment of $200,000.
Of this net amount, $877,000 is attributable to the partial repurchase of 13.5%
Debentures in June 1997, offset by extraordinary losses in the amount of
$677,000 incurred in connection with the refinancing of the Company's Residence
Inn hotels in Tulsa, Oklahoma and Greenville, South Carolina. In Fiscal 1995 the
Company purchased 7% Debentures having a face amount of $604,000 for a
discounted amount of $461,000, which resulted in an extraordinary gain from
extinguishment of debt in the amount of $143,000.
LIQUIDITY AND CAPITAL RESOURCES.
The Company's unrestricted cash and cash equivalents at December 31, 1997
totaled $4,737,000.
The Company's real estate segment generates funds principally from its
property management and leasing activities without significant additional
capital costs. All of the HRP limited partnership units are subject to a limited
negative pledge on the Company's energy term loan. If the Company pledges
designated HRP units, as defined, having a market value up to $2,000,000, the
negative pledge can be released. Each quarter HRC reviews HRP's capacity to make
cash distributions to its partners.
The Company's energy segment generates funds from its 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 of HEP's
long-term obligations totaling $4,731,000 at December 31, 1997. HEP's borrowings
are secured by a first lien on approximately 80% in value of HEP's oil and gas
properties. At December 31, 1997, HEP had $4,286,000 outstanding under a note
purchase agreement which matures in April 1998, and $30,700,000 outstanding
under a revolving credit agreement which
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<PAGE> 16
matures in May 2003. HEP's unused borrowing capacity under the revolving credit
agreement was $25,014,000 at February 28, 1998. The parent company does not
provide any loan guarantees on HEP's borrowings.
In December 1996, HEPGP obtained a $2,500,000 term loan, which is
collateralized by the Company's general partner and limited partner interests.
The term loan was amended, restated and increased to $4,000,000 in November 1997
and had a balance of $3,867,000 at December 31, 1997. The term loan contains a
provision which prohibits HEPGP from making any distribution to the Company
during the term of the loan which matures in May 2000.
In February 1998, HEP closed its public offering of 1.8 million Class C
units priced at $10.00 per unit. Proceeds to HEP, net of underwriting discounts
and expenses, were approximately $16,315,000. HEP used $14,000,000 of the net
proceeds to repay borrowings and applied the remaining amount towards the
repayment of HEP's outstanding contract settlement obligation.
During 1997, HEP declared distributions of $.52 per Class A unit and $1.00
per Class C unit to its unitholders. Distributions on Class B units are
suspended if the Class A units receive a distribution of less than $.20 per
Class A unit per calendar quarter. In any quarter for which distributions of
$.20 or more per unit are made on the Class A units, the Class B units are
entitled to be paid, in whole or in part, suspended distributions. The general
partner of HEP is considering the distribution level for future quarters, taking
into account oil and gas prices and the capital needs of HEP.
In January 1997 Brookwood acquired a revolving credit facility from the
Bank of New York in an amount of $14,000,000 (increasing to $15,000,000 for the
period April through June 1998). Borrowings under this facility are
collateralized by accounts receivable, certain inventory and equipment and the
outstanding capital stock of Brookwood. At February 28, 1998, Brookwood had
$648,000 of unused borrowing capacity.
In April 1998, a $784,000 cash dividend is expected to be paid by Brookwood
on its preferred stock. Future dividends are expected to be declared as
permitted by a formula contained in The Bank of New York loan agreement subject
to availability under the facility.
Although capital expenditures are periodically required under franchise
agreements, cash flow from hotel operations have contributed significantly to
the Company's working capital. Sales of hotels are 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 has recently renovated the
Longboat Key Holiday Inn hotel with part of the financing provided by the owner,
and has been informed by Marriott that substantial renovations will have to be
made to each of the three Residence Inn hotels prior to the renewal of their
franchise in January 2000.
Management believes that it will have sufficient funds for operations and
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
$13,118,000 (excluding operating lease commitments of $28,878,000).
INFORMATION SYSTEMS AND THE YEAR 2000
As the year 2000 approaches, there are uncertainties concerning whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or fail. The Company's primary software package
has been developed and is continually updated by a third-party provider, who has
provided assurances that timely updates will be made available to ensure full
Year 2000 compliance of the software package. The Company expects to receive the
fully tested and updated software package in 1998 and anticipates that it will
incur nominal costs associated with its software or hardware operating systems
for this process. Failure by the Company and/or vendors and customers to
complete Year 2000 compliance work in a timely manner could have a material
adverse effect on the Company's operations.
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NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 - Reporting on
Comprehensive Income ("SFAS No. 130"), was issued in June 1997 and, establishes
standards for reporting and presenting comprehensive income in financial
statements. It is effective for periods beginning after December 15, 1997 and
will be adopted by the Company effective January 1, 1998. The Company
anticipates that the adoption of SFAS No. 130 will not have a significant impact
on its current disclosures.
Statement of Financial Accounting Standards No. 131 - Disclosures about
Segments of an Enterprise and Related Information ("SFAS No. 131"), which was
issued in June 1997 and will be effective January 1, 1998, redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. As the Company
has been disclosing segment information, SFAS No. 131 is not expected to have a
significant effect on its current disclosures.
Statement of Financial Accounting Standards No. 132 - Employers'
Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132"),
was issued in February 1998 and revises disclosures about pension and other
postretirement benefit plans. It is effective for periods beginning after
December 15, 1997 and will be adopted by the Company effective January 1, 1998.
As the Company does not have any such postretirement benefit plans, the adoption
will not have any impact on its current disclosures.
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.
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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, 1997.
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 54, 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 55, 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.
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.
17
<PAGE> 19
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, 1997 and 1996
Consolidated Statements of Operations, Years ended December
31, 1997 and 1996, Five months ended December 31, 1995 and
Year ended July 31, 1995
Consolidated Statements of Changes in Stockholders' Equity,
Year ended July 31, 1995, Five months ended December 31, 1995
and Years ended December 31, 1996 and 1997
Consolidated Statements of Cash Flows, Years ended December
31, 1997 and 1996, Five months ended December 31, 1995 and
Year ended July 31, 1995
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 Hallwood Realty Partners, L.P.
Form 10-K for the year ended December 31, 1997
3. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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, filed herewith.
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
18
<PAGE> 20
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.
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.
10.6 -- 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.
*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.
*10.18 -- 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.
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 incorporated herein by reference to
Exhibit 10.20 to the Company's Form 10-K for the
year ended December 31, 1996, File No. 1-8303.
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
incorporated herein by reference to Exhibit 10.21
to the Company's Form 10-K for the year ended
December 31, 1996, File No. 1-8303.
*10.22 -- Financial Consulting Agreement, dated as of
December 31, 1996, between the Company and HSC
Financial Corporation, is incorporated herein by
reference to Exhibit 10.22 to the Company's Form
10-K for the year ended December 31, 1996, File No.
1-8303.
*10.23 -- Financial Consulting Agreement, dated as of
December 31, 1996, between the Company and Hallwood
Petroleum, Inc., is incorporated herein by
reference to Exhibit 10.23 to the Company's Form
10-K for the year ended December 31, 1996, File No.
1-8303.
19
<PAGE> 21
10.24 -- Amendment No. 1, dated as of April 1, 1997 to
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 is incorporated
herein by reference to Exhibit 10.24 to the
Company's Form 10-Q for the quarter ended March 31,
1997, File No. 1-8303.
10.25 -- Amendment No. 2, dated as of May 23, 1997 to
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 is incorporated
herein by reference to Exhibit 10.25 to the
Company's Form 10-Q for the quarter ended June 30,
1997, File No. 1-8303.
10.26 -- Amendment No. 3, dated as of June 25, 1997 to
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 is incorporated
herein by reference to Exhibit 10.26 to the
Company's Form 10-Q for the quarter ended June 30,
1997, File No. 1-8303.
10.27 -- Amended and Restated Credit Agreement, dated as of
November 14, 1997, among HEPGP Ltd., as Borrower,
and The Hallwood Group Incorporated, as Parent
Guarantor, and Hallwood G.P., Inc., as Guarantor,
and First Union National Bank, as Lender, filed
herewith.
10.28 -- Promissory note and related mortgage in the
original amount of $5,280,000, dated October 31,
1997, between Brock Suite Tulsa, Inc., as Maker,
and Credit Suisse First Boston Mortgage Capital
LLC, as Lender, filed herewith.
10.29 -- Promissory note and related mortgage in the
original amount of $6,750,000, dated December 24,
1997, between Brock Suite Greenville, Inc., as
Maker, and L.J. Melody & Company, as Lender, filed
herewith.
21 -- Active Subsidiaries of the Registrant as of
February 28, 1998.
27 -- Financial Data Schedule.
(b) Reports on Form 8-K.
None.
- ------------------------------------
* Constitutes a compensation plan or agreement for executive
officers.
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 27, 1998
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 27th day of March 1998.
<TABLE>
<CAPTION>
<S> <C>
/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/ 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
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
<S> <C>
Independent Auditors' Report.............................................................................. 23
Financial Statements:
Consolidated Balance Sheets, December 31, 1997 and 1996............................................... 24-25
Consolidated Statements of Operations, Years Ended December 31, 1997 and 1996,
Five Months Ended December 31, 1995 and Year Ended July 31, 1995................................... 26-27
Consolidated Statements of Changes in Stockholders' Equity, Year Ended July 31, 1995,
Five Months Ended December 31, 1995 and Years Ended December 31, 1996 and 1997..................... 28
Consolidated Statements of Cash Flows, Years Ended December 31, 1997 and 1996,
Five Months Ended December 31, 1995 and Year Ended July 31, 1995.................................. 29
Notes to Consolidated Financial Statements............................................................ 30-57
Supplemental Oil and Gas Reserve Information (Unaudited).............................................. 58-60
Independent Auditors' Report on Schedules................................................................. 61
Schedules:
I Condensed Financial Information of Registrant...................................................... 62-66
II Valuation and Qualifying Accounts and Reserves..................................................... 67
IIIReal Estate and Accumulated Depreciation........................................................... 68
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 Hallwood Realty Partners, L.P.
Form 10-K for the Year Ended December 31, 1997
</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, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 1997 and
1996, the five months ended December 31, 1995 and the year ended July 31, 1995.
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, 1997 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1997 and 1996,
the five months ended December 31, 1995 and the year ended July 31, 1995, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 9, 1998
23
<PAGE> 25
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------
1997 1996
-------- --------
ASSET MANAGEMENT
REAL ESTATE
<S> <C> <C>
Investments in HRP .................................. $ 7,197 $ 7,007
Receivables and other assets ........................ 1,063 1,220
-------- --------
8,260 8,227
ENERGY
Oil and gas properties, net ......................... 9,589 8,928
Current assets of HEP ............................... 2,657 2,426
Noncurrent assets of HEP ............................ 1,859 1,664
Receivables and other assets ........................ 434 548
-------- --------
14,539 13,566
-------- --------
Total asset management assets .................... 22,799 21,793
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories ......................................... 17,935 17,188
Receivables ......................................... 14,296 13,094
Property, plant and equipment, net .................. 9,057 8,791
Other ............................................... 938 1,037
-------- --------
42,226 40,110
HOTELS
Properties, net ..................................... 14,168 15,568
Receivables and other assets ........................ 1,742 2,076
-------- --------
15,910 17,644
-------- --------
Total operating subsidiaries assets .............. 58,136 57,754
ASSOCIATED COMPANY
Investment in ShowBiz Pizza Time, Inc. .............. -- 16,945
OTHER
Cash and cash equivalents ........................... 4,737 7,495
Deferred tax asset, net ............................. 2,040 11,000
Other ............................................... 1,557 1,236
Restricted cash ..................................... 489 573
-------- --------
Total other assets ............................... 8,823 20,304
-------- --------
TOTAL ASSETS ..................................... $ 89,758 $116,796
======== ========
</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,
----------------------
1997 1996
--------- ---------
ASSET MANAGEMENT
REAL ESTATE
<S> <C> <C>
Accounts payable and accrued expenses ........................ $ 1,295 $ 490
Loans payable ................................................ 500 500
--------- ---------
1,795 990
ENERGY
Long-terms obligations of HEP ................................ 4,731 4,432
Loan payable ................................................. 3,867 2,361
Current liabilities of HEP ................................... 2,793 2,531
Accounts payable and accrued expenses ........................ 548 1,223
--------- ---------
11,939 10,547
--------- ---------
Total asset management liabilities ........................ 13,734 11,537
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable ................................................ 13,800 11,200
Accounts payable and accrued expenses ........................ 7,771 8,678
--------- ---------
21,571 19,878
HOTELS
Loans payable ................................................ 12,019 12,281
Accounts payable and accrued expenses ........................ 1,607 1,976
--------- ---------
13,626 14,257
--------- ---------
Total operating subsidiaries liabilities .................. 35,197 34,135
ASSOCIATED COMPANY
Loans payable ................................................... -- 11,000
Accounts payable and accrued expenses ........................... -- 870
--------- ---------
Total associated companies liabilities .................... -- 11,870
OTHER
7% Collateralized Senior Subordinated Debentures ................ 24,292 24,892
Interest and other accrued expenses ............................. 1,364 1,906
13.5% Subordinated Debentures ................................... -- 25,672
--------- ---------
Total other liabilities ................................... 25,656 52,470
--------- ---------
TOTAL LIABILITIES ......................................... 74,587 110,012
REDEEMABLE PREFERRED STOCK
Series B, $.10 par value; 250,000 shares issued and outstanding . 1,000 1,000
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY
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 1,261,757 and 1,298,509 shares, respectively ..... 160 160
Additional paid-in capital ...................................... 54,823 57,306
Accumulated (deficit) ........................................... (31,693) (44,490)
Treasury stock, 335,447 and 298,695 shares, respectively; at cost (9,119) (7,192)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................................ 14,171 5,784
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................ $ 89,758 $ 116,796
========= =========
</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>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
----------------------- DECEMBER 31, JULY 31,
1997 1996 1995 1995
-------- -------- -------- --------
ASSET MANAGEMENT
REAL ESTATE
<S> <C> <C> <C> <C>
Fees ..................................................... $ 6,017 $ 5,672 $ 1,744 $ 3,906
Equity income (loss) from investments in HRP ............. 900 (1,731) (833) (211)
Interest and discounts from mortgage loans ............... 5 6 2 198
Rentals .................................................. -- -- 298 702
-------- -------- -------- --------
6,922 3,947 1,211 4,595
Administrative expenses .................................. 2,436 1,387 517 1,174
Depreciation and amortization ............................ 674 673 405 972
Interest ................................................. 160 281 303 639
Provision for losses (recovery) .......................... 81 (21) 101 431
Operating expenses ....................................... -- 9 17 28
-------- -------- -------- --------
3,351 2,329 1,343 3,244
-------- -------- -------- --------
Income (loss) from real estate operations ................ 3,571 1,618 (132) 1,351
ENERGY
Oil and gas revenues ..................................... 6,013 7,066 2,980 5,343
Other income (including intercompany amount of $181 in the
year ended July 31, 1995) ............................. 337 449 169 16
-------- -------- -------- --------
6,350 7,515 3,149 5,359
Operating expenses ....................................... 1,401 1,509 801 1,336
Depreciation, depletion, amortization and impairment ..... 1,387 1,532 887 2,403
Administrative expenses .................................. 1,317 1,314 704 1,525
Interest ................................................. 413 456 289 375
Minority interest ........................................ -- 422 192 (64)
-------- -------- -------- --------
4,518 5,233 2,873 5,575
-------- -------- -------- --------
Income (loss) from energy operations .................. 1,832 2,282 276 (216)
-------- -------- -------- --------
Income from asset management operations ............... 5,403 3,900 144 1,135
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales .................................................... 91,552 77,583 28,229 77,808
Cost of sales ............................................ 79,473 67,256 24,824 68,797
Administrative and selling expenses ...................... 9,072 8,482 3,091 7,973
Interest (including intercompany amount of $16 in the
year ended July 31, 1995) ............................. 1,030 623 307 834
-------- -------- -------- --------
89,575 76,361 28,222 77,604
-------- -------- -------- --------
Income from textile products operations ............... 1,977 1,222 7 204
</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>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
----------------------- DECEMBER 31, JULY 31,
OPERATING SUBSIDIARIES (CONTINUED) 1997 1996 1995 1995
---------- ---------- ---------- ----------
HOTELS
<S> <C> <C> <C> <C>
Sales .................................................... $ 21,038 $ 20,948 $ 8,073 $ 22,502
Gain from sale of hotel .................................. -- -- -- 2,396
---------- ---------- ---------- ----------
21,038 20,948 8,073 24,898
Operating expenses ....................................... 16,990 17,137 7,163 18,744
Depreciation and amortization ............................ 2,841 2,657 943 2,429
Interest ................................................. 1,444 1,154 220 902
---------- ---------- ---------- ----------
21,275 20,948 8,326 22,075
---------- ---------- ---------- ----------
Income (loss) from hotel operations ................... (237) -- (253) 2,823
---------- ---------- ---------- ----------
Income (loss) from operating subsidiaries ............. 1,740 1,222 (246) 3,027
ASSOCIATED COMPANY
Income (loss) from investment in ShowBiz .................... 19,416 4,448 (88) (171)
Interest .................................................... 607 1,558 310 687
---------- ---------- ---------- ----------
Income (loss) from associated company ................. 18,809 2,890 (398) (858)
OTHER
Insurance settlement ........................................ 1,508 -- -- --
Interest on short-term investments and other income ......... 1,423 535 56 312
Fee income .................................................. 560 425 177 425
---------- ---------- ---------- ----------
3,491 960 233 737
Interest, net of $197 from other segments in the
year ended July 31, 1995 ................................. 3,597 4,258 1,728 4,304
Administrative expenses ..................................... 3,291 2,724 1,594 3,841
Provision for losses (recovery) ............................. -- (8) -- 13
---------- ---------- ---------- ----------
6,888 6,974 3,322 8,158
---------- ---------- ---------- ----------
Other loss, net ....................................... (3,397) (6,014) (3,089) (7,421)
---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary gain .... 22,555 1,998 (3,589) (4,117)
Income taxes (benefit) ...................................... 9,908 (4,525) (299) 830
---------- ---------- ---------- ----------
Income (loss) before extraordinary gain ..................... 12,647 6,523 (3,290) (4,947)
Extraordinary gain from extinguishment of debt .............. 200 -- 25 143
---------- ---------- ---------- ----------
NET INCOME (LOSS) ............................................... $ 12,847 $ 6,523 $ (3,265) $ (4,804)
========== ========== ========== ==========
PER COMMON SHARE
BASIC
Income (loss) before extraordinary gain .................. $ 8.96 $ 4.93 $ (2.47) $ (3.60)
Extraordinary gain from extinguishment of debt ........... 0.14 -- 0.02 0.10
---------- ---------- ---------- ----------
Net income (loss) ..................................... $ 9.10 $ 4.93 $ (2.45) $ (3.50)
========== ========== ========== ==========
ASSUMING DILUTION
Income (loss) before extraordinary gain .................. $ 8.63 $ 4.89 $ (2.47) $ (3.60)
Extraordinary gain from extinguishment of debt ........... 0.14 -- 0.02 0.10
---------- ---------- ---------- ----------
Net income (loss) ..................................... $ 8.77 $ 4.89 $ (2.45) $ (3.50)
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED JULY 31, 1995,
FIVE MONTHS ENDED DECEMBER 31, 1995 AND
YEARS ENDED DECEMBER 31, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM TOTAL
COMMON STOCK ADDITIONAL FOREIGN TREASURY STOCK STOCKHOLDERS'
--------------------- PAID-IN ACCUMULATED CURRENCY ------------------
SHARES PAR VALUE CAPITAL (DEFICIT) TRANSLATION SHARES COST EQUITY
----------- --------- -------- --------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 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
Net income ............................. 12,847 12,847
Purchase of treasury stock ............. 304 (8,373) (8,373)
Preferred stock dividends .............. (50) (50)
Exchange of treasury stock for
ShowBiz shares ...................... (2,626) (268) 6,446 3,820
Proportionate share of stockholders'
equity transactions of equity
investments ......................... 143 143
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 ................. 1,597 $ 160 $ 54,823 $(31,693) $ -- 335 $ (9,119) $ 14,171
======== ======== ======== ======== ======== ======== ======== ========
</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>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
------------------------ DECEMBER 31, JULY 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income (loss) ..................................................... $ 12,847 $ 6,523 $ (3,265) $ (4,804)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Gain from sale of investment in ShowBiz ............................ (18,277) (2,431) -- --
Net change in deferred tax asset ................................... 8,960 (5,071) (500) 471
Depreciation, depletion, amortization and impairment ............... 6,142 5,953 2,705 6,846
Undistributed income from energy affiliate ......................... (3,826) (4,559) (1,592) (2,567)
Distributions from energy affiliate ................................ 2,135 2,562 1,332 2,892
Equity in net (income) loss of associated company/affiliate ........ (2,039) (286) 921 382
Accrued interest on 13.5% Debentures ............................... 1,069 2,656 (1,789) 8
Amortization of deferred gain from debenture exchange .............. (600) (577) (234) (517)
Gain from extinguishment of debt ................................... (201) -- (25) (143)
Provision for losses ............................................... 81 2 101 423
Proceeds from collections of mortgage loans ........................ 25 7 2 1,144
Increase in mortgage loans from sale of real estate ................ -- (10) -- (18)
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
Amortization of mortgage loan discounts ............................ -- -- -- (29)
Net change in textile products assets and liabilities .............. (2,825) (3,517) 2,817 (1,547)
Net change in other assets and liabilities ......................... (324) (2,020) 226 (3,000)
Net change in energy assets and liabilities ........................ 88 321 (287) 49
---------- ---------- ---------- ----------
Net cash provided by (used in ) operating activities ............ 3,255 (447) 412 (1,214)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment in ShowBiz ........................... 40,323 4,139 -- --
Investments in textile products property and equipment ................ (1,440) (1,118) (371) (1,465)
Capital expenditures and acquisition of hotels and real estate ........ (1,286) (7,761) (402) (1,106)
Purchase of minority shares of HEC .................................... (648) (1,750) -- --
Net change in restricted cash for investing activities ................ (372) (102) 37 (83)
Investments in energy property and equipment .......................... (223) (346) (126) (36)
Investments in associated company/affiliate ........................... -- (53) (1) (4,473)
Proceeds from sale of hotel and real estate assets .................... -- 23 7,610 14,132
Proceeds from sale of marketable securities ........................... -- -- -- 610
Proceeds from sale of (investment in) insurance contracts, net ........ -- -- -- 229
---------- ---------- ---------- ----------
Net cash provided by (used in) investing activities ............. 36,354 (6,968) 6,747 7,808
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of 13.5% Debentures ........................................ (27,163) -- (22) --
Repayment of bank borrowings and loans payable ........................ (25,411) (2,227) (8,066) (9,447)
Proceeds from bank borrowings and loans payable ....................... 18,630 14,775 250 4,005
Purchase of common stock for treasury ................................. (8,373) (394) (188) (314)
Payment of dividends to Series B preferred stockholders ............... (50) (50) -- --
Net change in restricted cash for financing activities ................ -- (375) -- 1,432
Purchase of capital stock by energy subsidiary for treasury ........... -- (158) (1,189) (1,042)
Payment of dividends to minority stockholders of energy subsidiary .... -- -- (429) (661)
Repurchase of 7% Debentures ........................................... -- -- -- (460)
Purchase of fractional shares - reverse split ......................... -- -- -- (17)
---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities ............. (42,367) 11,571 (9,644) (6,504)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................... -- -- -- 6
---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... (2,758) 4,156 (2,485) 96
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 7,495 3,339 5,824 5,728
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 4,737 $ 7,495 $ 3,339 $ 5,824
========== ========== ========== ==========
</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 subsidiaries
Condo Hotel and Resort Management, Inc.
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.
Hallwood Hotels, Inc.
Hallwood-Integra Holding Company and subsidiaries
Hallwood Investment Company
Hallwood-Kenyon Holding Company
Hallwood Realty Corporation
Integra Resort Management, Inc.
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 fiscal year ended July 31, 1995.
(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.
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.
During 1997, the Company's investee affiliate, Hallwood Realty
Partners, L.P. ("HRP"), completed a review of its real estate lives.
In light of recent improvements and actions taken to increase its
preventative maintenance programs, the estimated economic lives for
buildings were found to be generally longer than the useful lives
being used for depreciation purposes. Accordingly, effective January
1, 1997, HRP extended the depreciable lives of certain building costs.
The effect of this change in estimate reduced depreciation and
amortization expense and improved the net operating results of HRP by
approximately $7,200,000. The proportional effect to the Company under
equity accounting standards was an increase in equity earnings from
HRP in 1997 of approximately $1,800,000, considering the Company's
overall 25% ownership of HRP.
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 full
cost method of accounting, whereby all costs related to the
acquisition and development of oil and gas properties are capitalized
in a single cost center ("full cost pool") and are amortized over the
productive life of the underlying proved reserves using the units of
production method. Proceeds from property sales are generally credited
to the full cost pool.
Capitalized costs of oil and gas properties may not exceed an amount
equal to the present value, discounted at 10%, of estimated future net
revenues from proved oil and gas reserves plus the cost, or estimated
fair market value, if lower, of unproved properties. Should
capitalized costs exceed this ceiling, an impairment is recognized.
The present value of estimated future net revenues is computed by
applying current prices of oil and gas to estimated future production
of proved oil and gas reserves as of year end, less estimated future
expenditures to be incurred in developing and producing the proved
reserves assuming continuation of existing economic conditions.
Costs are not accrued for future site restoration, dismantlement and
abandonment related to proved oil and gas properties, because the
Company and its energy affiliates estimate that such costs will be
offset by the salvage value of the equipment sold upon abandonment of
such properties. Estimates are based upon historical experience and
review of current properties and restoration obligations.
Unproved properties are withheld from the amortization base until such
time as they are either developed or abandoned. The properties are
evaluated periodically for impairment.
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 decreases
and to provide a measure of stability in the volatile environment of
oil and natural gas spot pricing. The amounts received or paid upon
settlement of these contracts are recognized as oil or gas revenue at
the time the hedged volumes are sold.
(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) Impairment
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.
(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)
(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 loss 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) Environmental Remediation Costs
The Company 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 the remedial feasibility study. Such accruals are
adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are
recorded as assets when their receipt is deemed probable. Company
management is not aware of any environmental remediation obligations
which would materially affect the operations, financial position or
cash flow of the Company.
(n) Common Stock
Share and per share amounts have been retroactively adjusted to give
effect to the one-for-four reverse stock split effected on June 28,
1995.
(o) 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.
(p) Computation of Earnings Per Common Share
The Company has adopted Statement of Financial Accounting Standards
No. 128 - Earnings Per Share ("SFAS No. 128"). Comparative earnings
per share data have been restated to conform to the adoption of this
new standard. Basic earnings per share is computed by dividing net
income (loss) attributable to the common stockholders' interests after
preferred dividend requirements by the weighted average number of
common shares outstanding. Earnings per share assuming dilution is
computed by dividing net income (loss) attributable to the common
stockholders' interests after preferred stock dividend requirements by
the weighted average number of equivalent shares outstanding. Stock
options described in Note 9 are considered to be equivalent shares.
The number of equivalent shares is computed using the
32
<PAGE> 34
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
"treasury stock method ," which assumes that the increase in the
number of shares is reduced by the number of shares which could have
been repurchased by the Company with the proceeds from the exercise of
the options.
The following table reconciles the Company's net income (loss) to net
income (loss) available to common stockholders, and the number of
equivalent common shares used in the calculation of net income (loss)
for the basic and assumed dilution methods (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
---------------- ----------------- --------------
DESCRIPTION 1997 1996 DECEMBER 31, 1995 JULY 31, 1995
- ------------------------------------- ------- ------- ----------------- --------------
NET INCOME (LOSS)
<S> <C> <C> <C> <C>
Net income (loss), as reported ...... $12,847 $ 6,523 $ (3,265) $ (4,804)
Less: Dividends on preferred stock .. 50 50 -- --
------- ------- ------- --------
Net income (loss) available to
common stockholders .............. $12,797 $ 6,473 $ (3,265) $ (4,804)
======= ======= ======== ========
AVERAGE SHARES OUTSTANDING
Average shares outstanding - basic .. 1,406 1,314 1,331 1,369
Stock options ....................... 54 10 -- * -- *
------- ------- -------- --------
Outstanding shares -assuming dilution 1,460 1,324 1,331 1,369
======= ======= ======== ========
NET INCOME (LOSS) PER COMMON SHARE
Basic ............................... $ 9.10 $ 4.93 $ (2.45) $ (3.50)
Assuming dilution ................... $ 8.77 $ 4.89 $ (2.45) $ (3.50)
</TABLE>
* Not applicable, as stock options are anti-dilutive for loss periods.
(q) New Accounting Pronouncements
Statement of Financial Accounting Standards No. 130 - Reporting on
Comprehensive Income ("SFAS No. 130"), was issued in June 1997, and
establishes standards for reporting and presenting comprehensive
income in financial statements. It is effective for periods beginning
after December 15, 1997 and will be adopted by the Company effective
January 1, 1998. The Company anticipates that the adoption of SFAS No.
130 will not have a significant impact on its current disclosures.
Statement of Financial Accounting Standards No. 131 - Disclosures
about Segments of an Enterprise and Related Information ("SFAS No.
131"), which was issued in June 1997 and will be effective January 1,
1998, redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a
company's operating segments. As the Company has been disclosing
segment information, SFAS No. 131 is not expected to have a
significant effect.
Statement of Financial Accounting Standards No. 132 - Employers'
Disclosures about Pensions and Other Postretirement Benefits ("SFAS
No. 132"), was issued in February 1998 and revises disclosures about
pension and other postretirement benefit plans. It is effective for
periods beginning after December 15, 1997 and will be adopted by the
Company effective January 1, 1998. As the Company does not have any
such postretirement benefit plans, the adoption will not have any
impact on its current disclosures.
33
<PAGE> 35
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 2 -- INVESTMENTS IN REAL ESTATE AFFILIATE AND ASSOCIATED COMPANY (DOLLAR
AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
INCOME (LOSS) FOR PERIOD
------------------------------------------
DECEMBER 31, 1997 FIVE YEAR
----------------- AMOUNT AT WHICH YEARS ENDED MONTHS ENDED ENDED
NUMBER CARRIED AT DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
BUSINESS SEGMENTS AND OF ----------------------- ------------------
DESCRIPTION OF INVESTMENTS UNITS COST 1997 1996 1997 1996 1995 1995
- ---------------------------- -------- -------- -------- -------- ------- -------- -------- --------
<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 $ 4,435 $ 5,117 $ 29 $ (101) $ (47) $ (90)
-- Limited partner interest ........ 413,040 5,377 2,762 1,890 871 (1,630) (786) (121)
-------- -------- -------- -------- -------- -------- --------
Totals ................ $ 14,027 $ 7,197 $ 7,007 $ 900 $ (1,731) $ (833) $ (211)
======== ======== ======== ======== ======== ======== ========
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
-- Common stock .................... $ 16,945
Equity in earnings (loss) .... -- $ 1,139 $ 2,017 $ (88) $ (171)
Gain on sale of shares ....... -- 18,277 2,431 -- --
-------- -------- -------- -------- --------
Totals ................ $ 16,945 $ 19,416 $ 4,448 $ (88) $ (171)
======== ======== ======== ======== ========
</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) In November 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
direct and open market purchases. The 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 1990 consolidation. Beginning November 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 years ended December
31, 1997 and 1996, $280,000 for the five months ended December 31,
1995 and $672,000 for the year ended July 31, 1995, 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 a result of this program, which expired in July 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.
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 cumulative amount of such adjustments, from the original
date of investment through December 31, 1997, resulted in a $49,000
decrease in the carrying value of the HRP investment.
The Company has pledged 89,269 HRP limited partner units to
collateralize a $500,000 promissory note, which was repaid in March
1998. See Note 6.
34
<PAGE> 36
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The quoted market price per unit and the Company's carrying value per
unit of the limited partner units of HRP (Quotron symbol HRY) at
December 31, 1997 were $47.50 and $6.69, respectively. The general
partner interest in HRP is not publicly traded.
As of December 31, 1997, the Company owned a 1% general partner and a
25% limited partner interest in HRP.
The following table sets forth summarized (unaudited) financial data
of Hallwood Realty Partners, L.P. as of and for the years ended
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
Balance Sheet Data
<S> <C> <C>
Real estate property, net ...................... $ 179,028 $ 182,877
Total assets ................................... 207,134 210,214
Mortgages payable .............................. 157,911 160,732
Total partners' capital ........................ 33,041 30,684
Statement of Operations Data
Revenue ........................................ $ 53,899 $ 49,612
Net income (loss) .............................. 2,357 (9,428)
</TABLE>
The data used to compile the above table was obtained from
published reports, including Securities and Exchange
Commission filings on Form 10-K.
(B) The Company acquired its investment in ShowBiz Pizza Time, Inc.
("ShowBiz") in 1988 as a result of (i) a spin-off 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.
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 maintained 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 recorded its pro rata share of
various shareholders' equity transactions reported by ShowBiz.
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, an
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
35
<PAGE> 37
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 realized a gain of $18,277,000 from the sale. Concurrent with
the sale, all five directors of the Company who were also directors of
ShowBiz resigned from the ShowBiz board.
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, 1997 and
1996 and for the years then ended (in thousands):
(a) Category:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Proved mineral interests .................................. $ 118,898 $ 116,989
Unproved mineral interests ................................ 278 157
Other property and equipment .............................. 422 404
--------- ---------
119,598 117,550
Less: Accumulated depreciation, depletion, amortization and
property impairment ................................. (110,009) (108,622)
--------- ---------
Oil and gas properties, net ............................ $ 9,589 $ 8,928
========= =========
</TABLE>
(b) Cost:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Development ...................................... $1,136 $1,321 $ 979
Exploration ...................................... 834 100 166
Property acquisition - proved .................... 233 279 191
Property acquisition - unproved .................. 121 87 56
------ ------ ------
Total ......................................... $2,324 $1,787 $1,392
====== ====== ======
</TABLE>
Depreciation, depletion, amortization and impairment per equivalent barrel
of production for the years ended 1997, 1996 and 1995, was $3.78, $3.54 and
$5.00, respectively.
(c) Unproved mineral interests (at cost):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
---- ----
<S> <C> <C>
Exploration acreage .............................. $209 $129
Other ............................................ 69 28
---- ----
Total ......................................... $278 $157
==== ====
</TABLE>
36
<PAGE> 38
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 properties as of the balance sheet dates (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Building improvements and equipment ................... $ 16,670 $ 15,406
Leasehold acquisition costs ........................... 6,501 8,026
Land and land improvements ............................ 1,797 1,776
-------- --------
24,968 25,208
Less: Accumulated depreciation and amortization ....... (10,800) (9,640)
-------- --------
Total .............................................. $ 14,168 $ 15,568
======== ========
</TABLE>
At December 31, 1997, hotel properties consisted of fee interests in two
Residence Inns and leasehold interests in one Residence Inn, one Embassy Suites
and one Holiday Inn.
NOTE 5 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents at the balance sheet dates are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------ ------
<S> <C> <C>
Cash equivalents ........................................... $3,752 $6,452
Cash ....................................................... 985 1,043
------ ------
Total ................................................... $4,737 $7,495
====== ======
</TABLE>
37
<PAGE> 39
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6 -- LOANS PAYABLE
Loans payable at the balance sheet dates are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------- -------
Real Estate
<S> <C> <C>
Promissory note, 8%, repaid March 1998 ................................. $ 500 $ 500
Energy
Term loan, LIBOR + 3.5%, due May 2000 .................................. 3,867 --
Term loan, prime + 1%, refinanced November 1997 ........................ -- 2,361
------- -------
3,867 2,361
Textile Products
Revolving credit facility, prime + .25%, due January 2000 .............. 13,800 --
Revolving credit facility, prime + .5%, refinanced January 1997 ........ -- 11,200
------- -------
13,800 11,200
Hotels
Term loan, 7.86% fixed, due January 2008 ............................... 6,750 --
Term loan, prime + 3.5%, refinanced December 1997 ...................... -- 6,739
Term loan, 8.20% fixed, due November 2007 .............................. 5,269 --
Term loan, 10%, refinanced October 1997 ................................ -- 5,001
Short-term loan, certificate of deposit rate, repaid January 1997 ...... -- 375
Non-interest bearing obligation, repaid March 1997 ..................... -- 166
------- -------
12,019 12,281
Associated Company
Line of credit, prime + .75%, repaid March 1997 ........................ -- 7,000
Promissory note, 5%, repaid March 1997 ................................. -- 4,000
------- -------
-- 11,000
Total .............................................................. $30,186 $37,342
======= =======
</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 $47.50 at December 31, 1997, $450,000 was accrued for the HRP
Participation Amount as a charge to interest expense, of which $120,000 and
$230,000 were recorded in the years ended December 31, 1997 and 1996 and
$100,000 in the five months ended December 31, 1995, respectively. The Company
tendered full payment on the note and HRP Participation Amount totaling
$1,000,000 in March 1998, but continues to litigate the validity of an earlier
tender that was rejected by the noteholder.
38
<PAGE> 40
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Energy
Term loan. In November 1997, HEPGP Ltd. ("HEPGP") amended, restated and
increased its credit agreement with First Union National Bank of North Carolina
("First Union"). The new term loan for $4,000,000 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 15, 2000; (ii) monthly
principal payments of $133,000, plus interest; (iii) interest rate of LIBOR plus
3.5% (9.1875% at December 31, 1997); (iv) a limited negative pledge relating to
all of the Company's HRP limited partner units; and (v) restrictions on the
declaration of distributions or redemptions of partnership interests. At
December 31, 1997, the outstanding balance was $3,867,000.
Long term obligations. Included in the consolidated balance sheets at
December 31, 1997 and 1996 are long-term obligations of HEP in the amount of
$4,731,000 and $4,432,000, respectively. These amounts represent the Company's
and its' subsidiaries share of HEP's outstanding long-term obligations which, at
December 31, 1997, consisted of a $30,700,000 revolving credit agreement and a
$4,286,000 note purchase 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. Brookwood had established a revolving line of
credit facility in an amount up to $13,500,000 with the Chase Manhattan Bank,
N.A. ("Chase"). Borrowings were collateralized by accounts receivable, inventory
imported under trade letters of credit and certain industrial machinery and
equipment of Brookwood's subsidiaries. The facility bore interest at Brookwood's
option from one-half percent over prime or LIBOR plus 2.25%.
In January 1997 a new revolving credit facility in an amount up to
$14,000,000 with The Bank of New York ("BNY") replaced the Chase facility.
Borrowings are collateralized by accounts receivable, inventory imported under
trade letters of credit, certain finished goods inventory, the machinery and
equipment of Brookwood's subsidiaries and all of the issued and outstanding
capital stock of Brookwood and its subsidiaries. The BNY facility expires on
January 7, 2000 and bears interest, at Brookwood's option, at one-quarter
percent over prime (8.75% at December 31, 1997) or LIBOR plus 2.25%. The
facility was amended to increase the maximum amount to $17,500,000 for the
period April through December 1997 and $15,000,000 for the period April through
June 1998 and to change certain of the financial covenants. Availability for
direct borrowings and letter of credit obligations under the facility are
limited to the lesser of the facility or the formula borrowing base, as defined
in the agreement. As of December 31, 1997, the Company had an additional
$1,452,000 of borrowing base availability. The facility contains covenants,
which include maintenance of certain financial ratios, restrictions on dividends
and repayment of debt or cash transfers to the Company. At December 31, 1997,
the outstanding balance was $13,800,000.
Hotels
Term loan. In December 1997, the Company's Brock Suite Greenville, Inc.
subsidiary entered into a new $6,750,000 mortgage loan, collateralized by the
Residence Inn hotel located in Greenville, South Carolina. Significant terms
include: (i) fixed interest rate of 7.86%; (ii) monthly loan payments of $51,473
based upon 25-year amortization schedule with a maturity date of January 2008;
(iii) prepayment permitted after December 1999, subject to yield maintenance
provisions and (iv) various other financial and non-financial covenants. The
balance at December 31, 1997 was $6,750,000.
Term loan. In May 1996, the Company's Brock Suite Greenville, Inc.
subsidiary 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
mortgage loan and included the following significant terms: (i) interest rate of
prime plus 3.5% (minimum rate 12%, maximum rate 17%); (ii) loan payments based
upon a 19-year amortization schedule with a maturity date of May 2001; and (iii)
prepayment permitted, subject to a prepayment premium which declines from 4% to
1% of loan balance, depending on the prepayment date. The loan was repaid in
December 1997 in connection with the aforementioned refinancing.
39
<PAGE> 41
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Term loan. In October 1997, the Company's Brock Suite Tulsa, Inc.
subsidiary entered into a new $5,280,000 mortgage loan collateralized by the
Residence Inn hotel in Tulsa, Oklahoma. Significant terms include: (i) fixed
interest rate of 8.20%; (ii) monthly loan payments of $41,454 based upon 25-year
amortization schedule with a maturity date of November 2007; (iii) prepayment
permitted after October 2001, subject to yield maintenance provisions and; (iv)
various other financial and non-financial covenants. The outstanding balance at
December 31, 1997 was $5,269,000.
Term loan. In October 1994, the Company entered into a mortgage loan in
the amount of $5,200,000 to replace an obligation the Company assumed as part of
Integra's emergence from bankruptcy in March 1994. The loan included 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 loan was repaid in October 1997 in
connection with the aforementioned refinancing of the Residence Inn hotel in
Tulsa, Oklahoma.
Short-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, which was repaid 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.
Associated Company
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%; (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 line of credit was repaid in
March 1997 from proceeds of sale of the Company's ShowBiz investment as
discussed in Note 2.
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 were (i)
maturity date - March 8, 1997; (ii) interest rate - 5% fixed; (iii) collateral -
517,242 shares of ShowBiz common stock; and (iv) the Trust was entitled to an
additional payment at the "Payment Date", as 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 had accrued the ShowBiz
Participation Amount, it contended that proper tender of payment and accrued
interest was made in October 1996, and therefore no ShowBiz Participation Amount
was owed. As the Trust contended that the promissory note did 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 entered into an agreement
(the "Partial Compromise and Settlement Agreement"), whereby the Trust 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 of $2,513,000 (the "Full Escrowed Amount")
into an escrow account, which was a combination of the disputed ShowBiz
Participation Amount and the balance of accrued interest to the maturity date.
In July 1997 the Company entered into a Compromise and Settlement
Agreement, whereby (i) the parties agreed that the Full Escrowed Amount would be
equally divided between the Trust and the Company and (ii) mutual releases would
be executed, in respect to the civil action in the United States District Court,
Case No. 3-96CV309DG, for the Northern District of Texas, Dallas Division.
Accordingly, the Company received settlement proceeds of $1,256,500 plus accrued
interest on July 31, 1997.
40
<PAGE> 42
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
DECEMBER 31, ESTATE ENERGY (A) PRODUCTS HOTELS OTHER (B) TOTAL
- -------------------- ------- --------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
1998 ......... $ 500 $ 1,600 $ 7,800 $ 158 $ 1,927 $11,985
1999 ......... -- 1,600 -- 172 -- 1,772
2000 ......... -- 667 6,000 186 20,881 27,734
2001 ......... -- -- -- 201 -- 201
2002 ......... -- -- -- 217 -- 217
Thereafter ...... -- -- -- 11,085 -- --
------- ------- ------- ------- ------- -------
Total .... $ 500 $ 3,867 $13,800 $12,019 $22,808 $52,994
======= ======= ======= ======= ======= =======
</TABLE>
- ------------------
(a) HEP's long-term indebtedness of $34,986,000 is not a direct obligation of
HEPGP or of the Company. HEP's debt maturities are as follows: $-0- in
1998; $6,561,000 in 1999; $8,748,000 in 2000; $8,748,000 in 2001; and
$8,748,000 in 2002 and $2,181,000 thereafter.
(b) Sinking fund requirement and maturity for the 7% Debentures, excludes net
unrecognized gain from purchase and exchange of $1,484,000.
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 was payable annually on August 15, and,
at the Company's option, up to two annual interest payments in any five-year
period could 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 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. Interest due on
August 15, 1997 was paid in-kind by the issuance of $1,524,000 of additional
13.5% Debentures (the "1997 Series") and $199,000 of cash in lieu of fractional
debentures. The 1996 Series and 1997 Series did not meet the $5,000,000 minimum
listing requirement on a recognized exchange and therefore were not listed.
Between March 1989 and December 1996, the Company repurchased and retired 13.5%
Debentures with a face amount of $2,230,000.
41
<PAGE> 43
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Tender Offer for 13.5% Debentures. In June 1997, pursuant to a self-tender
offer for up to $20,000,000 of its 13.5% Debentures, debentureholders tendered
$12,875,000 principal value of 13.5% Debentures during the offer period. The
breakdown by Series is listed below:
<TABLE>
<CAPTION>
PRINCIPAL
SERIES AMOUNT TENDERED
------ ---------------
<S> <C>
1989 ............... $ 8,484,000
1991 ............... 1,208,000
1992 ............... 1,218,000
1996 ............... 1,965,000
-----------
$12,875,000
===========
</TABLE>
The price offered for the 13.5% Debentures was $105 per $100 principal
amount, and aggregated $13,519,000 for all debentures properly tendered. As no
interest was paid to debentureholders accepting the offer, the Company
recognized an extraordinary gain from debt extinguishment of $877,000,
attributable to the amount of accrued interest to the expiration of the
self-tender offer less the principal amount of premium.
Redemption of 13.5% Debentures. In November 1997, the Company announced
the full redemption of the remaining balance of its outstanding 13.5%
Debentures. The redemption price was 100% of the principal amount plus accrued
interest to the redemption date of December 19, 1997. The breakdown by Series is
listed below:
<TABLE>
<CAPTION>
PRINCIPAL
SERIES AMOUNT REDEEMED
------ ---------------
<S> <C>
1989 ............................... $ 9,684,000
1991 ............................... 1,085,000
1992 ............................... 1,142,000
1996 ............................... 852,000
1997 ............................... 1,524,000
-----------
$14,287,000
===========
</TABLE>
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. In January 1998, the Company repurchased
7% Debentures having a face amount of $2,253,000 for $2,142,000, to satisfy the
balance of a sinking fund requirement contained in the Indenture.
42
<PAGE> 44
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
------
Total ..................................................................... $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 $600,000 and $577,000 for the years ended December 31, 1997 and 1996,
$234,000 for the five months ended December 31, 1995 and $517,000 for the year
ended July 31, 1995, respectively.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
DESCRIPTION 1997 1996
----------- ---- ----
<S> <C> <C>
7% Debentures (face amount) ............................................... $22,808 $22,808
Unrecognized gain from purchase and exchange, net of $2,736 and $2,136
accumulated amortization ............................................... 1,484 2,084
------- -------
Totals ............................................................. $24,292 $24,892
======= =======
13.5% Debentures (face amount)
1989 Original Series ................................................... $ -- $18,203
1991 Series ............................................................ -- 2,292
1992 Series ............................................................ -- 2,360
1996 Series ............................................................ -- 2,817
------- -------
Totals ............................................................. $ -- $25,672
======= =======
</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 (total amount of $50,000),
which have been paid in 1996 and 1997. 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.
43
<PAGE> 45
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9 -- STOCKHOLDERS' EQUITY
Reverse Stock Split and Stock Transfer Restrictions. At a Special Meeting
of Stockholders held in June 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 treasury shares. 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.
Treasury Stock. Treasury stock consists of shares of common stock
repurchased by the Company and its former HEC subsidiary. As of December 31,
1997 and 1996, the Company held 335,000 and 299,000 treasury shares,
respectively. In January 1998, the Company repurchased 7,006 shares of its
common stock for $250,000.
Commission-Free Offer to Purchase Common Stock. In June 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 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. In July 1996, the Offer terminated resulting in the Company's
purchase of 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.
Reissuance of Treasury Stock. In January 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
discussed in Note 2.
Tender Offer for Common Stock. In June 1997, the Company conducted a
self-tender offer for up to 300,000 shares of its common stock at $27.50 per
share, terms and conditions of which were discussed in the offering document.
Stockholders tendered a total of 328,346 shares, of which the Company accepted
304,461 shares as permitted by the offering documents, for a total purchase
price of $8,373,000.
44
<PAGE> 46
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1997:
<TABLE>
<S> <C> <C>
Total options authorized.................................. 136,000
Less: Options granted, not exercised:
September 1997.................................. (68,000) Exercise price of $26.06, expiring September 2007
February 1997................................... (10,750) Exercise price of $22.50, expiring February 2007
September 1996.................................. (46,500) Exercise price of $11.75, expiring September 2006
June 1995....................................... (10,750) Exercise price of $11.50, expiring June 2005
-------
Options available for grant............................ --
=======
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting 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 under the 1995 Stock Option Plan
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>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
------------------------- DECEMBER 31, JULY 31,
1997 1996 1995 1995
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss) - as reported .......... $ 12,847 $ 6,523 $ (3,265) $ (4,804)
Net income (loss) - pro forma ............ 11,750 6,222 (3,265) (4,871)
Net income (loss) per share - as reported
Basic ................................. 9.10 4.93 (2.45) (3.50)
Assuming dilution ..................... 8.77 4.89 (2.45) (3.50)
Net income (loss) per share - pro forma
Basic ................................. 8.32 4.70 (2.45) (3.56)
Assuming dilution ..................... 8.02 4.66 (2.45) (3.56)
</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.
45
<PAGE> 47
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10 -- INCOME TAXES
The following is a summary of the income tax provision (benefit) (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
------------------------ DECEMBER 31, JULY 31,
1997 1996 1995 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal
Deferred tax (benefit) ......... $ 8,960 $ (5,071) $ (500) $ 471
Current tax .................... 652 183 6 133
State ............................. 296 363 195 226
---------- ---------- ---------- ----------
Total ...................... $ 9,908 $ (4,525) $ (299) $ 830
========== ========== ========== ==========
</TABLE>
Reconciliations of the expected tax or (benefit) at the statutory tax rate
to the effective tax are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
-------------------- DECEMBER 31, JULY 31,
1997 1996 1995 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Expected tax or (benefit) at the statutory tax rate ........ $ 7,737 $ 679 $(1,212) $(1,351)
Expired NOLs ............................................... 6,813 -- -- --
Increase (decrease) in deferred tax asset valuation
allowance ............................................... (5,694) (5,879) (736) 1,605
Alternative minimum tax .................................... 652 183 6 133
State taxes (net of federal benefit) ....................... 196 240 129 226
Foreign loss not taxable ................................... 59 190 1,094 331
Capital loss carryover ..................................... -- -- -- (515)
Net (increase) decrease in tax credits ..................... -- -- -- (133)
Other ...................................................... 145 62 420 534
------- ------- ------- -------
Effective tax or (benefit) ................................. $ 9,908 $(4,525) $ (299) $ 830
======= ======= ======= =======
</TABLE>
The Company paid only a federal alternative minimum tax of $682,000,
$146,000 and $133,000 for the years ended December 31, 1997 and 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 five months ended
December 31, 1995.
46
<PAGE> 48
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1997 DECEMBER 31, 1996
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Net operating loss carryforward .......................... $ 35,086 $ -- $ 50,783 $ --
Equity in earnings (losses) of unconsolidated
affiliates ............................................ 3,325 (938) 2,982 (4,796)
Tax credits .............................................. 2,216 -- 1,727 --
Original issue discounts and cancellation of debt
income on 7% and 13.5% Debentures ..................... 2,102 -- 3,255 --
Reserves recorded for financial statement purposes
and not for tax purposes .............................. 466 -- 881 --
Other temporary differences .............................. 159 (185) 679 (476)
Depreciation and amortization ............................ -- (720) 936 --
Litigation costs deferred for tax purposes ............... -- -- 425 --
Basis differences ........................................ -- -- -- (231)
-------- -------- -------- --------
Deferred tax assets and liabilities ...................... 43,354 $ (1,843) 61,668 $ (5,503)
======== ======== ========
Less: Deferred tax liabilities ........................... (1,843) (5,503)
-------- --------
41,511 56,165
Less: Valuation allowance ................................ (39,471) (45,165)
-------- --------
Deferred tax asset, net ........................... $ 2,040 $ 11,000
======== ========
</TABLE>
Below is a schedule of expiring NOLs by year (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, NOLS
------------ ---------
<S> <C>
1998..................................................... $ 42,944
1999..................................................... 607
2001..................................................... 793
2004..................................................... 447
2005..................................................... 6,584
2006..................................................... 22,144
2007..................................................... 8,517
2008..................................................... 12,896
2009..................................................... 6,915
2010..................................................... 1,347
---------
Total........................................... $ 103,194
=========
</TABLE>
In addition, the Company has approximately $1,468,000 of alternative
minimum tax credits which have no expiration date, a depletion carryforward of
approximately $6,142,000, which may be used to offset future taxable income
without an expiration limitation and an investment tax credit carryforward of
approximately $718,000, which will expire between 1998 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, 1997, management was not aware of any
ownership changes which would limit the utilization of the NOLs and tax credit
carryforwards.
47
<PAGE> 49
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 MONTHS YEAR
YEARS ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JULY 31,
DESCRIPTION 1997 1996 1995 1995
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Issuance of treasury stock in exchange for common shares
of ShowBiz:
Investment in ShowBiz ........................................... $ 3,820 $ -- $ -- $ --
Reduction of additional paid-in capital ......................... 2,626 -- -- --
Reduction in treasury stock ..................................... 6,446 -- -- --
Payment in-kind of annual interest on 13.5% Debentures ............. 1,524 2,817 -- --
Repayment of note payable from funds held in restricted cash ....... 375 -- -- --
Recording of proportionate share of stockholders' equity/
partners' capital transactions of equity investments ............ 143 96 67 238
Real estate acquired through foreclosure ........................... -- -- 25 --
Issuance of Redeemable Preferred Stock ............................. -- -- -- 1,000
Effect of reverse split on common stock/paid-in capital ............ -- -- -- 479
Supplemental disclosures of cash payments:
Interest paid (including capitalized interest) ..................... $ 7,244 $ 4,625 $ 4,645 $ 8,010
Income taxes paid .................................................. 853 482 95 280
</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").
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. 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.
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 $466,000 and $467,000 for the years
ended December 31, 1997 and 1996, $190,000 for the five months ended December
31, 1995 and $436,000 for the year ended July 31, 1995, 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
$5,551,000 and $5,205,000 during the years ended December 31, 1997 and 1996,
$1,554,000 for the five months ended December 31, 1995 and $3,470,000 in the
year ended July 31, 1995, respectively.
48
<PAGE> 50
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13 -- ORGANIZATION AND OPERATIONS OF HALLWOOD ENERGY CORPORATION AND HEPGP
LTD.
Organization. In May 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.
In May 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. In
October 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 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, 1997 and 1996, the Company has included
$395,000 and $1,043,000 in accounts payable and accrued expenses, respectively,
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 was 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. The Company's HEP affiliate routinely enters into financial
contracts for hedging transactions of its crude oil and natural gas production.
Management does not consider the portion attributable to the Company to be
material.
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.
49
<PAGE> 51
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. Commissions paid to the factors were
approximately $441,000 and $330,000 for the years ended December 31, 1997 and
1996, $118,000 for the five months ended December 31, 1995 and $335,000 for the
year ended July 31, 1995, respectively.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
------ --------
<S> <C> <C>
Raw materials............................................................ $5,307 $ 4,472
Work in process.......................................................... 3,239 2,669
Finished goods........................................................... 9,849 10,481
----- -------
18,395 17,622
Less: Obsolescence reserve............................................... (460) (434)
------ --------
Total................................................................. $17,935 $17,188
====== ======
</TABLE>
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- ------
<S> <C> <C>
Land..................................................................... $ 391 $ 391
Buildings and improvements............................................... 4,314 4,314
Leasehold improvements................................................... 121 113
Machinery and equipment.................................................. 8,591 6,739
Office furniture and equipment........................................... 1,872 1,421
Construction in progress................................................. 1,297 2,192
----- -------
16,586 15,170
Less: Accumulated depreciation........................................... (7,529) (6,379)
------ ------
Total................................................................. $9,057 $ 8,791
===== ======
</TABLE>
NOTE 15 -- 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 7%
Debenture issue 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 $30,186,000 and $37,342,000 at December 31, 1997 and 1996,
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 7%
and 13.5% Debenture issues is $21,468,000 and $41,675,000, based on market
prices on the New York Bond Exchange, compared to the carrying values of
$24,292,000 and $50,564,000 at December 31, 1997 and 1996, respectively.
50
<PAGE> 52
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As of December 31, 1997 and 1996, 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
HSC Financial Corporation. Effective August 1, 1994, the Company entered
into a 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.
Effective December 31, 1996, the compensation committee approved a
Financial Consulting Contract with HSC, 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. In addition, the Board of Directors awarded bonuses to
HSC in March 1997 in the amount of $100,000 from the Company and $139,000 from
its HCRE subsidiary, and in March 1998 in the amount of $500,000 from the
Company and $323,000 from its HCRE subsidiary. The March 1998 bonuses were
accrued and payable at December 31, 1997.
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.
The Company entered into a 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 affiliates of HEP. 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. Approximately $13,000 of such fee paid in 1997 was paid by
HEPGP, and the remainder by HEP and other affiliates of HEP.
Expenses. Pursuant to an existing agreement, the Company reimburses HSC
for reasonable and necessary expenses in providing office space and
administrative services. The Company reimbursed HSC $299,000 and $307,000 for
the years ended December 31, 1997 and 1996, $114,000 for the five months ended
December 31, 1995, and $275,000 for the year ended July 31, 1995, respectively.
Of the amounts paid in the periods, the Company paid $60,000 and $58,000 for the
years ended December 31, 1997 and 1996, $29,000 for the five months ended
December 31, 1995, and $69,000 for the year ended July 31, 1995, respectively.
The remainder was paid by HRP, HEPGP, HEP and other affiliates of HEP.
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. As described in Note 17, the Board of Directors authorized the
Company to loan Mr. Gumbiner the amount needed to satisfy the personal
assessment due the Securities and Exchange Commission in accordance with the
terms of a settlement
51
<PAGE> 53
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
agreement of its claims. The original amount of the promissory note, dated July
25, 1996, was $477,000 and the outstanding balance at December 31, 1997 and 1996
was $366,000 and $453,000, respectively. In addition, at December 31, 1997, the
Company is due $150,000 from the Alpha and Epsilon Trusts for certain costs
associated with the sale of the ShowBiz investment. In January 1998 the Company
received $87,000 from the Trusts in partial satisfaction of the amount due. The
remaining balance is contingent upon resolution of a related matter.
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
$6,000 and $25,000 for the years ended December 31, 1997 and 1996, $12,500 for
the five months ended December 31, 1995 and $25,000 for the year ended July 31,
1995, respectively. 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.
In December 1997, the litigation matter 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, Inc. and Brock Suite Hotels, Inc.), Defendants,
earlier filed in Santa Fe, New Mexico state court was settled. 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
alleged, 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. Integra's contribution to the settlement
was paid by its insurance carrier.
In July 1997, the Company entered into a Compromise and Settlement
Agreement, whereby the Company and the Integra Unsecured Creditors' Trust agreed
to equally divide a $2,513,000 escrow account which had been established in
connection with the Company's sale of its ShowBiz investment. See also Note 6.
In June 1997, the plaintiff's claim against the Company's subsidiary,
Integra Hotels Incorporated, and numerous third party defendants in the matter
styled Marc P. Malcuit, et al, Plaintiffs vs. Howard Johnson International,
Inc., et al, Defendants, No. 96- C1-00049, was settled, and Integra's
contribution was paid by its insurance carrier. However, this settlement did not
resolve Integra's potential exposure to one of the third party defendants,
Holiday Inns, Inc., pursuant to a contractual indemnity of Holiday Inn by
Integra. However, Integra's contractual indemnity provision predates Integra's
bankruptcy proceeding; therefore, if an action is brought hereafter, the Company
will assert this and other factors as defenses.
In February 1997, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.
and Hallwood Realty Corporation (C.A. No.15578). The complaint sought access to
certain books and records of HRP, a list of the limited partners and
reimbursement of the plaintiff's expenses. On June 20, 1997, Gotham Partners,
L.P. filed a separate complaint in the Chancery Court for New Castle County,
Delaware, styled Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al
(C.A. No.15754), against the Company, HRP, HRC and the directors of HRC,
alleging claims of breach of fiduciary duties, breach of HRP's partnership
agreement, fraud, and as to the Company, aiding and abetting these alleged
breaches. At the same time as the filing of this complaint, plaintiff filed a
motion to amend its complaint in the earlier action to allege the same facts and
demand the same relief as plaintiff sought in the separate complaint. On June
27, 1997, the parties entered into a Stipulation and Order under which HRP
provided to plaintiff copies of certain of the documents requested. The other
claims in the two actions remain outstanding. On August 27, 1997, defendants
moved to dismiss the complaint in the separate action for plaintiff's failure
either to make a demand on HRC to bring suit or to allege adequately that such a
demand was futile. On February 6, 1998, the court granted defendants' motion to
dismiss but gave plaintiff thirty days to file an amended complaint. Plaintiffs
filed an amended complaint on March 6, 1998, which defendants have again moved
to
52
<PAGE> 54
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
dismiss. Defendants believe that the claims are without merit and intend to
defend the cases vigorously, but because of their early stages, cannot predict
the outcome of the claims or any possible 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 May 1997, a case was filed in the United States District Court for the
District of Colorado styled Wayland E. Noland v. Hallwood Energy Corporation,
The Hallwood Group Incorporated, et al, (C.A. No. 96-WM-2665). In September
1997, this case was consolidated with the Ravenswood Investment Company, L.P.
vs. Hallwood Energy Corporation, Hallwood Group, Inc. case discussed below.
Unlike the plaintiff in the Ravenswood case, the plaintiff in the Noland case
tendered his shares pursuant to the tender offer made by the Company to the
shareholders of HEC, but the allegations are substantially identical as those
made in the Ravenswood case. The plaintiff in the Noland case seeks damages of
an unspecified amount, and seeks class certification to represent similarly
situated former shareholders of HEC. 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
the Noland case, like the Ravenswood case, is without merit. Certain
non-tendering plaintiffs in the Ravenswood case have also filed a lawsuit styled
Cede & Company, et al, vs. Hallwood Group Inc. for appraisal rights under the
Texas statute. The Company plans to vigorously defend these cases, but because
of their early stages, cannot predict the outcome of the claims 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 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 felt 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 February 1995, the Company entered into agreements to settle the
following three lawsuits styled: (1) Louis G. Reesse, Inc., et al v. The
Hallwood Group Incorporated, et al, which was filed in the Fourteenth District
Court of Dallas County, Texas;
53
<PAGE> 55
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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. See note 8 for a description of the terms of the Series B Preferred
Stock.
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 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 the aforementioned litigation matters
will not have a material adverse effect on the financial condition, 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 had been contingently liable for the 12% Convertible Notes
(the "Notes") due July 31, 1997, issued by the Company's former wholly owned
subsidiary, Atlantic Metropolitan (U.K.) plc. Obligations under the Notes were
assumed by Grainger Trust plc ("Grainger") in connection with its purchase of
Atlantic Metropolitan (U.K.) plc in fiscal 1988; however, the Company remained a
guarantor as to the repayment of the Notes in the event Grainger defaulted. The
Notes were paid in full on July 31, 1997, therefore, the Company has no further
obligation.
The Company has entered into an agreement (the "Option Agreement") with
the president of its Brookwood Companies Incorporated subsidiary to sell all of
the capital stock of Brookwood for a minimum of $9.8 million, including at least
$1.8 million of anticipated dividends and tax sharing payments. The Company is
currently unable to determine if the Option Agreement will be exercised by its
March 31, 1998 expiration date. If such transaction is determined to be
probable, the Company will record a charge against earnings at that time. In
accordance with the terms of the Indenture, proceeds from the sale would be used
to repurchase 7% Debentures.
Commitments. Total lease expense was $4,479,000 and $4,575,000 for the
years ended December 31, 1997 and 1996, $1,977,000 for the five months ended
December 31, 1995, and $4,991,000 for the year ended July 31, 1995. 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 require the payment of rent contingent
upon hotel revenue. Contingent rent was $439,000 and $473,000 for the year ended
December 31, 1997 and 1996, $126,000 for the five months ended December 31, 1995
and $689,000 for the year ended July 31, 1995.
At December 31, 1997, 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>
1998........................................................................ $ 4,467
1999........................................................................ 4,675
2000........................................................................ 4,063
2001........................................................................ 3,795
2002........................................................................ 2,798
Thereafter.................................................................. 9,080
--------
Total.............................................................. $ 28,878
========
</TABLE>
54
<PAGE> 56
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 COMPANY OTHER CONSOLIDATED
--------- --------- --------- --------- ----------- --------- -----------
YEAR ENDED DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue ............................ $ 6,922 $ 6,350 $ 91,552 $ 21,038 $ 19,416 $ 3,491 $ 148,769
========= ========= ========= ========= =========== ========= =========
Operating income (loss) .................. $ 3,571 $ 1,832 $ 1,977 $ (237) $ 18,809 $ -- $ 25,952
========= ========= ========= ========= =========== ========= =========
Unallocable expenses, net ................ $ (3,397) (3,397)
========= ---------
Income before income taxes ............... $ 22,555
=========
Identifiable assets, December 31, 1997 ... $ 8,260 $ 14,539 $ 42,226 $ 15,910 $ -- $ -- $ 80,935
Cash allocable with segment .............. 186 31 44 396 -- 4,569 5,226
--------- --------- --------- --------- ----------- --------- ---------
$ 8,446 $ 14,570 $ 42,270 $ 16,306 $ -- $ 4,569 86,161
========= ========= ========= =========== ========= =========
Corporate assets ......................... $ 3,597 3,597
========= ---------
Total assets, December 31, 1997 .......... $ 89,758
=========
Depreciation, depletion, amortization
and impairment ....................... $ 674 $ 1,387 $ 1,240 $ 2,841 $ -- $ -- $ 6,142
========= ========= ========= ========= =========== ========= =========
Capital expenditures/acquisitions ........ $ -- $ 223 $ 1,440 $ 1,286 $ -- $ -- $ 2,949
========= ========= ========= ========= =========== ========= =========
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
========= ========= ========= ========= =========== ========= =========
</TABLE>
55
<PAGE> 57
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 18 -- BUSINESS BY INDUSTRY SEGMENT (CONTINUED)
The Company's business by industry segment is summarized below (in
thousands):
<TABLE>
<CAPTION>
REAL TEXTILE ASSOCIATED
ESTATE ENERGY PRODUCTS HOTELS COMPANY OTHER CONSOLIDATED
--------- --------- --------- --------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= ============= ========= =========
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
========= ========= ========= ========= ============= ========= =========
</TABLE>
- ---------------------------
* Operating income of the textile products industry segment is net of $16 of
intercompany interest expense in the year ended July 31, 1995.
56
<PAGE> 58
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 19 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The results of operations by quarter for the years ended December 31, 1997
and 1996, are summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenues............................ $51,815 $36,258 $28,113 $32,583
Gross profit.................................. 21,687 6,421 3,554 7,009
Net income.................................... 8,381 3,221 55 1,190
Net income per share - basic.................. 5.37 2.05 0.04 0.94
Net income per share - assuming dilution...... 5.27 2.01 0.04 0.90
<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 - basic.................. 0.23 1.77 0.38 2.55
Net income per share - assuming dilution...... 0.23 1.77 0.38 2.53
</TABLE>
Year ended December 31, 1997. In March 1997, the Company sold its
ShowBiz investment and realized a gain of $18,277,000 from the sale. Pursuant to
a self-tender offer the Company repurchased 13.5% Debentures in the face amount
of $12,875,000 in June 1997 and subsequently redeemed the remaining balance of
the 13.5% Debentures in the face amount of $14,287,000 in December 1997.
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.
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) spin-out Brookwood employees into a separate plan. The
Company's 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. HPI has a separate
401(k) plan which is similar to the Company's plan. Employer contributions paid
on behalf of HRC and HPI employees are substantially paid by the respective real
estate and energy master limited partnerships. The Company's contributions to
the plan for the years ended December 31, 1997 and 1996, the five months ended
December 31, 1995 and the year ended July 31, 1995, respectively, excluding
contributions from the HRC and HPI affiliates to the extent paid by the master
limited partnership, were $212,000, $220,000, $24,000 and $150,000,
respectively.
Brookwood's union employees belong to a pension fund maintained
by their union. The Company contributes $81 per month per employee to the fund.
Total contributions for the years ended December 31, 1997 and 1996, five months
ended December 31, 1995 and the year ended July 31, 1995, were $217,000,
$207,000, $85,000 and $198,000, respectively. At September 30, 1997, 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.
57
<PAGE> 59
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1997
(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 based on estimates which are highly complex and interpretive.
The estimates are subject to continuing change as additional information becomes
available.
The standardized measure of discounted future net cash flows
provides a comparison of the 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, 1997, oil and gas prices averaged $16.88 per barrel of oil and
$2.38 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 $219,300 at December 31, 1997 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%.
58
<PAGE> 60
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
RESERVE QUANTITIES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GAS OIL
MCF BBLS
--- ----
PROVED RESERVES:
<S> <C> <C>
Balance, January 1, 1995 .................................... 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
Extensions and discoveries .................................. 531 123
Revision of previous estimates .............................. 1,403 (231)
Sales of reserves in place .................................. (13) (2)
Purchases of reserves in place .............................. 62 12
Production .................................................. (1,602) (100)
------- -------
Balance, December 31, 1997 .................................. 12,431 754
======= =======
PROVED DEVELOPED RESERVES:
Balance, December 31, 1995 .................................. 11,009 914
======= =======
Balance, December 31, 1996 .................................. 11,768 904
======= =======
Balance, December 31, 1997 .................................. 12,092 691
======= =======
</TABLE>
59
<PAGE> 61
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
DESCRIPTION 1997 1996 1995
-----------
<S> <C> <C> <C>
Future cash flows ............................................... $ 40,000 $ 70,000 $ 43,000
Future production and development costs ......................... (14,000) (21,000) (15,000)
-------- -------- --------
Future net cash flows before discount ........................... 26,000 49,000 28,000
10% discount to present value ................................... (7,000) (18,000) (9,000)
-------- -------- --------
Standardized measure of discounted future net cash flows ........ $ 19,000 $ 31,000 $ 19,000
======== ======== ========
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
DESCRIPTION 1997 1996 1995
----------- -------- -------- --------
<S> <C> <C> <C>
Standardized measure of discounted future net cash
at beginning of year ......................................... $ 31,000 $ 19,000 $ 17,000
Sales of oil and gas produced, net of production costs .......... (4,611) (5,557) (4,064)
Net changes in prices and production costs ...................... (11,722) 11,583 2,424
Extensions, discoveries and other additions, net of future
production costs ............................................. 1,496 1,582 2,550
Changes in estimated future development costs ................... (1,358) (1,125) (1,037)
Development costs incurred ...................................... 1,136 1,321 979
Revisions of previous quantity estimates ........................ 20 2,186 335
Purchases of reserves in place .................................. 158 2,064 63
Sales of reserves in place ...................................... (29) (1,220) (54)
Accretion of discount ........................................... 3,100 1,900 1,700
Changes in production rates and other ........................... (190) (734) (896)
-------- -------- --------
Standardized measure of discounted future net cash flows
at the end of year ........................................... $ 19,000 $ 31,000 $ 19,000
======== ======== ========
</TABLE>
- -----------------------
The standardized measure of discounted future net cash flows is calculated using
year end average oil and gas prices. At December 31,1997, oil and gas prices
averaged $16.88 per bbl of oil and $2.38 per mcf of gas. If average oil and gas
prices as of March 9, 1998 of $15.68 per bbl of oil and $2.18 per mcf of gas had
been used in this calculation, the standardized measure of discounted future net
cash flows would have been approximately 13% lower.
60
<PAGE> 62
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, 1997 and 1996 and the
related consolidated statements of operations, changes in stockholders equity
and cash flows for the years ended December 31, 1997 and 1996, the five month
period ended December 31, 1995, and the year ended July 31, 1995, and have
issued our report thereon dated March 9, 1998, 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
March 9, 1998
61
<PAGE> 63
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Investments in subsidiaries ...................................................... $ 27,560 $ 33,229
Energy division
Oil and gas properties, net .................................................. 5,457 4,569
Current assets of HEP ........................................................ 1,409 1,298
Noncurrent assets of HEP ..................................................... 964 815
Cash and cash equivalents ........................................................ 4,358 6,288
Investment in HRP ................................................................ 2,762 1,890
Deferred tax asset, net .......................................................... 2,040 11,000
Receivables and other assets ..................................................... 1,608 1,153
Investment in ShowBiz ............................................................ -- 16,945
-------- --------
Total Assets ................................................................. $ 46,158 $ 77,187
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
7% Collateralized Senior Subordinated Debentures ................................. $ 24,292 $ 24,892
Accounts payable, accrued interest and other accrued expenses .................... 1,817 3,564
Energy division
Long-term obligations of HEP ................................................. 2,511 2,347
Current liabilities of HEP ................................................... 1,472 1,385
Accounts payable and accrued expenses ........................................ 395 1,043
Loans payable .................................................................... 500 11,500
13.5% Subordinated Debentures .................................................... -- 25,672
-------- --------
Total Liabilities ............................................................ 30,987 70,403
Redeemable preferred stock ....................................................... 1,000 1,000
Common stock ..................................................................... 160 160
Additional paid-in capital ....................................................... 54,823 57,306
Accumulated (deficit) ............................................................ (31,693) (44,490)
Treasury stock ................................................................... (9,119) (7,192)
-------- --------
Total Stockholders' Equity ................................................... 14,171 5,784
-------- --------
Total Liabilities and Stockholders' Equity ................................... $ 46,158 $ 77,187
======== ========
</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".
62
<PAGE> 64
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
--------------------- DECEMBER 31, JULY 31,
1997 1996 1995 1995
-------- -------- ------------ ----------
<S> <C> <C> <C> <C>
INCOME
Income (loss) from investment in ShowBiz ............... $ 19,416 $ 4,448 $ (88) $ (171)
Intercompany income from subsidiaries
Management fees ..................................... 2,834 2,598 833 1,988
Dividends ........................................... 2,800 1,100 1,792 2,292
Interest income ..................................... 278 524 505 1,797
Energy division - oil and gas revenues and other income 2,742 251 -- --
Insurance settlement ................................... 1,508 -- -- --
Equity in net income (loss) of subsidiaries ............ (1,561) 1,431 (2,097) (2,607)
Interest on short-term investments ..................... 922 175 18 113
Income (loss) from investment in HRP ................... 871 (1,630) (786) (121)
Fee income ............................................. 560 425 177 425
Other income ........................................... 202 215 21 53
-------- -------- -------- --------
Total income ..................................... 30,572 9,537 375 3,769
EXPENSES
Interest expense ....................................... 4,364 6,097 2,174 5,116
Administrative expenses ................................ 3,196 2,174 1,401 3,332
Energy division - oil and gas expenses ................. 1,845 152 -- --
Depreciation and amortization .......................... 152 -- -- --
Provision for losses (recovery) ........................ -- (29) -- 11
Hotel and real estate operating expenses ............... -- 9 3 11
Intercompany expenses of subsidiaries
Management fees ..................................... -- -- -- 300
Interest expense .................................... -- -- 50 38
-------- -------- -------- --------
Total expenses ................................... 9,557 8,403 3,628 8,808
-------- -------- -------- --------
Income (loss) before income taxes and extraordinary gain 21,015 1,134 (3,253) (5,039)
Income taxes (benefit) ................................. 9,045 (5,389) 37 418
-------- -------- -------- --------
Income (loss) before extraordinary gain ................ 11,970 6,523 (3,290) (5,457)
Extraordinary gain from extinguishment of debt ......... 877 -- 25 653
-------- -------- -------- --------
NET INCOME (LOSS) .......................................... $ 12,847 $ 6,523 $ (3,265) $ (4,804)
======== ======== ======== ========
</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."
63
<PAGE> 65
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
--------------------- DECEMBER 31, JULY 31,
1997 1996 1995 1995
-------- -------- ------------- --------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ......... $ 873 $ 523 $ (1,997) $ (2,718)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment in ShowBiz ........... 40,323 4,139 -- --
Return of (additional) investment in subsidiaries ..... 4,108 2,176 (607) 9,774
Purchase of minority shares of HEC .................... (648) (1,750) -- --
Capital acquisition of real estate .................... -- (40) -- --
Investments in associated company/affiliate ........... -- (4) -- (4,473)
Proceeds from sale of marketable securities ........... -- -- -- 610
Disbursements related to asset held for sale .......... -- -- -- 79
-------- -------- -------- --------
Net cash provided by (used in) investing activities 43,783 4,521 (607) 5,990
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of 13.5% Debentures ........................ (27,163) -- -- --
Proceeds from bank borrowings and loans payable ....... -- 2,000 -- --
Repayment of bank borrowings and loans payable ........ (11,000) (437) (213) (1,750)
Purchase of common stock for treasury ................. (8,373) (394) -- --
Payment of dividends to Series B preferred stockholders (50) (50) -- --
Repurchase of 7% Debentures ........................... -- -- -- (1,845)
Purchase of fractional shares - reverse split ......... -- -- (22) (17)
-------- -------- -------- --------
Net cash provided by (used in) financing activities (46,586) 1,119 (235) (3,612)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ........................................... (1,930) 6,163 (2,839) (340)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............. 6,288 125 2,964 3,304
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................... $ 4,358 $ 6,288 $ 125 $ 2,964
======== ======== ======== ========
</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."
64
<PAGE> 66
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>
YEARS ENDED FIVE MONTHS YEAR
DECEMBER 31, ENDED ENDED
----------------- DECEMBER 31, JULY 31,
DESCRIPTION 1997 1996 1995 1995
----------- ------ ------ ----------- -------
<S> <C> <C> <C> <C>
Issuance of treasury stock in exchange for common shares of ShowBiz:
Investment in ShowBiz ......................................... $3,820 $ -- $ -- $ --
Reduction of additional paid-in capital ....................... 2,626 -- -- --
reduction in treasury stock ................................... 6,446 -- -- --
Payment in-kind of annual interest on 13.5% Debentures ............. 1,524 2,817 -- --
Recording of proportionate share of stockholders' equity/
partners' capital transactions of equity investments .......... 143 96 67 238
Effect of reverse split on common stock/paid-in capital ............ -- -- -- 479
Real estate acquired through foreclosure ........................... -- -- 25 --
Supplemental disclosures of cash payments:
Interest paid (including capitalized interest) ..................... $5,522 $2,659 $4,645 $ 5,591
Income taxes paid .................................................. 600 322 95 15
</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
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 referenced in 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 1997 1996
----------- ------- -------
<S> <C> <C>
Debenture Issues
7% Debentures (including deferred gain of $1,484 and $2,136, respectively) ...... $24,292 $24,892
13.5% Debentures ................................................................ -- 25,672
------- -------
Totals ..................................................................... $24,292 $50,564
======= =======
Loans Payable (by segment)
Real estate ..................................................................... $ 500 $ 500
Associated company .............................................................. -- 11,000
------- -------
Totals ..................................................................... $ 500 $11,500
======= =======
</TABLE>
Maturities over the next five years are as follows (in thousands):
1998 -- $2,427; 1999 -- $-0-; 2000 -- $20,881; 2001 -- $-0-; 2002 -- $-0-.
NOTE 3 -- LITIGATION, CONTINGENCIES AND COMMITMENTS
See Note 17 to the consolidated financial statements.
66
<PAGE> 68
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, 1997.............. $ -- $ -- $ -- $ -- $ --
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
Allowance for losses - mortgage loans:
Year ended December 31, 1997.............. -- -- -- -- --
Year ended December 31, 1996.............. -- -- -- -- --
Five months ended December 31, 1995....... -- -- -- -- --
Year ended July 31, 1995.................. 226 220 -- (446)(b) --
TEXTILE PRODUCTS
Allowance for losses - accounts receivable:
Year ended December 31, 1997.............. 455 31 -- (79)(c) 407
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
OTHER
Allowance for losses - marketable securities:
Year ended December 31, 1997.............. 130 -- -- -- 130
Year ended December 31, 1996.............. 130 -- -- -- 130
Five months ended December 31, 1995....... 130 -- -- -- 130
Year ended July 31, 1995.................. 277 -- -- (147)(b) 130
</TABLE>
- ------------------------
Notes:
(a) Change in foreign currency exchange rate
(b) Write-off upon disposition/foreclosure
(c) Write-off, net of recoveries
67
<PAGE> 69
SCHEDULE III
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT WHICH
INITIAL COST CARRIED AT CLOSE
TO COMPANY COSTS CAPI- OF PERIOD
------------ TALIZED SUB- ------------------
BUILD- SEQUENT TO BUILD- ACCUMU- DEPRE-
INGS AND ACQUISITION INGS AND ULATED CIABLE
ENCUM- IMPROVE (IMPROVE- IMPROVE- DEPRECIA- DATE LIFE IN
BRANCES LAND MENTS MENTS) LAND MENTS TOTAL TION ACQUIRED YEARS
------- ---- -------- ----------- ---- -------- ----- --------- -------- -------
TEXTILE PRODUCTS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Industrial plant
Kenyon, Rhode Island (b)... -- $ 391 $ 2,355 $ 1,959 $ 391 $ 4,314 $ 4,705 $ 1,612 3/89 20
HOTELS
Sarasota, Florida (a)(b)...... -- -- 5,100 3,199 -- 8,299 8,299 6,147 6/91 7
Greenville, South Carolina.... $6,750 -- 459 6,892 828 6,523 7,351 1,053 3/94 15
Tulsa, Oklahoma .............. 5,269 909 4,285 607 919 4,882 5,801 1,904 3/94 10
Oklahoma City, Oklahoma (a)(b) -- -- -- 2,082 -- 2,082 2,082 1,161 6/91 6
Huntsville, Alabama (a)....... -- -- 942 443 -- 1,385 1,385 535 3/94 10
Miscellaneous investments..... -- 50 -- -- 50 -- 50 -- 3/94 n/a
------ ------- ------- ------ -------- ------- --------
Subtotal................ 959 10,786 13,223 1,797 23,171 24,968 10,800
------ ------- ------- ------ -------- ------- --------
Totals.................. $1,350 $13,141 $15,182 $2,188 $ 27,485 $29,673 $ 12,412
====== ======= ======= ====== ======== ======= ========
</TABLE>
Changes in real estate owned and accumulated depreciation for the years
ended December 31, 1997 and 1996, five months ended December 31, 1995 and year
ended July 31, 1995 are summarized below (in thousands):
<TABLE>
<CAPTION>
FIVE MONTHS
YEAR ENDED YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JULY 31,
1997 1996 1995 1995
---------------------- --------------------- --------------------- -----------------------
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......... $29,913 $11,038 $22,141 $ 8,168 $ 32,500 $ 8,915 $ 43,619 $ 7,964
Additions during the period
Costs capitalized.............. 1,285 -- 7,772 -- 402 -- 1,135 --
Depreciation................... -- 2,899 -- 2,870 -- 1,153 -- 2,893
Fully depreciated assets....... (1,525) (1,525) -- -- -- -- -- --
Foreign exchange adjustment.... -- -- -- -- (330) -- 417 --
Deductions during the period
Sales.......................... -- -- -- -- (10,431) (1,900) (12,671) (1,942)
------- ------- ------- ------- -------- ------- -------- -------
BALANCE, END OF PERIOD............... $29,673 $12,412 $29,913 $11,038 $ 22,141 $ 8,168 $ 32,500 $ 8,915
======= ======= ======= ======= ======== ======= ======== =======
</TABLE>
- ------------------------
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.
68
<PAGE> 70
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------- ------------------------
<S> <C>
UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS AMERICAN STOCK EXCHANGE
</TABLE>
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 units held by nonaffiliates of the registrant as
of March 3, 1998 was approximately $65,332,000.
CLASS: UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
OUTSTANDING AT MARCH 3, 1998: 1,672,556 UNITS.
================================================================================
PAGE 1 OF 35
<PAGE> 71
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 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 Supplemental Information 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 29
PART III
Item 10. Directors and Executive Officers of the
Registrant 30
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 33
Item 13. Certain Relationships and Related Transactions 33
PART IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K. 34
</TABLE>
PAGE 2 OF 35
<PAGE> 72
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 limited
partners' interests, or units, are traded on the American Stock Exchange under
the symbol "HRY".
As of December 31, 1997, HRP owned twelve real estate properties (the
"Properties") located in six states (see Item 2 - Properties). Seven are
commercial office building properties and five are industrial park properties.
HRP seeks to maximize the value of its real estate by making capital and tenant
improvements, by executing marketing programs to attract and retain tenants,
and by controlling or reducing, where possible, operating expenses.
Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is HRP's general partner and is responsible for asset management
of HRP 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 HRP. Hallwood
Commercial Real Estate, Inc. ("HCRE"), another wholly-owned subsidiary of
Hallwood, provides property management services to the Properties.
OCCUPANCY/MAJOR TENANT INFORMATION
In the aggregate, the Properties were 94% occupied at December 31, 1997. 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>
1998 24%
1999 21%
2000 16%
2001 10%
2002 11%
Thereafter 18%
</TABLE>
During 1997 and 1996, 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 15% and 16% of revenues in 1997 and
1996, respectively. The Centers for Disease Control and Prevention ("CDC"), an
agency of the U.S. Department of Health and Human Services, leases space in
Corporate Square and Executive Park and contributed approximately 10% of the
revenues in 1997 and 1996.
As of December 31, 1997, Ford occupied approximately 248,000 square feet of
office space under 10 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 1998
and 2002 and most contain renewal options, providing for one to ten year
renewals. As of December 31, 1997, 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 HRP
otherwise dependent on any one tenant or group of tenants for 10% or more of
its revenues.
PAGE 3 OF 35
<PAGE> 73
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 approximately $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.
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 93 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, 1997, HRP owned twelve properties in six states with
approximately 5,162,000 net rentable square feet, of which seven are office
building properties containing 2,608,000 square feet and five are industrial
park properties containing 2,554,000 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,
1997.
Bellevue Corporate Plaza Fee simple interest in a 10-story office building constructed in
Bellevue, Washington 1980 containing 234,880 net rentable square feet of space located
on 3.6 acres of land. The property was 99% occupied at December
31, 1997.
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 443,117 net rentable square feet of
space located on 32 acres of land. The property was 98% occupied
at December 31, 1997.
</TABLE>
PAGE 4 OF 35
<PAGE> 74
<TABLE>
<CAPTION>
NAME AND LOCATION GENERAL DESCRIPTION OF THE PROPERTY
- ----------------- -----------------------------------
<S> <C>
OFFICE BUILDING PROPERTIES - CONTINUED:
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 90% occupied at December 31, 1997.
First Maryland Building Fee simple interest in a 22-story office building constructed in
Baltimore, Maryland 1972 containing 344,153 net rentable square feet of office space
on 0.6 acres of land. At December 31, 1997, the property was 94%
occupied.
Montrose Office Center Fee simple interest in a 10-story office building constructed in
Rockville, Maryland 1980 containing 147,658 net rentable square feet of space on 3
acres of land. The property was 99% occupied at December 31,
1997.
Parklane Towers Fee simple interest in twin 15-story office buildings constructed
Dearborn, Michigan in 1973 containing 481,034 net rentable square feet of space on
31.8 acres of land. The property was 88% occupied at December 31,
1997.
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, 1997, the
property was 91% occupied.
Fairlane Commerce Park Fee simple interest in a portion of an office/industrial park
Dearborn, Michigan consisting of 12 single-story buildings constructed between 1974
and 1990. The property consists of 417,922 net rentable square
feet of space on 35 acres of land. The property was 88% occupied
at December 31, 1997.
Joy Road Distribution Center Fee simple interest in a 455,500 square foot warehouse situated on
Detroit, Michigan 21 acres and originally constructed in the early 1940's.The
property was 93% occupied at December 31, 1997.
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 99%
occupied at December 31, 1997.
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, 1997,
the property was 97% 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 5 to the Consolidated Financial
Statements and Schedule III contained in Item 8.
PAGE 5 OF 35
<PAGE> 75
ITEM 3. LEGAL PROCEEDINGS
On February 27, 1997, a lawsuit was filed in the Chancery Court for New Castle
County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty Partners,
L.P. and Hallwood Realty Corporation (C.A. No. 15578). The complaint sought
access to certain books and records of HRP, a list of the limited partners and
reimbursement of the plaintiff's expenses.
On June 20, 1997, Gotham Partners, L.P. filed a separate complaint in the
Chancery Court for New Castle County, Delaware, styled Gotham Partners, L.P. v.
Hallwood Realty Partners, L.P., et al. (C.A. No. 15754), against Hallwood, HRP,
the general partner of HRP, and the directors of the general partner, alleging
claims of breach of fiduciary duties, breach of HRP's partnership agreement,
fraud, and as to Hallwood, aiding and abetting these alleged breaches. At the
same time as the filing of this complaint, plaintiff filed a motion to amend
its complaint in the earlier action to allege the same facts and demand the
same relief as plaintiff sought in the separate complaint.
On June 27, 1997, the parties entered into a Stipulation and Order under which
HRP provided to plaintiff copies of certain of the documents requested. The
other claims in the two actions remain outstanding.
On August 27, 1997, defendants moved to dismiss the complaint in the separate
action for plaintiff's failure either to make a demand on the general partner
to bring suit or to allege adequately that such a demand was futile. On
February 6, 1998, the Court granted defendants' motion to dismiss but gave
plaintiff thirty days to file an amended complaint.
Defendants believe that the claims are without merit and intend to defend the
cases vigorously, but because of their early stages, cannot predict the outcome
of the claims or any possible effect an adverse outcome might have.
HRP is from time to time involved in various legal proceedings and claims which
arise in the ordinary course of business. These matters are generally covered
by insurance. Management believes that the resolution of these matters will not
have a material adverse effect on HRP's financial position, cash flow or
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of HRP during the
fourth quarter of 1997.
PAGE 6 OF 35
<PAGE> 76
PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED SECURITY HOLDER MATTERS
The Partnership's units are traded on the American Stock Exchange under the
symbol "HRY". As of March 3, 1998, there were approximately 35,000 unitholders
of record of the 1,672,556 units outstanding. HRP has not paid any cash
distributions since February, 1992. 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:
<TABLE>
<CAPTION>
Trading Ranges
--------------------
High Low
-------- --------
<S> <C> <C>
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
1997 -
1st Quarter $ 27.625 $ 24.50
2nd Quarter 29.75 24.50
3rd Quarter 55.50 29.50
4th Quarter 54.75 47.375
</TABLE>
PAGE 7 OF 35
<PAGE> 77
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,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- ---------- ---------
(in thousands except per unit amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Total revenues $ 53,899 $ 49,612 $ 50,829 $ 48,615 $ 48,065
Income (loss) before extraordinary item 2,357 (9,428) (9,024) (18,161) (18,769)
Net income (loss) 2,357 (9,428) (9,789) (18,161) (18,769)
Net income (loss) per unit - basic (a) 1.40 (5.50) (5.55) (10.38) (10.73)
Net income (loss) per unit -
assuming dilution (a) $ 1.35 (5.50) (5.55) (10.38) (10.73)
Balance Sheet:
Real estate, net (b) $ 179,028 $ 182,877 $ 192,266 $ 205,212 $ 219,710
Total assets 207,134 210,214 225,359 225,418 248,093
Mortgages payable 157,911 160,732 166,675 160,296 162,938
Partners' capital (c) 33,041 30,684 41,917 51,522 69,683
</TABLE>
Notes to Selected Financial Data:
(a) Reflects effect of a 1-for-5 reverse split of the outstanding units
effective as of the close of business on March 3, 1995.
(b) Real estate assets declined in each of the years, primarily due to
depreciation and amortization exceeding the additions of tenant and
property improvements.
(c) Partners' capital is allocated 99% to the limited partners and 1% to
the general partner.
PAGE 8 OF 35
<PAGE> 78
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:
1997 VERSUS 1996 -
REVENUE FROM PROPERTY OPERATIONS in 1997 increased $4,099,000, or 8.4%, as
compared to 1996. The following table illustrates the components of the change:
<TABLE>
<S> <C>
Rental income, net $ 3,651,000
Expense recoveries 145,000
Other property income 303,000
-----------
Net increase $ 4,099,000
===========
</TABLE>
RENTAL INCOME increased primarily as the result of a rise in average occupancy
between 1996 and 1997 from 87.8% to 93.1%. As of December 31, 1997, HRP had
leases executed and in place for 94.4% of the portfolio's net rentable square
feet.
GAIN FROM PROPERTY SALE of $394,000 in 1997 represents the sale of one building
in Fairlane Commerce Park containing 3,500 net rentable square feet on
approximately 0.5 acres for $510,000 before expenses of $8,000.
INTEREST INCOME decreased $206,000 primarily as a result of decreased earnings
on overnight investments due to lower average cash balances.
PROPERTY OPERATIONS EXPENSES for 1997 increased $213,000, or 0.9%, as compared
to 1996, primarily due to higher janitorial, security costs and management
fees, due to increased occupancy, as well as higher salary costs, partially
offset by lower property insurance and utilities' costs. The following table
illustrates the components of the change:
<TABLE>
<S> <C>
Administrative costs $ 90,000
Management fees 99,000
Marketing and leasing (51,000)
Utilities (81,000)
Services, including janitorial 276,000
Repairs and maintenance 4,000
Real estate taxes (7,000)
Insurance (117,000)
----------
Net increase $ 213,000
==========
</TABLE>
INTEREST EXPENSE decreased $577,000, or 4.3%, due to loan modifications/renewals
for First Maryland Building and Executive Park in 1996. First Maryland's costs
dropped $92,000 and is comprised of a $112,000 reduction in cash interest paid
to the lender and a $20,000 decrease in amortization of mortgage principal
forgiveness. Executive Park's costs decreased $313,000 due to the reduction in
its interest rate by slightly more than 1%. All other interest costs fell
$172,000 due to a reduction in debt levels as a result of monthly principal
amortization payments.
DEPRECIATION AND AMORTIZATION EXPENSE decreased $6,958,000 primarily due to an
extension of depreciable lives of certain building costs effective January 1,
1997 (see Note 2 to the Consolidated Financial Statements in Item 8).
GENERAL AND ADMINISTRATIVE EXPENSES decreased $176,000, or 5.1%, as the result
of a net decrease in professional fees and services in 1997 as compared to
1996, including certain due diligence costs for a potential acquisition in
1996, partially offset by an increase in legal costs in 1997 as a result of the
legal proceeding described in Note 9 to the Consolidated Financial Statements
in Item 8.
PAGE 9 OF 35
<PAGE> 79
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 $834,000, or 3.8%, as compared
to 1995, primarily due to higher utility costs, 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 60,000
Utilities 191,000
Services, including janitorial 203,000
Repairs and maintenance 289,000
Real estate taxes 65,000
Insurance (1,000)
---------
Net increase $ 834,000
=========
</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 $46,000 primarily due to
reduced building improvement depreciation, partially offset by an increase in
lease commission amortization.
GENERAL AND ADMINISTRATIVE EXPENSES increased $598,000, or 20.8%, in 1996 as
compared to 1995, as the result of certain due diligence costs which were
expensed for a potential acquisition which was not completed, and increases in
business/franchise taxes, certain professional fees, personnel and other
overhead costs.
PAGE 10 OF 35
<PAGE> 80
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, 1997, HRP had cash and cash equivalents of $6,665,000, as
compared to $3,556,000 as of December 31, 1996. Therefore, the Partnership's
cash position increased $3,109,000 during 1997. The sources of cash for 1997
were $9,864,000 of cash provided by operating activities, $549,000 of mortgage
principal proceeds, $502,000 of net cash proceeds from the sale of a building,
$46,000 of principal collections from a mortgage receivable, and $25,000 of
other financing related activities. Uses of cash for 1997 were $4,002,000 of
net tenant and property improvements, $649,000 of property acquisition costs,
and $3,226,000 of mortgage principal payments.
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, 1997. HRP has no mortgage loans maturing or requiring balloon
principal payments until the year 2000. Based upon loan amortization's in
effect, HRP is required to pay $3,489,000 of principal payments in 1998.
As of December 31, 1997, HRP had remaining commitments for current construction
projects of about $1,500,000. Additionally, HRP has estimated and budgeted for
1998 tenant and capital improvements (excluding the aforementioned commitments)
of approximately $5,370,000 and lease commissions of about $1,570,000.
On February 27, 1998, but to be effective as of March 20, 1998, HRP entered into
an agreement to re-finance the mortgage loan secured by Executive Park. The new
loan reduces the interest rate from 8.87% to 7.32% and extends the amortization
period from fifteen years to twenty-six and a half years with a maturity date of
April 11, 2008. The loan proceeds of $34,000,000 will be used (i) to pay the
current principal balance of $28,800,000, (ii) to pay transaction costs and
prepayment penalties of approximately $2,500,000, and (iii) for general working
capital.
For the foreseeable future, HRP 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
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. HRP has not made any cash distributions since
February, 1992.
HRP anticipates that it will not incur any costs associated with its computers
and building operating systems as it relates to the conversion to the year
2000.
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 1924, 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 statements
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
representation by HRP or any other person that the objectives and plans of HRP
will be achieved.
Page 11 of 35
<PAGE> 81
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: Page
----
<S> <C>
Independent Auditors' Report 13
Consolidated Balance Sheets as of December 31, 1997 and 1996 14
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 15
Consolidated Statements of Partners' Capital for the years
ended December 31, 1997, 1996 and 1995 16
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 17
Notes to Consolidated Financial Statements 18
FINANCIAL STATEMENT SCHEDULE:
Schedule III - Real Estate and Accumulated Depreciation 28
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 12 OF 35
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
To the Partners of Hallwood Realty Partners, L.P.
We have audited the accompanying consolidated balance sheets of Hallwood Realty
Partners, L.P. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 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.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1997, the Partnership extended the depreciable lives of certain
building costs based on a review of its real estate lives. The effect of the
change in estimate reduced depreciation and amortization expense and improved
the net results by approximately $7,200,000.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 6, 1998 (Except for Note 10,
as to which the date is February 27, 1998).
PAGE 13 OF 35
<PAGE> 83
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Real estate:
Land $ 56,441 $ 55,900
Buildings and improvements 259,220 257,913
Tenant improvements 18,734 18,578
--------- ---------
334,395 332,391
Accumulated depreciation and amortization (155,367) (149,514)
--------- ---------
Real estate, net 179,028 182,877
Cash and cash equivalents 6,665 3,556
Accounts receivable 1,162 1,606
Prepaid lease commissions, net 7,049 6,959
Lease concessions 2,511 2,354
Loan reserves and escrows 6,215 7,739
Loan costs, net 3,213 3,691
Prepaid expenses and other assets, net 1,291 1,432
--------- ---------
Total assets $ 207,134 $ 210,214
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 157,911 $ 160,732
Unamortized mortgage payable forgiveness 8,926 10,456
Accounts payable and accrued expenses 4,157 4,834
Prepaid rent and security deposits 2,764 2,600
Payable to affiliates 335 908
--------- ---------
Total liabilities 174,093 179,530
--------- ---------
COMMITMENTS AND CONTINGENCIES
Partners' capital:
Limited partners - 1,672,556 units outstanding 32,711 30,377
General partner 330 307
--------- ---------
Total partners' capital 33,041 30,684
--------- ---------
Total liabilities and partners' capital $ 207,134 $ 210,214
========= =========
</TABLE>
See notes to consolidated financial statements.
PAGE 14 OF 35
<PAGE> 84
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Property operations $ 52,946 $ 48,847 $ 50,206
Gain from property sale 394 -- --
Interest and other 559 765 623
-------- -------- --------
Total revenues 53,899 49,612 50,829
-------- -------- --------
EXPENSES:
Property operations 23,248 23,035 22,201
Interest 12,945 13,522 15,721
Depreciation and amortization 12,055 19,013 19,059
General and administrative 3,294 3,470 2,872
-------- -------- --------
Total expenses 51,542 59,040 59,853
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 2,357 (9,428) (9,024)
Extraordinary item -
Loss on early extinguishment of debt -- -- (765)
-------- -------- --------
NET INCOME (LOSS) $ 2,357 $ (9,428) $ (9,789)
======== ======== ========
ALLOCATION OF NET INCOME (LOSS):
Limited partners $ 2,334 $ (9,334) $ (9,691)
General partner 23 (94) (98)
-------- -------- --------
Total $ 2,357 $ (9,428) $ (9,789)
======== ======== ========
INCOME (LOSS) PER UNIT AND EQUIVALENT UNIT:
Earnings per unit - basic
Income (loss) before extraordinary item $ 1.40 $ (5.50) $ (5.12)
Loss on early extinguishment of debt -- -- (.43)
-------- -------- --------
Net income (loss) $ 1.40 $ (5.50) $ (5.55)
======== ======== ========
Earnings per unit - assuming dilution
Income (loss) before extraordinary item $ 1.35 $ (5.50) $ (5.12)
Loss on early extinguishment of debt -- -- (.43)
-------- -------- --------
Net income (loss) $ 1.35 $ (5.50) $ (5.55)
======== ======== ========
WEIGHTED AVERAGE UNITS
USED IN COMPUTING NET INCOME
(LOSS) PER UNIT AND EQUIVALENT UNIT:
Basic 1,673 1,698 1,745
======== ======== ========
Assuming dilution 1,730 1,698 1,745
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
PAGE 15 OF 35
<PAGE> 85
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, 1995 $ 515 $ 51,007 $ 51,522 1,732,459
Purchase of fractional units (2) (174) (176) (14,694)
Sale and issuance of 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
Net income 23 2,334 2,357 --
---------- ---------- ---------- ----------
PARTNERS' CAPITAL, DECEMBER 31, 1997 $ 330 $ 32,711 $ 33,041 1,672,556
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
PAGE 16 OF 35
<PAGE> 86
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,357 $ (9,428) $ (9,789)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 12,055 19,013 19,059
Amortization of mortgage principal forgiveness (1,674) (1,693) (338)
Gain from property sale (394) -- --
Lease concessions (157) 144 688
Changes in assets and liabilities:
Receivables 444 (526) 124
Prepaid lease commissions, net (2,191) (4,338) (2,172)
Prepaid expenses and other assets, net 510 (62) 659
Accounts payable and other liabilities (1,086) 487 (5,745)
-------- -------- --------
Net cash provided by operating activities 9,864 3,597 2,486
-------- -------- --------
INVESTING ACTIVITIES:
Property and tenant improvements (5,534) (5,998) (4,477)
Tenant improvement escrow 1,532 (1,532) --
Property acquisition (649) (1,699) --
Cash proceeds from property sale, net of selling costs 502 -- --
Mortgage receivable principal payments 46 86 79
-------- -------- --------
Net cash used for investing activities (4,103) (9,143) (4,398)
-------- -------- --------
FINANCING ACTIVITIES:
Mortgage principal payments (3,226) (2,706) (2,600)
Mortgage principal proceeds 549 -- 88,400
Mortgage principal refinanced -- -- (70,171)
Loan reserves -- (450) (3,376)
Loan fees and expenses 25 (239) (4,009)
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 (2,652) (5,200) 8,428
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,109 (10,746) 6,516
BEGINNING CASH AND CASH EQUIVALENTS 3,556 14,302 7,786
-------- -------- --------
ENDING CASH AND CASH EQUIVALENTS $ 6,665 $ 3,556 $ 14,302
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
PAGE 17 OF 35
<PAGE> 87
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
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 limited partners' interests, or units, are traded on the
American Stock Exchange under the symbol "HRY". As of December 31, 1997,
there were 1,672,556 units outstanding.
As of December 31, 1997, HRP owned twelve real estate assets (the
"Properties"), located in six states. Seven are commercial office building
properties and five are industrial park properties containing approximately
2,608,000 and 2,554,000 net rentable square feet, respectively. HRP seeks
to maximize the value of its real estate by making capital and tenant
improvements, by executing marketing programs to attract and retain
tenants, and by controlling or reducing, where possible, operating
expenses.
Hallwood Realty Corporation ("HRC" or the "General Partner"), a Delaware
corporation and wholly-owned subsidiary of The Hallwood Group Incorporated
("Hallwood") is HRP's general partner and is responsible for asset
management of HRP 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 HRP. Hallwood Commercial Real Estate, Inc. ("HCRE"), another
wholly-owned subsidiary of Hallwood, provides property management services
to the Properties.
2. ACCOUNTING POLICIES
CONSOLIDATION
HRP fully consolidates into its financial statements majority owned
entities and reflects a minority interest for those entities not fully
owned. For each of the three years in the period ended December 31, 1997,
all entities and Properties were fully owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
HRP considers highly liquid investments with original maturities 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. HRP'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 15 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.
During 1997, HRP completed a review of its real estate lives. In light of
recent improvements and actions taken to increase its preventative
maintenance programs, the estimated economic lives for buildings were found
to be generally longer than the useful lives being used for depreciation
purposes. Accordingly, effective January 1, 1997, HRP extended the
depreciable lives of certain building costs. The effect of this change in
estimate reduced depreciation and amortization expense and improved the net
operating results by approximately $7,200,000 ($4.26 per unit.)
PAGE 18 OF 35
<PAGE> 88
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
2. ACCOUNTING POLICIES - CONTINUED
HRP 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 accruals 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. HRP's management
is not aware of any environmental remediation obligations which would
materially affect the operations, financial position or cash flows of HRP
and therefore has made no loss accruals.
OTHER ASSETS
Lease concessions and commissions are amortized over the terms of the
respective leases. Leases in the Properties expire from 1998 to 2013.
Loan costs are amortized over the terms of the respective loans. The loans
mature between 2000 and 2011. Amortization of lease concessions income,
included in property operations revenues, was $157,000 in 1997.
Amortization of lease concessions expense, included in property operations
revenues, was $144,000 and $688,000 in 1996 and 1995, respectively.
Amortization of lease commissions, included in property operations expense,
was $2,101,000, $1,897,000, and $1,629,000 in 1997, 1996 and 1995,
respectively. Amortization of loan costs, included in interest expense, was
$453,000, $453,000, and $704,000 in 1997, 1996 and 1995, 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,
-------------------
1997 1996
------ ------
<S> <C> <C>
Prepaid real estate taxes $ 851 $ 723
Prepaid insurance 311 472
Other deposits and prepaids 129 191
Mortgage receivable -- 46
------ ------
Total $1,291 $1,432
====== ======
</TABLE>
INCOME TAXES
Currently, HRP 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 HRP and subsidiary entities. These business and
franchises taxes, included in general and administrative expenses, were
$117,000, $206,000, and $8,000, in 1997, 1996, and 1995, respectively.
HRP's tax returns are subject to examination by federal and state taxing
authorities. If HRP'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 HRP as
an association taxable as a corporation for federal income tax purposes.
Such classification may have an adverse effect on HRP.
COMPUTATION OF EARNINGS PER UNIT
HRP has adopted Statements of Financial Accounting Standards ("SFAS") No.
128 - "Earnings per Share". Comparative earnings per unit data have been
restated to conform to the adoption of this new standard. Basic earnings
per unit is computed by dividing net income (loss) attributable to the
limited partners' interests by the weighted average number of units
outstanding. Earnings per unit assuming dilution is computed by dividing
net income (loss) attributable to the limited partners' interests by the
weighted average number of units and equivalent units outstanding. The
options to acquire units described in Note 7 are considered to be unit
equivalents. The number of equivalent units is computed using the treasury
stock method which assumes that the increase in the number of units is
reduced by the number of units which could have been repurchased by HRP
with the proceeds from the exercise of the options. In 1997, the weighted
average units outstanding is calculated by increasing the actual weighted
average units outstanding by the assumed issuance of 86,000 units from the
options and the repurchase of 29,000 units with the proceeds of the
exercise of such options. The options are considered antidilutive in 1996
and 1995, and therefore are not taken into consideration in the computation
of earnings per unit assuming dilution.
PAGE 19 OF 35
<PAGE> 89
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
2. ACCOUNTING POLICIES - CONTINUED
OTHER
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 certain assets,
liabilities, revenues, and expenses as of and for the reporting
periods. Actual results may differ from these 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.
SFAS No. 130 - "Reporting on Comprehensive Income", was issued in June 1997
and establishes standards for reporting and presenting comprehensive income
in financial statements. It is effective for periods beginning after
December 15, 1997 and will be adopted by HRP effective January 1, 1998. HRP
anticipates the adoption of SFAS No. 130 will not have any impact on its
current disclosures.
Also issued in June 1997 was SFAS No. 131 - "Disclosures about Segments of
an Enterprise and Related Information", which redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. SFAS No. 131
may require additional disclosure by HRP and will be effective for HRP
beginning January 1, 1998.
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.
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 1997 1996 1995
---------- ------ ------ ------
<S> <C> <C> <C> <C>
Asset management fee HRC $ 458 $ 450 $ 446
Property management fee HCRE 1,524 1,433 1,459
Lease commissions HCRE 1,425 2,888 1,501
Construction fees HCRE 353 382 270
Acquisition fee HRC 7 17 --
Reimbursement of costs (a) HRC 2,316 2,321 1,992
</TABLE>
- ----------
(a) 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 20 OF 35
<PAGE> 90
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
4. PROPERTY ACQUISITION AND PROPERTY SALE
In May 1997, HRP acquired approximately 6.2 acres of land at the Corporate
Square office complex of which about half is a parking lot and the other half
is wooded land for a purchase price of $725,000, plus about $25,000 of
miscellaneous costs. The purchase price consists of a $75,000 cash down
payment and a $650,000 seven year, fully-amortizing non-recourse mortgage
note with 0% interest the first year; 4% interest in years two and three; 6%
interest in years four and five; and 8% interest in years six and seven. For
financial reporting purposes, the carrying values of the mortgage note and
land were reduced by $101,000 in order to reflect an imputed market interest
rate of 8% for the mortgage note. HCRE has erected a "build to suit" sign in
order to further explore HRP's possibilities for the land's usage.
In October 1997, HRP sold one building in Fairlane Commerce Park containing
3,500 net rentable square feet on approximately 0.5 acres for $510,000 in
cash before closing expenses of $8,000. HRP recorded a $394,000 gain from the
property sale.
5. MORTGAGES PAYABLE
Substantially all of the buildings in eleven of HRP's Properties were
encumbered and pledged as collateral by six non-recourse mortgages
aggregating $157,911,000 as of December 31, 1997. These mortgages have
interest rates varying from 8.5% to 9.25%, with an effective average interest
rate of 8.9% and mature between 2000 and 2011. Certain mortgages provide for
variable interest rates. Cash interest payments were $14,177,000,
$14,947,000, and $15,396,000, in 1997, 1996 and 1995, 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>
1998 $ 3,489 $ -- $ 3,489
1999 3,954 -- 3,954
2000 4,048 6,069 10,117
2001 4,478 -- 4,478
2002 4,862 -- 4,862
Thereafter 29,894 101,117 131,011
-------- --------- ---------
Total $ 50,725 $ 107,186 $ 157,911
======== ========= =========
</TABLE>
NOMURA REFINANCING -
On September 29, 1995, a newly formed limited partnership owned 99.9% by HRP
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 64% of Corporate Square, about 93% of Fairlane Commerce Park, Montrose
Office Center, Parklane Towers, and Raintree Industrial Park.
PAGE 21 OF 35
<PAGE> 91
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
5. MORTGAGES PAYABLE - (CONTINUED)
FIRST MARYLAND BUILDING -
Per the loan modification agreement described below, HRP was 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. Concurrent
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 increased 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% (9.13% as of December 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. During 1997, an additional $144,000 of
forgiveness was recorded.
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 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 was reported as a gain to the partners of HRP on their 1996
Schedule K-1s.
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. For further information regarding this mortgage loan, see Note 10.
6. 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 $2,561,000, $2,416,000, and $3,358,000 in 1997, 1996 and
1995, respectively. At December 31, 1997, the Properties, in the aggregate,
were 94% occupied and minimum cash rental payments to be received under
non-cancelable leases with tenants were as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 44,076
1999 35,832
2000 28,019
2001 18,894
2002 14,029
Thereafter 45,498
---------
Total $ 186,348
=========
</TABLE>
PAGE 22 OF 35
<PAGE> 92
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
6. LEASE AGREEMENTS - (CONTINUED)
During 1997 and 1996, 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 15% and 16% of revenues
in 1997 and 1996, respectively. The Centers for Disease Control and
Prevention ("CDC"), an agency of the U.S. Department of Health and Human
Services, leases space in Corporate Square and Executive Park and contributed
approximately 10% of the revenues in 1997 and 1996.
As of December 31, 1997, Ford occupied approximately 248,000 square feet of
office space under 10 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 1998 and 2002 and most contain renewal options, providing for one to
ten year renewals. As of December 31, 1997, 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 HRP
otherwise dependent on any one tenant or group of tenants for 10% or more of
its revenues.
7. 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.
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
HRP upon the exercise of such Options. As of December 31, 1997, none of the
Options have been exercised. Also approved was a loan program that provides
for HRP, 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 in
1996 and 1995, and therefore were not included in the calculation of loss per
unit amounts.
PAGE 23 OF 35
<PAGE> 93
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
7. PARTNERS' CAPITAL - (CONTINUED)
HRP has adopted the disclosure-only provisions of 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 1997, 1996 and 1995 would have been the pro forma amounts
indicated below (in thousands except per unit amounts):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) - as reported $ 2,357 $ (9,428) $ (9,789)
Net income (loss) - pro forma 2,325 (9,623) (10,146)
Net income (loss) per unit:
As reported -
Basic 1.40 (5.50) (5.55)
Assuming dilution 1.35 (5.50) (5.55)
Pro forma -
Basic 1.38 (5.61) (5.76)
Assuming dilution 1.33 (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 TO PURCHASE UNITS
On June 5, 1995, HRP announced a commission-free program for unitholders to
sell their 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 HRP without incurring any brokerage commissions. The
offer benefits HRP by reducing the annual unitholder servicing costs incurred
for tax reporting, printing, postage and transfer agent costs.
Units were purchased by HRP on the first business day (the "Purchase Date")
on which HRP 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 HRP 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. HRP
acquired about 294,000 units from over 16,600 unitholders. As planned, HRP
resold the acquired units to Hallwood for the amount that it had paid for the
units, approximately $4,100,000.
OTHER UNIT PURCHASES
HRP purchased, in private transactions, 74,760 units for $1,775,000 in May
1996 and 449 units for $12,000 in July 1996. Accordingly, HRP's outstanding
units have decreased from 1,747,765 Units to 1,672,556 units. 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.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value amounts of certain financial instruments 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 Partnership could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
PAGE 24 OF 35
<PAGE> 94
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONTINUED)
The fair value of financial instruments that are short-term or re-price
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.
Management has reviewed the carrying values of its mortgages payable in
connection with interest rates currently available to the Partnership for
borrowing with similar characteristics and maturities (approximately 7.75%
and 8.8% as of December 31, 1997 and 1996, respectively) and has determined
that they would equal approximately $166,871,000 and $159,096,000 (excluding
the unamortized mortgage payable forgiveness discussed in Note 4) of
estimated fair value as of December 31, 1997 and 1996, respectively.
As of December 31, 1997 and 1996, 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.
9. COMMITMENTS AND CONTINGENCIES
LITIGATION
On February 27, 1997, a lawsuit was filed in the Chancery Court for New
Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty
Partners, L.P. and Hallwood Realty Corporation (C.A. No. 15578). The
complaint sought access to certain books and records of HRP, a list of the
limited partners and reimbursement of the plaintiff's expenses.
On June 20, 1997, Gotham Partners, L.P. filed a separate complaint in the
Chancery Court for New Castle County, Delaware, styled Gotham Partners, L.P.
v. Hallwood Realty Partners, L.P., et al. (C.A. No. 15754), against Hallwood,
HRP, the general partner of HRP, and the directors of the general partner,
alleging claims of breach of fiduciary duties, breach of HRP's partnership
agreement, fraud, and as to Hallwood, aiding and abetting these alleged
breaches. At the same time as the filing of this complaint, plaintiff filed a
motion to amend its complaint in the earlier action to allege the same facts
and demand the same relief as plaintiff sought in the separate complaint.
On June 27, 1997, the parties entered into a Stipulation and Order under
which HRP provided to plaintiff copies of certain of the documents requested.
The other claims in the two actions remain outstanding.
On August 27, 1997, defendants moved to dismiss the complaint in the separate
action for plaintiff's failure either to make a demand on the general partner
to bring suit or to allege adequately that such a demand was futile. On
February 6, 1998, the Court granted defendants' motion to dismiss but gave
plaintiff thirty days to file an amended complaint.
Defendants believe that the claims are without merit and intend to defend the
cases vigorously, but because of their early stages, cannot predict the
outcome of the claims or any possible effect an adverse outcome might have.
HRP is from time to time involved in various legal proceedings and claims
which arise in the ordinary course of business. These matters are generally
covered by insurance. Management believes that the resolution of these
matters will not have a material adverse effect on HRP's financial position,
cash flow or operations.
PAGE 25 OF 35
<PAGE> 95
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
9. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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 approximately $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
HRP 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. HRP 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.
10. SUBSEQUENT EVENT
On February 27, 1998, but to be effective as of March 20, 1998, HRP entered
into an agreement to re-finance the mortgage loan secured by Executive Park.
The new loan reduces the interest rate from 8.87% to 7.32% and extends the
amortization period from fifteen years to twenty-six and a half years with a
maturity date of April 11, 2008. The loan proceeds of $34,000,000 will be
used (i) to pay the current principal balance of $28,800,000, (ii) to pay
transaction costs and prepayment penalties of approximately $2,500,000, and
(iii) for general working capital.
PAGE 26 OF 35
<PAGE> 96
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is selected quarterly financial data for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ending
----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(In thousands except per unit amounts)
<S> <C> <C> <C> <C>
1997
Total revenues (a) $ 12,908 $ 13,443 $ 13,533 $ 14,015
Property operations revenues less property
operations expenses and general
and administrative expenses 6,135 7,054 6,693 6,522
Net income 68 936 569 784
Net income per unit - basic .04 .55 .34 .47
Net income per unit - assuming dilution .04 .54 .33 .45
1996
Total revenues $ 12,432 $ 12,258 $ 12,277 $ 12,645
Property operations revenues less property
operations expenses and general
and administrative expenses 5,485 5,682 5,689 5,486
Net loss (2,520) (2,324) (2,103) (2,481)
Net loss per unit - basic (1.43) (1.35) (1.24) (1.48)
Net loss per unit - assuming dilution (1.43) (1.35) (1.24) (1.48)
</TABLE>
- ----------
(a) Total revenues in the fourth quarter of 1997 include $394,000 of gain
from the sale of a property.
PAGE 27 OF 35
<PAGE> 97
HALLWOOD REALTY PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Costs
capitalized
subsequent to Gross amount at which
Initial cost acquisition carried at close of period
----------------------- ------------ -----------------------------------
Buildings Buildings Buildings
and and and
Description (A) Encumbrances Land improvements improvements Land improvements Total (B)
------------ -------- ------------ ------------ -------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Airport Plaza $ 781 $ 300 $ 4,013 $ 337 $ 300 $ 4,350 $ 4,650
Bellevue Corporate Plaza 15,623 7,428 17,617 2,999 7,428 20,616 28,044
Corporate Square 13,488 6,142 14,112 8,304 6,142 22,416 28,558
Executive Park 28,974 15,243 34,982 9,897 15,243 44,879 60,122
First Maryland Building 24,873 2,100 43,772 3,418 2,100 47,190 49,290
Montrose Office Center 6,347 5,096 15,754 3,660 5,096 19,414 24,510
Parklane Towers 23,435 3,420 37,592 3,203 3,420 40,795 44,215
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks 6,349 5,018 15,563 4,448 5,018 20,011 25,029
Fairlane Commerce Park 20,701 5,191 18,080 5,319 5,191 23,399 28,590
Joy Road Distribution Center -- 359 1,340 1,299 359 2,639 2,998
Raintree Industrial Park 10,936 1,191 18,208 1,264 1,191 19,472 20,663
Seattle Business Parks 6,404 4,953 8,730 3,955 4,953 12,685 17,638
OFFICE EQUIPMENT -- -- -- 88 -- 88 88
-------- -------- -------- -------- -------- -------- --------
TOTAL $157,911 $ 56,441 $229,763 $ 48,191 $ 56,441 $277,954 $334,395
======== ======== ======== ======== ======== ======== ========
<CAPTION>
Accumulated
depreciation Date
Description (A) B)(C) acquired
------------ --------
<S> <C> <C>
OFFICE PROPERTIES:
Airport Plaza $ 3,819 4/30/87
Bellevue Corporate Plaza 5,198 6/30/88
Corporate Square 13,613 8/2/85 & 10/1/92
Executive Park 32,185 12/19/85
First Maryland Building 25,708 6/29/84
Montrose Office Center 7,455 1/8/88
Parklane Towers 28,358 12/16/84
INDUSTRIAL PARK PROPERTIES:
Bradshaw Business Parks 10,845 9/24/85
Fairlane Commerce Park 10,321 12/30/86 & 7/1/87
Joy Road Distribution Center 280 2/14/96
Raintree Industrial Park 9,901 7/17/86
Seattle Business Parks 7,636 4/24/86
OFFICE EQUIPMENT 48 various
--------
TOTAL $155,367
========
</TABLE>
See notes to Schedule III on following page.
PAGE 28 OF 35
<PAGE> 98
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO SCHEDULE III
DECEMBER 31, 1997
(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, 1995 $ 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 (5,784) (5,784)
--------- ---------
Balance, December 31, 1996 332,391 149,514
Additions 6,183 9,924
Retirements and disposition (4,179) (4,071)
--------- ---------
Balance, December 31, 1997 $ 334,395 $ 155,367
========= =========
</TABLE>
(C) COMPUTATION OF DEPRECIATION:
Depreciation of buildings is computed using the straight-line method
over estimated useful lives ranging from 15 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.
During 1997, HRP completed a review of its real estate lives. In
light of recent improvements and actions taken to increase its
preventative maintenance programs, the estimated economic lives for
buildings were found to be generally longer than the useful lives
being used for depreciation purposes. Accordingly, effective January
1, 1997, HRP extended the depreciable lives of certain building
costs. The effect of this change in estimate reduced depreciation
and amortization expense by approximately $7,200,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PAGE 29 OF 35
<PAGE> 99
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, 53, 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 since May 1984 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; and as a director of Hallwood Consolidated
Resources Corporation ("HCRC") since 1992. Mr. Gumbiner is also a
Solicitor of the Supreme Court of Judicature of England.
BRIAN M. TROUP, 50, 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; and as a director of HRC since 1990. 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, 54, 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, 54, 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, 50, 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, 56, 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. Since 1994, Mr. Crisp has been a
consultant for various international companies. He is a Fellow of the
Royal Institution of Chartered Surveyors and holds a B.A. (Hons) Degree.
WILLIAM F. FORSYTH, 48, 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, 54, DIRECTOR OF HRC
Mr. Story has been President and Chief Executive Officer of SOCO
International, plc, 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, 50, 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 30 OF 35
<PAGE> 100
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 HRP'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 HRP with copies of
all Section 16(a) forms they file. Based solely on a review of the copies of
such forms furnished to HRP, or written representations that no Forms 5 were
required, HRP believes that during the period January 1, 1997 to December 31,
1997, 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 1997, 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. Forsyth,
Crisp, Story and Walther were each paid $20,000 in each of the three years ended
December 31, 1997 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 1997 1996 1995
---------- ---- ---- ----
<S> <C> <C> <C> <C>
Asset management fee HRC $ 458 $ 450 $ 446
Property management fee HCRE 1,524 1,433 1,459
Lease commissions HCRE 1,425 2,888 1,501
Construction fees HCRE 353 382 270
Acquisition fee HRC 7 17 -
Reimbursement of costs (a) HRC 2,316 2,321 1,992
</TABLE>
(a) 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 31 OF 35
<PAGE> 101
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,
1997.
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 1997 $ - $ - $ - -
Chairman of the Board and 1996 - - - -
Chief Executive Officer 1995 - - - 25,800
William L. Guzzetti 1997 200,000 17,583 - -
President and Chief 1996 200,000 8,333 - -
Operating Officer 1995 200,000 8,333 - 15,000
John G. Tuthill 1997 150,360 46,265 8,256 -
Executive Vice President 1996 150,360 46,265 3,345 -
and Secretary 1995 150,360 6,265 8,556 13,000
Jeffrey D. Gent 1997 99,396 11,212 6,385 -
Vice President - Finance 1996 90,360 15,648 2,317 -
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 held by each of the executive officers and the potential realizable
values for their options at December 31, 1997. None of the executive officers
exercised any options during the year ended December 31, 1997 and HRP has not
granted SARs.
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND OPTION/SAR VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Options at Options at
Units December 31, 1997 December 31, 1997
Acquired ------------------------------- ----------------------------
Name on Exercise Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner 0 25,800 0 $ 919,125 $ 0
William L. Guzzetti 0 15,000 0 534,375 0
John G. Tuthill 0 13,000 0 463,125 0
Jeffrey D. Gent 0 7,000 0 249,375 0
</TABLE>
PAGE 32 OF 35
<PAGE> 102
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 3, 1998 concerning the
number of Partnership units 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%
Private Management Group, Inc.
20 Corporate Park, Suite 400
Irvine, CA 92606 102,615 6.1%
Alan G. Crisp * - -
William F. Forsyth * - -
Anthony J. Gumbiner * 25,800 (b) 1.5% (b)
William L. Guzzetti * 15,100 (c) 0.9% (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) 4.5% (e)
</TABLE>
- -----------
* 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 33 OF 35
<PAGE> 103
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 1997 or
in 1998 prior to the filing of this Form 10-K for the year ended
December 31, 1997.
(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 34 OF 35
<PAGE> 104
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 3, 1998 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, 1997, has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ ANTHONY J. GUMBINER Chairman of the Board and Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Anthony J. Gumbiner (Chief Executive Officer)
/s/ WILLIAM L. GUZZETTI President and Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
William L. Guzzetti (Chief Operating Officer)
/s/ JOHN G. TUTHILL Executive Vice President and Secretary, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
John G. Tuthill
/s/ JEFFREY D. GENT Vice President - Finance, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Jeffrey D. Gent (Chief Accounting Officer)
/s/ALAN G. CRISP Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Alan G. Crisp
/s/ WILLIAM F. FORSYTH Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
William F. Forsyth
/s/ EDWARD T. STORY Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Edward T. Story
/s/ BRIAN M. TROUP Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Brian M. Troup
/s/ UDO H. WALTHER Director, March 3, 1998
- -------------------------------------------------- Hallwood Realty Corporation
Udo H. Walther
</TABLE>
PAGE 35 OF 35
<PAGE> 105
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
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, filed herewith.
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
</TABLE>
<PAGE> 106
<TABLE>
<S> <C>
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.
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.
10.6 -- 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.
*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.
*10.18 -- 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.
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 incorporated herein by reference to
Exhibit 10.20 to the Company's Form 10-K for the
year ended December 31, 1996, File No. 1-8303.
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
incorporated herein by reference to Exhibit 10.21
to the Company's Form 10-K for the year ended
December 31, 1996, File No. 1-8303.
*10.22 -- Financial Consulting Agreement, dated as of
December 31, 1996, between the Company and HSC
Financial Corporation, is incorporated herein by
reference to Exhibit 10.22 to the Company's Form
10-K for the year ended December 31, 1996, File No.
1-8303.
*10.23 -- Financial Consulting Agreement, dated as of
December 31, 1996, between the Company and Hallwood
Petroleum, Inc., is incorporated herein by
</TABLE>
<PAGE> 107
<TABLE>
<S> <C>
reference to Exhibit 10.23 to the Company's Form
10-K for the year ended December 31, 1996, File No.
1-8303.
10.24 -- Amendment No. 1, dated as of April 1, 1997 to
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 is incorporated
herein by reference to Exhibit 10.24 to the
Company's Form 10-Q for the quarter ended March 31,
1997, File No. 1-8303.
10.25 -- Amendment No. 2, dated as of May 23, 1997 to
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 is incorporated
herein by reference to Exhibit 10.25 to the
Company's Form 10-Q for the quarter ended June 30,
1997, File No. 1-8303.
10.26 -- Amendment No. 3, dated as of June 25, 1997 to
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 is incorporated
herein by reference to Exhibit 10.26 to the
Company's Form 10-Q for the quarter ended June 30,
1997, File No. 1-8303.
10.27 -- Amended and Restated Credit Agreement, dated as of
November 14, 1997, among HEPGP Ltd., as Borrower,
and The Hallwood Group Incorporated, as Parent
Guarantor, and Hallwood G.P., Inc., as Guarantor,
and First Union National Bank, as Lender, filed
herewith.
10.28 -- Promissory note and related mortgage in the
original amount of $5,280,000, dated October 31,
1997, between Brock Suite Tulsa, Inc., as Maker,
and Credit Suisse First Boston Mortgage Capital
LLC, as Lender, filed herewith.
10.29 -- Promissory note and related mortgage in the
original amount of $6,750,000, dated December 24,
1997, between Brock Suite Greenville, Inc., as
Maker, and L.J. Melody & Company, as Lender, filed
herewith.
21 -- Active Subsidiaries of the Registrant as of
February 28, 1998.
27 -- Financial Data Schedule.
</TABLE>
- ------------------------------------
* Constitutes a compensation plan or agreement for executive
officers.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
THE HALLWOOD GROUP INCORPORATED
A DELAWARE CORPORATION
ARTICLE I: OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of The Hallwood Group
Incorporated (the "Corporation") shall be at Corporate Trust Center, 1209 Orange
Street, City of Wilmington, County of New Castle, State of Delaware, and the
name of the registered agent in charge at that office shall be The Corporation
Trust Company.
SECTION 1.2 PRINCIPAL OFFICE. The principal office for the transaction of the
business of the Corporation shall be at the place, either within or without the
State of Delaware, as the Board of Directors of the Corporation (the "Board")
may determine. The Board is granted full power and authority to change the
principal office from one location to another.
SECTION 1.3 OTHER OFFICES. The Corporation may also have an office or offices at
any other place or places, either within or without the State of Delaware, as
the Board may from time to time determine or as the business of the Corporation
may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS. All annual and other meetings of stockholders
shall be held either at the principal office of the Corporation or at any other
place within or without the State of Delaware as may be designated by the Board.
SECTION 2.2 ANNUAL MEETINGS. Annual meetings of stockholders of the Corporation
for the purpose of electing directors and for the transaction of any other
proper business as may come before the meetings may be held at the time and
place and on the date as the Board shall determine.
SECTION 2.3 SPECIAL MEETINGS. Subject to the rights of the holders of any class
or series of stock having a preference over the Common Stock as to dividends or
upon liquidation, special meetings of the stockholders for any purposes may be
called only by the Board and may be held at the time and place and on the date
as the Board shall determine.
SECTION 2.4 NOTICE OF MEETINGS. Except as otherwise required by law, notice of
each meeting of stockholders, whether annual or special, shall be given not less
than 10 days nor more than 60 days before the date of the meeting to each
stockholder of record entitled to vote at the meeting by delivering a
typewritten or printed notice of the meeting to the stockholder
<PAGE> 2
personally, or by depositing the notice in the U. S. mail, in a postage prepaid
envelope, directed to the stockholder at the stockholder's post office address
furnished by the stockholder to the Secretary of the Corporation for that
purpose, or, if the stockholder shall not have furnished an address to the
Secretary for that purpose, then at the stockholder's post office address last
known to the Secretary, or by transmitting a notice of the meeting to the
stockholder at that address by telegraph, cable, wireless or fax. Except as
otherwise expressly required by law, no publication of any notice of a meeting
of stockholders shall be required. Every notice of a meeting of stockholders
shall state the place, date and hour of the meeting and, in the case of a
special meeting, shall also state the purpose for which the meeting is called.
Notice of any meeting of stockholders shall not be required to be given to any
stockholder to whom notice may be omitted pursuant to applicable Delaware law or
who shall have waived notice, and notice shall be deemed waived by any
stockholder who shall attend the meeting in person or by proxy, except a
stockholder who shall attend the meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of stockholders need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
SECTION 2.5 QUORUM. Except as otherwise required by law, the holders of record
of a majority in voting interest of the shares of stock of the Corporation
entitled to be voted at the meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of
stockholders of the Corporation or any adjournment thereof. Subject to the
requirement of a larger percentage vote contained in the Certificate of
Incorporation, these Bylaws or by statute, the stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding any withdrawal of stockholders that may leave
less than a quorum remaining, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
In the absence of a quorum at any meeting or any adjournment thereof, a majority
in voting interest of the stockholders present in person or by proxy and
entitled to vote at the meeting, or, in the absence of all the stockholders, any
officer entitled to preside at, or to act as secretary of, the meeting may
adjourn the meeting from time to time. At any adjourned meeting at which a
quorum is present, any business may be transacted that might have been
transacted at the meeting as originally called.
SECTION 2.6 VOTING.
(A) Each stockholder shall, at each meeting of stockholders, be
entitled to vote in person or by proxy each share of the stock of the
Corporation that has voting rights on the matter in question and that shall have
been held by the stockholder and registered in the stockholder's name on the
books of the Corporation:
(i) on the date fixed pursuant to Section 6.5 of these Bylaws as
the record date for the determination of stockholders entitled to notice of and
to vote at the meeting; or
2
<PAGE> 3
(ii) if no record date is fixed, then (a) at the close of
business on the day before the notice of the meeting is given or (b) if notice
of the meeting is waived, at the close of business on the day before the meeting
is held.
(B) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in any other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote the stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
the pledgor shall have expressly empowered the pledgee to vote , in which case
only the pledgee, or the pledgee's proxy, may represent the stock and vote .
Stock having voting power standing of record in the names of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, tenants by the entirety or otherwise, or with respect to which two or
more persons have the same fiduciary relationship, shall be voted in accordance
with the provisions of the Delaware General Corporation Law.
(C) Any voting rights may be exercised by the stockholder entitled
thereto in person or by the stockholder's proxy appointed by an instrument in
writing, subscribed by the stockholder or by the stockholder's attorney and
delivered to the secretary of the meeting; provided, however, that no proxy
shall be voted or acted upon after three years from its date unless the proxy
shall provide for a longer period. The attendance at any meeting of a
stockholder who may have given a proxy shall not have the effect of revoking the
proxy unless the stockholder shall in writing so notify the secretary of the
meeting prior to the voting of the proxy. The vote at any meeting of
stockholders on any question need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot, each ballot shall be signed by the
stockholder voting, or by the stockholder's proxy, if there is a proxy, and it
shall state the number of shares voted.
(D) At any meeting of stockholders, all matters, except as otherwise
provided in the Certificate of Incorporation, in these Bylaws or by law, shall
be decided by the vote of a majority in voting interest of the stockholders
present in person or by proxy and entitled to vote at the meeting and on the
particular matter, a quorum being present.
SECTION 2.7 INSPECTORS. If at any meeting of stockholders a vote by written
ballot shall be taken on any question, the chairman of the meeting may appoint
an inspector or inspectors to act with respect to the vote. Each inspector so
appointed shall first subscribe an oath faithfully to execute the duties of an
inspector at the meeting with strict impartiality and according to the best of
the inspector's ability. The inspectors shall decide upon the qualification of
the voters and shall report the number of shares represented at the meeting and
entitled to vote on the question, shall conduct and accept the votes, and, when
the voting is completed, shall ascertain and report the number of shares voted
respectively for and against the question. Reports of inspectors shall be in
writing and subscribed and delivered by them to the Secretary of the
Corporation. The inspectors need not be stockholders of the Corporation, and any
officer of the Corporation may
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be an inspector on any question other than a vote for or against a proposal in
which the officer has a material interest.
SECTION 2.8 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS AND
STOCKHOLDER NOMINATIONS.
(A) At any meeting of the stockholders, the only business that may be
conducted is business that is brought before the meeting (i) by or at the
direction of the Board or (ii) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2.8(A) and Section
2.8(B). For business to be properly brought before any meeting of the
stockholders by a stockholder, the stockholder must have given notice thereof in
writing to the Secretary of the Corporation at least 90 days in advance of the
meeting or, if later, the tenth day following the first public announcement of
the date of the meeting, and the business must be a proper matter for
stockholder action under the Delaware General Corporation Law. A stockholder's
notice to the Secretary must set forth as to each matter the stockholder
proposes to bring before the meeting (1) a brief description of the business
desired to be brought before the meeting and the reasons for conducting the
business at the meeting, (2) the name and address, as they appear on the
Corporation's books, of the stockholder proposing the business, (3) the class
and number of shares of the Corporation that are beneficially owned by the
stockholder, and (4) any material interest of the stockholder in the business.
In addition, the stockholder making the proposal shall promptly provide any
other information reasonably requested by the Corporation. Notwithstanding
anything in these Bylaws to the contrary, no business may be conducted at any
meeting of the stockholders except in accordance with the procedures set forth
in this Section 2.8. The chairman of any meeting shall have the power and the
duty to determine whether any business proposed to be brought before the meeting
has been made in accordance with the procedure set forth in these Bylaws and
shall direct that any business not properly brought before the meeting will not
be considered.
(B) Nominations for the election of directors may be made by the Board
or by any stockholder entitled to vote in the election of directors; provided,
however, that a stockholder may nominate a person for election as a director at
a meeting only if written notice of the stockholder's intent to make the
nomination has been given to the Secretary of the Corporation at least 90 days
in advance of the meeting or, if later, the tenth day following the first public
announcement of the date of the meeting. Each notice must set forth: (i) the
name and address of the stockholder who intends to make the nomination and of
the person or persons to be nominated; (ii) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at the meeting and intends to appear in person or by proxy at the meeting and
nominate the person or persons specified in the notice; (iii) a description of
all arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming the person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (iv) any other
information regarding each nominee proposed by the stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the United States Securities and Exchange Commission had the nominee been
nominated, or intended to be nominated, by the Board; and (v) the consent of
each nominee to serve as a director of the Corporation if so elected. In
addition, the stockholder making the
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nomination must promptly provide any other information reasonably requested by
the Corporation. Notwithstanding the foregoing provisions of this Section
2.8(B), if the number of directors to be elected to the Board is increased and
there is no public announcement naming either all of the nominees for director
or specifying the size of the increased Board made by the Corporation at least
100 days in advance of the meeting, a stockholders notice required by this
Section 2.8(B) shall be considered timely, but only with respect to nominees for
any new positions created by the increase, if it is delivered to the Secretary
of the Corporation not later than the tenth day following the day on which the
public announcement is first made by the Corporation. No person shall be
eligible for election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 2.8(B). The chairman of
any meeting of stockholders shall have the power and the duty to determine
whether a nomination has been made in accordance with the procedure set forth in
this Section 2.8(B) and shall direct that any nomination not made in accordance
with these procedures be disregarded.
SECTION 2.9 RECORD DATE FOR STOCKHOLDER ACTION BY WRITTEN CONSENT.
(A) Unless otherwise provided in the Certificate of Incorporation, any
action that may be taken at any annual or special meeting of stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding shares having not less than the minimum voting power
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote on the matter were present and voted. Prompt notice
of the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
(B) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
may fix a record date, which may not precede the date upon which the resolution
fixing the record date is adopted by the Board, and which may not be more than
10 days after the date upon which the resolution fixing the record date is
adopted by the Board. Any stockholder of record seeking to have the stockholders
authorize or take corporate action by written consent shall, by written notice
to the Secretary, request the Board to fix a record date. The Board shall
promptly, but in all events within 10 days after the date upon which the request
is received, adopt a resolution fixing the record date. If no record date has
been fixed by the Board within 10 days of the date upon which the request is
received, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
is required by applicable law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Corporation by delivery to its registered office in the State of Delaware,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded, addressed to the attention of the Secretary. Delivery shall be by hand
or by certified or registered mail, return receipt requested. If no record date
has been fixed by the Board and prior action by the Board is required by
applicable law, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the day on which the Board adopts the resolution taking the prior
action.
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SECTION 2.10 STOCKHOLDER LISTS. The officer who has charge of the stock ledger
of the Corporation shall prepare and make, at least 10 days before every meeting
of stockholders a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
ARTICLE III: BOARD OF DIRECTORS
SECTION 3.1 GENERAL POWERS. Subject to any requirements in the Certificate of
Incorporation, these Bylaws, and of the Delaware General Corporation Law as to
action which must be authorized or approved by the stockholders, any and all
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation shall be under the direction of, the
Board to the fullest extent permitted by law. Without limiting the generality of
the foregoing, it is hereby expressly declared that the Board shall have the
following powers:
(A) to select and remove all the officers, agents and employees of the
Corporation, prescribe the powers and duties for them as may not be inconsistent
with law, the Certificate of Incorporation or these Bylaws, fix their
compensation, and require from them security for faithful service;
(B) to conduct, manage and control the affairs and business of the
Corporation, and to make any rules and regulations for that purpose not
inconsistent with law, the Certificate of Incorporation or these Bylaws, as it
may deem best;
(C) to change the location of the registered office of the Corporation
in Section 1.1 ; to change the principal office and the principal office for the
transaction of the business of the Corporation from one location to another as
provided in Section 1.2 ; to designate any place within or without the State of
Delaware for the holding of any meeting or meetings of stockholders; and to
adopt, make and use a corporate seal, and to prescribe the forms of certificates
of stock, and to alter the form of the seal and of the certificates from time to
time, and in its judgment as it may deem best, provided the seal and the
certificate at all times complies with the provisions of law;
(D) to authorize the issue of shares of stock of the Corporation from
time to time, upon any terms and for any considerations as may be lawful;
(E) to borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust and
securities; and
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(F) by resolution adopted by a majority of the authorized number of
directors, to designate an executive and other committees of the Board, each
consisting of one or more directors, to serve at the pleasure of the Board, and
to prescribe the manner in which proceedings of the committee or committees
shall be conducted.
SECTION 3.2 NUMBER AND TERM OF OFFICE.
(A) The authorized number of directors of the Corporation shall be not
less than 5 nor more than 14. The exact number of directors shall be fixed from
time to time, within the limits specified, by resolution of the Board. Directors
need not be stockholders. Each of the directors of the Corporation shall hold
office until the director's successor is duly elected and qualifies or until the
director resigns or is removed in the manner provided in these Bylaws.
(B) The Directors on the Board shall be classified with respect to the
time for which they shall severally hold office by dividing them into three
classes. If the total number of directors is evenly divisible by three, then
each class shall have one-third of the total number of directors. If the total
number of directors is not evenly divisible by three, the Board of Directors
shall by resolution determine the number of directors in each class, which shall
be, as nearly as possible, the same for each class. The directors of the each
class shall hold office as provided in the Corporation's Certificate of
Incorporation. At each annual meeting of the stockholders, the successors to the
class of directors whose terms shall expire in that year shall be elected, and
the successors shall hold office until the third following annual meeting of
stockholders and until the election and qualification of their respective
successors. If successors to the class of directors whose term expire at an
annual meeting of stockholders are not elected at the meeting or if the meeting
is not held, directors may be elected at a special meeting of stockholders as
successors to that class of directors.
SECTION 3.3 ELECTION OF DIRECTORS. The directors shall be elected by the
stockholders of the Corporation, and at each election, the persons receiving the
greater number of votes, up to the number of directors then to be elected, shall
be the persons then elected. The election of directors is subject to any
provisions contained in the Certificate of Incorporation, including any
provision granting the holders of preferred stock the right to elect directors.
SECTION 3.4 RESIGNATIONS. Any director of the Corporation may resign at any time
by giving written notice to the Board or to the Secretary of the Corporation.
Any resignation shall take effect at the time specified therein, or, if the time
is not specified, it shall take effect immediately upon receipt; and, unless
otherwise specified therein, the acceptance of the resignation shall not be
necessary to make it effective.
SECTION 3.5 VACANCIES. Except as otherwise provided in the Certificate of
Incorporation, any vacancy in the Board, whether because of death, resignation,
disqualification, an increase in the number of directors, or any other cause,
may be filled by vote of the majority of the remaining directors, although less
than a quorum, or by a sole remaining director; provided, however, that whenever
the holders of any class or series of shares are entitled to elect one or more
directors, any vacancy or newly created directorship of any class or series may
be filled by a
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majority of the directors elected by that class or series then in office, or
by a sole remaining director so elected. Each director chosen to fill a vacancy
shall hold office until the director's successor is elected and qualifies or
until the director resigns or is removed. No reduction of the authorized number
of directors shall have the effect of removing any director prior to the
expiration of the director's term of office.
SECTION 3.6 PLACE OF MEETING. The Board or any committee may hold any of its
meetings at any place within or without the State of Delaware as the Board or
the committee may from time to time by resolution designate or as is designated
by the person or persons calling the meeting or in the notice or a waiver of
notice of any meeting. Directors may participate in any regular or special
meeting of the Board or any committee thereof by means of conference telephone
or similar communications equipment pursuant to which all persons participating
in the meeting of the Board or the committee can hear each other, and the
participation shall constitute presence in person at the meeting.
SECTION 3.7 REGULAR MEETINGS. Regular meetings of the Board may be held at the
times as the Board shall from time to time by resolution determine. Except as
provided by law, notice of regular meetings need not be given.
SECTION 3.8 SPECIAL MEETINGS. Special meetings of the Board for any purpose or
purposes shall be called at any time by the Chairman of the Board and the
Chairman of the Board shall call a special meeting at any time upon the written
request of two directors. Except as otherwise provided by law or by these
Bylaws, written notice of the time and place of special meetings shall be
delivered personally or by fax to each director, or sent to each director by
mail or by other form of written communication, charges prepaid, addressed to
the director at the director's address as it is shown upon the records of the
Corporation. In case the notice is mailed or telegraphed, it shall be deposited
in the U.S. mail or delivered to the telegraph company at least 72 hours prior
to the time of the holding of the meeting. In case the notice is delivered
personally or by fax as above provided, it shall be delivered at least 24 hours
prior to the time of the holding of the meeting. The mailing, telegraphing,
delivery or faxing as above provided shall be due, legal and personal notice to
the director. Except where otherwise required by law or by these Bylaws, notice
of the purpose of a special meeting need not be given. Notice of any meeting of
the Board shall not be required to be given to any director who is present at
the meeting, except a director who shall attend the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
SECTION 3.9 QUORUM AND MANNER OF ACTING. Except as otherwise provided in these
Bylaws, the Certificate of Incorporation or by applicable law, the presence of a
majority of the authorized number of directors shall be required to constitute a
quorum for the transaction of business at any meeting of the Board, and all
matters shall be decided at any meeting, a quorum being present, by the
affirmative votes of a majority of the directors present. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, provided any action taken is approved by at least a
majority of the required quorum for the meeting. In the absence of a quorum, a
majority of directors present at any meeting may
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adjourn the same from time to time until a quorum shall be present. Notice of
any adjourned meeting need not be given. The directors shall act only as a
Board, and the individual directors shall have no power as such.
SECTION 3.10 ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board or of any committee thereof may be taken without a
meeting if consent in writing is given thereto by all members of the Board or of
the committee, as the case may be, and the consent is filed with the minutes of
proceedings of the Board or of the committee.
SECTION 3.11 COMPENSATION. Directors, whether or not employees of the
Corporation or any of its subsidiaries, may receive an annual fee for their
services as directors in an amount fixed by resolution of the Board, and, in
addition, a fixed fee, with or without expenses of attendance, may be allowed by
resolution of the Board for attendance at each meeting, including each meeting
of a committee of the Board. The fees may be in the form of cash or other lawful
consideration, including stock grants and stock options. Nothing in these Bylaws
shall be construed to preclude any director from serving the Corporation in any
other capacity as an officer, agent, employee, or otherwise, and receiving
compensation therefor.
SECTION 3.12 COMMITTEES. The Board may, by resolution passed by a majority of
the whole Board, designate one or more committees, each committee to consist of
one or more of the directors of the Corporation. Any committee, to the extent
provided in the resolution of the Board and subject to any restrictions or
limitations on the delegation of power and authority imposed by applicable law,
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it. Any
committee shall keep written minutes of its meetings and report the same to the
Board at the next regular meeting of the Board. Unless the Board or these Bylaws
shall otherwise prescribe the manner of proceedings of any committee, meetings
of committee may be regularly scheduled in advance and may be called at any time
by the chairman of the committee or by any two members; otherwise, the
provisions of these Bylaws with respect to notice and conduct of meetings of the
Board shall govern.
ARTICLE IV: OFFICERS
SECTION 4.1 OFFICERS. The officers of the Corporation shall be a Chairman of the
Board, a President, one or more Vice Presidents (the number thereof and their
respective titles to be determined by the Board), a Secretary, a Treasurer, and
any other officers as may be appointed at the discretion of the Board in
accordance with the provisions of Section 4.3.
SECTION 4.2 ELECTION. The officers of the Corporation, except any officers that
are appointed or elected in accordance with the provisions of Sections 4.3 or
4.5, shall be chosen annually by the Board at its first meeting, and each
officer shall hold office until the officer resigns or is removed or otherwise
disqualified to serve, or until the officer's successor is elected and
qualified.
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SECTION 4.3 OTHER OFFICERS. In addition to the officers chosen annually by the
Board at its first meeting, the Board also may appoint or elect any other
officers as the business of the Corporation may require, each of whom shall have
the authority and perform the duties as are provided in these Bylaws or as the
Board may from time to time specify, and shall hold office until the officer
resigns or is removed or otherwise disqualified to serve, or until the officer's
successor is elected and qualified.
SECTION 4.4 REMOVAL AND RESIGNATION. Any officer may be removed, either with or
without cause, by resolution of the Board passed by a majority of the directors
at the time in office, at any regular or special meeting of the Board, or except
in case of an officer chosen by the Board, by any officer upon whom the power of
removal may be conferred by the Board.
SECTION 4.5 VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to the office.
SECTION 4.6 CHAIRMAN OF THE BOARD. The Chairman of the Board shall, subject to
the control of the Board, be the chief executive officer of the Corporation and
shall have general supervision, direction and control of the business and
affairs of the Corporation and shall have any other powers and duties with
respect to the administration of the business and affairs of the Corporation as
may from time to time be assigned to the office by the Board or as may be
prescribed by these Bylaws.
SECTION 4.7 PRESIDENT. The President shall have the powers and duties with
respect to the administration of the business and affairs of the Corporation as
may from time to time be assigned to the President by the Board or the Chairman
of the Board or as may be prescribed by these Bylaws.
SECTION 4.10 VICE PRESIDENTS. Each Vice President shall have the powers and
perform the duties with respect to the administration of the business and
affairs of the Corporation as may from time to time be assigned to that Vice
President by the Board or the Chairman of the Board or as may be prescribed by
these Bylaws. In the absence or disability of the Chairman of the Board and the
President, the Vice Presidents in order of their rank as fixed by the Board, or
if not ranked, the Vice President designated by the Board, shall perform all of
the duties of the Chairman of the Board and the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
Chairman of the Board and the President.
SECTION 4.11 SECRETARY.
(A) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation, or any other place as the Board may order, a book of
minutes of all meetings of directors and stockholders, with the time and place
of holding, whether regular or special, and if special, how authorized and the
notice given, the names of those present at meetings of directors, the number of
shares present or represented at meetings of stockholders, and the proceedings
thereof.
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(B) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation's transfer agent, a share register, or a duplicate
share register, showing the name of each stockholder, the number of shares of
each class held by the stockholder, the number and date of certificates issued
for shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
(C) The Secretary shall give, or cause to be given, notice of all
meetings of stockholders and of the Board required by these Bylaws or by law to
be given, and shall keep the seal of the Corporation in safe custody and shall
affix and attest the seal to all documents to be executed on behalf of the
Corporation under its seal, and shall have any other powers and perform any
other duties as may be prescribed by these Bylaws or assigned by the Board, the
Chairman of the Board or any officer of the Corporation to whom the Secretary
may report. If for any reason the Secretary shall fail to give notice of any
special meeting of the Board called by one or more of the persons identified in
Section 3.8 , then any of those persons may give notice of any special meeting.
SECTION 4.12 TREASURER. The Treasurer shall receive, deposit and disburse funds
belonging to the Corporation, and perform all duties that pertain to the office
and that are required by the Board.
ARTICLE V: CONTRACTS, CHECKS, DRAFTS,
BANK ACCOUNTS, ETC.
SECTION 5.1 EXECUTION OF CONTRACTS. The Board, except as these Bylaws otherwise
provide, may authorize any officer or officers, or agent or agents, to enter
into any contract or execute any instrument in the name of and on behalf of the
Corporation, and the authority may be general or confined to specific instances;
and unless so authorized by the Board or by these Bylaws, no officer, agent or
employee shall have any power or authority to bind the Corporation by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or in any amount.
SECTION 5.2 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment
of money, notes or other evidence of indebtedness, issued in the name of or
payable to the Corporation, shall be signed or endorsed by those persons and in
the manner as, from time to time, shall be determined by resolution of the
Board. Each officer, assistant, agent or attorney shall give a bond, if any, as
the Board may require.
SECTION 5.3 DEPOSITS. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in any banks,
trust companies or other depositories as the Board may select, or as may be
selected by any officer or officers, assistant or assistants, agent or agents,
or attorney or attorneys of the Corporation to whom the power shall have been
delegated by the Board. For the purpose of deposit and for the purpose of
collection for the account of the Corporation, the Chairman of the Board, the
President, any Vice President, the Secretary and the Treasurer (or any other
officer or officers, assistant or assistants, agent or agents, or attorney or
attorneys of the Corporation who shall from time to time be
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determined by the Board) may endorse, assign and deliver checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation.
SECTION 5.4 GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to time
authorize the opening and keeping of general and special bank accounts with any
banks, trust companies or other depositories as the Board may select or as may
be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom the power is
delegated by the Board. The Board may make any special rules and regulations
with respect to the bank accounts, not inconsistent with the provisions of these
Bylaws, as it may deem expedient.
ARTICLE VI: SHARES AND THEIR TRANSFER
SECTION 6.1 CERTIFICATES FOR STOCK.
(A) Every owner of stock of the Corporation shall be entitled to have a
certificate or certificates, to be in the form the Board shall prescribe,
certifying the number and class or series of shares of the stock of the
Corporation owned by the owner. The certificates representing shares of stock
shall be numbered in the order in which they are issued and shall be signed in
the name of the Corporation by the Chairman of the Board, the President or any
Vice President, and by the Secretary, any Assistant Secretary or the Treasurer.
Any or all of the signatures on the certificates may be a facsimile. In case any
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any certificate, shall have ceased to be an
officer, transfer agent or registrar before the certificate is issued, the
certificate may nevertheless be issued by the Corporation with the same effect
as though the person who signed the certificate, or whose facsimile signature is
placed thereupon, were the officer, transfer agent or registrar at the date of
issue. A record shall be kept of the names of the persons, firms or corporations
owning the stock represented by the certificates, the number and class or series
of shares represented by the certificates, and the dates of the certificates,
and in case of cancellation, the respective dates of cancellation. Every
certificate surrendered to the Corporation for exchange or transfer shall be
canceled, and no new certificate or certificates shall be issued in exchange for
any existing certificate until the existing certificate shall have been so
canceled, except in cases provided for in Section 6.4 .
(B) Until the earliest of July 31, 2009, such date as the Corporation
shall no longer have any unutilized Carryforwards or such date after which
Section 382 of the Code is repealed or so substantially modified such that, in
the opinion of counsel to the Corporation, the restrictions on transfer
described in Paragraph (1)(c) of Article Fourth of the Corporation's Certificate
of Incorporation are no longer necessary to accomplish their intended purpose,
all certificates representing shares of Common Stock shall conspicuously bear
the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFERS SET FORTH IN ARTICLE FOURTH OF THE
CORPORATION'S CERTIFICATE OF INCORPORATION, THE TEXT OF WHICH IS
SUMMARIZED ON THE REVERSE SIDE OF THIS
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CERTIFICATE. ANY ATTEMPT TO ACQUIRE COMMON STOCK OF THE CORPORATION
IN VIOLATION OF SUCH RESTRICTIONS SHALL BE NULL AND VOID AND MAY
RESULT IN FINANCIAL LOSS TO THE PERSON OR ENTITY ATTEMPTING SUCH
ACQUISITION."
SECTION 6.2 TRANSFERS OF STOCK. Transfers of shares of stock of the Corporation
shall be made only on the books of the Corporation at the direction of the
registered holder of the shares, or by the holder's attorney authorized by a
power of attorney duly executed and filed with the Secretary, or with a transfer
clerk or a transfer agent appointed as provided in Section 6.3 , and upon
surrender of the certificate or certificates for the shares properly endorsed
and the payment of all taxes due. The person in whose name shares of stock stand
on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation. Whenever any transfer of shares shall be
made for collateral security, and not absolutely, that fact shall be so
expressed in the entry of transfer if, when the certificate or certificates
shall be presented to the Corporation for transfer, both the transferor and the
transferee request the Corporation to do so.
SECTION 6.3 REGULATIONS. The Board may make any rules and regulations as it may
deem expedient, not inconsistent with these Bylaws, concerning the issue,
transfer and registration of certificates for shares of the stock of the
Corporation. It may appoint, or authorize any officer or officers to appoint,
one or more transfer clerks or one or more transfer agents and one or more
registrars, and may require all certificates for stock to bear the signature or
signatures of any of them.
SECTION 6.4 LOST, STOLEN, DESTROYED, AND MUTILATED CERTIFICATES. In any
case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of loss, theft, destruction, or
mutilation and upon the giving of a bond of indemnity to the Corporation in any
form and in any sum as the Board or any officer may direct; provided, however,
that a new certificate may be issued without requiring any bond when, in the
judgment of the Board or any officer, it is proper so to do.
SECTION 6.5 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action other than to consent to corporate action in writing without a meeting,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of the meeting, nor more than 60 days
prior to any other action. If in any case involving the determination of
stockholders for any purpose other than notice of or voting at a meeting of
stockholders the Board shall not fix a record date, then the record date for
determining stockholders for that purpose shall be the close of business on the
day on which the Board shall adopt the resolution relating thereto. A
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
13
<PAGE> 14
ARTICLE VII: INDEMNIFICATION
SECTION 7.1 SCOPE OF INDEMNIFICATION. The Corporation shall indemnify to the
full extent permitted by the laws of Delaware as from time to time in effect,
the persons described in Section 145 of the Delaware General Corporation Law, or
other provisions of the laws of Delaware relating to the indemnification of
officers, directors, employees and agents, as from time to time in effect. The
foregoing shall not be construed to limit the powers of the Board to provide any
other rights of indemnity which it may deem appropriate.
SECTION 7.2 ADVANCES. The Corporation shall advance the expenses of any Director
or officer incurred in defending any action, suit or proceeding, or appeal
therefrom, whether civil, criminal, administrative, investigative or otherwise,
in advance of the final disposition of any action, suit or proceeding by
determination of the Board that the advance is appropriate; provided the
Corporation receive an undertaking by or on behalf of the Director or officer
involved to repay the amount unless it is ultimately determined that the person
is entitled to be indemnified by the Corporation. The expenses incurred by
officers, employees and agents may be so paid upon any terms and conditions the
Board deems appropriate.
ARTICLE VIII: MISCELLANEOUS
SECTION 8.1 SEAL. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the name of the Corporation and words showing
that the Corporation was incorporated in the State of Delaware.
SECTION 8.2 WAIVER OF NOTICES. Whenever notice is required to be given by these
Bylaws or the Certificate of Incorporation or by law, the person entitled to the
notice may waive the notice in writing, either before or after the time stated
therein, and the waiver shall be deemed equivalent to notice.
SECTION 8.3 AMENDMENTS. Except as otherwise provided in these Bylaws or in the
Certificate of Incorporation, these Bylaws or any of them may be altered,
amended, repealed or rescinded and new Bylaws may be adopted by the Board or by
the stockholders at any annual or special meeting of stockholders, provided that
notice of the proposed alteration, amendment, repeal, rescission or adoption is
given in the notice of the meeting.
SECTION 8.4 REPRESENTATION OF OTHER CORPORATIONS. The Chairman of the Board,
President, any Vice President, the Secretary or the Treasurer of the Corporation
is authorized to vote, represent and exercise on behalf of the Corporation all
rights incident to any and all shares or ownership interests of any other
corporation or corporations, partnership or limited liability company standing
in the name of the Corporation. The authority granted to the officers to vote or
represent on behalf of the Corporation any and all shares held by the
Corporation in any other corporation or corporations may be exercised either by
the officers in person or by any person authorized so to do by proxy or power of
attorney duly executed by the officers.
14
<PAGE> 1
EXHIBIT 10.27
PROMISSORY NOTE
$4,000,000 Charlotte, North Carolina November 14, 1997
FOR VALUE RECEIVED, the undersigned, HEPGP LTD., a Colorado limited
partnership of which Hallwood G.P., Inc., a Delaware corporation is the sole
general partner (the "Borrower"), hereby promises to pay to the order of FIRST
UNION NATIONAL BANK, a national banking association (the "Lender") on or before
the Maturity Date the lesser of (i) FOUR MILLION AND NO/100 DOLLARS ($4,000,000)
and (ii) the aggregate unpaid amount of the Loan (as that term is defined in the
Credit Agreement herein defined) made by the Lender pursuant to the Credit
Agreement (as herein defined) and outstanding on the Maturity Date. The unpaid
principal amount of the Loan made by the Lender pursuant to the Credit Agreement
shall be due and payable at such dates and times as are specified in the Credit
Agreement.
The Borrower promises to pay interest on the outstanding principal
amount of the Loan from the date of such Loan until such principal amount is
paid in full, at such interest rates, subject to Section 8.6 of the Credit
Agreement, and payable at such dates and times, as are specified in that certain
Amended and Restated Credit Agreement dated as of November 14, 1997 (as the same
may from time to time be further amended, modified or supplemented, the "Credit
Agreement," the terms defined therein and not otherwise defined herein being
used herein as therein defined) among the Borrower, The Hallwood Group
Incorporated, a Delaware corporation ("Parent Guarantor"), Hallwood G.P., Inc.,
a Delaware corporation ("Hallwood GP"), and the Lender.
Both principal and interest are payable in immediately available funds
in lawful money of the United States of America at the office of the Lender, 301
South College Street, Charlotte, North Carolina 28288, or at such other place as
the Lender shall designate in writing to the Borrower. The Lender is hereby
authorized, at its option, either (i) to endorse on the schedule attached hereto
all payments made on account of principal and interest hereof, or (ii) to record
such payments in its books and records. Such schedule or such books and records,
as the case may be, shall constitute prima facie evidence of the accuracy of the
information contained therein.
This Promissory Note is the Note referred to in, is subject to the
terms and conditions thereof, and is entitled to the benefits thereof and is
entitled to the benefits of the security provided under the Security
Instruments. The Credit Agreement, among other things, (i) provides for the
making of a term Loan by the Lender to the Borrower, the indebtedness of the
Borrower resulting from the Loan being evidenced by this Note, and (ii) contains
provisions for acceleration of the maturity hereof upon the happening of certain
stated events, also for prepayments on account of principal hereof prior to the
maturity hereof upon the terms and conditions therein specified, and to the
effect that no provision of the Credit Agreement or this
<PAGE> 2
Note shall require the payment or permit the collection of interest in excess of
the Highest Lawful Rate.
Except as otherwise specifically provided for in the Loan Documents,
the Borrower and any and all endorsers, guarantors and sureties severally waive
grace, demand, presentment for payment, notice of dishonor or default or intent
to accelerate or acceleration, protest and notice of protest and diligence in
collecting and bringing of suit against any party hereto, and agree to all
renewals, extensions or partial payments hereon and to any release or
substitution of security hereof, in whole or in part, with or without notice,
before or after maturity. Except as provided in Section 8.9 of the Credit
Agreement, this Note may not be assigned to any other Person.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF NORTH CAROLINA AND ANY APPLICABLE LAWS
OF THE UNITED STATES OF AMERICA.
This Note is issued in substitution for, and in replacement,
modification, rearrangement, renewal and extension of, but not in extinguishment
of all outstanding principal indebtedness evidenced by that certain promissory
note of the Borrower dated December 10, 1996, in the original principal sum of
$2,500,000 payable to the order of the Lender (the "Prior Note"), it being
acknowledged that the indebtedness evidenced by this Note constitutes an
extension, renewal, and refinancing of all outstanding principal indebtedness
evidenced by the Prior Note.
IN WITNESS WHEREOF, Borrower has caused this Note to be executed and
delivered effective as of the date first above written.
HEPGP LTD.
By: HALLWOOD G.P., INC.,
its sole general partner
By:
Name: William L. Guzzetti
Title: President
-2-
<PAGE> 3
THE LOAN, MATURITY, AND
PAYMENTS OF PRINCIPAL AND INTEREST
<TABLE>
<CAPTION>
====================================================================================================================================
Amount of Unpaid
Payment Amount Principal Paid or Amount of Interest Principal Notation Made
Date Due Prepaid Paid or Prepaid Balance By
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
</TABLE>
-3-
<PAGE> 4
===============================================================================
AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF NOVEMBER 14, 1997
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
AS LENDER
===============================================================================
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
SECTION 1.1. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1-
SECTION 1.2. Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
SECTION 1.3. Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -18-
SECTION 1.4. Calculations and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
ARTICLE II
TERMS OF FACILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
SECTION 2.1. Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
SECTION 2.2. The Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -19-
2.2.1. Borrowing Base Asset Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
2.2.2. Determination of Borrowing Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
SECTION 2.3. Borrowing Procedure for the Initial Loan . . . . . . . . . . . . . . . . . . . . . . . . . . -20-
SECTION 2.4. The Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
SECTION 2.5. Conversions or Continuation of Tranches . . . . . . . . . . . . . . . . . . . . . . . . . . -21-
SECTION 2.6. Interest on the Loan and Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
SECTION 2.7. Interest on Overdue Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
SECTION 2.8. Principal Payments on the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -22-
SECTION 2.9. Voluntary Prepayment of the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
SECTION 2.10. Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
SECTION 2.11. Yield Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -23-
SECTION 2.12. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
SECTION 2.13. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -24-
SECTION 2.14. Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
SECTION 2.15. Change in Circumstances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -25-
SECTION 2.16. Time, Place and Method of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
SECTION 2.17. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
ARTICLE III
CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
SECTION 3.1. Conditions Precedent to the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -26-
ARTICLE IV
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
SECTION 4.1. Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
SECTION 4.2. Organization; Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -30-
SECTION 4.3. Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
SECTION 4.4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
SECTION 4.5. No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
SECTION 4.6. Ownership of Properties; Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -31-
</TABLE>
-1-
<PAGE> 6
<TABLE>
<S> <C>
SECTION 4.7. Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
SECTION 4.8. No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -32-
SECTION 4.9. Financial Position; No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . -32-
SECTION 4.10. Litigation; Adverse Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
SECTION 4.11. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -33-
SECTION 4.12. Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
SECTION 4.13. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34-
SECTION 4.14. Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
SECTION 4.15. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -35-
SECTION 4.16. Subsidiaries; Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
SECTION 4.17. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
SECTION 4.18. Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
SECTION 4.19. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
SECTION 4.20. Licenses, Permits, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
SECTION 4.21. Location of the Loan Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36-
SECTION 4.22. Gas Imbalances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
SECTION 4.23. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
ARTICLE V
AFFIRMATIVE COVENANTS OF THE LOAN PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
SECTION 5.1. Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -37-
SECTION 5.2. Payment and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
SECTION 5.3. Business of the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -39-
SECTION 5.4. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
SECTION 5.5. Right of Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
SECTION 5.6. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
SECTION 5.7. Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
SECTION 5.8. Compliance with Laws and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -40-
SECTION 5.9. Maintenance of Ownership of Oil and Gas Interests . . . . . . . . . . . . . . . . . . . . . -40-
SECTION 5.10. Operation of Properties and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
SECTION 5.11. Environmental Law Compliance and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . -41-
SECTION 5.12. ERISA Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -41-
SECTION 5.13. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -42-
SECTION 5.14. Permits, Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
SECTION 5.15. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
SECTION 5.16. Title Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
SECTION 5.17. Performance of Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . -43-
SECTION 5.18. Repurchase of Debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
ARTICLE VI
NEGATIVE COVENANTS OF THE LOAN PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
SECTION 6.1. Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
SECTION 6.2. Restrictions on Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
SECTION 6.3. Liens; Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44-
SECTION 6.4. Consolidation, Mergers and Acquisitions; Fundamental Changes . . . . . . . . . . . . . . . . -45-
</TABLE>
-ii-
<PAGE> 7
<TABLE>
<S> <C>
SECTION 6.5. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -45-
SECTION 6.6. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
SECTION 6.7. Certain Contracts; Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
SECTION 6.8 Amendments to Organizational Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
SECTION 6.9. Subsidiaries, Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
SECTION 6.10. Sales of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46-
SECTION 6.11. ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-
SECTION 6.12. Sales and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-
SECTION 6.13. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-
SECTION 6.14. Hedging Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47-
SECTION 6.15. Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
ARTICLE VII
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
SECTION 7.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -48-
SECTION 7.2. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-
SECTION 7.3. Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51-
SECTION 7.4. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
ARTICLE VIII
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
SECTION 8.1. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -52-
SECTION 8.2. Notices, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -53-
SECTION 8.3. No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
SECTION 8.4. Costs, Expenses and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54-
SECTION 8.5. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
SECTION 8.6. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -55-
SECTION 8.7. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . -56-
SECTION 8.8. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
SECTION 8.9. Participations; Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
SECTION 8.10. Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -56-
SECTION 8.11. Marshaling; Recapture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
SECTION 8.12. Representation by the Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
SECTION 8.13. No Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
SECTION 8.14. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -57-
SECTION 8.15. Jurisdiction; Consent to Service of Process . . . . . . . . . . . . . . . . . . . . . . . . -57-
SECTION 8.16. WAIVER OF JURY TRIAL, DAMAGES, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
SECTION 8.17. FINAL AGREEMENT OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -58-
</TABLE>
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<PAGE> 8
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT dated as of November 14,
1997, 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 (FORMERLY KNOWN AS FIRST UNION NATIONAL
BANK OF NORTH CAROLINA), a national banking association (the "Lender").
PRELIMINARY STATEMENTS
WHEREAS, the Borrower, the Parent Guarantor, Hallwood GP and
the Lender entered into that certain Credit Agreement dated as of December 10,
1996 (the "Credit Agreement") providing for, among other things, a term loan to
be made by the Lender to the Borrower in the principal sum of $2,500,000 in the
aggregate at any time outstanding on the terms and subject to the conditions
therein set forth; and
WHEREAS, the Borrower, the Parent Guarantor and Hallwood GP have
requested that the Lender extend additional credit to the Borrower, as more
particularly set forth herein;
WHEREAS, Lender has agreed to extend such additional credit to the
Borrower upon the terms and subject to the conditions set forth herein;
WHEREAS, the Borrower, the Parent Guarantor and Hallwood GP desire to
further amend and to restate in its entirety the Credit Agreement in order to
provide for such additional credit among other matters as more fully provided
hereinbelow:
NOW THEREFORE, in consideration of the premises and the mutual
agreements and covenants herein contained, the parties hereto agree that the
Credit Agreement is hereby amended and restated, effective as of the Effective
Date, to read in its entirety 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:
"Accommodation Obligation," as applied to any Person, means 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,
<PAGE> 9
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.
"Additional Costs" means costs which the Lender determines are
attributable to its obligation to make or its making or maintaining any LIBO
Rate Tranche, or any reduction in any amount receivable by the Lender in
respect of any such obligation or any LIBO Rate Tranche, resulting from any
Regulatory Change which (a) changes the basis of taxation of any amounts
payable to the Lender under this Credit Agreement or any Note in respect of any
LIBO Rate Tranche other than taxes imposed on the overall net income of the
Lender or its Applicable Lending Office for any such LIBO Rate Tranche by the
jurisdiction in which the Lender has its principal office or Applicable Lending
Office), (b) imposes or modifies any reserve, special deposit, minimum capital,
capital ratio, or similar requirements (other than the Reserve Requirement
utilized in the determination of the Adjusted LIBO Rate for such Tranche)
relating to any extensions of credit or other assets of, or any deposits with
or other liabilities of, the Lender (including any LIBO Rate Tranche and
Dollar deposits in the London interbank market in connection with LIBO Rate
Tranches), or the London interbank market, or (c) imposes any other condition
affecting this Credit Agreement or any Note or any of such extensions of credit
or liabilities.
"Adjusted LIBO Rate" means, for any Interest Period for any LIBO Rate
Tranche, an interest rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1 %) determined by the Lender to be equal to the quotient of
(a) the sum of the LIBO Rate for such Interest Period for such LIBO Rate
Tranche plus the Applicable Margin for LIBO Rate Tranches divided by (b) 1
minus the Reserve Requirement for such LIBO Rate Tranche for such Interest
Period, such rate to be computed on the basis of a year of 360 days and actual
days elapsed (including the first day but excluding the last day) during the
period for which payable, but in no event shall such rate exceed the Highest
Lawful Rate.
"Affiliate" means, 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.
"Applicable Lending Office" means, the lending office of the Lender
(or an affiliate of the Lender) as the Lender may from time to time specify to
the Borrower as the office by which its LIBO Rate Tranches are to be made and
maintained.
"Applicable Margin" means, (i) with respect to each Floating Rate
Tranche, one percent (1.0%) per annum, and (ii) with respect to each LIBO Rate
Tranche, three and one-half percent (3.50%) per annum.
"Base Rate" means 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.
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<PAGE> 10
"Bankruptcy Code" means the Bankruptcy Reform Act of 1978 as codified
under 11 U.S.C. Section 101, et seq., as amended.
"Benefit Plan" means 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" means the Board of Governors of the Federal Reserve System of
the United States.
"Borrower" means HEPGP Ltd., a Colorado limited partnership whose sole
general partner is Hallwood GP and whose sole limited partner is the Parent
Guarantor.
"Borrowing Base" means, at the particular time in question, the amount
determined by the Lender in accordance with the provisions of Section 2.2,
provided, however, that in no event shall the Borrowing Base exceed $4,000,000.
"Borrowing Base Assets" means, collectively, the (i) Oil and Gas
Interests, (ii) distributions with respect to the Borrower's general
partnership interest in HEP, (iii) distributions with respect to the units of
limited partner interests in HEP owned by the Parent Guarantor and (iv) any
other property owned by the Borrower or the Parent Guarantor (x) which the
Borrower has requested that the Lender consider in its determination of the
Borrowing Base and (y) which the Lender, in its sole discretion, has considered
for purposes of determining the Borrowing Base (as evidenced by a notice to
such effect delivered by the Lender to the Borrower).
"Borrowing Base Deficiency" means, as of any date, the amount, if any,
by which the Loan Balance on such date exceeds the Borrowing Base in effect on
such date.
"Borrowing Base Asset Reports" means the reports required to be
delivered to the Lender pursuant to Section 3.1(c)(iii) which shall include (i)
the Engineering Reports, (ii) a report setting forth (x) all distributions
paid to date to the Borrower since the last report delivered to the Lender in
respect of its general partnership interest in HEP and (y) all distributions
paid to date to the Parent Guarantor since the last report delivered to the
Lender in respect of its units of limited partner interests in HEP and (iii) a
report setting forth the aggregate amount of all outstanding Consolidated Debt.
"Business Day" means 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. Any Business Day
in any way relating to any LIBO Rate Tranches (such as the day on which an
Interest Period begins or ends) must also be a day on which, in the judgment of
the Lender, significant transactions in dollars are carried out in the
interbank eurocurrency market.
"Capital Lease" means, 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" means, 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 obligations
shall have been or should be, in accordance with GAAP, capitalized on the
books of such Person.
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<PAGE> 11
"Cash Equivalents" means, 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" means Internal Revenue Code of 1986, as amended from time to
time, and the regulations promulgated thereunder.
"Collateral" means 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" means 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.
"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
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<PAGE> 12
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.
"Consolidated Debt" means, without duplication and with respect to the
Parent Guarantor and its Subsidiaries (including, without limitation, the
Borrower and Hallwood GP), at anytime, Debt in any of the following categories:
(a) Debt of such Person for borrowed money or for the deferred
purchase price of property or services;
(b) Debt of such Person which is evidenced by a note, bond,
debenture or similar instrument, but excluding bonds or
deposits posted in favor of the United States of America or
any state securing reclamation obligations, obligations to
plug abandoned wells or seal abandoned mines or obligations to
clean up and restore the land on which such wells or mines are
located;
(c) all obligations of such Person under Capitalized Lease
Obligations;
(d) all obligations of such Person in respect of letters of credit
and acceptances issued or created for the account of such
Person, except letters of credit in favor of the United States
of America or any state securing reclamation obligations,
obligations to plug abandoned wells or seal abandoned mines or
obligations to clean up and restore the land on which such
wells or mines are located;
(e) all liabilities secured by any Lien on any property owned by
such Person even though such Person has not assumed or
otherwise become liable for the payment thereof;
(f) all obligations to pay production payments and to make capital
contributions under joint venture or other similar agreements;
and
(g) all Accommodation Obligations of such Person with respect to
Consolidated Debt described in subclauses (a) through (f)
above.
"Contractual Obligation" as applied to any Person, means 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).
"Credit Agreement" means this Amended and Restated 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" means 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
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<PAGE> 13
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.
"Debtor Relief Laws" means 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" means the instruments listed in the Mortgage Schedule,
as the same have been amended pursuant to the Deed of Trust Amendment, and as
same may be further amended, supplemented, restated or otherwise modified from
time to time.
"Deed of Trust Amendment" means that certain Amendment to Deed of
Trust, dated as of the Effective Date from the Borrower in favor of the Lender,
substantially in the form of Exhibit B hereto, amending the mortgage
instruments listed in the Mortgage Schedule and delivered to the Lender
pursuant to Section 3.1(a)(i)(ii).
"Deed of Trust Schedule" means Schedule 1.1 hereto.
"Designated Realty Units" shall have the meaning assigned to that
term in Section 6.3.
"Default" means 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" means the interest rate described in Section 2.7.
"Distribution" means 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,
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<PAGE> 14
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 "$" means the lawful currency of the United
States.
"EBITDA" means, 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" means 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" means 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 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 etseq., 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
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<PAGE> 15
and Health Act, 29 U.S.C. Sections 51 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" means 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" means 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" means 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.
"ERISA Affiliate" means 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" means 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" means 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" means 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.
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<PAGE> 16
Rates for weekends or holidays shall be the same as the rate for the most
immediate preceding Business Day.
"Fiscal Year" means a twelve-month period ending on December 31 of any
year.
"Floating Rate" means, 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.
"Floating Rate Tranche" means any portion of the Loan bearing interest
at a rate determined by reference to the Floating Rate in accordance with the
provisions of Article II.
"GAAP" means 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" means 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" means any nation or government, any federal,
state, province, city, town, municipality, county, local or other political
subdivision thereof or thereto and any department, commission, board, bureau,
instrumentality, agency or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to
government.
"GP Guaranty" means that certain Amended and Restated Guaranty dated
as of the Effective Date, executed by Hallwood GP in favor of the Lender,
substantially in the form of Exhibit C hereto, as same may be amended,
supplemented, restated or otherwise modified from time to time.
"GP Pledge Agreement" means that certain Amended and Restated Pledge
Agreement dated as of November 14, 1997, executed by Hallwood GP in favor of
the Lender, substantially in the form of Exhibit D hereto, as same may be
further amended, supplemented, restated or otherwise modified from time to
time.
"Hallwood GP" means 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" means (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
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<PAGE> 17
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" means Hallwood Energy Partners, L.P., a Delaware limited
partnership, of which the Borrower is the sole general partner.
"Hedging Agreement" means (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 Lender or any Affiliate of the Lender relating to
Hydrocarbons or any option with respect to any such transaction.
"Highest Lawful Rate" means, 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 the Loan.
"Hydrocarbons" means 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 Borrowing Base Asset Reports" means (i) the Initial
Engineering Report, (ii) a report dated as of the Effective Date setting forth
(x) all distributions paid to date in fiscal year 1997 to the Borrower in
respect of its general partnership interest in HEP and (y) all distributions
paid to date in fiscal year 1998 to the Parent Guarantor in respect of its
units of limited partner interests in HEP and (iii) a report dated
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<PAGE> 18
as of the Effective Date setting forth the aggregate amount of all outstanding
Consolidated Debt as of the Effective Date, complete and correct copies of
which have been furnished to the Lender.
"Initial Engineering Report" shall have the meaning assigned to that
term in Section 3.1(c)(ii) hereof.
"Initial Financial Statements" means (i) the audited annual
Consolidated financial statements of the Parent Guarantor and its Consolidated
Subsidiaries dated as of December 31, 1996, (ii) the unaudited Consolidated
balance sheet of the Parent Guarantor and its Consolidated Subsidiaries as at
September 30, 1997, 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, copies of which Initial Financial Statements, including all
footnotes thereto, have heretofore been delivered by the Loan Parties to the
Lender.
"Interest Period" means with respect to any LIBO Rate Tranche:
(i) initially, the period commencing on the Effective
Date or conversion date, as the case may be, with respect to such LIBO
Rate tranche and ending one month thereafter; and
(ii) thereafter, each period commencing on the last day of
the next preceding Interest Period applicable to such LIBO Rate
tranche and ending one month thereafter;
provided that, all of the foregoing provisions relating to Interest Periods are
subject to the following:
(1) if any Interest Period pertaining to a LIBO Rate tranche 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;
(2) any Interest Period that would otherwise extend beyond the
Maturity Date shall end on the Maturity Date; and
(3) any Interest Period pertaining to a LIBO Rate tranche that begins
on the last Business 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.
"Interest Rate Protection Agreement" means that certain Interest Rate
Exchange Agreement substantially in the form of Exhibit E 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" means, 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
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<PAGE> 19
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" means the Internal Revenue Service or any successor agency.
"LIBO Rate" means, with respect to any Interest Period for any LIBO
Rate Tranche, the rate for deposits in Dollars for a period equal to such
Interest Period which appears on the Telerate Page 3750 at approximately 11:00
a.m., London time, two Business Days prior to the commencement of such Interest
Period. If, for any reason, such rate is not available, then "LIBO Rate" means,
with respect to any Interest Period, the rate per annum determined by the
Lender to be the arithmetic average (rounded upwards if necessary, to the
nearest 1/16 of 1%) of the rate per annum as quoted to the Lender by leading
reference banks at approximately 11:00 a.m., London time, two Business Days
prior to the commencement of such Interest Period for settlement in immediately
available funds by leading reference banks in the London interbank market for a
period equal to such Interest Period and in the approximate amount of such LIBO
Rate Tranche.
"LIBO Rate Tranche" means any portion of the Loan bearing interest at
the Adjusted LIBO Rate in accordance with the provisions of Article II and
which are permitted by the terms hereof to bear interest at the Adjusted LIBO
Rate.
"Lien" means, 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 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 Balance" means, at any time, the aggregate outstanding principal
balance under the Note at such time.
"Loan" means the term loan made by the Lender to or for the benefit of
the Borrower pursuant to this Credit Agreement.
"Loan Documents" means 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 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" means 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.
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<PAGE> 20
"Material Adverse Effect" means (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" means May 15, 2000, or the earlier date of termination
or acceleration in whole of the Loan pursuant to the provisions of Section 7.1
hereof.
"Maximum Borrowing Base" means $4,000,000 reduced monthly on the 15th
day of each calendar month by an amount equal to $133,333.00, commencing
December 15, 1997.
"Mortgaged Properties" means 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 any Deed of Trust, are purported to be subject to such Lien.
"Multiemployer Plan" means 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 contributions, or has within any of
the preceding five (5) plan years made or accrued an obligation to make
contributions.
"Note" means the promissory note of the Borrower dated the Effective
Date payable to the order of the Lender, substantially in the form of Exhibit
F.
"Notice of Conversion/Continuation" means a Notice of
Conversion/Continuation in the form of Exhibit G signed by a Responsible
Officer of the Borrower.
"Obligations" means 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" means
any part of the Obligations.
"Oil and Gas Interests" means 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
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<PAGE> 21
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" means 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" means 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" means that certain Amended and Restated Parent
Guaranty dated as of the Effective Date, executed by the Parent Guarantor in
favor of the Lender, substantially in the form of Exhibit H hereto, as same may
be amended, supplemented or otherwise modified from time to time.
"Parent Pledge Agreement" means that certain Amended and Restated
Parent Pledge Agreement dated as of November 14, 1997, executed by the Parent
Guarantor in favor of the Lender, substantially in the form of Exhibit I
hereto, as same may be further amended, supplemented, restated or otherwise
modified from time to time.
"Partnership Agreement" means 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" means the Pension Benefit Guaranty Corporation or any entity
succeeding to all or any of its functions under ERISA.
"Permitted Liens" means 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,
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<PAGE> 22
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 (i) or (ii) 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;
(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
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<PAGE> 23
(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" means 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" means 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" means any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible.
"Regulation D" means 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" means 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.
"Regulation U" means 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" means 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.
"Regulatory Change" means the passage, adoption, institution, or
modification of any federal, state, local, or foreign Requirement of Law
(including, without limitation, Regulation D), or any interpretation,
directive, or request (whether or not having the force of law) of any
Governmental Authority or monetary authority charged with the enforcement,
interpretation, or administration thereof, occurring after the Effective Date
and applying to a class of lenders including the Lender or its Applicable
Lending Office.
"Reimbursable Taxes" shall have the meaning assigned to that term in
Section 2.13 hereof.
"Related Energy Affiliates" means 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.
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<PAGE> 24
"Release" means 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" means 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" means 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" means, 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.
"Reserve Requirement" means, for any Interest Period for any LIBO Rate
Tranche, the average maximum rate at which reserves (including any marginal,
supplemental, or emergency reserves) are required to be maintained during such
Interest Period under Regulation D by member banks of the Federal Reserve
System in Dallas, Texas, with deposits exceeding one billion Dollars against
"Eurocurrency liabilities" (as such term is used in Regulation D) and any other
reserves required by reason of any Regulatory Change to be maintained by such
member banks against (a) any category of liabilities which includes deposits by
reference to which the LIBO Rate is to be determined as provided herein in the
definition of the term "LIBO Rate" or (b) any category of extensions of credit
or other assets which include a LIBO Rate Tranche.
"Responsible Officer" means (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" means Standard & Poor's Corporation.
"Security Agreement" means that certain Amended and Restated Security
Agreement dated as of November 14, 1997, executed by the Borrower in favor of
the Lender, substantially in the form of Exhibit J hereto, as same may be
further amended, supplemented, restated or otherwise modified from time to
time.
"Security Instruments" means 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 security for all or any
portion of the Obligations, as such instruments may be amended, restated, or
supplemented from time to time.
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<PAGE> 25
"Subsidiary" means 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" means (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 means 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;
(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
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<PAGE> 26
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.
SECTION 1.4. Calculations and Determinations. All calculations under
the Loan Documents of interest chargeable with respect to LIBO Rate Tranches
shall be made on the basis of actual day elapsed (including the first day but
excluding the last) and a year of 360 days. All other calculations of fees and
of interest made under the Loan Documents shall be made on the basis of actual
days elapsed (including the first day but excluding the last) and a year of 365
or 366 days, as appropriate. All financial statements and reports furnished to
the Lender hereunder shall be prepared and all financial computations and
determinations pursuant hereto shall be made, to the extent GAAP is applicable,
in accordance with GAAP.
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 $4,000,000 (the "Loan"), on the Effective Date. Except as
otherwise provided in this Credit Agreement, the Loan Balance shall mature and
be due and payable in full on the Maturity Date. The Loan may be borrowed by
the Borrower in designated (i) LIBO Rate Tranches, (ii) Floating Rate Tranches
or (iii) a combination thereof, as determined by the Borrower and notified to
the Lender in accordance with Section 2.3. LIBO Rate Tranches shall be in a
principal amount of $250,000 or a whole multiple of $50,000 in excess thereof.
The Loan is not revolving in nature, and amounts repaid or prepaid may not be
reborrowed.
SECTION 2.2. The Borrowing Base.
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2.2.1. Borrowing Base Asset Reports. As soon as available and in any
event by April 1 of each year, the Borrower shall deliver to the Lender the
Borrowing Base Asset Reports prepared as of the immediately preceding December
31.
2.2.2. Determination of Borrowing Base. Based in part on the
Borrowing Base Asset Reports delivered pursuant to Section 2.2.2, the Lender
shall determine the Borrowing Base to be in effect on the next succeeding May
1, which shall in no event, exceed the Maximum Borrowing Base in effect on the
applicable May 1. Such determination shall be made in good faith by the Lender
in its sole discretion in accordance with its customary practices and standards
for loans of this nature. The Lender shall notify the Borrower of any
reduction in the Borrowing Base below the Maximum Borrowing Base as soon as
possible after receipt of the Borrowing Base Asset Reports, but in any event
not later than sixty (60) calendar days thereafter.
Without limiting the right of the Lender to determine in good faith
the Borrowing Base in its sole discretion, the Borrower acknowledges and agrees
that the Lender (i) may make such assumptions regarding appropriate existing
and projected pricing for Hydrocarbons as it deems appropriate in its good
faith sole discretion, (ii) may make such assumptions regarding and/or
modifying projected rates and/or quantities of future production of
Hydrocarbons from Oil and Gas Interests owned by the Borrower as it deems
appropriate in its sole good faith discretion, (iii) may consider the projected
cash requirements of the Parent Guarantor and its Subsidiaries, and of the
Borrower and its Subsidiaries, including, without limitation, obligations under
Consolidated Debt, and other debt service and lease obligations of the Parent
Guarantor and its Subsidiaries and/or the Borrower and its Subsidiaries,
general and administrative expenses and distributions in respect of equity,
(iv) is not required to consider any asset other than Borrowing Base Assets,
(v) will give no consideration to any asset owned by an entity other than the
Borrower or a Guarantor and (vi) may make such other assumptions,
considerations and exclusions as the Lender deems appropriate in the exercise
of its good faith sole discretion, it being recognized that the ultimate
determination to be reached is predicated upon the aggregate amount of credit
available hereunder which, at the time of the determination, the Lender
determines should be available as reasonably expected to be repayable by the
Borrower and the Parent Guarantor, considering all then existing and projected
other items which are expected to be payable or repayable, without undue risk
of failure to timely repay.
SECTION 2.3. Borrowing Procedure for the Initial Loan.
(a) The Borrower shall submit a Borrowing Request in writing or by
telecopy (or telephone notice promptly confirmed in writing or by telecopy) to
the Lender, (i) in the case of LIBO Rate Tranche(s), not later than 10:00
a.m., Central Standard or Daylight Savings Time, as the case may be, three (3)
Business Days before the Effective Date and (ii) in the case of a Floating
Rate Tranche, not later than 10:00 a.m., Central Standard or Daylight Savings
Time, as the case may be, on the Effective Date. The Borrowing Request shall
refer to this Credit Agreement and specify (x) whether the Loan is to be a LIBO
Rate Tranche, or a Floating Rate Tranche, or a combination thereof , and (y) if
the Loan is to be a combination of Tranches, the aggregate principal amount of
each such Tranche.
(b) The Lender may at its option make any LIBO Rate Tranche by
causing any Applicable Lending Office of the Lender to make such LIBO Rate
Tranche; provided, however, that any exercise of such option shall not affect
the obligation of the Borrower to repay such LIBO Rate Tranche in accordance
with the terms of this Credit Agreement and the Note.
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(c) There shall be no more than two (2) LIBO Rate Tranches
outstanding at any time.
SECTION 2.4. 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 $4,000,000. The Lender is hereby authorized by the Borrower, at its
option, to endorse on the schedule attached to the Note (or on a continuation
of such schedule attached to the Note and made a part thereof) or in its
internal records relating to the 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 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 2.5. Conversions or Continuation of Tranches.
(a) Subject to the other provisions of this Credit Agreement, the
Borrower may elect from time to time to convert (i) a LIBO Rate Tranche to a
Floating Rate Tranche and (ii) a Floating Rate Tranche to a LIBO Rate Tranche,
provided, however, in each case that any such conversion of a LIBO Rate Tranche
shall only be made on the last day of the applicable Interest Period with
respect thereto and provided, further that no Tranche may be converted into a
LIBO Rate Tranche when any Default or Event of Default has occurred and is
continuing.
(b) A LIBO Rate Tranche may be continued as such effective upon
the expiration of the applicable Interest Period with respect thereto;
provided, that no LIBO Rate Tranche may be continued as such when any Default
or Event of Default has occurred and is continuing, but in such event shall be
automatically converted to a Floating Rate Tranche on the last day of the then
current Interest Period with respect thereto.
(c) In order to elect to convert or continue a LIBO Rate Tranche
under this Section 2.5, the Borrower shall deliver an irrevocable Notice of
Conversion/Continuation to the Lender not later than 10:00 a.m., Central
Standard or Daylight Savings Time, as the case may be, at least three (3)
Business Days in advance of the proposed conversion or continuation date in the
case of a conversion to, or continuation of, a LIBO Rate Tranche. Each such
Notice of Conversion/Continuation shall be by telecopy (confirmed thereafter by
a delivery of the original of such Notice of Conversion/Continuation by United
States mail or a reputable courier) and shall specify (x) the date of the
requested conversion or continuation (which shall be a Business Day), (y) the
amount and the Tranche to be converted or continued, (z) whether a conversion
or continuation is requested.
(d) No Floating Rate Tranche may be converted into an LIBO Rate
Tranche, and no LIBO Rate Tranche may be continued as a LIBO Rate Tranche if,
after giving effect to such conversion or continuance, there would be more than
two (2) LIBO Rate Tranches outstanding at such time.
(e) If the Borrower shall fail to deliver a timely Notice of
Conversion/Continuation with respect to any LIBO Rate Tranche, the Borrower
shall be deemed to have elected to convert such LIBO Rate Tranche to a Floating
Rate Tranche on the last day of the Interest Period with respect to such LIBO
Rate Tranche.
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SECTION 2.6. Interest on the Loan and Payment Dates.
(a) Subject to the provisions of Section 2.7, each LIBO Rate
Tranche shall bear interest for each day during the Interest Period with
respect thereto at a rate per annum equal to the lesser of (i) the Highest
Lawful Rate and (ii) the Adjusted LIBO Rate determined for such Interest
Period.
(b) Subject to the provisions of Section 2.7, each Floating Rate
Tranche shall bear interest at a rate per annum equal to the lesser of (i) the
Highest Lawful Rate and (ii) the Floating Rate for such day plus the Applicable
Margin for Floating Rate Tranches for such day.
(c) Interest in respect of the unpaid principal amount of the Loan
shall accrue from (and include) the date of the making of the Loan to (but not
including) the date on which the Loan shall be paid in full.
(d) Interest on the Loan shall be payable (i) in respect of each
Floating Rate Tranche, monthly in arrears on the last Business Day of each
calendar month, (ii) in respect of each LIBO Rate Tranche, on the last day of
the Interest Period applicable to such LIBO Rate Tranche, (iii) in respect of
each Tranche accruing interest at the Default Rate, on demand, and (iv) in
respect of all Tranches, on any prepayment or conversion (on the amount prepaid
or converted), at maturity (whether by acceleration or otherwise) and, after
maturity, on demand.
SECTION 2.7. Interest on Overdue Amounts. If the Borrower shall
fail to pay any installment of principal of or interest on the Loan or any
Tranche, 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 2.8. Principal Payments on the Loan.
(a) If not sooner paid, the principal indebtedness of the Loan
evidenced by the Note shall be repaid in thirty (30) monthly installments on
the fifteenth (15th) day of each calendar month during the term of this Credit
Agreement as follows:
(i) $133,333.00 on December 15, 1997 and on the fifteenth
(15th) day of each successive calendar month thereafter to and
including April 15, 2000; and
(ii) a final payment of all outstanding principal on the
Note shall be due in full on the Maturity Date.
(b) If at any time there shall occur a Borrowing Base Deficiency,
the Borrower shall prepay (no later than thirty (30) calendar days after the
Lender has notified the Borrower of the new Borrowing Base) the principal of
the Loan in an aggregate amount equal to such Borrowing Base Deficiency
(together with accrued interest on the principal amount of the Loan so prepaid
to the date of prepayment). All payments made pursuant to this Section 2.8(b)
shall be accompanied by accrued interest on the principal
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amount being paid to the date of payment and shall be applied to reduce the
remaining installments of principal in the inverse order of their maturity.
SECTION 2.9. 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, (i) in the case of LIBO Rate
Tranches, upon at least three (3) Business Day's prior written or telecopy
notice or telephone notice promptly confirmed in writing) to the Lender,
provided, however that in the event the Borrower prepays a LIBO Rate Tranche on
a day which is not the last day of the Interest Period applicable thereto, the
provisions of Section 2.11 shall apply, or (ii) in the case of Floating Rate
Tranches, upon at least two (2) Business Day's prior written or telecopy notice
or telephone notice promptly confirmed in writing) to the Lender; provided,
further, that each such partial prepayment shall be in a minimum principal
amount of $100,000 and in integral multiples of $50,000.
(b) Each notice of prepayment under subsection (a) above shall (i)
specify the prepayment date, the principal amount of such prepayment, which
Tranches are being prepaid, and in the case of LIBO Rate Tranches, the specific
LIBO Rate Tranche, (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 2.9 shall be subject to Section 2.11 (as to
prepayments of LIBO Rate Tranches), but otherwise without premium or penalty.
All prepayments under this Section 2.9 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 2.10. Facility Fee. The Borrower will pay to the Lender on
the Effective Date in immediately available funds a facility fee in the amount
of $150,000.
SECTION 2.11. Yield Protection. (a) Without limiting the effect of
the other provisions of this Section (but without duplication), the Borrower
shall pay to the Lender from time to time such amounts as the Lender may
determine are necessary to compensate it for any Additional Costs incurred by
the Lender.
(b) Without limiting the effect of the other provisions
of this Section (but without duplication), the Borrower shall pay to the Lender
such amounts as shall be sufficient in the reasonable opinion of the Lender to
compensate it for any loss, cost, or expense incurred by and as a result of:
(i) any payment, prepayment, or conversion by the
Borrower of a LIBO Rate Tranche on a date other than
the last day of an Interest Period for such LIBO Rate
Tranche; or
(ii) any failure by the Borrower to borrow a LIBO Rate
Tranche or to convert a Floating Rate Tranche into a
LIBO Rate Tranche on the date for such borrowing or
conversion specified in the relevant Borrowing
Request or Notice of Conversion/Continuation;
such compensation to include, without limitation, with respect to any LIBO Rate
Tranche, an amount equal to the excess, if any, of (A) the amount of interest
which would have accrued on the principal amount so paid, prepaid, converted,
or not borrowed or converted for the period from the date of such payment,
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prepayment, conversion, or failure to borrow or convert to the last day of the
then current Interest Period for such LIBO Rate Tranche (or, in the case of a
failure to borrow or convert, the Interest Period for such requested LIBO Rate
Tranche which would have commenced on the date of such failure to borrow or
convert) at the applicable rate of interest for such LIBO Rate Tranche provided
for herein over (B) the interest component of the amount the Lender would have
bid in the London interbank market for Dollar deposits of amounts comparable to
such principal amount and maturities comparable to such period, as reasonably
determined by the Lender.
(c) Determinations by the Lender for purposes of this
Section of the effect of any Regulatory Change on its costs for maintaining
LIBO Rate Tranches, its obligation to make LIBO Rate Tranches, or on amounts
receivable by it in respect of LIBO Rate Tranches, and the additional amounts
required to compensate the Lender under this Section shall be conclusive,
absent manifest error, provided that such determinations are made on a
reasonable basis. The Lender shall furnish the Borrower with a certificate
setting forth in reasonable detail the basis and amount of increased costs
incurred or reduced amounts receivable as a result of any such event, and the
statements set forth therein shall be conclusive, absent manifest error. The
Lender shall (i) notify the Borrower, as promptly as practicable after the
Lender obtains knowledge of any Additional Costs or other sums payable pursuant
to this Section 2.11 and determines to request compensation therefor, of any
event occurring after the Effective Date which will entitle the Lender to
compensation pursuant to this Section. If the Lender requests compensation from
the Borrower under this Section, the Borrower may, after payment of all
compensation then accrued and by notice to the Lender, require that all LIBO
Rate Tranches be converted into Floating Rate Tranches in accordance with
Section 2.5 Any compensation requested by the Lender pursuant to this Section
2.11 shall be due and payable within five days of delivery of any such notice
to the Borrower.
SECTION 2.12. Illegality. Notwithstanding any other provision of
this Credit Agreement, in the event that it becomes unlawful for the Lender or
its Applicable Lending Office to (a) honor its obligation to make LIBO Rate
Tranches, or (b) maintain LIBO Rate Tranches, then the Lender shall promptly
notify the Borrower thereof. The obligation of the Lender to make LIBO Rate
Tranches and convert Floating Rate Tranches into LIBO Rate Tranches shall then
be suspended until such time as the Lender may again make and maintain LIBO
Rate Tranches, and the outstanding LIBO Rate Tranches of the Lender shall be
converted into Floating Rate Tranches in accordance with Section 2.5.
SECTION 2.13. Taxes. All payments made by the Borrower under this
Credit Agreement shall be made free and clear of, and without reduction or
withholding for or on account of, present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions or withholdings,
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority on the basis of any change after the date hereof in any applicable
treaty, law, rule, guideline or regulations or in the interpretation or
administration thereof, excluding, in the case of the Lender, net income and
franchise taxes imposed on the Lender by the jurisdiction under the laws of
which the Lender is organized or any political subdivision or taxing authority
thereof or therein, or by any jurisdiction in which the Lender's Applicable
Lending Office is located or any political subdivision or taxing authority
thereof or therein (all such non-excluded taxes, levies, imposts, deductions,
charges or withholdings being hereinafter called "Taxes"). If any Taxes are
required to be withheld from any amounts payable to the Lender hereunder or
under any other Loan Document, the amounts so payable to the Lender shall be
increased to the extent necessary to yield to the Lender (after payment of all
Taxes) interest or any such other amounts payable hereunder at the rates or in
the amounts specified in this Credit Agreement and the other Loan Documents.
Whenever any Taxes are payable by the Borrower, as promptly as possible
thereafter, the Borrower shall send to the Lender a
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certified copy of an original official receipt received by the Borrower showing
payment thereof. If the Borrower fails to pay any Taxes when due to the
appropriate taxing authority or fails to remit to the Lender the required
receipts or other required documentary evidence, the Borrower shall indemnify
the Lender for any incremental taxes, interest or penalties that may become
payable by the Lender as a result of any such failure. The agreements in this
Section 2.13 shall survive the termination of this Credit Agreement and the
payment of all Obligations.
SECTION 2.14. Availability. If (a) any change in applicable laws,
treaties, rules or regulations or in the interpretation or administration
thereof of or in any jurisdiction whatsoever, domestic or foreign, shall make
it impracticable for the Lender to fund or maintain LIBO Rate Tranches, or
shall materially restrict the authority of the Lender to purchase or take
offshore deposits of dollars (i.e., "eurodollars"), or (b) the Lender
determines that matching deposits appropriate to fund or maintain its LIBO Rate
Tranches are not available to it, or (c) the Lender determines that the formula
for calculating the Adjusted LIBO Rate does not fairly reflect the cost to the
Lender of making or maintaining LIBO Rate Tranches based on such rate, then the
Borrower's right to borrow LIBO Rate Tranches shall be suspended to the extent
and for the duration of such impracticability or restriction and all LIBO Rate
Tranches that are outstanding or are the subject of any Notice of
Conversion/Continuance and which cannot lawfully or practicably be converted or
maintained by the Lender shall immediately become or remain Floating Rate
Tranches. The Borrower agrees to indemnify the Lender and hold the Lender
harmless against all costs, expenses, claims, penalties, liabilities and
damages which may result from any such change in law, treaty, rule, regulation,
interpretation or administration as described in clause (a) of this Section
2.14.
SECTION 2.15. 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 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, in each case after the date hereof, 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
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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 2.16. 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.
(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 2.17. 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. The Parent Guarantor
shall use the proceeds from all advances made to it by the Borrower solely to
repurchase and retire the remaining 13.5% Subordinated Debentures issued by the
Parent Guarantor and due on July 31, 2009.
(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.
SECTION 2.18. Mitigation. Lender agrees to use reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions) to
change the jurisdiction of its lending office for LIBO Rate Tranches, if the
making of such a change would avoid the need for, or reduce the amount of, any
such additional amounts which may thereafter accrue under Sections 2.11, 2.13,
2.14 or 2.15 or would avoid the unavailability of LIBO Rate Tranches under
Section 2.12 and would not, in any such case, in the sole judgment of the
Lender, be otherwise disadvantageous to Lender.
ARTICLE III
CONDITIONS PRECEDENT
SECTION 3.1. Conditions Precedent to the Loan. The obligation of
the Lender to make the initial 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:
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(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,
(ee) in multiple counterparts as requested by the
Lender, a Financing Statement of Change 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, a Financing Statement of Change from
the 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 Amendment,
(jj) in multiple counterparts as requested by the
Lender, Amendments to 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 Statement of Change from
the Borrower, as debtor constituent to the
instrument described in subclause (kk) above,
(mm) the Interest Rate Protection Agreement, and
(ii) a certificate of the Borrower, dated the Effective Date,
substantially in the form of Exhibit K 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
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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
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) 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.
(c) The Lender shall have received the following, in form and
substance satisfactory to the Lender:
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(i) favorable 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;
(ii) 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, 1997, (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");
(iii) the Initial Borrowing Base Asset Reports (other than the
Initial Engineering Report) and such other information regarding the
Borrowing Base Assets as the Lender may reasonably request;
(d) 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 December 31, 1996;
(e) 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 December
31, 1996;
(f) 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,
in favor of any Person. The Lender shall have received a copy of the search
reports received as a result of such
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search and fully executed releases effectuating the termination of any and all
Liens (other than Permitted Liens) pertaining to any of the Collateral;
(g) The Lender shall have received payment in full of the facility
fee pursuant to the provisions of Section 2.10 hereof; and
(h) Such other conditions precedent which the Lender may
reasonably have requested or required.
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.
(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
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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).
SECTION 4.4. Use of Proceeds. The Borrower's uses of the proceeds
of the Loan shall be as set forth in Section 2.17. 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
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Borrower, including, without limitation, all Mortgaged Properties and all other
Property reflected in the financial statements referred to in Subsection 4.9(a)
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 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)(ii).
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.
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(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 end
December 31, 1996, 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, 1997, 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) 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.
(c) 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.
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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;
(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):
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(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
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.
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(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 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,
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
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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 OF THE LOAN PARTIES
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
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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 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.
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(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.
(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.
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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 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
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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 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.
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
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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 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.
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(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 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.
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 such title. Where appropriate in the opinion of the Lender, the
Borrower shall correct material defects in such title, or, if the Borrower
elects not to correct such defects in title, the Lender shall be entitled to an
immediate redetermination of the Borrowing Base pursuant to Section 2.2.
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
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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.
SECTION 5.18. Repurchase of Debentures. On or before December 31,
1997, the Parent Guarantor shall have deposited by wire transfer to State
Street Bank & Trust Company sufficient funds to repurchase the remaining
$12,800,000 of its 13.5% Subordinated Debentures due July 31, 2009.
ARTICLE VI
NEGATIVE COVENANTS OF THE LOAN PARTIES
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
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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
413,040 units of limited partner interests in Hallwood Realty Partners, L.P.
(the "Designated Realty Units") owned by the Parent Guarantor other than Liens
described in Schedule 6.3 and Liens in favor of the Lender, provided, however,
that if the Parent Guarantor pledges (pursuant to appropriate security
documents in form and substance satisfactory to the Lender) to the Lender
Designated Realty Units having a market value at the time of such pledge of up
to $2,000,000 as security for its obligations under the Parent Guaranty, then
the Parent Guarantor shall be released from the negative pledge contained in
this Section 6.3. 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.
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 or advances 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 or advance, 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.
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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 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
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(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 Realty Units, whether now
owned or hereafter acquired, or any income or profits therefrom, or enter into
any agreement to do so, provided, however, that if the Parent Guarantor pledges
to the Lender (pursuant to appropriate security documents in form and substance
satisfactory to the Lender) Designated Realty Units having a market value at
the time of such pledge of up to $2,000,000 as security for its obligations
under the Parent Guaranty, then the Parent Guarantor shall be released from the
obligations contained in this Section 6.3(b).
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 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,
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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 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.
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 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), 5.1(v) or 5.18 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
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(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 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
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(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
(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
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(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 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.
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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 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.
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) Acknowledgments 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, (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
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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 acknowledgments 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:
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
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If to the Lender, to it at:
First Union National Bank
c/o First 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
c/o First Union Corporation of North Carolina
1001 Fannin Street, Suite 2255
Houston, Texas 77002
Telephone Number: (713) 650-0452
Telecopy Number: (713) 650-6354
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,
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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.
(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
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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.
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
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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. Marshaling; 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 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
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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 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:
-------------------------------------
Name: William L. Guzzetti
Title: President
THE HALLWOOD GROUP INCORPORATED
By:
--------------------------------------------
Name: William L. Guzzetti
Title: Executive Vice President
HALLWOOD G.P., INC.
By:
--------------------------------------------
Name: William L. Guzzetti
Title: President
THE LENDER
FIRST UNION NATIONAL BANK
By:
--------------------------------------------
Name: Michael J. Kolosowsky
Title: Vice President
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<PAGE> 67
Exhibit H
AMENDED AND RESTATED PARENT GUARANTY
THIS AMENDED AND RESTATED PARENT GUARANTY (this "Restated
Guaranty"), dated as of November 14, 1997, made by THE HALLWOOD GROUP
INCORPORATED, a Delaware corporation (the "Guarantor"), in favor of FIRST UNION
NATIONAL BANK, a national banking association formerly known as First Union
National Bank of North Carolina (the "Lender").
PRELIMINARY STATEMENTS
WHEREAS, HEPGP Ltd., a Colorado limited partnership (the "Borrower"),
Hallwood G.P., Inc., a Delaware corporation ("Hallwood GP"), the Guarantor and
the Lender entered into that certain Credit Agreement dated as of December 10,
1996 (the "Existing Credit Agreement") pursuant to which a term loan was made by
the Lender to the Borrower on the terms and subject to the conditions therein
set forth;
WHEREAS, the term loan made by the Lender to the Borrower pursuant to
the Existing Credit Agreement was evidenced by that certain Promissory Note
dated December 10, 1996, issued by the Borrower payable to the order of the
Lender in the original principal sum of $2,500,000 (the "Existing Note");
WHEREAS, the Guarantor is the sole limited partner of the Borrower and
the legal and beneficial owner of a ninety-nine percent (99%) limited partner
interest in the Borrower;
WHEREAS, Hallwood GP is the sole general partner of the Borrower and
the legal and beneficial owner of a one percent (1%) general partner interest in
the Borrower;
WHEREAS, the Guarantor is the legal and beneficial owner of one hundred
percent (100%) of the issued and outstanding capital stock of Hallwood GP;
WHEREAS, the Guarantor is also the legal and beneficial owner of
certain Class A and C limited partnership units of Hallwood Energy Partners,
L.P., a publicly-traded Delaware limited partnership ("HEP");
WHEREAS, pursuant to that certain Parent Guaranty dated as of December
10, 1996 (the "Existing Parent Guaranty"), executed by the Guarantor in favor of
the Lender, the Guarantor guaranteed the prompt and complete payment of the term
loan made by the Lender to the Borrower pursuant to the terms and subject to the
conditions of the Existing Credit Agreement;
WHEREAS, the obligations of the Guarantor under the Existing Parent
Guaranty were secured by, among other things, that certain Parent Pledge
Agreement dated as of December 10, 1996 (the "Existing Parent Pledge Agreement")
executed by the Guarantor in favor of the Lender, pledging (i) all of the issued
and outstanding capital stock of every class of Hallwood GP (now owned or
hereafter acquired); (ii) all of its limited partner interest in the Borrower
(now owned or hereafter acquired), and (iii) all of the Class A and C limited
partnership units of HEP now or hereafter owned by the Guarantor;
WHEREAS, the Borrower, the Guarantor and Hallwood GP have requested
that the Lender extend additional credit to the Borrower and the Lender has
agreed to extend additional credit to the Borrower
<PAGE> 68
upon the terms and subject to the conditions set forth in the "Restated Credit
Agreement", as that term is herein defined;
WHEREAS, contemporaneously herewith, the Borrower, the Guarantor,
Hallwood GP and the Lender have entered into that certain Amended and Restated
Credit Agreement dated as of November 14, 1997 (the "Restated Credit
Agreement"), pursuant to which the Lender refinanced the outstanding balance
owing under the Existing Credit Agreement and increased the term loan to
$4,000,000;
WHEREAS, the obligations of the Guarantor under this Restated Guaranty
will be secured by, among other things, the Amended and Restated Parent Pledge
Agreement of even date herewith (the "Restated Parent Pledge") executed by the
Guarantor for the benefit of the Lender, pledging (i) all of the issued and
outstanding capital stock of every class of Hallwood GP (now owned or hereafter
acquired); (ii) all of its limited partner interest in the Borrower (now owned
or hereafter acquired), and (iii) all of the class A and C limited partnership
units of HEP now or hereafter owned by the Guarantor;
WHEREAS, it is a condition precedent to the Lender's obligation to make
the Loan under the Restated Credit Agreement that the Guarantor shall have
executed and delivered this Restated Guaranty; and
WHEREAS, the Guarantor has determined that valuable and substantial
benefits will be derived by it as a result of the Loan, including without
limitation, the availability of proceeds for distributions and/or loans to the
Guarantor.
NOW, THEREFORE, in consideration of the premises and in order
to induce the Lender to make the Loan, the Guarantor hereby agrees that the
Existing Parent Guaranty is hereby amended and restated, effective as of the
Effective Date, to read in its entirety as follows:
SECTION 1. Guaranty. The Guarantor hereby unconditionally
guarantees the full and punctual payment when due, whether at stated maturity,
as an installment, by required or optional prepayment or by demand, acceleration
or otherwise, of any and all of the following debts, liabilities and obligations
(such obligations being the "Obligations") of the Borrower, the Guarantor or any
subsidiary to the Lender now or hereafter existing:
(a) All indebtedness and other obligations now or hereafter
incurred or arising pursuant to the provisions of the Restated Credit
Agreement, and all supplements thereto and amendments or modifications
thereof, and all agreements given in substitution therefor or in
restatement, renewal or extension thereof, in whole or in part;
(b) Payment of all indebtedness or other obligations arising
under one certain Promissory Note of even date herewith, in the
principal amount of Four Million and NO/100 Dollars ($4,000,000) made
by the Borrower, and payable to the order of the Lender, on or before
May 15, 2000, bearing interest as therein provided and containing a
provision for the payment of a reasonable additional amount as
attorneys' fees (the above-described note of even date herewith, as
from time to time supplemented, amended, or modified and all other
notes given in substitution therefor, or in modification, renewal or
extension thereof, in whole or in part, being herein called the
"Note");
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(c) Payment of and performance of any and all present or
future obligations of the Borrower and/or of Hallwood GP in its
capacity as the sole general partner of the Borrower, according to the
terms of any present or future interest or currency rate swap, rate
cap, rate floor, rate collar, exchange transaction, forward rate
agreement, or other exchange or rate protection agreements or any
option with respect to any such transaction now existing or hereafter
entered into between the Borrower and/or Hallwood GP in its capacity as
general partner of the Borrower, on the one hand, and the Lender (or
any affiliate of the Lender), on the other;
(d) Payment of and performance of any and all present or
future obligations of the Borrower and/or of Hallwood GP in its
capacity as general partner of the Borrower according to the terms of
any present or future swap agreements, cap, floor, collar, exchange
transaction, forward agreement or other exchange or protection
agreements relating to crude oil, natural gas or other hydrocarbons, or
any option with respect to any such transaction now existing or
hereafter entered into between the Borrower and/or Hallwood GP in its
capacity as the sole general partner of the Borrower, on the one hand,
and the Lender (or any affiliate of the Lender), on the other;
(e) All indebtedness and other obligations now or hereafter
incurred or arising pursuant to the provisions of the Note, the
Restated Credit Agreement, the Restated Parent Pledge or any other
instrument now or hereafter evidencing, governing, guaranteeing or
securing the Obligations or any part thereof or otherwise executed in
connection with a loan evidenced or governed by the Note or the
Restated Credit Agreement, including without limitation that certain
Amended and Restated Security Agreement dated as of November 14, 1997,
from the Borrower in favor of the Lender, granting a lien on certain
property as security for the Obligations (herein called the "Restated
Security Agreement")(the Note, the Restated Credit Agreement, the
Restated Security Agreement, the Deed of Trust, this Restated Guaranty,
the Restated Parent Pledge, the GP Guaranty, the GP Pledge Agreement
and such other instruments being herein sometimes collectively called
the "Loan Documents"); and
(f) Without limiting the generality of the foregoing, all
post-petition interest, expenses, and other duties and liabilities with
respect to indebtedness or other obligations described in this Section
1, which would be owed but for the fact that they are unenforceable or
not allowable due to the existence of a bankruptcy, reorganization, or
similar proceeding.
SECTION 2. Guaranty Absolute. The Guarantor hereby
unconditionally guarantees that the Obligations will be paid strictly in
accordance with the terms of the Note, the Restated Credit Agreement and the
Loan Documents, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
Lender with respect thereto. The liability of the Guarantor under this Restated
Guaranty shall, to the full extent permitted by law, be absolute and
unconditional irrespective of:
(a) any lack of validity or enforceability of the Restated
Credit Agreement, the Note, the Loan Documents or any other agreement
or security document relating thereto or executed in connection
therewith or pursuant thereto;
(b) any extension, renewal, modification, settlement,
compromise, waiver or release or any change in the time, manner or
place of payment of, or in any other term of, all or any of the
Obligations or any other amendment or waiver of or any consent to any
departure from the
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<PAGE> 70
Restated Credit Agreement, the Note, the Loan Documents, or any other
agreement or instrument relating thereto or executed in connection
therewith or pursuant thereto;
(c) any taking, exchange, release or non-perfection of any
other collateral, or any release or amendment or waiver of or consent
to departure from any guaranty, including without limitation the Parent
Guaranty, for all or any of the Obligations;
(d) any manner of application of collateral, or proceeds
thereof, to all or any of the Obligations, or any manner of sale or
other disposition of any collateral for all or any of the Obligations
or any other assets of the Borrower or the Guarantor;
(e) any change, restructuring or termination of the corporate
structure or existence of the Borrower or any guarantor of the
Obligations; or
(f) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, the Borrower or any guarantor
of the Obligations in respect of the Obligations.
This Restated Guaranty shall continue to be effective or be reinstated, as the
case may be, if at any time any payment of any of the Obligations is rescinded
or must otherwise be returned by the Lender upon the insolvency, bankruptcy or
reorganization of the Borrower or the Guarantor or otherwise, all as though such
payment had not been made. The obligations of the Guarantor under this Restated
Guaranty shall not be subject to reduction, termination or other impairment by
reason of any setoff, recoupment, counterclaim or defense or for any other
reason. This Restated Guaranty is to be in addition to and is not to prejudice
or be prejudiced by any other securities or guaranties (including without
limitation any guaranty signed by the Guarantor or the GP Guaranty) which the
Lender may now or hereafter hold from or on account of the Borrower and is to be
binding on the Guarantor as a continuing security notwithstanding any payments
from time to time made to the Lender or any settlement of account or disability
or incapacity affecting the Guarantor or any other thing whatsoever.
SECTION 3. Waiver. The Guarantor hereby waives promptness,
diligence, notice of acceptance, presentment, demand, protest, notice of protest
and dishonor, notice of intent to accelerate, notice of acceleration and any
other notice with respect to any of the Obligations and this Restated Guaranty
and any requirement that the Lender institute suit, collection proceedings or
take any other action to collect the Obligations including any requirement that
the Lender protect, secure, perfect or insure any security interest or lien or
any property subject thereto or exhaust any right or take any action against the
Borrower, Hallwood GP or any other person or entity or any collateral (it being
the intention of the Lender and the Guarantor that this Restated Guaranty is a
guaranty of payment and not of collection) or that the Borrower, Hallwood GP or
any other person or entity be joined in any action hereunder. The Guarantor
hereby expressly waives each and every right to which it may be entitled by
virtue of the suretyship laws of the State of Texas, including, without
limitation, any and all rights it may have pursuant to Rule 31, Texas Rules of
Civil Procedure, Section 17.001 of the Texas Civil Practice and Remedies Code
and Chapter 34 of the Texas Business and Commercial Code. The Guarantor hereby
also waives marshaling of assets and liabilities, sale in inverse order of
alienation, notice by the Lender of any indebtedness or liability to which it
applies or may apply any amounts received by the Lender, notice of disposition
or substitution of collateral and of the creation, advancement, increase,
existence, extension, renewal, rearrangement and/or modification of the
Obligations.
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<PAGE> 71
SECTION 4. Waiver of Subrogation, Etc. Until such time, if
any, as all of the Obligations have been paid and performed in full, the
Guarantor shall have no rights of subrogation, contribution, reimbursement or
indemnity with respect to Borrower, Hallwood GP or any other Person liable for
any portion of the Obligations, and the Guarantor expressly WAIVES, to the
extent permitted by applicable law and until such time as all of the Obligations
of Borrower have been paid and performed in full, any right to enforce any
remedy that the Lender now has or hereinafter may have against Borrower,
Hallwood GP or any other Person liable for any portion of the Obligations and
WAIVES the benefit of, or any right to participate in, any collateral now or
hereafter held by the Lender. The Guarantor expressly WAIVES to the fullest
extent permitted by applicable law and until such time as all of the Obligations
of Borrower have been paid and performed in full, all setoffs and counterclaims
against the Lender. The Guarantor expressly WAIVES to the fullest extent
permitted by applicable law all presentments for payment, demands for payment or
performance, notices of nonpayment or nonperformance, protests, notices of
protest, notices of dishonor, notice of intent to accelerate, notice of
acceleration and all other notices or demands of any kind or nature whatsoever
with respect to the Obligations, and all notices of acceptance of this Guaranty
or of the existence, creation or incurring of new or additional Obligations.
SECTION 5. Payments Free and Clear of Taxes, Etc.
(a) Any and all payments made by the Guarantor hereunder shall
be made free and clear of and without deduction for any present or
future taxes, levies, imposts, deductions, charges, or withholdings,
and all liabilities with respect thereto, excluding taxes imposed on
net income and all income and franchise taxes of the United States and
any political subdivision thereof (all such non-excluded taxes, levies,
imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If the Guarantor shall be required
by law to deduct any Taxes from or in respect of any sum payable
hereunder, (i) the sum payable shall be increased as may be necessary
so that after making all required deductions (including deductions
applicable to additional sums payable under this Section) the Lender
shall receive an amount equal to the sum it would have received had no
such deductions been made, (ii) the Guarantor shall make such
deductions and (iii) the Guarantor shall pay the full amount deducted
to the relevant taxation authority or other authority in accordance
with applicable law.
(b) In addition, the Guarantor agrees to pay any present or
future stamp or documentary taxes, or any other excise or property
taxes, charges or similar levies which arise from any payment made
hereunder or from the execution, delivery or registration of, or
otherwise with respect to, this Restated Guaranty (hereinafter referred
to as "Other Taxes").
(c) The Guarantor will indemnify the Lender for the full
amount of Taxes or Other Taxes (including, without limitation, any
Taxes or Other Taxes imposed by any jurisdiction on amounts payable
under this Section) paid by the Lender or any holder of the Note and
any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other
Taxes were correctly or legally asserted. This indemnification shall be
made within 30 days from the date the Lender makes written demand
therefor.
(d) Within 30 days after the date of any payment of Taxes, the
Guarantor will furnish to the Lender, at its address described in
Section 8, the original or a certified copy of a receipt evidencing
payment thereof. If no Taxes are payable in respect of any payment, the
Guarantor will furnish to the Lender a certificate from each
appropriate taxing authority, or an opinion of counsel
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<PAGE> 72
acceptable to the Lender, in either case stating that such payment is
exempt from or not subject to Taxes.
(e) Without prejudice to the survival of any other agreement
of the Guarantor hereunder, the agreements and obligations of the
Guarantor contained in subsections (a) through (d) of this Section
shall survive the payment in full of the Obligations.
SECTION 6. Representations and Warranties. The Guarantor
hereby represents and warrants as follows:
(a) The Guarantor makes those representations and warranties
set forth in Article IV of the Restated Credit Agreement which are incorporated
herein by reference to read in their entirety as therein set forth, regardless
of whether the Restated Credit Agreement is in full force and effect.
(b) The execution, delivery and performance by the Guarantor
of this Restated Guaranty does not contravene any law or contractual restriction
binding on or affecting the Guarantor or result in or require the creation or
imposition of any Lien upon or with respect to any of the properties now owned
or hereafter acquired by the Guarantor.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or any other Person is
required for the due execution, delivery and performance by the Guarantor of
this Restated Guaranty.
(d) This Restated Guaranty is a legal, valid and binding
obligation of the Guarantor enforceable against Guarantor 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).
SECTION 7. Affirmative Covenants. So long as the Obligations
shall remain unpaid, outstanding or unperformed, the Guarantor will:
(a) furnish to the Lender, at the expense of the Guarantor,
all information respecting the condition or operations, financial or
otherwise, including, without limitation, income tax returns, of the
Guarantor as the Lender may from time to time reasonably request;
(b) pay and discharge, or cause to be paid and discharged,
promptly all taxes, assessments and governmental charges or levies
imposed upon the Guarantor or upon the income or any property of the
Guarantor as well as all claims of any kind (including claims for
labor, materials, supplies and rent) which, if unpaid, might become or
cause the creation of a Lien upon any property of the Guarantor;
provided, however, that the Guarantor shall not be required to pay any
such tax, assessment, charge, levy or claim if the amount,
applicability or validity thereof shall currently be contested in good
faith by appropriate proceedings diligently conducted by or on behalf
of the Guarantor, and, if required under generally accepted accounting
principles, the Guarantor shall have set up adequate reserves therefor;
and
(c) comply with all statutes, rules and regulations (where the
failure to so comply would constitute or result in a Material Adverse
Effect).
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SECTION 8. Consent to Jurisdiction; Waiver of Immunities.
(a) The Guarantor 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 Restated Credit Agreement or the Loan Documents, or for
recognition or enforcement of any order or judgment, and the Guarantor
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. The Guarantor 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
of the Restated Credit Agreement. The 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 Restated Guaranty shall affect any right that the Lender may
otherwise have to bring any action or proceeding relating to this Restated
Credit Agreement or the Loan Documents against the Guarantor of its Properties
in the courts of any other jurisdiction.
(b) The 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 Restated Guaranty or the Loan Documents in
any North Carolina State or Federal court sitting in Mecklenburg County, North
Carolina. The 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 9. Amendments, Etc. No amendment or waiver of any
provision of this Restated Guaranty nor consent to any departure by the
Guarantor therefrom shall in any event be effective unless the same shall be in
writing and signed by the Guarantor and the Lender, and any such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION 10. Notices, etc.. All notices, approvals, waivers,
requests and other communications to any party hereunder shall be given in
accordance with the notice provision contained in Section 8.2 of the Restated
Credit Agreement.
SECTION 11. No Waiver; Cumulative Remedies. No failure on the
part of the Lender to exercise, and no delay in exercising, any right hereunder
or under any of the Obligations shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. No course of dealing
between the Grantor or any other Person and the Lender shall operate as a waiver
of any rights of the Lender. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 12. Right of Set-off. Upon the occurrence and during
the continuance of any Event of Default the Lender is hereby authorized at any
time and from time to time, without notice to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any
time owing by the Lender to or for the credit or the account of the Guarantor
against any and all of the obligations of the Guarantor now
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or hereafter existing under this Restated Guaranty, irrespective of whether or
not the Lender shall have made any demand under this Restated Guaranty and
although such obligations may be unmatured. The Lender agrees promptly to notify
the Guarantor after any such set-off and application made by the Lender,
provided that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of the Lender under this Section 12 are
in addition to other rights and remedies (including, without limitation, other
rights of set-off or banker's lien) which the Lender may have.
SECTION 13. Continuing Guaranty; Transfer of Note. This
Restated Guaranty is a continuing guaranty and shall (i) remain in full force
and effect until payment in full of the Obligations and all other amounts
payable under this Restated Guaranty, (ii) be binding upon the Guarantor and its
successors and assigns, and (iii) inure to the benefit of and be enforceable by
the and its successors, transferees and assigns. Without limiting the generality
of the foregoing clause (iii), the Lender may assign or otherwise transfer all
or a portion of the Note to any other person or entity, and such other person or
entity shall thereupon become vested with all the rights in respect thereof
granted to the Lender herein or otherwise, provided, however, that all
indebtedness owing to the Lender by either the Borrower or the Guarantor shall
be paid in full before any assignee of the Obligations shall receive any benefit
from this Restated Guaranty.
SECTION 14. Separability. If any term or provision hereof or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or such provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable any remaining
terms and provisions hereof or the application of such term or provisions to
circumstances other than those as to which it is held invalid or unenforceable.
To the extent permitted by applicable law, the parties hereto hereby waive any
provision of law which renders any term or provision hereof invalid or
unenforceable in any respect.
SECTION 15. Survival. All warranties, representations and
covenants made by the Guarantor herein or in any certificate or other instrument
delivered by it or on its behalf under this Restated Guaranty shall be
considered to have been relied upon by the Lender and shall survive the
execution and delivery of this Restated Guaranty, regardless of any
investigation made by or on behalf of any thereof. All statements in any such
certificate or other instrument shall constitute warranties and representations
by the Guarantor hereunder.
SECTION 16. Further Assurances. The Guarantor hereby agrees to
execute and deliver all such instruments and take all such action as Lender may
from time to time reasonably request in order to fully effectuate the purpose of
this Restated Guaranty.
SECTION 17. Effect Of Bankruptcy Proceeding, Etc. This
Restated Guaranty shall continue to be effective, or be automatically
reinstated, as the case may be, if at any time payment, in whole or in part, of
any of the sums due the Lender pursuant to the terms of the Restated Credit
Agreement is rescinded or must otherwise be restored or returned by the Lender
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of
the Borrower, or upon or as a result of the appointment of a custodian,
receiver, trustee or other officer with similar powers with respect to the
Borrower or any substantial part of its property, or otherwise, all as though
such payments had not been made. If an Event of Default shall at any time have
occurred and be continuing and declaration of such Event of Default shall at
such time be prevented by reason of the pendency against the Borrower of a case
or proceeding under a bankruptcy or insolvency law, the Guarantor agrees that,
for purposes of this Restated Guaranty and its
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<PAGE> 75
obligations hereunder, the Restated Credit Agreement shall be deemed to have
been declared in default with the same effect as if the Restated Credit
Agreement had been declared in default in accordance with the terms thereof, and
the Guarantor shall forthwith pay the amounts specified by the Lender to be paid
thereunder, any interest thereon and any other amounts guaranteed hereunder
without further notice or demand.
SECTION 18. Captions. The captions in this Restated Guaranty
have been inserted for convenience only and shall be given no substantive
meaning or significance whatever in construing the terms and provisions of this
Restated Guaranty.
SECTION 19. Usury. Notwithstanding any other provisions herein
contained, no provision of this Restated Guaranty shall require or permit the
collection from the Guarantor of interest in excess of the Highest Lawful Rate.
SECTION 20. Loan Documents. The Guarantor acknowledges that it
has full and complete access to the Restated Credit Agreement, the other Loan
Documents and all other instruments and documents executed by the Borrower, or
any other person in connection with the Restated Credit Agreement, has fully
review same and is fully aware of their contents.
SECTION 21. Governing Law. THIS RESTATED GUARANTY SHALL
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE AND
THE LAWS OF THE UNITED STATES OF AMERICA.
SECTION 22. Capitalized Terms. All capitalized terms which are
defined in the Restated Credit Agreement and are not defined herein shall have
the same meanings herein as in the Restated Credit Agreement.
SECTION 23. FINAL AGREEMENT OF THE PARTIES. THIS RESTATED
GUARANTY, THE RESTATED CREDIT AGREEMENT (INCLUDING THE EXHIBITS AND SCHEDULES
HERETO), THE NOTE AND THE OTHER LOAN DOCUMENTS TO WHICH THE GUARANTOR IS A PARTY
CONSTITUTE A "LOAN AGREEMENT" FOR PURPOSES OF 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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<PAGE> 76
IN WITNESS WHEREOF, the Guarantor has caused this Restated
Guaranty to be duly executed and delivered this 14th day of November, 1997 to be
effective as of the date first above written.
THE HALLWOOD GROUP INCORPORATED
By:
---------------------------------------
Name: William L. Guzzetti
Title: Executive Vice President
Address of Guarantor:
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
Address of the Lender:
First Union National Bank
c/o First Union Corporation
1001 Fannin Street, Suite 2255
Houston, Texas 77002
Telephone Number: (713) 650-0452
Telecopy Number: (713) 650-6354
Attention: Jay Chernosky, Director
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<PAGE> 1
EXHIBIT 10.28
PROMISSORY NOTE
$5,280,000 October 31, 1997
For value received, BROCK SUITE TULSA, INC., a Delaware corporation,
having its principal place of business at 3710 Rawlins, Suite 1500, Dallas,
Texas 75219 (hereinafter referred to as "MAKER"), promises to pay to the order
of CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC, a Delaware limited
liability company ("LENDER" and also sometimes "PAYEE"), having its principal
office at 11 Madison Avenue, 5th Floor, New York, New York 10010, or at such
place as the holder hereof may from time to time designate in writing, the
principal sum of FIVE MILLION TWO HUNDRED EIGHTY THOUSAND AND 00/100 DOLLARS
($5,280,000), in lawful money of the United States of America, with interest
thereon to be computed on the unpaid principal balance from time to time
outstanding at the Applicable Interest Rate (as hereinafter defined), and to be
paid in installments as follows:
A. On the date hereof, a payment of interest only for the
period from the date hereof through and including November
10, 1997;
B. A constant payment of $41,453.90 (such amount hereinafter
the "MONTHLY PAYMENT AMOUNT"), on the eleventh (11th) day of
December, 1997 and on the eleventh (11th) day of each
calendar month thereafter up to and including the eleventh
(11th) day of October, 2022 (each a "PAYMENT DATE"); each of
such payments to be applied (a) to the payment of interest
computed at the Initial Term Interest Rate (as hereinafter
defined); and (b) the balance applied toward the reduction
of the principal sum;
and the balance of said principal sum together with all accrued and unpaid
interest thereon shall be due and payable on the eleventh (11th) day of
November, 2022 (the "MATURITY DATE"). Interest on the principal sum of this
Note shall be calculated on the basis of the actual number of days elapsed and
a three-hundred- sixty (360) day year. The constant payment required hereunder
is based on an amortization schedule of Three Hundred (300) months. For
purposes of making payments hereunder, but not for purposes of calculating l
interest accrual periods if the eleventh (11th) day of a given month is not a
Business Day (as hereinafter defined), then the Payment Date for such month
shall be the next succeeding Business Day. All amounts due under this Note
shall be payable without setoff, counterclaim or any other deduction
whatsoever.
1. As used in this Note:
(a) The term "ANNUAL BUDGET" shall mean an annual budget
submitted by Maker to Payee in accordance with the terms of paragraph 8(b)
herein.
<PAGE> 2
(b) The term "ANTICIPATED REPAYMENT DATE" shall mean
November 11, 2007.
(c) The term "APPLICABLE INTEREST RATE" shall mean from
(a) the date of this Note through but not including the Anticipated Repayment
Date, the Initial Term Interest Rate, and (b) from and after the Anticipated
Repayment Date through and including the date this Note is paid in full, the
Extended Initial Term Rate.
(d) The term "APPROVED ANNUAL BUDGET" shall mean each
Annual Budget approved by Payee in accordance with terms herein.
(e) The term "ASSIGNMENT OF LEASES" shall mean that
certain Assignment of Leases and Rents of even date herewith executed by Maker
in favor of Payee.
(f) The term "BUSINESS DAY" shall mean a day other than
(i) a Saturday or Sunday, or (ii) any day on which commercial banks in New York
City are not open for general banking business.
(g) The term "CAPITAL EXPENDITURES" shall mean for any
period, the amount expended for items capitalized under generally accepted
accounting principles including expenditures for building improvements or major
repairs, leasing commissions and tenant improvements.
(h) The term "CASH EXPENSES" shall mean for any period,
the operating expenses for the Mortgaged Property (as defined in the Security
Instrument and hereinafter referred to as the "Property") as set forth in an
Approved Annual Budget to the extent that such expenses are actually incurred
by Maker minus payments into the Tax Impound Fund (as defined in the Security
Instrument), and the FF&E Fund (as defined in the Security Instrument).
(i) The term "CASH MANAGEMENT AGREEMENT" shall mean that
certain Cash Management Agreement of even date herewith executed by Maker,
Mason Hospitality Services, Inc., and Payee in connection with the Loan.
(j) The term "DEBT" shall mean, collectively, the whole
of the principal sum of this Note, together with all interest accrued and
unpaid thereon and all other sums due under the Loan Documents
(k) The term "DEFAULT RATE" shall mean, a rate per annum
which equal to the lesser of (a) the maximum rate permitted by applicable law,
or (b) five percent (5%) above the Applicable Interest Rate.
(l) The term "DEFEASANCE OPTION" shall mean the right and
option of maker to release the Property from the lien of the Security
Instrument in accordance with the provision set forth in Paragraph 55 of the
Security Instrument.
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<PAGE> 3
(m) The term "EXTENDED TERM RATE" shall mean a rate per
annum equal to the greater of (i) the Initial Term Interest Rate plus five (5)
percentage points or (ii) the Treasury Rate plus five (5) percentage points,
except during such time as the Loan is held by a trust which trust may sell
certificates to investors evidencing an ownership interest in the trust assets,
during which time the rate shall equal the greater of (i) the Initial Term
Interest Rate plus two (2) percentage points or (ii) the Treasury Rate plus two
(2) percentage points.
(n) The term "EXCESS CASH FLOW" shall mean, for any
period, the sum (determined in accordance with generally accepted accounting
principles, consistently applied) of (a) net operating income (calculated as
all income derived from the operation of the Property after payment of taxes
and expenses), plus (b) depreciation and amortization (to the extent deducted
in determining net operating income) for such period, plus (c) disbursements
from the Tax Impound Fund, the Replacement Escrow Fund, the FF&E Fund or any
other escrows or reserves approved by Payee or provided for under the Loan
Documents, but only to the extent disbursed by Maker and not applied to the
payment of, or reimbursement for, taxes, insurance and other amounts for which
such reserves were set aside, minus (d) actual payments of the regularly
scheduled principal and interest payments (calculated at the Applicable
Interest Rate, or at the Default Rate, if applicable) due and payable in
accordance with this Note during an applicable period, minus (e) actual capital
improvement expenditures in excess of payments from the Replacement Escrow
Fund, and funding of reserves for working capital and extraordinary expenses as
approved by Lender in its sole discretion, and minus (f) payments into the Tax
Impound Fund, the FF&E Fund and other reserves required under the Loan
Documents.
(o) The term "EXTRAORDINARY EXPENSE" shall mean an
extraordinary operating expense or capital expense not set forth in the
Approved Annual Budget or allotted for in the Replacement Escrow Fund.
(p) The term "INITIAL TERM INTEREST RATE" shall mean a
rate of eight and two-tenths percent (8.20%) per annum.
(q) The term "LOAN" shall mean that certain loan made by
Payee to Maker contemporaneously herewith.
(r) The term "LOAN DOCUMENTS" shall mean collectively
this Note, the Security Instrument, the Assignment of Leases, the Cash
Management Agreement and any and all other documents securing, evidencing, or
guaranteeing all or any portion of the Loan or otherwise executed and/or
delivered in connection with this Note and the Loan.
(s) The term "NET CAPITAL EXPENDITURES" shall mean for
any period the amount by which Capital Expenditures during such period exceeds
reimbursements for such items during such period from any fund established
pursuant to the Loan Documents.
(t) The term "SECURITY INSTRUMENT" shall mean that
certain Mortgage, Assignment of Leases and Rents and Security Agreement of even
date herewith in the amount of
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<PAGE> 4
this Note given by Maker for the use and benefit of Payee covering the fee
estate of Maker in certain premises as more particularly described therein.
(u) The term "TREASURY RATE" shall mean, as of the
Anticipated Repayment Date, the yield, calculated by linear interpolation
(rounded to the nearest one-thousandth of one percent (i.e., 0.001%)) of the
yields of noncallable United States Treasury obligations with terms (one longer
and one shorter) most nearly approximating the period from the Anticipated
Repayment Date to the Maturity Date, as determined by Payee on the basis of
Federal Reserve Statistical Release H.15-Selected Interest Rates under the
heading U.S. Governmental Security/Treasury Constant Maturities, or other
recognized source of financial market information selected by Payee.
2. This Note is evidence of the Loan and of the obligation of the
Maker to repay the Loan in accordance with the terms hereof. This Note is
secured inter alia by (a) the Security Instrument, (b) an Assignment of Leases,
and (c) the other Loan Documents.
3. If any sum payable under this Note is not paid on or before
the date on which it is due, Maker shall pay to Payee upon demand an amount
equal to the lesser of five percent (5%) of such unpaid sum or the maximum
amount permitted by applicable law in order to defray a portion of the expenses
incurred by Payee in handling and processing such delinquent payment and to
compensate Payee for the loss of the use of such delinquent payment. If the
day when any payment required under this Note is due is not a Business Day,
then payment shall be due on the first Business Day thereafter.
4. The Debt or any portion thereof, shall without notice become
immediately due and payable at the option of Payee if any payment required in
this Note is not paid on or before the date on which it is due or upon the
happening of any other Event of Default (as defined in the Security
Instrument). In the event that it should become necessary to employ counsel to
collect or enforce the Debt or to protect or foreclose the security therefor,
Maker also shall pay on demand all costs of collection incurred by Payee,
including attorneys' fees and costs reasonably incurred for the services of
counsel whether or not suit be brought.
5. Maker does hereby agree that upon the occurrence of an Event
of Default (including upon the failure of Maker to pay the Debt in full on the
Maturity Date), Payee shall be entitled to receive and Maker shall pay interest
on the entire unpaid principal sum and any other amounts due at the Default
Rate.
6. Maker hereby agrees that upon the occurrence of an Event of
Default, Maker shall pay to Payee on the eleventh (11th) day of each month
while such Event of Default continues, an aggregate amount equal to the Excess
Cash Flow for the period from the eleventh (11th) day of the prior month
through and including the tenth (10th) day of the month in question, such
Excess Cash Flow to be applied by Payee to the payment of the Debt in such
order as Payee shall determine in its sole discretion, including, without
limitation, alternating applications thereof between interest and principal.
Interest at the Default Rate shall be computed from the occurrence of the Event
of Default until the actual receipt and collection of the Debt; provided,
however, that
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<PAGE> 5
if the Event of Default is cured within five (5) days of its occurrence to the
reasonable satisfaction of Payee, which cure may not be made more than 3 times,
from and after such cure, interest hereunder will be computed at the Applicable
Interest Rate. Interest at the Default Rate shall be added to the Debt and
shall be secured by the Security Instrument. This paragraph, however, shall
not be construed as an agreement or privilege to extend the date of the payment
of the Debt, nor as a waiver of any other right or remedy accruing to Payee by
reason of the occurrence of any Event of Default; the acceptance of any payment
of Excess Cash Flow shall not be deemed to cure or constitute a waiver of any
Event of Default; and Payee retains its rights under this Note to accelerate
and to continue to demand payment of the Debt upon the happening of any Event
of Default despite any payment of Excess Cash Flow.
7. This Note may not be prepaid prior to the date that is 30 days
prior to the Anticipated Repayment Date (the "Optional Prepayment Date");
provided, however, Maker shall have the right and option to release the
Property from the lien of the Security Instrument in accordance with the terms
and provisions of the Defeasance Option. Notwithstanding the foregoing
sentence, Maker shall have the privilege to prepay the entire principal balance
of this Note and any other amounts outstanding on any Payment Date from and
after the Optional Prepayment Date without payment of the Yield Maintenance
Premium (as defined in the Security Instrument) or any other premium or
penalty. In addition, on the Anticipated Repayment Date or on any Payment Date
thereafter, the Maker may, at its option and upon thirty (30) days prior
written notice from Maker to Payee, prepay in whole or in part the outstanding
principal balance of this Note and any other amounts outstanding without
payment of the Yield Maintenance Premium or any other premium or penalty.
Partial prepayments made pursuant to the previous sentence shall be made in
$100,000 increments only. If prior to the Anticipated Repayment Date and
following the occurrence of any Event of Default, Maker shall tender payment of
an amount sufficient to satisfy the Debt at any time prior to a sale of the
Property, either through foreclosure or the exercise of the other remedies
available to Payee under the Security Instrument, such tender by Maker shall be
deemed to be voluntary and Maker shall pay, in addition to the Debt, the Yield
Maintenance Premium, if any, that would be required under the Defeasance
Option.
8. (a) During any Sweep Period (as defined in the Cash
Management Agreement) and prior to the Anticipated Repayment Date, Maker shall
cause the Rents (as defined in the Security Instrument) to be deposited in the
applicable accounts required by the Cash Management Agreement and such sums
shall be applied on the eleventh (11th) day of each calendar month in the
following listed order of priority:
(i) First, payments to the Tax Impound Fund in
accordance with the terms and conditions of
the Security Instrument;
(ii) Second, the payment of the Monthly Payment
Amount;
(iii) Third, payments of any amounts due under the
Loan Documents not otherwise addressed in
this Section;
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<PAGE> 6
(iv) Fourth, payments to the FF&E Fund in
accordance with the terms and conditions of
the Security Instrument; and
(v) Lastly, payment to the Maker of any excess
amounts, which payment shall be made by the
fifteenth (15th) day of each calendar month.
(b) For each fiscal year commencing with the fiscal year
in which the Anticipated Repayment Date occurs, the Maker shall submit to the
Payee for the Payee's written approval an Annual Budget not later than sixty
(60) days prior to the commencement of such fiscal year, in form satisfactory
to Payee setting forth in reasonable detail budgeted monthly operating income
and monthly operating capital and other expenses for the Property. Each Annual
Budget shall contain, among other things, limitations on management fees, third
party service fees, and other expenses as the Maker may reasonably determine.
Payee shall have the right to approve such Annual Budget which approval shall
not be unreasonably withheld, and in the event that Payee objects to the
proposed Annual Budget submitted by Maker, Payee shall advise Maker of such
objections within fifteen (15) days after receipt thereof (and deliver to Maker
a reasonably detailed description of such objections) and Maker shall within
three (3) days after receipt of notice of any such objections revise such
Annual Budget and resubmit the same to Payee; provided, however, that Payee
shall approve of (i) items required by applicable law, rule or regulation; or
(ii) items reasonably required by Marriott International, Inc., pursuant to
that certain Franchise Agreement dated as of January 10, 1985. Payee shall
advise Maker of any objections to such revised Annual Budget within ten (10)
days after receipt thereof (and deliver to Maker a reasonably detailed
description of such objections) and Maker shall revise the same in accordance
with the process described in this subparagraph until the Payee approves an
Annual Budget, provided, however, that if Payee shall not advise Maker of its
objections to any proposed Annual Budget within the applicable time period set
forth in this paragraph, then such proposed Annual Budget shall be deemed
approved by Payee. Until such time that Payee approves a proposed Annual
Budget, the most recently Approved Annual Budget shall apply; provided that,
such Approved Annual Budget shall be adjusted to reflect actual increases in
real estate taxes, insurance premiums and utilities expenses.
9. In the event that the Maker does not pay the Debt in full
prior to the Anticipated Repayment Date, the provisions of paragraph 8 as set
forth above shall remain in full force and effect, and the following
subparagraphs also shall apply:
(a) From and after the Anticipated Repayment Date,
interest shall accrue on the unpaid principal balance from time to time
outstanding on this Note at the Extended Term Rate. Interest accrued at the
Extended Term Rate and not paid pursuant to this paragraph 9 shall be deferred
and added to the Debt and shall earn interest at the Extended Term Rate to the
extent permitted by applicable law (such accrued interest is hereinafter
defined as "Accrued Interest"). All of the Debt, including any Accrued
Interest, shall be due and payable on the Maturity Date.
(b) Maker shall cause all Rents to be deposited directly
into the applicable accounts required by the Cash Management Agreement and
Maker shall pay on the Anticipated
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Repayment Date and the eleventh (11th) day of each calendar month thereafter up
to and including the Maturity Date the following payments from Rents received
on or before such day in the listed order of priority:
(i) First, payments to the Tax Impound Fund in
accordance with the terms and conditions of
the Security Instrument;
(ii) Second, the payment of the Monthly Payment
Amount to be applied first to the payment of
interest computed at the Initial Term
Interest Rate with the remainder applied to
the reduction of the outstanding principal
balance of this Note;
(iii) Third, payment of any amounts due under the
Loan Documents not otherwise addressed in
this Section;
(iv) Fourth, payments to the FF&E Fund in
accordance with the terms and conditions of
the Security Instrument;
(v) Fifth, payments for monthly Cash Expenses,
less management fees payable to affiliates of
Maker, pursuant to the terms and conditions
of the related Approved Annual Budget;
(vi) Sixth, payment for monthly Net Capital
Expenditures, pursuant to the terms and
conditions of the related Approved Annual
Budget;
(vii) Seventh, payment for Extraordinary Expenses
approved by Payee, if any;
(viii) Eighth, payments to the Payee to be applied
against the outstanding principal due under
this Note until such principal amount is paid
in full;
(ix) Ninth, payments to the Payee for Accrued
Interest; and
(x) Lastly, payment to the Maker of any excess
amounts.
(c) In the event that the Maker must incur an
Extraordinary Expense, then the Maker shall promptly deliver to Payee a
reasonably detailed explanation of such proposed Extraordinary Expense for the
Payee's approval.
(d) Nothing in this paragraph 9 shall limit, reduce or
otherwise affect Maker's obligations to make payments of the Monthly Payment
Amount, payments to the Tax Impound Fund, or the FF&E Fund due hereunder and
under the other Loan Documents, whether or not Rents are available to make such
payments.
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<PAGE> 8
10. It is expressly stipulated and agreed to be the intent of
Maker and Payee at all times to comply with applicable state law or applicable
United States federal law (to the extent that it permits Payee to contract for,
charge, take, reserve, or receive a greater amount of interest than under state
law) and that this paragraph (and the similar paragraph contained in the
Security Instrument) shall control every other covenant and agreement in this
Note and the other Loan Documents. If the applicable law (state or federal) is
ever judicially interpreted so as to render usurious any amount called for
under this Note or under any of the other Loan Documents, or contracted for,
charged, taken, reserved, or received with respect to the Debt, or if Payee's
exercise of the option to accelerate the Maturity Date, or if any prepayment or
the exercise of any Defeasance Option by Maker results in Maker having paid any
interest in excess of that permitted by applicable law, then it is Payee's
express intent that all excess amounts theretofore collected by Payee shall be
credited on the principal balance of this Note and all other Debt and the
provisions of this Note and the other Loan Documents immediately be deemed
reformed and the amounts thereafter collectible hereunder and thereunder
reduced, without the necessity of the execution of any new documents, so as to
comply with the applicable law, but so as to permit the recovery of the fullest
amount otherwise called for hereunder or thereunder. All sums paid or agreed
to be paid to Payee for the use, forbearance, or detention of the Debt shall,
to the extent permitted by applicable law, be amortized, prorated, allocated,
and spread throughout the full stated term of the Debt until payment in full so
that the rate or amount of interest on account of the Debt does not exceed the
maximum lawful rate from time to time in effect and applicable to the Debt for
so long as the Debt is outstanding. Notwithstanding anything to the contrary
contained herein or in any of the other Loan Documents, it is not the intention
of Payee to accelerate the maturity of any interest that has not accrued at the
time of such acceleration or to collect unearned interest at the time of such
acceleration.
11. This Note may not be modified, amended, waived, extended,
changed, discharged or terminated orally or by any act or failure to act on the
part of Maker or Payee, but only by an agreement in writing signed by the party
against whom enforcement of any modification, amendment, waiver, extension,
change, discharge or termination is sought. Whenever used, the singular number
shall include the plural, the plural the singular, and the words "PAYEE" and
"MAKER" shall include their respective successors, assigns, heirs, executors
and administrators. If Maker consists of more than one person or party, the
obligations and liabilities of each such person or party shall be joint and
several.
12. Maker and all others who may become liable for the payment of
all or any part of the Debt do hereby severally waive presentment and demand
for payment, notice of dishonor, protest, notice of protest, notice of
nonpayment, notice of intent to accelerate the maturity hereof and of
acceleration. No release of any security for the Debt or any person liable for
payment of the Debt, no extension of time for payment of this Note or any
installment hereof, and no alteration, amendment or waiver of any provision of
the Loan Documents made by agreement between Payee and any other person or
party shall release, modify, amend, waive, extend, change, discharge, terminate
or affect the liability of Maker, and any other person or party who may become
liable under the Loan Documents for the payment of all or any part of the Debt.
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<PAGE> 9
13. Subject to the qualifications below, Payee shall not enforce
the liability and obligation of Maker or its constituent members, partners,
shareholders, directors, employees or agents to perform and observe the
obligations contained in this Note, the Security Instrument or the other Loan
Documents by any legal, equitable or other action or proceeding wherein a
judgment shall be sought against Maker or its constituent members, partners,
shareholders, directors, employees or agents, except that Payee may bring a
foreclosure action, an action for specific performance or any other appropriate
action or proceeding to enable Payee to enforce and realize upon its interest
under this Note, the Security Instrument and the other Loan Documents, or in
the Property, the Rents, or any other collateral given to Payee pursuant to the
Loan Documents; provided, however, that, except as specifically provided below,
any judgment in any such action or proceeding shall be enforceable against
Maker or its constituent members, partners, shareholders, directors, employees
or agents only to the extent of Maker's interest in the Property, in the Rents
and in any other collateral given to Payee, and Payee, by accepting this Note,
the Security Instrument and the other Loan Documents, agrees that it shall not
sue for, seek or demand any deficiency judgment against Maker or its
constituent members, partners, shareholders, directors, employees or agents in
any such action or proceeding under or by reason of or under or in connection
with this Note, the Security Instrument or the other Loan Documents. The
provisions of this paragraph shall not, however, (a) constitute a waiver,
release or impairment of any obligation evidenced or secured by any of the Loan
Documents, except as specifically provided herein; (b) impair the right of
Payee to name Maker as a party defendant in any action or suit for foreclosure
and sale under the Security Instrument if allowed by law; (c) affect the
validity or enforceability of or any guaranty made in connection with the Loan
or any of the rights and remedies of the Payee thereunder; (d) impair the right
of Payee to obtain the appointment of a receiver; (e) impair the enforcement of
the Assignment of Leases; or (f) constitute a waiver of the right of Payee to
enforce the liability and obligation of Maker, by money judgment or otherwise,
to the extent of any loss, damage, cost, expense, liability, claim or other
obligation incurred by Payee (including attorneys' fees and costs reasonably
incurred) arising out of or in connection with the following:
(i) fraud or intentional misrepresentation by
Maker or any guarantor in connection with the
Loan;
(ii) the willful misconduct of Maker;
(iii) physical waste of the Property which is
material in nature;
(iv) the breach of any representation, warranty,
covenant or indemnification provision in that
certain Environmental and Hazardous Substance
Indemnification Agreement of even date
herewith given by Maker to Payee or in the
Security Instrument concerning environmental
laws, hazardous substances or asbestos;
(v) the removal or disposal of any portion of the
Property after an Event of Default;
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<PAGE> 10
(vi) the misapplication or conversion by Maker of
(A) any insurance proceeds paid by reason of
any loss, damage or destruction to the
Property, (B) any awards or other amounts
received in connection with the condemnation
of all or a portion of the Property, (C) any
Rents following an Event of Default, or (D)
any Rents paid more than one month in
advance, (E) any personal property which is
part of the Mortgaged Property as defined in
the Security Instrument;
(vii) failure to pay charges for labor or materials
or taxes or other charges that can create
liens on any portion of the Property; and
(viii) any security deposits collected with respect
to the Property which are not delivered to
Payee upon a foreclosure of the Property or
other action in lieu thereof, except to the
extent any such security deposits were
applied in accordance with the terms and
conditions of any of the Leases (as defined
in the Security Instrument) prior to the
occurrence of the Event of Default that gave
rise to such sale or foreclosure or action in
lieu thereof.
Notwithstanding anything to the contrary in this Note or any of the
Loan Documents, (A) Payee shall not be deemed to have waived any right which
Payee may have under Section 506(a), 506(b), 1111(b) or any other provisions of
the U.S. Bankruptcy Code to file a claim for the full amount of the Debt
secured by the Security Instrument or to require that all collateral shall
continue to secure all of the Debt owing to Payee in accordance with the Loan
Documents, and (B) the Debt shall be fully recourse to Maker in the event that:
(i) the first full monthly payment of principal and interest under this Note is
not paid when due; (ii) Maker fails to maintain its status as a single purpose
entity, as required by, and in accordance with the terms and provisions of, the
Security Instrument; (iii) Maker fails to obtain Payee's prior written consent
to any subordinate financing or other voluntary lien encumbering the Property;
(iv) Maker fails to obtain Payee's prior written consent to any assignment,
transfer, or conveyance of the Property or any interest therein as required by
the Security Instrument or (v) a receiver, liquidator or trustee of Maker or of
any guarantor shall be appointed or if Maker or any guarantor shall be
adjudicated a bankrupt or insolvent, or if any petition for bankruptcy,
reorganization or arrangement pursuant to federal bankruptcy, reorganization or
arrangement pursuant to federal bankruptcy law, or any similar federal or state
law, shall be filed by or against, consented to, or acquiesced in by, Maker or
any guarantor or if any proceeding for the dissolution or liquidation of Maker
or of any guarantor shall be instituted; however, if such appointment,
adjudication, petition or proceeding was involuntary and not consented to by
Maker or such guarantor, upon the same not being discharged, stayed or
dismissed within sixty (60) days.
14. Maker (and the undersigned representative of Maker, if any)
represents that Maker has full power, authority and legal right to execute,
deliver and perform its obligations pursuant to this Note, the Security
Instrument and the other Loan Documents and that this Note, the Security
Instrument and the other Loan Documents constitute valid and binding
obligations of Maker.
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15. All notices or other communications required or permitted to
be given pursuant hereto shall be given in the manner specified in the Security
Instrument directed to the parties at their respective addresses as provided
therein.
16. MAKER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THE LOAN
DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION
THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY MAKER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE
AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE.
PAYEE IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING
AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY MAKER.
17. This Note shall be governed by and construed in accordance
with the laws of the State in which the Property is located and the applicable
laws of the United States of America.
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<PAGE> 12
Maker has duly executed this Note the day and year first above
written.
MAKER:
BROCK SUITE TULSA, INC.
By:
------------------------------------
Name: Melvin Melle
Its: Vice President
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<PAGE> 13
ACKNOWLEDGMENT
STATE OF NEW YORK )
) SS:
COUNTY OF NEW YORK )
Before me, the undersigned, a Notary Public, in and for said County
and State, on this ____ day of ______________, 1997, personally appeared,
Melvin Melle as Vice President of Brock Suite Tulsa, Inc., to me known to be
the identical person who executed the within and foregoing instrument as Vice
President of the corporation and acknowledged to me that he executed the same
on behalf of the corporation as his free and voluntary act and deed for the
uses and purposes therein set forth.
Given under my hand and seal the day and year last above written.
-----------------------------------
Notary Public
Commission expires:
13
<PAGE> 14
ALLONGE
This Allonge is made to that certain Promissory Note dated October
____, 1997 in the principal sum of Five Million Two Hundred Eighty Thousand and
No/100 Dollars ($5,280,000.00) executed by Brock Suite Tulsa, Inc., and made
payable to the order of CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC, a
Delaware limited liability company.
Pay to the order of _______________________________________ without
recourse or warranty.
Dated: October ___, 1997
CREDIT SUISSE FIRST BOSTON
MORTGAGE CAPITAL LLC
a Delaware limited liability company
By:
--------------------------------------
Name:
Its:
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<PAGE> 15
GUARANTY
This GUARANTY ("GUARANTY") is executed as of ________________, 1997,
by Brock Suite Hotels, Inc., a Delaware corporation (whether one or more
collectively referred to as "GUARANTOR"), for the benefit of Credit Suisse
First Boston Mortgage Capital LLC, a Delaware limited liability company
("LENDER").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Mortgage, Note, dated of even date
herewith, executed by Brock Suite Tulsa, Inc., a Delaware corporation
("BORROWER"), and payable to the order of Lender in the original principal
amount of $5,280,000 (together with all renewals, modifications, increases and
extensions thereof, the "NOTE"), Borrower has become indebted, and may from
time to time be further indebted, to Lender with respect to a loan ("LOAN")
which is secured by the lien and security interest of a Mortgage, Assignment of
Leases and Rents and Security Agreement, of even date herewith (the "SECURITY
INSTRUMENT"), and further evidenced, secured or governed by other instruments
and documents executed in connection with the Loan (together with the Note and
Security Instrument, the "LOAN DOCUMENTS"); and
WHEREAS, Lender is not willing to make the Loan, or otherwise extend
credit, to Borrower unless Guarantor unconditionally guarantees payment and
performance to Lender of the Guaranteed Obligations (as herein defined); and
WHEREAS, Guarantor is the owner of a direct or indirect interest in
Borrower, and Guarantor will directly benefit from Lender's making the Loan to
Borrower.
NOW, THEREFORE, as an inducement to Lender to make the Loan to
Borrower, and to extend such additional credit as Lender may from time to time
agree to extend under the Loan Documents, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties do hereby agree as follows:
ARTICLE I
NATURE AND SCOPE OF GUARANTY
1.1 GUARANTY OF OBLIGATION. Guarantor hereby irrevocably and
unconditionally guarantees to Lender and its successors and assigns the payment
and performance of the Guaranteed Obligations as and when the same shall be due
and payable, whether by lapse of time, by acceleration of maturity or
otherwise. Guarantor hereby irrevocably and unconditionally covenants and
agrees that it is liable for the Guaranteed Obligations as a primary obligor.
<PAGE> 16
1.2 DEFINITION OF GUARANTEED OBLIGATIONS. As used herein, the
term "GUARANTEED OBLIGATIONS" means the obligations or liabilities of Borrower
to Lender for any loss, damage, cost, expense, liability, claim or other
obligation incurred by Lender (including attorneys' fees and costs reasonably
incurred) arising out of or in connection with the following:
(a) fraud or intentional misrepresentation by Borrower or
Guarantor in connection with the Loan;
(b) the willful misconduct by Borrower;
(c) physical waste of the Mortgaged Property (as defined
in the Security Instrument and hereinafter referred to as the
"Property") which is material in nature;
(d) the breach of any representation, warranty, covenant
or indemnification provision in that certain Environmental and
Hazardous Substances Indemnification Agreement of even date herewith
given by Borrower to Lender or in the Security Instrument concerning
environmental laws, hazardous substances or asbestos;
(e) the removal or disposal of any portion of the
Property after an Event of Default (as defined in the Security
Instrument);
(f) the misapplication or conversion by Borrower of (i)
any insurance proceeds paid by reason of any loss, damage or
destruction to the Property, (ii) any awards or other amounts received
in connection with the condemnation of all or a portion of the
Property, (iii) any Rents (as defined in the Security Instrument)
following an Event of Default, and (iv) any Rents paid more than one
month in advance;
(g) failure to pay charges for labor or materials or
other charges that can create liens on any portion of the Property;
and
(h) any security deposits collected with respect to the
Property which are not delivered to Lender upon a foreclosure of the
Property or action in lieu thereof, except to the extent any such
security deposits were applied in accordance with the terms and
conditions of any of the Leases (as defined in the Security
Instrument) prior to the occurrence of the Event of Default that gave
rise to such foreclosure or action in lieu thereof.
Notwithstanding anything to the contrary in Paragraph 2.1
hereof, the definition of Guaranteed Obligations will only be amended pursuant
to Paragraph 5.5 hereof.
Notwithstanding anything to the contrary in any of the Loan
Documents, (i) Lender shall not be deemed to have waived any right which Lender
may have under Section 506(a), 506(b), 1111(b) or any other provisions of the
U.S. Bankruptcy Code to file a claim for the full amount of the Debt secured
by the Security Instrument or to require that all collateral shall continue to
secure all of the Debt owing to Lender in accordance with the Loan Documents,
and
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<PAGE> 17
(ii) Guarantor shall be liable for the full amount of the Debt in the event
that (A) the first full monthly payment of principal and interest on the Note
is not paid when due; (B) Borrower fails to maintain its status as a single
purpose entity, as required by, and in accordance with, the Security
Instrument; (C) Borrower fails to obtain Lender's prior written consent to any
subordinate financing or other voluntary lien encumbering the Property; (D)
Borrower fails to obtain Lender's prior written consent to any assignment,
transfer, or conveyance of the Property or any interest therein as required by
the Security Instrument; or (E) a receiver, liquidator or trustee of Borrower
or Guarantor shall be appointed or if Borrower or Guarantor shall be
adjudicated a bankrupt or insolvent, or if any petition for bankruptcy,
reorganization or arrangement pursuant to federal bankruptcy, reorganization or
arrangement pursuant to federal bankruptcy law, or any similar federal or state
law, shall be filed by or against, consented to, or acquiesced in by, Borrower
or Guarantor or if any proceeding for the dissolution or liquidation of
Borrower or Guarantor shall be instituted; however, if such appointment,
adjudication, petition or proceeding was involuntary and not consented to by
Borrower or Guarantor, upon the same not being discharged, stayed or dismissed
within sixty (60) days.
1.3 NATURE OF GUARANTY. This Guaranty is an irrevocable,
absolute, continuing guaranty of payment and performance and not a guaranty of
collection. This Guaranty may not be revoked by Guarantor and shall continue
to be effective with respect to any Guaranteed Obligations arising or created
after any attempted revocation by Guarantor and after (if Guarantor is a
natural person) Guarantor's death (in which event this Guaranty shall be
binding upon Guarantor's estate and Guarantor's legal representatives and
heirs). The fact that at any time or from time to time the Guaranteed
Obligations may be increased or reduced shall not release or discharge the
obligation of Guarantor to Lender with respect to the Guaranteed Obligations.
This Guaranty may be enforced by Lender and any subsequent holder of the Note
and shall not be discharged by the assignment or negotiation of all or part of
the Note.
1.4 GUARANTEED OBLIGATIONS NOT REDUCED BY OFFSET. The Guaranteed
Obligations and the liabilities and obligations of Guarantor to Lender
hereunder, shall not be reduced, discharged or released because or by reason of
any existing or future offset, claim or defense of Borrower, or any other
party, against Lender or against payment of the Guaranteed Obligations, whether
such offset, claim or defense arises in connection with the Guaranteed
Obligations (or the transactions creating the Guaranteed Obligations) or
otherwise.
1.5 PAYMENT BY GUARANTOR. If all or any part of the Guaranteed
Obligations shall not be punctually paid when due, whether at demand, maturity,
acceleration or otherwise, Guarantor shall, immediately upon demand by Lender,
and without presentment, protest, notice of protest, notice of non-payment,
notice of intention to accelerate the maturity, notice of acceleration of the
maturity, or any other notice whatsoever, pay in lawful money of the United
States of America, the amount due on the Guaranteed Obligations to Lender at
Lender's address as set forth herein. Such demand(s) may be made at any time
coincident with or after the time for payment of all or part of the Guaranteed
Obligations, and may be made from time to time with respect to the same or
different items of Guaranteed Obligations. Such demand shall be deemed made,
given and received in accordance with the notice provisions hereof.
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<PAGE> 18
1.6 NO DUTY TO PURSUE OTHERS. It shall not be necessary for
Lender (and Guarantor hereby waives any rights which Guarantor may have to
require Lender), in order to enforce the obligations of Guarantor hereunder,
first to (i) institute suit or exhaust its remedies against Borrower or others
liable on the Loan or the Guaranteed Obligations or any other person, (ii)
enforce Lender's rights against any collateral which shall ever have been given
to secure the Loan, (iii) enforce Lender's rights against any other guarantors
of the Guaranteed Obligations, (iv) join Borrower or any others liable on the
Guaranteed Obligations in any action seeking to enforce this Guaranty, (v)
exhaust any remedies available to Lender against any collateral which shall
ever have been given to secure the Loan, or (vi) resort to any other means of
obtaining payment of the Guaranteed Obligations. Lender shall not be required
to mitigate damages or take any other action to reduce, collect or enforce the
Guaranteed Obligations.
1.7 WAIVERS. Guarantor agrees to the provisions of the Loan
Documents, and hereby waives notice of (i) any loans or advances made by Lender
to Borrower, (ii) acceptance of this Guaranty, (iii) any amendment or extension
of the Note, the Security Instrument or of any other Loan Documents, (iv) the
execution and delivery by Borrower and Lender of any other loan or credit
agreement or of Borrower's execution and delivery of any promissory notes or
other documents arising under the Loan Documents or in connection with the
Property, (v) the occurrence of any breach by Borrower or an Event of Default,
(vi) Lender's transfer or disposition of the Guaranteed Obligations, or any
part thereof, (vii) sale or foreclosure (or posting or advertising for sale or
foreclosure) of any collateral for the Guaranteed Obligations, (viii) protest,
proof of non-payment or default by Borrower, or (ix) any other action at any
time taken or omitted by Lender, and, generally, all demands and notices of
every kind in connection with this Guaranty, the Loan Documents, any documents
or agreements evidencing, securing or relating to any of the Guaranteed
Obligations and the obligations hereby guaranteed.
1.8 PAYMENT OF EXPENSES. In the event that Guarantor should
breach or fail to timely perform any provisions of this Guaranty, Guarantor
shall, immediately upon demand by Lender, pay Lender all costs and expenses
(including court costs and attorneys' fees) incurred by Lender in the
enforcement hereof or the preservation of Lender's rights hereunder. The
covenant contained in this Section shall survive the payment and performance of
the Guaranteed Obligations.
1.9 EFFECT OF BANKRUPTCY. In the event that, pursuant to any
insolvency, bankruptcy, reorganization, receivership or other debtor relief
law, or any judgment, order or decision thereunder, Lender must rescind or
restore any payment, or any part thereof, received by Lender in satisfaction of
the Guaranteed Obligations, as set forth herein, any prior release or discharge
from the terms of this Guaranty given to Guarantor by Lender shall be without
effect, and this Guaranty shall remain in full force and effect. It is the
intention of Borrower and Guarantor that Guarantor's obligations hereunder
shall not be discharged except by Guarantor's performance of such obligations
and then only to the extent of such performance.
1.10 WAIVER OF SUBROGATION, REIMBURSEMENT AND CONTRIBUTION.
Notwithstanding anything to the contrary contained in this Guaranty, Guarantor
hereby unconditionally and irrevocably waives, releases and abrogates any and
all rights it may now or hereafter have under
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<PAGE> 19
any agreement, at law or in equity (including, without limitation, any law
subrogating the Guarantor to the rights of Lender), to assert any claim against
or seek contribution, indemnification or any other form of reimbursement from
Borrower or any other party liable for payment of any or all of the Guaranteed
Obligations for any payment made by Guarantor under or in connection with this
Guaranty or otherwise until such time as all obligations of Borrower under the
Loan Documents have been fulfilled.
1.11 BORROWER. The term "BORROWER" as used herein shall include
any new or successor corporation, association, partnership (general or
limited), joint venture, trust or other individual or organization formed as a
result of any merger, reorganization, sale, transfer, devise, gift or bequest
of Borrower or any interest in Borrower.
ARTICLE II
EVENTS AND CIRCUMSTANCES NOT REDUCING
OR DISCHARGING GUARANTOR'S OBLIGATIONS
Guarantor hereby consents and agrees to each of the following,
and agrees that Guarantor's obligations under this Guaranty shall not be
released, diminished, impaired, reduced or adversely affected by any of the
following, and waives any common law, equitable, statutory or other rights
(including without limitation rights to notice) which Guarantor might otherwise
have as a result of or in connection with any of the following:
2.1 MODIFICATIONS. Any renewal, extension, increase,
modification, alteration or rearrangement of all or any part of the Guaranteed
Obligations, the Note, the Security Instrument, the other Loan Documents, or
any other document, instrument, contract or understanding between Borrower and
Lender, or any other parties, pertaining to the Guaranteed Obligations or any
failure of Lender to notify Guarantor of any such action.
2.2 ADJUSTMENT. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by Lender to Borrower or Guarantor.
2.3 CONDITION OF BORROWER OR GUARANTOR. The insolvency,
bankruptcy, arrangement, adjustment, composition, liquidation, disability,
dissolution or lack of power of Borrower, Guarantor or any other party at any
time liable for the payment of all or part of the Guaranteed Obligations; or
any dissolution of Borrower or Guarantor, or any sale, lease or transfer of any
or all of the assets of Borrower or Guarantor, or any changes in the
shareholders, partners or members of Borrower or Guarantor; or any
reorganization of Borrower or Guarantor.
2.4 INVALIDITY OF GUARANTEED OBLIGATIONS. The invalidity,
illegality or unenforceability of all or any part of the Guaranteed
Obligations, or any document or agreement executed in connection with the
Guaranteed Obligations, for any reason whatsoever, including without limitation
the fact that (i) the Guaranteed Obligations, or any part thereof, exceeds the
amount permitted by law, (ii) the act of creating the Guaranteed Obligations or
any part thereof
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<PAGE> 20
is ultra vires, (iii) the officers or representatives executing the Note, the
Security Instrument or the other Loan Documents or otherwise creating the
Guaranteed Obligations acted in excess of their authority, (iv) the Guaranteed
Obligations violate applicable usury laws, (v) the Borrower has valid defenses,
claims or offsets (whether at law, in equity or by agreement) which render the
Guaranteed Obligations wholly or partially uncollectible from Borrower, (vi)
the creation, performance or repayment of the Guaranteed Obligations (or the
execution, delivery and performance of any document or instrument representing
part of the Guaranteed Obligations or executed in connection with the
Guaranteed Obligations, or given to secure the repayment of the Guaranteed
Obligations) is illegal, uncollectible or unenforceable, or (vii) the Note, the
Security Instrument or any of the other Loan Documents have been forged or
otherwise are irregular or not genuine or authentic, it being agreed that
Guarantor shall remain liable hereon regardless of whether Borrower or any
other person be found not liable on the Guaranteed Obligations or any part
thereof for any reason.
2.5 RELEASE OF OBLIGORS. Any full or partial release of the
liability of Borrower on the Guaranteed Obligations, or any part thereof, or of
any co-guarantors, or any other person or entity now or hereafter liable,
whether directly or indirectly, jointly, severally, or jointly and severally,
to pay, perform, guarantee or assure the payment of the Guaranteed Obligations,
or any part thereof, it being recognized, acknowledged and agreed by Guarantor
that Guarantor may be required to pay the Guaranteed Obligations in full
without assistance or support of any other party, and Guarantor has not been
induced to enter into this Guaranty on the basis of a contemplation, belief,
understanding or agreement that other parties will be liable to pay or perform
the Guaranteed Obligations, or that Lender will look to other parties to pay or
perform the Guaranteed Obligations.
2.6 OTHER COLLATERAL. The taking or accepting of any other
security, collateral or guaranty, or other assurance of payment, for all or any
part of the Guaranteed Obligations.
2.7 RELEASE OF COLLATERAL. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, property or security at any time existing in connection with, or
assuring or securing payment of, all or any part of the Guaranteed Obligations.
2.8 CARE AND DILIGENCE. The failure of Lender or any other party
to exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, property or security, including but not limited to any neglect,
delay, omission, failure or refusal of Lender (i) to take or prosecute any
action for the collection of any of the Guaranteed Obligations or (ii) to
foreclose, or initiate any action to foreclose, or, once commenced, prosecute
to completion any action to foreclose upon any security therefor, or (iii) to
take or prosecute any action in connection with any instrument or agreement
evidencing or securing all or any part of the Guaranteed Obligations.
2.9 UNENFORCEABILITY. The fact that any collateral, security,
security interest or lien contemplated or intended to be given, created or
granted as security for the repayment of the
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<PAGE> 21
Guaranteed Obligations, or any part thereof, shall not be properly perfected or
created, or shall prove to be unenforceable or subordinate to any other
security interest or lien, it being recognized and agreed by Guarantor that
Guarantor is not entering into this Guaranty in reliance on, or in
contemplation of the benefits of, the validity, enforceability, collectibility
or value of any of the collateral for the Guaranteed Obligations.
2.10 OFFSET. The Note, the Guaranteed Obligations and the
liabilities and obligations of the Guarantor to Lender hereunder shall not be
reduced, discharged or released because of or by reason of any existing or
future right of offset, claim or defense of Borrower against Lender, or any
other party, or against payment of the Guaranteed Obligations, whether such
right of offset, claim or defense arises in connection with the Guaranteed
Obligations (or the transactions creating the Guaranteed Obligations) or
otherwise.
2.11 MERGER. The reorganization, merger or consolidation of
Borrower into or with any other corporation or entity.
2.12 PREFERENCE. Any payment by Borrower to Lender is held to
constitute a preference under bankruptcy laws, or for any reason Lender is
required to refund such payment or pay such amount to Borrower or someone else.
2.13 OTHER ACTIONS TAKEN OR OMITTED. Any other action taken or
omitted to be taken with respect to the Loan Documents, the Guaranteed
Obligations, or the security and collateral therefor, whether or not such
action or omission prejudices Guarantor or increases the likelihood that
Guarantor will be required to pay the Guaranteed Obligations pursuant to the
terms hereof, it is the unambiguous and unequivocal intention of Guarantor that
Guarantor shall be obligated to pay the Guaranteed Obligations when due,
notwithstanding any occurrence, circumstance, event, action, or omission
whatsoever, whether contemplated or uncontemplated, and whether or not
otherwise or particularly described herein, which obligation shall be deemed
satisfied only upon the full and final payment and satisfaction of the
Guaranteed Obligations.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into the Loan Documents and extend
credit to Borrower, Guarantor represents and warrants to Lender as follows:
3.1 BENEFIT. Guarantor is an affiliate of Borrower, is the owner
of a direct or indirect interest in Borrower, and has received, or will
receive, direct or indirect benefit from the making of this Guaranty with
respect to the Guaranteed Obligations.
3.2 FAMILIARITY AND RELIANCE. Guarantor is familiar with, and has
independently reviewed books and records regarding, the financial condition of
the Borrower and is familiar with the value of any and all collateral intended
to be created as security for the payment of the Note
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<PAGE> 22
or Guaranteed Obligations; however, Guarantor is not relying on such financial
condition or the collateral as an inducement to enter into this Guaranty.
3.3 NO REPRESENTATION BY LENDER. Neither Lender nor any other
party has made any representation, warranty or statement to Guarantor in order
to induce the Guarantor to execute this Guaranty.
3.4 GUARANTOR'S FINANCIAL CONDITION. As of the date hereof, and
after giving effect to this Guaranty and the contingent obligation evidenced
hereby, Guarantor is, and will be, solvent, and has and will have assets which,
fairly valued, exceed its obligations, liabilities (including contingent
liabilities) and debts, and has and will have property and assets sufficient to
satisfy and repay its obligations and liabilities.
3.5 LEGALITY. The execution, delivery and performance by
Guarantor of this Guaranty and the consummation of the transactions
contemplated hereunder do not, and will not, contravene or conflict with any
law, statute or regulation whatsoever to which Guarantor is subject or
constitute a default (or an event which with notice or lapse of time or both
would constitute a default) under, or result in the breach of, any indenture,
Security Instrument, charge, lien, or any contract, agreement or other
instrument to which Guarantor is a party or which may be applicable to
Guarantor. This Guaranty is a legal and binding obligation of Guarantor and is
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency or other laws of general application relating to the enforcement of
creditors' rights.
3.6 SURVIVAL. All representations and warranties made by
Guarantor herein shall survive the execution hereof.
ARTICLE IV
SUBORDINATION OF CERTAIN INDEBTEDNESS
4.1 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "GUARANTOR CLAIMS" shall mean all debts and liabilities of Borrower to
Guarantor, whether such debts and liabilities now exist or are hereafter
incurred or arise, or whether the obligations of Borrower thereon be direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or liabilities be evidenced by note,
contract, open account, or otherwise, and irrespective of the person or persons
in whose favor such debts or liabilities may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may
hereafter be acquired by Guarantor. The Guarantor Claims shall include without
limitation all rights and claims of Guarantor against Borrower (arising as a
result of subrogation or otherwise) as a result of Guarantor's payment of all
or a portion of the Guaranteed Obligations. Upon the occurrence of an Event of
Default or the occurrence of an event which would, with the giving of notice or
the passage of time, or both, constitute an Event of Default, Guarantor shall
not receive or collect, directly or indirectly, from Borrower or any other
party any amount upon the Guarantor Claims.
8
<PAGE> 23
4.2 CLAIMS IN BANKRUPTCY. In the event of receivership,
bankruptcy, reorganization, arrangement, debtor's relief, or other insolvency
proceedings involving Guarantor as debtor, Lender shall have the right to prove
its claim in any such proceeding so as to establish its rights hereunder and
receive directly from the receiver, trustee or other court custodian dividends
and payments which would otherwise be payable upon Guarantor Claims. Guarantor
hereby assigns such dividends and payments to Lender. Should Lender receive,
for application upon the Guaranteed Obligations, any such dividend or payment
which is otherwise payable to Guarantor, and which, as between Borrower and
Guarantor, shall constitute a credit upon the Guarantor Claims, then upon
payment to Lender in full of the Guaranteed Obligations, Guarantor shall become
subrogated to the rights of Lender to the extent that such payments to Lender
on the Guarantor Claims have contributed toward the liquidation of the
Guaranteed Obligations, and such subrogation shall be with respect to that
proportion of the Guaranteed Obligations which would have been unpaid if Lender
had not received dividends or payments upon the Guarantor Claims.
4.3 PAYMENTS HELD IN TRUST. In the event that, notwithstanding
anything to the contrary in this Guaranty, Guarantor should receive any funds,
payment, claim or distribution which is prohibited by this Guaranty, Guarantor
agrees to hold in trust for Lender an amount equal to the amount of all funds,
payments, claims or distributions so received, and agrees that it shall have
absolutely no dominion over the amount of such funds, payments, claims or
distributions so received except to pay them promptly to Lender, and Guarantor
covenants promptly to pay the same to Lender.
4.4 LIENS SUBORDINATE. Guarantor agrees that any liens, security
interests, judgment liens, charges or other encumbrances upon Borrower's
assets securing payment of the Guarantor Claims shall be and remain inferior
and subordinate to any liens, security interests, judgment liens, charges or
other encumbrances upon Borrower's assets securing payment of the Guaranteed
Obligations, regardless of whether such encumbrances in favor of Guarantor or
Lender presently exist or are hereafter created or attach. Without the prior
written consent of Lender, Guarantor shall not (i) exercise or enforce any
creditor's right it may have against Borrower, or (ii) foreclose, repossess,
sequester or otherwise take steps or institute any action or proceedings
(judicial or otherwise, including without limitation the commencement of, or
joinder in, any liquidation, bankruptcy, rearrangement, debtor's relief or
insolvency proceeding) to enforce any liens, mortgage, deeds of trust, security
interests, collateral rights, judgments or other encumbrances on assets of
Borrower held by Guarantor.
ARTICLE V
MISCELLANEOUS
5.1 WAIVER. No failure to exercise, and no delay in exercising,
on the part of Lender, any right hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right. The rights of Lender
hereunder shall be in addition to all other rights provided by law. No
modification or waiver of any provision of this Guaranty, nor consent to
departure therefrom, shall be effective unless in writing and no such consent
or waiver shall extend beyond the particular case and
9
<PAGE> 24
purpose involved. No notice or demand given in any case shall constitute a
waiver of the right to take other action in the same, similar or other
instances without such notice or demand.
5.2 NOTICES. Any notice, demand, statement, request or
consent made hereunder shall be in writing and shall be deemed to be received
by the addressee on the third day following the day such notice is deposited
with the United States Postal Service first class certified mail, return
receipt requested, addressed to the address, as set forth below, of the party
to whom such notice is to be given, or to such other addressee as either party
shall in like manner designate in writing. The addresses of the parties hereto
are as follows:
Guarantor: Brock Suite Hotels, Inc.
3710 Rawlins, Suite 1500
Dallas, Texas 75219
Attention: Melvin Melle
Telecopier: (214) 522-9254
With a copy to: Hofheimer, Gartlir & Gross LLP
633 Third Avenue
New York, NY 10017
Attention: Daniel M. Weisberg, Esq.
Telecopier: 212 661-3132
Lender: Credit Suisse First Boston Mortgage
Capital LLC
11 Madison Avenue, 5th Floor
New York, New York 10010
Attention: Trevor Bond
Re: Tulsa Residence Inn
Telecopier: (212) 325-8064
5.3 GOVERNING LAW. This Guaranty shall be governed by and
construed in accordance with the laws of the State in which the real property
encumbered by the Security Instrument is located and the applicable laws of the
United States of America.
5.4 INVALID PROVISIONS. If any provision of this Guaranty is held
to be illegal, invalid, or unenforceable under present or future laws effective
during the term of this Guaranty, such provision shall be fully severable and
this Guaranty shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Guaranty, and the
remaining provisions of this Guaranty shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Guaranty, unless such continued effectiveness of this
Guaranty, as modified, would be contrary to the basic understandings and
intentions of the parties as expressed herein.
5.5 AMENDMENTS. This Guaranty may be amended only by an
instrument in writing executed by the party or an authorized representative of
the party against whom such amendment is sought to be enforced.
10
<PAGE> 25
5.6 PARTIES BOUND; ASSIGNMENT; JOINT AND SEVERAL. This Guaranty
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns and legal representatives; provided, however,
that Guarantor may not, without the prior written consent of Lender, assign any
of its rights, powers, duties or obligations hereunder. If Guarantor consists
of more than one person or party, the obligations and liabilities of each such
person or party shall be joint and several.
5.7 HEADINGS. Section headings are for convenience of reference
only and shall in no way affect the interpretation of this Guaranty.
5.8 RECITALS. The recital and introductory paragraphs hereof are
a part hereof, form a basis for this Guaranty and shall be considered prima
facie evidence of the facts and documents referred to therein.
5.9 COUNTERPARTS. To facilitate execution, this Guaranty may be
executed in as many counterparts as may be convenient or required. It shall
not be necessary that the signature of, or on behalf of, each party, or that
the signature of all persons required to bind any party, appear on each
counterpart. All counterparts shall collectively constitute a single
instrument. It shall not be necessary in making proof of this Guaranty to
produce or account for more than a single counterpart containing the respective
signatures of, or on behalf of, each of the parties hereto. Any signature page
to any counterpart may be detached from such counterpart without impairing the
legal effect of the signatures thereon and thereafter attached to another
counterpart identical thereto except having attached to it additional signature
pages.
5.10 RIGHTS AND REMEDIES. If Guarantor becomes liable for any
indebtedness owing by Borrower to Lender, by endorsement or otherwise, other
than under this Guaranty, such liability shall not be in any manner impaired or
affected hereby and the rights of Lender hereunder shall be cumulative of any
and all other rights that Lender may ever have against Guarantor. The exercise
by Lender of any right or remedy hereunder or under any other instrument, or at
law or in equity, shall not preclude the concurrent or subsequent exercise of
any other right or remedy.
5.11 OTHER DEFINED TERMS. Any capitalized term utilized herein
shall have the meaning as specified in the Security Instrument, unless such
term is otherwise specifically defined herein.
5.12 ENTIRETY. THIS GUARANTY EMBODIES THE FINAL, ENTIRE AGREEMENT
OF GUARANTOR AND LENDER WITH RESPECT TO GUARANTOR'S GUARANTY OF THE GUARANTEED
OBLIGATIONS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF. THIS GUARANTY IS INTENDED BY GUARANTOR AND LENDER AS A
FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY, AND NO COURSE OF
DEALING BETWEEN GUARANTOR AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE
PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE
USED TO
11
<PAGE> 26
CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY AGREEMENT.
THERE ARE NO ORAL AGREEMENTS BETWEEN GUARANTOR AND LENDER.
5.13 WAIVER OF RIGHT TO TRIAL BY JURY. GUARANTOR HEREBY AGREES NOT
TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY
RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR
HEREAFTER EXIST WITH REGARD TO THIS GUARANTY, THE NOTE, THE SECURITY
INSTRUMENT, OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER
ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY
IS GIVEN KNOWINGLY AND VOLUNTARILY BY GUARANTOR, AND IS INTENDED TO ENCOMPASS
INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY
JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF
THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY
GUARANTOR.
5.14 COOPERATION. Guarantor acknowledges that Lender and its
successors and assigns may (i) sell this Guaranty, the Note and other Loan
Documents to one or more investors as a whole loan, (ii) participate the Loan
secured by this Guaranty to one or more investors, (iii) deposit this Guaranty,
the Note and other Loan Documents with a trust, which trust may sell
certificates to investors evidencing an ownership interest in the trust assets,
or (iv) otherwise sell the Loan or interest therein to investors (the
transactions referred to in clauses (i) through (iv) are hereinafter each
referred to as "SECONDARY MARKET TRANSACTION"). Guarantor shall cooperate with
Lender in effecting any such Secondary Market Transaction and shall cooperate
to implement all requirements imposed by any Rating Agency (as defined in the
Security Instrument) involved in any Secondary Market Transaction. Guarantor
shall provide such information and documents relating to Guarantor, Borrower,
the Property and any tenants of the Improvements as Lender may reasonably
request in connection with such Secondary Market Transaction. In addition,
Guarantor shall make available to Lender all information concerning its
business and operations that Lender may reasonably request. Lender shall be
permitted to share all such information with the investment banking firms,
Rating Agencies, accounting firms, law firms and other third-party advisory
firms involved with the Loan and the Loan Documents or the applicable Secondary
Market Transaction. It is understood that the information provided by
Guarantor to Lender may ultimately be incorporated into the offering documents
for the Secondary Market Transaction and thus various investors may also see
some or all of the information. Lender and all of the aforesaid third-party
advisors and professional firms shall be entitled to rely on the information
supplied by, or on behalf of, Guarantor in the form as provided by Guarantor.
Lender may publicize the existence of the Loan in connection with its marketing
for a Secondary Market Transaction or otherwise as part of its business
development.
5.15 REINSTATEMENT IN CERTAIN CIRCUMSTANCES. If at any time any
payment of the principal of or interest under the Note or any other amount
payable by the Borrower under the Loan Documents is rescinded or must be
otherwise restored or returned upon the insolvency, bankruptcy or
reorganization of the Borrower or otherwise, the Guarantor's obligations
hereunder
12
<PAGE> 27
with respect to such payment shall be reinstated as though such payment has
been due but not made at such time.
13
<PAGE> 28
EXECUTED as of the day and year first above written.
BROCK SUITE HOTELS, INC.
By:
----------------------------------------
Name: Melvin Melle
Title: Vice President
14
<PAGE> 29
SCHEDULE 1
FORM OF ACKNOWLEDGMENT
[DATE]
Brock Suite Tulsa, Inc.
3710 Rawlins, Suite 1500
Dallas, Texas 75219
Credit Suisse First Boston Mortgage Capital LLC
11 Madison Avenue, 5th Floor
New York, New York 10010
Reference is made to that certain Clearing Bank Instruction
Letter dated ______, 199[__] (the "Instruction Letter") from BROCK SUITE TULSA,
INC. (the "Borrower"). I, ____________, on behalf of ________________ (the
"Bank"), hereby acknowledge receipt of the instructions set forth in the
Instruction Letter and notice of the pledges and security interest described
therein. The Bank hereby agrees to perform the instructions set forth in the
Instruction Letter upon the delivery by CREDIT SUISSE FIRST BOSTON MORTGAGE
CAPITAL LLC (the "Lender") of the Instruction Letter.
[BANK]
By:
------------------------------------
Name:
Title:
LOCK BOX ADDRESS:
- -------------------------------------
- -------------------------------------
- -------------------------------------
<PAGE> 30
BROCK SUITE TULSA, INC.
(Mortgagor)
and
CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC
(Mortgagee)
MORTGAGE, ASSIGNMENT OF LEASES
AND RENTS AND SECURITY AGREEMENT
Dated: As of October __, 1997
PROPERTY LOCATION:
Residence Inn
Tulsa, Oklahoma
(Tulsa County)
THIS INSTRUMENT AFFECTS REAL AND PERSONAL PROPERTY SITUATED IN THE
STATE OF OKLAHOMA, COUNTY OF TULSA, CITY OF TULSA.
THIS INSTRUMENT IS TO BE FILED AND INDEXED IN THE REAL ESTATE
RECORDS AND IS ALSO TO BE INDEXED IN THE INDEX OF FINANCING
STATEMENTS UNDER THE NAMES OF MORTGAGOR, AS "DEBTOR" AND
MORTGAGEE, AS "SECURED PARTY"
DOCUMENT PREPARED BY AND WHEN RECORDED, RETURN TO:
Orrick, Herrington & Sutcliffe LLP
Old Federal Reserve Bank Building
400 Sansome Street
San Francisco, California 94111
Attention: Ms. Ellen F. McDonald
<PAGE> 31
TABLE OF CONTENTS
<TABLE>
<S> <C>
GRANTING CLAUSE ONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
GRANTING CLAUSE TWO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
GRANTING CLAUSE THREE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
GRANTING CLAUSE FOUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GRANTING CLAUSE FIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GRANTING CLAUSE SIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GRANTING CLAUSE SEVEN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GRANTING CLAUSE EIGHT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . 4
General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1. Payment of Debt and Incorporation of Covenants, Conditions and
Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Warranty of Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Casualty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6. Tax Impound Fund; Replacement Escrow Fund, FF&E Fund. . . . . . . . . . . . . . . . . . . . . . . . 9
7. Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
8. Leases and Rents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9. Maintenance and Use of Mortgaged Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
10. Transfer or Encumbrance of the Mortgaged Property. . . . . . . . . . . . . . . . . . . . . . . . . 16
11. Representations and Covenants of Mortgagor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12. Single Purpose Entity/Separateness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
13. Estoppel Certificates and No Default Affidavits. . . . . . . . . . . . . . . . . . . . . . . . . . 22
14. Controlling Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
15. Changes in Laws Regarding Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16. No Credits on Account of the Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17. Documentary Stamps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
18. Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19. Performance of Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
20. Further Acts, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
21. Recording of Mortgage, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
22. Reporting Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
i
<PAGE> 32
<TABLE>
<S> <C>
23. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
24. Late Payment Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
25. Right To Cure Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
26. Additional Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
27. Right of Entry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
28. Security Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
29. Actions and Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
30. Waiver of Setoff and Counterclaim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
31. Contest of Certain Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
32. Recovery of Sums Required to be Paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
33. Marshalling and Other Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
34. Hazardous Substances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
35. Asbestos. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
36. Environmental Monitoring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
37. Handicapped Access. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
38. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
39. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
40. Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
41. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
42. Remedies of Mortgagor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
43. Sole Discretion of Mortgagee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
44. Non-Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
45. No Oral Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
46. Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
47. Inapplicable Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
48. Headings, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
49. Duplicate Originals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
50. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
51. Homestead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
52. Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
53. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
54. Recourse Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
55. Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
56. Lock-Box Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
57. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
58. Certain Hotel Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . 52
State Specific Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
59. Amplification of Foreclosure Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
60. Payment of Oklahoma Mortgage Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
EXHIBIT A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
LEGAL DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
ii
<PAGE> 33
THIS MORTGAGE, ASSIGNMENT OF LEASES AND RENTS AND SECURITY AGREEMENT
(the "MORTGAGE"), made as of October __, 1997, by Brock Suite Tulsa, Inc., a
Delaware corporation, having its principal place of business at 3710 Rawlins,
Suite 1500, Dallas, Texas 75219 ("MORTGAGOR"), and to Credit Suisse First
Boston Mortgage Capital LLC, a Delaware limited liability company
("MORTGAGEE"), having its principal office at 11 Madison Avenue, 5th Floor, New
York, New York 10010.
W I T N E S S E T H:
To secure the payment of an indebtedness in the original principal sum
of Five Million Two Hundred Eighty Thousand and 00/100 Dollars ($5,280,000.00),
lawful money of the United States of America, to be paid with interest
according to a certain mortgage note of even date herewith made by Mortgagor to
Mortgagee (the mortgage note together with all extensions, renewals or
modifications thereof being hereinafter collectively called the "NOTE", and the
loan evidenced by the Note hereinafter being referred to as the "LOAN") and all
other sums due hereunder, under the other Loan Documents (hereinafter defined)
and under the Note (said indebtedness and interest due under the Note and all
other sums due hereunder under the Note and the other Loan Documents being
hereinafter collectively referred to as the "DEBT"), Mortgagor has mortgaged,
given, granted, bargained, sold, alienated, enfeoffed, conveyed, confirmed,
warranted, pledged, assigned, and hypothecated and by these presents does
hereby deed, mortgage, give, grant, bargain, sell, alien, enfeoff, convey,
confirm, warrant, pledge, assign and hypothecate unto Mortgagee, the real
property described in Exhibit A attached hereto (the "PREMISES") and the
buildings, structures, fixtures, additions, enlargements, extensions,
modifications, repairs, replacements and improvements now or hereafter located
thereon (the "IMPROVEMENTS");
TOGETHER WITH: all right, title, interest and estate of Mortgagor now
owned, or hereafter acquired, in and to the following property, rights,
interests and estates (the Premises, the Improvements, and such property,
rights, interests and estates hereinafter described are collectively referred
to herein as the "MORTGAGED PROPERTY"):
GRANTING CLAUSE ONE
All easements, rights-of-way, strips and gores of land, streets, ways,
alleys, passages, sewer rights, water, water courses, water rights and powers,
air rights and development rights, all rights to oil, gas, minerals, coal and
other substances of any kind or character, and all estates, rights, titles,
interests, privileges, liberties, tenements, hereditaments and appurtenances of
any nature whatsoever, in any way belonging, relating or pertaining to the
Premises and the Improvements and the reversion and reversions, remainder and
remainders, and all land lying in the bed of any street, road, highway, alley
or avenue, opened, vacated or proposed, in front of or adjoining the Premises,
to the center line thereof and all the estates, rights, titles, interests,
dower and rights of dower, curtsey and rights of curtsey, property, possession,
claim and demand whatsoever, both at law and in equity, of Mortgagor of, in and
<PAGE> 34
to the Premises and the Improvements and every part and parcel thereof, with
the appurtenances thereto;
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GRANTING CLAUSE TWO
All machinery, furniture, furnishings, equipment, computer software
and hardware, fixtures (including, without limitation, all heating, air
conditioning, plumbing, lighting, communications and elevator fixtures),
inventory and articles of personal property and accessions thereof and
renewals, replacements thereof and substitutions therefor, if any (including,
but not limited to, beds, bureaus, chiffonniers, chests, chairs, desks, lamps,
mirrors, bookcases, tables, rugs, carpeting, drapes, draperies, curtains,
shades, venetian blinds, screens, paintings, hangings, pictures, divans,
couches, luggage carts, luggage racks, stools, sofas, chinaware, linens,
pillows, blankets, glassware, foodcarts, cookware, dry cleaning facilities,
dining room wagons, keys or other entry systems, bars, bar fixtures, liquor and
other drink dispensers, icemakers, radios, television sets, intercom and paging
equipment, electric and electronic equipment, dictating equipment, private
telephone systems, medical equipment, potted plants, heating, lighting and
plumbing fixtures, fire prevention and extinguishing apparatus, cooling and
air-conditioning systems, elevators, escalators, fittings, plants, apparatus,
stoves, ranges, refrigerators, laundry machines, tools, machinery, engines,
dynamos, motors, boilers, incinerators, switchboards, conduits, compressors,
vacuum cleaning systems, floor cleaning, waxing and polishing equipment, call
systems, brackets, electrical signs, bulbs, bells, ash and fuel, conveyors,
cabinets, lockers, shelving, spotlighting equipment, dishwashers, garbage
disposals, washers and dryers), other customary hotel equipment and other
property of every kind and nature, whether tangible or intangible, whatsoever
owned by Mortgagor, or in which Mortgagor has or shall have an interest, now or
hereafter located upon the Premises and the Improvements, or appurtenant
thereto, and usable in connection with the present or future operation and
occupancy of the Premises and the Improvements and all building equipment,
materials and supplies of any nature whatsoever owned by Mortgagor, or in which
Mortgagor has or shall have an interest, now or hereafter located upon the
Premises and the Improvements, or appurtenant thereto, and usable in connection
with the present or future operation, enjoyment and occupancy of the Premises
and the Improvements (hereinafter collectively referred to as the "EQUIPMENT"),
including any leases of any of the foregoing, any deposits existing at any time
in connection with any of the foregoing, and the proceeds of any sale or
transfer of the foregoing, and the right, title and interest of Mortgagor in
and to any of the Equipment that may be subject to any "security interests" as
defined in the Uniform Commercial Code, as adopted and enacted by the State or
States where any of the Mortgaged Property is located (the "UNIFORM COMMERCIAL
CODE"), superior in lien to the lien of this Mortgage;
GRANTING CLAUSE THREE
Awards or payments, including interest thereon, that may heretofore
and hereafter be made with respect to the Premises and the Improvements,
whether from the exercise of the right of eminent domain or condemnation
(including, without limitation, any transfer made in lieu of or in anticipation
of the exercise of said rights), or for a change of grade, or for any other
injury to or decrease in the value of the Premises and Improvements;
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GRANTING CLAUSE FOUR
All leases and other agreements or arrangements heretofore or
hereafter entered into affecting the use, enjoyment or occupancy of, or the
conduct of any activity upon or in, the Premises and the Improvements,
including any extensions, renewals, modifications or amendments thereof (the
"LEASES") and all rents, rent equivalents, moneys payable as damages or in lieu
of rent or rent equivalents, royalties (including, without limitation, all oil
and gas or other mineral royalties and bonuses), income, receivables, receipts,
revenues, deposits (including, without limitation, security, utility and other
deposits), accounts, cash, issues, profits, charges for services rendered, and
other consideration of whatever form or nature received by or paid to or for
the account of or benefit of Mortgagor or its agents or employees from any and
all sources arising from or attributable to the Premises and the Improvements,
including, without limitation, all revenues and credit card receipts collected
from guest rooms, restaurants, bars, meeting rooms, banquet rooms and
recreational facilities, all receivables, customer obligations, installment
payment obligations and other obligations now existing or hereafter arising or
created out of the sale, lease, sublease, license, concession or other grant of
the right of the use and occupancy of property or rendering of services by
Mortgagor or any operator or manager of the hotel or the commercial space
located in the Improvements or acquired from others (including, without
limitation, from the rental of any office space, retail space, guest rooms or
other space, halls, stores, and offices, and deposits securing reservations of
such space), license, lease, sublease and concession fees and rentals, health
club membership fees, food and beverage wholesale and retail sales, service
charges, vending machine sales and proceeds, if any, from business interruption
or other loss of income insurance (the "RENTS"), together with all proceeds
from the sale or other disposition of the Leases and the right to receive and
apply the Rents to the payment of the Debt ;
GRANTING CLAUSE FIVE
All proceeds of and any unearned premiums on any insurance policies
covering the Mortgaged Property, including, without limitation, the right to
receive and apply the proceeds of any insurance, judgments, or settlements made
in lieu thereof, for damage to the Mortgaged Property;
GRANTING CLAUSE SIX
The right, in the name and on behalf of Mortgagor, to appear in and
defend any action or proceeding brought with respect to the Mortgaged Property
and to commence any action or proceeding to protect the interest of Mortgagee
in the Mortgaged Property;
GRANTING CLAUSE SEVEN
All accounts, escrows, documents, instruments, chattel paper, claims,
deposits and general intangibles, as the foregoing terms are defined in the
Uniform Commercial Code, and all franchises, trade names, trademarks, symbols,
service marks, books, records, plans, specifications, designs, drawings,
permits, consents, licenses, franchise agreements,
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management agreements, contract rights (including, without limitation, any
contract with any architect or engineer or with any other provider of goods or
services for or in connection with any construction, repair, or other work upon
the Mortgaged Property), approvals, actions, refunds of real estate taxes and
assessments (and any other governmental impositions related to the Mortgaged
Property), and causes of action that now or hereafter relate to, are derived
from or are used in connection with the Mortgaged Property, or the use,
operation, maintenance, occupancy or enjoyment thereof or the conduct of any
business or activities thereon, but only to the extent same are assignable by
law (hereinafter collectively referred to as the "INTANGIBLES"); and
GRANTING CLAUSE EIGHT
All proceeds, products, offspring, rents and profits from any of the
foregoing, including, without limitation, those from sale, exchange, transfer,
collection, loss, damage, disposition, substitution or replacement of any of
the foregoing.
TO HAVE AND TO HOLD the above granted and described Mortgaged Property
unto and to the use and benefit of Mortgagee, forever;
PROVIDED, HOWEVER, these presents are upon the express condition that,
if Mortgagor shall well and truly pay to Mortgagee the Debt at the time and in
the manner provided in the Note and this Mortgage and shall well and truly
abide by and comply with each and every covenant and condition set forth
herein, in the Note and in the other Loan Documents (hereinafter defined) in a
timely manner, these presents and the estate hereby granted shall cease,
terminate and be void;
AND Mortgagor represents and warrants to and covenants and agrees with
Mortgagee as follows:
PART I
GENERAL PROVISIONS
1. PAYMENT OF DEBT AND INCORPORATION OF COVENANTS, CONDITIONS AND
AGREEMENTS. Mortgagor shall pay the Debt at the time and in the manner
provided in the Note and in this Mortgage. All the covenants, conditions and
agreements contained in (a) the Note and (b) all and any of the documents
including the Note and this Mortgage now or hereafter executed by Mortgagor
and/or others and by or in favor of Mortgagee, which evidences, secures or
guarantees all or any portion of the payments due under the Note or otherwise
is executed and/or delivered in connection with the Note and this Mortgage (the
"LOAN DOCUMENTS") are hereby made a part of this Mortgage to the same extent
and with the same force as if fully set forth herein.
2. WARRANTY OF TITLE. Mortgagor warrants that Mortgagor has
good, marketable and insurable title to the Mortgaged Property and has the full
power, authority and right to
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execute, deliver and perform its obligations under this Mortgage and to deed,
encumber, mortgage, give, grant, bargain, sell, alienate, enfeoff, convey,
confirm, pledge, assign and hypothecate the same and that Mortgagor possesses
an unencumbered fee estate in the Premises and the Improvements and that it
owns the Mortgaged Property free and clear of all liens, encumbrances and
charges whatsoever except for those exceptions shown in the title insurance
policy insuring the lien of this Mortgage and that this Mortgage is and will
remain a valid and enforceable first lien on and security interest in the
Mortgaged Property, subject only to said exceptions. Mortgagor shall forever
warrant, defend and preserve such title and the validity and priority of the
lien of this Mortgage and shall forever warrant and defend the same to
Mortgagee against the claims of all persons whomsoever.
3. INSURANCE.
(a) Mortgagor, at its sole cost and expense, for the
mutual benefit of Mortgagor and Mortgagee, shall obtain and maintain during the
entire term of this Mortgage (the "TERM") policies of insurance against loss or
damage by fire, lightning and such other perils as are included in a standard
"all-risk" endorsement, and against loss or damage by all other risks and
hazards covered by a standard extended coverage insurance policy including,
without limitation, riot and civil commotion, vandalism, malicious mischief,
burglary and theft. Such insurance shall be in an amount not less than the
greatest of (i) the then full replacement cost of the Improvements and
Equipment, without deduction for physical depreciation, (ii) the outstanding
principal balance of the Loan, and (iii) such amount that the insurer would
not deem Mortgagor a co-insurer under said policies. The policies of insurance
carried in accordance with this paragraph shall be paid annually in advance and
shall contain a "Replacement Cost Endorsement" with a waiver of depreciation,
and shall have a deductible no greater than the least of (i) $25,000.00 (i) 5%
of the then full replacement cost of the Improvements and Equipment, without
deduction for physical depreciation and (iii) 5% of annual Net Operating
Income, as defined below, unless so agreed by Mortgagee.
(b) Mortgagor, at its sole cost and expense, for the
mutual benefit of Mortgagor and Mortgagee, shall also obtain and maintain
during the Term the following policies of insurance:
(i) Flood insurance if any part of the Mortgaged
Property is located in an area identified by the Federal Emergency Management
Agency as an area having special flood hazards and in which flood insurance has
been made available under the National Flood Insurance Program in an amount at
least equal to the outstanding principal amount of the Loan or the maximum
limit of coverage available with respect to the Improvements and Equipment
under said Program, whichever is less.
(ii) Comprehensive public liability insurance,
including broad form property damage, blanket contractual and personal injuries
(including death resulting therefrom) coverages and containing minimum limits
per occurrence of $1,000,000 and $2,000,000 in the aggregate for any policy
year. In addition, at least $5,000,000 excess and/or umbrella liability
insurance shall be obtained and maintained for any and all claims,
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including all legal liability imposed upon Mortgagor and all court costs and
attorneys' fee incurred in connection with the ownership, operation and
maintenance of the Mortgaged Property.
(iii) Rental loss and/or business interruption
insurance in an amount equal to the greater of (A) estimated gross revenues for
eighteen (18) months from the operations of the Mortgaged Property or (B) the
projected operating expenses (including debt service) for eighteen (18) months
for the maintenance and operation of the Mortgaged Property. The amount of
such insurance shall be increased from time to time during the Term as and when
new Leases and renewal Leases are entered into and the Rents increase or the
estimate of (or the actual) gross revenue, as may be applicable, increases.
(iv) Insurance against loss or damage from (A)
leakage of sprinkler systems and (B) explosion of steam boilers, air
conditioning equipment, high pressure piping, machinery and equipment, pressure
vessels or similar apparatus now or hereafter installed in the Improvements
(without exclusion for explosions), to the extent that such items now or
hereafter exist upon the Mortgaged Property, in an amount at least equal to the
outstanding principal amount of the Note or $2,000,000, whichever is less.
(v) Worker's compensation insurance with respect to
any employees of Mortgagor, as required by any governmental authority or legal
requirement.
(vi) During any period of repair or restoration,
builder's "all risk" insurance in an amount equal to not less than the full
insurable value of the Mortgaged Property insuring against such risks
(including, without limitation, fire and extended coverage and collapse of the
Improvements to agreed limits) as Mortgagee may request, in form and substance
acceptable to Mortgagee.
(vii) Ordinance or law coverage to compensate for
the cost of demolition and the increased cost of construction.
(viii) Such other insurance as may from time to time
be reasonably required by Mortgagee in order to protect its interests.
(c) All policies of insurance (the "POLICIES") required
pursuant to this paragraph: (i) shall be issued by companies approved by
Mortgagee and licensed to do business in the state where the Mortgaged Property
is located, with a claims paying ability rating of "A" or better by Standard &
Poor's Rating Services, a division of the McGraw Hill Companies, Inc.; (ii)
shall name Mortgagee and its successors and/or assigns as their interest may
appear as the beneficiary/mortgagee; (iii) shall contain a non-contributory
standard mortgagee clause and a lender's loss payable endorsement or their
equivalents, naming Mortgagee as the person to which all payments made by such
insurance company shall be paid; (iv) shall contain a waiver of subrogation
against Mortgagee; (v) shall be maintained throughout the Term without cost to
Mortgagee; (vi) shall be assigned and the originals delivered to Mortgagee;
(vii) shall contain such provisions as Mortgagee deems reasonably necessary or
desirable to protect its interest including, without limitation, endorsements
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providing that neither Mortgagor, Mortgagee nor any other party shall be a
co-insurer under said Policies and that Mortgagee shall receive at least thirty
(30) days prior written notice of any modification, reduction or cancellation;
and (viii) shall be satisfactory in form and substance to Mortgagee and shall
be approved by Mortgagee as to amounts, form, risk coverage, deductibles, loss
payees and insureds. Mortgagor shall pay the premiums for such Policies (the
"INSURANCE PREMIUMS") as the same become due and payable and shall furnish to
Mortgagee evidence of the renewal of each of the Policies with receipts for the
payment of the Insurance Premiums or other evidence of such payment reasonably
satisfactory to Mortgagee. If Mortgagor does not furnish such evidence and
receipts at least thirty (30) days prior to the expiration of any expiring
Policy, then Mortgagee may procure, but shall not be obligated to procure, such
insurance and pay the Insurance Premiums therefor, and Mortgagor agrees to
reimburse Mortgagee for the cost of such Insurance Premiums promptly on demand.
Within thirty (30) days after request by Mortgagee, Mortgagor shall obtain such
increases in the amounts of coverage required hereunder as may be reasonably
requested by Mortgagee, taking into consideration changes in the value of money
over time, changes in liability laws, changes in prudent customs and practices.
4. CASUALTY.
(a) If the Mortgaged Property shall be damaged or
destroyed, in whole or in part, by fire or other casualty (an "INSURED
CASUALTY"), Mortgagor shall give prompt notice thereof to Mortgagee. Following
the occurrence of an Insured Casualty, Mortgagor, regardless of whether
insurance proceeds are available (unless insurance proceeds are received by
Mortgagee and Mortgagee fails to make such proceeds available to Mortgagor),
shall promptly proceed to restore, repair, replace or rebuild the same to be of
at least equal value and of substantially the same character as prior to such
damage or destruction, all to be effected in accordance with applicable law.
The expenses incurred by Mortgagee in the adjustment and collection of
insurance proceeds shall become part of the Debt and be secured hereby and
shall be reimbursed by Mortgagor to Mortgagee upon demand.
(b) In case of loss or damages covered by any of the
Policies, the following provisions shall apply:
(i) In the event of an Insured Casualty that does
not exceed the greater of (a) $250,000.00 or (b) ten percent (10%) of the then
outstanding principal balance of the Note, Mortgagor may settle and adjust any
claim without the consent of Mortgagee and agree with the insurance company or
companies on the amount to be paid upon the loss; provided that such adjustment
is carried out in a competent and timely manner. In such case, Mortgagor is
hereby authorized to collect and receipt for any such insurance proceeds.
(ii) In the event an Insured Casualty shall exceed
the greater of (a) $250,000.00 or (b) ten percent (10%) of the then outstanding
principal balance of the Note, then and in that event, Mortgagee may settle and
adjust any claim without the consent of Mortgagor and agree with the insurance
company or companies on the amount to be paid on
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the loss and the proceeds of any such policy shall be due and payable solely to
Mortgagee and held in escrow by Mortgagee in accordance with the terms of this
Mortgage.
(iii) In the event of an Insured Casualty where the
loss is in an aggregate amount less than fifty percent (50%) of the original
principal balance of the Note, and if, in the reasonable judgment of Mortgagee,
the Mortgaged Property can be restored within six (6) months and prior to the
Anticipated Repayment Date (as defined in the Note) of the Note to an economic
unit not materially less valuable (including an assessment of the impact of the
termination of any Leases due to such Insured Casualty) and not less useful
than the same was prior to the Insured Casualty, and after such restoration
will adequately secure the outstanding balance of the Debt, then, if no Event
of Default (as hereinafter defined) shall have occurred and be then continuing,
the proceeds of insurance (after reimbursement of any expenses incurred by
Mortgagee) shall be applied to reimburse Mortgagor for the cost of restoring,
repairing, replacing or rebuilding the Mortgaged Property or part thereof
subject to the Insured Casualty, in the manner set forth below. Mortgagor
hereby covenants and agrees to commence and diligently to prosecute such
restoring, repairing, replacing or rebuilding; provided always, that Mortgagor
shall pay all costs (and if required by Mortgagee, Mortgagor shall deposit the
total thereof with Mortgagee in advance) of such restoring, repairing,
replacing or rebuilding in excess of the net proceeds of insurance made
available pursuant to the terms hereof.
(iv) Except as provided above, the proceeds of
insurance collected upon any Insured Casualty shall, at the option of Mortgagee
in its sole discretion, be applied to the payment of the Debt or applied to
reimburse Mortgagor for the cost of restoring, repairing, replacing or
rebuilding the Mortgaged Property or part thereof subject to the Insured
Casualty, in the manner set forth below. Any such application to the Debt shall
be without any prepayment consideration except that if an Event of Default, or
an event with notice and/or the passage of time would constitute an Event of
Default, has occurred, then the Mortgagor shall pay to Mortgagee an additional
amount equal to the Yield Maintenance Premium (hereinafter defined), if any,
that would be required under Paragraph 55 hereof if Defeasance Collateral
(hereinafter defined) was to be purchased by Mortgagor. Any such application to
the Debt shall be applied to those payments of principal and interest last due
under the Note but shall not postpone or reduce any payments otherwise required
pursuant to the Note other than such last due payments.
(v) In the event Mortgagor is entitled to
reimbursement out of insurance proceeds held by Mortgagee, such proceeds shall
be disbursed from time to time upon Mortgagee being furnished with (1) evidence
satisfactory to it of the estimated cost of completion of the restoration,
repair, replacement and rebuilding, (2) funds or, at Mortgagee's option,
assurances reasonably satisfactory to Mortgagee that such funds are available,
sufficient in addition to the proceeds of insurance to complete the proposed
restoration, repair, replacement and rebuilding, and (3) such architect's
certificates, waivers of lien, contractor's sworn statements, title insurance
endorsements, bonds, plats of survey and such other reasonable evidences of
cost, payment and performance as Mortgagee may reasonably require and approve.
Mortgagee may, in any event, require that all plans and specifications for such
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restoration, repair, replacement and rebuilding be submitted to and approved by
Mortgagee prior to commencement of work. No payment made prior to the final
completion of the restoration, repair, replacement and rebuilding shall exceed
ninety percent (90%) of the value of the work performed from time to time;
funds other than proceeds of insurance shall be disbursed prior to disbursement
of such proceeds; and at all times, the undisbursed balance of such proceeds
remaining in the hands of Mortgagee, together with funds deposited for that
purpose or irrevocably committed to the satisfaction of Mortgagee by or on
behalf of Mortgagor for that purpose, shall be at least sufficient in the
reasonable judgment of Mortgagee to pay for the cost of completion of the
restoration, repair, replacement or rebuilding, free and clear of all liens or
claims for lien. Any surplus which may remain out of insurance proceeds held
by Mortgagee after payment of such costs of restoration, repair, replacement or
rebuilding shall be paid to any party entitled thereto.
5. PAYMENT OF TAXES, ETC. Mortgagor shall pay all taxes,
assessments, water rates and sewer rents, now or hereafter levied or assessed
or imposed against the Mortgaged Property or any part thereof (the "TAXES") and
all ground rents, maintenance charges, other impositions, and other charges,
including, without limitation, vault charges and license fees for the use of
vaults, chutes and similar areas adjoining the Premises, now or hereafter
levied or assessed or imposed against the Mortgaged Property or any part
thereof (the "OTHER CHARGES") as the same become due and payable. Mortgagor
will deliver to Mortgagee receipts for payment or other evidence satisfactory
to Mortgagee that the Taxes and Other Charges have been so paid or are not then
delinquent no later than thirty (30) days prior to the date on which the Taxes
and/or Other Charges would otherwise be delinquent if not paid. Mortgagor
shall not suffer and shall promptly cause to be paid and discharged any lien or
charge whatsoever which may be or become a lien or charge against the Mortgaged
Property, and shall promptly pay for all utility services provided to the
Mortgaged Property. Mortgagor shall furnish to Mortgagee receipts for the
payment of the Taxes and the Other Charges prior to the date the same shall
become delinquent (provided, however, that Mortgagor is not required to furnish
such receipts for payment of Taxes in the event that such Taxes have been paid
for by Mortgagee pursuant to Paragraph 6 hereof).
6. TAX IMPOUND FUND; REPLACEMENT ESCROW FUND, FF&E FUND.
(a) Concurrently with the execution of this Mortgage,
Mortgagor shall deposit with Mortgagee the sum of $23,825.50. In addition,
Mortgagor shall pay to Mortgagee on the eleventh day of each calendar month
one-twelfth of the Taxes that Mortgagee reasonably estimates will be payable
during the next ensuing twelve (12) months in order to accumulate with
Mortgagee sufficient funds to pay all such Taxes at least thirty (30) days
prior to their respective due dates (said amount hereinafter called the "TAX
IMPOUND FUND"). The Tax Impound Fund and the payments of interest or principal
or both, payable pursuant to the Note, shall be added together and shall be
paid as an aggregate sum by Mortgagor to Mortgagee. Mortgagee will apply the
Tax Impound Fund to payments of Taxes required to be made by Mortgagor pursuant
to Paragraph 5 hereof. In making any payment relating to the Tax Impound Fund,
Mortgagee may do so according to any bill, statement or estimate procured from
the appropriate public office, without inquiry into the validity of any tax,
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assessment, sale, forfeiture, tax lien or title or claim thereof. If the
amount of the Tax Impound Fund shall exceed the amounts due for Taxes pursuant
to Paragraph 5 hereof, Mortgagee shall, in its sole discretion, return any
excess to Mortgagor or credit such excess against future payments to be made to
the Tax Impound Fund. In allocating such excess, Mortgagee may deal with the
person shown on the records of Mortgagee to be the owner of the Mortgaged
Property. If at any time Mortgagee determines that the Tax Impound Fund is not
or will not be sufficient to pay the items set forth above, Mortgagee shall
notify Mortgagor of such determination and Mortgagor shall increase its monthly
payments to Mortgagee by the amount that Mortgagee estimates is sufficient to
make up the deficiency at least thirty (30) days prior to delinquency of the
Taxes. Until expended or applied as above provided, any amounts in the Tax
Impound Fund shall constitute additional security for the Debt. The Tax
Impound Fund shall not constitute a trust fund and may be commingled with other
monies held by Mortgagee. No earnings or interest on the Tax Impound Fund
shall be payable to Mortgagor. If Mortgagee so elects at any time, Mortgagor
shall provide, at Mortgagor's expense, a tax service contract for the Term
issued by a tax reporting agency acceptable to Mortgagee. If Mortgagee does
not so elect, Mortgagor shall reimburse Mortgagee for the cost of making annual
tax searches throughout the Term.
(b) Concurrently with the execution of this Mortgage,
Mortgagor shall deposit with Mortgagor the sum of $285,625.00 for replacement
and repairs required to be made to the Mortgaged Property and for any other
work approved by Mortgagee ("REPLACEMENT ESCROW FUND"). Mortgagee shall make
disbursements from the Replacement Escrow Fund as requested by Mortgagor, and
approved by Mortgagee in its sole discretion (except the Mortgagee shall
approve disbursements (i) required by applicable law, rule or regulation; or
(ii) reasonably required by Marriott International, Inc. pursuant to the
Franchise Agreement as defined in Paragraph 11 hereof), no more frequently than
once in any thirty (30) day period of no less than $5,000.00 upon delivery by
Mortgagor of Mortgagee's standard form of draw request accompanied by copies of
paid invoices for the amounts requested and, if required by Mortgagee for
requests in excess of $10,000.00, lien waivers and releases from all parties
furnishing materials and/or services in connection with the requested payment.
Mortgagee may require an inspection of the Mortgaged Property at Mortgagor's
expense prior to making a monthly disbursement in order to verify completion of
replacements and repairs of items in excess of $10,000.00 for which
reimbursement is sought. The Replacement Escrow Fund shall be held in an
interest bearing account in Mortgagee's name at a financial institution
selected by Mortgagee in its sole discretion. All earnings or interest on the
Replacement Escrow Fund shall be and become part of such Replacement Escrow
Fund and shall be disbursed as provided in this Paragraph 6(b). Until expended
or applied as above provided, the Replacement Escrow Fund shall constitute
additional security for the Debt. The Replacement Escrow Fund shall not
constitute a trust fund and may be commingled with other monies held by
Mortgagee.
(c) Mortgagor shall pay to Mortgagee on the eleventh day
of each calendar month the Monthly Deposit (hereinafter defined) which shall be
deposited with and held by Mortgagee for replacement of fixtures, furniture and
equipment required in connection with the Mortgaged Property during the
calendar year and for any other purchases reasonably approved
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by Mortgagee ("FF&E FUND"). The "Monthly Deposit" required to be made each
month during the term is an amount equal to, for each previous calendar month
(i) until the earlier of (a) the renewal of the Franchise Agreement or (b)
three years from the date hereof, five percent (5%) of Gross Income From
Operations as defined in Paragraph 18 hereof and (ii) thereafter, three and
one-half percent (3.5%) of Gross Income from Operations. Mortgagee may in its
reasonable discretion reassess its estimate of the amount necessary for the
FF&E Fund from time to time and in its discretion may adjust the monthly
amounts required to be deposited into the FF&E Fund by thirty (30) days notice
to Mortgagor. Mortgagee shall make disbursements from the FF&E Fund as
requested by Mortgagor, and approved by Mortgagee in its sole reasonable
discretion (except the Mortgagee shall approve disbursements (i) required by
applicable law, rule or regulation; or (ii) reasonably required by Marriott
International, Inc. pursuant to the Franchise Agreement), no more frequently
than once in any thirty (30) day period of no less than $5,000.00 upon delivery
by Mortgagor of Mortgagee's standard form of draw request accompanied by copies
of paid invoices for the amounts requested and, if required by Mortgagee for
requests in excess of $10,000.00, lien waivers and releases from all parties
furnishing materials in connection with the requested payment. The FF&E Fund
shall be held in an interest bearing account in Mortgagee's name at a financial
institution selected by Mortgagee in its sole discretion. All earnings or
interest on the FF&E Fund shall be and become part of such FF&E Fund and shall
be disbursed as provided in this Paragraph 6(c). Until expended or applied as
above provided, the FF&E Fund shall constitute additional security for the
Debt. The FF&E Fund shall not constitute a trust fund and may be commingled
with other monies held by Mortgagee.
(d) Mortgagor hereby pledges to Mortgagee and grants to
Mortgagee a security interest in any and all monies now or hereafter deposited
in the Tax Impound Fund and the Replacement Escrow Fund and the FF&E Fund as
additional security for the payment of the Debt. Upon the occurrence of an
Event of Default, Mortgagee may apply any sums then present in the Tax Impound
Fund, the Replacement Escrow Fund and/or the FF&E Fund to the payment of the
Debt in any order in its sole discretion.
7. CONDEMNATION. Mortgagor shall promptly give Mortgagee
written notice of the actual or threatened commencement of any condemnation or
eminent domain proceeding (a "CONDEMNATION") and shall deliver to Mortgagee
copies of any and all papers served in connection with such Condemnation.
Following the occurrence of a Condemnation, Mortgagor, regardless of whether an
Award (hereinafter defined) is available (unless the Mortgagee receives an
Award and fails to make such Award available to Mortgagor), shall promptly
proceed to restore, repair, replace or rebuild the same to the extent
practicable to be of at least equal value and of substantially the same
character as prior to such Condemnation, all to be effected in accordance with
applicable law.
(a) Mortgagee is hereby irrevocably appointed as
Mortgagor's attorney-in-fact, coupled with an interest, with exclusive power to
collect, receive and retain any award or payment ("AWARD") for any taking
accomplished through a Condemnation (a "TAKING") and to make any compromise or
settlement in connection with such Condemnation, subject to the provisions of
this Mortgage. Notwithstanding any Taking by any public or quasi-public
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authority (including, without limitation, any transfer made in lieu of or in
anticipation of such a Taking), Mortgagor shall continue to pay the Debt at the
time and in the manner provided for in the Note, in this Mortgage and the other
Loan Documents and the Debt shall not be reduced unless and until any Award
shall have been actually received and applied by Mortgagee to expenses of
collecting the Award and to discharge of the Debt. Mortgagee shall not be
limited to the interest paid on the Award by the condemning authority but shall
be entitled to receive out of the Award interest at the rate or rates provided
in the Note. Mortgagor shall cause any Award that is payable to Mortgagor to
be paid directly to Mortgagee.
(b) In the event of any Condemnation where the Award is
in an aggregate amount greater than the lesser of (i) $250,000.00 or (ii) ten
percent (10%) of the then outstanding original principal balance of the Note,
and if, in the reasonable judgment of Mortgagee, the Mortgaged Property can be
restored within six (6) months and prior to the Anticipated Repayment Date to
an economic unit not less valuable (including an assessment of the impact of
the termination of any Leases due to such Condemnation) and not less useful
than the same was prior to the Condemnation, and after such restoration will
adequately secure the outstanding balance of the Debt, then, if no Event of
Default shall have occurred and be then continuing, the proceeds of the Award
(after reimbursement of any expenses incurred by Mortgagee) shall be applied
to reimburse Mortgagor for the cost of restoring, repairing, replacing or
rebuilding the Mortgaged Property or part thereof subject to Condemnation, in
the manner set forth below. Mortgagor hereby covenants and agrees to commence
and diligently to prosecute such restoring, repairing, replacing or rebuilding;
provided always, that Mortgagor shall pay all costs (and if required by
Mortgagee, Mortgagor shall deposit the total thereof with Mortgagee in advance)
of such restoring, repairing, replacing or rebuilding in excess of the Award
made available pursuant to the terms hereof.
(c) Except as provided above, the Award collected upon
any Condemnation shall, at the option of Mortgagee in its sole discretion, be
applied to the payment of the Debt or applied to reimburse Mortgagor for the
cost of restoring, repairing, replacing or rebuilding the Mortgaged Property or
part thereof subject to the Condemnation, in the manner set forth below. Any
such application to the Debt shall be without any prepayment consideration
except that if an Event of Default, or an event with notice and/or the passage
of time would constitute an Event of Default, has occurred then the Mortgagor
shall pay to Mortgagee an additional amount equal to the Yield Maintenance
Premium, if any, that would be required under Paragraph 55 hereof if Defeasance
Collateral was to be purchased by Mortgagor. Any such application to the Debt
shall be applied to those payments of principal and interest last due under the
Note but shall not postpone or reduce any payments otherwise required pursuant
to the Note other than such last due payments. If the Mortgaged Property is
sold, through foreclosure or otherwise, prior to the receipt by Mortgagee of
such Award, Mortgagee shall have the right, whether or not a deficiency
judgment on the Note shall be recoverable or shall have been sought, recovered
or denied, to receive all or a portion of said Award sufficient to pay the
Debt.
(d) In the event Mortgagor is entitled to reimbursement
out of the Award received by Mortgagee, such proceeds shall be disbursed from
time to time upon Mortgagee
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being furnished with (1) evidence satisfactory to it of the estimated cost of
completion of the restoration, repair, replacement and rebuilding resulting
from such condemnation, (2) funds or, at Mortgagee's option, assurances
reasonably satisfactory to Mortgagee that such funds are available, sufficient
in addition to the proceeds of the Award to complete the proposed restoration,
repair, replacement and rebuilding, and (3) such architect's certificates,
waivers of lien, contractor's sworn statements, title insurance endorsements,
bonds, plats of survey and such other evidences of costs, payment and
performance as Mortgagee may reasonably require and approve; and Mortgagee may,
in any event, require that all plans and specifications for such restoration,
repair, replacement and rebuilding be submitted to and approved by Mortgagee
prior to commencement of work. No payment made prior to the final completion
of the restoration, repair, replacement and rebuilding shall exceed ninety
percent (90%) of the value of the work performed from time to time; funds other
than proceeds of the Award shall be disbursed prior to disbursement of such
proceeds; and at all times, the undisbursed balance of such proceeds remaining
in hands of Mortgagee, together with funds deposited for that purpose or
irrevocably committed to the satisfaction of Mortgagee by or on behalf of
Mortgagor for that purpose, shall be at least sufficient in the reasonable
judgment of Mortgagee to pay for the costs of completion of the restoration,
repair, replacement or rebuilding, free and clear of all liens or claims for
lien. Any surplus which may remain out of the Award received by Mortgagee
after payment of such costs of restoration, repair, replacement or rebuilding
shall, in the sole and absolute discretion of Mortgagee, be retained by
Mortgagee and applied to payment of the Debt or paid to any party entitled
thereto.
8. LEASES AND RENTS.
(a) Mortgagor does hereby absolutely and unconditionally
assign to Mortgagee, all of Mortgagor's right, title and interest in all
current and future Leases and Rents, it being intended by Mortgagor that this
assignment constitutes a present, absolute assignment and not an assignment for
additional security only. Such assignment to Mortgagee shall not be construed
to bind Mortgagee to the performance of any of the covenants, conditions or
provisions contained in any such Lease or otherwise impose any obligation upon
Mortgagee. Mortgagor agrees to execute and deliver to Mortgagee such
additional instruments, in form and substance satisfactory to Mortgagee, as may
hereafter be requested by Mortgagee to further evidence and confirm such
assignment. Nevertheless, subject to the terms of this paragraph, Mortgagee
grants to Mortgagor a revocable license to operate and manage the Mortgaged
Property and to collect the Rents. Mortgagor shall hold the Rents, or a
portion thereof, sufficient to discharge all current sums due on the Debt, in
trust for the benefit of Mortgagee for use in the payment of such sums. Any
remaining Rents exceeding the amount held in trust pursuant to the previous
sentence, if any, may be used by Mortgagor. Upon an Event of Default, without
the need for notice or demand, the license granted to Mortgagor herein shall
automatically be revoked, and Mortgagee shall immediately be entitled to
possession of all Rents, whether or not Mortgagee enters upon or takes control
of the Mortgaged Property. Mortgagee is hereby granted and assigned by
Mortgagor the right, at its option, upon revocation of the license granted
herein, to enter upon the Mortgaged Property in person, by agent or by
court-appointed receiver to collect the Rents. Any Rents collected after
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the revocation of the license may be applied toward payment of the Debt in such
priority and proportions as Mortgagee in its sole discretion shall deem proper.
(b) All Leases shall be written on the standard form of
lease which has been approved by Mortgagee. Upon request, Mortgagor shall
furnish Mortgagee with executed copies of all Leases. No material changes may
be made to the Mortgagee-approved standard lease without the prior written
consent of Mortgagee. All Leases shall provide that they are subordinate to
this Mortgage and that the tenant agrees to attorn to Mortgagee. Unless
otherwise approved by Mortgagee, each Lease shall contain a provision requiring
continuous operations of tenant's business on the premises. None of the Leases
shall contain any option to purchase, any right of first refusal to lease or
purchase, any right to terminate the lease term (except in the event of the
destruction of all or substantially all of the Mortgaged Property), any
non-disturbance or similar recognition agreement or any other similar
provisions which adversely affect the Mortgaged Property or which might
adversely affect the rights of any holder of the Mortgaged Loan without the
prior written consent of Mortgagee. Each tenant shall conduct business only in
that portion of the Mortgaged Property covered by its lease. Upon request,
Mortgagor shall furnish Mortgagee with executed copies of all Leases.
(c) Mortgagor, as the lessor thereunder, may enter into
proposed lease renewals and new leases without the prior written consent of
Mortgagee if such proposed Lease or extension: (i) is not for greater than or
equal to 10,000 square feet of the net rentable area of the Mortgaged Property,
or greater than or equal to five percent (5%) of the total net rentable area of
the Mortgaged Property; (ii) shall have an initial term of not less than three
(3) years or greater than ten (10) years; (iii) shall provide for rental rates
comparable to existing local market rates and shall be an arms-length
transaction; (iv) shall not contain any options for renewal or expansion by the
tenant thereunder at rental rates which are either below comparable market
levels or less than the rental rates paid by the tenant during the initial
lease term; (v) shall be to a tenant which is experienced, creditworthy and
reputable; (vi) shall provide that it is subordinate to this Mortgage and that
the tenant thereunder agrees to attorn to Mortgagee; and (vii) shall comply
with the provisions of subparagraph (b), above. Mortgagor may enter into a
proposed lease which does not satisfy all of the conditions set forth in
clauses (i) through (vii) immediately above, provided Mortgagee consents in
writing to such proposed lease, such consent not to be unreasonably withheld,
conditioned or delayed. Mortgagor expressly understands that any and all
proposed leases are included in the definition of "Lease" or "Leases" as such
terms may be used throughout this Mortgage, the Note and the other Loan
Documents. Notwithstanding the foregoing, this Paragraph 8(b) and 8(c) shall
not apply to Leases for hotel bookings in the ordinary course of business.
(d) Mortgagor (i) shall observe and perform all the
obligations imposed upon the lessor under the Leases and shall not do or permit
to be done anything to materially impair the value of the Leases as security
for the Debt; (ii) shall promptly send copies to Mortgagee of all notices of
default which Mortgagor shall send or receive thereunder; (iii) shall enforce
all the terms, covenants and conditions contained in the Leases upon the part
of the lessee thereunder to be observed or performed, short of termination
thereof; (iv) shall not collect any of the Rents more than one (1) month in
advance (except for advance hotel bookings made in
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the ordinary course of business); (v) shall not execute any other assignment of
the lessor's interest in the Leases or the Rents; (vi) shall deliver to
Mortgagee, upon request, tenant estoppel certificates from each commercial
tenant at the Mortgaged Property in form and substance reasonably satisfactory
to Mortgagee, provided that Mortgagor shall not be required to deliver such
certificates more frequently than two (2) times in any calendar year; and (vii)
shall execute and deliver at the request of Mortgagee all such further
assurances, confirmations and assignments in connection with the Mortgaged
Property as Mortgagee shall from time to time require.
(e) All security deposits of tenants, whether held in
cash or any other form, shall not be commingled with any other funds of
Mortgagor and, if cash, shall be deposited by Mortgagor at such commercial or
savings bank or banks, or otherwise held in compliance with applicable law, as
may be reasonably satisfactory to Mortgagee. Any bond or other instrument
which Mortgagor is permitted to hold in lieu of cash security deposits under
any applicable legal requirements shall be maintained in full force and effect
in the full amount of such deposits unless replaced by cash deposits as
hereinabove described, shall be issued by an institution reasonably
satisfactory to Mortgagee, shall, if permitted pursuant to any legal
requirements, name Mortgagee as payee or mortgagee thereunder (or at
Mortgagee's option, be fully assignable to Mortgagee) and shall, in all
respects, comply with any applicable legal requirements and otherwise be
reasonably satisfactory to Mortgagee. Mortgagor shall, upon request, provide
Mortgagee with evidence reasonably satisfactory to Mortgagee of Mortgagor's
compliance with the foregoing. Following the occurrence and during the
continuance of any Event of Default, Mortgagor shall, upon Mortgagee's request,
if permitted by any applicable legal requirements, turn over to Mortgagee the
security deposits (and any interest theretofore earned thereon) with respect to
all or any portion of the Mortgaged Property, to be held by Mortgagee subject
to the terms of the Leases.
9. MAINTENANCE AND USE OF MORTGAGED PROPERTY. Mortgagor shall
cause the Mortgaged Property to be maintained in a good and safe condition and
repair. The Improvements and the Equipment shall not be removed, demolished or
materially altered (except for normal replacement of the Equipment) without the
consent of Mortgagee. Mortgagor shall promptly comply with all laws, orders
and ordinances affecting the Mortgaged Property, or the use thereof. Mortgagor
shall promptly repair, replace or rebuild any part of the Mortgaged Property
that is destroyed by any casualty, or becomes damaged, worn or dilapidated or
that is affected by any proceeding of the character referred to in Paragraph 7
hereof and shall complete and pay for any structure at any time in the process
of construction or repair on the Premises. Mortgagor shall not initiate, join
in, acquiesce in, or consent to any change in any private restrictive covenant,
zoning law or other public or private restriction, limiting or defining the
uses which may be made of the Mortgaged Property or any part thereof. If under
applicable zoning provisions the use of all or any portion of the Mortgaged
Property is or shall become a nonconforming use, Mortgagor will not cause or
permit such nonconforming use to be discontinued or abandoned without the
express written consent of Mortgagee. Mortgagor shall not (i) change the use
of the Mortgaged Property, (ii) permit or suffer to occur any waste on or to
the Mortgaged Property or to any portion thereof or (iii) take any steps
whatsoever to convert the Mortgaged Property, or any portion thereof, to a
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condominium or cooperative form of management. Mortgagor will not install or
permit to be installed on the Premises any underground storage tank.
10. TRANSFER OR ENCUMBRANCE OF THE MORTGAGED PROPERTY.
(a) Mortgagor acknowledges that Mortgagee has examined
and relied on the creditworthiness and experience of Mortgagor in owning and
operating properties such as the Mortgaged Property in agreeing to make the
Loan, and that Mortgagee will continue to rely on Mortgagor's ownership of the
Mortgaged Property as a means of maintaining the value of the Mortgaged
Property as security for repayment of the Debt. Mortgagor acknowledges that
Mortgagee has a valid interest in maintaining the value of the Mortgaged
Property so as to ensure that, should Mortgagor default in the repayment of the
Debt, Mortgagee can recover the Debt by a sale of the Mortgaged Property.
Mortgagor shall not, without the prior written consent of Mortgagee, sell,
convey, alienate, mortgage, encumber, pledge or otherwise transfer the
Mortgaged Property or any part thereof, or permit the Mortgaged Property or any
part thereof to be sold, conveyed, alienated, mortgaged, encumbered, pledged or
otherwise transferred.
(b) A sale, conveyance, alienation, mortgage,
encumbrance, pledge or transfer within the meaning of this Paragraph 10 shall
be deemed to include (i) an installment sales agreement wherein Mortgagor
agrees to sell the Mortgaged Property or any part thereof for a price to be
paid in installments; (ii) an agreement by Mortgagor leasing all or a
substantial part of the Mortgaged Property for other than actual occupancy by a
space tenant thereunder or a sale, assignment or other transfer of, or the
grant of a security interest in, Mortgagor's right, title and interest in and
to any Leases or any Rents; (iii) if Mortgagor, Guarantor, or any general
partner or managing member of Mortgagor or Guarantor is a corporation, the
voluntary or involuntary sale, conveyance or transfer of such corporation's
stock (or the stock of any corporation directly or indirectly controlling such
corporation by operation of law or otherwise) or the creation or issuance of
new stock in one or a series of transactions by which an aggregate of more than
10%, or, as long as 100% of such corporation's stock is held by one party, 49%,
of such corporation's stock shall be vested in a party or parties who are not
now stockholders or any change in the control of such corporation; (iv) if
Mortgagor, any Guarantor or any general partner of Mortgagor or any Guarantor
is a limited or general partnership, joint venture or limited liability
company, the change, removal, resignation or addition of a general partner,
managing partner, joint venturer or the transfer of any ownership interest of
any general partner, managing partner or joint venturer or the transfer,
assignment or pledge of any ownership interest of any general partner, managing
partner or joint venturer; (v) if Mortgagor or any Guarantor is a limited
partnership, the voluntary or involuntary sale, conveyance, transfer or pledge
of any limited partnership interests or the creation or issuance of new limited
partnership interests, by which an aggregate of more than 49% of such limited
partnership interests are held by parties who are not currently limited
partners; or (vi) if Mortgagor or any Guarantor is a limited liability company,
the voluntary or involuntary sale, conveyance or transfer of a member's
interest.
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(c) Mortgagee shall not be required to demonstrate any
actual impairment of its security or any increased risk of default hereunder in
order to declare the Debt immediately due and payable upon Mortgagor's sale,
conveyance, alienation, mortgage, encumbrance, pledge or transfer of the
Mortgaged Property without Mortgagee's consent. This provision shall apply to
every sale, conveyance, alienation, mortgage, encumbrance, pledge or transfer
of the Mortgaged Property regardless of whether voluntary or not, or whether or
not Mortgagee has consented to any previous sale, conveyance, alienation,
mortgage, encumbrance, pledge or transfer of the Mortgaged Property.
(d) Mortgagee's consent to one sale, conveyance,
alienation, mortgage, encumbrance, pledge or transfer of the Mortgaged Property
shall not be deemed to be a waiver of Mortgagee's right to require such
consent to any future occurrence of same. Any sale, conveyance, alienation,
mortgage, encumbrance, pledge or transfer of the Mortgaged Property made in
contravention of this paragraph shall be null and void and of no force and
effect.
(e) Mortgagor agrees to bear and shall pay or reimburse
Mortgagee on demand for all reasonable expenses (including, without limitation,
reasonable attorneys' fees and disbursements, title search costs and title
insurance endorsement premiums) incurred by Mortgagee in connection with the
review, approval and documentation of any such sale, conveyance, alienation,
mortgage, encumbrance, pledge or transfer.
(f) Mortgagee's consent to the sale or transfer of the
Mortgaged Property will not be unreasonably withheld after consideration of all
relevant factors, provided that:
(i) no Event of Default or event which with the
giving of notice or the passage of time would
constitute an Event of Default shall have
occurred and remain uncured;
(ii) the proposed transferee ("TRANSFEREE") shall
be a reputable entity or person of good
character, creditworthy, with sufficient
financial worth considering the obligations
assumed and undertaken, as evidenced by
financial statements and other information
reasonably requested by Mortgagee;
(iii) the Transferee and its property manager shall
have sufficient experience in the ownership
and management of properties similar to the
Mortgaged Property, and Mortgagee shall be
provided with reasonable evidence thereof
(and Mortgagee reserves the right to approve
the Transferee without approving the
substitution of the property manager);
(iv) Mortgagee shall have recommendations in
writing from the Rating Agencies to the
effect that such transfer will not result in
a requalification, reduction or withdrawal of
any rating initially assigned or to be
assigned in a Secondary Market Transaction .
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The term "RATING AGENCIES" as used herein
shall mean each of Standard & Poor's Ratings
Group, a division of the McGraw-Hill
Companies, Inc., Moody's Investors Service,
Inc., Duff and Phelps Credit Rating Co. and
Fitch Investors Service, L.P., or any other
nationally-recognized statistical rating
agency which has been approved by Mortgagee;
(v) the Transferee shall have executed and
delivered to Mortgagee an assumption
agreement in form and substance acceptable to
Mortgagee, evidencing such Transferee's
agreement to abide and be bound by the terms
of the Note, this Mortgage and the other Loan
Documents, together with such legal opinions
and title insurance endorsements as may be
reasonably requested by Mortgagee; and
(vi) Mortgagee shall have received the payment of
an assumption fee equal to 1% of the
outstanding principal balance of the Loan and
all costs and expenses incurred by Mortgagee
in connection with such assumption (including
reasonable attorneys' fees and costs).
11. REPRESENTATIONS AND COVENANTS OF MORTGAGOR.
Mortgagor represents, warrants and covenants as follows:
(a) The Note, this Mortgage and the other Loan Documents
are not subject to any right of rescission, set-off, counterclaim or defense,
including the defense of usury, nor would the operation of any of the terms of
the Note, this Mortgage or any of the other Loan Documents, or the exercise of
any right thereunder, render this Mortgage unenforceable, in whole or in part,
or subject to any right of rescission, set-off, counterclaim or defense,
including the defense of usury.
(b) All certifications, permits, licenses and approvals,
including, without limitation, certificates of completion and occupancy permits
required for the legal use, occupancy and operation of the Mortgaged Property
as a hotel (collectively, the "LICENSES"), have been obtained and are in full
force and effect (including, without limitation, any applicable liquor
license). Mortgagor shall keep and maintain all licenses necessary for the
operation of the Mortgaged Property as a hotel. The Mortgaged Property is free
of material damage and is in good repair, and there is no proceeding pending
for the total or partial condemnation of, or affecting, the Mortgaged Property.
(c) All of the Improvements which were included in
determining the appraised value of the Mortgaged Property lie wholly within the
boundaries and building restriction lines of the Mortgaged Property, and no
improvements on adjoining properties encroach upon the Mortgaged Property, and
no easements or other encumbrances upon the Premises encroach upon any of the
Improvements, so as to affect the value or marketability of the Mortgaged
Property except those which are insured against by title insurance. All of the
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Improvements comply with all material requirements of any applicable zoning and
subdivision laws and ordinances.
(d) The Mortgaged Property is not subject to any Leases
other than Equipment leases and hotel bookings in the ordinary course of
business.
(e) The survey of the Mortgaged Premises and Improvements
delivered to Mortgagee in connection with this Mortgage, has been performed by
a duly licensed surveyor or registered professional engineer in the
jurisdiction in which the Mortgaged Premises and Improvements is situated, is
certified to the Mortgagee, its successors and assigns, and the title insurance
company, and is in accordance with the most current minimum standards for title
surveys as determined by the American Land Title Association, with the
signature and seal of a licensed engineer or surveyor affixed thereto, and to
the best of Mortgagor's knowledge, does not fail to reflect any material matter
affecting the Mortgaged Premises and Improvements or the title thereto.
(f) The Mortgaged Property is and shall at all times
remain in compliance with all statutes, ordinances, regulations and other
governmental or quasi-governmental requirements and private covenants now or
hereafter relating to the ownership, construction, use or operation of the
Mortgaged Property.
(g) There has not been and shall never be committed by
Mortgagor or any other person in occupancy of or involved with the operation or
use of the Mortgaged Property any act or omission affording the federal
government or any state or local government the right of forfeiture as against
the Mortgaged Property or any part thereof or any monies paid in performance of
Mortgagor's obligations under any of the Loan Documents.
(h) The Franchise Agreement, dated January 10, 1985 (the
"FRANCHISE AGREEMENT"), between Integra Hotels, Inc., and The Residence Inn
Company assigned by the Residence Inn Company to Marriott International, Inc.,
pursuant to that certain Assignment and Assumption of Franchise Agreements
dated as of March 30, 1995 and assigned to Mortgagor by Integra Hotels, Inc.
pursuant to that certain Assignment and Assumption of Franchise Agreement dated
as of October 22, 1997, pursuant to which Mortgagor has the right to operate
the hotel located on the Mortgaged Property under a name and/or hotel system
controlled by such franchisor, is in full force and effect and there is no
default, breach or violation existing thereunder by any party thereto and no
event has occurred (other than payments due but not yet delinquent) that, with
the passage of time or the giving of notice, or both, would constitute a
default, breach or violation by any party thereunder.
(i) The Management and Operating Agreement, dated April
1, 1996 (the "MANAGEMENT AGREEMENT"), between Integra Hotels, Inc. and Mason
Hospitality Services, Inc., and assigned by Integra Hotels, Inc. to Mortgagor
pursuant to that certain Assignment and Assumption of Management Agreement
dated as of the date hereof, pursuant to which such hotel manager operates the
Mortgaged Property as a hotel, is in full force and effect and there is no
default, breach or violation existing thereunder by any party thereto and no
event has
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occurred (other than payments due but not yet delinquent) that, with the
passage of time or the giving of notice, or both, would constitute a default,
breach or violation by any party thereunder. The fee due under the Management
Agreement, and the terms and provisions of the Management Agreement, are
subordinate to this Mortgage and Manager shall attorn to Mortgagee. Mortgagor
shall not terminate, cancel, modify, renew or extend the Management Agreement,
or enter into any agreement relating to the management or operation of the
Mortgaged Property with Manager or any other party without the express written
consent of Mortgagee, which consent shall not be unreasonably withheld. If at
any time Mortgagee consents to the appointment of a new manager, such new
manager and Mortgagor shall, as a condition of Mortgagor's consent, execute a
Consent and Agreement of Manager in the form then used by Mortgagee.
(j) Neither the execution and delivery of the Loan
Documents, the Mortgagor's performance thereunder, the recordation of this
Mortgage, nor the exercise of any remedies by Mortgagee, will adversely affect
Mortgagor's rights under the Franchise Agreement, the Management Agreement, or
any of the Licenses.
(k) No financial advisors, brokers, underwriters,
placement agents, agents or finders have been dealt with by the Mortgagor in
connection with the Loan.
12. SINGLE PURPOSE ENTITY/SEPARATENESS. Mortgagor represents,
warrants and covenants as follows:
(a) Mortgagor does not own and will not own any asset or
property other than (i) the Mortgaged Property, and (ii) incidental personal
property necessary for the ownership or operation of the Mortgaged Property.
(b) Mortgagor will not engage in any business other than
the ownership, management and operation of the Mortgaged Property and Mortgagor
will conduct and operate its business as presently conducted and operated.
(c) Mortgagor will not enter into any contract or
agreement with any affiliate of the Mortgagor, any constituent party of
Mortgagor, any guarantor (a "GUARANTOR") of the Debt or any part thereof or any
affiliate of any constituent party or Guarantor, except upon terms and
conditions that are intrinsically fair and substantially similar to those that
would be available on an arms-length basis with third parties other than any
such party.
(d) Mortgagor has not incurred and will not incur any
indebtedness, secured or unsecured, direct or indirect, absolute or contingent
(including guaranteeing any obligation), other than (i) the Debt, (ii) trade
and operational debt incurred in the ordinary course of business with trade
creditors and in amounts as are normal and reasonable under the circumstances,
and (iii) debt incurred in the financing of equipment and other personal
property used on the Premises. No indebtedness other than the Debt may be
secured (subordinate or pari passu) by the Mortgaged Property.
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(e) Mortgagor has not made and will not make any loans or
advances to any third party (including any affiliate or constituent party, any
Guarantor or any affiliate of any constituent party or Guarantor), and shall
not acquire obligations or securities of its affiliates.
(f) Mortgagor is and will remain solvent and Mortgagor
will pay its debts and liabilities (including, as applicable, shared personnel
and overhead expenses) from its assets as the same shall become due.
(g) Mortgagor has done or caused to be done and will do
all things necessary to observe organizational formalities and preserve its
existence, and Mortgagor will not, nor will Mortgagor permit any constituent
party or Guarantor to amend, modify or otherwise change the partnership
certificate, partnership agreement, articles of incorporation and bylaws, trust
or other organizational documents of Mortgagor or such constituent party or
Guarantor without the prior written consent of Mortgagee.
(h) Mortgagor will maintain all of its books, records,
financial statements and bank accounts separate from those of its affiliates
and any constituent party and Mortgagor will file its own tax returns unless
required otherwise by applicable law. Mortgagor shall maintain its books,
records, resolutions and agreements as official records.
(i) Mortgagor will be, and at all times will hold itself
out to the public as, a legal entity separate and distinct from any other
entity (including any affiliate of Mortgagor, any constituent party of
Mortgagor, any Guarantor or any affiliate of any constituent party or
Guarantor), shall correct any known misunderstanding regarding its status as a
separate entity, shall conduct business in its own name, shall not identify
itself or any of its affiliates as a division or part of the other and shall
maintain and utilize a separate telephone number and separate stationery,
invoices and checks.
(j) Mortgagor will maintain adequate capital for the
normal obligations reasonably foreseeable in a business of its size and
character and in light of its contemplated business operations.
(k) Neither Mortgagor nor any constituent party will seek
the dissolution, winding up, liquidation, consolidation or merger in whole or
in part, of the Mortgagor.
(l) Mortgagor will not commingle the funds and other
assets of Mortgagor with those of any affiliate or constituent party, any
Guarantor, or any affiliate of any constituent party of Guarantor, or any other
person.
(m) Mortgagor has and will maintain its assets in such a
manner that it will not be costly or difficult to segregate, ascertain or
identify its individual assets from those of any affiliate or constituent
party, any Guarantor, or any affiliate of any constituent party or Guarantor,
or any other person.
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(n) Mortgagor does not and will not hold itself out to be
responsible for the debts or obligations of any other person.
(o) If Mortgagor is a limited partnership or a limited
liability company, the general partner or managing member shall be a
corporation whose sole asset is its interest in Mortgagor and the general
partner or managing member will at all times comply, and will cause Mortgagor
to comply, with each of the representations, warranties, and covenants
contained in this Paragraph 12 as if such representation, warranty or covenant
was made directly by such general partner or managing member.
13. ESTOPPEL CERTIFICATES AND NO DEFAULT AFFIDAVITS.
(a) After request by Mortgagee, Mortgagor shall within
ten (10) days furnish Mortgagee with a statement, duly acknowledged and
certified, setting forth (i) the amount of the original principal amount of the
Note, (ii) the unpaid principal amount of the Note, (iii) the rate of interest
of the Note, (iv) the date installments of interest and/or principal were last
paid, (v) any offsets or defenses to the payment of the Debt, if any, (vi) that
the Note, this Mortgage and the other Loan Documents are valid, legal and
binding obligations and have not been modified or if modified, giving
particulars of such modification; and (vii) reaffirming all representations and
warranties of Mortgagor set forth herein and in the other Loan Documents as of
the date requested by Mortgagee or, to the extent of any changes to any such
representations and warranties, so stating such changes.
(b) Mortgagor shall deliver to Mortgagee upon request,
tenant estoppel certificates from each commercial tenant at the Mortgaged
Property in form and substance reasonably satisfactory to Mortgagee provided
that Mortgagor shall not be required to deliver such certificates more
frequently than two (2) times in any calendar year.
14. CONTROLLING AGREEMENT. It is expressly stipulated and agreed
to be the intent of Mortgagor and Mortgagee at all times to comply with
applicable state law or applicable United States federal law (to the extent
that it permits Mortgagee to contract for, charge, take, reserve, or receive a
greater amount of interest than under state law) and that this Paragraph 14
(and the similar paragraph contained in the Note) shall control every other
covenant and agreement in this Mortgage and the other Loan Documents. If the
applicable law (state or federal) is ever judicially interpreted so as to
render usurious any amount called for under the Note or under any of the other
Loan Documents, or contracted for, charged, taken, reserved, or received with
respect to the Debt, or if Mortgagee's exercise of the option to accelerate the
maturity of the Note, or if any prepayment by Mortgagor results in Mortgagor
having paid any interest in excess of that permitted by applicable law, then it
is Mortgagor's and Mortgagee's express intent that all excess amounts
theretofore collected by Mortgagee shall be credited on the principal balance
of the Note and all other Debt (or, if the Note and all other Debt have been or
would thereby be paid in full, refunded to Mortgagor), and the provisions of
the Note and the other Loan Documents immediately be deemed reformed and the
amounts thereafter collectible hereunder and thereunder reduced, without the
necessity of the execution of any new documents, so as to comply with the
applicable law, but so as to permit the recovery of
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the fullest amount otherwise called for hereunder or thereunder. All sums paid
or agreed to be paid to Mortgagee for the use, forbearance, or detention of the
Debt shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of the Debt until payment
in full so that the rate or amount of interest on account of the Debt does not
exceed the maximum lawful rate from time to time in effect and applicable to
the Debt for so long as the Debt is outstanding. Notwithstanding anything to
the contrary contained herein or in any of the other Loan Documents, it is not
the intention of Mortgagee to accelerate the maturity of any interest that has
not accrued at the time of such acceleration or to collect unearned interest at
the time of such acceleration.
15. CHANGES IN LAWS REGARDING TAXATION. If any law is enacted or
adopted or amended after the date of this Mortgage which deducts the Debt from
the value of the Mortgaged Property for the purpose of taxation or which
imposes a tax, either directly or indirectly, on the Debt or Mortgagee's
interest in the Mortgaged Property, Mortgagor will pay such tax, with interest
and penalties thereon, if any. In the event Mortgagee is advised by counsel
chosen by it that the payment of such tax or interest and penalties by
Mortgagor would be unlawful or taxable to Mortgagee or unenforceable or provide
the basis for a defense of usury, then in any such event, Mortgagee shall have
the option, by written notice of not less than ninety (90) days, to declare the
Debt immediately due and payable.
16. NO CREDITS ON ACCOUNT OF THE DEBT. Mortgagor will not claim
or demand or be entitled to any credit or credits on account of the Debt for
any part of the Taxes or Other Charges assessed against the Mortgaged Property,
or any part thereof, and no deduction shall otherwise be made or claimed from
the assessed value of the Mortgaged Property, or any part thereof, for real
estate tax purposes by reason of this Mortgage or the Debt. In the event such
claim, credit or deduction shall be required by law, Mortgagee shall have the
option, by written notice of not less than ninety (90) days, to declare the
Debt immediately due and payable.
17. DOCUMENTARY STAMPS. If at any time the United States of
America, any State thereof or any subdivision of any such State shall require
revenue or other stamps to be affixed to the Note or this Mortgage, or impose
any other tax or charge on the same, Mortgagor will pay for the same, with
interest and penalties thereon, if any.
18. BOOKS AND RECORDS.
(a) The financial statements heretofore furnished to
Mortgagee are, as of the dates specified therein, complete and correct and
fairly present the financial condition of the Mortgagor and any other persons
or entities that are the subject of such financial statements, and are prepared
in accordance with generally accepted accounting principles. Mortgagor does
not have any contingent liabilities, liabilities for taxes, unusual forward or
long-term commitments or unrealized or anticipated losses from any unfavorable
commitments that are known to Mortgagor and reasonably likely to have a
materially adverse effect on the Mortgaged Property or the operation thereof as
a hotel, except as referred to or reflected in said financial statements.
Since the date of such financial statements, there has been no
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materially adverse change in the financial condition, operation or business of
Mortgagor from that set forth in said financial statements.
(b) Mortgagor will maintain full and accurate books of
accounts and other records reflecting the results of the operations of the
Mortgaged Property and will furnish, or cause to be furnished, to Mortgagee on
or before forty-five (45) days after the end of each calendar quarter the
following items, each certified as true and correct: (i) a written statement
(rent roll) dated as of the last day of each such calendar quarter identifying
each of the Leases by the term, space occupied, rental required to be paid,
security deposit paid, any rental concessions, and identifying any defaults or
payment delinquencies thereunder, a report of occupancy for the subject quarter
including an average daily rate, and any and all franchise inspection reports
received by Mortgagor during the subject quarter; (ii) monthly and year to date
operating statements prepared for each calendar month during each such calendar
quarter, noting Net Operating Income, Gross Income from Operations, and Hotel
Operating Expenses (all as hereinafter defined), and including an itemization
of actual (not pro forma) capital expenditures and other information necessary
and sufficient under generally accepted accounting practices to fairly
represent the financial position and results of operation of the Mortgaged
Property during such calendar month, all in form satisfactory to Mortgagee;
(iii) a property balance sheet for each such calendar quarter; (iv) a
comparison of the budgeted total income and total expenses and the actual total
income and total expenses for each calendar quarter and year to date together
with a detailed explanation of any variances of five percent (5%) or more
between budgeted and actual amounts for such quarterly periods and year to
date; (v) a calculation reflecting the Debt Service Coverage Ratio (hereinafter
defined) as of the last day of each such calendar quarter; and (vi) monthly
occupancy statements including average daily rate. Until the occurrence of a
Secondary Market Transaction, Mortgagor shall furnish monthly each of the items
listed in the immediately preceding sentence within twenty (20) days after the
end of such month. All monthly operating statements shall be prepared based
upon the Uniform System of Accounts for Hotels, current edition. Within one
hundred twenty (120) days following the end of each calendar year, Mortgagor
shall furnish statements of its financial affairs and condition including a
balance sheet and a statement of profit and loss for the Mortgagor in such
detail as Mortgagee may request, and setting forth the financial condition and
the income and expenses for the Mortgaged Property for the immediately
preceding calendar year, which statements shall be prepared by Mortgagor.
Mortgagor's annual financial statements shall be accompanied by a certificate
executed by the chief financial officer of Mortgagor or the general partner of
Mortgagor, as applicable, stating that each such annual financial statement
presents fairly the financial condition of the Mortgaged Property being
reported upon. Each such annual financial statement shall be prepared in
accordance with generally accepted accounting principles consistently applied.
At any time and from time to time Mortgagor shall deliver to Mortgagee or its
agents such other financial data as Mortgagee or its agents shall reasonably
request with respect to the ownership, maintenance, use and operation of the
Mortgaged Property
(c) As used herein the term "NET OPERATING INCOME" means
the amount obtained by subtracting Hotel Operating Expenses from Gross Income
from Operations. "GROSS INCOME FROM OPERATIONS" shall mean all income,
computed on an accrual basis in
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accordance with generally accepted accounting practices and principles, derived
for each full or partial month during the Term from the ownership and operation
of the Mortgaged Property from whatever source, including, but not limited to,
all guest room revenues, all food, beverage, and merchandise sales receipts,
all interest income, if any, rent, utility charges, escalations, forfeited
security deposits, service fees or charges, license fees, parking fees, rent
concessions or credits, and any business interruption insurance proceeds but
excluding sales, use and occupancy or other taxes on receipts required to be
accounted for by Mortgagor to any government or governmental agency, refunds
and uncollectible accounts, sales of furniture, fixtures and equipment,
proceeds of casualty insurance and condemnation awards, and interest on credit
accounts. Gross income shall not be diminished as a result of the Mortgage or
the creation of any intervening estate or interest in the Mortgaged Property or
any part thereof. "HOTEL OPERATING EXPENSES" shall mean the total of all
expenditures of whatever kind relating to the operation, maintenance and
management of the Mortgaged Property that are incurred on a regular monthly or
other periodic basis, including without limitation, utilities, ordinary repairs
and maintenance, insurance, license fees, taxes and assessments, advertising
expenses, management fees, franchise fees, contributions to the Replacement
Escrow Fund, payroll and related taxes, computer processing charges,
operational equipment or other lease payments as approved by Mortgagee, and
other similar costs, but excluding depreciation, debt service, and capital
expenditures, all calculated on a monthly basis in accordance with generally
accepted accounting practices and principles consistently applied.
(d) For the purposes of this Mortgage the term "DEBT
SERVICE COVERAGE RATIO" shall mean a ratio for the applicable period in which:
(A) the numerator is the Net Operating Income (excluding interest on credit
accounts) for such period as set forth in the statements required hereunder;
and (B) the denominator is the greater of (i) the aggregate amount of principal
due and payable on the Note multiplied by a debt service constant of 10.48% and
(ii) the Monthly Payment Amount (as defined in the Note) multiplied by twelve.
19. PERFORMANCE OF OTHER AGREEMENTS. Mortgagor shall observe and
perform each and every term to be observed or performed by Mortgagor pursuant
to the terms of any agreement or recorded instrument affecting or pertaining to
the Mortgaged Property.
20. FURTHER ACTS, ETC.
(a) Mortgagor will, at the cost of Mortgagor, and without
expense to Mortgagee, do, execute, acknowledge and deliver all and every such
further acts, deeds, conveyances, mortgages, assignments, notices of
assignment, Uniform Commercial Code financing statements or continuation
statements, transfers and assurances as Mortgagee shall, from time to time,
require, for the better assuring, conveying, assigning, transferring, and
confirming unto Mortgagee the property and rights hereby deeded, mortgaged,
given, granted, bargained, sold, alienated, enfeoffed, conveyed, confirmed,
pledged, assigned and hypothecated or intended now or hereafter so to be, or
which Mortgagor may be or may hereafter become bound to convey or assign to
Mortgagee, or for carrying out the intention or facilitating the performance of
the terms of this Mortgage or for filing, registering or recording this
Mortgage or for facilitating the sale of the Loan and the Loan Documents as
described in
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Paragraph 20(b) below. Mortgagor, on demand, will execute and deliver, and if
Mortgagor fails to execute and deliver within five (5) days of receipt of such
demand, hereby authorizes Mortgagee to execute in the name of Mortgagor or
without the signature of Mortgagor to the extent Mortgagee may lawfully do so,
one or more financing statements, chattel mortgages or other instruments, to
evidence more effectively the security interest of Mortgagee in the Mortgaged
Property. Upon foreclosure, the appointment of a receiver or any other
relevant action, Mortgagor will, at the cost of Mortgagor and without expense
to Mortgagee, cooperate fully and completely to effect the assignment or
transfer of any license, permit, agreement or any other right necessary or
useful to the operation of or the Mortgaged Property. Mortgagor grants to
Mortgagee an irrevocable power of attorney coupled with an interest for the
purpose of exercising and perfecting any and all rights and remedies available
to Mortgagee at law and in equity, including, without limitation, such rights
and remedies available to Mortgagee pursuant to this paragraph.
(b) Mortgagor acknowledges that Mortgagee and its
successors and assigns may (i) sell this Mortgage, the Note and other Loan
Documents to one or more investors as a whole loan, (ii) participate the Loan
secured by this Mortgage to one or more investors, (iii) deposit this Mortgage,
the Note and other Loan Documents with a trust, which trust may sell
certificates to investors evidencing an ownership interest in the trust assets,
or (iv) otherwise sell the Loan or interest therein to investors (the
transactions referred to in clauses (i) through (iv) are hereinafter each
referred to as "SECONDARY MARKET TRANSACTION"). Mortgagor shall cooperate with
Mortgagee in effecting any such Secondary Market Transaction and shall
cooperate to implement all requirements imposed by any Rating Agency involved
in any Secondary Market Transaction. Mortgagor, however, shall not be required
to modify any documents evidencing or securing the Loan which would modify (A)
the interest rate payable under the Note, (B) the stated maturity of the Note,
(C) the amortization of principal of the Note, (D) the non-recourse provisions
of the Loan or (E) any other material economic term of the Loan. Mortgagor
shall provide such information, legal opinions and documents relating to
Mortgagor, Guarantor, if any, the Mortgaged Property and any tenants of the
Improvements as Mortgagee may reasonably request in connection with such
Secondary Market Transaction; provided, however, that such requests will not
materially increase the obligations of Mortgagor under the Loan Documents. In
addition, Mortgagor shall make available to Mortgagee all information
concerning its business and operations that Mortgagee may reasonably request.
Mortgagee shall be permitted to share all such information with the investment
banking firms, Rating Agencies, accounting firms, law firms and other
third-party advisory firms involved with the Loan and the Loan Documents or the
applicable Secondary Market Transaction. It is understood that the information
provided by Mortgagor to Mortgagee may ultimately be incorporated into the
offering documents for the Secondary Market Transaction and thus various
investors may also see some or all of the information. Mortgagee and all of
the aforesaid third-party advisors and professional firms shall be entitled to
rely on the information supplied by, or on behalf of, Mortgagor and Mortgagor
indemnifies Mortgagee as to any losses, claims, damages or liabilities that
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in such information or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated in such information or necessary in order to make the statements
in such information, or
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in light of the circumstances under which they were made, not misleading.
Mortgagee may publicize the existence of the Loan in connection with its
marketing for a Secondary Market Transaction or otherwise as part of its
business development.
21. RECORDING OF MORTGAGE, ETC. Mortgagor forthwith upon the
execution and delivery of this Mortgage and thereafter, from time to time, will
cause this Mortgage, and any security instrument creating a lien or security
interest or evidencing the lien hereof upon the Mortgaged Property and each
instrument of further assurance to be filed, registered or recorded in such
manner and in such places as may be required by any present or future law in
order to publish notice of and fully to protect the lien or security interest
hereof upon, and the interest of Mortgagee in, the Mortgaged Property.
Mortgagor will pay all filing, registration or recording fees, and all expenses
incident to the preparation, execution and acknowledgment of this Mortgage, any
mortgage supplemental hereto, any security instrument with respect to the
Mortgaged Property and any instrument of further assurance, and all federal,
state, county and municipal, taxes, duties, imposts, assessments and charges
arising out of or in connection with the execution and delivery of this
Mortgage, any mortgage supplemental hereto, any security instrument with
respect to the Mortgaged Property or any instrument of further assurance,
except where prohibited by law so to do. Mortgagor shall hold harmless and
indemnify Mortgagee, its successors and assigns, against any liability incurred
by reason of the imposition of any tax on the making and recording of this
Mortgage.
22. REPORTING REQUIREMENTS. Mortgagor agrees to give prompt
notice to Mortgagee of the insolvency or bankruptcy filing of Mortgagor or the
death, insolvency or bankruptcy filing of any Guarantor.
23. EVENTS OF DEFAULT . The Debt shall become immediately due and
payable at the option of Mortgagee upon the happening of any one or more of the
following events of default (each an "EVENT OF DEFAULT"):
(a) if any portion of the Debt is not paid on or before
the date on which such payment is due;
(b) subject to Mortgagor's right to contest as provided
herein, if any of the Taxes or Other Charges are not paid when the same are due
and payable (unless sums equaling the amount of Taxes and Other Charges then
due and payable have been delivered to Mortgagee in accordance with Paragraph 6
hereof);
(c) if the Policies are not kept in full force and
effect, or if the Policies are not delivered to Mortgagee within 10 days after
request;
(d) if Mortgagor transfers or encumbers any portion of
the Mortgaged Property without Mortgagee's prior written consent;
(e) if any representation or warranty of Mortgagor, or of
any Guarantor, made herein or in any other Loan Document or in any certificate,
report, financial statement or
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other instrument or document furnished to Mortgagee shall have been false or
misleading in any material respect when made;
(f) if Mortgagor or any Guarantor shall make an
assignment for the benefit of creditors or if Mortgagor shall generally not be
paying its debts as they become due;
(g) if a receiver, liquidator or trustee of Mortgagor or
of any Guarantor shall be appointed or if Mortgagor or any Guarantor shall be
adjudicated a bankrupt or insolvent, or if any petition for bankruptcy,
reorganization or arrangement pursuant to federal bankruptcy law, or any
similar federal or state law, shall be filed by or against, consented to, or
acquiesced in by, Mortgagor or any Guarantor or if any proceeding for the
dissolution or liquidation of Mortgagor or of any Guarantor shall be
instituted; however, if such appointment, adjudication, petition or proceeding
was involuntary and not consented to by Mortgagor or such Guarantor, upon the
same not being discharged, stayed or dismissed within sixty (60) days;
(h) if Mortgagor shall be in default under any other
mortgage or security agreement covering any part of the Mortgaged Property
whether it be superior or junior in lien to this Mortgage and the holder
accelerates same;
(i) subject to Mortgagor's right to contest as provided
herein, if the Mortgaged Property becomes subject to any mechanic's,
materialman's or other lien and such lien is not removed or recorded within
forty-five (45) days of the filing or recording of such lien (except a lien for
local real estate taxes and assessments not then due and payable);
(j) if Mortgagor fails to cure properly any violations of
laws or ordinances affecting or which may be interpreted to affect the
Mortgaged Property within thirty (30) days after Mortgagor first receives
notice of any such violations;
(k) except as permitted in this Mortgage, the material
alteration, improvement, demolition or removal of any of the Improvements
without the prior consent of Mortgagee;
(l) if Mortgagor shall continue to be in default under
any term, covenant, or provision of the Note or any of the other Loan
Documents, beyond applicable cure periods contained in those documents;
(m) if Mortgagor fails to cure a default under any other
term, covenant or provision of this Mortgage within thirty (30) days after
Mortgagor first receives notice of any such default; provided, however, if such
default is reasonably susceptible of cure, but not within such thirty (30) day
period, then Mortgagor may be permitted up to an additional sixty (60) days to
cure such default provided that Mortgagor diligently and continuously pursues
such cure;
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(n) if without Mortgagee's prior consent, which shall not
be unreasonably withheld, (i) the hotel manager for the Mortgaged Property
under the Management Agreement (or any successor management agreement) resigns,
if not replaced within a reasonable time by a successor hotel manager
reasonably acceptable to Mortgagee, or is removed, or (ii) the ownership,
management or control of such hotel manager is transferred to a person or
entity other than the general partner or managing partner of the Mortgagor, or
(iii) there is any material change in the Management Agreement (or any
successor management agreement);
(o) if a default has occurred and continues beyond any
applicable cure period under the Management Agreement (or any successor
management agreement) if such default permits the hotel manager to terminate or
cancel the Management Agreement (or any successor management agreement) unless
Mortgagor provides Mortgagee with written notice from the hotel manager that it
will not exercise its right to terminate or cancel the Management Agreement;
(p) if without Mortgagee's prior consent, there is any
material change in the Franchise Agreement (or any successor franchise
agreement);
(q) if a default has occurred and continues beyond any
applicable cure period under the Franchise Agreement (or any successor
franchise agreement) if such default permits the franchisor to terminate or
cancel the Franchise Agreement (or any successor franchise agreement) unless
Mortgagor provides Mortgagee with written notice from the franchisor that it
will not exercise its right to terminate or cancel the Franchise Agreement; or
(r) if Mortgagor ceases to do business as a hotel or
motel on the Mortgaged Property or terminates such business for any reason
whatsoever (other than temporary cessation in connection with any renovations
to the Mortgaged Property).
24. LATE PAYMENT CHARGE. If any portion of the Debt is not paid
on or before the date on which such payment is due, Mortgagor shall pay to
Mortgagee upon demand an amount equal to the lesser of five percent (5%) of
such unpaid portion of the Debt or the maximum amount permitted by applicable
law in order to defray a portion of the expenses incurred by Mortgagee in
handling and processing such delinquent payment and to compensate Mortgagee for
the loss of the use of such delinquent payment, and such amount shall be
secured by this Mortgage.
25. RIGHT TO CURE DEFAULTS. Upon the occurrence of any Event of
Default or if Mortgagor fails to make any payment or to do any act as herein
provided, Mortgagee may, but without any obligation to do so and without notice
to or demand on Mortgagor and without releasing Mortgagor from any obligation
hereunder, make or do the same in such manner and to such extent as Mortgagee
may deem necessary to protect the security hereof. Mortgagee is authorized to
enter upon the Mortgaged Property for such purposes or appear in, defend, or
bring any action or proceeding to protect its interest in the Mortgaged
Property or to foreclose this Mortgage or collect the Debt, and the cost and
expense thereof (including reasonable attorneys' fees and disbursements to the
extent permitted by law), with interest at the Default
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Rate (as defined in the Note) for the period after notice from Mortgagee that
such cost or expense was incurred to the date of payment to Mortgagee, shall
constitute a portion of the Debt, shall be secured by this Mortgage and the
other Loan Documents and shall be due and payable to Mortgagee upon demand.
26. ADDITIONAL REMEDIES.
(a) Upon the occurrence of any Event of Default,
Mortgagee may take such action, without notice or demand, as it deems advisable
to protect and enforce its rights against Mortgagor and in and to the Mortgaged
Property by Mortgagee itself or otherwise, including, without limitation, the
following actions, each of which may be pursued concurrently or otherwise, at
such time and in such order as Mortgagee may determine, in its sole discretion,
without impairing or otherwise affecting the other rights and remedies of
Mortgagee:
(i) declare the entire Debt to be immediately due
and payable;
(ii) institute a proceeding or proceedings,
judicial or nonjudicial, by advertisement or
otherwise, for the complete foreclosure of
this Mortgage in which case the Mortgaged
Property or any interest therein may be sold
for cash or upon credit in one or more
parcels or in several interests or portions
and in any order or manner;
(iii) with or without entry, to the extent
permitted and pursuant to the procedures
provided by applicable law, institute
proceedings for the partial foreclosure of
this Mortgage for the portion of the Debt
then due and payable, subject to the
continuing lien of this Mortgage for the
balance of the Debt not then due;
(iv) sell for cash or upon credit the Mortgaged
Property or any part thereof and all estate,
claim, demand, right, title and interest of
Mortgagor therein and rights of redemption
thereof, pursuant to the power of sale
contained herein or otherwise, at one or more
sales, as an entirety or in parcels, at such
time and place, upon such terms and after
such notice thereof as may be required or
permitted by law;
(v) institute an action, suit or proceeding in
equity for the specific performance of any
covenant, condition or agreement contained
herein, or in any of the other Loan
Documents;
(vi) recover judgment on the Note either before,
during or after any proceedings for the
enforcement of this Mortgage;
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(vii) apply for the appointment of a trustee,
receiver, liquidator or conservator of the
Mortgaged Property, without notice and
without regard for the adequacy of the
security for the Debt and without regard for
the solvency of the Mortgagor, any Guarantor
or of any person, firm or other entity liable
for the payment of the Debt;
(viii) enforce Mortgagee's interest in the Leases
and Rents and enter into or upon the
Mortgaged Property, either personally or by
its agents, nominees or attorneys and
dispossess Mortgagor and its agents and
servants therefrom, and thereupon Mortgagee
may (A) use, operate, manage, control,
insure, maintain, repair, restore and
otherwise deal with all and every part of the
Mortgaged Property and conduct the business
thereat; (B) complete any construction on the
Mortgaged Property in such manner and form as
Mortgagee deems advisable; (C) make
alterations, additions, renewals,
replacements and improvements to or on the
Mortgaged Property; (D) exercise all rights
and powers of Mortgagor with respect to the
Mortgaged Property, whether in the name of
Mortgagor or otherwise, including, without
limitation, the right to make, cancel,
enforce or modify Leases, obtain and evict
tenants, and demand, sue for, collect and
receive all Rents; and (E) apply the receipts
from the Mortgaged Property to the payment of
Debt, after deducting therefrom all expenses
(including reasonable attorneys' fees and
disbursements) incurred in connection with
the aforesaid operations and all amounts
necessary to pay the taxes, assessments
insurance and other charges in connection
with the Mortgaged Property, as well as just
and reasonable compensation for the services
of Mortgagee, its counsel, agents and
employees;
(ix) require Mortgagor to pay monthly in advance
to Mortgagee, or any receiver appointed to
collect the Rents, the fair and reasonable
rental value for the use and occupation of
any portion of the Mortgaged Property
occupied by Mortgagor and require Mortgagor
to vacate and surrender possession to
Mortgagee of the Mortgaged Property or to
such receiver and, in default thereof, evict
Mortgagor by summary proceedings or
otherwise; or
(x) pursue such other rights and remedies as may
be available at law or in equity or under the
Uniform Commercial Code including without
limitation the right to receive and/or
establish a lock box for all Rents proceeds
from the Intangibles and any other receivables
or rights to payments of Mortgagor relating to
the Mortgaged Property.
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In the event of a sale, by foreclosure or otherwise, of less than all of the
Mortgaged Property, this Mortgage shall continue as a lien on the remaining
portion of the Mortgaged Property.
(b) The proceeds of any sale made under or by virtue of
this paragraph, together with any other sums which then may be held by
Mortgagee under this Mortgage, whether under the provisions of this paragraph
or otherwise, shall be applied by Mortgagee to the payment of the Debt in such
priority and proportion as Mortgagee in its sole discretion shall deem proper.
(c) Mortgagee may adjourn from time to time any sale by
it to be made under or by virtue of this Mortgage by announcement at the time
and place appointed for such sale or for such adjourned sale or sales; and,
except as otherwise provided by any applicable provision of law, Mortgagee,
without further notice or publication, may make such sale at the time and place
to which the same shall be so adjourned.
(d) Upon the completion of any sale or sales pursuant
hereto, Mortgagee, or an officer of any court empowered to do so, shall execute
and deliver to the accepted purchaser or purchasers a good and sufficient
instrument, or good and sufficient instruments, conveying, assigning and
transferring all estate, right, title and interest in and to the property and
rights sold. Mortgagee is hereby irrevocably appointed the true and lawful
attorney of Mortgagor, in its name and stead, to make all necessary
conveyances, assignments, transfers and deliveries of the Mortgaged Property
and rights so sold and for that purpose Mortgagee may execute all necessary
instruments of conveyance, assignment and transfer, and may substitute one or
more persons with like power, Mortgagor hereby ratifying and confirming all
that its said attorney or such substitute or substitutes shall lawfully do by
virtue hereof. Any sale or sales made under or by virtue of this paragraph,
whether made under the power of sale herein granted or under or by virtue of
judicial proceedings or of a judgment or decree of foreclosure and sale, shall
operate to divest all the estate, right, title, interest, claim and demand
whatsoever, whether at law or in equity, of Mortgagor in and to the properties
and rights so sold, and shall be a perpetual bar both at law and in equity
against Mortgagor and against any and all persons claiming or who may claim the
same, or any part thereof from, through or under Mortgagor.
(e) Upon any sale made under or by virtue of this
paragraph, whether made under the power of sale herein granted or under or by
virtue of judicial proceedings or of a judgment or decree of foreclosure and
sale, Mortgagee may bid for and acquire the Mortgaged Property or any part
thereof and in lieu of paying cash therefor may make settlement for the
purchase price by crediting upon the Debt the net sales price after deducting
therefrom the expenses of the sale and costs of the action and any other sums
which Mortgagee is authorized to deduct under this Mortgage.
(f) No recovery of any judgment by Mortgagee and no levy
of an execution under any judgment upon the Mortgaged Property or upon any
other property of Mortgagor
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shall affect in any manner or to any extent the lien of this Mortgage upon the
Mortgaged Property or any part thereof, or any liens, rights, powers or
remedies of Mortgagee hereunder, but such liens, rights, powers and remedies of
Mortgagee shall continue unimpaired as before.
(g) Mortgagee may terminate or rescind any proceeding or
other action brought in connection with its exercise of the remedies provided
in this paragraph at any time before the conclusion thereof, as determined in
Mortgagee's sole discretion and without prejudice to Mortgagee.
(h) Mortgagee may resort to any remedies and the security
given by the Note, this Mortgage or the Loan Documents in whole or in part, and
in such portions and in such order as determined by Mortgagee's sole
discretion. No such action shall in any way be considered a waiver of any
rights, benefits or remedies evidenced or provided by the Note, this Mortgage
or any of the other Loan Documents. The failure of Mortgagee to exercise any
right, remedy or option provided in the Note, this Mortgage or any of the other
Loan Documents shall not be deemed a waiver of such right, remedy or option or
of any covenant or obligation secured by the Note, this Mortgage or the other
Loan Documents. No acceptance by Mortgagee of any payment after the occurrence
of any Event of Default and no payment by Mortgagee of any obligation for which
Mortgagor is liable hereunder shall be deemed to waive or cure any Event of
Default with respect to Mortgagor, or Mortgagor's liability to pay such
obligation. No sale of all or any portion of the Mortgaged Property, no
forbearance on the part of Mortgagee, and no extension of time for the payment
of the whole or any portion of the Debt or any other indulgence given by
Mortgagee to Mortgagor, shall operate to release or in any manner affect the
interest of Mortgagee in the remaining Mortgaged Property or the liability of
Mortgagor to pay the Debt. No waiver by Mortgagee shall be effective unless it
is in writing and then only to the extent specifically stated. All costs and
expenses of Mortgagee in exercising the rights and remedies under this
Paragraph 26 (including reasonable attorneys' fees and disbursements to the
extent permitted by law), shall be paid by Mortgagor immediately upon notice
from Mortgagee, with interest at the Default Rate for the period after notice
from Mortgagee and such costs and expenses shall constitute a portion of the
Debt and shall be secured by this Mortgage.
(i) The interests and rights of Mortgagee under the Note,
this Mortgage or in any of the other Loan Documents shall not be impaired by
any indulgence, including (i) any renewal, extension or modification which
Mortgagee may grant with respect to any of the Debt, (ii) any surrender,
compromise, release, renewal, extension, exchange or substitution which
Mortgagee may grant with respect to the Mortgaged Property or any portion
thereof; or (iii) any release or indulgence granted to any maker, endorser,
Guarantor or surety of any of the Debt.
27. RIGHT OF ENTRY. In addition to any other rights or remedies
granted under this Mortgage, Mortgagee, and its agents, during the Term, shall
have the right to enter and inspect the Mortgaged Property with reasonable
notice during normal business hours. The cost of such inspections or audits
shall be borne by Mortgagor should Mortgagee determine that an Event of Default
exists, including the cost of all follow up or additional investigations or
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inquiries deemed reasonably necessary by Mortgagee. The cost of such
inspections, if not paid for by Mortgagor following demand, may be added to the
principal balance of the sums due under the Note and this Mortgage and shall
bear interest thereafter until paid at the Default Rate.
28. SECURITY AGREEMENT.
(a) This Mortgage is both a real property mortgage and a
"security agreement" within the meaning of the Uniform Commercial Code. The
Mortgaged Property includes both real and personal property and all other
rights and interests, whether tangible or intangible in nature, of Mortgagor in
the Mortgaged Property. Mortgagor by executing and delivering this Mortgage
has granted and hereby grants to Mortgagee, as security for the Debt, a
security interest in the Mortgaged Property to the full extent that the
Mortgaged Property may be subject to the Uniform Commercial Code (said portion
of the Mortgaged Property so subject to the Uniform Commercial Code being
called in this paragraph the "COLLATERAL"). Mortgagor hereby agrees with
Mortgagee to execute and deliver to Mortgagee, in form and substance
satisfactory to Mortgagee, such financing statements and such further
assurances as Mortgagee may from time to time, reasonably consider necessary to
create, perfect, and preserve Mortgagee's security interest herein granted.
This Mortgage shall also constitute a "fixture filing" for the purposes of the
Uniform Commercial Code. As such, this Mortgage covers all items of the
Collateral that are or are to become fixtures. Information concerning the
security interest herein granted may be obtained from the parties at the
addresses of the parties set forth in the first paragraph of this Mortgage.
(b) If an Event of Default shall occur, Mortgagee, in
addition to any other rights and remedies which it may have, shall have and may
exercise immediately and without demand, any and all rights and remedies
granted to a secured party upon default under the Uniform Commercial Code,
including, without limiting the generality of the foregoing, the right to take
possession of the Collateral or any part thereof, and to take such other
measures as Mortgagee may deem necessary for the care, protection and
preservation of the Collateral. Upon request or demand of Mortgagee,
Mortgagor shall at its expense assemble the Collateral and make it available to
Mortgagee at a convenient place acceptable to Mortgagee. Mortgagor shall pay
to Mortgagee on demand any and all expenses, including attorneys' fees and
disbursements, incurred or paid by Mortgagee in protecting the interest in the
Collateral and in enforcing the rights hereunder with respect to the
Collateral. Any notice of sale, disposition or other intended action by
Mortgagee with respect to the Collateral sent to Mortgagor in accordance with
the provisions hereof at least five (5) days prior to such action, shall
constitute commercially reasonable notice to Mortgagor. The proceeds of any
disposition of the Collateral, or any part thereof, may be applied by Mortgagee
to the payment of the Debt in such priority and proportions as Mortgagee in its
sole discretion shall deem proper. In the event of any change in name,
identity or structure of any Mortgagor, such Mortgagor shall notify Mortgagee
thereof and promptly after request shall execute, file and record such Uniform
Commercial Code forms as are necessary to maintain the priority of Mortgagee's
lien upon and security interest in the Collateral, and shall pay all expenses
and fees in connection with the filing and recording thereof. If Mortgagee
shall require the filing or recording of
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<PAGE> 68
additional Uniform Commercial Code forms or continuation statements, Mortgagor
shall, promptly after request, execute, file and record such Uniform Commercial
Code forms or continuation statements as Mortgagee shall deem necessary, and
shall pay all expenses and fees in connection with the filing and recording
thereof, it being understood and agreed, however, that no such additional
documents shall increase Mortgagor's obligations under the Note, this Mortgage
and any of the other Loan Documents. Mortgagor hereby irrevocably appoints
Mortgagee as its attorney-in-fact, coupled with an interest, to file with the
appropriate public office on its behalf any financing or other statements
signed only by Mortgagee, as secured party, in connection with the Collateral
covered by this Mortgage.
29. ACTIONS AND PROCEEDINGS. Mortgagee has the right to appear
in and defend any action or proceeding brought with respect to the Mortgaged
Property and to bring any action or proceeding, in the name and on behalf of
Mortgagor, which Mortgagee, in its sole discretion, decides should be brought
to protect their interest in the Mortgaged Property. Mortgagee shall, at its
option, be subrogated to the lien of any mortgage or other security instrument
discharged in whole or in part by the Debt, and any such subrogation rights
shall constitute additional security for the payment of the Debt.
30. WAIVER OF SETOFF AND COUNTERCLAIM. All amounts due under
this Mortgage, the Note and the other Loan Documents shall be payable without
setoff, counterclaim or any deduction whatsoever. Mortgagor hereby waives the
right to assert a setoff, counterclaim (other than a mandatory or compulsory
counterclaim) or deduction in any action or proceeding in which Mortgagee is a
participant, or arising out of or in any way connected with this Mortgage, the
Note, any of the other Loan Documents, or the Debt.
31. CONTEST OF CERTAIN CLAIMS. Notwithstanding the provisions of
Paragraphs 5 and 23 hereof, Mortgagor shall not be in default for failure to
pay or discharge Taxes, Other Charges or mechanic's or materialman's lien
asserted against the Mortgaged Property if, and so long as, (a) Mortgagor shall
have notified Mortgagee of same within five (5) days of obtaining knowledge
thereof; (b) Mortgagor shall diligently and in good faith contest the same by
appropriate legal proceedings which shall operate to prevent the enforcement or
collection of the same and the sale of the Mortgaged Property, or any part
thereof, to satisfy the same; (c) Mortgagor shall have furnished to Mortgagee a
cash deposit, or an indemnity bond satisfactory to Mortgagee with a surety
reasonably satisfactory to Mortgagee, in the amount of the Taxes, Other Charges
or mechanic's or materialman's lien claim, plus a reasonable additional sum to
pay all costs, interest and penalties that may be imposed or incurred in
connection therewith, to assure payment of the matters under contest and to
prevent any sale or forfeiture of the Mortgaged Property or any part thereof;
(d) Mortgagor shall promptly upon final determination thereof pay the amount of
any such Taxes, Other Charges or claim so determined, together with all costs,
interest and penalties which may be payable in connection therewith; (e) the
failure to pay the Taxes, Other Charges or mechanic's or materialman's lien
claim does not constitute a default under any other deed of trust, mortgage or
security interest covering or affecting any part of the Mortgaged Property; and
(f) notwithstanding the foregoing, Mortgagor shall immediately upon request of
Mortgagee pay (and if Mortgagor shall fail so to do, Mortgagee may, but shall
not be required to, pay or cause to be discharged
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or bonded against) any such Taxes, Other Charges or claim notwithstanding such
contest, if in the reasonable opinion of Mortgagee, the Mortgaged Property or
any part thereof or interest therein may be in danger of being sold, forfeited,
foreclosed, terminated, cancelled or lost. Mortgagee may pay over any such
cash deposit or part thereof to the claimant entitled thereto at any time when,
in the judgment of Mortgagee, the entitlement of such claimant is established.
32. RECOVERY OF SUMS REQUIRED TO BE PAID. Mortgagee shall have
the right from time to time to take action to recover any sum or sums which
constitute a part of the Debt as the same become due, without regard to whether
or not the balance of the Debt shall be due, and without prejudice to the right
of Mortgagee thereafter to bring an action of foreclosure, or any other action,
for a default or defaults by Mortgagor existing at the time such earlier action
was commenced.
33. MARSHALLING AND OTHER MATTERS. Mortgagor hereby waives, to
the extent permitted by law, the benefit of all appraisement, valuation, stay,
extension, reinstatement and redemption laws now or hereafter in force and all
rights of marshalling in the event of any sale hereunder of the Mortgaged
Property or any part thereof or any interest therein. Further, Mortgagor
hereby expressly waives any and all rights of redemption from sale under any
order or decree of foreclosure of this Mortgage on behalf of Mortgagor, and on
behalf of each and every person acquiring any interest in or title to the
Mortgaged Property subsequent to the date of this Mortgage and on behalf of all
persons to the extent permitted by applicable law.
34. HAZARDOUS SUBSTANCES. Mortgagor hereby represents and
warrants to Mortgagee that, to the best of Mortgagor's knowledge, after due
inquiry and investigation except as disclosed in the report dated September,
1997, prepared by Lexington Group International, Inc. (the "PHASE I REPORT")
and delivered to Mortgagee in connection with the Loan: (a) the Mortgaged
Property is not in direct or indirect violation of any local, state, federal or
other governmental authority, statute, ordinance, code, order, decree, law,
rule or regulation pertaining to or imposing liability or standards of conduct
concerning environmental regulation, contamination or clean-up including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), the Resource Conservation and Recovery
Act, as amended ("RCRA"), the Emergency Planning and Community Right-to-Know
Act of 1986, as amended, the Hazardous Substances Transportation Act, as
amended, the Solid Waste Disposal Act, as amended, the Clean Water Act, as
amended, the Clean Air Act, as amended, the Toxic Substance Control Act, as
amended, the Safe Drinking Water Act, as amended, the Occupational Safety and
Health Act, as amended, any state super-lien and environmental clean-up
statutes and all rules and regulations adopted in respect to the foregoing laws
whether presently in force or coming into being and/or effectiveness hereafter
(collectively, "ENVIRONMENTAL LAWS"); (b) the Mortgaged Property is not subject
to any private or governmental lien or judicial or administrative notice or
action or inquiry, investigation or claim relating to hazardous and/or toxic,
dangerous and/or regulated, substances, wastes, materials, raw materials which
include hazardous constituents, pollutants or contaminants including without
limitation, petroleum, tremolite, anthlophylie, actinolite or polychlorinated
biphenyls and any other substances or materials
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which are included under or regulated by Environmental Laws or which are
considered by scientific opinion to be otherwise dangerous in terms of the
health, safety and welfare of humans (collectively, "HAZARDOUS SUBSTANCES");
(c) no Hazardous Substances are or have been (including the period prior to
Mortgagor's acquisition of the Mortgaged Property) discharged, generated,
treated, disposed of or stored on, incorporated in, or removed or transported
from the Mortgaged Property other than in compliance with all Environmental
Laws; (d) no Hazardous Substances are present in, on or under any nearby real
property which could migrate to or otherwise affect the Mortgaged Property; and
(e) no underground storage tanks exist on any of the Mortgaged Property. So
long as Mortgagor owns or is in possession of the Mortgaged Property, Mortgagor
(i) shall keep or cause the Mortgaged Property to be kept free from Hazardous
Substances and in compliance with all Environmental Laws, (ii) shall promptly
notify Mortgagee if Mortgagor shall become aware of any Hazardous Substances on
or near the Mortgaged Property and/or if Mortgagor shall become aware that the
Mortgaged Property is in direct or indirect violation of any Environmental Laws
and/or if Mortgagor shall become aware of any condition on or near the
Mortgaged Property which shall pose a threat to the health, safety or welfare
of humans, and (iii) Mortgagor shall remove such Hazardous Substances and/or
cure such violations and/or remove such threats, as applicable, as required by
law (or as shall be required by Mortgagee in the case of removal which is not
required by law, but in response to the opinion of a licensed hydrogeologist,
licensed environmental engineer or other qualified consultant engaged by
Mortgagee ("MORTGAGEE'S CONSULTANT")), promptly after Mortgagor becomes aware
of same, at Mortgagor's sole expense. Notwithstanding anything to the contrary
in this paragraph, the Mortgagor may use and store immaterial amounts of
Hazardous Substances at the Mortgaged Property if such use or storage is in
connection with the ordinary cleaning and maintenance of the Mortgaged Property
so long as such use and storage (A) does not violate any applicable
Environmental Laws and (B) is not the subject of any specific recommendations
in the Phase I Report. Nothing herein shall prevent Mortgagor from recovering
such expenses from any other party that may be liable for such removal or cure.
The obligations and liabilities of Mortgagor under this Paragraph 34 shall
survive any termination, satisfaction, or assignment of this Mortgage and the
exercise by Mortgagee of any of its rights or remedies hereunder, including,
without limitation, the acquisition of the Mortgaged Property by foreclosure
or a conveyance in lieu of foreclosure.
35. ASBESTOS. Mortgagor represents and warrants that, to the
best of Mortgagor's knowledge, after due inquiry and investigation, no asbestos
or any substance or material containing asbestos ("ASBESTOS") is located on the
Mortgaged Property except as may have been disclosed in the Phase I Report
delivered to Mortgagee in connection with the Loan. Mortgagor shall not
install in the Mortgaged Property, nor permit to be installed in the Mortgaged
Property, Asbestos and shall remove any Asbestos promptly upon discovery to the
satisfaction of Mortgagee, at Mortgagor's sole expense. Mortgagor shall in all
instances comply with, and ensure compliance by all occupants of the Mortgaged
Property with, all applicable federal, state and local laws, ordinances, rules
and regulations with respect to Asbestos, and shall keep the Mortgaged Property
free and clear of any liens imposed pursuant to such laws, ordinances, rules or
regulations. In the event that Mortgagor receives any notice or advice from
any governmental agency or any source whatsoever with respect to Asbestos on,
affecting or installed on the Mortgaged Property, Mortgagor shall immediately
notify
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Mortgagee. The obligations and liabilities of Mortgagor under this Paragraph
35 shall survive any termination, satisfaction, or assignment of this Mortgage
and the exercise by Mortgagee of any of its rights or remedies hereunder,
including but not limited to, the acquisition of the Mortgaged Property by
foreclosure or a conveyance in lieu of foreclosure.
36. ENVIRONMENTAL MONITORING. Mortgagor shall give prompt
written notices to Mortgagee of: (a) any proceeding or inquiry by any party
with respect to the presence of any Hazardous Substance or Asbestos on, under,
from or about the Mortgaged Property, (b) all claims made or threatened by any
third party against Mortgagor or the Mortgaged Property relating to any loss or
injury resulting from any Hazardous Substance or Asbestos, and (c) Mortgagor's
discovery of any occurrence or condition on any real property adjoining or in
the vicinity of the Mortgaged Property that could cause the Mortgaged Property
to be subject to any investigation or cleanup pursuant to any Environmental
Law. Mortgagor shall permit Mortgagee to join and participate in, as a party
if it so elects, any legal proceedings or actions initiated with respect to the
Mortgaged Property in connection with any Environmental Law or Hazardous
Substance, and Mortgagor shall pay all attorneys' fees and disbursements
incurred by Mortgagee in connection therewith. Upon Mortgagee's request, at
any time and from time to time while this Mortgage is in effect but not more
frequently than once per calendar year, unless Mortgagee has determined (in the
exercise of its good faith judgment) that reasonable cause exists for the
performance of an environmental inspection or audit of the Mortgaged Property,
Mortgagor shall provide at Mortgagor's sole expense, (i) an inspection or audit
of the Mortgaged Property prepared by a licensed hydrogeologist or licensed
environmental engineer approved by Mortgagee indicating the presence or absence
of Hazardous Substances on, in or near the Mortgaged Property, and (ii) an
inspection or audit of the Mortgaged Property prepared by a duly qualified
engineering or consulting firm approved by Mortgagee, indicating the presence
or absence of Asbestos on the Mortgaged Property; provided, however, any such
inspection or audit requested by Mortgagee, during the Term, in excess of one
(1) inspection during each five (5) year period commencing upon the date
hereof, shall be performed at Mortgagee's expense unless an Event of Default
exists or Mortgagee has determined (in the exercise of its good faith and
judgment) that reasonable cause exists for the performance of an environmental
inspection or audit. If Mortgagor fails to provide such inspection or audit
within thirty (30) days after such request Mortgagee may order same, and
Mortgagor hereby grants to Mortgagee and its employees and agents access to the
Mortgaged Property and a license to undertake such inspection or audit. The
cost of such inspection or audit may be added to the Debt and shall bear
interest thereafter until paid at the Default Rate. In the event that any
environmental site assessment report prepared in connection with such
inspection or audit recommends that an operations and maintenance plan be
implemented for Asbestos or any Hazardous Substance, Mortgagor shall cause such
operations and maintenance plan to be prepared and implemented at Mortgagor's
expense upon request of Mortgagee. In the event that any investigation, site
monitoring, containment cleanup, removal, restoration, or other work of any
kind is reasonably necessary or desirable under an applicable Environmental Law
(the "REMEDIAL WORK"), Mortgagor shall commence and thereafter diligently
prosecute to completion all such Remedial Work within thirty (30) days after
written demand by Mortgagee for performance thereof (or any such shorter period
of time as may be required under applicable law.) All Remedial Work shall be
performed by contractors approved in
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advance by Mortgagee, and under the supervision of a consulting engineer
approved by Mortgagee. All costs and expenses of such Remedial Work shall be
paid by Mortgagor including, without limitation, Mortgagee's reasonable
attorneys' fees and disbursements incurred in connection with monitoring or
review of such Remedial Work. In the event Mortgagor shall fail to timely
commence, or cause to be commenced, or fail to diligently prosecute to
completion, such Remedial Work, Mortgagee may, but shall not be required to,
cause such Remedial Work to be performed, and all costs and expenses thereof,
or incurred in connection therewith, may be added to the Debt and shall bear
interest thereafter until paid at the Default Rate.
37. HANDICAPPED ACCESS.
(a) Mortgagor agrees that the Mortgaged Property shall at
all times strictly comply to the extent applicable with the requirements of the
Americans with Disabilities Act of 1990, the Fair Housing Amendments Act of
1988 (if applicable), all state and local laws and ordinances related to
handicapped access and all rules, regulations, and orders issued pursuant
thereto including, without limitation, the Americans with Disabilities Act
Accessibility Guidelines for Buildings and Facilities (collectively "ACCESS
LAWS").
(b) Notwithstanding any provisions set forth herein or in
any other document regarding Mortgagee's approval of alterations of the
Mortgaged Property, Mortgagor shall not alter the Mortgaged Property in any
manner which would increase Mortgagor's responsibilities for compliance with
the applicable Access Laws without the prior written approval of Mortgagee.
The foregoing shall apply to tenant improvements constructed by Mortgagor or by
any of its tenants. Mortgagee may condition any such approval upon receipt of
a certificate of Access Law compliance from an architect, engineer, or other
person acceptable to Mortgagee.
(c) Mortgagor agrees to give prompt notice to Mortgagee
of the receipt by Mortgagor of any complaints related to violation of any
Access Laws and of the commencement of any proceedings or investigations which
relate to compliance with applicable Access Laws.
38. INDEMNIFICATION. In addition to any other indemnifications
provided herein or in the other Loan Documents, Mortgagor shall protect,
defend, indemnify and save harmless Mortgagee from and against all liabilities,
obligations, claims, demands, damages, penalties, causes of action, losses,
fines, costs and expenses (including, without limitation, reasonable attorneys'
fees and disbursements), imposed upon or incurred by or asserted against
Mortgagee by reason of (a) ownership of this Mortgage, the Mortgaged Property
or any interest therein or receipt of any Rents; (b) any accident, injury to or
death of persons or loss of or damage to property occurring in, on or about the
Mortgaged Property or any part thereof or on the adjoining sidewalks, curbs,
adjacent property or adjacent parking areas, streets or ways; (c) any use,
nonuse or condition in, on or about the Mortgaged Property or any part thereof
or on adjoining sidewalks, curbs, adjacent property or adjacent parking areas,
streets or ways; (d) any failure on the part of Mortgagor to perform or comply
with any of the terms of this Mortgage; (e) performance of any labor or
services or the furnishing of any materials or other
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property in respect of the Mortgaged Property or any part thereof; (f) the
presence, disposal, escape, seepage, leakage, spillage, discharge, emission,
release, or threatened release of any Hazardous Substance or Asbestos on, from,
or affecting the Mortgaged Property; (g) any personal injury (including
wrongful death) or property damage (real or personal) arising out of or related
to such Hazardous Substance or Asbestos; (h) any lawsuit brought or threatened,
settlement reached, or government order relating to such Hazardous Substance or
Asbestos; (i) any violation of the Environmental Laws, which are based upon or
in any way related to such Hazardous Substance or Asbestos including, without
limitation, the costs and expenses of any Remedial Work, attorney and
consultant fees and disbursements, investigation and laboratory fees, court
costs, and litigation expenses; (j) any failure of the Mortgaged Property to
comply with any Access Laws; (k) any representation or warranty made in the
Note, this Mortgage or any of the other Loan Documents being false or
misleading in any material respect as of the date such representation or
warranty was made; (l) any claim by brokers, finders or similar persons
claiming to be entitled to a commission in connection with the Loan, any Lease
or other transaction involving the Mortgaged Property or any part thereof under
any legal requirement or any liability asserted against Mortgagee with respect
thereto; and (m) the claims of any lessee of any or any portion of the
Mortgaged Property or any person acting through or under any lessee or
otherwise arising under or as a consequence of any Lease. Any amounts payable
to Mortgagee by reason of the application of this paragraph shall be secured by
this Mortgage and shall become immediately due and payable and shall bear
interest at the Default Rate from the date loss or damage is sustained by
Mortgagee until paid. The obligations and liabilities of Mortgagor under this
Paragraph 38 shall survive any termination, satisfaction, or assignment of this
Mortgage and the exercise by Mortgagee of any of its rights or remedies
hereunder, including, but not limited to, the acquisition of the Mortgaged
Property by foreclosure or a conveyance in lieu of foreclosure.
39. NOTICES. Any notice, demand, statement, request or consent
made hereunder shall be in writing, addressed to the address, as set forth
below, of the party to whom such notice is to be given, or to such other
address as Mortgagor, Mortgagee, as the case may be, shall designate in
writing, and shall be deemed to be received by the addressee on (i) the third
(3rd) day following the day such notice is deposited with the United States
postal service first class certified mail, return receipt requested, (ii) the
day following the day on which such notice is delivered to a nationally
recognized overnight courier delivery service, or (iii) the day facsimile
transmission is confirmed after transmission of such notice by telecopy to such
telecopier number as Mortgagor or Mortgagee, as the case may be, shall have
previously designated in writing. Address for notices:
If to Mortgagee:
Credit Suisse First Boston Mortgage Capital LLC
11 Madison Avenue, 5th Floor, New York, NY,
Attn: Trevor Bond
Telecopier: 212-325-8064 Telephone: 212-325-2780
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With a copy to:
Orrick, Herrington & Sutcliffe LLP
400 Sansome St.
San Francisco, CA 94111
Attn: M.J. Pritchett, Esq.
Telecopier: 415-773-4276 Telephone: 415-773-5559
If to Mortgagor:
Brock Suite Tulsa, Inc.
3710 Rawlins, Suite 1500
Dallas, TX 75219
Attn: Melvin Melle
Telecopier: 214-522-9254 Telephone: 214-559-9254
With a copy to:
Hofheimer Gartlir & Gross LLP
633 Third Avenue
New York, NY 10017
Attn: Donald M. Weisberg, Esq.
Telecopier: 212-661-3132 Telephone: 212-818-9000
40. AUTHORITY.
(a) Mortgagor (and the undersigned representative of
Mortgagor, if any) represent and warrant that it (or they, as the case may be)
has full power, authority and right to execute, deliver and perform its
obligations pursuant to this Mortgage, and to deed, mortgage, give, grant,
bargain, sell, alien, enfeoff, convey, confirm, warrant, pledge, hypothecate
and assign the Mortgaged Property pursuant to the terms hereof and to keep and
observe all of the terms of this Mortgage on Mortgagor's part to be performed.
(b) Mortgagor represents and warrants that Mortgagor is
not a "foreign person" within the meaning of Section 1445(f)(3) of the Internal
Revenue Code of 1986, as amended and the related Treasury Department
regulations, including temporary regulations.
41. WAIVER OF NOTICE. Mortgagor shall not be entitled to any
notices of any nature whatsoever from Mortgagee except with respect to matters
for which this Mortgage specifically and expressly provides for the giving of
notice by Mortgagee to Mortgagor and except with respect to matters for which
Mortgagee is required by applicable law to give notice, and Mortgagor hereby
expressly waives the right to receive any notice from Mortgagee with respect to
any matter for which this Mortgage does not specifically and expressly provide
for the giving of notice by Mortgagee to Mortgagor.
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42. REMEDIES OF MORTGAGOR. In the event that a claim or
adjudication is made that Mortgagee has acted unreasonably or unreasonably
delayed acting in any case where by law or under the Note, this Mortgage or any
of the other Loan Documents, it has an obligation to act reasonably or
promptly, Mortgagee shall not be liable for any monetary damages, and
Mortgagor's remedies shall be limited to injunctive relief or declaratory
judgment.
43. SOLE DISCRETION OF MORTGAGEE. Wherever pursuant to this
Mortgage, Mortgagee exercises any right given to it to consent or not consent
or approve or disapprove, or any arrangement or term is to be satisfactory to
Mortgagee, the decision of Mortgagee to consent or not consent, to approve or
disapprove or to decide that arrangements or terms are satisfactory or not
satisfactory shall be in the sole discretion of Mortgagee and shall be final
and conclusive, except as may be otherwise expressly and specifically provided
herein; or if such exercise is arbitrary and capricious.
44. NON-WAIVER. The failure of Mortgagee to insist upon strict
performance of any term hereof shall not be deemed to be a waiver of any term
of this Mortgage. Mortgagor shall not be relieved of Mortgagor's obligations
hereunder by reason of (a) the failure of Mortgagee to comply with any request
of Mortgagor or Guarantor to take any action to foreclose this Mortgage or
otherwise enforce any of the provisions hereof or of the Note, or the other
Loan Documents, (b) the release, regardless of consideration, of the whole or
any part of the Mortgaged Property, or of any person liable for the Debt or any
portion thereof, or (c) any agreement or stipulation by Mortgagee extending the
time of payment or otherwise modifying or supplementing the terms of the Note,
this Mortgage or any of the other Loan Documents. Mortgagee may resort for the
payment of the Debt to any other security held by Mortgagee in such order and
manner as Mortgagee, in its sole discretion, may elect. Mortgagee may take
action to recover the Debt, or any portion thereof, or to enforce any covenant
hereof without prejudice to the right of Mortgagee thereafter to foreclosure
this Mortgage. The rights and remedies of Mortgagee under this Mortgage shall
be separate, distinct and cumulative and none shall be given effect to the
exclusion of the others. No act of Mortgagee shall be construed as an election
to proceed under any one provision herein to the exclusion of any other
provision. Mortgagee shall not be limited exclusively to the rights and
remedies herein stated but shall be entitled to every right and remedy now or
hereafter afforded at law or in equity.
45. NO ORAL CHANGE. This Mortgage, and any provisions hereof,
may not be modified, amended, waived, extended, changed, discharged or
terminated orally or by any act or failure to act on the part of Mortgagor or
Mortgagee, but only by an agreement in writing signed by the party against whom
enforcement of any modification, amendment, waiver, extension, change,
discharge or termination is sought.
46. LIABILITY. If Mortgagor consists of more than one person,
the obligations and liabilities of each such person hereunder shall be joint
and several. Subject to the provisions hereof requiring Mortgagee's consent to
any transfer of the Mortgaged Property, this Mortgage shall be binding upon and
inure to the benefit of Mortgagor and Mortgagee and their respective successors
and assigns forever.
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47. INAPPLICABLE PROVISIONS. If any term, covenant or condition
of the Note or this Mortgage is held to be invalid, illegal or unenforceable in
any respect, the Note and this Mortgage shall be construed without such
provision.
48. HEADINGS, ETC. The headings and captions of various
paragraphs of this Mortgage are for convenience of reference only and are not
to be construed as defining or limiting, in any way, the scope or intent of the
provisions hereof.
49. DUPLICATE ORIGINALS. This Mortgage may be executed in any
number of duplicate originals and each such duplicate original shall be deemed
to be an original.
50. DEFINITIONS. Unless the context clearly indicates a contrary
intent or unless otherwise specifically provided herein, words used in this
Mortgage may be used interchangeably in singular or plural form and the word
"MORTGAGOR" shall mean "each Mortgagor and any subsequent owner or owners of
the Mortgaged Property or any part thereof or any interest therein," the word
"MORTGAGEE" shall mean "Mortgagee and any subsequent holder of the Note," the
word "NOTE" shall mean "the Note and any other evidence of indebtedness secured
by this Mortgage," the word "PERSON" shall include an individual, corporation,
partnership, trust, unincorporated association, government, governmental
authority, and any other entity, the words "MORTGAGED PROPERTY" shall include
any portion of the Mortgaged Property and any interest therein and the words
"ATTORNEYS' FEES" shall include any and all attorneys' fees, paralegal and law
clerk fees, including, without limitation, fees at the pre-trial, trial and
appellate levels incurred or paid by Mortgagee in protecting its interest in
the Mortgaged Property and Collateral and enforcing its rights hereunder.
Whenever the context may require, any pronouns used herein shall include the
corresponding masculine, feminine or neuter forms, and the singular form of
nouns and pronouns shall include the plural and vice versa.
51. HOMESTEAD. Mortgagor hereby waives and renounces all
homestead and exemption rights provided by the Constitution and the laws of the
United States and of any state, in and to the Mortgaged Property as against the
collection of the Debt, or any part hereof.
52. ASSIGNMENTS. Mortgagee shall have the right to assign or
transfer its rights under this Mortgage without limitation. Any assignee or
transferee shall be entitled to all the benefits afforded Mortgagee under this
Mortgage.
53. WAIVER OF JURY TRIAL. MORTGAGOR HEREBY AGREES NOT TO ELECT A
TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO
TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST WITH REGARD TO THE NOTE, THIS MORTGAGE, OR THE OTHER LOAN DOCUMENTS, OR
ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS
WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY
MORTGAGOR, AND IS INTENDED TO ENCOMPASS
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INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY
JURY WOULD OTHERWISE ACCRUE. MORTGAGEE IS HEREBY AUTHORIZED TO FILE A COPY OF
THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY
MORTGAGOR.
54. RECOURSE PROVISIONS. Subject to the qualifications below,
Mortgagee shall not enforce the liability and obligation of Mortgagor or its
constituent members, partners, shareholders, directors, employees or agents, to
perform and observe the obligations contained in this Mortgage, the Note or any
of the other Loan Documents by any action or proceeding wherein a money
judgment shall be sought against Mortgagor, except that Mortgagee may bring a
foreclosure action, an action for specific performance or any other appropriate
action or proceeding to enable Mortgagee to enforce and realize upon its
interests under the Note, this Mortgage or the other Loan Documents or in the
Mortgaged Property, the Rents or any other collateral given to Mortgagee
pursuant to this Mortgage and the other Loan Documents; provided, however,
that, except as specifically provided herein, any judgment in any such action
or proceeding shall be enforceable against Mortgagor or its constituent
members, partners, shareholders, directors, employees or agents, only to the
extent of Mortgagor's interest in the Mortgaged Property, the Rents and in any
other collateral given to Mortgagee, and Mortgagee, by accepting this Mortgage,
the Note and the other Loan Documents, agrees that it shall not sue for, seek
or demand any deficiency judgment against Mortgagor or its constituent members,
partners, shareholders, directors, employees or agents in any such action or
proceeding under or by reason of or in connection with this Mortgage, the Note
or any of the other Loan Documents. The provisions of this paragraph shall
not, however, (i) constitute a waiver, release or impairment of any obligation
evidenced or secured by this Mortgage, the Note or any of the other Loan
Documents except as specifically provided herein; (ii) impair the right of
Mortgagee to name Mortgagor, as a party defendant in any action or suit for
foreclosure and sale under this Mortgage; (iii) affect the validity or
enforceability of any guaranty made in connection with the Loan or any rights
and remedies of Mortgagee thereunder; (iv) impair the right of Mortgagee to
obtain the appointment of a receiver; (v) impair the enforcement of the
Assignment of Leases and Rents executed in connection herewith; or (vi)
constitute a waiver of the right of Mortgagee to enforce the liability and
obligation of Mortgagor, by money judgment or otherwise, to the extent of any
loss, damage, cost, expense, liability, claim or other obligation incurred by
Mortgagee (including attorneys' fees and costs reasonably incurred) arising out
of or in connection with the following:
(a) fraud or intentional misrepresentation by Mortgagor
or any Guarantor in connection with the Loan;
(b) the willful misconduct of Mortgagor;
(c) physical waste of the Mortgaged Property which is
material in nature;
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(d) the breach of any representation, warranty, covenant
or indemnification provision in that certain Environmental and Hazardous
Substance Indemnification Agreement of even date herewith given by Mortgagor to
Mortgagee or in this Mortgage concerning Environmental Laws, Hazardous
Substances and Asbestos;
(e) the removal or disposal of any portion of the
Mortgaged Property after an Event of Default;
(f) the misapplication or conversion by Mortgagor of (i)
any insurance proceeds paid by reason of any loss, damage or destruction to the
Mortgaged Property, (ii) any awards or other amounts received in connection
with the condemnation of all or a portion of the Mortgaged Property, (iii) any
Rents following an Event of Default or (iv) any Rents paid more than one month
in advance;
(g) failure to pay charges for labor or materials or
taxes or other charges that can create liens on any portion of the Mortgaged
Property; and
(h) any security deposits collected with respect to the
Mortgaged Property which are not delivered to Mortgagee upon a foreclosure of
the Mortgaged Property or action in lieu thereof, except to the extent any such
security deposits were applied in accordance with the terms and conditions of
any of the Leases prior to the occurrence of the Event of Default that gave
rise to such foreclosure or action in lieu thereof.
Notwithstanding anything to the contrary in any of the Loan
Documents (i) Mortgagee shall not be deemed to have waived any right which
Mortgagee may have under Section 506(a), 506(b), 1111(b) or any other
provisions of the U.S. Bankruptcy Code to file a claim for the full amount of
the Debt secured by this Mortgage or to require that all collateral shall
continue to secure all of the Debt owing to Mortgagee in accordance with the
Loan Documents, and (ii) the Debt shall become fully recourse to Mortgagor in
the event that: (A) the first full monthly payment of principal and interest
under the Note is not paid when due; (B) Mortgagor fails to maintain its status
as a single purpose entity in accordance with the provisions of this Mortgage;
(C) Mortgagor fails to obtain Mortgagee's prior written consent to any
subordinate financing or other voluntary lien encumbering the Mortgaged
Property; (D) Mortgagor fails to obtain Mortgagee's prior written consent to
any assignment, transfer, or conveyance of the Mortgaged Property or any
interest therein as required by this Mortgage; or (E) a receiver, liquidator or
trustee of Mortgagor or the Guarantor shall be appointed or if Mortgagor or the
Guarantor shall be adjudicated a bankrupt or insolvent, or if any petition for
bankruptcy, reorganization or arrangement pursuant to federal bankruptcy,
reorganization or arrangement pursuant to federal bankruptcy law, or any
similar federal or state law, shall be filed by or against, consented to, or
acquiesced in by, Mortgagor or the Guarantor or if any proceeding for the
dissolution or liquidation of Mortgagor or the Guarantor shall be instituted;
however, if such appointment, adjudication, petition or proceeding was
involuntary and not consented to by Mortgagor or the Guarantor, upon the same
not being discharged, stayed or dismissed within sixty (60) days.
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55. DEFEASANCE.
(a) Provided no Event of Default has occurred and is
continuing, at any time after the earlier to occur of (i) two years after the
"startup day," within the meaning of Section 860G(a)(9) of the Internal Revenue
Code of 1986, as amended from time to time or any successor statute (the
"CODE"), of a "real estate mortgage investment conduit," within the meaning of
Section 860D of the Code, that holds the Note or (ii) four years after the date
hereof and before the Anticipated Repayment Date, Mortgagor may cause the
release of the Mortgaged Property from the lien of this Mortgage and the other
Loan Documents upon the satisfaction of the following conditions:
(i) not less than thirty (30) days prior written
notice shall be given to Mortgagee specifying a date (the
"RELEASE DATE") on which the Defeasance Collateral (as
hereinafter defined) is to be delivered, such Release Date
only to occur on a Payment Date (as defined in the Note);
(ii) all accrued and unpaid interest and all other
sums due under the Note and under the other Loan Documents up
to the Release Date, including, without limitation, all costs
and expenses incurred by Mortgagee or its agents in connection
with such release (including, without limitation, the review
of the proposed Defeasance Collateral and the preparation of
the Defeasance Security Agreement (as hereinafter defined) and
related documentation), shall be paid in full on or prior to
the Release Date; and
(iii) Mortgagor shall deliver to Mortgagee on or
prior to the Release Date:
(A) an amount equal to the remaining principal amount of the Note
and the Yield Maintenance Premium (hereinafter defined), if
any, sufficient to purchase direct, non-callable obligations
of the United States of America that provide for payments
prior, but as close as possible, to all successive monthly
Payment Dates occurring after the Release Date and assuming
the Loan is paid in full on the Anticipated Repayment Date (as
defined in the Note), with each such payment being equal to or
greater than the amount of the corresponding installment of
principal and interest required to be paid under the Note (the
"DEFEASANCE COLLATERAL"), each of which shall be duly endorsed
by the holder thereof as directed by Mortgagee or accompanied
by a written instrument of transfer in form and substance
wholly satisfactory to Mortgagee (including, without
limitation, such instruments as may be required by the
depository institution holding such securities to effectuate
book-entry transfers and pledges through the book-entry
facilities of such institution) in order to create a first
priority security interest therein in favor of the Mortgagee
in conformity with all applicable state and federal laws
governing granting of such security interests;
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(B) a pledge and security agreement, in form and substance
satisfactory to Mortgagee in its sole discretion, creating a
first priority security interest in favor of Mortgagee in the
Defeasance Collateral (the "DEFEASANCE SECURITY AGREEMENT"),
which shall provide, among other things, that any excess
received by Mortgagee from the Defeasance Collateral over the
amounts payable by Mortgagor hereunder shall be refunded to
Mortgagor promptly after each Payment Date;
(C) a certificate of Mortgagor certifying that all of the
requirements set forth in this Paragraph 55 have been
satisfied;
(D) an opinion of counsel for Mortgagor in form and substance and
delivered by counsel satisfactory to Mortgagee in its sole
discretion stating, among other things, that (1) Mortgagee has
a perfected first priority security interest in the Defeasance
Collateral and that the Defeasance Security Agreement is
enforceable against Mortgagor in accordance with its terms;
and (2) that any REMIC Trust formed pursuant to a
securitization will not fail to maintain its status as a "real
estate mortgage investment conduit" within the meaning of
Section 860D of the Code as a result of such defeasance;
(E) Mortgagor shall deliver evidence in writing from the
applicable Rating Agencies to the effect that the collateral
substitution will not result in a downgrading, withdrawal or
qualification of the respective ratings in effect immediately
prior to such defeasance event for any securities issued in
connection with the securitization which are then outstanding;
and
(F) such other certificates, documents or instruments as Mortgagee
may reasonably require.
(b) Upon compliance with the requirements of this
paragraph, the Mortgaged Property shall be released from the lien of the this
Mortgage and the other Loan Documents, and the Defeasance Collateral shall
constitute the only collateral which shall secure the Note and all other
obligations under the Loan Documents. Mortgagee will, at Mortgagor's expense,
execute and deliver any agreements reasonably requested by Mortgagor to release
the lien of the Mortgage from the Mortgaged Property. Mortgagor, pursuant to
the Defeasance Security Agreement, shall authorize and direct that the payments
received from Defeasance Collateral be made directly to Mortgagee and applied
to satisfy the obligations of the Mortgagor under the Note.
(c) Upon the release of the Mortgaged Property in
accordance with this paragraph, Mortgagor may, or at option of Mortgagee shall,
assign all its obligations under the Note, together with the pledged Defeasance
Collateral, to a successor entity designated by Mortgagor and approved by
Mortgagee in its sole discretion. Such successor entity shall execute an
assumption agreement in form and substance satisfactory to Mortgagee in its
sole discretion pursuant to which it shall assume Mortgagor's obligations under
the Note and the
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Defeasance Security Agreement. As conditions to such assignment and
assumption, Mortgagor shall (i) deliver to Mortgagee an opinion of counsel in
form and substance and delivered by counsel satisfactory to Mortgagee in its
sole discretion stating, among other things, that such assumption agreement is
enforceable against Mortgagor and such successor entity in accordance with its
terms and that the Note, the Defeasance Security Agreement and the other Loan
Documents, as so assumed, are enforceable against such successor entity in
accordance with their respective terms, and (ii) pay all costs and expenses
incurred by Mortgagee or its agents in connection with such assignment and
assumption (including, without limitation, the review of the proposed
transferee and the preparation of the assumption agreement and related
documentation). Upon such assumption, Mortgagor shall be relieved of its
obligations hereunder, under the other Loan Documents and under the Defeasance
Security Agreement other than those obligations which are specifically intended
to survive the termination, satisfaction or assignment of this Mortgage or the
exercise of Mortgagee's rights and remedies hereunder.
(d) Upon the release of the Mortgaged Property in
accordance with this paragraph, Mortgagor shall have no further right to prepay
the Note pursuant to the other provisions of this paragraph or otherwise. In
connection with the conditions set forth in subparagraph (a)(iii)(A) above,
Mortgagor hereby appoints Mortgagee as its agent and attorney-in-fact for the
purpose of purchasing the Defeasance Collateral with funds provided by the
Mortgagor. Mortgagor shall pay any and all expenses incurred in the purchase
of the Defeasance Collateral and any revenue, documentary stamp or intangible
taxes or any other tax or charge due in connection with the transfer of the
Note or otherwise required to accomplish the agreements of this paragraph.
(e) For purposes of this Mortgage the Note and the other
Loan Documents, the term "YIELD MAINTENANCE PREMIUM" shall mean the amount, if
any, which, when added to the remaining principal amount of the Note, will be
sufficient to purchase the Defeasance Collateral.
56. LOCK-BOX AGREEMENT. On or before the date hereof Mortgagor
covenants and agrees to enter into one or more servicing account agreements and
lockbox servicing agreements acceptable to Mortgagee between Mortgagor,
Mortgagee and one or more certain financial institutions (together with any
modification, amendment, substitution or replacement thereof, hereinafter
collectively referred to as the "CASH MANAGEMENT AGREEMENT") which shall
provide, among other things, that all Rents and other sums collected from, or
arising with respect to, the Mortgaged Property be deposited in the accounts
established in connection with such Cash Management Agreement and that such
amounts shall be disbursed in accordance with paragraphs 8 and 9 of the Note.
The Mortgagor shall pay all costs and expenses required under the Cash
Management Agreement. During a Sweep Period, as defined in the Cash Management
Agreement, following an Event of Default, Mortgagee may apply any sums then
held pursuant to the Cash Management Agreement to the payment of the Debt in
any order in its sole discretion. Until expended or applied, amounts held
pursuant to the Cash Management Agreement shall constitute additional security
for the Debt.
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57. MISCELLANEOUS.
(a) Any consent or approval by Mortgagee in any single
instance shall not be deemed or construed to be Mortgagee's consent or approval
in any like matter arising at a subsequent date, and the failure of Mortgagee
to promptly exercise any right, power, remedy, consent or approval provided
herein or at law or in equity shall not constitute or be construed as a waiver
of the same nor shall Mortgagee be estopped from exercising such right, power,
remedy, consent or approval at a later date. Any consent or approval requested
of and granted by Mortgagee pursuant hereto shall be narrowly construed to be
applicable only to Mortgagor and the matter identified in such consent or
approval and no third party shall claim any benefit by reason thereof, and any
such consent or approval shall not be deemed to constitute Mortgagee a venturer
or partner with Mortgagor nor shall privity of contract be presumed to have
been established with any such third party. If Mortgagee deems it to be in its
best interest to retain assistance of persons, firms or corporations
(including, without limitation, attorneys, title insurance companies,
appraisers, engineers and surveyors) with respect to a request for consent or
approval, Mortgagor shall reimburse Mortgagee for all costs reasonably incurred
in connection with the employment of such persons, firms or corporations.
(b) Mortgagor covenants and agrees that during the Term,
unless Mortgagee shall have previously consented in writing, (a) Mortgagor will
take no action that would cause it to become an "EMPLOYEE BENEFIT PLAN" as
defined in 29 C.F.R. Section 2510.3-101, or "ASSETS OF A GOVERNMENTAL PLAN"
subject to regulation under the state statutes, and (b) Mortgagor will not
sell, assign or transfer the Mortgaged Property, or any portion thereof or
interest therein, to any transferee that does not execute and deliver to
Mortgagee its written assumption of the obligations of this covenant.
Mortgagor further covenants and agrees to protect, defend, indemnify and hold
Mortgagee harmless from and against all loss, cost, damage and expense
(including without limitation, all attorneys' fees and excise taxes, costs of
correcting any prohibited transaction or obtaining an appropriate exemption)
that Mortgagee may incur as a result of Mortgagor's breach of this covenant.
This covenant and indemnity shall survive the extinguishment of the lien of
this Mortgage by foreclosure or action in lieu thereof; furthermore, the
foregoing indemnity shall supersede any limitations on Mortgagor's liability
under any of the Loan Documents.
(c) If there is more than one party comprising Mortgagor,
then the obligations and liabilities of each party under this Mortgage shall be
joint and several.
(d) The Loan Documents contain the entire agreement
between Mortgagor and Mortgagee relating to or connected with the Loan. Any
other agreements relating to or connected with the Loan not expressly set forth
in the Loan Documents are null and void and superseded in their entirety by the
provisions of the Loan Documents.
(e) Mortgagor hereby covenants and agrees not to commit,
permit or suffer to exist any act, omission or circumstance affording such
right of forfeiture. In furtherance thereof, Mortgagor hereby indemnifies
Mortgagee and agrees to defend and hold Mortgagee harmless from and against any
loss, damage or injury by reason of the breach of the covenants
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and agreements or the representations and warranties set forth in this
paragraph. Without limiting the generality of the foregoing, the filing of
formal charges or the commencement of proceedings against Mortgagor or all or
any part of the Mortgaged Property under any federal or state law for which
forfeiture of the Mortgaged Property or any part thereof or of any monies paid
in performance of Mortgagor's obligations under the Loan Documents is a
potential result, shall, at the election of Mortgagee, constitute an Event of
Default hereunder without notice or opportunity to cure.
(f) Mortgagor acknowledges that, with respect to the
Loan, Mortgagor is relying solely on its own judgment and advisors in entering
into the Loan without relying in any manner on any statements, representations
or recommendations of Mortgagee or any parent, subsidiary or affiliate of
Mortgagee. Mortgagor acknowledges that Mortgagee engages in the business of
real estate financings and other real estate transactions and investments which
may be viewed as adverse to or competitive with the business of the Mortgagor
or its affiliates. Mortgagor acknowledges that it is represented by competent
counsel and has consulted counsel before executing the Loan Documents.
(g) Mortgagor covenants and agrees to pay Mortgagee upon
receipt of written notice from Mortgagee, all reasonable costs and expenses
(including reasonable attorneys' fees and disbursements) incurred by Mortgagee
in connection with (i) the preparation, negotiation, execution and delivery of
this Mortgage and the other Loan Documents; (ii) Mortgagor's performance of and
compliance with Mortgagor's respective agreements and covenants contained in
this Mortgage and the other Loan Documents on its part to be performed or
complied with after the date hereof; (iii) Mortgagee's performance and
compliance with all agreements and conditions contained in this Mortgage and
the other Loan Documents on its part to be performed or complied with after the
date hereof; (iv) the negotiation, preparation, execution, delivery and
administration of any consents, amendments, waivers or other modifications to
this Mortgage and the other Loan Documents; and (v) the filing and recording
fees and expenses, title insurance fees and expenses, and other similar
expenses incurred in creating and perfecting the lien in favor of Mortgagee
pursuant to this Mortgage and the other Loan Documents.
(h) This Mortgage shall be governed by and construed in
accordance with the laws of the State in which the Premises are located and the
applicable laws of the United States of America.
58. CERTAIN HOTEL COVENANTS. Mortgagor further covenants and
agrees with Mortgagee as follows:
(a) Mortgagor shall cause the hotel located on the
Mortgaged Property to be operated pursuant to the Franchise Agreement and the
Management Agreement.
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(b) Mortgagor shall:
(i) promptly perform and/or observe all of the
covenants and agreements required to be performed and observed
by it under the Franchise Agreement and the Management
Agreement and do all things necessary to preserve and to keep
unimpaired its material rights thereunder;
(ii) promptly notify Mortgagee of any default
under the Franchise Agreement or the Management Agreement of
which it is aware;
(iii) promptly deliver to Mortgagee a copy of each
financial statement, business plan, capital expenditures plan,
notice, report and estimate received by it under the Franchise
Agreement or the Management Agreement; and
(iv) promptly enforce the performance and
observance of all of the covenants and agreements required to
be performed and/or observed by the franchisor under the
Franchise Agreement and the manager under the Management
Agreement.
(c) Mortgagor shall not, without Mortgagee's prior consent:
(i) surrender, terminate or cancel the Franchise
Agreement or the Management Agreement;
(ii) reduce or consent to the reduction of the
term of the Franchise Agreement or the Management Agreement;
(iii) increase or consent to the increase of the
amount of any charges under the Franchise Agreement or the
Management Agreement; or
(iv) otherwise modify, change, supplement, alter
or amend, or waive or release any of its rights and remedies
under, the Franchise Agreement or the Management Agreement in
any material respect.
(d) Mortgagor shall not, without Mortgagee's prior consent, enter
into transactions with any affiliate, including without limitation any
arrangement providing for the managing of the hotel on the Mortgaged Property,
the rendering or receipt of services or the purchase or sale of inventory,
except any such transaction in the ordinary course of business of Mortgagor if
the monetary or business consideration arising therefrom would be substantially
as
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advantageous to Mortgagor as the monetary or business consideration that would
obtain in a comparable transaction with a person not an affiliate of Mortgagor.
PART II
STATE SPECIFIC PROVISIONS
59. AMPLIFICATION OF FORECLOSURE REMEDIES. Without in any way
limiting the other provisions of this Mortgage, but in addition thereto and in
amplification thereof, Mortgagor hereby confers on Mortgagee the power to sell
the Mortgaged Property, and the interests of persons therein, upon the
occurrence and during the continuation of any Event of Default hereunder, in
the manner and pursuant to the procedures set forth in the Oklahoma Power of
Sale Mortgage Foreclosure Act, 46 O.S. Sections 40-49 (the "Act"), as said Act
may be amended from time to time, or pursuant to other applicable statutory or
judicial authority. If no cure of such default is effected within the time
period set forth in the Act, Mortgagee may accelerate the indebtedness secured
hereby without further notice (the aforementioned statutory cure period to run
concurrently with any contractual provision for notice before acceleration of
debt) and may then proceed in the manner and subject to the conditions of the
Act to send to Mortgagor and other necessary parties a notice of sale and may
sell and convey the Mortgaged Property in accordance with the Act. Mortgagee
may enforce this Mortgage by exercising said power of sale or, at the option of
Mortgagee, by judicial foreclosure proceedings as provided by law. No action
of Mortgagee based upon the provisions contained in this Mortgage or in the
Act, including, without limitation, the giving of the notice of intent to
foreclose by power of sale or the notice of sale, shall constitute an election
of remedies which would preclude Mortgagee from accelerating the indebtedness
secured hereby and pursuing judicial foreclosure before or at any time after
commencement of the power of sale foreclosure procedure. If Mortgagee
institutes judicial proceedings to enforce this Mortgage, Mortgagor, to the
fullest extent permitted by law, hereby waives or does not waive, at the sole
option of Mortgagee, appraisement of the Mortgaged Property, said option to be
exercised by Mortgagee at the time judgement is rendered or at any time prior
thereto. Mortgagor fully understands the consequences of conferring on
Mortgagee the above-described power of sale, and if Mortgagee elects to enforce
this Mortgage by exercising said power of sale, Mortgagor hereby expressly
waives, to the fullest extent permitted by law, any right to a judicial hearing
prior to the sale of the Mortgaged Property. As often as any proceedings may
be taken to foreclose this Mortgage, whether pursuant to the power of sale or
by judicial proceedings, or to foreclose the security interest which has been
granted to Mortgagee, Mortgagor agrees to pay to Mortgagee, in addition to all
other sums due, all reasonable costs and expenses, including reasonable
attorneys' fees, incurred by Mortgagee.
60. PAYMENT OF OKLAHOMA MORTGAGE TAX. Notwithstanding any provisions
to the contrary contained in this Mortgage, including without limitation the
provisions of Paragraphs 17 and 21, Mortgagor shall not be required to pay the
Oklahoma Real Estate Mortgage Tax to be paid upon the recording of this
Mortgage, as prescribed and levied pursuant to 68 O.S. Sections 1901-1910.
Said tax shall be paid by Mortgagee.
53
<PAGE> 86
A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF SALE
MAY ALLOW THE MORTGAGEE TO TAKE THE MORTGAGED PROPERTY AND SELL IT WITHOUT
GOING TO COURT IN A FORECLOSURE ACTION UPON DEFAULT BY THE MORTGAGOR UNDER THIS
MORTGAGE.
IN WITNESS WHEREOF, Mortgagor has executed this instrument the day and
year first above written.
BROCK SUITE TULSA, INC.,
a Delaware corporation
By:
----------------------------------
Name: Melvin Melle
Title: Vice President
54
<PAGE> 87
ACKNOWLEDGMENT
STATE OF ________________________ )
) SS:
COUNTY OF ________________________ )
Before me, the undersigned, a Notary Public, in and for said County
and State, on this ____ day of ______________, 1997, personally appeared,
Melvin Melle as Vice President of Brock Suite Tulsa, Inc., to me known to be
the identical person who executed the within and foregoing instrument as Vice
President of the corporation and acknowledged to me that he executed the same
on behalf of the corporation as his free and voluntary act and deed for the
uses and purposes therein set forth.
Given under my hand and seal the day and year last above written.
-----------------------------------
Notary Public
Commission expires:
55
<PAGE> 88
EXHIBIT A
LEGAL DESCRIPTION
56
<PAGE> 1
EXHIBIT 10.29
PROMISSORY NOTE
US$6,750,000.00 Greenville, South Carolina
as of December 24, 1997
FOR VALUE RECEIVED, the undersigned promise to pay L.J. MELODY &
COMPANY, a Texas corporation, or order, the principal sum of SIX MILLION SEVEN
HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($6,750,000.00), with interest on the
unpaid principal balance from the date of this Note, until paid, at the rate of
seven and eighty-six hundredths percent (7.86%) per annum. The principal and
interest shall be payable at P. O. Box 297480, Houston, Texas 77927, or such
other place as the holder hereof may designate in writing, in consecutive
monthly installments of Fifty-One Thousand Four Hundred Seventy-Three and 14/100
Dollars (US$51,473.14) on the first (1st) day of each month beginning February
1, 1998, (herein "amortization commencement date"), until the entire
indebtedness evidenced hereby is fully paid, except that any remaining
indebtedness, if not sooner paid, shall be due and payable on January 1, 2008
(the "Maturity Date").
If any installment under this Note is not paid when due, the entire
principal amount outstanding hereunder and accrued interest thereon shall at
once become due and payable, at the option of the holder hereof. The holder
hereof may exercise this option to accelerate during any default by the
undersigned regardless of any prior forbearance. In the event of any default in
the payment of this Note or any other payment due under the Instrument or any
other Loan Document (as such terms are hereinafter defined) and if the same is
referred to an attorney at law for collection or any action at law or in equity
is brought with respect hereto, the undersigned shall pay the holder hereof all
expenses and costs, including, but not limited to, reasonable attorneys' fees.
If any installment under this Note is not received by the holder hereof
within ten (10) calendar days after the installment is due, the undersigned
shall pay to the holder hereof a late charge of the greater of (a) US$250.00 or
(b) five percent (5%) of such installment, such late charge to be immediately
due and payable without demand by the holder hereof. If any installment under
this Note or any other monetary payment due under this Note, the Instrument or
any other Loan Document remains past due for ten (10) calendar days or more, the
outstanding principal balance of this Note shall bear interest during the period
in which the undersigned is in default at a rate of twelve and eighty-six
hundredths percent (12.86%) per annum, or if there shall exist any non-monetary
default under this Note, the Instrument or any other Loan Document which remains
uncured for the later of (i) ten (10) calendar days or (ii) the expiration of
any applicable grace or cure period specifically provided in the Instrument, the
outstanding principal balance of this Note shall bear interest during the period
the undersigned is in default at the rate of nine and eighty-six hundredths
percent (9.86%) percent per annum, or, if such increased rate of interest may
not be collected from the undersigned under applicable law, then at the maximum
increased rate of interest, if any, which may be collected from the undersigned
under applicable law.
From time to time, without affecting the obligation of the undersigned
or the successors or assigns of the undersigned to pay the outstanding principal
balance of this Note and observe the covenants of the undersigned contained
herein, in the Instrument or in any other Loan Document without affecting the
guaranty of any person, corporation, partnership or other entity for payment of
the outstanding principal balance of this Note, without giving notice to or
obtaining the consent of the undersigned, the successors or assigns of the
undersigned or guarantors, and without liability on the part of the holder
hereof, the holder hereof may, at the option of the holder hereof, extend the
time for payment of said outstanding principal balance or any part thereof,
reduce the payments thereon, release anyone liable on any of said outstanding
principal balance, accept a renewal of this Note, modify the terms and time of
payment of said outstanding principal balance, join in any extension or
subordination agreement, release any security given herefor, take or release
other or additional security, and agree in writing with the undersigned to
modify the rate of interest or period of amortization of this Note or change the
amount of the monthly installments payable hereunder.
Presentment, notice of dishonor, and protest are hereby waived by all
makers, sureties, guarantors and endorsers hereof. This Note shall be the joint
and several obligation of all makers, sureties, guarantors, and endorsers, and
shall be binding upon them and their successors and assigns.
The indebtedness evidenced by this Note is secured by, among other
things, that certain Mortgage, Assignment of Rents and Security Agreement (the
"Instrument"), executed by the undersigned, encumbering real property more
particularly described therein (the "Property"), dated of even date herewith,
and reference is made thereto for rights as to acceleration of the indebtedness
evidenced by this Note.
Prior to and through December 31, 1998, this Note may not be prepaid in
whole or (except as hereinafter provided) in part. Commencing January 1, 1999,
and continuing through and including June 30, 2007, this Note may only be
prepaid (whether voluntarily or involuntarily, except as hereinafter provided,
and including any acceleration by the holder hereof) in whole (but not in part)
upon not less than forty five (45) days and not more than ninety (90) days prior
written notice by the undersigned to the holder hereof and the simultaneous
payment by the undersigned to the holder hereof of an amount (the "Yield
Maintenance Premium") equal to the aggregate (without duplication) of:
(a) the product obtained by multiplying (1) the entire unpaid principal
balance of this Note at the time of prepayment, times (2) the difference
obtained by subtracting from the interest rate on this Note the yield rate (the
"Yield Rate") on the 6.125% U.S. Treasury Security due August 15,2007, (the
"Specified U.S. Treasury Security"), as the Yield Rate is reported in the Wall
Street Journal on the fifth Business Day (as hereinafter defined) preceding (x)
the date notice of prepayment is given to holder hereof where prepayment is
voluntary, or (y) the date holder hereof accelerates the Loan (as hereinafter
defined), times (3) the present value factor calculated using the following
formula:
1-(1 + r)-n
r
r = Yield Rate
n = the number of years, and any
fraction thereof, remaining
between the prepayment date and
the Maturity Date.
In the event that no Yield Rate is published for the Specified
U.S. Treasury Security, then the nearest equivalent U.S. Treasury
Security shall be selected at the holder hereof's sole discretion. If
the publication of such Yield Rates in the Wall Street Journal is
discontinued, the holder hereof shall determine such Yield Rates from
another source selected by the holder hereof. As used herein, the term
"Business Day" means any day other than a Saturday, a Sunday, or any
other day on which the holder hereof is not open for business; and
(b) an amount equal to the interest which would have
accrued on the amount of such prepayment during the remaining days of the full
calendar month within which such prepayment is made.
<PAGE> 2
The undersigned shall pay the Yield Maintenance Premium whether the
prepayment is voluntary or involuntary (in connection with holder hereof's
acceleration of the unpaid principal balance of this Note) or the Instrument is
satisfied or released by foreclosure (whether by power of sale or judicial
proceeding), deed in lieu of foreclosure or by any other means. Notwithstanding
any other provision herein to the contrary, the undersigned shall not be
required to pay any Yield Maintenance Premium in connection with any prepayment
occurring as a result of the application of insurance proceeds or condemnation
awards under the Instrument.
The Yield Maintenance Premium is not a penalty or additional interest,
but is holder hereof's cost of liquidating its investments in the event of any
prepayment of this Note. The undersigned hereby covenants and agrees to
indemnify holder hereof and hold it harmless from any costs, fees, expenses
(including attorney's fees) resulting from any action, litigation or judicial
decision alleging, claiming or holding that the Yield Maintenance Premium is a
penalty or additional interest, and from any damages (whether compensatory or
punitive) ordered by a court, judge or administrative law judge which may
determine that the Yield Maintenance Premium is a penalty or additional
interest.
Notwithstanding anything herein contained to the contrary, any
permitted prepayment of this Note may only be made by payment of the principal
amount to be prepaid together with (i) the applicable Yield Maintenance Premium,
(ii) all accrued and unpaid interest and (iii) any other sums due under this
Note, the Instrument or any other Loan Document.
Subject to the qualifications below in this paragraph, the undersigned
shall be liable for payment and performance of all of the obligations, covenants
and agreements of the undersigned under this Note, the Instrument, the
Assignment of Leases and Rents (herein so called), dated of even date herewith,
and executed by the undersigned to the holder hereof, the Environmental
Indemnity Agreement (herein so called), dated of even date herewith, and
executed by the undersigned and the holder hereof, and all other instruments and
documents evidencing, securing or governing the terms of the loan (the "Loan")
evidenced by this Note (collectively, the "Loan Documents"), to the full extent
(but only to the extent) of all of the Property and any other items, property or
amounts which are collateral or security for the Loan. If a default occurs in
the timely and proper payment of any portion of such indebtedness or in the
timely performance of any obligations, agreements or covenants under any of the
Loan Documents, except as set forth below in this paragraph, neither the
undersigned, nor any partner of the undersigned, nor any partner, stockholder,
director or officer of any partner of the undersigned, shall be personally
liable for the repayment of any of the principal of, interest on, or prepayment
fees or late charges, or other charges or fees, due in connection with, the
Loan, the performance of any covenants of the undersigned under this Note, the
Instrument or any of the other Loan Documents or for any deficiency judgment
which the holder hereof may obtain after default by the undersigned.
Notwithstanding the foregoing provisions of this paragraph or any other
agreement, the undersigned shall be fully and personally liable for any and all:
(1) liabilities, costs, losses, damages, expenses or claims (including, without
limitation, any reduction in the value of the Property or any other items,
property or amounts which are collateral or security for the Loan) suffered or
incurred by the holder hereof by reason of or in connection with (a) any fraud
or misrepresentation by the undersigned in connection with the Loan, including
but not limited to any misrepresentation of the undersigned contained in any
Loan Document, (b) any failure to pay taxes, insurance premiums (except to the
extent that such taxes and insurance premiums are then held by the holder
hereof), assessments, charges for labor or materials or other charges that can
create liens on any portion of the Property, (c) any misapplication of (i)
proceeds of insurance covering any portion of the Property, or (ii) proceeds of
the sale or condemnation of any portion of the Property, (d) any rentals,
income, profits, issues and products received by or on behalf of the undersigned
subsequent to the date on which the holder hereof gives written notice that a
default has occurred under the Loan and not applied to the payment of principal
or interest due under this Note or the payment of operating expenses (excluding
any operator's, manager's, or developer's fee payable to the undersigned or any
affiliate of the undersigned) of the Property, (e) any failure to maintain,
repair or restore the Property in accordance with any Loan Document, to the
extent not covered by insurance proceeds made available to the holder hereof,
(f) any failure by the undersigned to deliver to the holder hereof all unearned
advance rentals and security deposits paid by tenants of the Property received
by or on behalf of the undersigned, and not refunded to or forfeited by such
tenants, (g) any failure by the undersigned to return to, or reimburse the
holder hereof for, all personalty taken from the Property by or on behalf of the
undersigned, except in accordance with the provisions of the Instrument, and (h)
any and all indemnities given by the undersigned to the holder hereof set forth
in the Environmental Indemnity Agreement or any other Loan Document in
connection with any environmental matter relating to the Property; and (2) court
costs and all reasonable attorneys' fees provided for in any Loan Document.
Furthermore, no limitation of liability or recourse provided above in this
paragraph shall (x) apply to the extent that the holder hereof's rights of
recourse to the Property are suspended, reduced or impaired by or as a result of
any act, omission or misrepresentation of the undersigned or any other party now
or hereafter liable for any part of the Loan and accrued interest thereon, or by
or as a result of any case, action, suit or proceeding to which the undersigned
or any such other party, voluntarily becomes a party; or (y) constitute a
waiver, forfeiture, abrogation or limitation of or on any right accorded by any
law establishing a debtor relief proceeding, including, but not limited to,
Title 11, U.S. Code, which right provides for the assertion in such debtor
relief proceeding of a deficiency arising by reason of the insufficiency of
collateral notwithstanding an agreement of the holder hereof not to assert such
deficiency.
This Note shall be governed by and construed in accordance with the law
of the state in which the Property is located, and applicable federal law. The
parties hereto intend to conform strictly to the applicable usury laws. In no
event, whether by reason of demand for payment, prepayment, acceleration of the
maturity hereof or otherwise, shall the interest contracted for, charged or
received by the holder hereof hereunder or otherwise exceed the maximum amount
permissible under applicable law. If from any circumstance whatsoever interest
would otherwise be payable to the holder hereof in excess of the maximum lawful
amount, the interest payable to the holder hereof shall be reduced automatically
to the maximum amount permitted by applicable law. If the holder hereof shall
ever receive anything of value deemed interest under applicable law which would
apart from this provision be in excess of the maximum lawful amount, an amount
equal to any amount which would have been excessive interest shall be applied to
the reduction of the principal amount owing hereunder in the inverse order of
its maturity and not to the payment of interest, or if such amount which would
have been excessive interest exceeds the unpaid balance of principal hereof,
such excess shall be refunded to the undersigned. All interest paid or agreed to
be paid to the holder hereof shall, to the extent permitted by applicable law,
be amortized, prorated, allocated, and spread throughout the full stated term
(including any renewal or extension) of such indebtedness so that the amount of
interest on account of such indebtedness does not exceed the maximum permitted
by applicable law. The provisions of this paragraph shall control all existing
and future agreements between the undersigned and the holder hereof.
THE UNDERSIGNED HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES
ANY RIGHT THE UNDERSIGNED MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH THIS
NOTE, THE INSTRUMENT, ANY OTHER LOAN DOCUMENT, ANY OTHER AGREEMENT CONTEMPLATED
TO BE EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY.
The holder hereof shall have the right to assign, in whole or in part,
this Note, the Instrument and any other Loan Document and all of its rights
hereunder and thereunder, and all of the provisions herein and therein shall
continue to apply to the Loan. The holder hereof shall have the right to
participate the Loan with other parties.
Interest on the principal sum of this Note shall be calculated on the
basis of the actual number of days elapsed over a year consisting of 360 days.
Interest on this Note shall be paid in arrears.
The undersigned shall pay the holder hereof, in advance, on the date
hereof, interest only on the outstanding principal balance of this Note, at the
interest rate first mentioned above, from the date hereof through and including
the last day of the calendar month in which this Note is executed.
2
<PAGE> 3
Executed as of the date set forth above.
BROCK SUITE GREENVILLE, INC.,
a Delaware corporation
By: /s/ MELVIN J. MELLE
-------------------------------
Melvin J. Melle, Vice President
3
<PAGE> 4
WHEN RECORDED MAIL TO
SPACE ABOVE THIS LINE FOR RECORDER'S USE
- -------------------------------------------------------------------------------
MORTGAGE, ASSIGNMENT OF RENTS,
SECURITY AGREEMENT AND FIXTURE FINANCING STATEMENT
THIS MORTGAGE (herein "Instrument") is made this 24th day of December,
1997, between the Mortgagor/Grantor, Brock Suite Greenville, Inc., whose address
is 3710 Rawlins, Suite 1500, Dallas, Texas 75219 herein "Borrower"), and the
Mortgagee, L. J. Melody & Company, a corporation organized and existing under
the laws of Texas, whose address is 400 Frank Burr Blvd., Teaneck, N.J., 07666,
together with its successors, assigns and transferees, (herein "Lender").
WHEREAS, Borrower is indebted to Lender in the principal sum of six
million seven hundred fifty thousand and no dollars ($6,750,000.00) Dollars,
which indebtedness is evidenced by Borrower's note dated of even date herewith
(herein "Note"), providing for monthly installments of principal and interest,
with the balance of the indebtedness, if not sooner paid, due and payable on
January 1, 2008 (the "Maturity Date");
TO SECURE TO LENDER (a) the repayment of the indebtedness evidenced by
the Note with interest thereon, and all renewals, extensions and modifications
thereof; (b) the repayment of any future advances with interest thereon, made by
Lender to Borrower pursuant to PARAGRAPH 40 hereof (herein "Future Advances");
(c) the performance of the covenants and agreements of Borrower contained in an
Environmental Indemnity Agreement (herein so-called) between Lender, Borrower
and Principal (as defined in the Environmental Indemnity Agreement) dated of
even date herewith; (d) the payment of all other sums, with interest thereon,
advanced in accordance herewith to protect the security of this Instrument; and
(e) the performance of the covenants and agreements of Borrower herein
contained, or contained in any other Loan Document (as hereinafter defined),
Borrower does hereby mortgage, grant, convey and assign to Lender, its
successors, assigns and transferees, with power of sale, the following described
property located in County, State of South Carolina, and more particularly
described on Exhibit "A" attached hereto and incorporated herein by reference
for all purposes.
TOGETHER with all buildings, improvements, and tenements now or
hereafter erected on the property, and all heretofore or hereafter vacated
alleys and streets abutting the property, and all easements, rights,
appurtenances, rents (subject however to the assignment of rents to Lender
herein), royalties, mineral, oil and gas rights and profits, water, water
rights, and water stock appurtenant to the property, and all fixtures,
machinery, equipment, engines, boilers, incinerators, building materials,
appliances and goods of every nature whatsoever now or hereafter located in, or
on, or used, or intended to be used in connection with the property, including,
but not limited to, those for the purposes of supplying or distributing heating,
cooling, electricity, gas, water, air and light; and all elevators, and related
machinery and equipment, fire prevention and extinguishing apparatus, security
and access control apparatus, plumbing, bath tubs, water heaters, water closets,
sinks, ranges, stoves, refrigerators, dishwashers, disposals, washers, dryers,
awnings, storm windows, storm doors, screens, blinds, shades, curtains and
curtain rods, mirrors, cabinets, panelling, rugs, attached floor coverings,
furniture, pictures, antennas, trees and plants, tax refunds, trade names,
licenses, permits, Borrower's rights to insurance proceeds, unearned insurance
premiums and choses in action, food, beverages, linens, furniture, fixtures,
items held for sale, refrigeration plants or units, kitchen equipment, cooking
appliances, cabinets, partitions, doors, windows, furniture, furnishings, living
and artificial plants and planters, televisions, beds, dressers, radios, lamps,
switchboards, telephones, telephone systems and equipment, computers, computer
equipment and software, cabinets, signage, storm windows and doors, window and
door screens, window and door shades, all drapes and curtains and related
hardware and mounting devises, wall-to-wall carpeting, tables, chairs, pots,
pans, plates, china, dishes, silver and flatware, linens, and vending machines;
all of which, including replacements and additions thereto, shall be deemed to
be and remain a part of the real property covered by this Instrument; and all of
the foregoing, together with said property (or the leasehold estate in the event
this Instrument is on a leasehold ) are herein referred to as the "Property";
TOGETHER with all right, title and interest in, to and under any and
all leases now or hereinafter in existence (as amended or supplemented from time
to time) and covering space in or applicable to the Property (hereinafter
referred to collectively as the "Leases" and singularly as a "Lease"), together
with all rents, earnings, income, profits, benefits and advantages arising from
the Property and from said Leases and all other sums due or to become due under
and pursuant thereto, and together with any and all guarantees of or under any
of said Leases, and together with all rights, powers, privileges, options and
other benefits of Borrower as lessor under the Leases, including, without
limitation, the immediate and continuing right to receive and collect all rents,
income, revenues, issues, profits, condemnation awards, insurance proceeds,
moneys and security payable or receivable under the Leases or pursuant to any of
the provisions thereof, whether as rent or otherwise, the right to accept or
reject any offer made by any tenant pursuant to its Lease to purchase the
Property and any other property subject to the Lease as therein provided and to
perform all other necessary or appropriate acts with respect to such Leases as
agent and attorney-in-fact for Borrower, and the right to make all waivers and
agreements, to give and receive all notices, consents and releases, to take such
action upon the happening of a default under any Lease, including the
commencement, conduct and consummation of proceedings at law or in equity as
shall be permitted under any provision of any Lease or by any law, and to do any
and all other things whatsoever which the Borrower is or may become entitled to
do under any such Lease together with all accounts receivable, contract rights,
franchises, interests, estates or other claims, both at law and in equity,
relating to the Property, to the extent not included in rent earnings and income
under any of the Leases;
TOGETHER with all right, title and interest in, to and under any and
all reserve, deposit or escrow accounts (the "Accounts") made pursuant to any
loan document made between Borrower and Lender with respect to the Property,
together with all income, profits, benefits and advantages arising therefrom,
and together with all rights, powers, privileges, options and other benefits of
Borrower under the Accounts, and together with the right to do any and all other
things whatsoever which the Borrower is or may become entitled to do under the
Accounts;
TOGETHER with all agreements, contracts, certificates, guaranties,
warranties, instruments, franchises, permits, licenses, plans, specifications
and other documents, all agreements for the provision of property or services to
or in connection with, or otherwise benefitting, the real estate, including,
without limitation, all management agreements, license agreements, franchise
agreements and cable television agreements, now or hereafter entered into, and
all rights therein and thereto, pertaining to the use, occupancy, construction,
management or operation of the Property and any part thereof and any
improvements or respecting any business or activity conducted on the Property
and any part thereof and all right, title and interest of Borrower therein,
including the right to receive and collect any sums payable to Borrower
thereunder and all deposits or other security or advance payments made by
Borrower with respect to any of the services related to the Property or the
operation thereof;
1
<PAGE> 5
TOGETHER with all tradenames, trademarks, servicemarks, logos,
copyrights, goodwill, books and records, licenses, permits and all other general
intangibles relating to or used in connection with the operation of the
Property; and
TOGETHER with all accounts receivable, credit card receivables, room
deposits, security deposits, advances and other accounts now or hereafter
accruing, arising, existing, or owed to or held by Borrower from, relating to,
or deriving from the operation of the Property; including, but not limited to,
revenues derived from (i) the occupancy of guest rooms, (ii) the occupancy of
meeting rooms, (iii) food and beverage facilities, (iv) vending machines, (v)
telephone and television systems, (vi) guest laundry, (vii) the provision or
sale of other goods and services, and all revenues, royalties, issues and
profits therefrom and derived from the Property and any other items of revenue,
receipts or other income as identified in the Uniform System of Accounts for
Hotels, 8th Edition, International Association of Hospitality Accounts (1986),
as amended from time to time (collectively, the "Rents");
TOGETHER with all right, title and interest in and to all assets and
tangible personal property of Borrower, including, without limitation, all of
Borrower's now owned or hereafter acquired machinery, equipment, furniture,
furnishings, fixtures, tools, supplies, plates, china, glasses, silver and
flatware, pots, pans, cooking implements, linens, decorations, artwork, plants,
planters, carpets, wall and floor coverings, draperies, beds, lamps, tables,
chairs, millwork, telephones and systems, partitions, computers and peripherals,
televisions, radios, clocks, stereos and other audio equipment, motor vehicles
and other tangible personal property of every kind and description, all parts
therefor, and all improvements, accessions or appurtenances thereto, and all of
the foregoing whether now owned or existing or hereafter created or acquired
(collectively, the "Equipment"), and
TOGETHER with any and all proceeds resulting or arising from the
foregoing (collectively, the "Collateral").
It is the intent hereof and of Borrower and Lender that Lender shall
have a first and best pre- and post-bankruptcy petition lien in and to all of
the foregoing and a first and best lien as to all items which may be deemed
"cash collateral" under 11 USC. It is also the intent hereof and the intent and
agreement of Borrower and Lender that all revenue derived from the leasing of
the Property [regardless of the Property's use and nature (including without
limitation its use and nature as an apartment, retail, office, warehouse,
distribution, manufacturing, hotel, motel, restaurant or any other commercial
facility)] shall be and be deemed rent derived from the underlying real estate.
Further, if the Property is a hotel or motel facility, it is the intent hereof
and the intent and agreement of Borrower and Lender that all revenues generated
by and/or attributable to all or any part of said hotel or motel facility or the
use or the operation thereof shall be and be deemed rent derived from the
underlying real estate. Any person or entity extending credit to Borrower after
the recording hereof shall be deemed to have assented to the terms of this
paragraph.
Borrower covenants that Borrower is lawfully seised of the estate
hereby conveyed and has the right to mortgage, grant, convey and assign the
Property (and, if this Instrument is on a leasehold, that the ground lease is in
full force and effect without modification except as noted above and without
default on the part of either lessor or lessee thereunder), that the Property is
unencumbered, and that Borrower will warrant and defend generally the title to
the Property against all claims and demands, subject to any easements and
restrictions listed in a schedule of exceptions to coverage in any title
insurance policy insuring Lender's interest in the Property.
UNIFORM COVENANTS. Borrower and Lender covenant and agree as follows:
1. PAYMENT OF PRINCIPAL AND INTEREST. Borrower shall promptly pay when due
the principal of and interest on the indebtedness evidenced by the Note, any
prepayment and late charges provided in the Note and all other sums secured by
this Instrument.
2. FUNDS FOR TAXES, INSURANCE AND OTHER CHARGES. Subject to applicable law
or to a written waiver by Lender, Borrower shall pay to Lender on the day
monthly installments of principal or interest are payable under the Note (or on
another day designated in writing by Lender), until the Note is paid in full, a
sum (herein "Funds") equal to one-twelfth of (a) the yearly taxes and
assessments which may be levied on the Property, (b) the yearly ground rents, if
any, ( c) the yearly premium installments for fire and other hazard insurance,
rent loss insurance and such other insurance covering the Property as Lender may
require pursuant to PARAGRAPH 5 hereof, (d) the yearly premium installments for
mortgage insurance, if any, and (e) if this Instrument is on a leasehold, the
yearly fixed rents, if any, under the ground lease, all as reasonably estimated
initially and from time to time by Lender on the basis of assessments and bills
and reasonable estimates thereof [Determine whether an escrow for franchise
payments is required]. Any waiver by Lender of a requirement that Borrower pay
such Funds may be revoked by Lender, in Lender's sole discretion, at any time
upon notice in writing to Borrower. Lender may require Borrower to pay to
Lender, in advance, such other Funds for other taxes, charges, premiums,
assessments and impositions in connection with Borrower or the Property which
Lender shall reasonably deem necessary to protect Lender's interests (herein
"Other Impositions"). Unless otherwise provided by applicable law, Lender may
require Funds for Other Impositions to be paid by Borrower in a lump sum or in
periodic installments, at Lender's option.
The Funds shall be held in an institution(s) the deposits or accounts
of which are insured or guaranteed by a Federal or state agency (including
Lender if Lender is such an institution). Lender shall apply the Funds to pay
said rents, taxes, assessments, insurance premiums and Other Impositions so long
as Borrower is not in breach of any covenant or agreement of Borrower in this
Instrument. Lender shall make no charge for so holding and applying the Funds,
analyzing said account or for verifying and compiling said assessments and
bills, unless Lender pays Borrower interest, earnings or profits on the Funds
and applicable law permits Lender to make such a charge. Borrower and Lender may
agree in writing at the time of execution of this Instrument that interest on
the Funds shall be paid to Borrower, and unless such agreement is made or
applicable law requires interest, earnings or profits to be paid, Lender shall
not be required to pay Borrower any interest, earnings or profits on the Funds.
Lender shall give to Borrower, without charge, an annual accounting of the Funds
in Lender's normal format showing credits and debits to the Funds and the
purpose for which each debit to the Funds was made. The Funds are pledged as
additional security for the sums secured by this Instrument.
If the amount of the Funds held by Lender at the time of the annual
accounting thereof shall exceed the amount deemed necessary by Lender to provide
for the payment of taxes, assessments, insurance premiums, rents and Other
Impositions, as they fall due, such excess shall be credited to Borrower on the
next monthly installment or installments of Funds due. If at any time the amount
of the Funds held by Lender shall be less than the amount deemed necessary by
Lender to pay taxes, assessments, insurance premiums, rents and Other
Impositions, as they fall due, Borrower shall pay to Lender any amount necessary
to make up the deficiency within thirty days after notice from Lender to
Borrower requesting payment thereof.
Upon Borrower's breach of any covenant or agreement of Borrower in this
Instrument, Lender may apply, in any amount and in any order as Lender shall
determine in Lender's sole discretion, any Funds held by Lender at the time of
application (i) to pay rents, taxes, assessments, insurance premiums and Other
Impositions which are now or will hereafter become due, or (ii) as a credit
against sums secured by this Instrument. Upon payment in full of all sums
secured by this Instrument, Lender shall promptly refund to Borrower any Funds
held by Lender.
3. APPLICATION OF PAYMENTS. Unless applicable law provides otherwise, all
payments received by Lender from Borrower under the Note or this Instrument
shall be applied by Lender in the following order of priority: (i) amounts
payable to Lender by Borrower under PARAGRAPH 2 hereof; (ii) interest payable on
the Note; (iii) principal of the Note; (iv) interest payable on advances made
pursuant to PARAGRAPH 8 hereof; (v) principal of advances made pursuant to
PARAGRAPH 8 hereof; (vi) interest payable on any Future Advance, provided that
if more than one Future Advance is outstanding, Lender may apply payments
received among the amounts of interest payable on the Future Advances in such
order as Lender, in Lender's sole discretion, may
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<PAGE> 6
determine; (vii) principal of any Future Advance, provided that if more than one
Future Advance is outstanding, Lender may apply payments received among the
principal balances of the Future Advances in such order as Lender, in Lender's
sole discretion, may determine; and (viii) any other sums secured by this
Instrument in such order as Lender, at Lender's option, may determine: provided,
however, that Lender may, at Lender's option, apply any sums payable pursuant to
PARAGRAPH 8 hereof prior to interest on and principal of the Note, but such
application shall not otherwise affect the order of priority of application
specified in this PARAGRAPH 3.
4. CHARGES; LIENS. Borrower shall pay all rents, taxes, assessments,
premiums, and Other Impositions attributable to the Property at Lender's option
in the manner provided under PARAGRAPH 2 hereof or, if not paid in such manner,
by Borrower making payment, when due, directly to the payee thereof, or in such
other manner as Lender may designate in writing. Borrower shall promptly furnish
to Lender all notices of amounts due under this PARAGRAPH 4, and in the event
Borrower shall make payment directly, Borrower shall promptly furnish to Lender
receipts evidencing such payments. Borrower shall promptly discharge any lien,
which has, or may have, priority over or equality with, the lien of this
Instrument, and Borrower shall pay, when due, the claims of all persons
supplying labor or materials to or in connection with the Property. Without
Lender's prior written permission, Borrower shall not allow any lien inferior to
this Instrument to be perfected against the Property.
5. HAZARD INSURANCE. Borrower shall keep the improvements now existing or
hereafter erected on the Property insured by carriers at all times satisfactory
to Lender against loss by fire, hazards included within the term "extended
coverage", rent loss and such other hazards, casualties, liabilities and
contingencies as Lender (and, if this Instrument is on a leasehold, the ground
lease) shall require and in such amounts and for such periods as Lender shall
require. Borrower shall purchase policies of insurance with respect to the
Property with such insurers, in such amounts and covering such risks as shall be
satisfactory to Lender, including, but not limited to, (i) personal injury and
death; (ii) loss or damage by fire, lightning, hail, windstorm, explosion,
hurricane (to the extent available), and such other hazards, casualties and
contingencies (including at least twelve (12) months rental insurance in an
amount equal to the gross rentals generated by the Property for such period and
broad form boiler and machinery insurance) as are normally and usually covered
by extended coverage policies in effect where the Property is located and
comprehensive general public liability insurance in an amount not less than
$1,000,000.00 and containing an "Ordinance or Law Coverage" or "Enforcement"
endorsement if any of the improvements or the use of the Property shall at any
time constitute legal nonconforming structures or uses; provided, that each
policy shall provide by way of endorsement, rider or otherwise that no such
insurance policy shall be cancelled, endorsed, altered, or reissued to effect a
change in coverage unless such insurer shall have first given Lender thirty (30)
days prior written notice thereof, such policy shall be on a replacement cost
basis, with a waiver of depreciation, in an amount not less than that necessary
to comply with any coinsurance percentage stipulated in the policy, but not less
than one hundred percent (100%) of the insurable value (based upon replacement
cost) of the Property and the deductible clause, if any, of the fire and
extended coverage policy may not exceed the lesser of one percent (1%) of the
face amount of the policy or $1,000.00; (iii) loss or damage by flood, if the
Property is in an area designated by the Secretary of Housing and Urban
Development as an area having special flood hazards, in an amount equal to the
principal amount of the Note or the maximum amount available under the Flood
Disaster Protection Act of 1973, and regulations issued pursuant thereto, as
amended from time to time, whichever is less, in form complying with the
"insurance purchase requirement" of that Act; (iv) business interruption
insurance; (v) worker's compensation in statutorily mandated amounts and
employer's liability insurance; and (vi) such other insurance and endorsements,
if any, as Lender may require from time to time, or which is required by the
Loan Documents. Borrower shall cause all insurance (except general public
liability insurance) carried in accordance with this PARAGRAPH 5 to be payable
to Lender as a mortgagee and not as a coinsured, and, in the case of all
policies of insurance carried by each lessee for the benefit of Borrower, if
any, to cause all such policies to be payable to Lender as Lender's interest may
appear. All premiums on insurance policies shall be paid, in the manner provided
under PARAGRAPH 2 hereof, or in such other manner as Lender may designate in
writing.
All insurance policies and renewals thereof shall be in a form
acceptable to Lender and shall include a standard mortgagee clause in favor of
and in form acceptable to Lender. Lender shall have the right to hold the
policies, and Borrower shall promptly furnish to Lender all renewal notices and
all receipts of paid premiums. At least thirty (30) days prior to the expiration
date of a policy, Borrower shall deliver to Lender a renewal policy in form
satisfactory to Lender. If this Instrument is on a leasehold, Borrower shall
furnish Lender a duplicate of all policies, renewal notices, renewal policies
and receipts of paid premiums if, by virtue of the ground lease, the originals
thereof may not be supplied by Borrower to Lender.
In the event of loss, Borrower shall give immediate written notice to
the insurance carrier and to Lender. Borrower hereby authorizes and empowers
Lender as attorney-in-fact for Borrower to make proof of loss, to adjust and
compromise any claim under insurance policies, to appear in and prosecute any
action arising from such insurance policies, to collect and receive insurance
proceeds, and to deduct therefrom Lender's expenses incurred in the collection
of such proceeds; provided however, that nothing contained in this PARAGRAPH 5
shall require Lender to incur any expense or take any action hereunder. Borrower
further authorizes Lender, at Lender's option, (a) to hold the balance of such
proceeds to be used to reimburse Borrower for the cost of reconstruction or
repair of the Property or (b) subject to the immediately following paragraph, to
apply such proceeds to the payment of the sums secured by this Instrument
whether or not then due, in the order of application set forth in PARAGRAPH 3
hereof (subject, however, to the rights of the lessor under the ground lease if
this Instrument is on a leasehold).
Lender shall not exercise Lender's option to apply insurance proceeds
to the payment of the sums secured by this Instrument if all of the following
conditions are met: (i) Borrower is not in breach or default of any covenant or
agreement of this Instrument, the Note or any other Loan Document; (ii) Lender
determines that there will be sufficient funds to restore and repair the
Property to the Pre-existing Condition (as hereinafter defined); (iii) Lender
agrees in writing that the rental income of the Property, after restoration and
repair of the Property to the Pre-existing Condition, will be sufficient to meet
all operating costs and other expenses, payments for reserves and loan repayment
obligations (including any obligations under any permitted subordinate
financing) relating to the Property and maintain a debt service coverage ratio
of at least 1.5 to 1.0; (iv) Lender determines that restoration and repair of
the Property to the Pre-existing Condition will be completed within one year of
the date of the loss or casualty to the Property, but in no event later than six
months prior to the Maturity Date; (v) less than fifty percent (50%) of the
total floor area of the improvements has been damaged, destroyed or rendered
unusable as a result of such fire or other casualty; and (vi) Lender is
reasonably satisfied that the Property can be restored and repaired as nearly as
possible to the condition it was in immediately prior to such casualty and in
compliance with all applicable zoning, building and other laws and codes (the
"Pre-existing Condition"). If Lender elects to make the insurance proceeds
available for the restoration and repair of the Property, Borrower agrees that,
if at any time during the restoration and repair, the cost of completing such
restoration and repair, as determined by Lender, exceeds the undisbursed
insurance proceeds, Borrower shall, immediately upon demand by Lender, deposit
the amount of such excess with Lender, and Lender shall first disburse such
deposit to pay for the costs of such restoration and repair on the same terms
and conditions as the insurance proceeds are disbursed.
If the insurance proceeds are held by Lender to reimburse Borrower for
the cost of restoration and repair of the Property, the Property shall be
restored to the equivalent of its original condition or such other condition as
Lender may approve in writing. Lender may, at Lender's option, condition
disbursement of said proceeds on Lender's approval of such plans and
specifications of an architect satisfactory to Lender, contractor's cost
estimates, architect's certificates, waivers of liens, sworn statements of
mechanics and materialmen and such other evidence of costs, percentage
completion of construction, application of payments; and satisfaction of liens
as Lender may reasonably require. If the insurance proceeds are applied to the
payment of the sums secured by this Instrument, any such application of proceeds
to principal shall not extend or postpone the due dates of the monthly
installments referred to in PARAGRAPHS 1 AND 2 hereof or change the amounts of
such installments. If the Property is sold pursuant to PARAGRAPH 27 hereof or if
Lender acquires title to the Property, Lender shall have all of the right, title
and interest of Borrower in and to any insurance policies and unearned premiums
thereon and in and to the proceeds resulting from any damage to the Property
prior to such sale or acquisition.
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<PAGE> 7
6. PRESERVATION AND MAINTENANCE OF PROPERTY; LEASEHOLDS. Borrower (a)
shall not commit waste or permit impairment or deterioration of the Property,
(b) shall not abandon the Property, (c) shall restore or repair promptly and in
a good and workmanlike manner all or any part of the Property to the equivalent
of its original condition, or such other condition as Lender may approve in
writing, in the event of any damage, injury or loss thereto, whether or not
insurance proceeds are available to cover in whole or in part the costs of such
restoration or repair, (d) shall keep the Property, including improvements,
fixtures, equipment, machinery and appliances thereon in good repair and shall
replace fixtures, equipment, machinery and appliances on the Property when
necessary to keep such items in good repair, (e) shall comply with all laws,
ordinances, regulations and requirements of any governmental body applicable to
the Property, (f) shall provide for professional management of the Property by a
hotel manager satisfactory to Lender pursuant to a contract approved by Lender
in writing, unless such requirement shall be waived by Lender in writing, (g)
shall generally operate and maintain the Property in a manner to ensure maximum
room occupancy and rates, (h) shall give notice in writing to Lender of and,
unless otherwise directed in writing by Lender, appear in and defend any action
or proceeding purporting to affect the Property, the security of this Instrument
or the rights or powers of Lender, and (i) comply with the terms of any
franchise agreement affecting the Property. Neither Borrower nor any tenant or
other person shall remove, demolish or alter any improvement now existing or
hereafter erected on the Property or any fixture, equipment, machinery or
appliance in or on the Property except when incident to the replacement of
fixtures, equipment, machinery and appliances with items of like kind.
If this Instrument is on a leasehold, Borrower (i) shall comply with
the provisions of the ground lease, (ii) shall give immediate written notice to
Lender of any default by lessor under the ground lease or of any notice received
by Borrower from such lessor of any default under the ground lease by Borrower,
(iii) shall exercise any option to renew or extend the ground lease and give
written confirmation thereof to Lender within thirty days after such option
becomes exercisable, (iv) shall give immediate written notice to Lender of the
commencement of any remedial proceedings under the ground lease by any party
thereto and, if required by Lender, shall permit Lender as Borrower's
attorney-in-fact to control and act for Borrower in any such remedial
proceedings and (v) shall within thirty days after request by Lender obtain from
the lessor under the ground lease and deliver to Lender the lessor's estoppel
certificate required thereunder, if any. Borrower hereby expressly transfers and
assigns to Lender the benefit of all covenants contained in the ground lease,
whether or not such covenants run with the land, but Lender shall have no
liability with respect to such covenants nor any other covenants contained in
the ground lease.
Borrower shall not surrender the leasehold estate and interests herein
conveyed nor terminate or cancel the ground lease creating said estate and
interests, and Borrower shall not, without the express written consent of
Lender, alter or amend said ground lease. Borrower covenants and agrees that
there shall not be a merger of the ground lease, or of the leasehold estate
created thereby, with the fee estate covered by the ground lease by reason of
said leasehold estate or said fee estate, or any part of either, coming into
common ownership, unless Lender shall consent in writing to such merger, if
Borrower shall acquire such fee estate, then this Instrument shall
simultaneously and without further action be spread so as to become a lien on
such fee estate.
7. USE OF PROPERTY. Unless required by applicable law or unless Lender has
otherwise agreed in writing, Borrower shall not allow changes in the use for
which all or any part of the Property was intended at the time this Instrument
was executed. Borrower shall not subdivide the Property or initiate or acquiesce
in a change in the zoning classification of the Property without Lender's prior
written consent.
8. PROTECTION OF LENDER'S SECURITY. If Borrower fails to perform the
covenants and agreements contained in this Instrument, or if any action or
proceeding is commenced which affects the Property or title thereto or the
interest of Lender therein, including, but not limited to, eminent domain,
insolvency, code enforcement, or arrangements or proceedings involving a
bankrupt or decedent, then Lender at Lender's option may make such appearances,
disburse such sums and take such action as Lender deems necessary, in its sole
discretion, to protect Lender's interest, including, but not limited to, (i)
disbursement of attorney's fees, (ii) entry upon the Property to make repairs,
(iii) procurement of satisfactory insurance as provided in PARAGRAPH 5 hereof,
(iv) if this Instrument is on a leasehold, exercise of any option to renew or
extend the ground lease on behalf of Borrower and the curing of any default of
Borrower in the terms and conditions of the ground lease, and (v) the payment of
any taxes and/or assessments levied against the Property and then due and
payable.
Any amounts disbursed by Lender pursuant to this PARAGRAPH 8, with
interest thereon, shall become additional indebtedness of Borrower secured by
this Instrument. Unless Borrower and Lender agree to other terms of payment,
such amounts shall be immediately due and payable and shall bear interest from
the date of disbursement at the rate stated in the Note unless collection from
Borrower of interest at such rate would be contrary to applicable law, in which
event such amounts shall bear interest at the highest rate which may be
collected from Borrower under applicable law. Borrower hereby covenants and
agrees that Lender shall be subrogated to the lien of any mortgage or other lien
discharged, in whole or in part, by the indebtedness secured hereby. Nothing
contained in this PARAGRAPH 8 shall require Lender to incur any expense or take
any action hereunder.
9. INSPECTION. Lender may make or cause to be made reasonable entries upon
and inspections of the Property including, but not limited to, phase I and/or
phase II environmental audits and inspections which phase II inspections will
not unreasonably disturb Borrower's use of the Property.
10. BOOKS AND RECORDS. Borrower shall keep and maintain at all times at
Borrower's address stated below, or such other place as Lender may approve in
writing, complete and accurate books of accounts and records adequate to reflect
correctly the results of the operation of the Property and copies of all written
contracts, leases and other instruments which affect the Property. Such books,
records, contracts, leases and other instruments shall be subject to examination
and inspection at any reasonable time by Lender. Upon Lender's request, Borrower
shall furnish to Lender, within thirty (30) days after the end of each three
month quarter of each fiscal year of Borrower, a balance sheet, a statement of
income and expenses of the Property and a statement of changes in financial
position, each in reasonable detail and certified by Borrower and, if Lender
shall require, by an independent certified public accountant; such financial
statements shall set forth, in reasonable detail, available rooms, occupancy
percentage, rooms rented and average daily rate and all other items of revenue
receipts or income (and all accompanying items of expense) as identified in the
Uniform System of Accounts for Hotels, 8th Revised Edition, International
Association of Hospitality Accountants and Hotel Association of New York City,
Inc. (1986) as from time to time amended. Borrower shall furnish, together with
the foregoing financial statements and at any other time upon Lender's request,
a rent schedule for the Property, certified by Borrower, showing the name of
each tenant, and for each tenant, the space occupied, the lease expiration date,
the rent payable and the rent paid. In addition to the above delivery of
financial statements and rent schedule, Borrower shall deliver to Lender updated
versions of such financial statements at any other time upon Lender's request,
including monthly balance sheets and monthly statements of income and expenses
of the Property. Borrower shall furnish to Lender a copy of each franchise
inspection report relating to the Property within fifteen (15) days after
Borrower's receipt thereof.
11. CONDEMNATION. Borrower shall promptly notify Lender of any action or
proceeding relating to any condemnation or other taking, whether direct or
indirect, of the Property, or part thereof, and Borrower shall appear in and
prosecute any such action or proceeding unless otherwise directed by Lender in
writing. Borrower authorizes Lender, at Lender's option, as attorney-in-fact for
Borrower, to commence, appear in and prosecute, in Lender's or Borrower's name,
any action or proceeding relating to any condemnation or other taking of the
Property, whether direct or indirect, and to settle or compromise any claim in
connection with such condemnation or other taking. The proceeds of any award,
payment or claim for damages, direct or consequential, in connection with any
condemnation or other taking, whether direct or indirect, of the Property, or
part thereof, or for conveyances in lieu of condemnation, are hereby assigned to
and shall be paid to Lender subject, if this Instrument is on a leasehold, to
the rights of lessor under the ground lease.
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<PAGE> 8
Borrower authorizes Lender to apply such awards, payments, proceeds or
damages, after the deduction of Lender's expenses incurred in the collection of
such amounts, at Lender's option, to restoration or repair of the Property or to
payment of the sums secured by this Instrument, whether or not then due, in the
order of application set forth in PARAGRAPH 3 hereof, with the balance, if any,
to Borrower. Unless Borrower and Lender otherwise agree in writing, any
application of proceeds to principal shall not extend or postpone the due date
of the monthly installments referred to in PARAGRAPHS 1 AND 2 hereof or change
the amount of such installments. Borrower agrees to execute such further
evidence of assignment of any awards, proceeds, damages or claims arising in
connection with such condemnation or taking as Lender may require.
12. BORROWER AND LIEN NOT RELEASED. From time to time, Lender may, at
Lender's option, without giving notice to or obtaining the consent of Borrower,
Borrower's successors or assigns or of any junior lienholder or guarantors,
without liability on Lender's part and notwithstanding Borrower's breach of any
covenant or agreement of Borrower in this Instrument, extend the time for
payment of said indebtedness or any part thereof, reduce the payments thereon,
release anyone liable on any of said indebtedness, accept a renewal note or
notes therefor, modify the terms and time of payment of said indebtedness,
release from the lien of this Instrument any part of the Property, take or
release other or additional security, reconvey any part of the Property, consent
to any map or plan of the Property, consent to the granting of any easement,
join in any extension or subordination agreement, and agree in writing with
Borrower to modify the rate of interest or period of amortization of the Note or
change the amount of the monthly installments payable thereunder. Any actions
taken by Lender pursuant to the terms of this PARAGRAPH 12 shall not affect the
obligation of Borrower or Borrower's successors or assigns to pay the sums
secured by this Instrument and to observe the covenants of Borrower contained
herein, shall not affect the guaranty of any person, corporation, partnership or
other entity for payment of the indebtedness secured hereby, and shall not
affect the lien or priority of lien hereof on the Property. Borrower shall pay
Lender a reasonable service charge, together with such title insurance premiums
and attorney's fees as may be incurred at Lender's option, for any such action
if taken at Borrower's request.
13. FORBEARANCE BY LENDER NOT A WAIVER. Any forbearance by Lender in
exercising any right or remedy hereunder, or otherwise afforded by applicable
law, shall not be a waiver of or preclude the exercise of any right or remedy.
The acceptance by Lender of payment of any sum secured by this Instrument after
the due date of such payment shall not be a waiver of Lender's right to either
require prompt payment when due of all other sums so secured or to declare a
default for failure to make prompt payment. The procurement of insurance or the
payment of taxes or other liens or charges by Lender shall not be a waiver of
Lender's right to accelerate the maturity of the indebtedness secured by this
Instrument, nor shall Lender's receipt of any awards, proceeds or damages under
PARAGRAPHS 5 AND 11 hereof operate to cure or waive Borrower's default in
payment of sums secured by this Instrument.
14. ESTOPPEL CERTIFICATE. Borrower shall within ten (10) days of a written
request from Lender furnish Lender with a written statement, duly acknowledged,
setting forth the sums secured by this Instrument and any right of set-off,
counterclaim or other defense which exists against such sums and the obligations
of this Instrument and attaching true, correct and complete copies of the Note,
this Instrument and any other Loan Documents and any and all modifications,
amendments and substitutions thereof.
15. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT. This Instrument is intended
to be a security agreement pursuant to the Uniform Commercial Code for any of
the items specified above as part of the Property which, under applicable law,
may be subject to a security interest pursuant to the Uniform Commercial Code,
and Borrower hereby grants Lender a security interest in said items. Borrower
agrees that Lender may file this Instrument, or a reproduction thereof, in the
real estate records or other appropriate index, as a financing statement for any
of the items specified above as part of the Property. Any reproduction of this
Instrument or of any other security agreement or financing statement shall be
sufficient as a financing statement. In addition, Borrower agrees to execute and
deliver to Lender, upon Lender's request, any financing statements, as well as
extensions, renewals and amendments thereof, and reproductions of this
Instrument in such form as Lender may require to perfect a security interest
with respect to said items. Borrower shall pay all costs of filing such
financing statements and any extensions, renewals, amendments and releases
thereof, and shall pay all reasonable costs and expenses of any record searches
for financing statements Lender may reasonably require. Without the prior
written consent of Lender, Borrower shall not create or suffer to be created
pursuant to the Uniform Commercial Code any other security interest in said
items, including replacements and additions thereto. Upon Borrower's breach of
any covenant or agreement of Borrower contained in this Instrument, including
the covenants to pay when due all sums secured by this Instrument, Lender shall
have the remedies of a secured party under the Uniform Commercial Code and, at
Lender's option, may also invoke the remedies provided in PARAGRAPH 27 of this
Instrument as to such items. In exercising any of said remedies, Lender may
proceed against the items of real property and any items of personal property
specified above as part of the Property separately or together and in any order
whatsoever, without in any way affecting the availability of Lender's remedies
under the Uniform Commercial Code or of the remedies provided in PARAGRAPH 27 of
this Instrument.
16. LEASES OF THE PROPERTY. As used in this PARAGRAPH 16, the word "lease"
shall mean "sublease" if this Instrument is on a leasehold. Borrower shall
comply with and observe Borrower's obligations as landlord under all leases of
the Property or any part thereof. Borrower will not lease any portion of the
Property (other than the guest rooms on an overnight or extended- stay basis)
without the prior written approval of Lender. The request for approval of each
such proposed lease shall be made to Lender in writing and Borrower shall
furnish to Lender (and any loan servicer specified from time to time by Lender):
(i) such biographical and financial information about the proposed tenant as
Lender may require in conjunction with its review, (ii) a copy of the proposed
form of lease, and (iii) a summary of the material terms of such proposed lease
(including, without limitation, rental terms and the term of the proposed lease
and any options).
Borrower, at Lender's request, shall furnish Lender with executed
copies of all leases hereafter made of all or any part of the Property, and all
leases hereafter entered into will be in form and substance subject to the
approval of Lender. All leases of the Property or a separate agreement in
recordable form and substance satisfactory to Lender shall specifically provide
that such leases are subordinate to this Instrument; that the tenant attorns to
Lender, such attornment to be effective upon Lender's acquisition of title to
the Property; that the tenant agrees to execute such further evidences of
attornment as Lender may from time to time request; that the attornment of the
tenant shall not be terminated by foreclosure; that in no event shall Lender, as
holder of this Instrument or as successor landlord, be liable to the tenant for
any act or omission of any prior landlord or for any liability or obligation of
any prior landlord occurring prior to the date that Lender or any subsequent
owner acquire title to the Property; and that Lender may, at Lender's option,
accept or reject such attornments. Except as otherwise provided in this
PARAGRAPH 16, Borrower shall not, without Lender's written consent, execute,
modify, surrender or terminate, either orally or in writing, any lease now
existing or hereafter made of all or any part of the Property, permit an
assignment or sublease of a lease without Lender's written consent, or request
or consent to the subordination of any lease of all or any part of the Property
to any lien subordinate to this Instrument. If Borrower becomes aware that any
tenant proposes to do, or is doing, any act or thing
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<PAGE> 9
which may give rise to any right of set-off against rent, Borrower shall (i)
take such steps as shall be reasonably calculated to prevent the accrual of any
right to a set-off against rent, (ii) notify Lender thereof and of the amount of
said set-offs, and (iii) within ten (10) days after such accrual, reimburse the
tenant who shall have acquired such right to set-off or take such other steps as
shall effectively discharge such set-off and as shall assure that rents
thereafter due shall continue to be payable without set-off or deduction.
Upon Lender's request, Borrower shall absolutely assign to Lender, by
written instrument satisfactory to Lender, all leases now existing or hereafter
made of all or any part of the Property and all security deposits made by
tenants in connection with such leases of the Property. Upon assignment by
Borrower to Lender of any leases of the Property, Lender shall have all of the
rights and powers possessed by Borrower prior to such assignment and Lender
shall have the right to modify, extend or terminate such existing leases and to
execute new leases, in Lender's sole discretion.
17. REMEDIES CUMULATIVE. Each remedy provided in this Instrument is
distinct and cumulative to all other rights or remedies under this Instrument or
afforded by law or equity, and may be exercised concurrently, independently, or
successively, in any order whatsoever.
18. ACCELERATION IN CASE OF BORROWER'S INSOLVENCY. If Borrower shall
voluntarily file a petition under Title 11 of the U.S. Code (the "Act"), as such
Act may from time to time be amended, or under any similar or successor Federal
statute relating to bankruptcy, insolvency, arrangements or reorganizations, or
under any state bankruptcy or insolvency act, or file an answer in any
involuntary proceeding admitting insolvency or inability to pay debts, or if
Borrower shall fail to obtain a vacation or stay of involuntary proceedings
brought for the reorganization, dissolution or liquidation of Borrower, within
one hundred and twenty (120) days of the filing of such involuntary proceeding,
or if Borrower shall be adjudged a bankrupt, or if a trustee or receiver shall
be appointed for Borrower or Borrower's property, or if the Property shall
become subject to the jurisdiction of a Federal bankruptcy court or similar
state court, or if Borrower shall make an assignment for the benefit of
Borrower's creditors, or if there is an attachment, execution or other judicial
seizure of any portion of Borrower's assets and such seizure is not discharged
within ten (10) days, then Lender may, at Lender's option, declare all of the
sums secured by this Instrument to be immediately due and payable without prior
notice to Borrower, and Lender may invoke any remedies permitted by PARAGRAPH 27
of this Instrument. Any attorney's fees and other expenses incurred by Lender in
connection with Borrower's bankruptcy or any of the other aforesaid events shall
be additional indebtedness of Borrower secured by this Instrument pursuant to
PARAGRAPH 8 hereof
19. TRANSFERS OF THE PROPERTY OR BENEFICIAL INTERESTS IN BORROWER.
(a) Except as provided in SUBPARAGRAPH (C) of this PARAGRAPH 19,
upon the sale or transfer of (i) all or any part of the Property, or any
interest therein, or (ii) beneficial interests in Borrower (if Borrower is not a
natural person or persons but is a corporation, partnership, trust or other
legal entity), Lender may, at Lender's option, declare all of the sums secured
by this Instrument to be immediately due and payable, and Lender may invoke any
remedies permitted by PARAGRAPH 27 of this Instrument.
(b) For purposes of this PARAGRAPH 19, a sale or transfer of a
beneficial interest in Borrower shall be deemed to include, but is not limited
to:
(i) if Borrower or any general partner of Borrower is
a corporation or limited liability company, the
voluntary or involuntary sale, conveyance,
transfer or pledge of a majority of such
corporation's or limited liability company's stock
(or the stock of any corporation directly or
indirectly controlling such corporation or limited
liability company by operation of law or
otherwise) or the creation or issuance of new
stock by which an aggregate of more than 49% of
such corporation's or limited liability company's
stock shall be vested in a party or parties who
are not now stockholders;
(ii) if Borrower is a limited liability company, the
change, removal or resignation of a managing
member;
(iii) if Borrower, or any general partner of Borrower,
is a limited or general partnership, the change,
removal or resignation of a general partner or
managing partner or the transfer or pledge of the
partnership interest of any general partner or
managing partner or any profits or proceeds
relating to such partnership interest;
(iv) if Borrower is a limited partnership, the transfer
or pledge of a majority of the limited partnership
interests which in the aggregate constitute more
than a 49% interest in Borrower, or any profits or
proceeds relating to such limited partnership
interests.
(c) Notwithstanding the foregoing, the following shall not be
deemed a sale or transfer of a beneficial interest in Borrower for purposes of
this PARAGRAPH 19:
(i) a transfer of less than a 49% interest in
Borrower, or any partner, shareholder or member of
Borrower, by devise, descent or by operation of
law upon the death of a partner, member or
stockholder of Borrower;
(ii) a transfer of a limited partner, shareholder or
non-managing member interest in Borrower for
estate planning purposes to an immediate family
member of such limited partner, shareholder or
member, or a trust for the benefit of an immediate
family member; or
(iii) a transfer of a general partner or managing member
interest in Borrower for estate planning purposes
to an immediate family member of such partner or
member, or a trust for the benefit of an immediate
family member, subject to obtaining Lender's prior
written consent, which consent shall not be
unreasonably withheld subject to the criteria set
forth in SUBPARAGRAPH (B) of PARAGRAPH 35 of this
Instrument.
See PARAGRAPH 35 of this Instrument.
20. NOTICE. Except for any notice required under applicable law to be given
in another manner, (a) any notice to Borrower provided for in this Instrument or
in the Note shall be given by mailing such notice by certified mail addressed to
Borrower at Borrower's address stated above or at such other address as Borrower
may designate by notice to Lender as provided herein, and (b) any notice to
Lender shall be given by certified mail, return receipt requested, to Lender's
address stated herein or to such other address as Lender may designate by notice
to Borrower as provided herein. Any notice provided for in this Instrument or in
the Note shall be deemed to have been given to Borrower or Lender when given in
the manner designated herein.
21. SUCCESSORS AND ASSIGNS BOUND; JOINT AND SEVERAL LIABILITY; AGENTS;
CAPTIONS. The covenants and agreements herein contained shall bind, and the
rights hereunder shall inure to, the respective successors and assigns of Lender
and Borrower, subject to the provisions of PARAGRAPH 19 hereof. All covenants
and agreements of Borrower shall be joint and
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<PAGE> 10
several. In exercising any rights hereunder or taking any actions provided for
herein, Lender may act through its employees, agents or independent contractors
as authorized by Lender. The captions and headings of the paragraphs of this
Instrument are for convenience only and are not to be used to interpret or
define the provisions hereof.
22. UNIFORM INSTRUMENT; GOVERNING LAW; SEVERABILITY. This form of
instrument combines uniform covenants for national use and non-uniform covenants
with limited variations by jurisdiction to constitute a uniform security
instrument covering real property and related fixtures and personal property.
This Instrument shall be governed by the law of the jurisdiction in which the
Property is located. In the event that any provision of this Instrument or the
Note conflicts with applicable law, such conflict shall not affect other
provisions of this Instrument or the Note which can be given effect without the
conflicting provisions, and to this end the provisions of this Instrument and
the Note are declared to be severable. In the event that any applicable law
limiting the amount of interest or other charges permitted to be collected from
Borrower is interpreted so that any charge provided for in this Instrument or in
the Note, whether considered separately or together with other charges levied in
connection with this Instrument and the Note, violates such law, and Borrower is
entitled to the benefit of such law, such charge is hereby reduced to the extent
necessary to eliminate such violation. The amounts, if any, previously paid to
Lender in excess of the amounts payable to Lender pursuant to such charges as
reduced shall be applied by Lender to reduce the principal of the indebtedness
evidenced by the Note. For the purposes of determining whether any applicable
law limiting the amount of interest or other charges permitted to be collected
from Borrower has been violated, all indebtedness which is secured by this
Instrument or evidenced by the Note and which constitutes interest, as well as
all other charges levied in connection with such indebtedness which constitute
interest, shall be deemed to be allocated and spread over the stated term of the
Note. Unless otherwise required by applicable law, such allocation and spreading
shall be effected in such a manner that the rate of interest computed thereby is
uniform throughout the stated term of the Note.
23. WAIVER OF STATUTE OF LIMITATIONS. Borrower hereby waives the right to
assert any statute of limitations as a bar to the enforcement of the lien of
this Instrument or to any action brought to enforce the Note or any other
obligation secured by this Instrument. THE PROVISIONS OF THIS PARAGRAPH SHALL BE
APPLICABLE ONLY WHEN THE LAW OR PUBLIC POLICY OF SOUTH CAROLINA DO NOT PROHIBIT
SUCH A WAIVER.
24. WAIVER OF MARSHALLING. Notwithstanding the existence of any other
security interest in the Property held by Lender or by any other party, Lender
shall have the right to determine the order in which any or all of the Property
shall be subjected to the remedies provided herein. Lender shall have the right
to determine the order in which any or all portions of the indebtedness secured
hereby are satisfied from the proceeds realized upon the exercise of the
remedies provided herein. Borrower, any party who consents to this Instrument
and any party who now or hereafter acquires a security interest in the Property
and who has actual or constructive notice hereof hereby waives any and all right
to require the marshalling of assets in connection with the exercise of any of
the remedies permitted by applicable law or provided herein.
25. INTENTIONALLY OMITTED.
26. ASSIGNMENT OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION. As
part of the consideration for the indebtedness evidenced by the Note, Borrower
hereby absolutely and unconditionally assigns and transfers to Lender all the
rents and revenues of the Property, including the Rents and those other rents
and revenues of the Property now due, past due, or to become due by virtue of
any lease or other agreement for the occupancy or use of all or any part of the
Property, regardless of to whom the rents and revenues of the Property are
payable, including, without limitation, leases or other agreements with respect
to guest rooms, meeting rooms, food and beverage facilities and vending
machines. Borrower hereby authorizes Lender or Lender's agents to collect the
aforesaid rents and revenues and hereby directs each tenant of the Property to
pay such rents to Lender or Lender's agents; provided, however, that prior to
written notice given by Lender to Borrower of the breach by Borrower of any
covenant or agreement of Borrower in this Instrument or any other Loan Document,
Borrower shall collect and receive all rents and revenues of the Property as
trustee for the benefit of Lender and Borrower, to apply the rents and revenues
so collected to the sums secured by this Instrument in the order provided in
PARAGRAPH 3 hereof with the balance, so long as no such breach has occurred, to
the account of Borrower, it being intended by Borrower and Lender that this
assignment of rents constitutes an absolute assignment and not an assignment for
additional security only. Upon delivery of written notice by Lender to Borrower
of the breach by Borrower of any covenant or agreement of Borrower in this
Instrument, and without the necessity of Lender entering upon and taking and
maintaining full control of the Property in person, by agent or by a
court-appointed receiver, Lender shall immediately be entitled to possession of
all rents and revenues of the Property as specified in this PARAGRAPH 26 as the
same become due and payable, including, but not limited to, rents then due and
unpaid, and all such rents shall immediately upon delivery of such notice be
held by Borrower as trustee for the benefit of Lender only; provided, however,
that the written notice by Lender to Borrower of the breach by Borrower shall
contain a statement that Lender exercises its rights to such rents. Borrower
agrees that commencing upon delivery of such written notice of Borrower's breach
by Lender to Borrower, each tenant of the Property shall make such rents payable
to and pay such rents to Lender or Lender's agents on Lender's written demand to
each tenant therefor, delivered to each tenant personally, by mail or by
delivering such demand to each retail store, without any liability on the part
of said tenant to inquire further as to the existence of a default by Borrower.
Borrower hereby covenants that Borrower has not executed any prior
assignment of said rents, that Borrower has not performed, and will not perform,
any acts or has not executed, and will not execute, any instrument which would
prevent Lender from exercising its rights under this PARAGRAPH 26, and that at
the time of execution of this Instrument there has been no anticipation or
prepayment of any of the rents of the Property for more than one month prior to
the due dates of such rents. Borrower covenants that Borrower will not hereafter
collect or accept payment of any rents of the Property more than one month prior
to the due dates of such rents. Borrower further covenants that Borrower will
execute and deliver to Lender such further assignments of rents and revenues of
the Property as Lender may from time to time request.
Upon Borrower's breach of any covenant or agreement of Borrower in this
Instrument, or upon Borrower's breach of any material covenant of Borrower as
landlord or lessor under any lease, Lender shall be entitled to the appointment
of a receiver for the Property, without notice to Borrower or any other person
or entity and Lender may in person, by agent or by a court appointed receiver,
regardless of the adequacy of Lender's security, enter upon and take and
maintain full control of the Property in order to perform all acts necessary and
appropriate for the operation and maintenance thereof including, but not limited
to, the execution, cancellation or modification of leases, the collection of all
rents and revenues of the Property, the enforcement or fulfillment of any terms,
condition or provision of any lease, the making of repairs to the Property and
the execution or termination of contracts providing for the management or
maintenance of the Property, all on such terms as are deemed best to protect the
security of this Instrument. In the event Lender elects to seek the appointment
of a receiver for the Property upon Borrower's breach of any covenant or
agreement of Borrower in this Instrument, Borrower hereby expressly consents to
the appointment of such receiver. Lender or the receiver shall be entitled to
receive a reasonable fee for so managing the Property.
All rents and revenues collected subsequent to delivery of written
notice by Lender to Borrower of the breach by Borrower of any covenant or
agreement of Borrower in this Instrument shall be applied first to the costs, if
any, of taking control of and managing the Property and collecting the rents,
including, but not limited to, attorney's fees, receiver's fees, premiums on
receiver's bonds, costs of repairs to the Property, premiums on insurance
policies, taxes, assessments and other charges on the Property, and the costs of
discharging any obligation or liability of Borrower as lessor or landlord of the
Property and then to the sums secured by this Instrument. Lender or the receiver
shall have access to the books and records used in the operation and maintenance
of the Property and shall be liable to account only for those rents actually
received. Lender shall not be liable to Borrower, anyone claiming under or
through Borrower or anyone having an interest in the Property by reason of
anything done or left undone by Lender under this PARAGRAPH 26.
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<PAGE> 11
If the rents of the Property are not sufficient to meet the costs, if
any, of taking control of and managing the Property and collecting the rents,
any funds expended by Lender for such purposes shall become indebtedness of
Borrower to Lender secured by this Instrument pursuant to PARAGRAPH 8 hereof.
Unless Lender and Borrower agree in writing to other terms of payment, such
amounts shall be payable upon notice from Lender to Borrower requesting payment
thereof and shall bear interest from the date of disbursement at the rate stated
in the Note unless payment of interest at such rate would be contrary to
applicable law, in which event such amounts shall bear interest at the highest
rate which may be collected from Borrower under applicable law.
Any entering upon and taking and maintaining of control of the Property
by Lender or the receiver and any application of rents as provided herein shall
not cure or waive any default hereunder or invalidate any other right or remedy
of Lender under applicable law or provided herein. This assignment of rents of
the Property shall terminate at such time as this Instrument ceases to secure
indebtedness held by Lender.
NON-UNIFORM COVENANTS. Borrower and Lender further covenant and agree as
follows:
27. ACCELERATION; REMEDIES. Upon Borrower's breach of any representation,
covenant or agreement of Borrower in this Instrument, the Note, the
Environmental Indemnity Agreement or any other Loan Document, including, but not
limited to, the covenants to pay when due any sums secured by this Instrument,
Lender, at Lender's option, may declare all of the sums secured by this
Instrument to be immediately due and payable without further demand, and may
invoke the power of sale and any other remedies permitted by applicable law or
provided herein. Borrower acknowledges that the power of sale herein granted may
be exercised by Lender without prior judicial hearing. Borrower has the right to
bring an action to assert the non-existence of a breach or any other defense of
Borrower to acceleration and sale. Lender shall be entitled to collect all costs
and expenses incurred in pursuing such remedies, including, but not limited to,
attorney's fees and costs of documentary evidence, abstracts and title reports.
Notwithstanding the foregoing, Lender shall not invoke any remedy
provided hereunder, under the Loan Documents, at law or in equity upon
Borrower's breach of a non-monetary representation, covenant, or agreement of
Borrower in this Instrument, the Note, the Environmental Indemnity Agreement or
any other Loan Document, other than a breach of PARAGRAPHS 5, 19, 32(N), 32(O)
OR 32(Q) of this Instrument, or PARAGRAPH 2 of the Environmental Indemnity
Agreement, provided Borrower shall have, on or before the date that is ten (10)
days after Borrower's receipt of notice thereof, cured such default or, if such
default cannot be cured within such ten (10) day period, Borrower shall have
commenced to cure within such ten (10) day period and is taking all actions
required to diligently cure such default and such default is cured on or before
the date that is thirty (30) days after Borrower's receipt of a notice to cure
such default.
See PARAGRAPH 34 of this Instrument.
28. RELEASE. Upon payment of all sums secured by this Instrument, Lender
shall release this Instrument. Borrower shall pay Lender's $100 for the release
of this Instrument.
29. ATTORNEY'S FEES. As used in this Instrument and in the Note,
"attorney's fees" shall include attorney's fees, if any, which may be awarded by
an appellate court.
30. NONRECOURSE LOAN. Subject to the qualifications below in this
paragraph, the Borrower shall be liable for payment and performance of all of
the obligations, covenants and agreements of the Borrower under the Note, this
Instrument, the Assignment of Leases and Rents (herein so-called), dated of even
date herewith, executed by Borrower to Lender, the Environmental Indemnity
Agreement dated of even date herewith, executed by Borrower and Lender, and all
other instruments and documents evidencing, securing or governing the terms of
the loan (the "Loan") evidenced by the Note (collectively, the "Loan
Documents"), to the full extent (but only to the extent) of all of the Property
and any other items, property or amounts which are collateral or security for
the Loan. If a default occurs in the timely and proper payment of any portion of
such indebtedness or in the timely performance of any obligations, agreements or
covenants, except as set forth below in this paragraph, neither Borrower, nor
any partner of Borrower, nor any partner, stockholder, director or officer of
any partner of Borrower, shall be personally liable for the repayment of any of
the principal of, interest on, or prepayment fees or late charges, or other
charges or fees due in connection with the Loan, the performance of any
covenants of Borrower under the Note, this Instrument or any of the other Loan
Documents or for any deficiency judgment which Lender may obtain after default
by Borrower. Notwithstanding the foregoing provisions of this paragraph or any
other agreement, the Borrower shall be fully and personally liable for any and
all: (1) liabilities, costs, losses, damages, expenses or claims (including,
without limitation, any reduction in the value of the Property or any other
items, property or amounts which are collateral or security for the Loan)
suffered or incurred by Lender by reason of or in connection with (a) any fraud
or misrepresentation by the Borrower in connection with the Loan, including but
not limited to any misrepresentation of the Borrower contained in any Loan
Document, (b) any failure to pay taxes, insurance premiums (except to the extent
that such taxes and insurance premiums are then held by the Lender),
assessments, franchise fees, charges for labor or materials or other charges
that can create liens on any portion of the Property, (c) any misapplication of
(i) proceeds of insurance covering any portion of the Property, or (ii) proceeds
of the sale or condemnation of any portion of the Property, (d) any rentals,
income, profits, issues and products received by or on behalf of the Borrower
subsequent to the date on which the Lender gives written notice that a default
has occurred under the Loan and not applied to the payment of principal or
interest due under the Note or the payment of operating expenses (excluding any
operator's, manager's or developer's fee paid to the Borrower or any affiliate
of the Borrower) of the Property, (e) any failure to maintain, repair or restore
the Property in accordance with any Loan Document to the extent not covered by
insurance proceeds made available to the Lender, (f) any failure by the Borrower
to deliver to the Lender all unearned advance rentals and security deposits paid
by tenants of the Property received by or on behalf of the Borrower, and not
refunded to or forfeited by such tenants, (g) any failure by the Borrower to
return to, or reimburse the Lender for, all personalty taken from the Property
by or on behalf of the Borrower, except in accordance with the provisions of
this Instrument, and (h) any and all indemnities given by the Borrower to the
Lender set forth in the Environmental Indemnity Agreement or any other Loan
Document in connection with any environmental matter relating to the Property;
and (2) court costs and all attorneys' fees provided for in any Loan Document.
Furthermore, no limitation of liability or recourse provided above in this
paragraph shall (x) apply to the extent that the Lender's rights of recourse to
the Property are suspended, reduced or impaired by or as a result of any act,
omission or misrepresentation of the Borrower or any other party now or
hereafter liable for any part of the Loan and accrued interest thereon, or by or
as a result of any case, action, suit or proceeding to which the Borrower or any
such other party, voluntarily becomes a party; or (y) constitute a waiver,
forfeiture, abrogation or limitation of or on any right accorded by any law
establishing a debtor relief proceeding, including, but not limited to, Title
11, U.S. Code, which right provides for the assertion in such debtor relief
proceeding of a deficiency arising by reason of the insufficiency of collateral
notwithstanding an agreement of the Lender not to assert such deficiency.
31. REPRESENTATIONS OF BORROWER. The Borrower hereby represents and
warrants to Lender the following:
(a) Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. There are no
proceedings or actions pending, threatened or contemplated for the liquidation,
termination or dissolution of Borrower.
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<PAGE> 12
(b) Borrower has delivered to Lender a true, correct, and complete
rent roll (the "Rent Roll") of annual and monthly rents payable by all Existing
Tenants, including all percentage rents, if any, expiration dates of the
Existing Leases, and the amount of security deposit being held by Borrower under
each Existing Lease, if any; and Borrower has not granted any Existing Tenant
any rent concessions (whether in form of cash contributions, work agreements,
assumption of an Existing Tenant's other obligations, or otherwise) or
extensions of time whatsoever not reflected in such Rent Roll.
(c) There are no legal proceedings commenced (or, to the best of
the knowledge of the Borrower, threatened) against Borrower by any Existing
Tenant; no rental in excess of one month's rent has been prepaid under any of
the Existing Leases; each of the Leases is valid and binding on the parties
thereto in accordance with its terms; and the execution of this Instrument and
the other Loan Documents will not constitute an event of default under any of
the Existing Leases.
(d) Borrower currently holds the security deposits (if any)
specified in the Existing Leases and has not given any credit, refund, or set
off against such security deposits to any person.
(e) There are no residential units in the Property, and no portion
of the Property is an apartment or other unit subject to any form or rent
control, stabilization or regulation; and no person presently occupies any part
of the Property for dwelling purposes.
(f) Except for Borrower, there are no persons or entities
occupying space in the Property as tenants other than the persons or entities
specifically named in the Existing Leases.
(g) Except as specifically listed in the schedule of exceptions to
coverage in the title policy insuring Lender's interest in the Property,
Borrower is now in possession of the Property; Borrower's possession of the
Property is peaceable and undisturbed; Borrower does not know any facts by
reason of which any claim to the Property, or any part thereof, might arise or
be set up adverse to Borrower; and the Property is free and clear of (i) any
lien for taxes (except real property taxes not yet due and payable for the
calendar year in which this Instrument is being executed), and (ii) any
easements, rights-of-way, restrictions, encumbrances, liens or other exceptions
to title by mortgage, decree, judgment, agreement, instrument, or, to the
knowledge of Borrower, proceeding in any court.
(h) All charges for labor, materials or other work of any kind
furnished in connection with the construction, improvement, renovation or
rehabilitation of the Property or any portion thereof have been paid in full,
and no unreleased affidavit claiming a lien against the Property, or any portion
thereof, for the supplying of labor, materials or services for the construction
of improvements on the Property has been executed or recorded in the mechanic's
lien or other appropriate records in the county in which the Property is
located.
(i) The Property and the current and contemplated uses of the
Property are in compliance with all applicable federal, state and municipal
laws, rules, regulations and ordinances, applicable restrictions, zoning
ordinances, building codes and regulations, building lines and easements,
including, without limitation, federal and state environmental protection law
and the Americans with Disabilities Act of 1990, the Fair Housing Amendments Act
of 1988, all state and local laws or ordinances related to handicapped access,
and any statute, rule, regulation, ordinance, or order of governmental bodies or
regulatory agencies, or any order or decree of any court adopted or enacted with
respect thereto (collectively, "Applicable Laws"); no governmental authority
having jurisdiction over any aspect of the Property has made a claim or
determination that there is any such violation; the Property is not included in
any area identified by the Secretary of Housing and Urban Development pursuant
to the Flood Disaster Protection Act of 1973, as amended, as an area having
special flood hazards; and all permits, licenses and the like which are
necessary for the operation of the Property have been issued and are in full
force and effect.
(j) There have been no material adverse changes, financial or
otherwise, in the condition of Borrower from that disclosed to Lender in the
loan application submitted to Lender by Borrower, or in any supporting data
submitted in connection with the Loan, and all of the information contained
therein was true and correct when submitted and is now substantially and
materially true and correct on the date hereof.
(k) There is no claim, litigation or condemnation proceeding
pending, or, to the knowledge of the Borrower, threatened, against the Property
or Borrower, which would affect the Property or Borrower's ability to perform
its obligations in the connection with the Loan.
(l) Borrower does not own any real property or assets other than
the Property and does not operate any business other than the management and
operation of the Property.
(m) No proceedings in bankruptcy or insolvency has ever been
instituted by or against Borrower or any affiliate thereof, and no such
proceeding is now pending or contemplated.
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<PAGE> 13
(n) Borrower is, and if there are any general partners or members
of Borrower, such partners or members are, solvent pursuant to the laws of the
United States, as reflected by the entries in Borrower's books and records and
as reflected by the actual facts.
(o) The Loan Documents have been duly authorized, executed and
delivered by Borrower and constitute valid and binding obligations of Borrower,
enforceable against Borrower in accordance with their respective terms. No
approval, consent, order or authorization of any governmental authority and no
designation, registration, declaration or filing with any governmental authority
is required in connection with the execution and delivery of the Note, this
Instrument or any other Loan Document.
(p) The execution and delivery of the Loan Documents will not
violate or contravene in any way the articles of incorporation or bylaws or
partnership agreement, articles of organization or operating agreement as the
case may be, of Borrower or any indenture, agreement or instrument to which
Borrower is a party or by which it or its property may be bound, or be in
conflict with, result in a breach of or constitute a default under any such
indenture, agreement or other instrument, result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of the
property or assets of Borrower, except as contemplated by the provisions of such
Loan Documents, and no action or approval with respect thereto by any third
person is required.
(q) No part of the Property is all or a part of Borrower's
homestead.
(r) The Property is served by all utilities required for the
current or contemplated use thereof. All utility service is provided by public
utilities and the Property has accepted or is equipped to accept such utility
service.
(s) All public roads and streets necessary for service of and
access to the Property for the current or contemplated use thereof have been
completed, are serviceable and all-weather and are physically and legally open
for use by the public.
(t) The Property is serviced by public water and sewer systems.
(u) The Property is free from damage caused by fire or other
casualty.
(v) All liquid and solid waste disposal, septic and sewer systems
located on the Property are in a good and safe condition and repair and in
compliance with all Applicable Laws.
(w) All collective bargaining agreements and other employee
agreements to which Borrower is a party are in full force and effect; there are
no strikes or material disputes existing or, to Borrower's knowledge,
threatened, and Borrower is not in default under any such agreements.
(x) Borrower is the sole fee simple owner of the Collateral and
the Collateral is free of any lien, security interest, encumbrance, or other
right of any third party.
32. BORROWER'S ADDITIONAL COVENANTS. Borrower hereby covenants, agrees and
undertakes to:
(a) fulfill and perform all of Borrower's obligations as landlord
or lessor under any lease; will promptly send Lender copies of any notices of
default received from the tenant under any lease; and will enforce (short of
terminating such lease) the performance by the tenant of the tenant's
obligations under any lease;
(b) not make, enter into, execute, cancel, amend or modify any
lease without the prior written consent of Lender;
(c) not approve any assignment of a lease, of any sublease or
underlease, without the prior written consent of Lender;
(d) not cancel or modify any guaranty of a lease, or release any
security deposit or letter of credit constituting security under a lease,
without the prior written consent of Lender;
(e) not accept prepayment of any installment of rent from any
tenants of the Property for a period of more than one (1) month in advance;
(f) not further assign the whole (or any part of) the leases or
the rents;
(g) fulfill and perform all of Borrower's obligations under the
Franchise Agreement;
(h) not cancel, amend or modify the Franchise Agreement without
the prior written consent of Lender;
(i) not allow any breach, withdrawal, cancellation, rescission,
termination, alteration or modification of the Franchise Agreement or any other
contract, agreement, license, permit or certificate affecting the Property;
(j) not undertake or commence any alterations of any improvements
on the Property the cost of which is in excess of five percent (5%) of the then
original principal amount of the Note, without the prior written consent of
Lender;
(k) from time to time, at the request of Lender, (i) promptly
correct any defect, error or omission which may be discovered in the contents of
this Instrument or in any other Loan Document or in the execution or
acknowledgement thereof; (ii) execute, acknowledge, deliver and record and/or
file such further documents or instruments (including, without limitation,
further mortgages, security agreements, financing statements, continuation
statements, assignments of rents or leases and environmental indemnity
agreements) and perform such further acts and provide such further assurances as
may be necessary, desirable or proper, in Lender's opinion, to carry out more
effectively the purposes of this Instrument and such other instruments and to
subject to the liens and security interests hereof and thereof any property
intended by the terms hereof or thereof to be covered hereby or thereby,
including specifically, but without limitation, any renewals, additions,
substitutions, replacements, or appurtenances to the Property; provided that
such documents or instruments do not materially increase Borrower's liability
under the Loan Documents; and (iii) execute, acknowledge, deliver, procure, and
file and/or record any document or instrument (including specifically, but
without limitation, any financing statement) deemed advisable by Lender to
protect the liens and the security interests herein granted against the rights
or interests of third persons; provided that such documents or instruments do
not materially increase Borrower's liability under the Loan Documents. Borrower
will pay all reasonable costs connected with any of the foregoing in this
SUBPARAGRAPH (K);
(l) continuously maintain Borrower's existence and right to do
business in the State of South Carolina;
(m) at any time any law shall be enacted imposing or authorizing
the imposition of any tax upon this Instrument, or upon any rights, titles,
liens or security interests created hereby, or upon the obligations secured
hereby or any part thereof, immediately pay all such taxes; provided that, if
such law as enacted makes it unlawful for Borrower to pay such tax, Borrower
shall not pay nor be obligated to pay such tax, and in the alternative, Borrower
may, in the event of the enactment of such a law, and must, if it is unlawful
for Borrower to pay such taxes, prepay the obligations secured hereby in full
within sixty (60) days after demand therefor by Lender;
10
<PAGE> 14
(n) not execute or deliver any deed of trust, mortgage or pledge
of any type covering all or any portion of the Property;
(o) not acquire any real property or assets (other than the
Property) or operate any business other than the management and operation of the
Property during the term of the Loan;
(p) not permit any drilling or exploration for or extraction,
removal or production of any mineral, natural element, compound or substance
from the surface or subsurface of the Property regardless of the depth thereof
or the method of mining or extraction thereof;
(q) not change its name, identity, structure or employer
identification number during the term of the Loan;
(r) pay on demand all reasonable and bona fide out-of-pocket
costs, fees and expenses and other expenditures, including, but not limited to,
reasonable attorneys' fees and expenses, paid or incurred by Lender to third
parties incident to this Instrument or any other Loan Document (including, but
not limited to, reasonable attorneys' fees and expenses in connection with the
negotiation, preparation and execution hereof and of any other Loan Document and
any amendment hereto or thereto, any release hereof, any consent, approval or
waiver hereunder or under any other Loan Document, the making of any advance
under the Note, and any suit to which Lender is a party involving this
Instrument or the Property) or incident to the enforcement of the obligations
secured hereby or the exercise of any right or remedy of Lender under any Loan
Document; and
(s) maintain and keep the Property in compliance with all
Applicable Laws.
(t) manage and operate the Property and provide services to guests
of the Property as a first class hotel so as to maximize the business and cash
flow of the Property;
(u) not lease (including in connection with any purchase money
financing) any real or personal property, other than personal property that is
routinely leased in the hotel industry and is required for the Property as
currently operated;
(v) not dispose of items of personal property included in the
Collateral except in the ordinary course of business and provided that (1) such
items of personal property are replaced (by purchase, subject only to Lender's
lien, and not leased) with similar items of personal property of equal or
greater value which are free and clear of any and all security interests or
claims in favor of third parties, but which are subject to the lien of Lender
granted under this Instrument, and (2) if the value of this property being
disposed of, together with the value of all other property previously disposed
of during any calendar year will exceed ten thousand dollars ($10,000), such
disposal has been approved in writing by Lender; and
(w) not amend, modify, cancel or terminate the existing management
agreement, or enter into, amend, modify or terminate any future management
agreement, with respect to the Property without Lender's prior written approval,
to be given or withheld in Lender's sole discretion. Any new management
agreement must contain a provision permitting Lender (without liability) to
terminate (without cost or liability) such agreement if Lender (or its assignee
or nominee) commences foreclosure of this Instrument or otherwise owns or
operates all or any part of the Property or if there exists a breach of any
representation, covenant or agreement contained in this Instrument.
33. RESERVES.
(a) CAPITAL IMPROVEMENTS/FURNITURE, FIXTURES AND EQUIPMENT
RESERVE.
(i) Commencing on the first day a monthly installment of
principal and interest is due and payable under the Note and continuing on the
first calendar day of each calendar month thereafter, Borrower shall deliver to
Lender, together with the regular installments of principal and interest an
amount (a "CIR/FF&E Payment") equal to $16,666.67 for thirty-six (36) months
and equal to $8,333.34 thereafter. Each CIR/FF&E Payment shall be deemed "Other
Impositions" and "Funds" as defined in paragraph 2 of this Instrument. The
CIR/FF&E Payments will be placed in interest bearing deposits or accounts in
the name of Lender or Lender's loan servicer at the same financial
institution(s) as the other Funds (the "Other Impositions Account"), shall be
held in accordance with the terms of paragraph 2 of this Instrument, and may be
drawn on by Borrower for deferred maintenance, ongoing capital improvement
expenditures and/or the replacement of furniture, fixtures, and/or equipment,
in connection with the Property, pursuant to the terms set forth below in
subparagraph 33(a)(ii). At Lender's discretion, the CIR/FF&E Payments may be
increased to reflect any increase in the "Consumer Price Index" published by
the Bureau of Labor Statistics of the U.S. Department of Labor, All Items, U.S.
city average, all urban consumers (presently denominated "CPI-U"), or a
successor or substitute index appropriately adjusted (the "CPI"). In the event
Lender shall elect not to increase the CIR/FF&E Payment for any given year by
the CPI, Lender, at its sole discretion, may during any subsequent year elect
to increase the CIR/FF&E Payment by the aggregate amount of CPI increases which
Lender otherwise was entitled to make during the previous years in which it did
not elect to make such increases.
(ii) So long as Borrower (x) is not in default under any
of the terms of the Note, this Instrument or any of the other Loan Documents,
and (y) no situation exists which with the passage of time or the giving of
notice or both would constitute a default under the Note, this Instrument or
any of the other Loan Documents, Borrower, subject to the following provisions
of this subparagraph (ii) and upon ten (10) days' prior written notice to
Lender and Lender's loan servicer (which notice shall include a brief statement
of the purpose for which the advance is to be used), shall be entitled to draw
on the CIR/FF&E Payments on deposit in the Other Impositions Account solely for
the payment of deferred maintenance, ongoing capital improvement expenditures
and/or the replacement of furniture, fixtures and/or equipment for the
Property. Borrower may not make any drawing on the Other Impositions Account
(1) for less than $500 and (2) without the prior consent of Lender. Lender
reserves the right to require such information as Lender may reasonably
require, and to withhold consent in the event that Lender deems it necessary to
do so. Without limiting the foregoing, Lender may request, in connection with a
request by Borrower for a drawing on the Other Impositions Account, that
Borrower furnish written evidence reasonably satisfactory to Lender that the
amount requested by Borrower is for work performed, services or materials
furnished, and bills paid or payable with respect to the deferred maintenance,
ongoing capital improvement expenditures and/or the replacement of furniture,
fixtures and/or equipment (including, but not limited to, contracts and invoices
for work performed or materials supplied and mechanics' and materialmen' lien
releases and waivers from such parties performing such work or supplying such
material(s). Lender also reserves the right to make any disbursement or portion
thereof from the Other Impositions Account directly to the party performing such
work or supplying such materials. Lender or Lender's servicing agent, as the
case may be, shall be entitled to charge Borrower a reasonable processing fee
for administering and reviewing Borrower's draw requests. In addition, Lender
shall be reimbursed by Borrower for any costs incurred by Lender or Lender's
servicing agent in inspecting the Property in connection with Borrower's draw
requests. Any such processing fees and inspection costs shall be deducted by
Lender from the Funds on deposit or account or, at Lender's option, shall be
paid to Lender by Borrower within ten (10) days of Lender's written demand.
(iii) Each CIR/FF&E Payment is pledged as additional
security for the sums secured by this Instrument and any of the other Loan
Documents. Borrower hereby grants to Lender a lien and security interest in
each CIR/FF&E Payment and the deposit or other accounts in which such payments
are placed.
(b) DEFERRED MAINTENANCE RESERVE
(i) Contemporaneously with the execution hereof, Borrower
shall deliver the sum of $100,000.00 to Lender (the "Deferred Maintenance
Reserve") to be held in accordance with the provisions of this paragraph 33(b)
for the purpose of ensuring Borrower's performance of certain deferred
maintenance described in that certain Engineering Report dated November 13,
1997, prepared by Lexington Group International, Inc., covering the Property
(the "Deferred Maintenance").
11
<PAGE> 15
Borrower shall complete the Deferred Maintenance within ninety (90) calendar
days after the date hereof, and failure to do so shall, in Lender's sole and
absolute discretion, be deemed an event of default under this Instrument, the
Note and the other Loan Documents.
(ii) The Deferred Maintenance Reserve shall be deemed
"Other Impositions" and "Funds" as defined in paragraph 2 of this Instrument.
The Deferred Maintenance Reserve will be placed in a non-interest bearing
account in the name of Lender or Lender's loan servicer at the same financial
institution(s) as the other Funds (the "Deferred Maintenance Account") and
shall be held in accordance with the terms of paragraph 2 of this Instrument.
So long as Borrower (x) is not in default under any of the terms of this Note,
this Instrument or any of the other Loan Documents, and (y) no situation exists
which with the passage of time or the giving of notice or both would constitute
a default under the Note, this Instrument or any of the other Loan Documents,
Borrower, subject to the following provisions of this subparagraph (b) and upon
ten (10) days' prior written notice to Lender and, if applicable, Lender's loan
servicer (the "Deferred Maintenance Request") and satisfaction of the other
requirements set forth in this paragraph 33(b), shall be entitled to withdraw
the entire amount then held in the Deferred Maintenance Account. The Deferred
Maintenance Request shall include copies of invoices for all items or materials
purchased and all labor and services provided in connection with the Deferred
Maintenance, and Borrower shall certify and provide evidence satisfactory to
Lender, in Lender's reasonable discretion, including, without limitation, final
lien releases executed by all mechanics and materialmen, that the Deferred
Maintenance has been completed in a good and workmanlike manner, free and clear
of any mechanics' or materialmen's liens and encumbrances and is in compliance
with all applicable laws, ordinances, rules and regulations of any governmental
authority, agency or instrumentality having jurisdiction over the Property.
Notwithstanding the receipt by Lender of the aforesaid certification and
evidence, Lender reserves the right to inspect, or have Lender's agent inspect,
the Property to verify that the Deferred Maintenance has been satisfactorily
completed on a lien free basis. Borrower shall pay all costs necessary for
completion of the Deferred Maintenance without regard to the sufficiency of the
funds in the Deferred Maintenance Account. Lender or Lender's servicing agent,
as the case may be, shall be entitled to charge Borrower a reasonable
processing fee for administering and reviewing the Deferred Maintenance
Request. In addition, Lender shall be reimbursed by Borrower for any costs
incurred by Lender or Lender's servicing agent in inspecting the Property in
connection with the Deferred Maintenance Request. Any such processing fees and
inspection costs shall be deducted by Lender from the Deferred Maintenance
Account or, at Lender's option, shall be paid to Lender by Borrower within ten
(10) days of Lender's written demand.
(iii) The Deferred Maintenance Reserve is pledged as
additional security for the sums secured by this Instrument and any of the
other Loan documents. Borrower hereby grants to Lender a lien and security
interest in the Deferred Maintenance Reserve and the Deferred Maintenance
Account.
34. FORECLOSURE. South Carolina law requires judicial foreclosure.
35. ASSUMABILITY.
(a) So long as (i) Borrower is not in default under any of the
terms of the Note, this Instrument or any other Loan Document, and (ii) no
situation exists which with the passage of time or the giving of notice or both
would constitute a default under the Note, this Instrument or any other Loan
Document, in the event Borrower desires to transfer all of the Property to
another party (the "Transferee") and have the Transferee assume all of
Borrower's obligations under the Note, this Instrument and all of the other Loan
Documents (collectively, the "Transfer and Assumption"), Borrower, subject to
the terms of this paragraph, may make a written application to Lender for
Lender's consent to the Transfer and Assumption, subject to the conditions set
forth in SUBPARAGRAPH (B) of this PARAGRAPH 35. Together with such written
application (and afterwards if requested by Lender), Borrower will submit to
Lender true, correct and complete copies of any and all information and
documents of any kind requested by Lender concerning the Property, Transferee
and/or Borrower, together with any review fee required by Lender, in Lender's
sole discretion.
(b) Lender shall not unreasonably withhold its consent to a
Transfer and Assumption provided and upon the condition that:
(i) Lender receives an opinion from counsel acceptable
to Lender that (x) such Transfer and Assumption
shall not affect, in any way, the enforceability
of the Loan Documents or the lien status, and (y)
that the Transferee complies in all respects with
the provisions of PARAGRAPH 31(n) and PARAGRAPH
32(l) of this Instrument and such other conditions
concerning the organizational structure of the
Transferee as were required by Lender at the time
of the making of the Loan;
(ii) Borrower has submitted to Lender true, correct and
complete copies of any and all information and
documents of any kind requested by Lender
concerning the Property, Transferee and/or
Borrower;
(iii) the Transferee, in Lender's sole judgment, has
sufficient experience in managing assets similar
in size and type to the Property;
(iv) in Lender's sole judgment, the Transferee and the
partners, members or shareholders of the
Transferee are financially sound or have
sufficient financial resources to manage the
Property for the term of the Loan;
(v) the Loan has been placed, or Lender plans to place
the Loan, in an offering of Securities (as defined
in PARAGRAPH 37) and Lender receives written
confirmation from the rating agencies that the
Transfer and Assumption will not result in any
downgrade, qualification or withdrawal of the
ratings assigned to the pool and assets in which
the Loan has been placed; and
(vi) Borrower has paid any review fee required by Lender.
(c) If Lender consents to the Transfer and Assumption, the
Transferee and/or Borrower as the case may be, shall deliver the following to
Lender:
(i) Borrower shall deliver to Lender an assumption fee
in the amount of one percent (1%) of the then
unpaid principal balance of the Loan;
(ii) Borrower and Transferee shall execute and deliver
to Lender any and all documents required by
Lender, in form and substance required by Lender,
in Lender's sole discretion (the "Assumption
Documents");
(iii) Borrower shall cause to be delivered to Lender, an
endorsement to the mortgagee policy of title
insurance then insuring the lien created by this
Instrument in form and substance acceptable to
Lender, in Lender's sole discretion (the
"Endorsement"); and
12
<PAGE> 16
(iv) Borrower shall deliver to Lender a payment in the
amount of all costs incurred by Lender in
connection with the Transfer and Assumption,
including but not limited to, Lender's attorneys
fees and expenses, all recording fees for the
Assumption Documents, and all fees payable to the
title company for the delivery to Lender of the
Endorsement.
(d) Notwithstanding anything contained in this paragraph to the
contrary, (x) under no circumstances may the Property and Loan be transferred
and assumed by any party under the terms of this paragraph more than once during
the entire term of the Loan and (y) except based on Lender's written agreement
to the Transfer and Assumption and Borrower's and Transferee's compliance with
all of the terms and provisions of this paragraph, the terms and provisions of
this paragraph shall in no way amend or modify the terms and provisions
contained in PARAGRAPH 19 of this Instrument.
36. WAIVER OF JURY TRIAL. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY RIGHT THE BORROWER MAY HAVE TO A TRIAL BY JURY IN
RESPECT TO ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN
CONJUNCTION WITH THE NOTE, THIS INSTRUMENT, ANY OTHER LOAN DOCUMENT, ANY OTHER
AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF
EITHER PARTY. THE PROVISIONS OF THIS PARAGRAPH SHALL BE APPLICABLE ONLY WHEN THE
LAW OR PUBLIC POLICY OF SOUTH CAROLINA DO NOT PROHIBIT SUCH A WAIVER.
37. TRANSFER OF LOAN. Lender may, at any time, sell, transfer or assign the
Note, this Instrument and the Loan Documents, or any part thereof, and any or
all servicing rights with respect thereto, or grant participations therein or
issue mortgage pass-through certificates or other securities evidencing a
beneficial interest in a rated or unrated public offering or private placement
(the "Securities"). Lender may forward to each purchaser, transferee, assignee,
servicer, participant, investor in such Securities or any rating agency rating
such Securities (singularly, an "Investor," and collectively, the "Investors")
and each prospective Investor, all documents and information which Lender now
has or may hereafter acquire relating to the Loan and to Borrower, any
guarantor, any indemnitors and/or the Property, whether furnished by Borrower,
any guarantor, any indemnitors or otherwise, as Lender determines necessary or
desirable. Borrower shall furnish and Borrower consents to Lender furnishing to
such Investors or such prospective Investors or rating agency any and all
information concerning the Property, the leases, the financial condition of
Borrower, any guarantor and any indemnitor as may be requested by Lender, any
Investor or any prospective Investor or rating agency in connection with any
sale, transfer or participation interest.
38. WAIVER OF HOMESTEAD. Borrower hereby waives all right of homestead
exemption in the Property.
39. WAIVER OF APPRAISAL. Borrower hereby waives any right of appraisal of
the Property. In the event of foreclosure pursuant to PARAGRAPH 27 hereof,
Lender may, at Lender's option, obtain an appraisal of the Property and any
funds expended by Lender for such purpose shall become indebtedness of Borrower
to Lender secured by this Instrument. THE PROVISIONS OF THIS PARAGRAPH SHALL BE
APPLICABLE ONLY WHEN THE LAW OR PUBLIC POLICY OF SOUTH CAROLINA DO NOT PROHIBIT
SUCH A WAIVER.
40. FUTURE ADVANCES. Upon request of Borrower, Lender, at Lender's option
so long as this Instrument secures indebtedness held by Lender, may make Future
Advances to Borrower. Such Future Advances, with interest thereon, shall be
secured by this Instrument when evidenced by promissory notes stating that said
notes are secured hereby. At no time shall the principal amount of the
indebtedness secured by this Instrument, not including sums advanced in
accordance herewith to protect the security of this Instrument, exceed the
original amount of the Note (US $6,750,000.00) plus the additional sum of US$ 0,
nor shall the maturity of Future Advances secured hereby extend beyond the time
of repayment of the Note.
This Instrument may be executed in any number of duplicate originals
and each duplicate original shall be deemed to be an original.
IN WITNESS WHEREOF, Borrower has executed this Instrument or has caused
the same to be executed by its representatives thereunto duly authorized.
BROCK SUITE GREENVILLE, INC.
(a Delaware corporation)
/s/ LINDA HETTERLY /s/ MELVIN J. MELLE
- ------------------ -----------------------------
Witness Vice President
/s/ JULIE BRYANT BORROWER'S ADDRESS:
- ------------------
Witness 3710 Rawlins, Suite 1500
Dallas, Texas 75219
<PAGE> 17
EXHIBIT "A"
Property Description
All that certain piece, parcel or tract of land situate, lying and being in the
State of South Carolina, County of Greenville, in the City of Greenville, as is
more fully shown on a plat entitled "ALTA/ACSM Land Title Survey for (I) Brock
Suite Greenville, Inc., A Delaware Corporation, (ii) L.J. Melody & Company and
Citibank, its successors and assigns, (iii) Apperson, Crump, Duzane & Maxwell,
PLC, (iv) Chicago Title Insurance Company (v) Citicorp Real Estate, Inc,. and
their respective successors and assigns, dated December 8, 1997, certified
December 13, 1997, and prepared by Freeland & Associates, Inc., containing 3.08
acres, 134,155 sq. Ft., and recorded in the RMC Office for Greenville County in
Plat Book 31-G at page 2, and having the following metes and bounds, to-wit:
PARCEL ONE:
Commencing at the intersection of Orchard Park Drive and McPrice Court; thence
along the western right-of-way of McPrice Court for the following bearings and
distances; S 14-25-00 E for 38.59 feet to a point; thence S 25-04-00 W for
260.73 feet to a point; thence S 37-21-00 W for 18.63 feet to a point; thence S
15-40-00 W for 36.95 feet to an iron pin, said iron being the Point of
Beginning; thence with the right-of-way of McPrice Court, which is the
property's boundary line and McPrice Court's right-of-way border being the same,
with a radius of 50.00 feet, which is also the radius of the right-of-way, and a
chord bearing and distance of S 48-51-40 E for 67.89 feet, delta of 85-30-56,
tangent of 46.23 feet and an arc of 74.63 feet to an iron pin; thence leaving
the right-of-way of McPrice Court along the common line with RIC Properties LTD
S 01-10-42 E for 14.10 feet to an iron pin; thence S 52-39-09 E for 304.68 feet
to an iron pin; thence with the common line of the Marriot Corporation S
37-21-15 W for 345.00 feet to an iron pin on the northeastern right-of-way of
Interstate Highway I-385; thence with the right-of-way of I-385, which is the
property's boundary line and I-385's right-of-way border being the same, N
52-40-21 W for 387.55 feet to an iron pin; thence leaving the right-of-way of
I-385 (variable right-of-way which is approximately 300 feet in width) along the
common line with CEA Properties N 37-18-34 E for 344.98 feet to an iron pin;
thence N 60-14-14 E for 17.01 feet to an iron pin, being the Point of Beginning.
Said property containing 3.08 acres, 134,155 square feet. Said property is
recorded in the Greenville County RMC Office in Deed Book 1204 at page 348 and
Plat Book 11F at page 58 and Plat Book 31G at page 2.
PARCEL TWO:
All easements appurtenant to the above described property, including that
certain non-exclusive storm drainage easement described in Exhibit "C" to that
certain deed from Alliance Haywood Associates to Orchard Park Associates dated
September 28, 1982, and recorded in the RMC Office for Greenville County, South
Carolina in Deed Volume 1175 at Page 42 and those certain non-exclusive
easements set forth in the Declaration of Reciprocal Rights and Easements and
Restrictive Covenants dated September 28, 1982, and recorded in deed Volume
1175 at page 50.
14
<PAGE> 1
EXHIBIT 21
ACTIVE SUBSIDIARIES OF THE REGISTRANT
AS OF FEBRUARY 28, 1998
<TABLE>
<CAPTION>
NAME STATE OR COUNTRY
- -------------------------- ----------------------------
<S> <C>
Brookwood Companies Incorporated and subsidiaries .............. Delaware
Condo Hotel and Resort Management, Inc. ........................ Delaware
HEPGP Ltd. ..................................................... Colorado
HSC Securities Corporation...................................... Delaware
HWG 95 Advisors, Inc. .......................................... 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,737
<SECURITIES> 7,197
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 17,935
<CURRENT-ASSETS> 0
<PP&E> 161,192
<DEPRECIATION> 128,341
<TOTAL-ASSETS> 89,758
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1,000
0
<COMMON> 160
<OTHER-SE> 14,011
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<CGS> 0
<TOTAL-COSTS> 118,882
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<INCOME-TAX> 9,908
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<EXTRAORDINARY> 200
<CHANGES> 0
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<EPS-PRIMARY> 9.10
<EPS-DILUTED> 8.77
</TABLE>
