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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999 COMMISSION FILE NUMBER: 1-8303
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
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DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS, SUITE 1500, DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (214) 528-5588
Securities Registered Pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($.10 par value) New York Stock Exchange
10% Collateralized Subordinated Debentures New York Stock Exchange
Due July 31, 2005
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in, definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock, $.10 par value per share,
held by non-affiliates of the registrant, based on the closing price of $8.6875
per share on March 24, 2000 on the New York Stock Exchange, was $6,405,000.
1,424,789 shares of Common Stock, $.10 par value per share, were
outstanding at March 24, 2000.
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, 1999.
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TABLE OF CONTENTS
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PAGE
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PART I
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 7(A). Quantitative and Qualitative Disclosures About Market
Risk...................................................... 16
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 17
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................................................ 18
Item 13. Certain Relationships and Related Transactions.............. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 18
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PART I
ITEM 1. BUSINESS
The Hallwood Group Incorporated ("Hallwood" or the "Company") (NYSE:HWG), a
Delaware corporation, is a diversified holding company and classifies its
business operations into two principal divisions: asset management and operating
subsidiaries. The asset management division includes the commercial real estate
and energy businesses, and the operating subsidiaries division includes the
textile products and hotel businesses. For financial reporting purposes, the
Company operates in four business segments: real estate, energy, textile
products and hotels. Financial information for each industry segment in which
the Company operates is set forth in Note 19 to the consolidated financial
statements.
Asset Management Division.
Real Estate. Real estate activities are conducted primarily through the
Company's wholly owned subsidiaries, HWG, LLC, Hallwood Realty, LLC ("Hallwood
Realty") and Hallwood Commercial Real Estate, LLC ("HCRE"). Hallwood Realty is
the sole general partner of Hallwood Realty Partners, L.P. ("HRP"), a
publicly-traded, master limited partnership (AMEX:HRY). At December 31, 1999,
HRP owned fourteen real estate properties in six states containing 5,352,000 net
rentable square feet. Hallwood Realty owns a 1% general partner interest and
HWG, LLC owns a 20% (25% prior to December 21, 1999) limited partner interest in
HRP. Hallwood Realty is responsible for asset management of HRP and its
properties, including the decisions regarding financing, acquiring and disposing
of properties. It also provides general operating and administrative services to
HRP. HCRE is responsible for on-site property management for all HRP properties,
and properties it manages for third parties, for which it receives management,
leasing and construction supervision fees. The Company accounts for its
ownership in HRP using the equity method of accounting, recording its pro-rata
share of net income and partners' capital transactions reported by HRP. The
December 31, 1999 financial statements of HRP are included elsewhere within this
document.
Real estate accounted for 8% of the Company's total revenues in 1999,
compared to 7% in 1998, and 5% in 1997. See Note 13 to the Company's
consolidated financial statements.
Energy. Energy operations were consolidated beginning in May 1990, when the
Company increased its ownership of the former Hallwood Energy Corporation
("HEC") to 53%. As a result of 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
merger were subsequently transferred to two wholly owned entities, HEPGP Ltd.
("HEPGP") and Hallwood G.P., Inc. ("HGP"), the general partner of HEPGP.
From November 1996, the Company's energy operations were conducted
primarily through HEPGP, and consisted of the development, production and sale
of oil and gas, and the acquisition, exploration, development and operation of
additional oil and gas properties. HEPGP was the sole general partner of the
former Hallwood Energy Partners, L.P. ("HEP"), a then publicly-traded oil and
gas master limited partnership, and conducted substantially all of its
operations through HEP. HEPGP's former general partner interest in HEP entitled
it to a share of net revenue derived from HEP's properties ranging from 2% to
25%. Additionally, the Company held an approximate 6.5% limited partner interest
in HEP through its Class A, B and C units.
In December 1998, HEP and its affiliate, Hallwood Consolidated Resources
Corporation ("HCRC"), jointly announced a proposal to consolidate HEP with HCRC
and the energy interests of the Company into a new, publicly-traded entity to be
called Hallwood Energy Corporation ("Hallwood Energy"). On June 8, 1999,
Hallwood Energy announced that the consolidation was approved by the HEP
unitholders, the HCRC stockholders and the Company and that the consolidation
was completed as of that date (the "Energy Consolidation"). At its inception,
the common stock of Hallwood Energy was owned 56% by the Class A unitholders of
HEP, 26% by the stockholders of HCRC and 18% by the Company. HEP's Class C
unitholders received redeemable preferred stock in Hallwood Energy. The Company
received 1,800,000 shares of common
2
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stock (18% of the total outstanding) and 43,816 shares of preferred stock (1.9%
of the total outstanding, which was sold in February 2000) in Hallwood Energy,
in exchange for the contribution of its combined energy interests. On December
21, 1999, the Company's ownership was reduced to 14.4% of the outstanding common
shares.
Hallwood Energy (NASDAQ:HECO) is engaged in the development, exploration,
acquisition and production of oil and gas properties. Hallwood Energy owns
interests in approximately 1,300 wells, primarily located in the Rocky Mountain,
Greater Permian and Gulf Coast regions of the United States. The December 31,
1999 financial statements of Hallwood Energy are included elsewhere within this
document.
Prior to the June 8, 1999 consolidation date, the Company and its
subsidiaries accounted for their ownership of HEP using the proportionate
consolidation method, whereby it recorded a proportional share of HEP's revenues
and expenses, current assets, current liabilities, noncurrent assets, long-term
obligations and fixed assets. Subsequently, the Company no longer proportionally
consolidates its energy business. The investment in Hallwood Energy is now
accounted for under the equity method, as the Company exercises significant
influence over Hallwood Energy's operational and financial policies. In
accordance with the equity method of accounting, the Company records its
pro-rata share of Hallwood Energy's net income available to common stockholders,
its share of preferred dividends and any capital transactions.
Energy accounted for 3% of the Company's total revenues in 1999, compared
to 4% in 1998 and 4% in 1997. See Note 14 to the Company's consolidated
financial statements.
Operating Subsidiaries Division.
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.
Brookwood principally operates as a converter in the textile industry,
purchasing fabric from mills that is dyed and finished at its own plant, located
in Kenyon, Rhode Island, or by contracting with an independent finisher. Upon
completion of the finishing process, the fabric is sold to customers.
Additionally, the Brookwood Roll Goods Division serves manufacturers by
maintaining an extensive in-stock, short lot service on a same day/next day
basis. The First Performance Fabric Division buys and sells short lots, remnants
and mill seconds.
Textile products accounted for 70% of the Company's total revenues in 1999,
compared to 69% in 1998 and 62% in 1997. See Note 15 to the Company's
consolidated financial statements.
Hotels. Hotel operations are conducted through the Company's wholly owned,
Hallwood Hotels, Inc. ("Hallwood Hotels") and Brock Suite Hotels, Inc. ("Brock
Hotels") subsidiaries. Hallwood Hotels holds a long-term leasehold interest in
the Holiday Inn hotel, located in Longboat Key, Florida and a fee interest in
the Airport Embassy Suites hotel, located in Oklahoma City, Oklahoma. Brock
Hotels owns fee interests in two GuestHouse Suites Plus properties located in
Tulsa, Oklahoma and Greenville, South Carolina, and a long-term leasehold
interest in a GuestHouse Suites Plus property located in Huntsville, Alabama.
Prior to its disposition in December 1999, the Company also conducted hotel
operations through its former Integra Resort Management, Inc. ("IRM")
subsidiary. IRM owned 315 owner's rental contracts and certain real estate at
The Enclave Suites, a resort condominium hotel located in Orlando, Florida
("Enclave"). It managed the property for individual unit owners for which it
received a management fee and other consideration for the services it provided.
Hallwood Hotels and Brock Hotels properties are currently operated under
license agreements with Holiday Inns Franchising, Inc., Embassy Suites, Inc. and
GuestHouse International, LLC. 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.
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The hotel industry is, in some cases, affected by seasonal fluctuations in
demand. The Company's hotel properties as a whole do not experience significant
seasonal changes because many of the hotels primarily serve the business
traveler. The Holiday Inn hotel in Longboat Key , Florida, does, however,
experience seasonal changes in occupancy, as occupancy levels tend to increase
during the winter months.
Hotel revenues accounted for 19% of the Company's total revenues in 1999,
compared to 18% in 1998, and 14% in 1997. See Note 3 to the Company's
consolidated financial statements.
Associated Company. The Company has not been engaged in the associated
company segment since March 1997. Its remaining investment in ShowBiz Pizza
Time, Inc. ("ShowBiz") was sold at that time 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.
Associated company income accounted for 13% of the Company's total revenues in
the year ended December 31, 1997. See Note 2 to the Company's consolidated
financial statements.
Redemption of Treasury Stock. On December 21, 1999, the Company redeemed
457,794 shares of its common stock and options to purchase an additional 55,800
shares of common stock from its former president and director, Brian M. Troup
and a related trust. In exchange, the Company transferred to the trust or Mr.
Troup (i) 82,608 limited partnership units of HRP, (ii) 360,000 shares of common
stock of Hallwood Energy, and (iii) all of the Company's interests in the
Enclave and any other condominium hotel project then in process. In addition,
the Company agreed to pay quarterly to Mr. Troup the lesser of 20% of the net
cash flow from its real estate management activities for the preceding quarter
or $125,000, subject to termination in certain events. HRP and Hallwood Energy
agreed to register the trust's and/or Mr. Troup's units or shares in those
entities upon request by Mr. Troup and the Company, at the Company's expense.
The Company has the right to purchase all of these units and shares at the then
current trading price for a period of six months after December 21, 1999, the
effective date of the Agreement. Thereafter, Mr. Troup may sell the units and
shares subject to certain restrictions, including a right of first refusal in
favor of the Company. Mr. Troup and the trust have given an irrevocable proxy to
the Company to vote all their HRP units and Hallwood Energy shares on any and
all matters in and according to the Company's sole discretion, until Mr. Troup
or the trust sell the units or shares. See Note 9 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, therefore competition for tenants
will continue to affect rental rates and revenue.
The Company's energy affiliate encounters 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
and individuals. 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.
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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 with the laws and regulations.
Compliance with the requirements imposed may be time-consuming and costly. While
environmental considerations, by themselves, have not significantly affected the
Company's business to date, it is possible that such considerations may have a
significant and adverse impact in the future. The Company actively monitors its
environmental compliance and, while certain matters currently exist, management
is not aware of any compliance issues which will significantly impact the
financial position, operations or cash flows of the Company.
Number of Employees. The Company had 807 and 1,058 employees as of February
28, 2000 and 1999, respectively, comprised as follows:
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FEBRUARY 28,
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2000 1999
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Hallwood.................................................... 5 5
Brookwood................................................... 366 353
Hotel subsidiaries.......................................... 346 500
HCRE........................................................ 70 73
Hallwood Realty............................................. 20 19
Hallwood Petroleum, Inc. ................................... -- 108
--- -----
Total............................................. 807 1,058
=== =====
</TABLE>
A substantial amount of the salaries and related costs for the employees of
HCRE and Hallwood Realty are reimbursed by HRP. Similarly, a substantial amount
of the salaries and related costs for the employees of Hallwood Petroleum, Inc.
were reimbursed by HEP, prior to the June 1999 energy consolidation; thereafter,
former employees of Hallwood Petroleum, Inc. became direct employees of Hallwood
Energy.
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):
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DECEMBER 31, 1999
----------------------------------------------------
OPERATING NON-OPERATING
PROPERTY TYPE PROPERTIES(2) PROPERTIES TOTAL PERCENTAGE
- ------------- ------------- ------------- ------- ----------
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Textile Products
Dyeing and finishing plant -- Kenyon,
RI.................................... $ 4,756 $-- $ 4,756 10%
Hotels
Embassy Suites -- Oklahoma City, OK...... 20,908 -- 20,908 44
GuestHouse Suites Plus -- Greenville,
SC.................................... 8,060 -- 8,060 17
GuestHouse Suites Plus -- Tulsa, OK...... 6,710 -- 6,710 14
Holiday Inn -- Longboat Key, FL(1)....... 4,372 -- 4,372 10
GuestHouse Suites Plus -- Huntsville,
AL(1)................................. 2,346 -- 2,346 5
Parking lot -- Irving, TX................ -- 50 50 *
------- --- ------- ---
Subtotal......................... 42,396 50 42,446 90
------- --- ------- ---
Total............................ $47,152 $50 $47,202 100%
======= === ======= ===
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* Less than 1%.
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(1) Cost represents purchased leasehold interest in hotel property and capital
improvements.
(2) All operating properties are pledged as collateral under loan or bond
indenture agreements.
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DECEMBER 31, 1999
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NUMBER OF
GEOGRAPHIC DISTRIBUTION INVESTMENTS AMOUNT PERCENTAGE
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Oklahoma................................................. 2 $27,618 58%
South Carolina........................................... 1 8,060 17
Rhode Island............................................. 1 4,756 10
Florida.................................................. 1 4,372 10
Alabama.................................................. 1 2,346 5
Texas.................................................... 1 50 *
-- ------- ---
Total.......................................... 7 $47,202 100%
== ======= ===
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* Less than 1%.
As of December 31, 1999, the Company's Embassy Suites hotel in Oklahoma
City, Oklahoma was the only real estate property that 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. Brookwood's revolving credit agreement contains a
covenant to reasonably maintain property and equipment.
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 completed a renovation of the Longboat Key
Holiday Inn hotel in 1998, funded in part by the owner and working capital.
During 1999, renovations were completed to meet the new franchiser's standards
for the GuestHouse Suites Plus properties, funded by capital reserves, capital
lease facilities and working capital.
ITEM 3. LEGAL PROCEEDINGS
The Company, certain of its affiliates and others have been named as
defendants in several lawsuits relating to various transactions in which it or
its affiliated entities participated. The Company and its affiliates intend 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 of the Company. See
Note 18 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 924 stockholders of record as of March 24, 2000.
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. All
amounts and references have been adjusted retroactively for the three-for-two
stock split paid November 5, 1999.
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YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998
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QUARTERS HIGH LOW HIGH LOW
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First.............................................. $12.54 $11.12 $25.00 $19.83
Second............................................. 13.12 11.12 24.83 21.67
Third.............................................. 12.54 11.44 22.96 15.25
Fourth............................................. 12.94 10.81 15.17 11.08
</TABLE>
The Company did not pay cash dividends in 1999 or 1998 and 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 24, 2000 was $8.6875.
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ITEM 6. SELECTED FINANCIAL DATA
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FIVE MONTHS YEAR
YEARS ENDED DECEMBER 31, ENDED ENDED
----------------------------------------- DECEMBER 31, JULY 31,
1999 1998 1997 1996 1995 1995
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Revenues
Asset Management
Real estate.......................... $ 9,503 $ 7,813 $ 7,206 $ 3,947 $ 1,211 $ 4,595
Energy(a)............................ 2,895 5,216 6,350 7,515 3,149 5,359
Operating Subsidiaries
Textile products..................... 80,704 80,343 91,552 77,583 28,229 77,808
Hotels(b)............................ 21,894 21,130 21,038 20,948 8,073 24,898
Associated Company(c).................. -- -- 19,416 4,448 (88) (171)
Other.................................. 344 1,728 3,207 960 233 737
-------- -------- -------- -------- ------- --------
115,340 116,230 148,769 115,401 40,807 113,226
Expenses
Asset Management
Real estate.......................... 2,973 2,807 3,351 2,329 1,343 3,244
Energy(a)............................ 2,457 4,809 4,518 5,233 2,873 5,575
Operating Subsidiaries
Textile products..................... 79,139 79,245 89,575 76,361 28,222 77,604
Hotels(b)............................ 24,406 23,226 21,275 20,948 8,326 22,075
Associated Company(c).................. -- -- 607 1,558 310 687
Other.................................. 5,455 3,672 6,888 6,974 3,322 8,158
-------- -------- -------- -------- ------- --------
114,430 113,759 126,214 113,403 44,396 117,343
-------- -------- -------- -------- ------- --------
Income (loss) before income taxes and
extraordinary gain..................... 910 2,471 22,555 1,998 (3,589) (4,117)
Income taxes (benefit)................... (569) (3,115) 9,908 (4,525) (299) 830
-------- -------- -------- -------- ------- --------
Income (loss) before extraordinary
gain................................... 1,479 5,586 12,647 6,523 (3,290) (4,947)
Extraordinary gain from extinguishment of
debt................................... 240 1,481 200 -- 25 143
-------- -------- -------- -------- ------- --------
Net Income (Loss)............... $ 1,719 $ 7,067 $ 12,847 $ 6,523 $(3,265) $ (4,804)
======== ======== ======== ======== ======= ========
Net Income (loss) Per Common Share(d)
Basic.................................. $ 0.89 $ 3.73 $ 6.07 $ 3.29 $ (1.63) $ (2.33)
Assuming dilution...................... 0.88 3.60 5.84 3.26 (1.63) (2.33)
Dividends Per Common Share............... -- -- -- -- -- --
Weighted Average Shares Outstanding(d)
Basic.................................. 1,870 1,882 2,109 1,971 1,997 2,054
Assuming dilution...................... 1,899 1,947 2,190 1,986 1,997 2,054
Financial Condition
Total assets........................... $101,718 $109,252 $ 89,758 $116,796 $98,223 $112,375
Loans payable.......................... 61,463 43,021 30,186 37,342 24,794 32,731
Subordinated debentures................ 6,768 21,535 24,292 50,564 48,324 48,605
Redeemable preferred stock............. 1,000 1,000 1,000 1,000 1,000 1,000
Common stockholders' equity
(deficit)............................ 17,058 20,938 14,171 5,784 (391) 3,323
</TABLE>
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(a) The Company owned an 82% majority interest in HEC at October 1996 and,
after a successful tender offer for the remaining minority shares, HEC was
merged into the Company. In June 1999, the Energy Consolidation was
completed, whereby the Company exchanged its combined energy interests for
an 18% common stock interest and a 1.9% preferred stock interest in the
newly-formed Hallwood Energy, subsequent to which the Company adopted the
equity method of accounting for its energy investments.
(b) The Company's hotel operations consisted of six hotel properties (five
properties between August 1994 and June 1998). The Company acquired the fee
interest in the Greenville, South Carolina and Oklahoma City, Oklahoma
hotels in May 1996 and September 1998, respectively, which prior to the
acquisitions, were leasehold interests. In July 1998, the Company acquired
rental contracts and certain real estate at the Enclave, a resort
condominium hotel located in Orlando, Florida, which were distributed in
December 1999 in exchange for the redemption of treasury stock.
(c) The Company sold its remaining investment in ShowBiz in 1997, which
constituted its associated company segment.
(d) All references have been adjusted retroactively for the three-for-two stock
split paid November 5, 1999.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations. The Company reported net income of $1,719,000 for
the year ended December 31, 1999, compared to $7,067,000 for 1998, and
$12,847,000 for 1997.
Total revenue for 1999 was $115,340,000, compared to $116,230,000 for 1998
and $148,769,000 for 1997.
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 associated company business segments:
Asset Management Division. The Company's asset management division consists
of real estate and energy business segments.
REAL ESTATE
Revenues. Real estate revenues of $9,503,000 for 1999, $7,813,000 for 1998
and $7,206,000 for 1997, include fee income and equity income from the Company's
investments in HRP.
Fee income of $9,091,000 for 1999 increased by 53%, compared to $5,925,000
in 1998. The 1998 fee income decreased by 6%, compared to $6,306,000 in 1997.
The Company's Hallwood Realty subsidiary is the general partner of HRP and earns
an asset management fee and other fees from HRP properties, which amounted to
$619,000 for 1999, $495,000 for 1998 and $466,000 for 1997. The Company's HCRE
subsidiary is responsible for day-to-day on-site property management at all of
HRP's properties and other properties it manages for third parties, for which
HCRE receives management fees, leasing commissions and certain other fees. HCRE
revenue was $8,472,000 for 1999, $5,430,000 for 1998 and $5,840,000 for 1997.
The 56% increase during 1999 was primarily due to fees earned in connection with
the development and leasing of a six-story, 151,000 square feet commercial
office building owned by HRP, of which $1,481,000 is payable upon occupancy
which is expected to occur in the third quarter of 2000. The 7% decrease during
1998 was primarily due to a decline in management and leasing fees earned from
third party contracts.
The equity income from investments in HRP represents the Company's
recognition of its pro-rata share of the income reported by HRP, adjusted for
intercompany income and amortization of negative goodwill. The Company recorded
equity income of $412,000 in 1999, $1,888,000 in 1998 and $900,000 for 1997. The
1999 equity income declined due to reduced net income reported by HRP and an
increased intercompany income adjustment related to increased leasing and
development fees from HRP. The 1998 equity income was exclusive of the Company's
$1,374,000 pro-rata share of HRP's $5,347,000 net gain from early extinguishment
of debt, which is reported separately as an extraordinary item. The improvement
in 1998 compared to 1997 was primarily due to HRP's 5% increase in rental
revenues accompanied by a 4% decrease in property operating expenses.
Expenses. Real estate expenses were $2,973,000 for 1999, compared to
$2,807,000 for 1998 and $3,351,000 for 1997. This category includes
administrative expenses, depreciation and amortization, interest and provision
for losses.
Administrative expenses increased by 11% to $2,301,000 for 1999, compared
to $2,075,000 for 1998 and $2,436,000 for 1997. The fluctuations were primarily
attributable to the payments of leasing commissions to third party brokers
associated with leasing fee income and payments under HCRE's executive incentive
plan.
Depreciation and amortization was $672,000 for 1999, compared to $674,000
for 1998 and 1997. Amortization expense of $672,000 for each of the three years
relates to Hallwood Realty's general partner interest in HRP to the extent
allocated to management rights.
Interest expense of $58,000 and $160,000 for 1998 and 1997, respectively,
relates to a $500,000, which was paid in December 1999.
Provision for loss of $81,000 in 1997 was attributed to the
uncollectibility of a tenant receivable from the prior sale of an office-retail
property.
9
<PAGE> 11
ENERGY
Revenues. Energy revenues were $2,895,000 for 1999, $5,216,000 for 1998 and
$6,350,000 for 1997.
Prior to the Energy Consolidation of HEP, HCRC and the energy interests of
the Company into the newly formed Hallwood Energy, which was consummated on June
8, 1999, the Company's investments consisted of two wholly owned energy related
subsidiaries and certain energy assets owned directly by the Company. The former
general partner interest in HEP, owned by one of the Company's subsidiaries,
entitled the general partner to interests in HEP's properties ranging from 2% to
25%. The Company also owned an approximate 6.5% interest in HEP limited partner
units. The Company and its energy subsidiaries formerly accounted for their
ownership of HEP using the proportionate consolidation method of accounting,
whereby it recorded its proportional share of HEP's revenues and expenses,
current assets, current liabilities, noncurrent assets, long-term obligations
and fixed assets.
Pursuant to the terms of the Energy Consolidation, the Company received
1,800,000 shares of common stock (18% of the total outstanding) and 43,816
shares of preferred stock (1.9% of the total outstanding, which was sold in
February 2000) in Hallwood Energy, in exchange for the contribution of its
combined energy interests. Subsequent to June 8, 1999, the Company no longer
proportionally consolidates its combined energy business. The investment in
Hallwood Energy is being accounted for under the equity method, as the Company
exercises significant influence over Hallwood Energy's operational and financial
policies. Accordingly, the revenue and expense items of the energy segment
reflect proportionally consolidated amounts through June 8, 1999. Thereafter,
the Company records its pro-rata share of Hallwood Energy's net income available
to common stockholders and preferred dividends received as a single line
item -- equity income from investments in Hallwood Energy. Comparisons between
1999 and prior years are generally not meaningful, due to the change in method
of accounting.
Gas revenue of $1,677,000 for the period through June 8, 1999 decreased by
$1,975,000, or 54%, compared to $3,652,000 for 1998. Gas revenue for 1998
decreased by $368,000, or 9%, compared to $4,020,000 in 1997. Hallwood Energy's
gas production for the period through June 8, 1999 and calendar 1998 were
855,000 mcf and 1,854,000 mcf, respectively. The average gas price for the 1999
period was $1.96 per mcf, compared to the 1998 average gas price of $1.97 per
mcf. The decrease in gas revenue for 1998, compared to 1997, was due to a
decrease in the average gas price from $2.51 per mcf, partially offset by an
increase in production from 1,602,000 mcf. The fluctuation in production volumes
was caused by normal production declines and the temporary shut-in of two wells
in Louisiana during 1997 while workover procedures were performed.
Oil revenue of $603,000 for the period through June 8, 1999 decreased by
$802,000, or 57%, compared to $1,405,000 for 1998. Oil revenue for 1998
decreased by $588,000, or 30%, compared to $1,993,000 for 1997. HEC's oil
production for 1999 and 1998 were 46,000 barrels and 107,000 barrels,
respectively. The average price per barrel for the 1999 period was $13.11,
compared to the 1998 average price per barrel of $13.13. The decrease in oil
revenue for 1998 was due to a decrease in the average price per barrel from
$19.93 in 1997, partially offset by an increase in production from 100,000
barrels in 1997. The fluctuation in production volumes was caused by normal
production declines and the temporary shut-in of two wells in Louisiana during
1997 while workover procedures were performed.
The equity income in 1999 from investments in Hallwood Energy of $380,000
represents the Company's pro rata share (18% ownership interest from June 8,
1999 through December 21, 1999, 14.4% thereafter) of income available to common
stockholders and dividends on its preferred stock.
Other income consists primarily of acquisition fee and interest income, as
well as a share of HEP's interest income, facilities income, pipeline revenue,
equity in income of affiliate and other miscellaneous items. Other income of
$235,000 for 1999, compares to $159,000 for 1998 and $337,000 for 1997. The
increase in 1999 was primarily due to an increase in HEP's equity in earnings of
affiliate prior to the Energy Consolidation. The decrease in 1998 was primarily
due to a decrease in HEP's equity in earnings of affiliate, due to property
impairments taken by HEP's affiliate in 1998.
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<PAGE> 12
Expenses. Energy expenses of $2,457,000 for 1999, compared to $4,809,000
for 1998 and $4,518,000 for 1997. The decrease in 1999 was primarily due to the
conversion from the proportional method to the equity method of accounting in
June 1999.
Depreciation, depletion, amortization and impairment of properties
decreased by $912,000 to $849,000 for 1999, compared to $1,761,000 in 1998,
primarily as a result of the shorter 1999 period described above. Depreciation,
depletion, amortization and impairment of properties increased 27% in 1998 to
$1,761,000 from $1,387,000 in 1997. The increase was due to higher depletion
resulting from the increased production discussed above, as well as higher
capitalized costs.
Operating expenses, which are comprised of the costs of operating wells and
production-related taxes were $796,000 for 1999, which represents a $737,000
decrease from the 1998 amount of $1,533,000, primarily as a result of the
shorter 1999 period described above. The 1998 expenses increased by $132,000, or
9%, from the 1997 amount of $1,401,000. The increase in 1998 was attributable to
higher production taxes from the increased production.
Administrative expenses decreased by $431,000 to $537,000 for 1999 from
$968,000 in 1998, primarily as a result of the shorter 1999 period described
above. Administrative expenses decreased by $349,000, or 26%, in 1998 from
$1,317,000 in 1997. The decrease was due to reduced performance based
compensation during 1998.
Interest expense decreased by $272,000 to $275,000 in 1999, compared to
$547,000 in 1998, primarily as a result of the shorter 1999 period described
above. Interest expense in 1998 increased by $134,000, or 32%, compared to
$413,000 in 1997, due to an increase in the Company's term loan in November 1997
and an increase in the pro-rata share of HEP's interest expense due to HEP's
higher outstanding debt in 1998.
Operating Subsidiaries Division. The Company's operating subsidiaries
division consists of textile products and hotels segments.
TEXTILE PRODUCTS
Revenues. Sales of $80,704,000 increased by $361,000 in 1999, or less than
1%, compared to $80,343,000 in 1998. Sales decreased by $11,209,000, or 12%, in
1998, compared to $91,552,000 in 1997. The decrease in distribution sales in
1999 was due to lower priced Asian imports and domestic customers moving
production out of the country, offset by increased revenues at the dying and
finishing plant. Sales for the distribution businesses were lower in 1998
compared to 1997, due to decreased demand for textile products in consumer
markets, partially offset by increased sales of industrial products.
Expenses. Total expenses decreased $106,000 to $79,139,000 in 1999. The
1998 expenses decreased $10,330,000 to $79,245,000, or 12%, from $89,575,000 in
1997. Cost of sales decreased to $69,095,000, or less than 1%, in 1999. The 1998
cost of sales of $69,502,000 decreased by $9,971,000, or 13%, principally due to
the aforementioned sales decrease. The gross profit margin was 14.4%, 13.5% and
13.2% in 1999, 1998 and 1997, respectively. The higher gross profit margin in
1999 was primarily attributable to improved performance at the Kenyon plant, due
to higher volumes and increased operating efficiencies.
Administrative and selling expenses of $9,124,000 for 1999 increased by
$319,000, or 4%, from the 1998 amount of $8,805,000, which decreased $267,000,
or 3%, compared to the 1997 amount of $9,072,000. The fluctuations were
attributable to operating expenses associated with the changes in sales revenue
for the respective years.
Interest expense decreased by $18,000 for 1999 and $92,000 for 1998, and
the amounts were $920,000, $938,000 and $1,030,000, for the years ended 1999,
1998 and 1997, respectively. The respective decreases were the result of lower
average borrowings and lower interest rates.
HOTELS
Revenues. Sales of $21,894,000 in 1999 increased by $764,000, or 4%, from
the 1998 amount of $21,130,000. The increase in 1999 was due to management fee
revenues from the Enclave, a resort
11
<PAGE> 13
condominium hotel acquired in July 1998, and increased revenues at the Longboat
Key, Florida Holiday Inn hotel and Oklahoma City Embassy Suites properties,
partially offset by reduced revenues associated with lower occupancy at the
Company's three GuestHouse Suites Plus hotels, as a result of a $2.5 million
renovation substantially completed by the end of 1999. The Longboat Key Holiday
Inn revenue increased by $1,321,000 for 1999, as a result of increased occupancy
and average daily rate following a $4.1 million renovation project completed in
April 1998 and improved weather conditions in 1999. For all hotels combined,
average daily rate increased by 3.0% for 1999, however average occupancy
declined 14.6%, compared to 1998 due to the aforementioned renovations at the
GuestHouse Suites Plus properties. Sales for 1998 increased by $92,000, or less
than 1%, from the 1997 amount of $21,038,000. The average daily rate and the
average occupancy for 1998 declined 1.4% and 2.8%, respectively, compared to
1997 amounts. The 1998 sales increase was primarily due to management fee
revenues from Enclave which was acquired in July 1998, partially offset by a
decline in revenue at the Longboat Key Holiday Inn and Oklahoma City Embassy
Suite properties.
Expenses. Hotel expenses were $24,406,000 for 1999, $23,226,000 for 1998,
and $21,275,000 for 1997.
Operating expenses of $19,013,000 for 1999 increased by $461,000, or 2%,
from the 1998 amount of $18,552,000, which increased by $1,562,000, or 9%, from
the 1997 amount of $16,990,000. The 1999 increase was the result of a full year
of operations for the Enclave and increased Longboat Key expenses, offset by an
elimination of lease rent at the Embassy Suites, as that property's fee interest
was acquired in September 1998. The 1998 increase was primarily attributable to
operating expenses at the Enclave acquired in July 1998. Operating expenses at
the remaining properties for 1998 increased $237,000, or 1%, compared to 1997
expenses.
Depreciation and amortization expense of $2,896,000 for 1999 decreased by
$288,000, or 9%, from the 1998 amount of $3,184,000, which increased by
$343,000, or 12%, from the 1997 amount of $2,841,000. The 1999 decrease was due
to a reduction in leasehold amortization for Longboat Key which became fully
amortized and a reduction in amortization of costs associated with the Enclave,
offset by a full year of depreciation expense from the aforementioned
acquisition of Embassy Suites. The 1998 increase compared to 1999 was due to
one-half year depreciation and amortization for the Enclave and one-third year
depreciation for the Embassy Suites.
Interest expense of $2,497,000, for 1999 increased by $1,007,000, or 68%,
from the 1998 amount of $1,490,000, which increased by $46,000, or 3%, from the
1997 amount of $1,444,000. The 1999 increase was due to a full year's expense
for the Embassy Suites. The 1998 increase was due to the financing to acquire
the Embassy Suites in September 1998, offset by reduced costs from the
refinancing of the GuestHouse Suites Plus Tulsa and Greenville mortgages at more
favorable interest rates in the 1998 fourth quarter.
ASSOCIATED COMPANY
The Company has not been engaged in this segment since March 1997, as its
remaining ShowBiz investment was sold at that time.
Revenues. Associated company income for 1997 was $19,416,000, including the
Company's pro-rata share of ShowBiz' results using the equity method of
accounting 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 ShowBiz secondary common stock offering.
The Company had determined to sell its shares to repay debt, utilize expiring
federal income tax net operating loss carryforwards and to focus on core
investments.
Expenses. Interest expense for 1997 was $607,000, representing interest on
a $7,000,000 margin loan and a $4,000,000 promissory note, which had been
collateralized by the ShowBiz investment and were repaid.
OTHER
Revenues. Total revenues were $344,000 in 1999, $1,728,000 in 1998 and
$3,207,000 in 1997.
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<PAGE> 14
Fee income for 1999 of $241,000 decreased by $309,000, or 56%, compared to
$550,000 in 1998. The decrease was due to the termination of a consulting
contract with the Company's energy affiliate following the completion of the
Energy Consolidation in June 1999. Fee income for 1998 was substantially the
same as the 1997 amount of $560,000. The fees were derived from financial
consulting contracts with an HEP affiliate and ShowBiz. The consulting contract
with the HEP affiliate, provided for a $550,000 annual fee until its termination
in June 1999. The ShowBiz contract provided for a $125,000 annual fee until its
termination in March 1997.
Interest on short-term investments and other income in 1999 was $103,000,
compared to the 1998 amount of $153,000. The 1999 decrease was due to lower
interest income earned on the Company's short term investments. The substantial
decrease of $986,000 in 1998, compared to the 1997 amount of $1,139,000 was
primarily attributable to lower interest income earned on the Company's short
term investments, and lower rental income from the subleasing of executive
office space formerly occupied by an affiliated entity, which master lease
expired in May 1998. The 1997 amount also included interest income attributed to
significantly higher cash balances generated by the ShowBiz sale.
During 1998, the Company favorably settled a 1996 litigation claim for
$1,025,000 involving its former merchant banking activities, and reported it as
revenue in 1998. During 1997, the Company favorably settled an insurance claim
for $1,508,000, net of associated legal costs, involving issues relating to
directors and officers liability coverage, and reported it as revenue in 1997.
Expenses. Administrative expenses of $2,442,000 for 1999 compares to
$2,662,000 for 1998 and $3,291,000 for 1997. The decrease of $220,000, or 8%, in
1999, was primarily due to lower consulting fees and reduced costs associated
with the redemption of 7% Debentures in 1999, compared to the costs of the
exchange for 10% Debentures in 1998. The decrease of $629,000, or 19%, in 1998,
was primarily due to lower consulting and other professional fees.
The loss from redemption of treasury stock of $1,769,000 was the result of
the Separation Agreement between the Company and its former president, Brian M.
Troup. Mr. Troup and a related trust exchanged their 24% stock ownership in the
Company, for 20% of the Company's limited partner interest in HRP, 20% of the
Company's common stock interest in Hallwood Energy, all of the Company's
interest in its condominium hotel business and future cash payments based on the
net cash flow from the Company's real estate management activities. See Note 9
to the Company's consolidated financial statements.
Interest expense for the three year period primarily relates to the
Company's, 7% Collateralized Senior Subordinated Debentures, 10% Collateralized
Subordinated Debentures, 13.5% Subordinated Debentures and the Senior Secured
Term Loan. Interest expense of $1,244,000 for 1999 increased by $234,000, or
23%, compared to 1998 interest of $1,010,000. The increase was primarily due to
an exchange offer in August 1998, whereby $6,468,000 of 7% Debentures were
exchanged for a new issue of 10% Debentures and the refinancing of the 7%
Debentures in December 1999 from proceeds of a new 10.25% Senior Secured Term
Loan. Interest expense of $1,010,000 for 1998 decreased by $2,587,000, or 72%,
compared to 1997 interest of $3,597,000. The decrease was primarily due to (i)
the repurchase of $12,875,000 of its 13.5% Debentures in June 1997, pursuant to
a self-tender offer; (ii) the December 1997 redemption of the remaining
$14,287,000 outstanding 13.5% Debentures; (iii) the repurchase of 7% Debentures
with a face amount of $2,253,000 in January 1998, partially offset by the August
1998 exchange offer for 10% Debentures. See Note 6 to the Company's consolidated
financial statements.
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 basis of assets and liabilities
(approximately $42,794,000 at December 31, 1999), tax net operating loss
carryforwards ("NOLs") (approximately $47,874,000 at December 31, 1999) and tax
credit carryforwards (approximately $3,065,000 at December 31, 1999), 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 HRP limited partner units, the excess of market value over carrying value of
certain other assets, including Hallwood Energy and various hotels, and
projected income from operations, management has determined that the deferred
tax asset should be increased to reflect
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<PAGE> 15
the anticipated utilization of NOLs from assumed realization of the gains and
projected income from operations. Accordingly the Company recorded a deferred
tax benefit of $873,000 in 1999 and $4,308,000 in 1998 from anticipated future
utilization of NOLs, which increased the deferred tax asset to $7,221,000 at
December 31, 1999 from $6,348,000 at December 31, 1998 and $2,040,000 at
December 31, 1997.
In 1999, the Company recorded a federal current charge of $71,000 for
alternative minimum tax and $233,000 for state tax expense. See Note 10 to the
Company's consolidated financial statements.
During 1998, management completed a consolidation of the Company's real
estate assets. The assets were transferred at market value into a new structure
and, although the book basis of the assets was not changed, the consolidation
resulted in the recognition of a significant tax gain in 1998. Certain of the
Company's NOLs were utilized to reduce the related income tax effect of the
consolidation, although the Company recorded a current charge for federal
alternative minimum tax and state tax expense. The 1998 current federal and
state tax expenses were $745,000 and $448,000, respectively.
In 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.
The Company's NOLs expire as follows: 2006 -- $18,199,000;
2007 -- $8,517,000 and 2008 to 2010 -- $21,158,000. 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 $21,238,000 of the NOLs prior to their
ultimate expiration in the year 2010.
Management believes that the Company has certain tax planning strategies
available, which include the potential sale of certain real estate investments,
energy investments and hotel properties, that could be implemented, if
necessary, to supplement income from operations to fully realize the net
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 such limitations.
Extraordinary Gain from Early Extinguishment of Debt. The Company
recognized an extraordinary gain from early extinguishment of debt of $240,000,
$1,481,000 and $200,000 in 1999, 1998 and 1997, respectively. The 1999 gain of
$240,000 resulted from the December 1999 redemption of the 7% Debentures at par
value, to the extent of the remaining unamortized gain. The 1998 gain resulted
from the January repurchase of 7% Debentures having a face amount of $2,253,000
for a discounted amount of $2,146,000 resulting in a gain of $107,000, and a
$1,374,000 gain from the recognition of the Company's pro-rata share of a
$5,347,000 extraordinary gain from extinguishment of debt reported by HRP in
1998. In 1997, the Company recorded a net extraordinary gain from debt
extinguishment of $200,000. Of this amount, $877,000 was attributable to the
gain from the partial repurchase of 13.5% Debentures in June, offset by $677,000
of losses from the refinancing of the Company's GuestHouse Suites Plus hotel
mortgages in Tulsa, Oklahoma and Greenville, South Carolina.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at December 31, 1999
totaled $926,000.
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<PAGE> 16
The Company's real estate segment generates funds principally from its
property management and leasing activities without significant additional
capital costs. The Company has pledged 300,397 HRP limited partnership units and
the interest in its real estate subsidiaries to collateralize the Senior Secured
Term Loan and 30,035 HRP units to collateralize hotel capital lease obligations.
Each quarter Hallwood Realty reviews HRP's capacity to make cash distributions
to its partners. No distributions were declared by HRP in 1999.
In the years ended December 31, 1999, 1998 and 1997, the Company received
cash dividends of $400,000, $784,000 and $1,000,000, respectively, from
Brookwood. A cash dividend for 2000 is contingent upon Brookwood's compliance
with the covenants contained in its new loan agreement. In addition, the Company
received $350,000, $446,000 and $638,000 under its tax sharing agreement with
Brookwood in the years ended December 31, 1999, 1998 and 1997, respectively. As
of December 31, 1999, Brookwood had an additional $2,453,000 of borrowing base
availability under its loan agreement.
Although major capital expenditures are periodically required under
franchise agreements, cash flow from hotel operations have typically contributed
to the Company's working capital, although it is anticipated that working
capital generated in 2000 will be utilized at the subsidiary level. 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 completed a $4.1 million renovation of the Longboat Key
Holiday Inn hotel in April 1998, $2.5 million of which was financed by the owner
in the form of higher lease payments. During the second half of 1999, the
Company substantially completed a $2.5 million renovation at the three
GuestHouse Suites Plus hotels. Approximately $2.1 million of the renovation
costs were financed from proceeds of capital leases and the balance from capital
reserves held by mortgage lenders.
Management believes that it will have sufficient funds for operations and
to satisfy its current obligations. See Notes 5 and 6 to the Company's
consolidated financial statements for a further discussion of the Company's loan
and debenture obligations.
On March 16, 2000, the Board of Directors authorized a stockholder loan of
$1,500,000 which will contain certain common stock conversion options.
As described in Note 18 to the Company's consolidated financial statements,
the Company had outstanding contingencies and commitments of approximately
$13,118,000 (excluding operating lease commitments of $20,874,000).
INFORMATION SYSTEMS AND THE YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 compliant. The Company, its subsidiaries and affiliates had
each established Year 2000 programs for their respective industry segments and
monitored their status to determine that all necessary modifications were
completed and tested. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
neither the Company, nor any of its subsidiaries or affiliates experienced any
significant disruptions in its critical information technology and
non-information technology systems, and believes those systems successfully
responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its computer
applications, and those of its suppliers and vendors, throughout the Year 2000
to ensure that any latent Year 2000 matters that may arise are properly
addressed.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133 -- Accounting for Derivative Instruments and
Hedging Activities ("SFAS No. 133") was issued. The statement is effective for
the Company beginning January 1, 2001. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income depending on whether a derivative is part of a hedge
transaction, and if it is, the type of hedge transaction. The Company currently
has hedging contracts in its energy segment as related to oil and gas activities
and its real estate
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<PAGE> 17
segment as related to an interest rate swap agreement. The impact on the
Company's results of operations, financial position or cash flows will be
dependent on the level and type of derivative instruments the Company or its
affiliated entities will have entered into at the time SFAS No. 133 is
implemented. The Company is not planning on early adoption of SFAS No. 133 and
has not had an opportunity to evaluate the impact of the provisions of SFAS No.
133 on its consolidated financial statements relating to future adoption.
INFLATION
Inflation did not have a significant impact on the Company in 1999, 1998
and 1997, and is not anticipated to have a material impact in 2000.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not directly have any derivative financial instruments in
place as of December 31, 1999, nor does it have foreign operations. Also, the
Company does not enter into financial instrument transactions for trading or
other speculative purposes. However, the Company's energy division through its
investment in Hallwood Energy has attempted to hedge the exposure related to its
variable debt and its sales of forecasted oil and natural gas production in
amounts, which it believes are prudent based on the prices of available
derivatives and, in the case of production hedges, Hallwood Energy's deliverable
volumes. Hallwood Energy attempts to manage the exposure to adverse changes in
the fair value of its fixed rate debt agreements by issuing fixed rate debt only
when business conditions and markets are favorable. Management does not consider
the portion attributable to the Company to be significant in relation to these
derivative instruments.
The Company's real estate division through its investment in HRP will
sometimes use derivative financial instruments to achieve a desired mix of fixed
versus floating rate debt. As of December 31, 1999, HRP had a single "pay
fixed/receive variable" interest rate swap agreement with highly rated
counterparties in which the interest payments are calculated on a notional
amount. Management does not consider the portion attributable to the Company to
be significant on this derivative instrument.
The Company is exposed to market risk due to fluctuations in interest
rates. The Company utilizes both fixed and variable rate debt to finance its
operations. The table below presents principal cash flows and related weighted
average interest rates of the Company's debt at December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
EXPECTED MATURITIES AS OF DECEMBER 31, 1999
------------------------------------------------------- FAIR
DEBT CLASSIFICATION 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
- ------------------- ------ ------ ------ ------ ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate................................ $3,682 $4,071 $4,501 $4,982 $5,510 $32,494 $55,240 $52,527
Average Interest Rate................... 8.97% 8.89% 8.79% 8.65% 8.45% 8.16%
Variable Rate............................. $5,686 $ 161 $6,183 $ 209 $ 238 $ 214 $12,691 $12,691
Average Interest Rate................... 9.15% 9.38% 9.29% 13.15% 13.15% 13.15%
</TABLE>
There is inherent rollover risk for borrowings as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's future financing requirements. A hypothetical increase in interest
rates of two percentage points would cause a loss in income and cash flows of
approximately $1,359,000 during 2000, assuming that outstanding debt remained at
current levels.
FORWARD-LOOKING STATEMENTS
In the interest of providing stockholders with certain information
regarding the Company's future plans and operations, certain statements set
forth in this Form 10-K are forward-looking statements. Although any
forward-looking statement expressed by or on behalf of the Company is, to the
knowledge and in the judgment of the officers and directors, expected to prove
true and come to pass, management is not able to predict the future with
absolute certainty. Forward-looking statements involve known and unknown risks
and uncertainties, which may cause the Company's actual performance and
financial results in future periods to differ materially from any projection,
estimate or forecasted result. Among others, these risks and uncertainties
include, the ability to obtain financing or refinance maturing debt; a potential
oversupply of commercial office
16
<PAGE> 18
buildings, industrial parks and hotels in the markets served; fees for leasing,
construction and acquisition of real estate properties; lease and rental rates
and occupancy levels obtained; the volatility of oil and gas prices; the ability
to continually replace and expand oil and gas reserves; and the imprecise
process of estimating oil and gas reserves and future cash flows. These risks
and uncertainties are difficult or impossible to predict accurately and many are
beyond the control of the Company. Other risks and uncertainties may be
described, from time to time, in the Company's periodic reports and filings with
the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the
independent auditors' report, are included elsewhere herein. Reference is made
to Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form 8-K".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item 10 is contained in the
definitive proxy statement of the Company for its Annual Meeting of Stockholders
( the "Proxy Statement") under the heading "Election of Directors," and such
information is incorporated herein by reference. The Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
December 31, 1999.
In addition to Anthony J. Gumbiner, age 55, who serves as Director,
Chairman and President, the following individuals also serve as executive
officers of the Company:
William L. Guzzetti, age 56, 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 Hallwood Energy since December 1998. He was
President, Chief Operating Officer and a director of the general partner of HEP
from February 1985 until June 1999 and as President, Chief Operating Officer and
a Director of HCRC from May 1991 until June 1999. Since November 1990 and May
1991, Mr. Guzzetti has served as the President, Chief Operating Officer and a
Director of Hallwood Realty and HCRE, respectively. He is a member of the
Florida Bar and the State Bar of Texas.
Melvin J. Melle, age 57, 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.
17
<PAGE> 19
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.
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:
<TABLE>
<S> <C>
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Income, Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity,
Years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows, Years ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
</TABLE>
2. Financial Statement Schedules.
Independent Auditors' Report on Schedules
<TABLE>
<S> <C>
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts and Reserves
III Real Estate and Accumulated Depreciation
</TABLE>
All other schedules are omitted since the required information is not
applicable or is included in the consolidated financial statements or related
notes.
Financial Statements of Hallwood Realty Partners, L.P.
Form 10-K for the year ended December 31, 1999
Financial Statements of Hallwood Energy Corporation
Form 10-K for the year ended December 31, 1999
3. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. 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.
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.2 -- Restated Bylaws of the Company is incorporated herein by
reference to Exhibit 3.2 to the Company's Form 10-K for
the year ended December 31, 1997, File No. 1-8303.
4.1 -- Indenture Agreement and related Pledge and Security
Agreement, dated as of August 31, 1998 among Bank One,
N.A., a national banking association, as Trustee and the
Company, regarding 10% Collateralized Subordinated
Debentures due July 31, 2005, is incorporated herein by
reference to Form T-3 filed June 2, 1998 and related
T-3/A amendments filed on June 17, 1998, August 4, 1998
and August 31, 1998, File No. 1-8303.
10.1 -- 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.
*10.2 -- 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.
10.3 -- 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.
*10.4 -- 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.
*10.5 -- 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.
*10.6 -- 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.
10.7 -- Revolving credit loan and security agreement, related
revolving credit notes and stock pledge and security
agreements, all dated as of December 22, 1999, by and
among Brookwood Companies Incorporated, Kenyon
Industries, Inc., Brookwood Laminating, Inc. and Key Bank
National Association, filed herewith.
10.8 -- Promissory note and related credit agreement for an
$18,000,000 term loan, dated as of December 21, 1999,
among HWG, LLC, as borrower, The Hallwood Group
Incorporated, as parent guarantor, First Bank Texas,
N.A., as Administrative Agent, and Financial
Institutions, as lenders, filed herewith.
*10.9 -- 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.
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.10 -- Promissory note and related mortgage loan agreement 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, is incorporated herein by reference to Exhibit
10.28 to the Company's Form 10-K for the year ended
December 31, 1997, File No. 1-8303.
10.11 -- Promissory note and related mortgage loan agreement 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, is incorporated herein
by reference to Exhibit 10.29 to the Company's Form 10-K
for the year ended December 31, 1997, File No. 1-8303.
10.12 -- Promissory note and related mortgage loan and security
agreement in the original amount of $17,250,000, dated
September 11, 1998, between Hallwood Hotels -- OKC, Inc.,
as Maker, and WMF Capital Corporation, as Lender, is
incorporated herein by reference to Exhibit 10.31 to the
Company's Form 10-Q for the quarter ended September 30,
1998, File No. 1-8303.
10.13 -- Promissory note and related loan agreement in the
original amount of $1,300,000, dated September 11, 1998,
between Hallwood Hotels -- OKC Mezz, Inc., as Maker, and
Commercial Mortgage Investment Trust, Inc., as Lender, is
incorporated herein by reference to Exhibit 10.32 to the
Company's Form 10-Q for the quarter ended September 30,
1998, File No. 1-8303.
10.14 -- Agreement, as of May 5, 1999, among The Hallwood Group
Incorporated, Epsilon Trust and Brian Troup, is
incorporated herein by reference to Exhibit 10.34 to the
Company's Form 10-Q for the quarter ended March 31, 1999,
File No. 1-8303.
21 -- Active subsidiaries of the Registrant as of February 29,
2000.
27 -- Financial data schedule.
</TABLE>
(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 29, 2000
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 29th day of March 2000.
<TABLE>
<C> <S>
/s/ MELVIN J. MELLE Vice President -- Finance (Principal
- ----------------------------------------------------- Financial and Accounting Officer)
(Melvin J. Melle)
/s/ ANTHONY J. GUMBINER Director, Chairman of the Board and
- ----------------------------------------------------- President (Principal Executive and
(Anthony J. Gumbiner) Operating Officer)
/s/ CHARLES A. CROCCO, JR. Director
- -----------------------------------------------------
(Charles A. Crocco, Jr.)
/s/ J. THOMAS TALBOT Director
- -----------------------------------------------------
(J. Thomas Talbot)
</TABLE>
21
<PAGE> 23
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 23
Financial Statements:
Consolidated Balance Sheets, December 31, 1999 and 1998... 24
Consolidated Statements of Income, Years Ended December
31, 1999, 1998 and 1997................................ 26
Consolidated Statements of Changes in Stockholders'
Equity, Years Ended December 31, 1997, 1998 and 1999... 28
Consolidated Statements of Cash Flows, Years Ended
December 31, 1999, 1998 and 1997....................... 29
Notes to Consolidated Financial Statements................ 30
Independent Auditors' Report on Schedules................... 62
Schedules:
I Condensed Financial Information of Registrant (Parent
Company)............................................... 63
II Valuation and Qualifying Accounts and Reserves....... 68
III Real Estate and Accumulated Depreciation............. 69
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, 1999
Financial Statements of Hallwood Energy Corporation
Form 10-K for the Year Ended December 31, 1999
</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, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 17, 2000
23
<PAGE> 25
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Asset Management
Real Estate
Investments in HRP..................................... $ 8,232 $ 9,771
Receivables and other assets
Related parties...................................... 1,698 119
Other................................................ 229 568
-------- --------
10,159 10,458
Energy
Investments in Hallwood Energy......................... 4,927 --
Oil and gas properties, net............................ -- 11,479
Current assets of HEP.................................. -- 2,895
Noncurrent assets of HEP............................... -- 1,219
Receivables and other assets........................... -- 482
-------- --------
4,927 16,075
-------- --------
Total asset management assets..................... 15,086 26,533
Operating Subsidiaries
Textile products
Inventories............................................ 18,782 16,708
Receivables............................................ 12,630 11,713
Property, plant and equipment, net..................... 8,997 8,738
Other.................................................. 867 889
-------- --------
41,276 38,048
Hotels
Properties, net........................................ 31,509 31,810
Receivables and other assets........................... 2,026 3,845
-------- --------
33,535 35,655
-------- --------
Total operating subsidiaries assets............... 74,811 73,703
Other
Deferred tax asset, net................................ 7,221 6,348
Restricted cash........................................ 1,883 708
Other.................................................. 1,791 1,191
Cash and cash equivalents.............................. 926 769
-------- --------
Total other assets................................ 11,821 9,016
-------- --------
Total Assets...................................... $101,718 $109,252
======== ========
</TABLE>
24
<PAGE> 26
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Asset Management
Real Estate
Accounts payable and accrued expenses.................. $ 707 $ 775
Loan payable........................................... -- 500
-------- --------
707 1,275
Energy
Accounts payable and accrued expenses..................... 465 1,144
Long-term obligations of HEP.............................. -- 5,306
Current liabilities of HEP................................ -- 3,949
Loan payable.............................................. -- 2,267
-------- --------
465 12,666
-------- --------
Total asset management liabilities................ 1,172 13,941
Operating Subsidiaries
Textile products
Loan payable........................................... 11,545 9,900
Accounts payable and accrued expenses.................. 8,506 7,646
-------- --------
20,051 17,546
Hotels
Loans payable.......................................... 31,918 30,354
Accounts payable and accrued expenses.................. 2,021 2,120
-------- --------
33,939 32,474
-------- --------
Total operating subsidiaries liabilities.......... 53,990 50,020
Other
Senior Secured Term Loan.................................. 18,000 --
10% Collateralized Subordinated Debentures................ 6,768 6,808
Interest and other accrued expenses....................... 3,730 1,818
7% Collateralized Senior Subordinated Debentures.......... -- 14,727
-------- --------
Total other liabilities........................... 28,498 23,353
-------- --------
Total Liabilities................................. 83,660 87,314
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 2,396,149 shares in both years;
outstanding 1,424,789 and 1,882,469 shares,
respectively........................................... 240 240
Additional paid-in capital................................ 54,743 54,743
Accumulated deficit....................................... (23,007) (24,676)
Treasury stock, 971,360 and 513,680 shares, respectively;
at cost................................................ (14,918) (9,369)
-------- --------
Total Stockholders' Equity........................ 17,058 20,938
-------- --------
Total Liabilities and Stockholders' Equity........ $101,718 $109,252
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Asset Management
Real estate
Fees
Related parties...................................... $ 8,110 $ 4,381 $ 4,776
Other................................................ 981 1,544 1,530
Equity income from investments in HRP.................. 412 1,888 900
------- ------- -------
9,503 7,813 7,206
Administrative expenses................................ 2,301 2,075 2,436
Depreciation and amortization.......................... 672 674 674
Interest............................................... -- 58 160
Provision for losses................................... -- -- 81
------- ------- -------
2,973 2,807 3,351
------- ------- -------
Income from real estate operations................ 6,530 5,006 3,855
Energy
Gas revenues........................................... 1,677 3,652 4,020
Oil revenues........................................... 603 1,405 1,993
Equity income from investments in Hallwood Energy...... 380 -- --
Other income........................................... 235 159 337
------- ------- -------
2,895 5,216 6,350
Depreciation, depletion, amortization and impairment... 849 1,761 1,387
Operating expenses..................................... 796 1,533 1,401
Administrative expenses................................ 537 968 1,317
Interest............................................... 275 547 413
------- ------- -------
2,457 4,809 4,518
------- ------- -------
Income from energy operations..................... 438 407 1,832
------- ------- -------
Income from asset management operations........... 6,968 5,413 5,687
Operating Subsidiaries
Textile products
Sales.................................................. 80,704 80,343 91,552
Cost of sales.......................................... 69,095 69,502 79,473
Administrative and selling expenses.................... 9,124 8,805 9,072
Interest............................................... 920 938 1,030
------- ------- -------
79,139 79,245 89,575
------- ------- -------
Income from textile products operations........... 1,565 1,098 1,977
Hotels
Sales.................................................. 21,894 21,130 21,038
Operating expenses..................................... 19,013 18,552 16,990
Depreciation and amortization.......................... 2,896 3,184 2,841
Interest............................................... 2,497 1,490 1,444
------- ------- -------
24,406 23,226 21,275
------- ------- -------
Loss from hotel operations........................ (2,512) (2,096) (237)
------- ------- -------
Income (loss) from operating subsidiaries......... (947) (998) 1,740
</TABLE>
26
<PAGE> 28
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Associated Company
Income from investment in ShowBiz......................... $ -- $ -- $19,416
Interest.................................................. -- -- 607
------- ------- -------
Income from associated company.................... -- -- 18,809
Other
Fee income from related parties........................... 241 550 560
Interest on short-term investments and other income....... 103 153 1,139
Litigation and insurance settlements...................... -- 1,025 1,508
------- ------- -------
344 1,728 3,207
Administrative expenses................................... 2,442 2,662 3,291
Loss from redemption of treasury stock.................... 1,769 -- --
Interest.................................................. 1,244 1,010 3,597
------- ------- -------
5,455 3,672 6,888
------- ------- -------
Other loss, net................................... (5,111) (1,944) (3,681)
------- ------- -------
Income before income taxes and extraordinary gain......... 910 2,471 22,555
Income taxes (benefit).................................... (569) (3,115) 9,908
------- ------- -------
Income before extraordinary gain.......................... 1,479 5,586 12,647
Extraordinary gain from early extinguishment of debt...... 240 1,481 200
------- ------- -------
Net Income........................................ 1,719 7,067 12,847
Preferred stock dividends................................. 50 50 50
------- ------- -------
Net Income Available to Common Stockholders....... $ 1,669 $ 7,017 $12,797
======= ======= =======
Per Common Share
Basic
Income before extraordinary gain....................... $ 0.76 $ 2.94 $ 5.97
Extraordinary gain from extinguishment of debt......... 0.13 0.79 0.10
------- ------- -------
Net income........................................ $ 0.89 $ 3.73 $ 6.07
======= ======= =======
Assuming Dilution
Income before extraordinary gain....................... $ 0.75 $ 2.84 $ 5.75
Extraordinary gain from extinguishment of debt......... 0.13 0.76 0.09
------- ------- -------
Net income........................................ $ 0.88 $ 3.60 $ 5.84
======= ======= =======
Weighted Average Shares Outstanding:
Basic................................................ 1,870 1,882 2,109
======= ======= =======
Assuming dilution.................................... 1,899 1,947 2,190
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL TREASURY STOCK TOTAL
PAR PAID-IN ACCUMULATED ----------------- STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT SHARES COST EQUITY
------ ----- ---------- ----------- ------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997..... 2,396 $240 $57,226 $(44,490) 449 $ (7,192) $ 5,784
Net income................. 12,847 12,847
Purchase of treasury
stock................... 456 (8,373) (8,373)
Preferred stock
dividends............... (50) (50)
Exchange of treasury stock
for ShowBiz shares...... (2,626) (402) 6,446 3,820
Proportionate share of
stockholders' equity
transactions of equity
investments............. 143 143
----- ---- ------- -------- ---- -------- -------
Balance, December 31, 1997... 2,396 240 54,743 (31,693) 503 (9,119) 14,171
Net income................. 7,067 7,067
Purchase of treasury
stock................... 10 (250) (250)
Preferred stock
dividends............... (50) (50)
----- ---- ------- -------- ---- -------- -------
Balance, December 31, 1998... 2,396 240 54,743 (24,676) 513 (9,369) 20,938
Net income................. 1,719 1,719
Purchase of treasury
stock................... 458 (5,549) (5,549)
Preferred stock
dividends............... (50) (50)
----- ---- ------- -------- ---- -------- -------
Balance, December 31, 1999... 2,396 $240 $54,743 $(23,007) 971 $(14,918) $17,058
===== ==== ======= ======== ==== ======== =======
</TABLE>
All references to the number of common shares have been retroactively adjusted
for the three-for-two stock split paid on November 5, 1999.
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 DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income................................................ $ 1,719 $ 7,067 $ 12,847
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion, amortization and impairment... 5,612 7,006 6,142
Loss from redemption of treasury stock................. 1,769 -- --
Net change in deferred tax asset....................... (873) (4,308) 8,960
Distributions from HEP................................. 545 2,199 2,135
Equity in net income of HRP............................ (412) (1,888) (900)
Undistributed income from HEP.......................... (484) (2,472) (3,826)
Amortization of deferred gain from debenture
exchanges............................................ (439) (504) (600)
Equity in net income of Hallwood Energy................ (380) -- --
Extraordinary gain from extinguishment of debt......... (240) (1,481) (200)
Preferred dividends from Hallwood Energy............... 22 -- --
Gain from sale of investment in ShowBiz................ -- -- (18,277)
Equity in net income of ShowBiz........................ -- -- (1,139)
Accrued interest on 13.5% Debentures................... -- -- 1,069
Provision for losses................................... -- -- 81
Net change in textile products assets and
liabilities.......................................... (2,186) 3,675 (2,825)
Net change in other assets and liabilities............. (1,822) 119 (300)
Net change in energy assets and liabilities............ (411) (228) 88
-------- -------- --------
Net cash provided by operating activities......... 2,420 9,185 3,255
Cash Flows from Investing Activities
Investments in textile products property and equipment.... (1,377) (1,009) (1,440)
Purchase of hotel properties and related assets........... (861) (21,845) (1,286)
Net change in restricted cash for investing activities.... (274) (219) (372)
Investment in HEP by general partner...................... (50) (171) --
Investments in energy property and equipment.............. (8) (298) (223)
Proceeds from sale of investment in ShowBiz............... -- -- 40,323
Purchase of minority shares of HEC........................ -- -- (648)
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... (2,570) (23,542) 36,354
Cash Flows from Financing Activities
Proceeds from bank borrowings and loans payable........... 29,545 18,550 18,630
Redemption of 7% Debentures............................... (14,088) (2,146) --
Repayment of bank borrowings and loans payable............ (13,188) (5,715) (25,411)
Payment of deferred loan costs............................ (1,011) -- --
Net change in restricted cash for financing activities.... (901) -- --
Payment of preferred stock dividends...................... (50) (50) (50)
Purchase of common stock for treasury..................... -- (250) (8,373)
Redemption of 13.5% Debentures............................ -- -- (27,163)
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 307 10,389 (42,367)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ 157 (3,968) (2,758)
Cash and Cash Equivalents, Beginning of Year................ 769 4,737 7,495
-------- -------- --------
Cash and Cash Equivalents, End of Year...................... $ 926 $ 769 $ 4,737
======== ======== ========
</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, which are in accordance
with accounting principles generally accepted in the United States of America,
are as follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries:
Brock Suite Greenville, Inc.
Brock Suite Hotels, Inc.
Brock Suite Huntsville, Inc.
Brock Suite Tulsa, Inc.
Brookwood Companies Incorporated
Brookwood Laminating, Inc.
C-34 Holdings, Inc. (disposed in 1999)
Condo Hotel and Resort Management, Inc. (disposed in 1999)
Enclave Resort, Inc. (disposed in 1999)
HEPGP Ltd.
HWG, LLC
HWG 95 Advisors, Inc.
HWG 98 Advisors, Inc.
HWG Holding One, Inc.
HWG Holding Two, Inc.
HWG Realty Investors, Inc. (merged in 1998)
HWG Realty Investors, LLC
HSC Securities Corporation
Hallwood Commercial Real Estate, Inc. (merged in 1998)
Hallwood Commercial Real Estate, LLC
Hallwood Energy Corporation
Hallwood G.P., Inc.
Hallwood Hotels, Inc.
Hallwood Hotels -- OKC, Inc.
Hallwood Hotels -- OKC Mezz, Inc
Hallwood-Integra Holding Company
Hallwood Investment Company
Hallwood-Kenyon Holding Company
Hallwood Realty, LLC
Hallwood Realty Corporation (merged in 1998)
Integra Resort Management, Inc. (disposed in 1999)
Kenyon Industries, 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.
(b) Recognition of Income
Fee income from real estate operations 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,
when title passes to the customer.
30
<PAGE> 32
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Comprehensive Income
The Company had no items of other comprehensive income in the years
presented.
(d) 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 exercises significant influence over the issuer's operating and
financial policies.
Real estate is carried at cost, including interest costs associated with
properties under development or renovation.
(e) Investment in Energy Affiliate
Prior to the Energy Consolidation in June 1999 discussed in Note 2, the
Company and its energy subsidiaries accounted for their ownership of Hallwood
Energy Partners, L.P. ("HEP") using the proportionate consolidation method of
accounting, whereby the entities recorded their proportional share of HEP's
revenues and expenses, current assets, current liabilities, noncurrent assets,
long-term obligations and fixed assets. Subsequently, the Company utilizes the
equity method of accounting, since it exercises significant influence over the
operations and financial policies of its Hallwood Energy Corporation affiliate
("Hallwood Energy").
(f) Oil and Gas Properties
Prior to the Energy Consolidation, the Company followed the full cost
method of accounting, whereby all costs related to the acquisition and
development of oil and gas properties were capitalized in a single cost center
("full cost pool") and were amortized over the productive life of the underlying
proved reserves using the units of production method. Proceeds from property
sales were 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 was recognized. The present value of estimated future net revenues
was 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 were not accrued for future site restoration, dismantlement and
abandonment related to proved oil and gas properties, because the Company and
its energy affiliates estimated that such costs would be offset by the salvage
value of the equipment sold upon abandonment of such properties. Estimates were
based upon historical experience and review of current properties and
restoration obligations.
Unproved properties were withheld from the amortization base until such
time as they were either developed or abandoned. The properties were evaluated
periodically for impairment.
Hallwood Energy 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. Management does not consider the
portion attributable to the Company to be significant in relation to these
derivative instruments.
31
<PAGE> 33
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) 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. The
excess of the Company's proportionate share of the underlying equity in the net
assets of HRP over its investment is amortized on a straight line basis over a
period of 19 years. The excess of the Company's proportionate share of the
underlying equity in the net assets of Hallwood Energy over its investment is
amortized at a rate which approximates the depletion of Hallwood Energy's
reserves.
(h) 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.
(i) Depreciation and Amortization
Depreciation of fee-owned hotel properties is computed on the straight-line
method over a period of twenty to twenty-five years, five to twenty 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.
(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
basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences, 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 or
specific identification 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 can be reasonably estimated.
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
significantly affect the operations, financial position or cash flow of the
Company.
(n) Common Stock
The Company's Second Restated Certificate of Incorporation contains a
provision that restricts transfers of the Company's common stock in order to
protect certain federal income tax benefits.
32
<PAGE> 34
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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) Concentration of Credit Risk
The financial instruments of its wholly-owned subsidiaries which
potentially subject the Company to concentration of credit risk consist
principally of accounts receivable. The Company grants credit to customers based
on an evaluation of the customer's financial condition. Exposure to losses on
receivables is principally dependent on each customer's financial condition. The
Company controls its exposure to credit risks through credit approvals, credit
limits and monitoring procedures, and establishes allowances for anticipated
losses.
(q) Computation of Earnings Per Common Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Earnings per share assuming dilution is computed by dividing net income
available to the common stockholders by the weighted average of outstanding
equivalent shares outstanding. Stock options described in Note 8 are considered
to be equivalent shares. The number of equivalent shares is computed using the
"treasury stock method ," which assumes that the increase in the number of
shares is reduced by the number of shares which could have been repurchased with
the proceeds from the exercise of such options.
The following table reconciles the Company's net income to net income
available to common stockholders, and the number of equivalent common shares
used in the calculation of net income for the basic and assuming dilution
methods after the retroactive application of the three-for-two stock split paid
November 5, 1999, (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
DESCRIPTION 1999 1998 1997
- ----------- ------ ------ -------
<S> <C> <C> <C>
Net Income
Net income, as reported................................. $1,719 $7,067 $12,847
Less: Preferred stock dividends......................... 50 50 50
------ ------ -------
Net income available to common stockholders..... $1,669 $7,017 $12,797
====== ====== =======
Weighted Average Shares Outstanding
Basic................................................... 1,870 1,882 2,109
Assumed issuance of shares from stock options
exercised............................................ 82 189 204
Assumed repurchase of shares from stock options
proceeds............................................. (53) (124) (123)
------ ------ -------
Assuming dilution............................... 1,899 1,947 2,190
====== ====== =======
</TABLE>
(r) New Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards No.
133 -- Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133") was issued. The statement is effective for the Company beginning January
1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income
depending on whether a derivative is part of a hedge transaction, and if it is,
the type of hedge transaction. The Company currently has hedging contracts in
its
33
<PAGE> 35
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
energy segment as related to oil and gas activities and its real estate segment
as related to an interest rate swap agreement. The impact on the Company's
results of operations, financial position or cash flows will be dependent on the
level and type of derivative instruments the Company or its affiliated entities
will have entered into at the time SFAS No. 133 is implemented. The Company is
not planning on early adoption of SFAS No. 133 and has not had an opportunity to
evaluate the impact of the provisions of SFAS No. 133 on its consolidated
financial statements relating to future adoption.
NOTE 2 -- INVESTMENTS IN AFFILIATES AND ASSOCIATED COMPANY (DOLLAR AMOUNTS IN
THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 AMOUNT AT WHICH
-------------------- CARRIED AT INCOME FOR YEARS ENDED
NUMBER COST OR DECEMBER 31, DECEMBER 31,
BUSINESS SEGMENTS AND OF UNITS ASCRIBED --------------- -----------------------
DESCRIPTION OF INVESTMENTS OR SHARES VALUE 1999 1998 1999 1998 1997
- -------------------------- --------- -------- ------ ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE AFFILIATE
Hallwood Realty Partners, L.P.(A)
-- General partner interest....... $ 8,650 $3,243 $3,877 $ 51 $ 77 $ 29
-- Limited partner interest....... 330,432 4,302 4,989 5,894 361 1,811 871
------- ------ ------ ---- ------ -------
Totals.................... $12,952 $8,232 $9,771 $412 $1,888 $ 900
======= ====== ====== ==== ====== =======
ENERGY AFFILIATE
Hallwood Energy Corporation (B)
-- Common stock................... 1,440,000 $ 5,397 $4,624 $358
-- Preferred stock................ 43,816 303 303 22
------- ------ ----
Totals.................... $ 5,700 $4,927 $380
======= ====== ====
ASSOCIATED COMPANY
ShowBiz Pizza Time, Inc. (C)
-- Common stock
Equity in earnings............. $ 1,139
Gain on sale of shares......... 18,277
-------
Totals.................... $19,416
=======
</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 former 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 13. The Company 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, 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 $4,849,000, which is being amortized on the straight-line basis
over a period of 19 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
34
<PAGE> 36
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the general partner interest ascribed to the management rights and such
amortization was $672,000 for each of the years ended December 31, 1999, 1998
and 1997.
Between December 1990 and February 1995, the Company purchased 89,269
limited partner units for $905,000 in various transactions. In March 1995, the
Company purchased 30,000 units 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 the elimination of intercompany profits with a corresponding
adjustment to equity income, and 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, 1999, resulted in a $712,000 decrease in the carrying value
of the HRP investment. In 1998, the Company also recognized an extraordinary
gain of $1,374,000 from the recognition of the Company's pro-rata share of HRP's
$5,347,000 extraordinary gain from early extinguishment of debt.
During 1998, management completed a consolidation of the Company's real
estate assets into a new structure. Following the completion of the
consolidation, the general partner interest is owned by Hallwood Realty, LLC
("Hallwood Realty") and the limited partner interest is owned by HWG, LLC. The
consolidation did not effect the carrying value of the investments.
In December 1999, the Company distributed 82,608 HRP limited partner units
in connection with the Separation Agreement discussed in Note 9. The Company has
pledged 300,397 HRP limited partner units to collateralize the Senior Secured
Term Loan and 30,035 units to secure certain the hotel capital leases.
The quoted market price per unit and the carrying value per unit of the HRP
limited partner units (AMEX symbol HRY) at December 31, 1999 were $51.25 and
$15.10, respectively. The general partner interest is not publicly traded.
As of December 31, 1999, the Company owned a 1% general partner interest
and a 20% limited partner interest (25% prior to December 21, 1999) in HRP.
The following table sets forth summarized financial data of Hallwood Realty
Partners, L.P. as of and for the years ended December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance Sheet Data
Real estate property, net................................. $192,814 $175,779
Total assets.............................................. 230,386 214,023
Mortgages payable......................................... 171,312 162,078
Total partners' capital................................... 48,696 44,634
Income Statement Data
Revenue................................................... $ 59,645 $ 56,680
Income before extraordinary gain.......................... 4,062 6,246
Net income................................................ 4,062 11,593
</TABLE>
The data used to compile the above table was obtained from Securities and
Exchange Commission filings on Form 10-K.
35
<PAGE> 37
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(B) In December 1998, Hallwood Energy Partners, L.P. ("HEP") and its
affiliate, Hallwood Consolidated Resources Corporation ("HCRC") jointly
announced a proposal to consolidate HEP with HCRC and the energy interests of
the Company (the "Energy Consolidation ") into a new, publicly-traded entity to
be called Hallwood Energy Corporation ("Hallwood Energy"). On June 8, 1999,
Hallwood Energy announced that the consolidation was approved by the HEP
unitholders, the HCRC stockholders and the Company and that the consolidation
was completed as of that date. At its inception, the common stock of Hallwood
Energy was owned 56% by the Class A unitholders of HEP, 26% by the stockholders
of HCRC and 18% by the Company. HEP's Class C unitholders received redeemable
preferred stock in Hallwood Energy. The Company received 1,800,000 shares of
common stock (18% of the total outstanding) and 43,816 shares of preferred stock
(1.9% of the total outstanding) in Hallwood Energy, in exchange for the
contribution of its energy interests. In December 1999, the Company distributed
360,000 shares of Hallwood Energy common stock in connection with the Separation
Agreement discussed in Note 9 and, in February 2000, sold all of its preferred
stock to Hallwood Energy at its carrying value.
As of the June 8, 1999 consolidation date, the Company no longer
proportionally consolidates its energy business. The investment in Hallwood
Energy is accounted for under the equity method, as the Company exercises
significant influence over Hallwood Energy's operational and financial policies.
The assets and liabilities of the Company's energy business were combined
at the consolidation date to establish the carrying value of the initial
investment in Hallwood Energy of $5,700,000 as follows (in thousands):
<TABLE>
<S> <C>
Oil and gas properties...................................... $10,809
Current assets of HEP....................................... 3,267
Noncurrent assets of HEP.................................... 1,194
Receivables and other assets................................ 64
Long-term obligations of HEP................................ (6,872)
Current liabilities of HEP.................................. (2,160)
Accounts payable and accrued expenses....................... (602)
-------
Carrying value of initial investment.............. $ 5,700
=======
</TABLE>
In accordance with the equity method of accounting, the Company records its
pro-rata share of Hallwood Energy's net income available to common stockholders,
its preferred dividends and its pro-rata share of any capital transactions. The
Company's proportionate share of the underlying equity in net assets of Hallwood
Energy exceeded its investment by $4,391,000 on the consolidation date, which is
being amortized at a rate which approximates the depletion of Hallwood Energy's
reserves.
The quoted market price and the carrying value per common share (NASDAQ
symbol HECO) at December 31, 1999 was $4.37 and $3.21, respectively, and per
preferred share (NASDAQ symbol HECOP) was $7.37 and $6.92, respectively.
36
<PAGE> 38
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth summarized financial data of Hallwood Energy
as of and for the years ended December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Balance Sheet Data
Oil and gas properties, net............................... $181,621 $105,005
Total assets.............................................. 212,774 139,091
Loans payable............................................. 109,357 49,700
Total stockholders' equity................................ 75,387 62,632
Statement of Operations Data
Revenue................................................... $ 56,881 $ 43,586
Net income (loss)......................................... 2,880 (13,895)
Net income (loss) attributable to common stockholders..... 512 (16,359)
</TABLE>
The data used to compile the above table was obtained from Securities and
Exchange Commission filings on Form 10-K.
(C) The Company acquired its investment in ShowBiz Pizza Time, Inc.
("ShowBiz") in 1988 as a result of a spin-off of ShowBiz, formerly a 90%-owned
subsidiary of Integra-A Hotel and Restaurant Company ("Integra") and other
financing transactions for which it received additional common stock warrants.
The Company accounted for its investment in ShowBiz using the equity method
of accounting. Between 1990 and 1996, the Company acquired additional shares
through the exercise of common stock warrants and common stock splits and sold a
portion of its shares.
In January 1997, the Board of Directors authorized the issuance of 401,564
treasury shares in exchange for 219,194 common shares of ShowBiz from the Alpha
and Epsilon Trusts, which were associated with Messrs. Anthony J. Gumbiner and
Brian M. Troup, chairman and former 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 in March
1997.
In February 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 net operating loss carryforwards and
focus on core investments. In March 1997, the Company completed the sale of its
entire 2,632,983 ShowBiz shares at $15.68 per share, net of underwriting
commissions. A portion of the proceeds from the sale were used to repay the
$7,000,000 MLBFS line of credit and the $4,000,000 promissory note as discussed
in Note 5. 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.
37
<PAGE> 39
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- HOTEL PROPERTIES
The following table summarizes the cost and accumulated depreciation and
amortization of hotel properties as of the balance sheet dates (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Building improvements, furniture, fixtures and equipment.... $ 36,056 $35,866
Land and land improvements.................................. 2,903 2,903
Capital leases.............................................. 2,085 --
Leasehold acquisition costs................................. 1,401 1,401
-------- -------
42,445 40,170
Less: Accumulated depreciation and amortization............. (10,936) (8,360)
-------- -------
Total............................................. $ 31,509 $31,810
======== =======
</TABLE>
At December 31, 1999, hotel properties consisted of fee interests in one
Embassy Suites and two GuestHouse Suites Plus and leasehold interests in one
GuestHouse Suites Plus and one Holiday Inn. In December 1999, the Company
disposed of its condominium hotel interests in conjunction with the redemption
of treasury stock discussed in Note 9.
During 1999, the Company's Brock Suite Hotels, Inc. subsidiary entered into
three separate five-year leasing agreements for furniture, fixtures and building
improvements at the three GuestHouse Suites Plus properties. The total cost
accounted for as capital leases was $2,085,000. The lease term of 60 months
commenced on January 1, 2000 and the total monthly lease payment is $46,570. The
property was recorded at its fair value and will be depreciated over the
five-year lease term. The Company has an option to purchase the leased property
at fair market value or extend the lease at maturity.
NOTE 4 -- RESTRICTED CASH
Details of restricted cash, also discussed in Note 5, at the balance sheets
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1999 1998
------ ----
<S> <C> <C>
Capital replacement reserves for hotels..................... $ 982 $708
Deposit to secure litigation claim.......................... 901 --
------ ----
Total............................................. $1,883 $708
====== ====
</TABLE>
38
<PAGE> 40
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LOANS PAYABLE
Loans payable at the balance sheet dates are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Real Estate
Promissory note, 8%, repaid December 1999................. $ -- $ 500
Energy
Term loan, Libor + 3.5%, repaid December 1999............. -- 2,267
Textile Products
Revolving credit facility, prime + .25% or Libor + 2.25%,
due
December 2002.......................................... 11,545 --
Revolving credit facility, prime + .25%, repaid December
1999................................................... -- 9,900
Hotels
Term loan, 7.5%, fixed, due October 2008.................. 16,968 17,198
Term loan, 7.86% fixed, due January 2008.................. 6,577 6,667
Term loan, 8.20% fixed, due November 2007................. 5,142 5,209
Capital leases, 12.18% fixed, due December 2004........... 2,085 --
Term loan, Libor + 7.5%, due October 2005................. 1,146 1,280
------- -------
31,918 30,354
------- -------
Other
Senior Secured Term Loan, 10.25% fixed, due December
2004................................................... 18,000 --
------- -------
Total............................................. $61,463 $43,021
======= =======
</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 was secured by a pledge of 89,269 HRP limited partner units. The
settlement agreement also provided that the pledgee had 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").
The Company tendered full payment, including the HRP Participation Amount,
totaling $1,000,000 in March 1998, although it reserved its rights to litigate
the validity of an earlier tender that was rejected by the noteholder. The
noteholder refused acceptance of the March 1998 tendered payment and instituted
litigation in the State of Delaware. In December 1999, the Company and the
noteholder entered into an agreement, approved by the court, which provided that
(i) the Company pay the face amount of $500,000 plus $83,000 of accrued interest
to the noteholder; (ii) the Company pay $900,000 into an escrow account to
secure the maximum amount which could be payable by the Company, including a
potential claim of $400,000 for legal fees; and (iii) that the noteholder
release its collateral of 89,269 HRP units. The Company has performed under the
Agreement and the units were released. The litigation currently remains in the
discovery phase and a trial date has not yet been scheduled. The Company
believes it will be successful in resolving this litigation at an amount below
the $900,000 which has been placed in escrow.
39
<PAGE> 41
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 term loan in the original amount of $4,000,000 was
collateralized by the Company's HEP limited partner units and its investment in
HEPGP and Hallwood GP. HEPGP also pledged its direct interests in certain oil
and gas properties. Other significant terms included: (i) maturity date of May
15, 2000; (ii) monthly principal payments of $133,000, plus interest; (iii)
interest rate of Libor plus 3.5%; (iv) a limited negative pledge relating to
substantially all of the Company's HRP limited partner units; and (v)
restrictions on the declaration of distributions on or redemptions of
partnership interests. The term loan was repaid in December 1999 from proceeds
of the new Senior Secured Term Loan.
Long term obligations. Included in the consolidated balance sheet at
December 31, 1998 were long-term obligations of HEP in the amount of $5,306,000.
This amount represented the Company's share of HEP's outstanding long-term
obligations, which consisted of a $49,700,000 revolving credit agreement.
Following the Energy Consolidation discussed in Note 2, the Company no longer
records its proportional share of Hallwood Energy's outstanding long-term
obligations.
Textile Products
Revolving credit facility. The Company's Brookwood subsidiary had a
revolving credit facility for an amount up to $14,000,000 ($15,000,000 April
through June) with The Bank of New York ("BNY"). Borrowings under the BNY
facility were collateralized by accounts receivable, inventory imported under
trade letters of credit, finished goods inventory, machinery and equipment and
all of the issued and outstanding capital stock of Brookwood and its
subsidiaries. The BNY facility bore interest, at Brookwood's option, of one-
quarter percent over prime or Libor plus 2.25%. The BNY facility was amended on
March 18, 1998 to increase the maximum availability to $17,500,000, for the
period April through August 1998, and to $15,000,000 thereafter and change
certain of the financial covenants.
The BNY facility was replaced on December 22, 1999 by a new revolving
credit facility in an amount up to $17,000,000 with Key Bank National
Association ("Key"). Availability for direct borrowings and letter of credit
obligations under the facility are limited to the lesser of the facility amount
or the borrowing base so defined in the agreement. As of December 31, 1999,
Brookwood had an additional $2,453,000 of borrowing base availability.
Borrowings under the Key facility are collateralized by accounts receivable,
inventory imported under trade letters of credit, finished goods inventory,
machinery and equipment and all of the issued and outstanding capital stock of
the Company and its subsidiaries. The Key facility expires on December 22, 2002
and bears interest at Brookwood's option of one-quarter percent over prime
(8.75% at December 31, 1999) or Libor plus 2.25%.
The Key facility also provides for an additional $2,000,000 equipment
revolving credit line and a $2,000,000 acquisition revolving credit line. At
December 31, 1999, no amounts were outstanding under these lines. The loan
agreement contains covenants, which include maintenance of certain financial
ratios, restrictions on dividends and repayment of debt or cash transfers to the
parent company. The outstanding balance at December 31, 1999 was $11,545,000.
Hotels
Term Loans. In September 1998, the Company formed two new wholly-owned
subsidiaries, Hallwood Hotels -- OKC, Inc. to acquire the fee interest in the
Embassy Suites hotel in Oklahoma City, Oklahoma for $18,250,000 and the related
mortgage term loan; and Hallwood Hotels -- OKC Mezz, Inc. to acquire a mezzanine
loan related to that fee acquisition. Prior to the fee acquisition, the Company
held a leasehold interest in the hotel.
40
<PAGE> 42
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The mortgage loan in the original amount of $17,250,000, includes the
following significant terms: (i) fixed interest rate of 7.5%; (ii) monthly loan
payments of $127,476, based upon a 25-year amortization schedule, with a
maturity date of October 2008; (iii) prepayment permitted after November 2000,
subject to yield maintenance provisions and; (iv) various other financial and
non-financial covenants. The outstanding balance at December 31, 1999, the
outstanding balance was $16,968,000.
The mezzanine loan in the original amount of $1,300,000, includes the
following significant terms: (i) interest rate of Libor plus 7.5% (13.15% at
December 31, 1999); (ii) maturity date of October 2005; and (iii) prepayment
permitted at any time without penalty, upon 30-day notice to lender. The
outstanding balance at December 31, 1999 was $1,146,000.
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
GuestHouse Suites Plus hotel located in Greenville, South Carolina, which
replaced the former term loan. 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 outstanding balance at
December 31, 1999 was $6,577,000.
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
GuestHouse Suites Plus hotel in Tulsa, Oklahoma, which replaced the former term
loan. 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, 1999 was
$5,142,000.
Capital Leases. During 1999, the Company's Brock Suite Hotels subsidiaries
entered into three separate five-year capital leasing agreements for furniture,
fixtures and building improvements at a cost of $2,085,000 for the three
GuestHouse Suites Plus properties. The lease terms commenced January 2000 and
expire in December 2004. The monthly lease payment is $46,570 and the effective
interest rate is 12.18%. The outstanding balance at December 31, 1999 was
$2,085,000.
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. 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. In connection with the disposition of the Company's entire
ShowBiz investment in March 1997, the Company and the Integra Unsecured
Creditor's Trust (the "Trust") entered into an agreement, whereby the Trust
consented to the sale of the 517,242 shares of ShowBiz it held as collateral for
a $4,000,000 promissory note in exchange for (i) the repayment of the principal
amount of the note and accrued interest and (ii) the deposit of $2,513,000 into
an escrow account, which represented funds for a dispute over a participation
amount, based on appreciation in the ShowBiz share price 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
escrowed amount would be equally divided between the Trust and the Company and
(ii) mutual releases would be executed, in respect to the related civil action.
Accordingly, the Company received settlement proceeds of $1,256,500 plus accrued
interest on July 31, 1997.
Other
Senior Secured Term Loan. On December 21, 1999, the Company and its HWG,
LLC subsidiary entered into an $18,000,000 credit agreement with First Bank
Texas, N.A. and other financial institutions (the
41
<PAGE> 43
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Senior Secured Term Loan"). Proceeds were used to repay the 7% Debentures, the
energy term loan and provide working capital. The Senior Secured Term Loan bears
interest at a fixed rate of 10.25%, matures on December 21, 2004, is fully
amortizing and requires a monthly payment of $385,000. Collateral is comprised
of (i) 300,397 HRP limited partner units; (ii) 1,440,000 shares of Hallwood
Energy common stock; (iii) a senior lien on the capital stock of the Hallwood
Hotels, Inc. subsidiary; and (iv) a senior lien on the capital stock of the
Brock Suite Hotels, Inc. subsidiary. The Senior Secured Term Loan contains
various financial and non-financial covenants, including the maintenance of
certain financial ratios, restrictions on certain new indebtedness and the
payment of dividends.
Management believes it is in compliance with all loan covenants.
Schedule of Maturities. Maturities of loans payable and 10% Debentures for
the next five years are as presented below (in thousands):
<TABLE>
<CAPTION>
BUSINESS SEGMENT (AS APPLICABLE)
---------------------------------------------------
OTHER
--------------------
TEXTILE TERM 10%
PRODUCTS HOTELS LOAN DEBENTURES TOTAL
-------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
2000.............................. $ 5,545 $ 918 $ 2,905 $ -- $ 9,368
2001.............................. -- 1,015 3,217 -- 4,232
2002.............................. 6,000 1,121 3,563 -- 10,684
2003.............................. -- 1,245 3,946 -- 5,191
2004.............................. -- 1,379 4,369 -- 5,748
Thereafter.......................... -- 26,240 -- 6,468 32,708
------- ------- ------- ------ -------
Total..................... $11,545 $31,918 $18,000 $6,468 $67,931
======= ======= ======= ====== =======
</TABLE>
- ---------------
Maturity of 10% Debentures excludes unamortized gain of $300,000 from the 1998
Exchange Offer discussed in Note 6.
NOTE 6 -- DEBENTURES
10% Subordinated Debentures. In June 1998, the Company announced a
commission-free exchange offer (the "1998 Exchange Offer") to all holders of 7%
Debentures (discussed below). The Company offered to exchange 7% Debentures for
a new issue of 10% Collateralized Subordinated Debentures, due July 31, 2005, in
the ratio of $100 principal amount of 10% Debentures for each $100 principal
amount of 7% Debentures tendered. Terms and conditions of the 1998 Exchange
Offer were described in an exchange offer circular, dated June 22, 1998, and a
supplemental modification letter dated July 31, 1998, both of which were mailed
to all holders of 7% Debentures. The 7% debentureholders tendered $6,467,830, or
31% of the outstanding principal amount, prior to the August 28, 1998 expiration
date of the 1998 Exchange Offer.
The 10% Debentures were listed on The New York Stock Exchange and commenced
trading in August 1998. The direct costs of the exchange offer in the amount of
$131,000 were expensed in 1998. For accounting purposes, a pro-rata portion of
the $1,121,000 unamortized gain attributable to the 7% Debentures in the amount
of $353,000 was allocated to the 10% Debentures, and will be amortized over the
term of the 10% Debentures using the effective interest method. As a result, the
effective interest rate for financial reporting is 8.9%.
The 10% Debentures are secured by a junior lien on the capital stock of the
Brookwood, Hallwood Hotels, Inc. and Brock Suite Hotels, Inc. subsidiaries.
7% Collateralized Senior Subordinated Debentures. In March 1993, the
Company completed an exchange offer (the "1993 Exchange Offer") whereby
$27,481,000 of its then outstanding 13.5% Debentures
42
<PAGE> 44
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(discussed below) 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 was
payable quarterly in arrears in cash. The 7% Debentures were secured by a pledge
of the capital stock of the Brookwood and Hallwood Hotels subsidiaries.
The concessions given the Company by 13.5% debentureholders in the 1993
Exchange Offer were accounted for as a modification of an existing obligation
and no current period gain was recognized. The unrecognized gain of $4,220,000,
was being amortized, using the constant effective interest rate method over the
term of the 7% Debentures. The total unrecognized gain was recorded as an
increase to the carrying value of the 7% Debentures, and was amortized as a
reduction of interest expense. This amortization resulted in an effective
interest rate of approximately 4.2% for the 7% Debentures. The amortization of
such unrecognized gain was $399,000, $492,000 and $600,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
Between 1994 and 1998, the Company repurchased 7% Debentures having a
principal value of $4,673,000. These repurchases 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 original
issue prior to March 1998. In January 1998, the Company repurchased 7%
Debentures with a principal amount of $2,253,000 for $2,146,000, to fully
satisfy the balance of a sinking fund requirement contained in the Indenture.
The 1998 repurchase resulted in an extraordinary gain from debt extinguishment
of $107,000.
Redemption of 7% Debentures. On December 22, 1999, the Company announced
the full redemption (the "Redemption") of its outstanding 7% Debentures of
$14,088,000 on January 21, 2000 (the "Redemption Date"). The redemption price
was 100% of the face amount plus accrued and unpaid interest to the Redemption
Date. Funding for the Redemption was provided by proceeds from the new Senior
Secured Term Loan. In accordance with the terms of the indenture, the funds were
irrevocably transferred to the trustee on December 21, 1999, and the obligation
was effectively extinguished and collateral released. The Redemption was
actually completed by the trustee on January 21, 2000 on which date the 7%
Debentures were retired and canceled. The Company recognized an extraordinary
gain from debt extinguishment of $240,000 from the Redemption, representing the
remaining balance of the unrecognized gain at that date.
13.5% Subordinated Debentures. In May 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"). The Company
had authorized the issuance of up to $100,000,000 aggregate principal amount of
13.5% Debentures. The 13.5% Debentures were 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. The Company exercised this option and had paid the annual interest
payments in-kind for the 1991, 1992, 1996 and 1997 interest payments.
Tender Offer for and Redemption of 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 and the Company repurchased $12,875,000 principal
value of 13.5% Debentures. The offer price 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 in 1997
an extraordinary gain from early 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.
43
<PAGE> 45
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1997, the Company redeemed the $14,287,000 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.
Balance sheet amounts for the 10% Debentures and 7% Debentures are detailed
below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
DESCRIPTION 1999 1998
- ----------- ------ -------
<S> <C> <C>
10% Debentures (face amount)................................ $6,468 $ 6,468
Unamortized gain from exchange, net of accumulated
amortization.............................................. 300 340
------ -------
Totals............................................ $6,768 $ 6,808
====== =======
7% Debentures (face amount)................................. -- $14,088
Unamortized gain from exchange, net of accumulated
amortization.............................................. -- 639
------ -------
Totals............................................ -- $14,727
====== =======
</TABLE>
NOTE 7 -- REDEEMABLE PREFERRED STOCK
In connection with the February 1995 settlement of certain related
lawsuits, 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. 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, 1997, 1998 and 1999. For the first five years, dividends are cumulative
and the payment of cash dividends on any common stock is prohibited before the
full payment of any accrued dividends. Thereafter, dividends will accrue and be
payable only if and when declared by the Board of Directors. The Series B
Preferred Stock also has dividend and liquidation preferences to the Company's
common stock. The shares are subject to mandatory redemption 15 years from the
date of issuance, at 100% of the liquidation preference of $4.00 per share plus
all accrued and unpaid dividends, and may be redeemed at any time on the same
terms at the option of the Company. The holders of the shares of Series B
Preferred Stock are not entitled to vote on matters brought before the Company's
stockholders, except as otherwise provided by law.
NOTE 8 -- STOCKHOLDERS' EQUITY
Common Stock. The number of outstanding shares of common stock does not
include treasury shares. See "Treasury Stock" below. The Company's Second
Restated Certificate of Incorporation contains a provision that restricts
transfers of the Company's common stock in order to protect certain federal
income tax benefits.
Stock Split. On October 28, 1999, the Company announced that its board of
directors authorized a three-for-two stock split, payable in the form of a stock
dividend, of one share of common stock of the Company for each two issued shares
of common stock. The stock dividend had a record date of October 28, 1999 and
was paid November 5, 1999. All references to the number of common shares and the
presentation of earnings per common share have been retroactively adjusted for
the three-for-two stock split.
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 Series B Preferred Stock, as
discussed in Note 7.
Treasury Stock. During 1999 the Company redeemed 457,794 shares of common
stock in connection with the Separation Agreement discussed in Note 9. During
1998, the Company repurchased 10,509 shares of its common stock from the estate
of a former director at a cost of $250,000. In January 1997 the Board of
44
<PAGE> 46
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Directors authorized an exchange of 401,564 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. In June 1997, the Company conducted a self-tender offer
for up to 450,000 shares of its common stock at $18.33 per share, terms and
conditions of which were discussed in the offering document. Stockholders
tendered a total of 492,519 shares, of which the Company accepted 456,692 shares
as permitted by the offering documents, for a total purchase price of
$8,373,000. As of December 31, 1999 and 1998, the Company held 971,360 and
513,680 treasury shares, respectively.
Stock Options. All options under the 1995 Stock Option Plan for The
Hallwood Group Incorporated 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. During 1999, the Company reacquired
55,800 options from its former president, pursuant to the Separation Agreement
described in Note 9. During 1998, the Company reacquired 15,000 options from the
estate of a former director at a cost of $144,700 which was expensed.
A summary of options granted and the changes therein during the years ended
December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998
------------------ ------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year................. 189,000 $13.06 204,000 $13.16
Granted........................................ -- -- -- --
Exercised...................................... -- -- -- --
Forfeited...................................... -- -- -- --
Reacquired..................................... (55,800) 12.60 (15,000) 13.70
------- ------ ------- ------
Outstanding, end of year....................... 133,200 $13.25 189,000 $13.06
======= ====== ======= ======
Options exercisable at end of year............. 133,200 $13.25 189,000 $13.06
======= ====== ======= ======
</TABLE>
Below is the status of the 1995 Stock Option Plan as of December 31, 1999:
<TABLE>
<S> <C> <C>
Total options authorized............ 204,000
Less: Options granted, not
exercised:
September 1997.................... (66,600) Exercise price of $17.37, expiring
September 2007
February 1997..................... (12,375) Exercise price of $15.00, expiring
February 2007
September 1996.................... (41,850) Exercise price of $7.83, expiring
September 2006
June 1995......................... (12,375) Exercise price of $7.67, expiring
------- June 2005
Options available for grant......... 70,800
=======
</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 and net income per share for the
45
<PAGE> 47
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year ended December 31, 1997 would have been the pro forma amounts indicated
below (in thousands, except per share amounts):
<TABLE>
<S> <C>
Net income available to common stockholders -- as
reported................................................ $12,797
Net income available to common stockholders -- pro
forma................................................... 11,700
Net income per common share -- as reported
Basic................................................... 6.07
Assuming dilution....................................... 5.84
Net income per common share -- pro forma
Basic................................................... 5.55
Assuming dilution....................................... 5.34
</TABLE>
The fair value of 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. The Company issued no options during 1999 or
1998 and all options previously issued were fully vested.
NOTE 9 -- LOSS FROM REDEMPTION OF TREASURY STOCK
On May 11, 1999, the Company announced that it had reached an agreement
with Mr. Brian M. Troup, former president and director of the Company, regarding
a separation of their interests (the "Separation Agreement"). Among other
things, the Separation Agreement was conditioned on completion of the Energy
Consolidation and a satisfactory refinancing of the 7% Debentures. The Energy
Consolidation was completed on June 8, 1999 and the redemption of the 7%
Debentures was effectively completed on December 21, 1999. Since all conditions
were satisfied, the Separation Agreement became effective at that time.
Mr. Troup held options to purchase 55,800 shares of the Company's common
stock and the Epsilon Trust owned 457,794 shares of the Company's common stock.
Mr. Troup surrendered his options, the trust surrendered all of its shares of
common stock to the Company and Mr. Troup resigned from all positions with the
Company, HRP and Hallwood Energy.
In exchange, the Company transferred to the trust or Mr. Troup (i) 82,608
units of HRP, (ii) 360,000 shares of common stock of Hallwood Energy, and (iii)
all of the Company's interests in the Enclave condominium hotel located in
Orlando, Florida and any other condominium hotel project then in process. In
addition, the Company agreed to pay quarterly to Mr. Troup the lesser of 20% of
the net cash flow from its real estate management activities for the preceding
quarter or $125,000, subject to termination in certain events. HRP and Hallwood
Energy agreed to register the trust's and/or Mr. Troup's units or shares in
those entities upon request by Mr. Troup and the Company, at the Company's
expense. The Company has the right to purchase all of these units and shares at
the then current trading price for a period of six months after December 21,
1999, the effective date of the Separation Agreement. Thereafter, Mr. Troup may
sell the units and shares subject to certain restrictions, including a right of
first refusal in favor of the Company. Mr. Troup and the trust have given an
irrevocable proxy to the Company to vote all their HRP units and HEC shares on
any and all matters in and according to the Company's sole discretion, until Mr.
Troup or the trust sell the units or shares.
46
<PAGE> 48
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair market value of assets distributed were as follows (in thousands):
<TABLE>
<S> <C>
82,608 HRP limited partnership units...................... $ 4,172
360,000 shares of Hallwood Energy common stock............ 1,665
Interest in all condominium hotel assets.................. 1,723
Present value of future cash payments..................... 3,197
-------
Total........................................... $10,757
=======
</TABLE>
The loss from redemption of treasury stock of $1,769,000 was comprised of
two components. A gain, resulting from a step-up in basis, was recorded to the
extent of the excess of fair market value of assets distributed over their
previous carrying values. The gain of $3,439,000 included $2,905,000 from the
step-up of 82,608 units of HRP and $534,000 from the step-up of 360,000 shares
of common stock of Hallwood Energy. A loss of $5,208,000 was recognized to the
extent of the excess of fair market value of assets distributed of $10,757,000
over the publicly-traded market value of the treasury shares redeemed
$5,549,000.
A summarized table is presented below (in thousands):
<TABLE>
<S> <C>
Excess of fair market value of assets distributed over
publicly-traded market value of treasury shares
redeemed................................................ $ 5,208
Gain from step-up in basis of assets distributed.......... (3,439)
-------
Loss from redemption of treasury stock.......... $ 1,769
=======
</TABLE>
NOTE 10 -- INCOME TAXES
The following is a summary of the income tax provision or (benefit) (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998 1997
----- ------- ------
<S> <C> <C> <C>
Federal
Deferred tax (benefit)................................... $(873) $(4,308) $8,960
Current tax.............................................. 71 745 652
State...................................................... 233 448 296
----- ------- ------
Total............................................ $(569) $(3,115) $9,908
===== ======= ======
</TABLE>
Reconciliations of the expected tax at the statutory tax rate to the
effective tax or (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Expected tax at the statutory tax rate.................. $ 391 $ 1,344 $ 7,737
Decrease in deferred tax asset valuation allowance...... (3,607) (9,092) (5,694)
Redemption of treasury stock............................ 2,639 -- --
State taxes............................................. 154 296 196
Alternative minimum tax................................. 71 745 652
Foreign loss not taxable................................ 3 (3) 59
Expired NOLs............................................ -- 3,309 6,813
Other................................................... (220) 286 145
------- ------- -------
Effective tax or (benefit).................... $ (569) $(3,115) $ 9,908
======= ======= =======
</TABLE>
47
<PAGE> 49
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the appreciation in the market value of the HRP limited
partner units, the excess of market value over carrying value of certain other
assets, including Hallwood Energy and various hotels, and projected income from
operations, management has determined that the deferred tax asset should be
increased to reflect the anticipated utilization of net operating loss
carryforwards ("NOLs") from assumed realization of the gains and projected
income from operations. Accordingly, the Company recorded a deferred tax benefit
of $873,000 in 1999 and $4,308,000 in 1998 from anticipated future utilization
of NOLs, which increased the deferred tax asset to $7,221,000 at December 31,
1999 from $6,348,000 at December 31, 1998 and $2,040,000 at December 31, 1997.
As a result of the appreciation in the market value of the Company's
investment in ShowBiz during 1996, management had determined that the deferred
tax asset should be increased at December 31, 1996 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 1996 of $5,071,000. In 1997,
concurrent with the sale of the ShowBiz investment, the Company recorded an
$8,960,000 non-cash federal deferred tax charge.
The Company incurred a federal alternative minimum tax of $71,000, $745,000
and $652,000 for the years ended December 31, 1999, 1998 and 1997, respectively,
due to the utilization of NOLs to offset taxable income. The accrued income tax
payable of $195,000 and $887,000 at December 31, 1999 and 1998, respectively, is
included in the interest and other accrued expenses line item of the Company's
balance sheets.
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 ASSET, NET
-----------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Net operating loss carryforward............. $ 16,277 $ 18,974
Equity in earnings of unconsolidated
affiliates................................ 2,153 2,135
Tax credits................................. 3,065 2,994
Original issue discounts and cancellation of
debt income on debentures................. 800 1,996
Reserves recorded for financial statement
purposes and not for tax purposes......... 578 519
Other temporary differences................. 19 -- $ (86)
Depreciation and amortization............... 22 -- (609)
Basis differences........................... 10,978 10,703 --
-------- ----- -------- -----
Deferred tax assets and liabilities......... 33,892 -- 37,321 $(695)
===== =====
Less: Deferred tax liabilities.............. -- (695)
======== ========
33,892 36,626
Less: Valuation allowance................... (26,671) (30,278)
======== ========
Deferred tax asset, net........... $ 7,221 $ 6,348
======== ========
</TABLE>
48
<PAGE> 50
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a schedule of expiring NOLs for tax purposes by year (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- ------------ -------
<S> <C>
2006.................................................... $18,199
2007.................................................... 8,517
2008.................................................... 12,896
2009.................................................... 6,916
2010.................................................... 1,346
-------
Total........................................... $47,874
=======
</TABLE>
In addition, the Company has approximately $2,249,000 of alternative
minimum tax credits which have no expiration date, a depletion carryforward of
approximately $6,317,000, which may be used to offset future taxable income
without an expiration limitation and an investment tax credit carryforward of
approximately $816,000, which expires in 2001.
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, 1999, management was not aware of any
ownership changes which would limit the utilization of the NOLs and tax credit
carryforwards.
NOTE 11 -- EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT
In the year ended December 31, 1999, the Company recognized an
extraordinary gain from early debt extinguishment of $240,000 from the
Redemption of the 7% Debentures. In the year ended December 31, 1998 the Company
recognized an extraordinary gain from early extinguishment of debt of
$1,481,000. The gain resulted from (i) the January 1998 repurchase of 7%
Debentures having a face amount of $2,253,000 for a discounted amount of
$2,146,000 resulting in a gain of $107,000; and (ii) a $1,374,000 gain from the
recognition of the Company's pro-rata share of a $5,347,000 extraordinary gain
from early extinguishment of debt reported by HRP during 1998. In the year ended
December 31, 1997, the Company recorded a net extraordinary gain from debt
extinguishment of $200,000. Of this amount, $877,000 was attributable to the
gain from the partial repurchase of 13.5% Debentures in June 1997, offset by
$677,000 of losses from early the refinancing of the Company's Tulsa, Oklahoma
and Greenville, South Carolina hotel mortgages.
49
<PAGE> 51
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- 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>
YEARS ENDED DECEMBER 31,
-------------------------
DESCRIPTION 1999 1998 1997
- ----------- ------- ------ ------
<S> <C> <C> <C>
Assets exchanged for redemption of treasury stock
Investment in HRP....................................... $ 4,172 -- --
Investment in Hallwood Energy........................... 1,665 -- --
Interest in all condominium hotel assets................ 1,723 -- --
Present value of future cash payments................... 3,197 -- --
------- ------ ------
$10,757 -- --
======= ====== ======
Conversion of energy investment to equity method from
proportional consolidation method at date of Energy
Consolidation
Oil and gas properties.................................. $10,809 -- --
Current assets of HEP................................... 3,267 -- --
Noncurrent assets of HEP................................ 1,194 -- --
Receivables and other assets............................ 64 -- --
Long-term obligations of HEP............................ (6,872) -- --
Current liabilities of HEP.............................. (2,160) -- --
Accounts payable and accrued expenses................... (602) -- --
------- ------ ------
$ 5,700 -- --
======= ====== ======
Hotel furniture, fixtures and improvements acquired by
capital lease........................................... $ 2,085 -- --
Exchange of 7% Debentures for a new issue of 10%
Debentures.............................................. -- $6,821 --
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
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
Supplemental disclosures of cash payments
Interest paid........................................... $ 5,620 $4,168 $7,244
Income taxes paid....................................... 965 396 853
</TABLE>
NOTE 13 -- ORGANIZATION AND OPERATIONS OF HALLWOOD REALTY PARTNERS, L.P.
Organization. In November 1990, the Company, through its former wholly
owned subsidiary Hallwood Realty Corporation, 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 partnerships into Hallwood Realty Partners, L.P. ("HRP").
The Company subsequently acquired additional limited partner units of HRP in
direct and open market purchases. During 1998, management completed a
consolidation of the Company's real estate assets into a new structure involving
several new wholly owned entities. Following the completion of the
consolidation, the general partner interest
50
<PAGE> 52
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is owned by Hallwood Realty, LLC ("Hallwood Realty") and the limited partner
interest is owned by HWG, LLC. The consolidation did not affect the carrying
value of the investments.
Operations. As general partner, Hallwood Realty earns an asset management
fee and related fees from HRP properties, which amounted to $619,000, $495,000
and $466,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company's Hallwood Commercial Real Estate, LLC ("HCRE") subsidiary is
responsible for day-to-day on-site property management at all of HRP's
properties for which HCRE receives management fees, leasing commissions and
other fees. HCRE earned fees and commissions from HRP and other third parties
aggregating $8,472,000, $5,430,000 and $5,840,000 during the years ended
December 31, 1999, 1998 and 1997, respectively.
Other. In accordance with the terms of the Separation Agreement discussed
in Note 9, the Company distributed 82,608 HRP limited partner units to the
Epsilon Trust on December 21, 1999. As of December 31, 1999, the Company owns
330,432 HRP limited partner units (20% of the total outstanding).
NOTE 14 -- ORGANIZATION AND OPERATIONS OF HALLWOOD ENERGY CORPORATION
Organization. Energy operations were consolidated beginning in May 1990,
when the Company increased its ownership of Hallwood Energy Corporation ("HEC")
to 53%. As a result 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% as of October 1996.
Tender Offer for Minority Shares and Merger of HEC into the Company. In
November 1996, the Company and HEC completed a merger whereby HEC was merged
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. 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 in November 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, the merger of HEC into the Company was consummated at that time.
Certain assets acquired by the Company from the merger were subsequently
transferred to two wholly owned entities, HEPGP Ltd. and Hallwood G.P., Inc.,
the general partner of HEPGP.
At December 31, 1999, the Company had included $465,000 in accounts
payable, representing the amount due certain former HEC shareholders who had not
yet surrendered their minority shares at $19.50 per share, or $395,000, and an
additional $70,000 for interest from the merger date through December 31, 1999.
The Company paid its obligation in full in February 2000, in accordance with the
terms of a settlement agreement approved by the court in January 2000, as
discussed in Note 18.
From November 1996, the Company's energy operations were conducted
primarily through HEPGP, and consisted of the development, production and sale
of oil and gas, and the acquisition, exploration, development and operation of
additional oil and gas properties. HEPGP was the sole general partner of
Hallwood Energy Partners, L.P. ("HEP"), a then publicly-traded oil and gas
master limited partnership, and conducted substantially all of its operations
through HEP. HEPGP's former general partner interest in HEP entitled it to a
share of net revenue derived from HEP's properties ranging from 2% to 25%.
Additionally, the Company held an approximate 6.5% limited partner interest in
HEP from its Class A, B and C units.
Energy Consolidation. In December 1998, HEP and its HCRC affiliate, jointly
announced a proposal to consolidate HEP with HCRC and the energy interests of
the Company into a new, publicly-traded entity to be
51
<PAGE> 53
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
called Hallwood Energy Corporation ("Hallwood Energy"). On June 8, 1999,
Hallwood Energy announced that the consolidation was approved by the HEP
unitholders, the HCRC stockholders and the Company and that the consolidation
was completed as of that date (the "Energy Consolidation"). At its inception,
the common stock of Hallwood Energy was owned 56% by the Class A unitholders of
HEP, 26% by the stockholders of HCRC and 18% by the Company. HEP's Class C
unitholders received redeemable preferred stock in Hallwood Energy. The Company
received 1,800,000 shares of common stock (18% of the total outstanding) and
43,816 shares of preferred stock (1.9% of the total outstanding) in Hallwood
Energy, in exchange for the contribution of its energy interests.
Operations. Prior to the Energy Consolidation, the Company and its
subsidiaries accounted for their ownership of HEP using the proportionate
consolidation method, whereby it recorded a proportional share of HEP's revenues
and expenses, current assets, current liabilities, noncurrent assets, long-term
obligations and fixed assets. As of the June 8, 1999 consolidation date, the
Company no longer proportionally consolidates its energy business. The assets
and liabilities of the Company's energy business were combined at the
consummation date to establish the initial investment in Hallwood Energy of
$5,700,000. The investment in Hallwood Energy is now accounted for under the
equity method, as the Company exercises significant influence over Hallwood
Energy's operational and financial policies. In accordance with the equity
method of accounting, the Company records its pro-rata share of Hallwood
Energy's net income available to common stockholders, its share of preferred
dividends and its pro-rata share of any capital transactions.
Other. In accordance with the terms of the Separation Agreement discussed
in Note 9, the Company distributed 360,000 shares of common stock of Hallwood
Energy to the Epsilon Trust on December 21, 1999. As of December 31, 1999, the
Company owns 1,440,000 shares of Hallwood Energy common stock (14.4% of the
total outstanding). In addition, the Company sold its shares of preferred stock
in February 2000 at its carrying value of $303,000.
NOTE 15 -- ORGANIZATION AND OPERATIONS OF BROOKWOOD COMPANIES INCORPORATED
Organization. Brookwood Companies Incorporated, a wholly owned subsidiary
of the Company ("Brookwood"), was formed in March 1989 to acquire certain assets
and assume certain liabilities of a nylon textile converting and finishing
company. Brookwood is a complete textile service firm that develops and produces
innovative fabrics and related products through specialized finishing, treating
and coating processes.
Operations. Brookwood maintains factoring agreements which provide that
receivables resulting from credit sales to customers, excluding the U.S.
Government, may be sold to the factor without recourse, subject to a commission
of 0.7% and the factor's prior approval. Commissions paid to the factors were
approximately $379,000, $417,000 and $441,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................... $ 6,044 $ 3,387
Work in process............................................. 3,391 4,555
Finished goods.............................................. 9,775 9,224
------- -------
19,210 17,166
Less: Obsolescence reserve.................................. (428) (458)
------- -------
Total............................................. $18,782 $16,708
======= =======
</TABLE>
52
<PAGE> 54
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Land........................................................ $ 391 $ 391
Buildings and improvements.................................. 4,365 4,333
Leasehold improvements...................................... 138 133
Machinery and equipment..................................... 10,260 9,780
Office furniture and equipment.............................. 2,361 2,122
Construction in progress.................................... 1,360 834
------- -------
18,875 17,593
Less: Accumulated depreciation.............................. (9,878) (8,855)
------- -------
Total............................................. $ 8,997 $ 8,738
======= =======
</TABLE>
NOTE 16 -- FAIR VALUE OF 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 the applicable accounting pronouncement.
Management has reviewed the carrying value of its loans payable and 10%
Debentures 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 would be
approximately $59,332,000 and $42,339,000 at December 31, 1999 and 1998,
compared to the carrying value of $61,463,000 and $43,021,000, respectively. The
estimated fair value of the 10% Debentures and the 7% Debentures (1998 only) is
$5,885,000 and $19,006,000, based on market prices on the New York Bond
Exchange, compared to the carrying values of $6,768,000 and $21,535,000 at
December 31, 1999 and 1998, respectively.
As of December 31, 1999 and 1998, 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 17 -- RELATED PARTY TRANSACTIONS
HSC Financial Corporation. Effective December 31, 1996, the compensation
committee approved a financial consulting contract with HSC Financial
Corporation ("HSC"), a corporation with which Mr. Gumbiner is and Mr. Troup was
associated, 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,
excluding reimbursement for out-of-pocket and other reasonable expenses. 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 had an
53
<PAGE> 55
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
original termination date of July 31, 1998, however, it automatically renews for
one-year periods if not terminated by the parties beforehand. Effective January
1, 2000, the contract was amended to reduce the annual consulting fee to
$495,000. 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.
Hallwood Petroleum, Inc. The Company entered into a financial consulting
agreement with Hallwood Petroleum, Inc. ("HPI"), a wholly owned subsidiary of
HEP, dated as of December 31, 1996, which provided that the Company or its agent
provide consulting services to HPI for compensation at the rate of $550,000 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. Approximately $6,000 of such fees
paid in 1999 and $13,000 of such fees paid in 1998 and 1997 were paid by HEPGP,
and the remainder by HEP and other affiliates of HEP. The financial consulting
agreement was terminated on June 8, 1999, concurrent with the completion of the
Energy Consolidation.
Expenses. Pursuant to the HSC financial consulting agreement, the Company
reimburses HSC for reasonable and necessary expenses in providing office space
and administrative services. The Company paid HSC $313,000, $325,000 and
$299,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Of
the amounts paid, the Company incurred $107,000, $65,000 and $60,000 of expense
for the years ended December 31, 1999, 1998 and 1997, respectively. The
remainder was reimbursed by HRP, HEPGP, HEP and other affiliates of HEP.
Exchange. In January 1997, the Board of Directors of the Company authorized
the issuance of 401,564 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 in March 1997.
Other. 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 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 was $366,000. The
remaining balance of the promissory note was paid in full in March 1998.
On March 16, 2000, the Board of Directors authorized a stockholder loan of
$1,500,000 which will contain certain common stock conversion options.
The Company shares common offices, facilities and staff with Stanwick
Holdings, Inc. ("Stanwick"). The Company pays the common general and
administrative expenses of the two entities and charges Stanwick a management
fee for its allocable share of the expenses. Stanwick reimbursed the Company
$25,000, $37,000 and $6,000 for the years ended December 31, 1999, 1998 and
1997, 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.
During 1998 and 1997, HCRE received management, leasing and brokerage fees
of $4,000 and $990,000, respectively, for services provided to an office
building owned by Stanwick, which was disposed of in December 1997.
54
<PAGE> 56
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, the Company repurchased 10,509 shares of common stock and
15,000 options to purchase shares of common stock from the estate of former
director, Robert L. Lynch, at a cost of $250,000 and $144,700, respectively.
NOTE 18 -- LITIGATION, CONTINGENCIES AND COMMITMENTS
Litigation. The Company, certain of its affiliates and others have been
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 of the Company.
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. In June 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. In June
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. In August 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. In February 1998, the court granted defendants' motion to dismiss but
gave plaintiff thirty days to file an amended complaint. Plaintiffs filed an
amended complaint in March 1998, which defendants again moved to dismiss. This
motion was denied and the parties are proceeding with discovery. Trial is
scheduled for January 2001. Management believes that the claims are without
merit and intend to defend the cases vigorously.
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 alleged 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
sought rescission or rescissionary damages of an unspecified amount. The
plaintiff also sought 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 also demanded an appraisal
of the fair value of the HEC shares owned by plaintiff. The defendants believed
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 were without merit. 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 were
substantially identical as those made in the Ravenswood case. The plaintiff in
the Noland case sought damages of an unspecified amount, and sought class
certification to represent similarly situated former shareholders of HEC. The
defendants believed 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
55
<PAGE> 57
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair, and that the Noland case, like the Ravenswood case, was without merit.
Certain non-tendering plaintiffs in the Ravenswood case had also filed a lawsuit
styled Cede & Company, et al, vs. Hallwood Group Inc. for appraisal rights under
the Texas statute. The Company entered into a settlement agreement in February
1999 for all three of these lawsuits. In general, the settlement provided for
the payment of $24.00 per share to the former HEC shareholders for all 143,209
shares purchased by the Company in the HEC tender offer and subsequent merger,
compared to the original tender offer price of $19.50 per share. The settlement
amount of $644,000 was accrued at December 31, 1998 by the Company's HEPGP
subsidiary and was payable 30 days after entry of a final order approving the
settlement. The settlement obligation was assumed by Hallwood Energy in
connection with the Energy Consolidation. The court gave its final approval for
the settlement during January 2000 and the settlement amount was paid in
February 2000.
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 Note 5.
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 Hallwood Realty, 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 Hallwood Realty has insufficient capital
to satisfy creditors of HRP. As of the date of this report no such demands have
been made.
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 significantly affected the Company's business to date, it is possible
that such considerations may have a significant and adverse impact in the
future. The Company actively monitors its environmental compliance and while
certain matters currently exist, management is not aware of any compliance
issues which will significantly impact the financial position, operations or
cash flows of the Company.
Commitments. Total lease expense for noncancelable operating leases was
$3,452,000, $4,126,000 and $4,479,000 for the years ended December 31, 1999,
1998 and 1997, respectively. The Company leases certain hotel property,
including land, buildings and equipment, executive office facilities at several
locations, and certain textile manufacturing equipment. The leases generally
require the Company to pay property taxes, insurance and maintenance of the
leased assets. Lease expense on certain office facilities is incurred on behalf
of partnerships, of which the Company is general partner and is substantially
reimbursed by such partnerships. Certain of the hotel property leases require
the payment of rent contingent upon hotel revenue. Contingent rent was $187,000,
$140,000 and $439,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Additionally, as discussed in Note 3, certain hotel property was
acquired in 1999 under capital lease obligations.
56
<PAGE> 58
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, aggregate net minimum annual rental commitments under
noncancelable operating and capital leases having an initial or remaining term
of more than one year, were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, CAPITAL OPERATING
- ------------ ------- ---------
<S> <C> <C>
2000...................................................... $ 559 $ 2,762
2001...................................................... 559 2,485
2002...................................................... 559 2,456
2003...................................................... 559 2,455
2004...................................................... 559 2,364
Thereafter................................................ -- 8,352
------ -------
Total............................................. 2,795 $20,874
=======
Less: Amount representing interest................ (710)
------
Present value of minimum future lease payments............ $2,085
======
</TABLE>
Employment Contracts. The Company's Brookwood subsidiary has employment
agreements which expire at various dates with a corporate officer and certain
key employees. The approximate minimum annual compensation due under these
commitments is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
- ------------
<S> <C>
2000................................................... $238,000
2001................................................... 238,000
--------
Total.......................................... $476,000
========
</TABLE>
NOTE 19 -- SEGMENT AND RELATED INFORMATION
The Company is a diversified holding company and classifies its current
operations into four reportable segments, each having different management teams
and infrastructures that engage in different businesses and offer different
services. The accounting policies are the same as those described in Note 1 and
the Company evaluates performance based upon operating income (loss):
Real Estate. Real estate activities are conducted primarily through the
Company's wholly owned subsidiaries, HWG, LLC, Hallwood Realty and HCRE.
Hallwood Realty is the sole general partner of HRP, a publicly-traded, real
estate master limited partnership. At December 31, 1999, HRP owned fourteen real
estate properties in six states. Hallwood Realty owns a 1% general partner
interest and HWG, LLC owns a 20% (25% prior to December 21, 1999) limited
partner interest in HRP. Hallwood Realty is responsible for asset management of
HRP and its properties, including the decisions regarding financing, acquiring
and disposing of properties. It also provides general operating and
administrative services to HRP. 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 accounts for its ownership in HRP using the equity method of accounting.
See Note 13.
Energy. Prior to the June 1999 Energy Consolidation, the Company's energy
operations were conducted primarily through HEPGP, and consisted of the
development, production and sale of oil and gas, and the acquisition,
exploration, development and operation of additional oil and gas properties.
HEPGP was the sole general partner of HEP, and conducted substantially all of
its operations through HEP. The Company and its subsidiaries accounted for their
ownership of HEP using the proportionate consolidation method, whereby it
recorded a proportional share of HEP's revenues and expenses, current assets,
current liabilities, noncurrent
57
<PAGE> 59
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets, long-term obligations and fixed assets. Following the June 1999 Energy
Consolidation, the Company no longer proportionally consolidates its energy
business. The assets and liabilities of the Company's energy business were
combined at the consummation date to establish the initial investment in
Hallwood Energy. The investment in Hallwood Energy is now accounted for under
the equity method. Hallwood Energy owns interests in approximately 1,300 wells,
primarily located in the Rocky Mountain, Greater Permian and Gulf Coast Regions
of the United States. See Note 14.
Textile Products. Textile products operations are conducted through the
Company's wholly owned 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. See Note 15.
Hotels. Hotel operations are conducted through the Company's wholly owned
Hallwood Hotels and Brock Hotels subsidiaries. Hallwood Hotels holds a long-term
leasehold interest in the Holiday Inn hotel, located in Longboat Key , Florida
and a fee interest in the Airport Embassy Suites hotel, located in Oklahoma
City, Oklahoma. Brock Hotels owns fee interests in GuestHouse Suites Plus
properties located in Tulsa, Oklahoma and Greenville, South Carolina, and a
long-term leasehold interest in a GuestHouse Suites Plus property located in
Huntsville, Alabama. Prior to its disposition in December 1999 (see Note 9), the
Company also conducted hotel operations through its wholly owned IRM subsidiary.
IRM owned 315 owner's rental contracts and certain real estate at the Enclave, a
resort condominium hotel located in Orlando, Florida. It managed the property
for individual unit owners for which it received a management fee and other
consideration for the services it provided.
Associated Company. The Company has not been engaged in the associated
company segment since March 1997. Its remaining investment in ShowBiz was sold
at that time, through a secondary public offering by ShowBiz. The Company had
accounted for its investment in ShowBiz on the equity method.
58
<PAGE> 60
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the Company's reportable amounts by segment as of
and for the years ended December 31, 1999, 1998 and 1997, respectively ( in
thousands):
<TABLE>
<CAPTION>
REAL TEXTILE ASSOCIATED
ESTATE ENERGY PRODUCTS HOTELS COMPANY OTHER CONSOLIDATED
------- ------- -------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Total revenue from external sources...... $ 9,503 $ 2,895 $80,704 $21,894 $ -- $ 344 $115,340
======= ======= ======= ======= ======= ======= ========
Operating income (loss).................. $ 6,530 $ 438 $ 1,565 $(2,512) $ -- $ -- $ 6,021
======= ======= ======= ======= ======= =======
Unallocable expenses, net................ $(5,111) (5,111)
======= --------
Income before income taxes............... $ 910
========
Extraordinary gain from early
extinguishment of debt................. $ -- $ -- $ -- $ -- $ -- $ 240 $ 240
======= ======= ======= ======= ======= ======= ========
Identifiable assets, December 31, 1999... $10,159 $ 4,927 $41,276 $33,535 $ -- $ -- $ 89,897
Cash allocable with segment.............. 104 -- 37 982 -- 1,686 2,809
------- ------- ------- ------- ------- ------- --------
$10,263 $ 4,927 $41,313 $34,517 $ -- $ 1,686 92,706
======= ======= ======= ======= ======= =======
Corporate assets......................... $ 9,012 9,012
======= --------
Total assets, December 31, 1999.......... $101,718
========
Depreciation, depletion, amortization and
impairment............................. $ 672 $ 849 $ 1,195 $ 2,896 $ -- $ -- $ 5,612
======= ======= ======= ======= ======= ======= ========
Capital expenditures/acquisitions........ $ -- $ 8 $ 1,377 $ 2,946 $ -- $ -- $ 4,331
======= ======= ======= ======= ======= ======= ========
YEAR ENDED DECEMBER 31, 1998
Total revenue from external sources...... $ 7,813 $ 5,216 $80,343 $21,130 $ -- $ 1,728 $116,230
======= ======= ======= ======= ======= ======= ========
Operating income (loss).................. $ 5,006 $ 407 $ 1,098 $(2,096) $ -- $ -- $ 4,415
======= ======= ======= ======= ======= =======
Unallocable expenses, net................ $(1,944) (1,944)
======= --------
Income before income taxes............... $ 2,471
========
Extraordinary gain from early
extinguishment of debt................. $ 1,374 $ -- $ -- $ -- $ -- $ 107 $ 1,481
======= ======= ======= ======= ======= ======= ========
Identifiable assets, December 31, 1998... $10,458 $16,075 $38,048 $35,655 $ -- $ -- $100,236
Cash allocable with segment.............. 114 87 42 944 -- 290 1,477
------- ------- ------- ------- ------- ------- --------
$10,572 $16,162 $38,090 $36,599 $ -- $ 290 101,713
======= ======= ======= ======= ======= =======
Corporate assets......................... $ 7,539 7,539
======= --------
Total assets, December 31, 1998.......... $109,252
--------
Depreciation, depletion, amortization and
impairment............................. $ 674 $ 1,761 $ 1,387 $ 3,184 $ -- $ -- $ 7,006
======= ======= ======= ======= ======= ======= ========
Capital expenditures/acquisitions........ $ -- $ 298 $ 1,009 $21,845 $ -- $ -- $ 23,152
======= ======= ======= ======= ======= ======= ========
YEAR ENDED DECEMBER 31, 1997
Total revenue from external sources...... $ 7,206 $ 6,350 $91,552 $21,038 $19,416 $ 3,207 $148,769
======= ======= ======= ======= ======= ======= ========
Operating income (loss).................. $ 3,855 $ 1,832 $ 1,977 $ (237) $18,809 $ -- $ 26,236
======= ======= ======= ======= ======= =======
Unallocable expenses, net................ $(3,681) (3,681)
======= --------
Income before income taxes............... $ 22,555
========
Extraordinary gain (loss) from early
extinguishment of debt................. $ -- $ -- $ -- $ (677) $ -- $ 877 $ 200
======= ======= ======= ======= ======= ======= ========
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
======= ======= ======= ======= ======= ======= ========
</TABLE>
59
<PAGE> 61
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Results of operations by quarter for the years ended December 31, 1999 and
1998, are summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenues....................... $31,415 $33,184 $26,660 $24,081
Gross profit............................. 4,191 6,696 3,644 783
Income (loss) before extraordinary
gain................................... 505 2,614 131 (1,771)
Net income (loss)........................ 505 2,614 131 (1,531)
Income (loss) before extraordinary gain
per share:
Basic.................................. 0.27 1.36 0.07 (0.97)
Assuming dilution...................... 0.26 1.34 0.07 (0.95)
Net income (loss) per share:
Basic.................................. 0.27 1.36 0.07 (0.84)
Assuming dilution...................... 0.26 1.34 0.07 (0.82)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenues....................... $31,100 $32,025 $26,843 $26,262
Gross profit............................. 3,940 5,762 3,758 3,521
Income before extraordinary gain......... 651 1,973 191 2,771
Net income............................... 344 1,905 191 4,627
Income before extraordinary gain per
share:
Basic.................................. 0.35 1.02 0.10 1.47
Assuming dilution...................... 0.33 0.98 0.10 1.45
Net income per share:
Basic.................................. 0.18 0.99 0.10 2.46
Assuming dilution...................... 0.17 0.95 0.10 2.41
</TABLE>
Year Ended December 31, 1999. In June 1999, the Company contributed its
combined energy assets in connection with the Energy Consolidation in exchange
for an 18% common stock investment in Hallwood Energy. The Company commenced
equity accounting for its energy investment, compared to the proportional method
of accounting prior to the Energy Consolidation. In December 1999, the Company
recognized (i) a loss from redemption of treasury stock of $1,769,000; (ii) a
deferred income tax benefit of $873,000 from assumed utilization of NOL's; and
(iii) an extraordinary gain of $240,000 from the redemption of its 7%
Debentures.
Year Ended December 31, 1998. In May 1998, the Company reported revenue of
$1,025,000 from the favorable settlement of a litigation claim involving its
former merchant banking activities. In December 1998, the Company recognized a
deferred income tax benefit of $4,308,000 from assumed utilization of NOL's, and
an extraordinary gain of $1,374,000 from the recognition of the Company's
pro-rata share of a $5,347,000 extraordinary gain from early extinguishment of
debt reported by HRP.
NOTE 21 -- 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 plan provides that (i) eligible employees may contribute up to 15% of their
compensation to the plan; (ii) the Company's matching contribution is
60
<PAGE> 62
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
discretionary, to be determined annually by the Company's Board of Directors;
(iii) excludes the Company's hotel hourly employees from a matching
contribution; and (iv) excludes highly compensated employees from a matching
contribution, although this group receives a compensatory bonus in lieu of such
contribution and diminution of related benefits. Amounts contributed by
employees are 100% vested and non-forfeitable. The Company's matching
contributions, which were 50% of its employees contributions up to the first 6%
contributed for each of the three years ended December 31, 1999, vest at a rate
of 20% per year of service and become fully vested after five years. Employees
of Hallwood Realty, HCRE and salaried hotel employees also participate in the
Company's 401(k) plan. Hallwood Energy and Brookwood have separate 401(k) plans
which are similar to the Company's plan. Employer contributions paid on behalf
of Hallwood Realty and Hallwood Energy employees were substantially paid by the
respective real estate and energy master limited partnerships. The Company's
contributions to the plans for the years ended December 31, 1999, 1998 and 1997,
respectively, excluding contributions from the Hallwood Realty and Hallwood
Energy affiliates to the extent paid by the master limited partnerships, were
$299,000, $215,000, and $212,000, respectively.
Brookwood's union employees belong to a pension fund maintained by their
union. The Company contributes $87 per month per employee to the fund. Total
contributions for the years ended December 31, 1999, 1998 and 1997 were
$212,000, $210,000 and $217,000, respectively. At September 30, 1999, 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.
61
<PAGE> 63
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Stockholders and Directors of
The Hallwood Group Incorporated
We have audited the consolidated balance sheets of The Hallwood Group
Incorporated and its subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1999,
and have issued our report thereon dated March 17, 2000, 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 17, 2000
62
<PAGE> 64
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Investments in subsidiaries................................. $ 15,587 $ 35,015
Deferred tax asset, net..................................... 7,221 6,348
Investment in Hallwood Energy............................... 3,480 --
Receivables and other assets................................ 1,693 1,147
Restricted cash............................................. 901 --
Cash and cash equivalents................................... 664 127
Energy division
Oil and gas properties, net............................... -- 6,759
Current assets of HEP..................................... -- 1,524
Noncurrent assets of HEP.................................. -- 647
-------- --------
Total Assets...................................... $ 29,546 $ 51,567
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
10% Collateralized Subordinated Debentures.................. $ 6,768 $ 6,808
Accounts payable, accrued interest and other accrued
expenses.................................................. 4,720 2,328
7% Collateralized Senior Subordinated Debentures............ -- 14,727
Energy division
Long-term obligations of HEP.............................. -- 2,817
Current liabilities of HEP................................ -- 2,054
Accounts payable and accrued expenses..................... -- 395
Loan payable................................................ -- 500
-------- --------
Total Liabilities................................. 11,488 29,629
Redeemable preferred stock.................................. 1,000 1,000
Stockholders' Equity
Common stock.............................................. 240 240
Additional paid-in capital................................ 54,743 54,743
Accumulated deficit....................................... (23,007) (24,676)
Treasury stock............................................ (14,918) (9,369)
-------- --------
Total Stockholders' Equity........................ 17,058 20,938
-------- --------
Total Liabilities and Stockholders' Equity........ $ 29,546 $ 51,567
======== ========
</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
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income
Intercompany income from subsidiaries
Management fees........................................ $ 3,987 $ 2,660 $ 2,834
Interest income........................................ 3,731 465 278
Dividends.............................................. 400 1,724 2,800
Energy division -- oil and gas revenues and other
income................................................. 1,051 2,218 2,742
Income from investment in Hallwood Energy................. 380 -- --
Equity in net loss of subsidiaries........................ (371) (2,749) (1,561)
Fee income................................................ 241 550 560
Interest on short-term investments and other income....... 90 130 1,124
Income from investment in HRP............................. -- 1,728 871
Litigation and insurance settlements...................... -- 1,025 1,508
Income from investment in ShowBiz......................... -- -- 19,416
------- ------- -------
Total income...................................... 9,509 7,751 30,572
Expenses
Loss from redemption of treasury stock.................... 4,675 -- --
Administrative expenses................................... 2,433 2,654 3,196
Interest expense.......................................... 1,261 1,067 4,364
Energy division -- oil and gas expenses................... 910 2,076 1,845
Intercompany interest expense............................. 51 -- --
Depreciation and amortization............................. -- 2 152
------- ------- -------
Total expenses.................................... 9,330 5,799 9,557
------- ------- -------
Income before income taxes (benefit) and extraordinary
gain................................................... 179 1,952 21,015
Income taxes (benefit).................................... (1,300) (3,688) 9,045
------- ------- -------
Income before extraordinary gain.......................... 1,479 5,640 11,970
Extraordinary gain from early extinguishment of debt...... 240 1,427 877
------- ------- -------
Net Income........................................ $ 1,719 $ 7,067 $12,847
======= ======= =======
</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
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Net Cash Provided by Operating Activities................... $ 2,914 $ 2,609 $ 873
Cash Flows from Investing Activities
Return of (additional) investment in subsidiaries......... 13,162 (4,394) 4,108
Proceeds from sale of investment in ShowBiz............... -- -- 40,323
Purchase of minority shares of HEC........................ -- -- (648)
-------- ------- --------
Net cash provided by (used in) investing
activities...................................... 13,162 (4,394) 43,783
-------- ------- --------
Cash Flows from Financing Activities
Redemption of 7% Debentures............................... (14,088) (2,146) --
Net change in restricted cash for financing activities.... (901) -- --
Repayment of bank borrowings and loans payable............ (500) -- (11,000)
Payment of preferred stock dividends...................... (50) (50) (50)
Purchase of common stock for treasury..................... -- (250) (8,373)
Redemption of 13.5% Debentures............................ -- -- (27,163)
-------- ------- --------
Net cash (used in) financing activities........... (15,539) (2,446) (46,586)
-------- ------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ 537 (4,231) (1,930)
Cash and Cash Equivalents, Beginning of Year................ 127 4,358 6,288
-------- ------- --------
Cash and Cash Equivalents, End of Year...................... $ 664 $ 127 $ 4,358
======== ======= ========
</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
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 DECEMBER 31,
-------------------------
DESCRIPTION 1999 1998 1997
- ----------- ------- ------ ------
<S> <C> <C> <C>
Assets exchanged for redemption of treasury stock Assets
owned by subsidiaries..................................... $ 5,895 -- --
Present value of future cash payments..................... 3,197 -- --
Investment in Hallwood Energy............................. 1,665 -- --
------- ------ ------
$10,757 -- --
======= ====== ======
Conversion of energy investment to equity method from
proportional consolidation method at date of Energy
Consolidation
Oil and gas properties.................................... $ 6,548 -- --
Current assets of HEP..................................... 1,722 -- --
Noncurrent assets of HEP.................................. 634 -- --
Receivables and other assets.............................. 53 -- --
Long-term obligations of HEP.............................. (3,648) -- --
Current liabilities of HEP................................ (1,056) -- --
------- ------ ------
$ 4,253 -- --
======= ====== ======
Exchange of 7% Debentures for new issue of 10% Debentures... -- $6,821 --
Issuance of treasury stock in exchange for common shares of
ShowBiz:
Investment in ShowBiz..................................... -- -- $3,820
Reduction of additional paid-in capital................... -- -- 2,626
------- ------ ------
-- -- 6,446
Payment in-kind of annual interest on 13.5% Debentures...... -- -- 1,524
Proportionate share of stockholders' equity/partners'
capital transactions of equity investments................ -- -- 143
Supplemental disclosures of cash payments
Interest paid............................................. $ 2,027 $1,508 $5,522
Income taxes paid......................................... 837 241 600
</TABLE>
The "Notes to Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
66
<PAGE> 68
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 -- DEBENTURES AND LOAN PAYABLE
As referenced in Notes 5 and 6 in the Consolidated Financial Statements,
the Registrant's debentures and loan payable are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
DESCRIPTION 1999 1998
- ----------- ------ -------
<S> <C> <C>
Debentures
10% Debentures (including deferred gain of $300 and $340,
respectively).......................................... $6,768 $ 6,808
7% Debentures (including deferred gain of $639)........... -- 14,727
------ -------
Totals............................................ $6,768 $21,535
====== =======
Loan payable -- real estate................................. -- $ 500
====== =======
</TABLE>
Maturities over the next five years are as follows (in thousands):
2000 -- $-0-; 2001 -- $-0-; 2002 -- $-0-; 2003 -- $-0-, 2004 -- $-0- and
2005 -- $6,468.
NOTE 3 -- LITIGATION, CONTINGENCIES AND COMMITMENTS
See Note 18 to the consolidated financial statements.
67
<PAGE> 69
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 YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
--------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Textile Products
Allowance for losses -- accounts
receivable:
Year Ended December 31, 1999............ $418 $42 -- $(33)(a) $427
Year Ended December 31, 1998............ 407 47 -- (36)(a) 418
Year Ended December 31, 1997............ 455 31 -- (79)(a) 407
</TABLE>
- ---------------
Notes:
(a) Write-off, net of recoveries
68
<PAGE> 70
SCHEDULE III
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT
INITIAL COST WHICH CARRIED AT
TO COMPANY COSTS CAPI- CLOSE OF PERIOD(C)
----------------- TALIZED SUB- ---------------------------
BUILD- SEQUENT TO BUILD-
INGS AND ACQUISITION INGS AND
ENCUM- IMPROVE- (IMPROVE- IMPROVE- ACCUMULATED DATE
BRANCES LAND MENTS MENTS) LAND MENTS TOTAL DEPRECIATION ACQUIRED
------- ------ -------- ------------ ------ -------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Textile Products
Industrial plant Kenyon,
Rhode Island(b)............ $ -- $ 391 $2,355 $ 2,010 $ 391 $ 4,365 $ 4,756 $ 2,038 3/89
Hotels
Oklahoma City, Oklahoma(b)... 18,114 -- -- 20,908 1,102 19,806 20,908 2,718 6/91
Greenville, South
Carolina(b)................ 7,002 -- 459 7,601 830 7,230 8,060 2,143 3/94
Tulsa, Oklahoma(b)........... 5,975 909 4,285 1,516 919 5,791 6,710 2,987 3/94
Longboat Key,
Florida(a)(b).............. -- -- -- 4,372 -- 4,372 4,372 2,181 6/91
Huntsville, Alabama(a)(b).... 827 -- 942 1,404 -- 2,346 2,346 908 3/94
Irving, Texas................ -- 50 -- -- 50 -- 50 -- 3/94
------- ------ ------ ------- ------ ------- ------- -------
Subtotal............... 31,918 959 5,686 35,801 2,901 39,545 42,446 10,937
------- ------ ------ ------- ------ ------- ------- -------
Totals................. $31,918 $1,350 $8,041 $37,811 $3,292 $43,910 $47,202 $12,975
======= ====== ====== ======= ====== ======= ======= =======
<CAPTION>
DEPRE-
CIABLE
LIFE IN
YEARS
-------
<S> <C>
Textile Products
Industrial plant Kenyon,
Rhode Island(b)............ 20
Hotels
Oklahoma City, Oklahoma(b)... 25
Greenville, South
Carolina(b)................ 15
Tulsa, Oklahoma(b)........... 10
Longboat Key,
Florida(a)(b).............. 7
Huntsville, Alabama(a)(b).... 10
Irving, Texas................
Subtotal...............
Totals.................
</TABLE>
Changes in real estate owned and accumulated depreciation for the three
years ended December 31, 1999 are summarized below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ---------------------- ----------------------
REAL ACCUMULATED REAL ACCUMULATED REAL ACCUMULATED
ESTATE DEPRECIATION ESTATE DEPRECIATION ESTATE DEPRECIATION
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year........................ $44,894 $10,185 $29,673 $12,412 $29,913 $11,038
Additions during the year
Costs capitalized............................. 2,980 -- 20,321 -- 1,285 --
Depreciation.................................. -- 2,837 -- 2,873 -- 2,899
Fully depreciated assets...................... -- -- (5,100) (5,100) (1,525) (1,525)
Deductions during the year
Sales......................................... (672) (47) -- -- -- --
------- ------- ------- ------- ------- -------
Balance, end of year.............................. $47,202 $12,975 $44,894 $10,185 $29,673 $12,412
======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Leasehold interest. Cost represents price paid for leasehold interest, plus
furnishings and equipment.
(b) Capital stock of the subsidiary which holds this asset is pledged as
collateral for bank loans or 10% Debentures.
(c) The aggregate cost basis of real estate owned for federal income tax
purposes was approximately $2.0 million higher than the basis for financial
reporting purposes.
69
<PAGE> 71
================================================================================
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, 1999
[ ] 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:
Name of each exchange on
Title of each class which registered
- ------------------------------------------------ ------------------------
UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 [ ] No [X]
The aggregate market value of units held by nonaffiliates of the registrant as
of March 13, 2000 was $61,711,000.
CLASS: UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS.
OUTSTANDING AT MARCH 13, 2000: 1,672,556 UNITS.
================================================================================
Page 1 of 38
<PAGE> 72
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 7a. Quantitative and Qualitative Disclosures about Market Risk 13
Item 8. Financial Statements and Supplemental Information 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 32
PART III
Item 10. Directors and Executive Officers of the
Registrant 33
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management 36
Item 13. Certain Relationships and Related Transactions 36
PART IV
Item 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K. 37
</TABLE>
Page 2 of 38
<PAGE> 73
PART I
ITEM 1. BUSINESS
DESCRIPTION OF THE BUSINESS
Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate business segment. HRP's
activities include the acquisition, ownership and operation of its commercial
real estate assets. Units representing limited partnership interests are traded
on the American Stock Exchange under the symbol "HRY".
As of December 31, 1999, HRP owned fourteen real estate properties (the
"Properties") located in six states (see Item 2 - Properties) containing
5,352,000 net rentable square feet. 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, LLC ("Realty" or the "General Partner"), a Delaware limited
liability company 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,
Realty provides general operating and administrative services to HRP. Hallwood
Commercial Real Estate, LLC ("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, 1999. 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>
2000 28%
2001 13%
2002 17%
2003 12%
2004 8%
Thereafter 22%
</TABLE>
During 1999 and 1998, two tenants leasing space contributed 10% or more of HRP's
revenues. Ford Motor Company and affiliates ("Ford") leases space in Parklane
Towers, Fairlane Commerce Park, and Gulley Road Industrial Park. Ford accounted
for 13% of revenues in both 1999 and 1998. The General Services Administration
("GSA") leases space in Corporate Square and Executive Park. GSA accounted for
10% and 9% of the revenues in 1999 and 1998, respectively.
As of December 31, 1999, Ford occupied 224,000 square feet of office space under
7 leases at Parklane Towers; 216,000 square feet of office, technical laboratory
and industrial space under 8 leases at Fairlane Commerce Park; and 5,000 square
feet under 1 lease at Gulley Road Industrial Park. These leases expire between
2000 and 2003 and most contain renewal options, providing for one to ten year
renewals. As of December 31, 1999, GSA occupied 270,000 square feet of office
space at Executive Park under 5 leases which expire between 2001 and 2007 and
158,000 square feet of office space at Corporate Square under a lease which
expires in 2013. In addition, HRP is constructing a 6-story office building
containing 151,000 net rentable square feet. The building will be 100% occupied
by the GSA starting in July 2000.
The remaining tenants are not concentrated in any one industry, nor is HRP
otherwise dependent on any group of related tenants for 10% or more of its
revenues.
Page 3 of 38
<PAGE> 74
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
not required because it is cementitious, it is not friable and because the
procedures in HRP's site environmental program Operations and Maintenance Manual
are performed as required.
Realty 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 91 employees rendering
services on behalf of HRP and its Properties are employees of Realty 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
As of December 31, 1999, HRP owned fourteen properties in six states with
5,352,000 net rentable square feet.
<TABLE>
<CAPTION>
NAME AND LOCATION GENERAL DESCRIPTION OF THE PROPERTY
- ----------------- -----------------------------------
<S> <C>
Airport Plaza Fee simple interest in a 3-story office
San Diego, California building constructed in 1982 containing
48,853 net rentable square feet of space
located on 2 acres of land. The property
was 100% occupied at December 31, 1999.
Allfirst Building Fee simple interest in a 22-story office
Baltimore, Maryland building constructed in 1972 containing
344,224 net rentable square feet of
office space on 0.6 acres of land. At
December 31, 1999, the property was 97%
occupied.
Bellevue Corporate Plaza Fee simple interest in a 10-story office
Bellevue, Washington building constructed in 1980 containing
242,847 net rentable square feet of
space located on 3.6 acres of land. The
property was 99% occupied at December
31, 1999.
Bradshaw Business Parks Fee simple interest in 21 single-story
Sacramento and buildings located at four separate sites
Rancho Cordova, California containing an aggregate of 452,838 net
rentable square feet of office/warehouse
space on 31 acres of land and
constructed between 1973 and 1981. At
December 31, 1999, the property was 94%
occupied.
Corporate Square Fee simple interest in an 8-building
Atlanta, Georgia office complex ranging from one to seven
stories, constructed between 1968 and
1973, containing an aggregate of 440,231
net rentable square feet of space
located on 32 acres of land. The
property was 98% occupied at December
31, 1999. In addition, HRP is
constructing, on existing land, a
6-story office building containing
151,000 net rentable square feet which
is 100% pre-leased with occupancy
anticipated to take place by July 2000.
</TABLE>
Page 4 of 38
<PAGE> 75
<TABLE>
<CAPTION>
NAME AND LOCATION GENERAL DESCRIPTION OF THE PROPERTY
- ----------------- -----------------------------------
<S> <C>
Executive Park Fee simple interest in 26 office
Atlanta, Georgia buildings ranging from one to six
stories, constructed between 1965 and
1972, containing a total of 910,909 net
rentable square feet of space located on
70 acres of land. The property was 94%
occupied at December 31, 1999.
Fairlane Commerce Park Fee simple interest in a portion of an
Dearborn, Michigan office/industrial park 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 96% occupied at December
31, 1999.
Gulley Road Industrial Park Fee simple interest in a 5-building
Dearborn, Michigan industrial park constructed between 1991
and 1993 containing 154,360 net rentable
square feet on 11 acres of land. The
property was 98% occupied at December
31, 1999.
Joy Road Distribution Center Fee simple interest in a 442,201 square
Detroit, Michigan foot warehouse situated on 21 acres and
originally constructed in the early
1940's. The property was 98% occupied at
December 31, 1999.
Montrose Office Center Fee simple interest in a 10-story office
Rockville, Maryland building constructed in 1980 containing
147,658 net rentable square feet of
space on 3 acres of land. The property
was 98% occupied at December 31, 1999.
Parklane Towers Fee simple interest in twin 15-story
Dearborn, Michigan office buildings constructed in 1973
containing 482,517 net rentable square
feet of space on 31.8 acres of land. The
property was 96% occupied at December
31, 1999.
Raintree Industrial Park Fee simple interest in an
Solon, Ohio office/industrial complex constructed
between 1971 and 1978 containing 794,953
net rentable square feet of space in 14
buildings on 49 acres of land. The
property was 88% occupied at December
31, 1999.
Riverbank Plaza Fee simple interest in two 3-story
San Diego, California office buildings constructed in 1978
containing 40,304 net rentable square
feet of space located on 1.6 acres of
land. As of December 31, 1999, the
property was being renovated and was not
occupied, however HRP has leased
approximately 90% of the space with
occupancy to coincide with the
anticipated April 2000 completion of
property and tenant improvements.
Seattle Business Parks Fee simple interest in office/industrial
Kent and Tukwila, Washington parks located at two separate sites. The
buildings were completed between 1972
and 1993 and contain an aggregate of
432,467 net rentable square feet of
space in 18 buildings on 27 acres of
land. At December 31, 1999, the property
was 98% occupied.
</TABLE>
On January 26, 2000, HRP acquired three 3-story office buildings in San Diego,
California (Fountain View) containing approximately 89,000 net rentable square
feet on 4.3 acres of land. The property was 95% occupied at the date of
acquisition.
For information regarding encumbrances to which the properties are subject and
the status of 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 6 to the Consolidated Financial
Statements and Schedule III in Item 8.
OFFICE SPACE -
HRP leases and shares office with Hallwood in Dallas, Texas under a lease which
expires May 31, 2002. The minimum cash rental payments are $295,000, $295,000,
and $123,000 for 2000, 2001, and 2002, respectively, of which HRP's portion is
approximately $179,000, $179,000, and $74,000, for 2000, 2001, and 2002,
respectively.
Page 5 of 38
<PAGE> 76
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,
Realty, and the directors of Realty, 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. Plaintiffs filed an amended complaint on
March 6, 1998, which defendants again moved to dismiss. This motion was denied
and the parties are proceeding with discovery. Trial is scheduled for January
2001.
HRP's management believes that the claims are without merit and intend to defend
against the claims vigorously, but cannot predict the outcome of the claims or
any possible effect an adverse outcome might have.
On February 15, 2000, HRP filed a lawsuit in the United States District Court
for the Southern District of New York styled Hallwood Realty Partners, L.P. v.
Gotham Partners, L.P. et al. (Civ. No. 00 CV 115) alleging violations of the
Securities Exchange Act of 1934 by certain purchasers of its units, including
Gotham Partners, L.P., Gotham Partners, III, L.P., Private Management Group,
Inc., Interstate Properties, Steven Roth and EFO Realty, Inc., by virtue of
those purchasers' misrepresentations and/or omissions in connection with filings
required under the Securities Exchange Act of 1934. HRP seeks various forms of
relief, including declaratory judgments, divestiture, corrective disclosures, a
"cooling-off" period and damages, including costs and disbursements.
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 1999.
Page 6 of 38
<PAGE> 77
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 13, 2000, there were approximately 30,000 unitholders
of record of the 1,672,556 units outstanding. HRP has not paid any cash
distributions since February, 1992. Each quarter Realty 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>
1998 -
1st Quarter $ 66.00 $ 46.00
2nd Quarter 70.00 64.25
3rd Quarter 70.00 53.50
4th Quarter 64.25 44.50
1999 -
1st Quarter $ 59.00 $ 51.00
2nd Quarter 61.50 47.75
3rd Quarter 61.25 52.00
4th Quarter 54.50 50.00
</TABLE>
Page 7 of 38
<PAGE> 78
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,
------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands except per unit amounts)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Total revenues $ 59,645 $ 56,680 $ 53,899 $ 49,612 $ 50,829
Income (loss) before extraordinary item 4,062 6,246 2,357 (9,428) (9,024)
Net income (loss) 4,062 11,593 2,357 (9,428) (9,789)
Income (loss) per unit and equivalent unit :
Basic -
Income (loss) before extraordinary item 2.40 3.70 1.40 (5.50) (5.55)
Net income (loss) 2.40 6.86 1.40 (5.50) (5.55)
Assuming dilution -
Income (loss) before extraordinary item 2.31 3.55 1.35 (5.50) (5.55)
Net income (loss) per unit 2.31 6.59 1.35 (5.50) (5.55)
BALANCE SHEETS:
Real estate, net(a) $ 192,814 $ 175,779 $ 179,028 $ 182,877 $ 192,266
Total assets 230,386 214,023 207,134 210,214 225,359
Mortgages payable 171,312 162,078 157,911 160,732 166,675
Partners' capital(b) 48,696 44,634 33,041 30,684 41,917
</TABLE>
Notes to Selected Financial Data:
(a) During 1999, HRP, through acquisition and construction activity,
increased its real estate assets. These increases were partially
offset by depreciation and amortization. Prior to 1999, real estate
assets declined in each of the years, primarily due to depreciation
and amortization exceeding the additions of tenant and property
improvements.
(b) Partners' capital is allocated 99% to the limited partners and 1% to
the general partner.
Page 8 of 38
<PAGE> 79
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:
1999 VERSUS 1998 -
REVENUE FROM PROPERTY OPERATIONS in 1999 increased $2,927,000, or 5.2%, compared
to 1998. The following table illustrates the components of the change:
<TABLE>
<S> <C>
Rental income, net $2,122,000
Other property income 805,000
----------
Net increase $2,927,000
==========
</TABLE>
Overall, net rental income increased primarily due to higher rental rates,
partially offset by a slight decline in average occupancy between the comparable
periods from 93.5% to 93.1%. As of December 31, 1999, HRP had leases executed
and in place for 94.3% of the portfolio's net rentable square feet. Other
property income increased due to increases in parking revenues, tenants' utility
reimbursements and various tenant services.
INTEREST INCOME increased $38,000 as a result of additional earnings on
overnight investments due to higher average cash balances available for
investment.
PROPERTY OPERATING EXPENSES for 1999 increased $1,701,000, or 7.6%, compared to
1998. The increase is comprised primarily of the following components:
o Real estate taxes increased $1,078,000 due to higher taxable values at
Executive Park, Corporate Square and Bellevue Corporate Plaza and in
1998, HRP received non-recurring tax refunds of $545,000 for prior
years' taxes.
o Snow removal costs increased $164,000 primarily due to a mild 1998
winter.
o Professional fees increased $141,000 due to costs incurred in 1999 for
research and analysis of potential property development projects.
o Fees paid to Realty of $105,000, which were incurred for the
acquisitions of Riverbank Plaza and Gulley Road during 1999.
o Combined, all other operating costs increased $213,000, or less than
1%.
INTEREST EXPENSE for 1999 increased $920,000, or 7.2%, compared to 1998. The
1998 period included $1,485,000 of non-cash amortization of Allfirst Building's
loan forgiveness, which served to decrease 1998 expense. This non-cash
amortization ceased in November 1998 as the result of the retirement and
refinancing of that loan. Cash mortgage interest decreased $645,000 (primarily
as the result of reduced contractual interest rates from 1998 loan refinancings)
and loan cost amortization increased $80,000 in 1999 compared to 1998.
DEPRECIATION AND AMORTIZATION EXPENSE decreased $116,000 primarily due to a
reduction in the amount of depreciable tenant improvements in 1999 compared to
1998.
GENERAL AND ADMINISTRATIVE EXPENSES for 1999 increased $2,644,000, or 80.7%,
compared to 1998, primarily as a result of an increase of $1,971,000 in
litigation costs (see Note 10 to the consolidated financial statements). All
other costs increased $673,000 primarily as a result of higher personnel,
occupancy and travel costs.
Page 9 of 38
<PAGE> 80
RESULTS OF OPERATIONS (CONTINUED) -
1998 VERSUS 1997 -
REVENUE FROM PROPERTY OPERATIONS in 1998 increased $2,864,000, or 5.4%, as
compared to 1997. The following table illustrates the components of the change:
<TABLE>
<S> <C>
Rental income, net $2,771,000
Other property income 93,000
----------
Net increase $2,864,000
==========
</TABLE>
Rental income increased largely due to rental rate increases at a number of
properties and to a lesser degree due to a rise in average occupancy to 93.5% in
1998 from 93.1% in 1997.
INTEREST INCOME increased $311,000 as a result of additional earnings on
overnight investments due to higher average cash balances available for
investment.
PROPERTY OPERATING EXPENSES for 1998 decreased $987,000, or 4.2%, compared to
1997. The decrease is comprised of the following components:
o Real estate taxes decreased $603,000 primarily due to tax refunds
received in 1998 for tax years 1993 to 1997 for Parklane Towers and
Raintree Industrial Park.
o Repairs and maintenance costs decreased $450,000 primarily due to
exterior window glazing costs performed in 1997 at Parklane Towers.
o Management fees rose $121,000 due to the increase in net rental income
and occupancy mentioned above.
o Janitorial costs increased $129,000 principally due to the increase in
occupancy.
o Combined, all other operating costs decreased $184,000, or 0.8%,
between the years.
INTEREST EXPENSE decreased $164,000, or 1.3%, due to lower principal balances as
a result of scheduled principal payments and due to lower interest rates from
the refinancing of loans secured by Executive Park and Seattle Business Parks
during 1998 (see Note 6 to the Consolidated Financial Statements for more
information about refinancing of loans).
DEPRECIATION AND AMORTIZATION EXPENSE increased $59,000 primarily due to an
increase in lease commission amortization of $131,000 as a result of new leases
executed during 1997 which increased the portfolio's occupancy, partially offset
by a decrease in building cost depreciation.
GENERAL AND ADMINISTRATIVE EXPENSES decreased $16,000 for 1998 compared to 1997,
due to lower insurance premiums for director and officer coverage and lower
investor mailing costs, partially offset by an increase in franchise taxes for
the state of Michigan.
NET GAIN FROM EARLY EXTINGUISHMENTS OF DEBT of $5,347,000 in 1998 is comprised
of the following transactions and is further discussed in Note 6 to the
Consolidated Financial Statements:
o A gain of $7,223,000 from the early payoff of the loan secured by
Allfirst Building comprised of $7,441,000 of unamortized loan
forgiveness, net of a $200,000 prepayment penalty and $18,000 of
unamortized loan costs, all associated with the retired loan.
o A loss of $1,611,000 from the early payoff of the loan secured by
Executive Park comprised of a prepayment penalty of $1,465,000 and the
writeoff of $146,000 of unamortized loan costs associated with the
retired loan.
o A loss of $265,000 from the early payoff of the loan secured by
Seattle Business Park comprised of a prepayment penalty of $190,000
and the writeoff of $75,000 of unamortized loan costs associated with
the retired loan.
Page 10 of 38
<PAGE> 81
LIQUIDITY AND CAPITAL RESOURCES
HRP operates in the commercial real estate business segment. HRP's activities
include the acquisition, ownership and operation of its commercial real estate
assets. While it is the General Partner's intention to operate HRP's existing
real estate investments and to acquire and operate additional real estate
investments, Realty 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.
HRP's cash position decreased $6,165,000 during 1999 from $14,497,000 as of
December 31, 1998 to $8,332,000 as of December 31, 1999. The sources of cash
during the period were $8,874,000 of cash provided by operating activities and
$6,998,000 of mortgage principal proceeds from a new construction loan. The uses
of cash during the period were $7,024,000 of property and tenant improvements,
$6,427,000 of property development costs, $5,454,000 of property acquisition
costs, $2,913,000 of mortgage principal payments, and $219,000 of loan fees and
expenses.
In addition to the commitments described below with regards to Corporate Square
and Riverbank Plaza, HRP had commitments for construction projects in progress
as of December 31, 1999 of about $1,500,000. Additionally for the year 2000, HRP
has estimated and budgeted tenant and capital improvements of $7,400,000 and
lease commissions of about $1,700,000.
For the foreseeable future, HRP anticipates that mortgage principal payments,
tenant and capital improvements, lease commissions and litigation costs 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 Realty reviews HRP's capacity to make cash distributions. HRP has
not made any cash distributions since February, 1992.
PROPERTY DEVELOPMENT -
During the second quarter of 1999, HRP began construction of a 6-story office
building containing approximately 151,000 net rentable square feet. It is being
constructed on 6.1 acres of land that was acquired in May 1997 within the
Corporate Square complex in Atlanta, Georgia. A 20-year lease with the General
Services Administration for all six floors has been executed with occupancy
anticipated to take place by July 2000.
The building, tenant improvements, lease commissions and loan costs are
estimated to be $19,000,000 (excluding the land). In August 1999, HRP paid off
the outstanding loan balance of $475,000 that was secured by the land and closed
on interim-construction loan financing that will fund up to $13,762,000 of the
costs. The amount outstanding under the interim-construction loan as of December
31, 1999 was $6,998,000. The interim-construction loan calls for interest
payments only with an interest rate of LIBOR plus 170 basis points (8.19% as of
December 31, 1999). HRP anticipates repaying the interim-construction loan at
its maturity in August 2000 from proceeds of a $19,000,000 to $20,000,000
permanent loan.
As of December 31, 1999, HRP has incurred and capitalized $9,068,000 of the
construction costs. Additionally, HRP has paid $1,481,000, or 50%, of the lease
commissions incurred; the remaining 50%, which has been accrued as of December
31, 1999, will be paid when the tenant takes occupancy of the space.
ACQUISITIONS -
In August 1999, HRP acquired two 3-story office buildings in San Diego,
California (Riverbank Plaza) containing approximately 40,300 net rentable square
feet on 1.6 acres of land for $2,354,000 in cash. As of December 31, 1999, the
property was being renovated and was not occupied, however HRP has leased
approximately 90% of the space with occupancy to coincide with the anticipated
April 2000 completion of approximately $1,550,000 of property and tenant
improvements.
In October 1999, HRP acquired a 5-building industrial park in Dearborn, Michigan
(Gulley Road Industrial Park) containing approximately 154,000 net rentable
square feet on 11 acres of land. The property was 98% occupied as of December
31, 1999. The acquisition costs of $8,249,000 included the assumption of an
outstanding mortgage of $5,149,000. The loan, which fully amortizes over the
next eleven and a half years, matures in May 2011, and has a fixed interest rate
of 7.375%.
Page 11 of 38
<PAGE> 82
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
On January 26, 2000, HRP acquired three 3-story office buildings in San Diego,
California (Fountain View) containing approximately 89,000 net rentable square
feet on 4.3 acres of land. The property was 95% occupied at the date of
acquisition. The acquisition cost was approximately $7,800,000, including a loan
with two notes totaling $5,500,000. The loan's monthly payment is based on a
twenty-year amortization, but matures in ten years, and has a fixed interest
rate of 8.17%. The balance of the acquisition cost, or approximately $2,300,000,
was paid in cash.
MORTGAGES -
Substantially all of the buildings in twelve of HRP's fourteen real estate
properties were encumbered and pledged as collateral by nine non-recourse
mortgages aggregating $171,312,000 as of December 31, 1999. These mortgages have
interest rates varying from 6.78% to 8.70% (with an effective average interest
rate of 8.10%) and mature between 2003 and 2011. Except for the construction
loan discussed previously, HRP has no other mortgage loans maturing or requiring
balloon principal payments until the year 2003. Based upon loan amortizations in
effect, HRP is required to pay $2,874,000 of principal payments in 2000.
NEW ACCOUNTING STANDARDS -
Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998 and is
effective for periods (or years) beginning after June 15, 2000. It requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of the derivatives would be recorded each period in
current earnings or other comprehensive income depending on whether a derivative
is designated as part of a hedge transaction, and if it is, the type of hedge
transaction. The impact on HRP's results of operation, financial position, or
cash flows will be dependent on the level and types of derivative instruments
that HRP will have entered into at the time SFAS No. 133 is implemented. HRP is
currently not planning on early adoption of SFAS No. 133 and has not had an
opportunity to evaluate the impact of the provisions of SFAS No. 133 on its
consolidated financial statements relating to future adoption.
YEAR 2000 COMPLIANCE -
In 1999, HRP completed its year 2000 compliance review of its information
technology ("IT") systems and non-IT systems and successfully implemented all
related upgrades, replacements, or modifications necessary. HRP did not
experience any year 2000 business interruptions either internally or related to
its major vendors. Total costs were less than $100,000.
INFLATION -
Inflation did not have a significant impact on HRP in 1999, 1998 and 1997 and is
not anticipated to have a material impact in 2000.
FORWARD-LOOKING STATEMENTS -
In the interest of providing investors with certain information regarding HRP's
future plans and operations, certain statements set forth in this Form 10-K
relate to management's future plans and objectives. Such statements are forward-
looking statements. Although any forward-looking statements contained in this
Form 10-K or otherwise expressed by or on behalf of HRP are, to the knowledge
and in the judgment of the officers and directors of the General Partner,
expected to prove true and come to pass, management is not able to predict the
future with absolute certainty. 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 will prove to be accurate.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause HRP's actual performance and financial results in future periods
to differ materially from any projection, estimate or forecasted result. These
risks and uncertainties include, among other things, interest rates, occupancy
rates, lease rental rates, outcome of litigation, 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; other risks and uncertainties may be described, from time to time, in HRP's
periodic reports and filings with the Securities and Exchange Commission.
Page 12 of 38
<PAGE> 83
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUALITATIVE INFORMATION -
HRP's primary risk management strategy is to manage its exposure to adverse
changes in interest rates by issuing fixed rate debt, where possible. HRP
attempts to manage the exposure to adverse changes in the fair value of its
fixed rate debt by issuing fixed rate debt when business and market conditions
are favorable. There is inherent rollover risk for borrowings as they mature and
are renewed at the then current market rates. The extent of this risk is not
quantifiable or predictable because of the variability of future interest rates
and HRP's future financing requirements. HRP does not hold or issue derivative
financial instruments for trading purposes. As part of HRP's financing activity,
a derivative security was used for the sole purpose of fixing the interest rate
of HRP's only variable rate debt instrument.
SPECIFIC AND QUANTITATIVE INFORMATION -
HRP's derivative instrument, which is matched directly against an outstanding
borrowing is a "pay fixed / receive variable" interest rate swap with a highly
rated counterparty in which the interest payments are calculated on a notional
amount. The notional amount does not represent amounts exchanged by the parties
and thus are not a measure of exposure to HRP through its use of the derivative.
HRP is exposed to credit-related gains or losses in the event of non-performance
by counterparties to this financial instrument; however, HRP does not expect any
counterparties to fail to meet their obligations. The interest rate swap is
described as follows:
<TABLE>
<CAPTION>
Variable Rate as of December 31, 1999
--------------------------------------
Fair Value
Notional Amount Maturity Date Fixed Rate % % Based On of Swap(a)
- --------------- ------------- ------------ ----- -------------- -----------
<S> <C> <C> <C> <C> <C>
$ 25,000,000 April 30, 2006 6.78% 7.78% 30 day LIBOR $1,873,000
</TABLE>
(a) The estimated amount that HRP would receive upon termination of its
interest rate swap agreement as of December 31, 1999 was based on a quote
received from the swap counterparty.
Page 13 of 38
<PAGE> 84
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS: Page
----
<S> <C>
Independent Auditors' Report 15
Consolidated Balance Sheets as of December 31, 1999 and 1998 16
Consolidated Statements of Income for the years
ended December 31, 1999, 1998 and 1997 17
Consolidated Statements of Partners' Capital for the years
ended December 31, 1999, 1998 and 1997 18
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 19
Notes to Consolidated Financial Statements 20
FINANCIAL STATEMENT SCHEDULE:
Schedule III - Real Estate and Accumulated Depreciation 31
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 14 of 38
<PAGE> 85
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, 1999 and 1998, and the
related consolidated statements of income, partners' capital and cash flows for
each of the three years in the period ended December 31, 1999. Our audit for the
year ended December 31, 1999 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 auditing standards generally accepted
in the United States of America. 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, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 25, 2000
Page 15 of 38
<PAGE> 86
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Real estate:
Land $ 58,378 $ 56,441
Buildings and improvements 282,013 262,588
Tenant improvements 17,924 17,692
--------- ---------
358,315 336,721
Accumulated depreciation and amortization (165,501) (160,942)
--------- ---------
Real estate, net 192,814 175,779
Cash and cash equivalents 8,332 14,497
Accounts receivable 2,287 1,456
Lease commissions, net 10,653 7,186
Loan reserves and escrows 7,073 6,986
Loan costs, net 3,607 3,923
Prepaid expenses and other assets 5,620 4,196
--------- ---------
Total assets $ 230,386 $ 214,023
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable $ 171,312 $ 162,078
Accounts payable and accrued expenses 6,013 4,435
Prepaid rent and security deposits 2,578 2,703
Payable to affiliates, net 1,787 173
--------- ---------
Total liabilities 181,690 169,389
--------- ---------
COMMITMENTS AND CONTINGENCIES
Partners' capital:
Limited partners - 1,672,556 units outstanding 48,209 44,188
General partner 487 446
--------- ---------
Total partners' capital 48,696 44,634
--------- ---------
Total liabilities and partners' capital $ 230,386 $ 214,023
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 16 of 38
<PAGE> 87
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Property operations $ 58,737 $ 55,810 $ 52,946
Gain from property sale -- -- 394
Interest 908 870 559
--------- --------- ---------
Total revenues 59,645 56,680 53,899
--------- --------- ---------
EXPENSES:
Property operations 23,962 22,261 23,248
Interest 13,701 12,781 12,945
Depreciation and amortization 11,998 12,114 12,055
General and administrative 5,922 3,278 3,294
--------- --------- ---------
Total expenses 55,583 50,434 51,542
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 4,062 6,246 2,357
Extraordinary item -
Net gain on early extinguishments of debt -- 5,347 --
--------- --------- ---------
NET INCOME $ 4,062 $ 11,593 $ 2,357
========= ========= =========
ALLOCATION OF NET INCOME:
Limited partners $ 4,021 $ 11,477 $ 2,334
General partner 41 116 23
--------- --------- ---------
Total $ 4,062 $ 11,593 $ 2,357
========= ========= =========
NET INCOME PER UNIT AND POTENTIAL UNIT:
Earnings per unit - basic
Income before extraordinary item $ 2.40 $ 3.70 $ 1.40
Net gain on early extinguishments of debt -- 3.16 --
--------- --------- ---------
Net income $ 2.40 $ 6.86 $ 1.40
========= ========= =========
Earnings per unit - assuming dilution
Income before extraordinary item $ 2.31 $ 3.55 $ 1.35
Net gain on early extinguishments of debt -- 3.04 --
--------- --------- ---------
Net income $ 2.31 $ 6.59 $ 1.35
========= ========= =========
WEIGHTED AVERAGE UNITS
USED IN COMPUTING NET INCOME
PER UNIT AND POTENTIAL UNIT:
Basic 1,673 1,673 1,673
========= ========= =========
Assuming dilution 1,740 1,741 1,730
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
Page 17 of 38
<PAGE> 88
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS EXCEPT UNIT AMOUNTS)
<TABLE>
<CAPTION>
Limited
Partnership
General Limited Units
Partner Partners Total Outstanding
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL, JANUARY 1, 1997 $ 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
Net income 116 11,477 11,593 --
--------- --------- --------- ---------
PARTNERS' CAPITAL, DECEMBER 31, 1998 446 44,188 44,634 1,672,556
Net income 41 4,021 4,062 --
--------- --------- --------- ---------
PARTNERS' CAPITAL, DECEMBER 31, 1999 $ 487 $ 48,209 $ 48,696 1,672,556
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
Page 18 of 38
<PAGE> 89
HALLWOOD REALTY PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,062 $ 11,593 $ 2,357
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 11,998 12,114 12,055
Net gain on early extinguishments of debt -- (5,347) --
Amortization of mortgage principal forgiveness -- (1,485) (1,674)
Gain from property sale -- -- (394)
Effective rent adjustments (778) (444) (157)
Changes in assets and liabilities:
Receivables (831) (294) 444
Lease commission payments (4,272) (2,369) (2,191)
Prepaid expenses and other assets (250) 255 510
Accounts payable and other liabilities (1,055) 55 (1,086)
---------- ---------- ----------
Net cash provided by operating activities 8,874 14,078 9,864
---------- ---------- ----------
INVESTING ACTIVITIES:
Property and tenant improvements (7,024) (6,603) (5,534)
Property development cost (6,427) -- --
Property acquisitions (5,454) -- (649)
Tenant improvement escrow -- -- 1,532
Cash proceeds from property sale, net of selling costs -- -- 502
Mortgage receivable principal collections -- -- 46
---------- ---------- ----------
Net cash used in investing activities (18,905) (6,603) (4,103)
---------- ---------- ----------
FINANCING ACTIVITIES:
Mortgage principal proceeds 6,998 66,500 549
Mortgage principal refinanced -- (59,577) --
Mortgage prepayment penalties -- (1,855) --
Mortgage principal payments (2,913) (2,756) (3,226)
Loan reserves -- (550) --
Loan fees and expenses (219) (1,405) 25
---------- ---------- ----------
Net cash provided by (used in) financing activities 3,866 357 (2,652)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,165) 7,832 3,109
BEGINNING CASH AND CASH EQUIVALENTS 14,497 6,665 3,556
---------- ---------- ----------
ENDING CASH AND CASH EQUIVALENTS $ 8,332 $ 14,497 $ 6,665
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
Page 19 of 38
<PAGE> 90
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
1. ORGANIZATION
Hallwood Realty Partners, L.P. ("HRP"), a publicly traded Delaware limited
partnership, operates in the commercial real estate business segment. HRP's
activities include the acquisition, ownership and operation of its
commercial real estate assets. Units representing limited partnership
interests are traded on the American Stock Exchange under the symbol "HRY".
As of December 31, 1999, there were 1,672,556 units outstanding.
As of December 31, 1999, HRP owned fourteen real estate assets (the
"Properties"), located in six states containing 5,352,000 net rentable
square feet. 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, LLC, formerly Hallwood Realty Corporation, ("Realty" or
the "General Partner"), a Delaware limited liability company 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, Realty
provides general operating and administrative services to HRP. Hallwood
Commercial Real Estate, LLC, formerly 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, 1999,
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.
HRP capitalizes all costs related to the development and construction of
its projects, including interest of $124,000 in 1999. The development
period of a project is considered to have begun when activities related to
the construction of the project or a portion thereof have commenced. All
costs for construction are capitalized and allocated to each building.
Capitalization of construction costs related to a particular building is
discontinued when the building is available for occupancy.
Page 20 of 38
<PAGE> 91
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
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 at the Properties expire from 2000 to 2013. Loan
costs are amortized over the terms of the respective loans. The loans
mature between 2000 and 2011. Amortization of effective rent income
adjustments, included in property operations revenues, was $778,000,
$444,000 and $157,000 in 1999, 1998 and 1997, respectively. Amortization of
lease commissions, included in depreciation and amortization expense, was
$2,286,000, $2,232,000, and $2,101,000 in 1999, 1998 and 1997,
respectively. Amortization of loan costs, included in interest expense, was
$536,000, $456,000, and $453,000 in 1999, 1998 and 1997, respectively. The
caption "Prepaid expenses and other assets" on the Consolidated Balance
Sheets include unamortized effective rent adjustments, prepaid real estate
taxes, prepaid insurance and other miscellaneous deposits and prepaid
expenses.
REVENUE RECOGNITION
Rental income is recognized as earned on a straight-line basis over the
terms of the respective leases.
INTEREST RATE AGREEMENTS
Interest rate swaps are entered into as a hedge against interest exposure
of variable rate debt. Differences between amounts to be paid or received
on these interest rate agreements designated as hedges are included in
interest expense as the payments are made or received. HRP is exposed to
credit-related gains or losses in the event of non-performance by
counterparties; however, HRP does not expect any counterparties to fail to
meet their obligations.
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 franchise taxes,
included in general and administrative expenses, were $243,000, $248,000,
and $117,000 in 1999, 1998, and 1997, 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.
Page 21 of 38
<PAGE> 92
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
2. ACCOUNTING POLICIES - (CONTINUED)
COMPUTATION OF NET INCOME PER UNIT
Basic earnings per unit is computed by dividing net income 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 attributable to the limited partners' interests by the weighted
average number of units and potential units outstanding. Options to acquire
units were issued during 1995 and are considered to be potential units. The
number of potential 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 these options. The following table illustrates the amounts
used to calculate the weighted average number of units outstanding:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average units outstanding - basic 1,673 1,673 1,673
Issuance of units from options 86 86 86
Repurchase of units from unit option proceeds (19) (18) (29)
--------- --------- ---------
Weighted average units outstanding - assuming dilution 1,740 1,741 1,730
========= ========= =========
</TABLE>
ACCOUNTING PRONOUNCEMENTS AND OTHER
The preparation of consolidated 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.
Statements of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998
and is effective for periods (or years) beginning after June 15, 2000. It
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of the derivatives would be
recorded each period in current earnings or other comprehensive income
depending on whether a derivative is designated as part of a hedge
transaction, and if it is, the type of hedge transaction. The impact on
HRP's results of operation, financial position, or cash flows will be
dependent on the level and types of derivative instruments that HRP will
have entered into at the time SFAS No. 133 is implemented. HRP is currently
not planning on early adoption of SFAS No. 133 and has not had an
opportunity to evaluate the impact of the provisions of SFAS No. 133 on its
consolidated financial statements relating to future adoption.
Page 22 of 38
<PAGE> 93
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
3. TRANSACTIONS WITH RELATED PARTIES
Realty receives certain fees in connection with the ongoing management of
HRP, including an asset management fee, acquisition fees and incentive
disposition fees. Specifically, Realty 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 have been extended
and expire June 30, 2004 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 (none exceeding 6%
of the net aggregate rent), and (iii) construction supervision fees for
administering all construction projects equal to 5% of the total contracted
costs of each capital expenditure or tenant improvement project.
Realty 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 1999 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Asset management fee Realty $ 514 $ 495 $ 458
Acquisition fee Realty 105 -- 7
Reimbursement of costs(a) Realty 2,941 2,320 2,316
Property management fee HCRE 1,693 1,608 1,524
Lease commissions(b) HCRE 4,933 1,964 1,425
Construction fees HCRE 891 314 353
</TABLE>
(a) These costs are mostly recorded as general and administrative
expenses and represent reimbursement to Realty, at cost, for
partnership level salaries, bonuses, employee and director
insurance, and certain overhead costs. HRP pays the balance of
its account with Realty on a monthly basis.
(b) As of December 31, 1999, $1,481,000 of the 1999 lease commissions
accrued are related to the development property at Corporate
Square and are scheduled to be paid in the year 2000. See Note 5.
4. STATEMENTS OF CASH FLOWS
Cash interest payments were $13,114,000 (net of capitalized interest of
$94,000), $13,934,000, and $14,177,000 in 1999, 1998 and 1997,
respectively.
Supplemental disclosure of noncash investing and financing activities -
As of December 31, 1999, HRP had a construction payable for property
development cost at Corporate Square of $2,641,000 for 1999.
In October 1999, HRP acquired Gulley Road Industrial Park for
$8,249,000 including the assumption of an outstanding mortgage of
$5,149,000.
Page 23 of 38
<PAGE> 94
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
5. PROPERTY TRANSACTIONS
ACQUISITIONS -
In May 1997, HRP acquired 6.1 acres of land at the Corporate Square office
complex for a purchase price of $725,000, plus about $25,000 of
miscellaneous costs. The purchase price consisted 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. The note was paid in full during
1999 in connection with the development of the land discussed below.
In August 1999, HRP acquired two 3-story office buildings in San Diego,
California (Riverbank Plaza) containing approximately 40,300 net rentable
square feet on 1.6 acres of land for $2,354,000 in cash. As of December 31,
1999, the property was being renovated and was not occupied, however HRP
has leased approximately 90% of the space with occupancy to coincide with
the anticipated April 2000 completion of approximately $1,550,000 of
property and tenant improvements.
In October 1999, HRP acquired a 5-building industrial park in Dearborn,
Michigan (Gulley Road Industrial Park) containing approximately 154,000 net
rentable square feet on 11 acres of land. The property was 98% occupied as
of December 31, 1999. The acquisition costs of $8,249,000 included the
assumption of an outstanding mortgage of $5,149,000. The loan, which fully
amortizes over the next eleven and a half years, matures in May 2011, and
has a fixed interest rate of 7.375%.
PROPERTY DEVELOPMENT
During the second quarter of 1999, HRP began construction of a 6-story
office building containing approximately 151,000 net rentable square feet.
It is being constructed on 6.1 acres of land that was acquired in May 1997
within the Corporate Square complex and discussed above. A 20-year lease
with the General Services Administration for all six floors has been
executed with occupancy anticipated to take place by July 2000.
The building, tenant improvements, lease commissions and loan costs are
estimated to be $19,000,000 (excluding the land). In August 1999, HRP paid
off the outstanding loan balance of $475,000 that was secured by the land
and closed on interim-construction loan financing that will fund up to
$13,762,000 of the costs.
As of December 31, 1999, HRP has incurred and capitalized $9,068,000 of the
construction costs. Additionally, HRP has paid $1,481,000, or 50%, of the
lease commissions incurred; the remaining 50%, which has been accrued as of
December 31, 1999, will be paid when the tenant takes occupancy of the
space.
PROPERTY SALE
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.
Page 24 of 38
<PAGE> 95
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
6. MORTGAGES PAYABLE
Substantially all of the buildings in twelve of HRP's fourteen real estate
properties were encumbered and pledged as collateral by nine non-recourse
mortgages aggregating $171,312,000 as of December 31, 1999. These mortgages
have interest rates varying from 6.78% to 8.70% (with an effective average
interest rate of 8.10%) and mature between 2003 and 2011.
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):
<TABLE>
<CAPTION>
Total
Principal Balloon Mortgage
Payments Payments Payments
---------- ---------- ----------
<S> <C> <C> <C>
2000 $ 2,874 $ 6,998 $ 9,872
2001 3,152 -- 3,152
2002 3,426 -- 3,426
2003 3,723 4,900 8,623
2004 3,695 -- 3,695
Thereafter 8,068 134,476 142,544
---------- ---------- ----------
Total $ 24,938 $ 146,374 $ 171,312
========== ========== ==========
</TABLE>
CORPORATE SQUARE -
In August 1999, HRP closed on interim-construction loan financing that will
fund up to $13,762,000 of the development costs of a new office building at
Corporate Square (see Note 5 for more information about this project). The
amount outstanding under the interim-construction loan as of December 31,
1999 was $6,998,000. The interim-construction loan calls for interest
payments only with an interest rate of LIBOR plus 170 basis points (8.19%
as of December 31, 1999). HRP anticipates repaying the interim-construction
loan at its maturity in August 2000 from proceeds of a $19,000,000 to
$20,000,000 permanent mortgage loan.
ALLFIRST BUILDING -
On November 16, 1998, HRP refinanced Allfirst Building's existing loan with
a new lender in the amount of $25,000,000. The interest rate was reduced to
LIBOR plus 1.30% from LIBOR plus 3.25% and the maturity date was extended
three years to April 30, 2006. The loan does not require any principal
amortization. In connection with the refinancing, HRP entered into an
interest rate swap agreement to reduce its exposure to changes in interest
rates, which has been designated as a hedge against HRP's variable interest
exposure relating to the loan with a notional amount of $25,000,000
terminating on April 30, 2006. This agreement, which is settled monthly,
effectively fixes the loan's interest rate at 6.78% compared to the
previous loan's rate of LIBOR plus 325 basis points, or 8.47% as of
November 1998.
The loan proceeds of $25,000,000 plus $15,000 of cash were used (i) to pay
the outstanding principal balance of $24,531,000 with the former lender,
(ii) to pay transaction costs of $284,000, and (iii) to pay a prepayment
penalty of $200,000.
HRP was amortizing mortgage principal forgiveness associated with
Allfirst's previous loan over that loan's life. The remaining unamortized
debt forgiveness of $7,441,000 less the prepayment penalty of $200,000 and
unamortized loan costs of $18,000, all associated with the retired loan,
resulted in a gain from early extinguishment of debt of $7,223,000, which
is included in the Consolidated Statements of Income as an extraordinary
item in 1998.
Page 25 of 38
<PAGE> 96
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
6. MORTGAGES PAYABLE - (CONTINUED)
SEATTLE BUSINESS PARKS -
On June 1, 1998, HRP refinanced the mortgage loan secured by Seattle
Business Parks into two new loans which reduced the interest rate from
9.25% to 6.97%. The new loans lengthened the amortization period from
twenty-two years to thirty years and the maturity date was extended by
seven years to June 7, 2008. The loan proceeds of $7,500,000 were used (i)
to pay the outstanding principal balance of $6,339,000 with the former
lender, (ii) to pay transaction costs of $220,000, (iii) to pay a
prepayment penalty of $190,000, and (iv) for general working capital. The
prepayment penalty along with the writeoff of $75,000 of unamortized loan
costs associated with the retired loan were expensed and are included in
the Consolidated Statements of Income as an extraordinary item.
EXECUTIVE PARK -
On February 27, 1998, HRP entered into an agreement to refinance the
mortgage loan secured by Executive Park that became effective March 20,
1998. The new loan reduced the interest rate from 8.87% to an effective
interest rate of 7.32% and extended the amortization period from fifteen
years to twenty-seven years with a maturity date of April 11, 2008. The
loan proceeds of $34,000,000 were used (i) to pay the outstanding principal
balance of $28,707,000 with the former lender, (ii) to pay transaction
costs of $901,000, (iii) to pay a prepayment penalty of $1,465,000, (iv) to
pay $550,000 of net loan reserves, and (v) for general working capital. The
prepayment penalty along with the writeoff of $146,000 of unamortized loan
costs associated with the retired loan were expensed and are included in
the Consolidated Statements of Income as an extraordinary item.
7. 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 $2,539,000, $2,591,000, and $2,561,000 in 1999, 1998 and
1997, respectively. At December 31, 1999, 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>
2000 $ 51,073
2001 40,769
2002 33,529
2003 24,703
2004 18,174
Thereafter 37,067
---------
Total $ 205,315
=========
</TABLE>
During 1999 and 1998, two tenants leasing space contributed 10% or more of
HRP's revenues. Ford Motor Company and affiliates ("Ford") leases space in
Parklane Towers, Fairlane Commerce Park, and Gulley Road Industrial Park.
Ford accounted for 13% of revenues in both 1999 and 1998. The General
Services Administration ("GSA") leases space in Corporate Square and
Executive Park. GSA accounted for 10% and 9% of the revenues in 1999 and
1998, respectively.
As of December 31, 1999, Ford occupied 224,000 square feet of office space
under 7 leases at Parklane Towers; 216,000 square feet of office, technical
laboratory and industrial space under 8 leases at Fairlane Commerce Park;
and 5,000 square feet under 1 lease at Gulley Road Industrial Park. These
leases expire between 2000 and 2003 and most contain renewal options,
providing for one to ten year renewals. As of December 31, 1999, GSA
occupied 270,000 square feet of office space at Executive Park under 5
leases which expire between 2001 and 2007 and 158,000 square feet of office
space at Corporate Square under a lease which expires in 2013. In addition,
HRP is constructing a 6-story office building containing 151,000 net
rentable square feet. The building will be 100% occupied by the GSA
starting in July 2000.
The remaining tenants are not concentrated in any one industry, nor is HRP
otherwise dependent on any group of related tenants for 10% or more of its
revenues.
HRP leases and shares office with Hallwood in Dallas, Texas under a lease
which expires May 31, 2002. The minimum cash rental payments are $295,000,
$295,000, and $123,000 for 2000, 2001, and 2002, respectively, of which
HRP's portion is approximately $179,000, $179,000, and $74,000, for 2000,
2001, and 2002, respectively.
Page 26 of 38
<PAGE> 97
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
8. PARTNERS' CAPITAL
In 1995, HRP issued options totaling 86,000 units to certain executives of
Realty with an exercise price of $11.875 per unit. The options expire after
10 years (approximately February 27, 2005) and generally, the optionees may
borrow the amounts necessary to exercise the options. As of December 31,
1999, none of the options had been exercised. HRP has adopted the
disclosure-only provisions of SFAS No. 123 - "Accounting for Stock Based
Compensation". The options were vested over a three year period ending in
1997, and accordingly under SFAS No. 123 would have had no effect on
compensation cost in 1998 or 1999. 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 income and
net income per unit for 1997 would have been the pro forma amounts
indicated below (in thousands except per unit amounts):
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Net income (loss) - as reported $ 2,357
Net income (loss) - pro forma 2,325
Net income (loss) per unit:
As reported -
Basic 1.40
Assuming dilution 1.35
Pro forma -
Basic 1.38
Assuming dilution 1.33
</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.
9. 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 Realty 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.
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 fair values of its mortgages payable in
connection with interest rates currently available to the Partnership for
borrowing with similar characteristics and maturities (approximately 8.2%
and 7.3% as of December 31, 1999 and 1998, respectively) and has determined
that the estimated fair value as of December 31, 1999 and 1998 would equal
approximately $167,212,000 and $171,921,000, respectively.
The fair value of HRP's interest rate swap agreement (used to hedge against
exposure to interest rate fluctuations) is $1,873,000, the estimated amount
that HRP would receive upon termination of the agreement as of December 31,
1999. The amount was determined based on a quote received from its swap
counterparty.
As of December 31, 1999 and 1998, 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.
Page 27 of 38
<PAGE> 98
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
10. 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, Realty, and the directors of Realty, 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.
Plaintiffs filed an amended complaint on March 6, 1998, which defendants
again moved to dismiss. This motion was denied and the parties are
proceeding with discovery. Trial is scheduled for January 2001.
HRP's management believes that the claims are without merit and intend to
defend against the claims vigorously, but cannot predict the outcome of the
claims or any possible effect an adverse outcome might have.
On February 15, 2000, HRP filed a lawsuit in the United States District
Court for the Southern District of New York styled Hallwood Realty
Partners, L.P. v. Gotham Partners, L.P. et al (Civ. No. 00 CV 115) alleging
violations of the Securities Exchange Act of 1934 by certain purchasers of
its units, including Gotham Partners, L.P., Gotham Partners, III, L.P.,
Private Management Group, Inc., Interstate Properties, Steven Roth and EFO
Realty, Inc., by virtue of those purchasers' misrepresentations and/or
omissions in connection with filings required under the Securities Exchange
Act of 1934. HRP seeks various forms of relief, including declaratory
judgments, divestiture, corrective disclosures, a "cooling-off" period and
damages, including costs and disbursements.
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.
ASBESTOS
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 not required because it is cementitious,
it is not friable and because the procedures in HRP's site environmental
program Operations and Maintenance Manual are performed as required.
Page 28 of 38
<PAGE> 99
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
10. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
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. 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.
Although it is HRP's position in the litigation filed in the Southern
District of New York that certain holders of HRP's units have become an
"Acquiring Person" under the Rights Plan by virtue of obtaining dispositive
power over more than 15% of the outstanding units, a final determination of
this issue will be made by the court. As a result, the general partner has
amended the Rights Plan, among other things, to postpone the "Distribution
Date" under the Rights Plan based on the general partner's current
understanding of the facts. By taking such action, the rights will become
exercisable, if at all, only after the final resolution by a court that an
"Acquiring Person" exists for the purposes of the Rights Plan.
Additionally, the expiration of the redemption period under the Rights Plan
has also been extended pending litigation. However, if additional facts
come to the general partner's attention or the status or unit ownership of
any unitholder change in any respect, the general partner will review the
circumstances at that time and may change its conclusions. HRP has also
amended the Rights Plan to extend the expiration period of the rights until
one year after entry of an order, which is final and not subject to appeal,
resolving the above-mention lawsuit.
OTHER
In addition to the commitments previously described in Note 5 with regards
to Corporate Square and Riverbank Plaza, HRP had commitments for
construction projects in progress as of December 31, 1999 of about
$1,500,000. Additionally for the year 2000, HRP has estimated and budgeted
tenant and capital improvements of $7,400,000 and lease commissions of
about $1,700,000.
11. SUBSEQUENT EVENT
On January 26, 2000, HRP acquired three 3-story office buildings in San
Diego, California (Fountain View) containing approximately 89,000 net
rentable square feet on 4.3 acres of land. The property was 95% occupied at
the date of acquisition. The acquisition cost was approximately $7,800,000,
including a loan with two notes totaling $5,500,000. The loan's monthly
payment is based on a twenty-year amortization, but matures in ten years,
and has a fixed interest rate of 8.17%. The balance of the acquisition
cost, or approximately $2,300,000, was paid in cash.
Page 29 of 38
<PAGE> 100
HALLWOOD REALTY PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is selected quarterly financial data for the years ended
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Quarter Ending
----------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
(in thousands except per unit amounts)
<S> <C> <C> <C> <C>
1999
Total revenues $ 14,559 $ 14,252 $ 15,140 $ 15,694
Property operations revenues less property
operations expenses and general
and administrative expenses 7,397 7,302 7,399 6,755
Net income 1,214 1,182 1,239 427
Net income per unit - basic .72 .70 .73 .25
Net income per unit - assuming dilution .69 .67 .70 .24
1998
Total revenues $ 13,823 $ 13,771 $ 14,515 $ 14,571
Property operations revenues less property
operations expenses and general
and administrative expenses 7,183 7,581 7,674 7,833
Income before extraordinary item 1,069 1,655 1,727 1,795
Net income (loss)(a) (542) 1,390 1,727 9,018
Earnings per unit - basic
Income before extraordinary item .63 .98 1.02 1.07
Extinguishments of debt(a) (.95) (.16) -- 4.27
Net income (loss) (.32) .82 1.02 5.34
Earnings per unit - assuming dilution
Income before extraordinary item .61 .94 .98 1.02
Extinguishments of debt(a) (.92) (.15) -- 4.11
Net income (loss) (.31) .79 .98 5.13
</TABLE>
(a) Net income (loss) for the first and second quarter of 1998 includes losses
on early extinguishments of debt of $1,611,000 and $265,000, respectively.
Net income for the fourth quarter of 1998 includes a gain on early
extinguishment of debt of $7,223,000. (See Note 6 to the Consolidated
Financial Statements for more information about the refinancing of mortgage
loans during 1998).
Page 30 of 38
<PAGE> 101
HALLWOOD REALTY PARTNERS, L.P.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(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>
Airport Plaza $ 760 $ 300 $ 4,013 $ 306 $ 300 $ 4,319 $ 4,619
Allfirst Building 25,000 2,100 43,772 3,778 2,100 47,550 49,650
Bellevue Corporate Plaza 15,200 7,428 17,617 2,878 7,428 20,495 27,923
Bradshaw Business Parks 5,956 5,018 15,563 4,611 5,018 20,174 25,192
Corporate Square 18,818 6,142 14,112 17,274 6,142 31,386 37,528
Executive Park 33,337 15,243 34,982 9,674 15,243 44,656 59,899
Fairlane Commerce Park 20,141 5,191 18,080 5,599 5,191 23,679 28,870
Gulley Road Industrial Park 5,101 1,227 7,022 -- 1,227 7,022 8,249
Joy Road Distribution Center -- 359 1,340 2,107 359 3,447 3,806
Montrose Office Center 6,175 5,096 15,754 3,755 5,096 19,509 24,605
Parklane Towers 22,801 3,420 37,592 5,523 3,420 43,115 46,535
Raintree Industrial Park 10,640 1,191 18,208 1,401 1,191 19,609 20,800
Riverbank Plaza -- 710 1,644 214 710 1,858 2,568
Seattle Business Parks 7,383 4,953 8,730 4,170 4,953 12,900 17,853
Corporate office equipment -- -- -- 218 -- 218 218
---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL $ 171,312 $ 58,378 $ 238,429 $ 61,508 $ 58,378 $ 299,937 $ 358,315
========== ========== ========== ========== ========== ========== ==========
<CAPTION>
Accumulated
depreciation Date
Description(A) (B)(C) acquired
- --------------- ------------- ---------------
<S> <C> <C> <C>
Airport Plaza $ 3,733 4/30/87
Allfirst Building 28,165 6/29/84
Bellevue Corporate Plaza 6,286 6/30/88
Bradshaw Business Parks 11,728 9/24/85
Corporate Square 14,366 8/2/85 & 10/1/92
Executive Park 32,671 12/19/85
Fairlane Commerce Park 11,081 12/30/86 & 7/1/87
Gulley Road Industrial Park 56 10/29/99
Joy Road Distribution Center 593 2/14/96
Montrose Office Center 8,614 1/8/88
Parklane Towers 29,549 12/16/84
Raintree Industrial Park 10,496 7/17/86
Riverbank Plaza 30 8/19/99
Seattle Business Parks 8,069 4/24/86
Corporate office equipment 64 various
----------
TOTAL $ 165,501
==========
</TABLE>
See notes to Schedule III on following page.
Page 31 of 38
<PAGE> 102
HALLWOOD REALTY PARTNERS, L.P.
NOTES TO SCHEDULE III
DECEMBER 31, 1999
(IN THOUSANDS)
(A) PROPERTY LOCATIONS ARE AS FOLLOWS:
Airport Plaza San Diego, California
Allfirst Building Baltimore, Maryland
Bellevue Corporate Plaza Bellevue, Washington
Bradshaw Business Parks Sacramento and Rancho
Cordova, California
Corporate Square Atlanta, Georgia
Executive Park Atlanta, Georgia
Fairlane Commerce Park Dearborn, Michigan
Gulley Road Industrial Park Dearborn, Michigan
Joy Road Distribution Center Detroit, Michigan
Montrose Office Center Rockville, Maryland
Parklane Towers Dearborn, Michigan
Raintree Industrial Park Solon, Ohio
Riverbank Plaza San Diego, California
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, 1997 $ 332,391 $ 149,514
Additions 6,183 9,924
Retirements and disposition (4,179) (4,071)
----------- -----------
Balance, December 31, 1997 334,395 155,367
Additions 6,603 9,852
Retirements (4,277) (4,277)
----------- -----------
Balance, December 31, 1998 336,721 160,942
Additions 26,694 9,659
Retirements (5,100) (5,100)
----------- -----------
Balance, December 31, 1999 $ 358,315 $ 165,501
=========== ===========
</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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
Page 32 of 38
<PAGE> 103
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
HRP has no officers or directors. Realty, as general partner, performs functions
generally performed by officers and directors. Realty was formed in Delaware as
a corporation in January 1990 and became a limited liability company in December
1998.
BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS OF REALTY -
ANTHONY J. GUMBINER, 55, CHAIRMAN OF THE BOARD AND DIRECTOR OF REALTY
Mr. Gumbiner has served a director and Chairman of the Board of Realty
since January 1990. He has also served as Chairman of the Board of Hallwood
since 1981 and as Chief Executive Officer since April 1984. He has served
as a director of Hallwood Energy Corporation ("HEC") since June 1999. He
was Chairman of the Board from 1984 to June 1999 and Chief Executive
Officer from 1987 to June 1999 of the general partner of Hallwood Energy
Partners, L.P. ("HEP"). He was Chairman of the Board and Chief Executive
Officer of Hallwood Consolidated Resources Corporation ("HCRC") from
February 1992 to June 1999. Mr. Gumbiner has also served as Chairman of the
Board of Directors and as a director of Hallwood Holdings S.A. ("HHSA"), a
Luxembourg real estate investment company, since March 1984. Mr. Gumbiner
is also a solicitor of the Supreme Court of Judicature of England.
WILLIAM L. GUZZETTI, 56, PRESIDENT AND DIRECTOR OF REALTY
Mr. Guzzetti has been President, Chief Operating Officer and a director of
Realty since January 1990. He has also served as Executive-Vice President
of Hallwood since October 1989 and in that capacity may devote a portion of
his time to the activities of Hallwood, including the management of real
estate investments, acquisitions and restructurings of entities controlled
by Hallwood. He has served as President, Chief Operating Officer and a
director of HEC since December 1998 and in that capacity devotes a portion
of his time to the activities of HEC. He was President, Chief Operating
Officer and a director of the general partner of HEP from February 1985 to
June 1999. He was President, Chief Operating Officer and a director of HCRC
from May 1991 until June 1999. He is a member of The Florida Bar and the
State Bar of Texas.
JOHN G. TUTHILL, 56, EXECUTIVE VICE PRESIDENT AND SECRETARY
Mr. Tuthill has been an Executive Vice President and Secretary of Realty
since January 1990. He 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.
UDO H. WALTHER, 51, SENIOR VICE PRESIDENT
Mr. Walther has been an Executive Vice President of Realty since November
1998. Mr. Walther was a member of the Board of Directors of Realty from
June 1994 to November 1998. Mr. Walther had been President and Chief
Executive Officer of Walther Group, Inc., a full service design and
construction consultancy, and President of Precept Builders, Inc. from 1991
to 1998. Previously, Mr. Walther was a Partner at Trammell Crow Company,
Project Manager with HCB Contractors and Marketing Vice President for
Researched Investments, Ltd.
JEFFREY D. GENT, 52, VICE PRESIDENT - FINANCE
Mr. Gent joined Hallwood in March 1990 and has been Vice President-Finance
of Realty since March 1990. He 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, 58, DIRECTOR OF REALTY
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, 50, DIRECTOR OF REALTY
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, 56, DIRECTOR OF REALTY
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.
Page 33 of 38
<PAGE> 104
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - (CONTINUED)
Section 16(a) of the Securities and Exchange Act of 1934 requires the officers
and directors of Hallwood Realty, LLC and persons who own more than ten percent
of HRP's units to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent owners 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 from certain
reporting persons that no forms were required of those persons, HRP believes
that during the period January 1, 1999 to December 31, 1999, all officers and
directors of Hallwood Realty, LLC and ten percent owners complied with
applicable filing requirements, except that, as alleged in litigation filed in
the Southern District of New York, HRP believes that certain holders of HRP's
units have obtained dispositive power over more than 15% of the outstanding
units, which has not been properly disclosed. A final determination of this
issue will be made by the court.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS, INSIDER PARTICIPATION AND COMPENSATION OF
DIRECTORS
Realty does not have a compensation committee and compensation decisions are
made by the Board of Directors of Realty. During 1999, Messrs. Gumbiner and
Guzzetti and (until December 21, 1999) Mr. Brian M. Troup served on the Board of
Directors of Realty and the compensation committee of HEC and the general
partner of HEP. Mr. Gumbiner is also Chief Executive Officer of Hallwood,
Realty, and HEC. Mr. Troup was the President and Chief Operating Officer of
Hallwood until December 1999. Mr. Guzzetti is also President and Chief Operating
Officer of Realty; Chief Operating Officer and President of HEC; and Executive
Vice President of Hallwood. Messrs. Forsyth, Crisp, and Story were each paid
$20,000 in each of the three years ended December 31, 1999 for director fees.
Mr. Walther was paid $20,000 in each of the two years ended December 31, 1998
for director fees.
Realty receives certain fees in connection with the ongoing management of HRP,
including an asset management fee, acquisition fees and incentive disposition
fees. Specifically, Realty 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, 2004 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 (none exceeding 6% of the net aggregate rent), and (iii) construction
supervision fees for administering all construction projects equal to 5% of the
total contracted costs of each capital expenditure or tenant improvement
project.
Realty 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 1999 1998 1997
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Asset management fee Realty $ 514 $ 495 $ 458
Acquisition fee Realty 105 -- 7
Reimbursement of costs (a) Realty 2,941 2,320 2,316
Property management fee HCRE 1,693 1,608 1,524
Lease commissions (b) HCRE 4,933 1,964 1,425
Construction fees HCRE 891 314 353
</TABLE>
(a) These costs are mostly recorded as General and Administrative
Expenses and represent reimbursement to Realty, at cost, for
partnership level salaries, bonuses, employee and director
insurance, and certain overhead costs. HRP pays the balance of
its account with Realty on a monthly basis.
(b) As of December 31, 1999, $1,481,000 of the 1999 lease commissions
accrued are related to the development property at Corporate
Square and are scheduled to be paid in the year 2000.
Page 34 of 38
<PAGE> 105
ITEM 11. EXECUTIVE COMPENSATION - (CONTINUED)
CASH COMPENSATION OF EXECUTIVE OFFICERS
The Partnership has no executive officers, however, employees of Realty (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 four other executive
officers with earnings that exceeded $100,000 for the year ended December 31,
1999. Bonuses and other annual compensation are with respect to years presented
and are usually paid in the following year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------------
Other Annual
Name and Principal Position Year Salary (a) Bonus Compensation (b)
--------------------------- ---- ---------- -------- ----------------
<S> <C> <C> <C> <C>
Anthony J. Gumbiner 1999 $ -- $150,000 $ --
Chairman of the Board and 1998 -- -- --
Chief Executive Officer 1997 -- -- --
William L. Guzzetti 1999 200,000 32,333 --
President and Chief 1998 200,000 28,833 --
Operating Officer 1997 200,000 15,583 --
John G. Tuthill 1999 150,360 68,265 7,923
Executive Vice President 1998 150,360 56,265 8,282
and Secretary 1997 150,360 57,265 8,212
Udo H. Walther 1999 150,000 68,250 --
Senior Vice President 1998 25,000 6,250 --
Jeffrey D. Gent 1999 108,541 18,784 6,206
Vice President - Finance 1998 104,366 15,523 8,017
1997 99,396 28,212 5,984
</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.
In 1995, HRP issued options totaling 86,000 units to certain executives of
Realty with an exercise price of $11.875 per unit. The following table discloses
for each of the executive officers of Realty the number of these options held by
each of the executive officers and the potential realizable values for their
options at December 31, 1999. None of the executive officers exercised any
options during the year ended December 31, 1999 and HRP has not granted SARs.
AGGREGATED OPTION/SAR EXERCISES IN 1999
AND OPTION/SAR VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money
Units Options at Options at
Acquired December 31, 1999 December 31, 1999
------------------------------- ----------------------------
Name on Exercise Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Anthony J. Gumbiner 0 25,800 0 $ 1,015,875 $ 0
William L. Guzzetti 0 15,000 0 590,625 0
John G. Tuthill 0 13,000 0 511,875 0
Jeffrey D. Gent 0 7,000 0 275,625 0
</TABLE>
Page 35 of 38
<PAGE> 106
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 13, 2000 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 Realty as a group:
<TABLE>
<CAPTION>
Amount Percent
Name and Address of Beneficially of
Beneficial Owner Owned(h) Class
- ------------------- ------------ -------
<S> <C> <C>
HWG, LLC 413,040 24.7%
c/o The Hallwood Group Incorporated
3710 Rawlins, Suite 1500
Dallas, Texas 75219 (a)
Gotham Partners, L.P. and 247,994 14.8%
Gotham Partners, L.P. III
237 Park Avenue, 9th Floor
New York, NY 10017 (b)
Interstate Properties 135,600 8.1%
Park 80 West, Plaza II
Saddle Brook, NJ 07662 (b)
Private Management Group, Inc. ("PMG") 108,655 6.5%
20 Corporate Park, Suite 400
Irvine, CA 92606 (b) (c)
Alan G. Crisp (d) -- --
William F. Forsyth (d) -- --
Anthony J. Gumbiner (d) 25,800(e) 1.5%(e)
William L. Guzzetti (d) 15,100(f) 0.9%(f)
Edward T. Story (d) -- --
All directors and executive officers
as a group (8 persons) 60,900(g) 3.5%(g)
</TABLE>
- --------------------
(a) Includes 82,608 units, or 4.9% of the outstanding units, transferred
to Epsilon Trust on December 21, 1999 as part of the resignation of
Mr. Brian Troup as an officer and director of Hallwood. Hallwood has
sole voting power with respect to the units and a right to purchase
such units for six months after the transfer and a right of first
refusal thereafter.
(b) See discussion in Item 3 regarding certain litigation filed in the
Southern District of New York.
(c) PMG is an Investment Advisor registered under Section 203 of the
Investment Advisers Act of 1940 with sole power to vote or direct the
vote of all the units, including any units directly-owned. PMG also
has sole power to dispose or direct the disposition of all of the
units.
(d) Represents the following address: c/o Hallwood Realty, LLC, 3710
Rawlins, Suite 1500, Dallas, Texas, 75219.
(e) Comprised of currently exercisable options to purchase 25,800 units.
(f) Includes currently exercisable options to purchase 15,000 units.
(g) Includes currently exercisable options to purchase 60,800 units.
(h) Unless otherwise indicated, each of the persons named has sole voting
and investment power with respect to the units reported.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information covered by this item, see Note 3 to the Registrant's
consolidated financial statements included in Item 8 hereof.
Page 36 of 38
<PAGE> 107
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 1999 or in
2000 prior to the filing of this Form 10-K for the year ended December 31,
1999.
(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 37 of 38
<PAGE> 108
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, LLC
GENERAL PARTNER
DATE: March 15, 2000 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, 1999, has been signed below
by the following persons on behalf of the Registrant in the capacities and on
the date indicated.
Signature Capacity Date
--------- -------- ----
/s/ ANTHONY J. GUMBINER Chairman of the Board and Director, March 15, 2000
- ------------------------ Hallwood Realty, LLC
Anthony J. Gumbiner (Chief Executive Officer)
/s/ WILLIAM L. GUZZETTI President and Director, March 15, 2000
- ------------------------ Hallwood Realty, LLC
William L. Guzzetti (Chief Operating Officer)
/s/ JEFFREY D. GENT Vice President - Finance, March 15, 2000
- ------------------------ Hallwood Realty, LLC
Jeffrey D. Gent (Chief Accounting Officer)
/s/ ALAN G. CRISP Director, March 15, 2000
- ------------------------ Hallwood Realty, LLC
Alan G. Crisp
/s/ WILLIAM F. FORSYTH Director, March 15, 2000
- ------------------------ Hallwood Realty, LLC
William F. Forsyth
/s/ EDWARD T. STORY Director, March 15, 2000
- ------------------------ Hallwood Realty, LLC
Edward T. Story
Page 38 of 38
<PAGE> 109
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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-9579
HALLWOOD ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 84-1489099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4610 South Ulster Street
Suite 200
Denver, Colorado 80237
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 850-7373
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share Series A
Cumulative Preferred Stock, par value $.01 per share
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. [ ]
The aggregate market value of the common shares held by nonaffiliates of the
registrant as of March 6, 2000 was approximately $37,353.000.
Number of Shares outstanding as of March 6, 2000:
Common Stock 9,999,754
Series A Cumulative Preferred Stock 2,290,349
Documents Incorporated by Reference
The information called for by Part III of Form 10-K 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, 1999.
<PAGE> 110
PART I
ITEM 1 - BUSINESS
Hallwood Energy Corporation ("HEC" or the "Company") is a Delaware corporation
engaged in the development, exploration, acquisition and production of oil and
gas properties. HEC began operations June 8, 1999, in connection with the
consolidation ("Consolidation") of Hallwood Energy Partners, L.P. ("HEP") and
Hallwood Consolidated Resources Corporation ("HCRC") and the acquisition of the
direct energy interests of The Hallwood Group Incorporated ("Hallwood Group").
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy interests of Hallwood Group.
Accordingly, the assets and liabilities of HEP, including its 46% share of
assets and liabilities of HCRC owned prior to the Consolidation, have been
recorded at historical cost, and the remaining assets and liabilities of HCRC
and the direct energy interests of Hallwood Group have been recorded at
estimated fair values as of the date of purchase. All information presented for
periods prior to June 8, 1999 represents the historical information of HEP
because HEP was considered to be the acquiring entity for accounting purposes.
The financial statements for periods prior to June 8, 1999 have been
retroactively restated to reflect the corporate structure of HEC, and all share
and per share information assumes that the shares of HEC issued to HEP in
connection with the Consolidation were outstanding for all periods prior to June
8, 1999. The Company's properties are primarily located in the Rocky Mountain,
Greater Permian and Gulf Coast regions of the United States. On March 6, 2000,
HEC had 100 employees.
Marketing
The oil and gas produced from the properties owned by HEC has typically been
marketed through normal channels for such products. The Company generally sells
its oil at local field prices generally paid by the principal purchasers of
crude oil in the areas where the majority of producing properties are located.
In response to the volatility in the oil markets, HEC has entered into financial
contracts for hedging the price of between 12% and 54% of its estimated oil
production for 2000 through 2001.
All of HEC's natural gas production is sold on the spot market or in short-term
contracts and is transported in intrastate and interstate pipelines. HEC has
entered into financial contracts for hedging the price of between 34% and 43% of
its estimated gas production for 2000 through 2002.
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 an increase or decrease in oil or gas revenue at the
time the hedged volumes are sold.
Both oil and natural gas are purchased by refineries, major oil companies,
public utilities, industrial customers and other users and processors of
petroleum products. HEC is not confined to, nor dependent upon, any one
purchaser or small group of purchasers. Accordingly, the loss of a single
purchaser, or a few purchasers, would not materially affect HEC's business
because there are numerous other purchasers in the areas in which HEC sells its
production. However, for the years ended December 31, 1999, 1998 and 1997,
purchases by the following companies exceeded 10% of the total oil and gas
revenues of the Company:
1999 1998 1997
---- ---- ----
Conoco Inc. 19% 23% 20%
El Paso Field Services Company 14% 11% 11%
Plains All American Inc. 14%
Marathon Petroleum Company 16%
Factors, if they were to occur, which might adversely affect HEC include
decreases in oil and gas prices, the reduced availability of a market for
production, rising operational costs of producing oil and gas, compliance with,
and changes in, environmental control statutes and increasing costs of
transportation.
<PAGE> 111
Competition
HEC encounters competition from other oil and gas companies in all areas of its
operations, including the acquisition of exploratory prospects and proven
properties. The Company's competitors include major integrated oil and gas
companies and numerous independent oil and gas companies, individuals and
drilling and income programs. As described above under "Marketing," production
is sold on the spot market, thereby reducing sales competition; however, oil and
gas must compete with coal, atomic energy, hydro-electric power and other forms
of energy.
Regulation
Production and sale of oil and gas is subject to federal and state governmental
regulation in a variety of ways, including environmental regulations, labor
laws, interstate sales, excise taxes and federal and Indian lands royalty
payments. Failure to comply with these regulations may result in fines,
cancellation of licenses to do business and cancellation of federal, state or
Indian leases.
The production of oil and gas is subject to regulation by the state regulatory
agencies in the states in which HEC does business. These agencies make and
enforce regulations to prevent waste of oil and gas and to protect the rights of
owners to produce oil and gas from a common reservoir. The regulatory agencies
regulate the amount of oil and gas produced by assigning allowable production
rates to wells capable of producing oil and gas.
Title to Properties
The Company believes it has satisfactory title to all of its material producing
properties in accordance with standards generally accepted in the oil and gas
industry. As is customary in the industry in the case of undeveloped properties,
little investigation of record title is made at the time of acquisition.
Investigations, including a title opinion of legal counsel, generally are made
before commencement of drilling operations. To the extent title opinions or
other investigations reflect title defects, the Company, rather than the seller
of undeveloped property, typically is responsible to cure any such title defects
at the Company's expense. If the Company was unable to remedy or cure title
defects of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of its entire
investment in such property. The Company's properties are subject to customary
royalty, overriding royalty, carried, net profits, working and other similar
interests, liens incident to operating agreements, liens for current taxes and
other burdens. In addition, the Company's credit facility is secured by
approximately 80% in value of the oil and natural gas interests of the Company
and other assets of the Company.
Environmental Considerations
The exploration for, and development of, oil and gas involves the extraction,
production and transportation of materials which, under certain conditions, can
be hazardous or can cause environmental pollution problems. In light of the
current interest in environmental matters, the Company cannot predict what
effect possible future public or private action may have on the business of HEC.
The Company is continually taking actions it believes are necessary in its
operations to ensure conformity with applicable federal, state and local
environmental regulations. As of December 31, 1999, HEC has not been fined or
cited for any environmental violations which would have a material adverse
effect upon capital expenditures, earnings, cash flows or the competitive
position of HEC in the oil and gas industry.
Insurance Coverage
HEC is subject to all the risks inherent in the exploration for, and development
of, oil and gas, including blowouts, fires and other casualties. HEC maintains
insurance coverage as is customary for entities of a similar size engaged in
operations similar to that of HEC, but losses can occur from uninsurable risks
or in amounts in excess of existing insurance coverage. The occurrence of an
event which is not insured or not fully insured could have an adverse impact
upon HEC's earnings, cash flows and financial position.
<PAGE> 112
Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 compliant. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in it critical
information technology and non-information technology systems, and believes
those systems successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its computer
applications and those of its suppliers and vendors throughout the Year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed properly.
Cautionary Statement Regarding Forward-Looking Statements
In the interest of providing the shareholders with certain information regarding
the Company's future plans and operations, certain statements set forth in this
Form 10-K relate to management's future plans and objectives. Such statements
are forward-looking statements within the meanings of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Although any forward-looking statements contained in
this Form 10-K or otherwise expressed by or on behalf of the Company are, to the
knowledge and in the judgment of the officers and directors of the Company,
expected to prove true and come to pass, there can be no assurances that any of
these expectations will prove correct or that any of the actions that are
planned will be taken. Forward-looking statements involve known and unknown
risks and uncertainties which may cause the Company's actual performance and
financial results in future periods to differ materially from any projection,
estimate or forecasted result.
These risks and uncertainties include, among others:
Volatility of oil and gas prices. It is impossible to predict future oil and gas
price movements with certainty. Declines in oil and gas prices may materially
adversely affect HEC's financial condition, liquidity, ability to finance
planned capital expenditures and results of operations. Lower oil and gas prices
may also reduce the amount of oil and gas that HEC can produce economically.
HEC's revenues, profitability, future growth and ability to borrow funds or
obtain additional capital, as well as the carrying value of its properties, will
be substantially dependent upon prevailing prices of oil and gas. Historically,
the markets for oil and gas have been volatile, and they are likely to continue
to be volatile in the future. Prices for oil and gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and gas, market uncertainty and a variety of additional factors that are
beyond HEC's control.
Hedging arrangements may expose the Company to financial loss. In order to
reduce its exposure to short-term fluctuations in the prices of oil and gas, the
Company periodically enters into hedging arrangements. The hedging arrangements
apply to only a portion of its production and provide only partial price
protection against declines in oil and gas prices. Such hedging arrangements may
expose the Company to risk of financial loss in some circumstances, including
instances where production is less than expected or where the other party to any
hedging arrangement fails to perform. In addition, the hedging arrangements may
limit the benefit to the Company of increases in the prices of oil or gas.
Similarly, in order to reduce its exposure to short-term fluctuations in
interest rates and to provide a measure of predictability for a portion of its
interest payments under its debt facilities, the Company has entered into
contracts to hedge its interest payments on a portion of its variable rate debt.
These hedges provide only partial protection against increases in interest
rates. These hedging arrangements may expose the Company to risk of financial
loss in some circumstances, including instances where the other party to any
hedging arrangement fails to perform. In addition, the hedging arrangements may
limit the benefit to the Company of declines in interest rates.
<PAGE> 113
Competition from larger, more established oil and gas companies. HEC encounters
competition from other oil and gas companies in all areas of its operation,
including the acquisition of exploratory prospects and proven properties. HEC's
competitors include major integrated oil and gas companies and numerous
independent oil and gas companies, individuals and drilling and income programs.
Many of its competitors are large, well-established companies with substantially
larger operating staffs and greater capital resources than HEC's and, in many
instances, have been engaged in the oil and gas business for a much longer time
than HEC. Those companies may be able to pay more for exploratory prospects and
productive oil and gas properties, and may be able to define, evaluate, bid for
and purchase a greater number of properties and prospects than HEC's financial
or human resources permit. HEC's ability to explore for oil and gas prospects
and to acquire additional properties in the future will be dependent upon its
ability to conduct its operations, to evaluate and select suitable properties
and to consummate transactions in highly competitive environments.
Risks of drilling activities. HEC's success will be materially dependent upon
the continued success of its drilling program. HEC's future drilling activities
may not be successful and, if drilling activities are unsuccessful, such failure
will have an adverse effect on HEC's future results of operations and financial
condition. Oil and gas drilling involves numerous risks, including the risk that
no commercially productive oil or gas reservoirs will be encountered, even if
the reserves targeted are classified as proved. The cost of drilling, completing
and operating wells is often uncertain, and drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, including
unexpected drilling conditions, pressure or irregularities in formations,
equipment failures or accidents, adverse weather conditions, compliance with
governmental requirements and shortages or delays in the availability of
drilling rigs and the delivery of equipment. Although HEC has identified
numerous drilling prospects, there can be no assurance that such prospects will
be drilled or that oil or gas will be produced from any such identified
prospects or any other prospects.
Availability of capital is important to the Company's ability to grow. The
acquisition of reserves is capital intensive, and funding for the costs of
acquisition may be greater than the Company's cash flow can provide. As a
result, additional financing may be required, and the availability or terms of
any such additional financing cannot be assured. In the event sufficient capital
resources are not available to the Company, it may negatively affect the
Company's flexibility in planning for and reacting to possible acquisition
activities.
Risks relating to the acquisition of oil and gas properties. The successful
acquisition of producing properties requires an assessment of recoverable
reserves, future oil and gas prices, operating costs, potential environmental
and other liabilities and other factors. Such assessments are necessarily
inexact and their accuracy inherently uncertain. In connection with such an
assessment, HEC will perform a review of the subject properties that it believes
to be generally consistent with industry practices. This usually includes
on-site inspections and the review of reports filed with various regulatory
entities. Such a review, however, will not reveal all existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
properties to fully assess their deficiencies and capabilities. Inspections may
not always be performed on every well, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken. Even when
problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of these problems. There
can be no assurances that any acquisition of property interests by HEC will be
successful and, if an acquisition is unsuccessful, that the failure will not
have an adverse effect on HEC's future results of operations and financial
condition.
Hazards relating to well operations and lack of insurance. The oil and gas
business involves certain hazards such as well blowouts; craterings; explosions;
uncontrollable flows of oil, gas or well fluids; fires; formations with abnormal
pressures; pollution; and releases of toxic gas or other environmental hazards
and risks, any of which could result in substantial losses to HEC. In addition,
HEC may be liable for environmental damages caused by previous owners of
property purchased or leased by HEC. As a result, substantial liabilities to
third parties or governmental entities may be incurred, the payment of which
could reduce or eliminate the funds available for exploration, development or
acquisitions or result in the loss of HEC's properties. While HEC believes that
it maintains all types of insurance commonly maintained in the oil and gas
industry, it does not maintain business interruption insurance. In addition, HEC
cannot predict with certainty the circumstances under which an insurer might
deny coverage. The occurrence of an event not fully covered by insurance could
have a materially adverse effect on HEC's financial condition and results of
operations.
<PAGE> 114
Future oil and gas production depends on continually replacing and expanding
reserves. In general, the volume of production from oil and gas properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. HEC's future oil and gas production is, therefore,
highly dependent upon its ability to economically find, develop or acquire
additional reserves in commercial quantities. Except to the extent HEC acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of HEC will decline as
reserves are produced. The business of exploring for, developing or acquiring
reserves is capital-intensive. To the extent cash flow from operations is
reduced, and external reserves of capital become limited or unavailable, HEC's
ability to make the necessary capital investments to maintain or expand its
asset base of oil and gas reserves would be impaired. In addition, there can be
no assurance that HEC's future exploration, development and acquisition
activities will result in additional proved reserves or that HEC will be able to
drill productive wells at acceptable costs. Furthermore, although HEC's revenues
could increase if prevailing prices for oil and gas increase significantly,
HEC's finding and development costs could also increase.
Estimates of reserves and future cash flows are imprecise. Reservoir engineering
is a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner. Estimates of economically
recoverable oil and gas reserves and of future net cash flows necessarily depend
upon a number of variable factors and assumptions, such as historical production
from the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies, and assumptions concerning
future oil and gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected from them
prepared by different engineers, or by the same engineers but at different
times, may vary substantially, and such reserve estimates may be subject to
downward or upward adjustment based upon such factors. In addition, the status
of the exploration and development program of any oil and gas company is
ever-changing. Consequently, reserve estimates also vary over time. Actual
production, revenues and expenditures with respect to HEC's reserves will likely
vary from estimates, and such variances may be material.
ITEM 2 - PROPERTIES
Exploration and Development Projects and Acquisitions
In 1999, HEC incurred $24,162,000 in direct property additions, development,
exploitation, and exploration costs. The costs were comprised of $11,093,000 for
property acquisitions and approximately $13,069,000 for domestic exploration and
development. HEC's 1999 capital program led to the replacement, including
revisions to prior year reserves, of 95% of 1999 production using year-end
prices of $24.32 per bbl and $2.00 per mcf. Excluded from these calculations are
the reserves of HCRC and the direct interests of Hallwood Group acquired in the
Consolidation. Also excluded from the calculations are sales of reserves in
place in 1999, which were approximately 9% of 1999 production.
Property Sales
During 1999, HEC received approximately $388,000 for the sale of approximately
420 non-strategic wells located principally in Texas but also included wells
located in Louisiana, Mississippi, North Dakota, New Mexico, Oklahoma, and Utah.
Regional Area Descriptions and 1999 Capital Budget
The following discussion of HEC's properties and capital projects contains
forward-looking statements that are based on current expectations, estimates and
projections about the oil and gas industry, management's beliefs and assumptions
made by management. Words such as "projects," "believes," "expects,"
"anticipates," "estimates," "plans," "could," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Please refer to the section entitled "Cautionary Statement Regarding
Forward-Looking Statements" under Item 1. for a discussion of factors which
could affect the outcome of the forward-looking statements.
Since HEP was considered the acquiring entity for accounting purposes, the
expenditures discussed below represent the costs incurred by HEP prior to June
8, 1999, plus the costs incurred on a consolidated basis after June 8, 1999.
<PAGE> 115
Gulf Coast Region
HEC has significant interests in the Gulf Coast Region in Louisiana and South
and East Texas. The Louisiana interests are located in Lafayette Parish and
consist of 13 producing gas wells and the associated water handling and gas
treating facilities. The wells produce principally from the Bol Mex formation at
13,500 to 14,500 feet and seven are operated by HEC. In South and East Texas,
HEC has interests in approximately 151 producing wells, 45 of which are operated
by the Company and produce primarily from the Austin Chalk, Paluxy, Lower Frio
and Cotton Valley formations at depths from 7,000 to 13,000 feet. During 1999,
HEC expended approximately $16,251,000 (67%) of its capital budget in this
region. Of this amount, approximately $7,230,000 was for the Seisgen
Exploration, Inc. ("Seisgen") acquisition described below. The following
discussion relates to major 1999 capital projects within the region.
Seisgen Acquisition. In October 1999, HEC acquired from Seisgen, interests in 34
wells located principally in the Yoakum Gorge area of Lavaca County, Texas. The
proven reserves have a net present value, discounted at 10% of $5,182,000, using
non-escalated prices of $2.50 mcf of gas and $18.50 per barrel of oil. HEC also
acquired significant non-producing assets including drilling locations,
exploration acreage and 3-D seismic data. HEC believes that the acquisition has
significant upside potential value and expands opportunities in the Yoakum Gorge
area where HEC has been active since 1998. Specifically, in 1998 HEC
participated in a successful non-operated exploration discovery in the Wilcox
formation using proprietary 3-D seismic data. In 1999, HEC participated in five
additional non-operated directional wells testing the Wilcox Steven Sands. Three
of the wells are producing and two of the wells are drilling or are in the
process of being completed as of December 31, 1999. The average rate of the
producing wells at December 31, 1999 is approximately 12,775 gross mcf per well
per day. HEC owns an average 28% working interest in four of the producing wells
and 12.5% working interests in the remaining two wells. HEC's 1999 drilling
costs incurred are approximately $3,130,000. During 2000, HEC plans to drill at
least three additional development wells and three exploration wells.
Bell Project. During 1998, HEC drilled one successful well within the Bell
prospect located in Houston County, Texas. HEC owns a 60% working interest in
this operated well. In 1999, HEC sidetracked another well to test reserves in
the Buda and Georgetown formations using a stacked dual lateral well. Initial
tests of the Georgetown formation showed it water prone, but the Buda formation
is currently being tested and is producing oil. At December 31, 1999, HEC was
also drilling a dual lateral Buda formation development well which is currently
being completed. HEC owns 36% working interests in the wells drilling or being
completed. The horizontal lateral sections are between 4,000-8,000 feet, and the
total vertical depth of the wells range from 9,000-10,000 feet. HEC's costs in
1999 were approximately $1,446,000 for all drilling and prospect costs in the
area. During 2000, HEC plans to drill as many as five wells in the area.
Scott Field Area. During 1999, the two most significant wells in the Field, the
A.L. Boudreaux #1, and the G.S. Boudreaux Estate #1 went offline. The A.L.
Boudreaux #1 was successfully restored to commercial production of 11.7 mmcf per
day and 250 bopd following a workover, although post-workover reserves are less
than had been previously estimated. The G.S. Boudreaux well was lost, but an
alternate unit well began drilling in the fourth quarter of 1999 to recover
additional gas believed to be remaining in the fault block. Also drilling at
December 31, 1999, was a well in a fault block adjacent to the A. L. Boudreaux.
In February of 2000, based on the drilling results, this well was plugged and
abandoned. In 2000, HEC's plans include an exploration test of the deeper Klump
Sands productive in nearby fields.
Mirasoles Project. In 1999, HEC began completion of a 17,000-foot Frio Formation
exploration well located in Kenedy County, Texas. In 1998, eight prospective
horizons were identified while drilling this large structural prospect defined
by 63 miles of proprietary 3-D seismic data. Stimulation of the deepest and
highest potential zone was not possible due to mechanical problems. HEC then
tested three shallower Frio zones, but found only subcommercial oil production
rather than gas as anticipated. In 1999, HEC incurred approximately $1,473,000
related to this project. HEC operates the well and owns a 35% working interest.
The well is temporarily abandoned and HEC, as operator, is currently proposing
the abandonment of the well and project.
Boca Chica Project. In 1999, HEC incurred approximately $313,000 for seismic
data and all costs associated with its participation in an exploration well,
which was directionally drilled from the shore to a bottom hole location under
the waters of the Gulf of Mexico. This 10,000-foot exploration well in the Big
Hum formation tested wet, yet the exploration results were sufficiently
encouraging that working interest owners shot 3-D seismic over the area in the
third quarter of 1999. Though the 3-D seismic interpretation is still underway,
HEC anticipates that during 2000 another well will be drilled. HEC owns a 25%
working interest in the well.
<PAGE> 116
Greater Permian Region
HEC has significant interests in the Greater Permian Region, which includes West
Texas and Southeast New Mexico. In this region, HEC has interests in 436
productive oil and gas wells (359 of which are operated), 30 shut-in oil and gas
wells (28 operated) and 13 operated salt water disposal wells or injection
wells. In 1999, HEC expended approximately $1,362,000 (6%) of its capital budget
on projects in this area. The following is a description of the significant
areas and 1999 capital projects within the Greater Permian Region.
Carlsbad/Catclaw Area. HEC's interests in the Carlsbad/Catclaw Area as of
December 31, 1999 consisted of 59 producing wells that produce primarily natural
gas and two shut-in wells. The wells are located on the northwestern edge of the
Delaware Basin in Lea, Eddy and Chaves Counties, New Mexico. The Company
operates 33 of these wells. The wells produce at depths ranging from
approximately 2,500 feet to 14,000 feet from the Delaware, Atoka, Bone Springs
and Morrow formations. In 1999, HEC spent approximately $475,000 recompleting or
drilling four producing development wells. HEC expects to continue operated
development drilling in Lea County.
Spraberry Area. HEC's interests in the Spraberry Area consist of 377 producing
wells, 13 salt-water disposal wells, and 28 shut-in wells in Dawson, Upton,
Reagan and Irion Counties, Texas. The Company operates 326 of the producing oil
and gas wells. Current production is predominately from the Upper and Lower
Spraberry, Clearfork Canyon, Dean, and Fusselman formations at depths ranging
from 5,000 feet to 9,000 feet. During 1999, HEC plugged 66 wells in the area and
anticipates an additional 10 wells will be plugged in 2000. The Spraberry area
is a mature operation where aggressive operating expense control and limited
development drilling typify the management of the area.
Rocky Mountain Region
HEC has significant interests in the Rocky Mountain Region, which include
producing properties in Colorado, Montana, North Dakota and Northwest New
Mexico. The Company has interests in 218 producing oil and gas wells, 176 of
which are operated by HEC, 22 shut-in wells, and five salt-water disposal wells.
HEC expended approximately $4,183,000 (17%) of its 1999 capital budget in this
area. A discussion of the major projects in the region follows.
Colorado Western Slope Project. HEC drilled and completed three 5,500-foot
Dakota Formation wells in 1999. The wells are located in Garfield County,
Colorado. HEC owns 100% working interests in the wells. Sales of production for
all three wells in November 1999 had combined rates of approximately 1,450 gross
mcf per day. HEC's total costs in 1999 for the three wells were approximately
$1,854,000. HEC has identified 13 additional development locations and in 2000,
plans to drill up to nine additional wells and to recomplete two wells.
Toole County Area. HEC's interests in the Toole County Area consist of 61
producing wells and 17 shut-in wells, 66 of which are operated by the Company.
The oil wells produce from the Nisku formation at depths of approximately 3,000
feet, and the gas wells produce from the Bow Island formation at depths of 900
to 1,200 feet. HEC plans to divest this area in 2000.
San Juan Basin Project - Colorado and New Mexico. HEC's interest in the San Juan
Basin consists of 80 producing gas wells (75 operated), 12 operated shut-in
wells and three operated salt water disposal wells located in San Juan County,
New Mexico and LaPlata County, Colorado. HEC operates 52 producing wells in New
Mexico, 31 of which produce from the Fruitland Coal formation at approximately
2,200 feet and 21 of which produce from the Picture Cliffs, Mesa Verde and
Dakota formations at 1,200 to 7,000 feet. HEC also operates 23 producing wells
in La Plata County, Colorado. The wells in Colorado produce from the Fruitland
Coal formation at depths of 1,800-2,200 feet. During 1999, $676,500 was spent
for the purchase of overriding royalty interests and working interests in 18
coal bed methane properties already operated by HEC, located in San Juan County,
New Mexico. Most of the interests purchased qualify for tax credits under
Section 29 of the Internal Revenue Code. In order to monetize these credits, the
majority of the acquired interests were sold to 44 Canyon LLC ("44 Canyon"), a
special purpose entity owned by a large East Coast financial institution, by
HEC, in exchange for cash, a production payment, and promissory notes. In 1999,
HEC along with some of its peers, petitioned the Colorado Oil & Gas Commission
to allow for optional infill drilling on 160 acre spacing in the Colorado
Fruitland Coal formation. If approved, additional drilling of as many as 17
wells would result in the area. Although no application for additional drilling
has been made in New Mexico, with regulatory approval, 14 new drilling
opportunities would be created in the area, as well. In addition, in 1999, HEC
installed an additional gas-gathering pipeline in LaPlata County, Colorado. HEC
anticipates that the additional line will help lower system pressures and will
increase production by 1,000 mcf per day. Additional water disposal capacity was
completed in the fourth quarter of 1999. HEC's costs incurred in 1999 for the
additional pipeline and water disposal facilities were approximately $395,000.
<PAGE> 117
Other
At December 31, 1999, HEC owned various other interests in properties in Kansas,
Oklahoma, California, and South Central Texas. The remaining $2,366,000 (10%) of
HEC's capital expenditures incurred in 1999 were devoted to technical general
and administrative expenditures, delay rental costs, and for numerous other
projects which were completed or are underway and which are individually less
significant.
Future Plans
At December 31, 1999, HEC's plans were to sell its interests in approximately
500 non-strategic oil and gas wells in 2000. These sales are being made in an
effort to better focus the Company on its core areas of Colorado, Utah, New
Mexico, Texas, and Louisiana and at the same time reduce its level of debt and
administrative overhead. These wells represent approximately 34% of HEC's total
well count, approximately 16% of HEC's reserve value, and approximately 11% of
its operating cash flow based on five year average reserve pricing. Proceeds
from the sales will be used initially to reduce debt. Subsequent to December 31,
1999 and through March 6, 2000, approximately 145 of the non-strategic oil and
gas wells located in the Keystone, Merkle, and Weesatche areas of Texas, as well
as various oil and gas wells in Oklahoma, North Dakota and Montana have been
sold. As a result of successful sales negotiations, sales proceeds in four of
the five areas exceeded the net present value, discounted at 10%, recorded in
HEC's January 1, 2000, five year average price reserve report. Purchase and sale
agreements for properties located in Williston Basin, Montana, North Dakota and
Kansas are currently being negotiated. Efforts to sell the remainder of the
non-strategic oil and gas wells are ongoing.
For 2000, HEC's capital budget, which will be provided by cash generated from
operations and cash on hand has been set at $24,000,000. The Company expects to
allocate its capital budget for 2000 among its core areas as follows:
Gulf Coast Region $14,500,000
Greater Permian Region 500,000
Rocky Mountain Region 7,000,000
Other 2,000,000
-----------
$24,000,000
Company Reserves, Production and Discussion by Significant Regions
The following table presents the December 31, 1999 reserve data by significant
regions.
<TABLE>
<CAPTION>
Proved Reserve Quantities Present Value of Future Net Cash Flows
Proved Proved
Mcf of Gas Bbls of Oil Undeveloped Developed Total
---------- ----------- ----------- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Gulf Coast Region 24,945 1,328 $11,743 $ 29,593 $ 41,336
Greater Permian Region 30,071 5,540 3,123 52,896 56,019
Rocky Mountain Region 93,838 1,322 1,415 89,590 91,005
Other 2,814 3,491 783 18,857 19,640
-------- ------- ------- -------- --------
151,668 11,681 $17,064 $190,936 $208,000
======== ======= ======= ======== ========
</TABLE>
<PAGE> 118
The following table presents the oil and gas production for significant regions
for the periods indicated.
<TABLE>
<CAPTION>
Production for the Production for the
Year Ended December 31, 1999 Year Ended December 31, 1998
---------------------------- ----------------------------
Mcf of Gas Bbls of Oil Mcf Gas Bbls of Oil
---------- ----------- ------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Gulf Coast Region 5,234 189 5,291 175
Greater Permian Region 2,758 437 2,893 401
Rocky Mountain Region 9,862 151 5,233 133
Other 409 148 620 78
------ --- ------ ----
18,263 925 14,037 787
====== === ====== ====
</TABLE>
The following table presents the Company's extensions and discoveries by
significant regions.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999 For the Year Ended December 31, 1998
------------------------------------ ------------------------------------
Mcf of Gas Bbls of Oil Mcf of Gas Bbls of Oil
---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Gulf Coast Region 5,708 113 1,201 164
Greater Permian Region 291 58 217 167
Rocky Mountain Region 4,346 9 78 83
Other 584 46 1
-------- ------- -------- ------
10,929 180 1,542 415
======== ======= ======== ======
</TABLE>
Average Sales Prices and Production Costs
The following table presents the average oil and gas sales price and average
production costs per equivalent mcf of gas computed at the ratio of six mcf of
gas to one barrel of oil.
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
Oil and condensate -
<S> <C> <C> <C>
includes the effects of hedging (per bbl) $16.52 $13.65 $19.08
Natural gas -
includes the effects of hedging (per mcf) 1.90 2.02 2.31
Production costs (per equivalent mcf of gas) .72 .65 .67
</TABLE>
<PAGE> 119
Productive Oil and Gas Wells
The following table summarizes the productive oil and gas wells as of December
31, 1999 attributable to HEC's direct interests. Productive wells are producing
wells and wells capable of production. Gross wells are the total number of wells
in which HEC has an interest. Net wells are the sum of HEC's fractional
interests owned in the gross wells.
Gross Net
Productive Wells
Oil 826 526
Gas 435 228
------ -----
Total 1,261 754
====== =====
Oil and Gas Acreage
The following table sets forth the developed and undeveloped leasehold acreage
held directly by HEC as of December 31, 1999. Developed acres are acres which
are spaced or assignable to productive wells. Undeveloped acres are acres on
which wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or not
such acreage contains proved reserves. Gross acres are the total number of acres
in which HEC has a working interest. Net acres are the sum of HEC's fractional
interests owned in the gross acres.
Gross Net
(in thousands)
Developed acreage 272 144
Undeveloped acreage 666 168
--- ---
Total 938 312
=== ===
At December 31, 1999, HEC held undeveloped acreage in Texas, Louisiana, Montana,
Utah, Oklahoma, New Mexico, Kansas, Colorado, North Dakota and California.
Drilling Activity
The following table sets forth the number of wells attributable to HEC's direct
interests drilled in the most recent three years.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------ ------ -----
Gross Net Gross Net Gross Net
----- --- ----- --- ----- ---
Development Wells:
<S> <C> <C> <C> <C> <C> <C>
Productive 1 .5 12 3.6 23 4.5
Dry 1 .5 5 1.5 5 .8
--- --- --- --- --- ----
Total 2 1 17 5.1 28 5.3
=== === == === == ===
Exploratory Wells:
Productive 11 4.1 17 4.3 14 2.2
Dry 8 2.4 17 3.0 22 5.4
--- --- -- --- -- ---
Total 19 6.5 34 7.3 36 7.6
=== === == === == ===
</TABLE>
<PAGE> 120
Office Space
HEC leases office space in Denver, Colorado, for approximately $600,000 per year
under a lease that terminates on December 31, 2006. HEC also sub-leases office
space in Houston, Texas for approximately $42,000 per year under a lease that
terminates on October 14, 2001.
ITEM 3 - LEGAL PROCEEDINGS
See Notes 12 and 13 to the financial statements included in Item 8 - Financial
Statements and Supplementary Data.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HEC's common stock began trading over the counter on NASDAQ National Market
System under the symbol "HECO" on June 9, 1999. HEC's Series A Preferred Stock
began trading on the NASDAQ under the symbol "HECOP" on June 11, 1999. As of
March 6, 2000, there were 18,808 registered holders of record of HEC's common
stock and 12,566 registered holders of record of HEC's Series A Preferred Stock.
The following table sets forth, for the periods indicated, the high and low
closing bid quotations for each class of stock as reported by the Nasdaq Stock
Market, Inc. and the dividends paid per Series A Preferred share for the
corresponding periods. No common stock dividends were paid during the periods
shown.
<TABLE>
<CAPTION>
Common Stock High Low Dividends
- ------------ ---- --- ---------
<S> <C> <C> <C>
Second quarter 1999 (from June 9, 1999) $8 3/8 $5 3/8
Third quarter 1999 7 3/4 5 1/8
Fourth quarter 1999 7 3 1/2
Series A Preferred Stock
Second quarter 1999 (from June 11, 1999) $8 3/4 $7 3/4 $ .25
Third quarter 1999 8 7/8 8 1/8 .25
Fourth quarter 1999 8 5/16 7 .25
----
$ .75
</TABLE>
<PAGE> 121
Prior to the Consolidation, HEP's Class A Units were traded on the American
Stock Exchange (the "Exchange") under the symbol "HEP" through June 8, 1999. The
following table sets forth, for the periods indicated, the high and low reported
sales prices for the Class A Units as reported on the Exchange and the
distributions paid per Class A Unit for the corresponding periods.
<TABLE>
<CAPTION>
Class A Units High Low Distributions
- ------------- ---- --- -------------
<S> <C> <C> <C>
First quarter 1998 $8 5/8 $6 3/8 $.13
Second quarter 1998 7 6 .13
Third quarter 1998 7 4 11/16 .13
Fourth quarter 1998 5 7/8 3 .13
----
$.52
First quarter 1999 $4 3/8 $3 $.13
Second quarter 1999 (through June 8, 1999) 4 3/8 3 1/2 --
----
$.13
</TABLE>
On January 17, 1996, HEP's Class C Units began trading on the Exchange under the
symbol "HEPC." On February 17, 1998, HEP closed its public offering of 1.8
million Class C Units which were priced at $10.00 per Unit. HEP's Class C Units
stopped trading on June 8, 1999. The following table sets forth, for the periods
indicated, the high and low reported sales prices for the Class C Units as
reported on the Exchange and distributions paid per Class C Unit for the
corresponding periods.
<TABLE>
<CAPTION>
Class C Units High Low Distributions
- ------------- ---- --- -------------
<S> <C> <C> <C>
First quarter 1998 $11 $9 1/8 $ .25
Second quarter 1998 9 13/16 8 3/8 .25
Third quarter 1998 8 1/2 6 3/4 .25
Fourth quarter 1998 7 15/16 5 7/8 .25
-----
$1.00
First quarter 1999 $ 8 1/2 $6 3/16 $ .25
Second quarter 1999 (through June 8, 1999) 8 9/16 7 3/16 --
------
$ .25
</TABLE>
HEC's debt agreements limit aggregate dividends paid by HEC in any twelve month
period to 50% of cash flow from operations before working capital changes and
50% of distributions received from affiliates, if the principal amount of debt
of HEC is 50% or more of the borrowing base. Aggregate dividends paid by HEC are
limited to 65% of cash flow from operations before working capital changes and
65% of distributions received from affiliates, if the principal amount of debt
is less than 50% of the borrowing base.
On February 18, 2000, HEC repurchased and retired 43,816 shares of Series A
Preferred Stock from its affiliate, Hallwood Group for $303,426. The shares were
repurchased for $6.925 per share which represented the average of the closing
prices of the stock during the five days prior to February 18, 2000.
<PAGE> 122
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected financial data regarding HEC's financial
position and results of operations as of the dates indicated. All information
presented for periods prior to June 8, 1999 represents the historical
information of HEP because HEP was considered to be the acquiring entity for
accounting purposes. The financial information for periods prior to June 8, 1999
have been retroactively restated to reflect the corporate structure of HEC, and
all share and per share information assumes that the shares of HEC issued to HEP
in connection with the Consolidation were outstanding for all periods prior to
June 8, 1999.
<TABLE>
<CAPTION>
As of and For the Year Ended December 31,
-----------------------------------------
1999 1998 1997 1996 1995
------ ------ ------- ------ -----
(In thousands except per Share)
Summary of Operations
Oil and gas revenues and
<S> <C> <C> <C> <C> <C>
pipeline operations $ 56,523 $ 43,177 $ 44,707 $ 50,644 $ 43,454
Total revenue 56,881 43,586 45,103 51,066 43,780
Production operating expense 17,100 12,175 11,060 11,511 11,298
Depreciation, depletion and
amortization 21,027 15,720 11,961 13,500 15,827
Impairment 14,000 10,943
General and administrative
expense 7,395 5,045 5,333 4,540 5,580
Net income (loss) 2,880 (13,895) 12,803 15,726 (9,031)
Basic net income (loss) per share
.06 (2.92) 2.17 2.69 (1.61)
Diluted net income (loss) per
share .06 (2.92) 2.14 2.69 (1.61)
Dividends per common share .21 1.26 1.25 1.34 1.78
Dividends per preferred share 1.00 1.00 1.00 1.00
Balance Sheet
Working capital (deficit) $ 3,371 $ (8,722) $ (973) $ (1,355) $ (4,363)
Property, plant and equipment,
net 181,621 105,005 94,331 88,549 94,926
Total assets 212,774 139,091 131,603 122,792 125,152
Long-term debt 109,357 40,381 34,986 29,461 37,557
Long-term contract settlement
obligation 2,512 2,397
Deferred liability and other 1,066 1,050 1,180 1,533 1,718
Minority interest in affiliates 582 2,788 3,258 3,336 3,042
Stockholders' equity 75,387 62,632 69,064 64,215 57,572
</TABLE>
<PAGE> 123
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
Overview
HEC began operations on June 8, 1999, in connection with the Consolidation of
HEP and HCRC and the acquisition of the direct property interests of Hallwood
Group. For accounting purposes, the Consolidation has been treated as a purchase
by HEP of the common stock of HCRC and the direct energy interests of Hallwood
Group. Generally accepted accounting principles require reporting of results on
a basis that makes it difficult to compare to prior years. Therefore, this
Overview provides certain information on a pro forma basis to facilitate the
comparison with prior periods.
Pro Forma Results
The following pro forma information is prepared as if the Consolidation had been
completed on January 1, 1997.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------
1999 1998 1997
------- -------- -------
(in thousands except prices)
<S> <C> <C> <C>
Prices
Gas (per mcf) $ 1.88 $ 1.96 $ 2.25
Oil (per bbl) $ 15.84 $ 13.33 $ 19.01
Production
Gas (mcf) 22,360 22,291 17,786
Oil (bbl) 1,177 1,386 1,362
Gas revenue $42,111 $ 43,752 $40,095
Oil revenue 18,638 18,477 25,888
Lease operating expense 21,187 21,705 19,318
</TABLE>
Liquidity and Capital Resources
Cash Flow
HEC generated $18,238,000 of cash flow from operating activities during 1999.
The other primary cash inflows were:
o Proceeds from long-term debt of $13,000,000;
o Distributions received from affiliate of $1,833,000;
o Proceeds from the sale of property of $388,000;
Cash was used primarily for:
o Additions to property, exploration and development costs of $24,162,000;
o Costs incurred in connection with the Consolidation of $2,933,000;
o Payments of long-term debt of $3,000,000 and,
o Dividends to shareholders of $4,061,000.
When combined with miscellaneous other cash activity during the year, the result
was a decrease of $1,394,000 in HEC's cash and cash equivalents from $11,874,000
at December 31, 1998 to $10,480,000 at December 31, 1999.
<PAGE> 124
Property Purchases, Sales and Capital Budget
In 1999, HEC incurred $24,162,000 in direct property additions, development,
exploitation, and exploration costs. The costs were comprised of $11,093,000 for
property acquisitions and approximately $13,069,000 for domestic exploration and
development. HEC's 1999 capital program led to the replacement, including
revisions to prior year reserves, of 95% of 1999 production using year-end
prices of $24.32 per bbl and $2.00 per mcf. Excluded from these calculations are
the reserves of HCRC and the direct interests of Hallwood Group acquired in the
Consolidation. Also excluded are sales of reserves in place in 1999, which were
approximately 9% of 1999 production.
Regional Area Descriptions and 1999 Capital Budget
Since HEP was considered the acquiring entity for accounting purposes, the
expenditures discussed below represent the costs incurred by HEP prior to June
8, 1999, plus the costs incurred on a consolidated basis after June 8, 1999.
In the Gulf Coast Region, HEC expended approximately $7,230,000 acquiring
interests in 34 wells and significant non-producing assets including drilling
locations, exploration acreage and 3-D seismic. Most of the assets are located
in Yoakum Gorge area of Lavaca County, Texas. In addition, in the Yoakum Gorge
area, HEC participated in a successful non-operated exploration discovery in
1998, and in 1999, HEC participated in five additional non-operated directional
wells testing the Wilcox Steven Sands. HEC's 1999 drilling costs incurred in the
Yoakum Gorge area were approximately $3,130,000. HEC drilled one successful well
and sidetracked two additional wells within the Bell prospect located in Houston
County, Texas. HEC's costs in 1999 were approximately $1,446,000 for all
drilling and prospect costs within the Bell area. HEC spent approximately
$1,473,000 for completion attempts on the Mirasoles exploration well located in
Kenedy County, Texas. In 1999, HEC incurred approximately $313,000 for seismic
and all costs associated with its participation in the Boca Chica exploration
well.
In the Greater Permian Region, HEC spent approximately $475,000 recompleting or
drilling four producing development wells.
In the Rocky Mountain Region, HEC drilled and completed three wells located in
Garfield County, Colorado. Drilling costs were approximately $1,854,000. HEC
incurred $676,500 for the purchase of overriding royalty interests and working
interests in 18 coal bed methane properties already operated by HEC, located in
San Juan County, New Mexico. In the same area, HEC incurred approximately
$395,000 for additional pipeline and water disposal facilities.
See Item 2 - Properties, for further discussion of HEC's exploration and
development projects.
Long-lived assets, other than oil and gas properties, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. To date, the Company has not recognized
any impairment losses on long-lived assets other than oil and gas properties.
Dividends
On December 13, 1999, HEC declared a quarterly dividend of $.25 per Series A
Cumulative Preferred share, which was paid on February 15, 2000 to shareholders
of record on December 31, 1999. This amount was accrued as of the year-end.
The Series A Cumulative Preferred Stock has a dividend preference of $1.00 per
share per year. HEC may not declare or pay dividends to common shareholders
unless full cumulative dividends have been paid on the preferred stock.
<PAGE> 125
Stock Option Plans
On June 9, 1999, HEC granted options to purchase 600,000 shares of common stock
at an exercise price of $7.00 per share which was equal to the fair market value
on the date of grant. On November 22, 1999, HEC granted an additional 61,500
options to purchase common stock at an exercise price of $7.00 per share which
was greater than the fair market value of the common stock on the date of the
grant. The options expire on June 9, 2006, unless sooner terminated pursuant to
the provisions of the plan. One-third of the options vested on the grant date,
and the remainder vest one-third on June 8, 2000 and one-third on June 8, 2001.
On January 28, 2000, HEC granted options to purchase 238,500 shares of common
stock at an exercise price of $4.625 per share which was equal to the fair
market value of the common stock on the date of grant. The options expire on
January 28, 2007, unless sooner terminated pursuant to the provisions of the
plan. One-third of the options vested on the grant date and the remainder vest
one-third on January 28, 2001 and one-third on January 28, 2002.
Prior to the Consolidation, the following HEP options were outstanding. All of
these options were cancelled on June 8, 1999.
<TABLE>
<CAPTION>
Number of Options
Outstanding Exercisable Exercise Price
<S> <C> <C> <C>
Class A Unit Options 390,400 390,400 $ 5.75
Class A Unit Options 25,500 17,000 $ 6.625
Class C Unit Options 120,000 120,000 $10.00
</TABLE>
Financing
On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended, the "Credit Agreement") to extend the term date of its
line of credit to May 31, 2002. The lenders are Morgan Guaranty Trust Company,
First Union National Bank and Bank of America. The terms of the Credit Agreement
were amended on October 15, 1999, to, among other matters, increase HEC's
borrowing base to $90,000,000. At December 31, 1999, HEC had amounts outstanding
of $86,200,000.
HEC's plans are to sell its interests in approximately 500 non-strategic oil and
gas wells during 2000. These property sales will enable HEC to better focus on
its core areas while at the same time reduce its level of outstanding debt.
Subsequent to December 31, 1999 and through March 6, 2000, approximately 145 oil
and gas properties have been sold and HEC has repaid $6,000,000 of its
borrowings under the Credit Agreement. On January 27, 2000, the Credit Agreement
was further amended to reduce HEC's borrowing base to reflect the property sales
made by the Company and to waive compliance with an asset sale covenant. On
February 9, 2000, HEC's borrowing base was further reduced to $84,479,000 to
reflect the most recent property sales, and therefore HEC's unused borrowing
base totaled $4,279,000 at March 6, 2000.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 2.125%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was 8.5%
at December 31, 1999. Interest is payable monthly. Quarterly principal payments
of $11,457,000 are calculated to include repayments of the borrowing made
subsequent to December 31, 1999 and commence May 31, 2002.
The borrowing base for the Credit Agreement is typically redetermined
semiannually, although the lenders have the right to make a redetermination at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas properties. Additionally, aggregate dividends paid
and stock repurchased by HEC in any 12 month period are limited to 50% of cash
flow from operations before working capital changes and distributions received
from affiliates, if the principal amount of debt of HEC is 50% or more of the
borrowing base. Aggregate dividends paid and stock repurchased by HEC are
limited to 65% of cash flow from operations before working capital changes and
distributions received from affiliates, if the principal amount of debt is less
than 50% of the borrowing base.
At the time of the Consolidation, HCRC had $25,000,000 of 10.32% Senior
Subordinated Notes ("Subordinated Notes") due December 23, 2007 and warrants to
purchase common stock which were held by The Prudential Insurance Company of
America ("Prudential"). On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase Agreement (the "Note Agreement") was amended to issue
warrants to Prudential to purchase 309,278 shares of HEC's Common Stock at an
exercise price of $7.00 per share. The terms of the Note Agreement were further
amended on October 15, 1999 to exclude certain hedging transactions of the
subsidiaries of HEC from the calculation of indebtedness. In connection with
this amendment, the Company received a written waiver under the Credit Agreement
of the restriction on amendments to the Note Agreement. The Subordinated Notes
bear interest at the rate of 10.32% per annum on the unpaid balance, payable
quarterly. Annual principal payments of $5,000,000 are due December 23, 2003
through December 23, 2007.
<PAGE> 126
HEC recorded the Subordinated Notes and the warrants based upon the relative
fair values of the Subordinated Notes without the warrants and of the warrants
themselves at the time of Consolidation. The allocated value of the warrants of
$1,956,000 was recorded as additional paid-in-capital. The discount on the
Subordinated Notes is being amortized over the term of the Subordinated Notes
using the interest method of amortization.
As part of its risk management strategy, HEC enters into financial contracts to
hedge the interest rate payments under its Credit Agreement. HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
interest rates under its Credit Agreement, which has a floating interest rate.
The amounts received or paid upon settlement of these transactions are
recognized as interest expense at the time the interest payments are due.
All contracts are interest rate swaps with fixed rates. As of March 6, 2000, HEC
was a party to eight contracts with three different counterparties.
The following table provides a summary of HEC's financial contracts.
<TABLE>
<CAPTION>
Amount of Contract Average
Period Debt Hedged Floor Rate
<S> <C> <C>
2000 $45,000,000 5.65%
2001 36,000,000 5.23
2002 37,500,000 5.23
2003 37,500,000 5.23
2004 6,000,000 5.23
</TABLE>
Gas Balancing
HEC uses the sales method for recording its gas balancing. Under this method,
HEC recognizes revenue on all of its sales of production, and any
over-production or under-production is recovered or repaid at a future date.
As of December 31, 1999, HEC had a net over-produced position of 496,000 mcf
($992,000 valued at year-end gas prices). The Company believes that this
imbalance can be made up from production on existing wells or from wells which
will be drilled as offsets to existing wells and that this imbalance will not
have a material effect on HEC's results of operations, liquidity and capital
resources. The reserves disclosed in Item 8 have been decreased by 496,000 mcf
in order to reflect HEC's gas balancing position.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Company is required to
adopt SFAS 133 on January 1, 2001. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 133.
Forward Looking Statements
Please refer to the section entitled "Cautionary Statement Regarding Forward
Looking Statements under Item 1. for a discussion of factors which could affect
the outcome of forward looking statements used by the Company.
<PAGE> 127
Inflation and Changing Prices
Prices obtained for oil and gas production depend upon numerous factors that are
beyond the control of HEC, including the extent of domestic and foreign
production, imports of foreign oil, market demand, domestic and worldwide
economic and political conditions, storage capacity and government regulations
and tax laws. Prices for both oil and gas fluctuated from 1997 through 1999,
with a distinct downward trend in both oil and gas prices occurring in the
calendar year 1998 through the first quarter of 1999. Prices began to rebound in
April 1999.
The following table presents the weighted average prices received per year by
HEC, and the effects of the hedging transactions discussed below.
<TABLE>
<CAPTION>
Oil Oil Gas Gas
(excluding effects (including effects (excluding effects (including effects
of hedging of hedging of hedging of hedging
transactions) transactions) transactions) transactions)
------------ ------------ ------------ ------------
(per bbl) (per bbl) (per mcf) (per mcf)
<S> <C> <C> <C> <C>
1999 $18.16 $16.52 $2.06 $1.90
1998 12.82 13.65 1.99 2.02
1997 19.35 19.08 2.54 2.31
</TABLE>
As part of its risk management strategy, HEC enters into 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 hedge contracts are recognized as oil or gas
revenue at the time the hedged volumes are sold.
HEC's philosophy is to use derivatives to provide a measure of stability in the
volatile price environment of oil and gas, and to furnish an element of
predictability in the cash flow of the Company. In general, the Company expects
to hedge up to 50%, on a total equivalent volume basis, of its oil and gas
production for the next two forward years, and 30% for each of the three years
thereafter. The Company does not ordinarily intend to hedge more than 65% of any
one commodity. In addition, HEC will, in most cases, enter into transactions
with minimum fixed prices for the production subject to the contracts. This
philosophy may be modified as circumstances require.
The financial contracts used by HEC to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HEC sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices. As of March 6, 2000,
HEC was a party to 16 financial contracts with three different counterparties.
The following table provides a summary of HEC's financial contracts.
<TABLE>
<CAPTION>
Oil
Percent of
Production Contract
Period Hedged Floor Price
------ ---------- -----------
(per bbl)
<S> <C> <C>
2000 54% $18.47
2001 12% 19.16
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
Gas
Percent of
Production Contract
Period Hedged Floor Price
------ ---------- -----------
(per mcf)
<S> <C> <C>
2000 42% $1.97
2001 43% $1.99
2002 34% $1.95
</TABLE>
Between 11% and 13% of the gas volumes hedged in each year are subject to a
collar agreement whereby HEC will receive the contract price if the spot price
is lower than the contract price, the cap price if the spot price is higher than
the cap price, and the spot price if that price is between the contract price
and the cap price. The cap prices range from $2.54 per mcf to $2.65 per mcf.
During the first quarter through March 6, 2000, the weighted average oil price
(for barrels not hedged) was approximately $26.50 per barrel, and the weighted
average price of natural gas (for mcf not hedged) was approximately $2.25 per
mcf.
Inflation
Inflation did not have a material impact on HEC in 1999, 1998 and 1997 and is
not anticipated to have a material impact in 2000.
Results of Operations
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy interests of Hallwood Group.
Accordingly, all information presented for periods prior to June 8, 1999
represents the historical information of HEP because HEP was considered to be
the acquiring entity for accounting purposes.
1999 Compared to 1998
The following table is presented to contrast HEC's oil and gas price and
production for discussion purposes. Significant fluctuations are discussed in
the accompanying narrative.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Gas
Production (mcf) 18,263,000 14,037,000
Price (per mcf) $ 1.90 $ 2.02
Oil
Production (bbl) 925,000 787,000
Price (per bbl) $ 16.52 $ 13.65
</TABLE>
<PAGE> 129
Gas Revenue
Gas revenue increased $6,373,000 during 1999 compared with 1998. The increase is
comprised of an increase in gas production from 14,037,000 mcf during 1998 to
18,263,000 mcf during 1999, partially offset by a decrease in the average gas
price from $2.02 per mcf in 1998 to $1.90 per mcf in 1999. The increase in
production is primarily due to the Consolidation which caused a 4,478,000 mcf
increase in gas production. This increase was partially offset by decreased
production resulting from a production decline on two significant wells in
Louisiana caused by increased rates of water production on the wells and normal
production declines.
The effect of HEC's hedging transactions as described under "Inflation and
Changing Prices" was to decrease HEC's average gas price from $2.06 per mcf to
$1.90 per mcf, representing a $2,922,000 decrease in gas revenues for 1999.
Oil Revenue
Oil revenue increased $4,539,000 during 1999 compared with 1998. The increase is
comprised of an increase in the average oil price from $13.65 per barrel in 1998
to $16.52 per barrel in 1999, combined with an increase in production, from
787,000 barrels in 1998 to 925,000 barrels in 1999. The Consolidation caused a
production increase of 242,000 barrels of oil which was partially offset by the
production decline on two wells in Louisiana, as discussed above, and normal
production declines.
The effect of HEC's hedging transactions was to decrease HEC's average oil price
from $18.16 per barrel to $16.52 per barrel, resulting in a $1,517,000 decrease
in oil revenue for 1999.
Pipeline and Other
Pipeline and other revenue consists primarily of facilities income from two
gathering systems located in New Mexico, revenues derived from salt water
disposal and incentive payments related to certain wells in San Juan County, New
Mexico and LaPlata County, Colorado. Pipeline facilities and other revenue
increased $2,434,000 during 1999 compared with 1998. The increase is comprised
of a $1,716,000 increase due to the Consolidation and a $718,000 increase
primarily due to an increase in incentive payment income resulting from HEC's
acquisition of a volumetric production payment during May 1998.
Interest Income
The decrease in interest income of $51,000 during 1999 compared with 1998
resulted from a lower average cash balance during 1999.
Production Operating Expense
Production operating expense increased $4,925,000 during 1999 compared with
1998. The increase is comprised of a $5,527,000 increase due to the
Consolidation, partially offset by a decrease of $602,000 primarily resulting
from cost savings measures implemented in Kansas and West Texas during 1999.
Facilities Operating Expense
Facilities operating expense represents operating expenses associated with
various smaller gathering systems operated by HEC. The increase in facilities
operating expense of $128,000 is primarily due to increased maintenance activity
during 1999 compared with 1998.
General and Administrative Expense
General and administrative expense includes costs incurred for direct
administrative services such as legal, audit and reserve reports, as well as
allocated internal overhead incurred by the operating company on behalf of HEC.
These expenses increased $2,350,000 during 1999 compared with 1998 primarily due
to the Consolidation.
<PAGE> 130
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $5,307,000 during
1999 compared with 1998. The increase is due to as higher capitalized costs
during 1999 primarily due to the Consolidation and property acquisitions during
1999.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during 1998 represents the property
impairments recorded during 1998 because capitalized costs exceeded the present
value (discounted at 10%) of estimated future net revenues from proved oil and
gas reserves at June 30, 1998, September 30, 1998 and December 31, 1998, based
on prices of $13.00 per barrel of oil and $2.00 per mcf of gas, $12.80 per bbl
of oil and $1.90 per mcf of gas and $10.00 per bbl of oil and $1.90 per mcf of
gas, respectively.
Interest Expense
Interest expense increased $4,018 during 1999 as compared with 1998. The
increase is due to a higher average outstanding debt balance during 1999
resulting from the Consolidation and additional borrowings.
Equity in Earnings (Loss) of HCRC
Equity in earnings (loss) of HCRC represents HEC's share of its equity
investment in HCRC prior to the Consolidation. HEC's equity in loss of HCRC
during 1998 represents twelve months of activity whereas the 1999 balance
represents activity until June 8, 1999. Additionally, the 1998 balance includes
HEC's share of the property impairments recorded by HCRC.
Minority Interest in Net Income of Affiliates
Minority interest in net income of affiliates represents unaffiliated partners'
interest in the net income of the May Partnerships. The decrease of $647,000
during 1999 compared with 1998 is primarily due to the liquidation of three of
the six May Partnerships on March 31, 1999.
Litigation
Litigation income during 1999 represents insurance proceeds received by HEC
which reimbursed costs previously paid in connection with a property related
claim partially offset by costs accrued for the settlement of a take-or-pay
related claim. Litigation expense during 1998 includes the settlement of the
Ellender lawsuit described in Item 8, Note 13, and the costs related to the
Arcadia arbitration described in Item 8, Note 12.
1998 Compared to 1997
The following table is presented to contrast HEC's oil and gas price and
production for discussion purposes. Significant fluctuations are discussed in
the accompanying narrative.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Gas
Production (mcf) 14,037,000 11,774,000
Price (per mcf) $ 2.02 $ 2.31
Oil
Production (bbl) 787,000 770,000
Price (per bbl) $ 13.65 $ 19.08
</TABLE>
<PAGE> 131
Gas Revenue
Gas revenue increased $1,146,000 during 1998 compared with 1997. The increase is
comprised of an increase in gas production from 11,774,000 mcf during 1997 to
14,037,000 mcf during 1998, partially offset by a decrease in the average gas
price from $2.31 per mcf in 1997 to $2.02 per mcf in 1998. Production increased
because two temporarily shut-in wells were back on line. The two wells were
temporarily shut-in during the second quarter of 1997 while workover procedures
were performed. The increase in gas production is also due to an expansion of
the gathering system in San Juan County, New Mexico during 1998.
The effect of HEC's hedging transactions was to increase HEC's average gas price
from $1.99 per mcf to $2.02 per mcf, representing a $421,000 increase in gas
revenues for 1998.
Oil Revenue
Oil revenue decreased $3,949,000 during 1998 compared with 1997. The decrease is
comprised of a decrease in the average oil price from $19.08 per barrel in 1997
to $13.65 per barrel in 1998, partially offset by an increase in production,
from 770,000 barrels in 1997 to 787,000 barrels in 1998. Production increased
slightly because two temporarily shut-in wells were back on line. The two wells
were temporarily shut-in during the second quarter of 1997 while workover
procedures were performed. The production increase was partially offset by
normal production declines.
The effect of HEC's hedging transactions was to increase HEC's average oil price
from $12.82 per barrel to $13.65 per barrel, resulting in a $653,000 increase in
oil revenue for 1998.
Pipeline and Other
Pipeline facilities and other revenue increased $1,273,000 during 1998 compared
with 1997 primarily due to an increase in incentive payment income resulting
from HEC's acquisition of a volumetric production payment during May 1998.
Interest Income
The increase in interest income of $13,000 during 1998 compared with 1997
resulted from a higher average cash balance during 1998 compared with 1997.
Production Operating Expense
Production operating expense increased $1,115,000 during 1998 compared with
1997. The increase is due to increased operating costs resulting from the
drilling projects completed during 1997 as well as the additional operating
expenses related to the properties acquired in the Arcadia acquisition during
October 1998.
Facilities Operating Expense
The decrease in facilities operating expense of $143,000 is primarily due to
decreased maintenance activity during 1998 compared with 1997.
General and Administrative Expense
General and administrative expense decreased $288,000 during 1998 compared with
1997 primarily due to a decrease in performance based compensation during 1998.
<PAGE> 132
Depreciation, Depletion and Amortization Expense
Depreciation, depletion and amortization expense increased $3,759,000 during
1998 compared with 1997. The increase is due to a higher depletion rate
resulting from the increased production discussed above as well as higher
capitalized costs during 1998.
Impairment of Oil and Gas Properties
Impairment of oil and gas properties during 1998 represents the property
impairments recorded during 1998 because capitalized costs exceeded the present
value (discounted at 10%) of estimated future net revenues from proved oil and
gas reserves at June 30, 1998, September 30, 1998 and December 31, 1998, based
on prices of $13.00 per barrel of oil and $2.00 per mcf of gas, $12.80 per bbl
of oil and $1.90 per mcf of gas and $10.00 per bbl of oil and $1.90 per mcf of
gas, respectively.
Interest Expense
Interest expense decreased $299,000 during 1998 compared with 1997. The decrease
is due to a lower average outstanding debt balance during 1998 as compared to
1997.
Equity in Earnings (Loss) of HCRC
HEC's equity in HCRC's earnings decreased $6,236,000 during 1998 as compared to
1997. The decrease is primarily the result of property impairments recorded by
HCRC during 1998.
Minority Interest in Net Income of Affiliates
Minority interest in net income of affiliates decreased $821,000 during 1998
compared with 1997 due to a decrease in the net income of the May Partnerships
resulting primarily from lower oil and gas prices and decreased production from
their properties.
Litigation
Litigation expense during 1998 includes the settlement of the Ellender lawsuit
described in Item 8, Note 13 and the costs related to the Arcadia arbitration
described in Item 8, Note 12. Litigation income during 1997 is comprised of
insurance proceeds which reimbursed a portion of expense incurred in a prior
period to settle certain litigation.
<PAGE> 133
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HEC's primary market risks relate to changes in interest rates and in the prices
received from sales of oil and natural gas. HEC's primary risk management
strategy is to partially mitigate the risk of adverse changes in its cash flows
caused by increases in interest rates on its variable rate debt and decreases in
oil and natural gas prices, by entering into derivative financial and commodity
instruments, including swaps, collars and participating commodity hedges. By
hedging only a portion of its market risk exposures, HEC is able to participate
in the increased earnings and cash flows associated with decreases in interest
rates and increases in oil and natural gas prices; however, it is exposed to
risk on the unhedged portion of its variable rate debt and oil and natural gas
production.
Historically, HEC has attempted to hedge the exposure related to its variable
rate debt and its forecasted oil and natural gas production in amounts which it
believes are prudent based on the prices of available derivatives and, in the
case of production hedges, the Company's deliverable volumes. HEC attempts to
manage the exposure to adverse changes in the fair value of its fixed rate debt
agreements by issuing fixed rate debt only when business conditions and market
conditions are favorable.
HEC does not use or hold derivative instruments for trading purposes nor does it
use derivative instruments with leveraged features. HEC's derivative instruments
are designated and effective as hedges against its identified risks, and do not
of themselves expose HEC to market risk because any adverse change in the cash
flows associated with the derivative instrument is accompanied by an offsetting
change in the cash flows of the hedged transaction.
Notes 1, 4 and 6 to the financial statements provide further disclosure with
respect to derivatives and related accounting policies.
All derivative activity is carried out by personnel who have appropriate skills,
experience and supervision. The personnel involved in derivative activity must
follow prescribed trading limits and parameters that are regularly reviewed by
the Board of Directors and by senior management. HEC uses only well-known,
conventional derivative instruments and attempts to manage its credit risk by
entering into financial contracts with reputable financial institutions.
Following are disclosures regarding HEC's market risk sensitive instruments by
major category. Investors and other users are cautioned to avoid simplistic use
of these disclosures. Users should realize that the actual impact of future
interest rate and commodity price movements will likely differ from the amounts
disclosed below due to ongoing changes in risk exposure levels and concurrent
adjustments to hedging positions. It is not possible to accurately predict
future movements in interest rates and oil and natural gas prices.
Interest Rate Risks (non trading) - HEC uses both fixed and variable rate debt
to partially finance operations and capital expenditures. As of December 31,
1999, HEC's debt consists of $86,200,000 in borrowings under its Credit
Agreement which bears interest at a variable rate, and $25,000,000 in borrowings
under its 10.32% Senior Subordinated Notes which bear interest at a fixed rate.
HEC hedges a portion of the risk associated with this variable rate debt through
derivative instruments, which consist of interest rate swaps and collars. Under
the swap contracts, HEC makes interest payments on its Credit Agreement as
scheduled and receives or makes payments based on the differential between the
fixed rate of the swap and a floating rate plus a defined differential. These
instruments reduce HEC's exposure to increases in interest rates on the hedged
portion of its debt by enabling it to effectively pay a fixed rate of interest
or a rate which only fluctuates within a predetermined ceiling and floor. A
hypothetical increase in interest rates of two percentage points would cause a
loss in income and cash flows of $1,724,000 during 2000, assuming that
outstanding borrowings under the Credit Agreement remain at current levels. This
loss in income and cash flows would be offset by a $900,000 increase in income
and cash flows associated with the interest rate swap and collar agreements that
are in effect for 2000.
A hypothetical decrease in interest rates of two percentage points would cause
an increase in the fair market value of $1,989,000 in HEC's Senior Subordinated
Notes from their fair value at December 31, 1999.
<PAGE> 134
Commodity Price Risk (non trading) - HEC hedges a portion of the price risk
associated with the sale of its oil and natural gas production through the use
of derivative commodity instruments, which consist of swaps and collars. These
instruments reduce HEC's exposure to decreases in oil and natural gas prices on
the hedged portion of its production by enabling it to effectively receive a
fixed price on its oil and gas sales or a price that only fluctuates between a
predetermined floor and ceiling. As of March 6, 2000, HEC has entered into
derivative commodity hedges covering an aggregate of 445,000 barrels of oil and
21,243,000 mcf of gas that extend through 2002. Under these contracts, HEC sells
its oil and natural gas production at spot market prices and receives or makes
payments based on the differential between the contract price and a floating
price which is based on spot market indices. The amount received or paid upon
settlement of these contracts is recognized as oil or natural gas revenues at
the time the hedged volumes are sold. A hypothetical decrease in oil and natural
gas prices of 10% from the prices in effect as of December 31, 1999 would cause
a loss in income and cash flows of $5,999,000 during 2000, assuming that oil and
gas production remain at 1999 levels. This loss in income and cash flows would
be offset by a $2,914,000 increase in income and cash flows associated with the
oil and natural gas derivative contracts that are in effect for 2000.
<PAGE> 135
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page No.
<S> <C>
FINANCIAL STATEMENTS:
Independent Auditors' Report 28
Consolidated Balance Sheets at December 31, 1999 and 1998 29-30
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 31
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 33
Notes to Consolidated Financial Statements 34-51
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED) 52-55
</TABLE>
<PAGE> 136
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Hallwood Energy Corporation:
We have audited the consolidated financial statements of Hallwood Energy
Corporation as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999, listed in the index at Item 8. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hallwood Energy Corporation at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 6, 2000
<PAGE> 137
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,480 $ 11,874
Accounts receivable:
Oil and gas revenues 12,442 5,911
Trade 4,918 4,040
Due from affiliates 704 119
Prepaid expenses and other current assets 1,209 1,338
Net working capital of affiliate 236
--------- ---------
Total 29,753 23,518
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost Oil and gas properties (full cost
method):
Proved mineral interests 758,473 664,799
Unproved mineral interests 6,543 2,694
Furniture, fixtures and other 1,941 3,411
--------- ---------
Total 766,957 670,904
Less accumulated depreciation, depletion,
amortization and property impairment (585,336) (565,899)
--------- ---------
Total 181,621 105,005
--------- ---------
OTHER ASSETS
Investment in common stock of HCRC 10,160
Deferred expenses and other assets 1,400 408
--------- ---------
Total 1,400 10,568
--------- ---------
TOTAL ASSETS $ 212,774 $ 139,091
========= =========
</TABLE>
(Continued on the following page)
<PAGE> 138
HALLWOOD ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 26,382 $ 22,921
Current portion of long-term debt 9,319
--------- ---------
Total 26,382 32,240
--------- ---------
NONCURRENT LIABILITIES
Long-term debt 109,357 40,381
Deferred revenue and other 1,066 1,050
--------- ---------
Total 110,423 41,431
--------- ---------
Total liabilities 136,805 73,671
--------- ---------
MINORITY INTEREST IN AFFILIATES 582 2,788
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY
Series A Cumulative Preferred Stock; 5,000,000 shares
authorized; 2,334,165 shares issued and outstanding in 1999
and 1998 21,386 21,386
Common Stock par value $.01 per share; 25,000,000 shares
authorized; 9,999,754 shares issued and outstanding in 1999
and 5,599,754 shares issued and outstanding in 1998 100 56
Additional paid-in capital 67,883 58,052
Accumulated deficit (13,982) (16,862)
--------- ---------
Stockholders' equity - net 75,387 62,632
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 212,774 $ 139,091
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 139
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gas revenue $ 34,739 $ 28,366 $ 27,220
Oil revenue 15,280 10,741 14,690
Pipeline, facilities and other 6,504 4,070 2,797
Interest 358 409 396
-------- -------- --------
56,881 43,586 45,103
-------- -------- --------
EXPENSES:
Production operating 17,100 12,175 11,060
Facilities operating 626 498 641
General and administrative 7,395 5,045 5,333
Depreciation, depletion and amortization 21,027 15,720 11,961
Impairment of oil and gas properties 14,000
Interest 6,815 2,797 3,096
-------- -------- --------
52,963 50,235 32,091
-------- -------- --------
OTHER INCOME (EXPENSES):
Equity in earnings (loss) of HCRC (419) (4,888) 1,348
Minority interest in net income of affiliates (329) (976) (1,797)
Litigation 48 (1,382) 240
-------- -------- --------
(700) (7,246) (209)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 3,218 (13,895) 12,803
PROVISION FOR INCOME TAXES:
Current 338
-------- --------
NET INCOME (LOSS) 2,880 (13,895) 12,803
PREFERRED DIVIDENDS 2,368 2,464 664
-------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ 512 $(16,359) $ 12,139
======== ======== ========
NET INCOME (LOSS) PER SHARE - BASIC $ .06 $ (2.92) $ 2.17
======== ======== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ .06 $ (2.92) $ 2.14
======== ======== ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,083 5,600 5,600
======== ======== ========
PRO FORMA INFORMATION ASSUMING PROVISION
FOR INCOME TAXES APPLIED RETROACTIVELY (NOTE 1)
Income (loss) before income taxes $ 3,218 $(13,895) $ 12,803
-------- -------- --------
Net income (loss) $ 3,218 $(13,895) $ 12,803
======== ======== ========
Net income (loss) attributable to common shareholders $ 850 $(16,359) $ 12,139
======== ======== ========
Net income (loss) per share - basic $ .11 $ (2.92) $ 2.17
======== ======== ========
Net income (loss) per share - diluted $ .11 $ (2.92) $ 2.14
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 140
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series A Cumulative Common Additional Accumulated
Preferred Stock Stock Paid-in-Capital Deficit Total
--------------- ----- --------------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 4,868 $ 56 $ 75,061 $ (15,770) $ 64,215
Dividends (7,676) (7,676)
Net income 12,803 12,803
Other (278) (278)
--------- --------- --------- --------- ---------
Balance, December 31, 1997 4,868 56 67,107 (2,967) 69,064
Issuance of preferred stock, net of
syndication costs 16,518 16,518
Capital contribution 171 171
Exercise of stock options 199 199
Dividends (9,495) (9,495)
Net loss (13,895) (13,895)
Other 70 70
--------- --------- --------- --------- ---------
Balance, December 31, 1998 21,386 56 58,052 (16,862) 62,632
Issuance of common stock in the
Consolidation 44 13,892 13,936
Dividends (4,061) (4,061)
Net income 2,880 2,880
--------- --------- --------- --------- ---------
Balance, December 31, 1999 $ 21,386 $ 100 $ 67,883 $ (13,982) $ 75,387
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 141
HALLWOOD ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,880 $(13,895) $ 12,803
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation, depletion and amortization 21,027 15,720 11,961
Impairment of oil and gas properties 14,000
Depreciation charged to affiliates 220 249 221
Gain on asset disposals (188)
Amortization of deferred loan costs and debt discount 282 82 81
Noncash interest expense 15 241
Minority interest in net income 329 976 1,797
Recoupment of take-or-pay liability (416) (130) (126)
Equity in (earnings) loss of HCRC 419 4,888 (1,348)
Undistributed (earnings) loss of affiliates (1,177) (1,319) 197
Changes in operating assets and liabilities provided (used) cash net of
noncash activity:
Oil and gas revenues receivable (2,642) 2,861 633
Trade receivables (529) 1,029 (562)
Due from affiliates (3,992) (362) (2,948)
Prepaid expenses and other assets 385 (247) (163)
Deferred expenses and other assets 193 (408)
Accounts payable and accrued liabilities 1,259 3,006 4,730
Due to affiliates (133)
-------- -------- --------
Net cash provided by operating activities 18,238 26,277 27,384
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (11,093) (28,756) (3,233)
Exploration and development costs incurred (13,069) (12,180) (12,983)
Costs incurred in connection with the Consolidation (2,933)
Proceeds from sales of property, plant and equipment 388 454 133
Distributions received from affiliate 1,833 1,583
Investment in affiliates (20) (76)
Other investing activities (29)
-------- -------- --------
Net cash used in investing activities (24,874) (38,919) (16,188)
-------- -------- --------
FINANCING ACTIVITIES:
Payments of long-term debt (3,000) (18,286) (7,285)
Proceeds from equity offering, net
of syndication costs 16,518
Proceeds from long-term debt 13,000 33,000 7,000
Dividends paid (4,061) (9,495) (7,676)
Distributions paid by consolidated affiliates
to minority interest (429) (1,446) (1,875)
Payment of contract settlement (2,767)
Exercise of options 199
Capital contribution 171
Debt issuance costs (268)
Other financing activities (278)
-------- -------- --------
Net cash provided by (used in) financing activities 5,242 17,894 (10,114)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,394) 5,252 1,082
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 11,874 6,622 5,540
-------- -------- --------
END OF YEAR $ 10,480 $ 11,874 $ 6,622
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE> 142
HALLWOOD ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Hallwood Energy Corporation ("HEC" or the "Company") is a Delaware corporation
engaged in the development, exploration, acquisition and production of oil and
gas properties. HEC began operations June 8, 1999, in connection with the
consolidation ("Consolidation") of Hallwood Energy Partners, L.P. ("HEP") and
Hallwood Consolidated Resources Corporation ("HCRC") and the acquisition of the
direct energy interests of The Hallwood Group Incorporated ("Hallwood Group").
For accounting purposes, the Consolidation has been treated as a purchase by HEP
of the common stock of HCRC and the direct energy interests of Hallwood Group.
Accordingly, the assets and liabilities of HEP, including its 46% share of
assets and liabilities of HCRC owned prior to the Consolidation, have been
recorded at historical cost, and the remaining assets and liabilities of HCRC
and the direct energy interests of Hallwood Group have been recorded at
estimated fair values as of the date of purchase. All information presented for
periods prior to June 8, 1999 represents the historical information of HEP
because HEP was considered to be the acquiring entity for accounting purposes.
The financial statements for periods prior to June 8, 1999 have been
retroactively restated to reflect the corporate structure of HEC, and all share
and per share information assumes that the shares of HEC issued to HEP in
connection with the Consolidation were outstanding for all periods prior to June
8, 1999. The Company's properties are primarily located in the Rocky Mountain,
Mid-Continent, Greater Permian and Gulf Coast regions of the United States.
The following pro forma information presents the financial information of HEP,
HCRC and the direct property interests of Hallwood Group as if the Consolidation
had taken place on January 1 of each year presented. Any additional provision or
benefit for income taxes is excluded because of the Company's net operating loss
carryforwards and related valuation allowance.
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 1998
------------------------------------- ---------------------------------------
As Acquired As Acquired
Reported Interests Pro Forma Reported Interests Pro Forma
-------- --------- --------- -------- --------- ---------
(In thousands except per Share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 56,881 $ 11,874 $ 68,755 $ 43,586 $ 25,181 $ 68,767
Net income (loss) 2,880 (1,163) 1,717 (13,895) (21,597) (35,492)
Net income (loss)
attributable to
common
shareholders 512 (1,163) (651) (16,359) (21,597) (37,956)
Net income (loss)
per share - basic $ .06 $ (.08) $ (2.92) $ (6.78)
======== ======== ======== ========
Net income (loss)
per share - diluted $ .06 $ (.08) $ (2.92) $ (6.78)
======== ======== ======== ========
</TABLE>
<PAGE> 143
Accounting Policies
Consolidation
HEC fully consolidates entities in which it owns a greater than 50% equity
interest and reflects a minority interest in the consolidated financial
statements. The accompanying financial statements include the majority owned
affiliates, the May Limited Partnerships 1984-1, 1984-2 and 1984-3 for all
periods and the May Limited Partnerships 1983-1, 1983-2 and 1983-3 through March
31, 1999 when they were liquidated.
Pro Forma Information
The pro forma information included in the statements of operations has been
presented to reflect the provision for income taxes, using statutory rates, as
though the Company had been a taxable corporation for all periods presented.
Because of the Company's net operating loss carryforwards and its recent
operating losses, it is assumed that the Company would have had a full valuation
allowance. Accordingly, no provision or benefit for income taxes has been
recorded in any period.
Derivatives
As of March 6, 2000, HEC was a party to 16 financial contracts to hedge the
price of its oil and natural gas. The purpose of the hedges is to protect
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.
As of March 6, 2000, HEC was a party to eight financial contracts to hedge the
interest payments under its Credit Agreement. The purpose of the hedges is to
protect against the variability of the interest rates under its Credit Agreement
which has a floating interest rate. The amounts received or paid upon settlement
of these transactions are recognized as interest expense at the time the
interest payments are due.
Gas Balancing
HEC uses the sales method for recording its gas balancing. Under this method,
HEC recognizes revenue on all of its sales of production, and any
over-production or under-production is recovered at a future date.
As of December 31, 1999, HEC had a net over-produced position of 496,000 mcf
($992,000 valued at year-end gas prices). The Company believes that this
imbalance can be made up with production on existing wells or from wells which
will be drilled as offsets to existing wells and that this imbalance will not
have a material effect on HEC's results of operations, liquidity and capital
resources. HEC's oil and gas reserves as of December 31, 1999 have been
decreased by 496,000 mcf in order to reflect HEC's gas balancing position.
Property, Plant and Equipment
HEC follows the full cost method of accounting whereby all costs related to the
acquisition and development of oil and gas properties are capitalized in a
single cost center ("full cost pool") and are amortized over the productive life
of the underlying proved reserves using the units of production method. Proceeds
from property sales are generally credited to the full cost pool.
<PAGE> 144
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. During the second, third
and fourth quarters of 1998, using oil and gas prices of $13.00 per barrel of
oil and $2.00 per mcf of gas, $12.80 per barrel of oil and $1.90 per mcf of gas
and $10.00 per barrel of oil and $1.90 per mcf of gas, respectively, HEC
recorded oil and gas property impairments totaling $14,000,000. HEC did not
record any property impairments during 1999 or 1997.
HEC does not accrue costs for future site restoration, dismantlement and
abandonment costs related to proved oil and gas properties because the Company
estimates that such costs will be offset by the salvage value of the equipment
sold upon abandonment of such properties. The Company's estimates are based upon
its historical experience and upon review of current properties and restoration
obligations.
Unproved properties are withheld from the amortization base until such time as
they are either developed or abandoned. The properties are evaluated
periodically for impairment.
Long-lived assets, other than oil and gas properties which are evaluated for
impairment as described above, are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. To date, HEC has not recognized any impairment losses on long-lived
assets other than oil and gas properties.
Dividends
On December 13, 1999, HEC declared a quarterly dividend of $.25 per Series A
Cumulative Preferred share, which was paid on February 15, 2000 to shareholders
of record on December 31, 1999. This amount was accrued as of year-end.
The Series A Cumulative Preferred Stock has a dividend preference of $1.00 per
share per year. HEC may not declare or pay dividends to common shareholders
unless full cumulative dividends have been paid on the preferred stock.
Cash and Cash Equivalents
All highly liquid investments purchased with an original maturity of three
months or less are considered to be cash equivalents.
Computation of Net Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income (loss)
attributable to the common shareholders by the weighted average number of common
shares outstanding during the periods. Diluted income per common share includes
the potential dilution that could occur upon exercise of the options or warrants
to acquire common stock computed using the treasury stock method which assumes
that the increase in the number of shares is reduced by the number of shares
which could have been repurchased by the Company with the proceeds from the
exercise of the options or warrants (which were assumed to have been made at the
average market price of the common shares during the reporting period). The
warrants described in Note 6 have been ignored in the computation of diluted net
income (loss) per share in all periods and the stock options described in Note 9
have been ignored in the computation of diluted income (loss) per share in 1999
and 1998 because their inclusion would be anti-dilutive.
<PAGE> 145
The following table reconciles the number of shares outstanding used in the
calculation of basic and diluted income (loss) per share.
<TABLE>
<CAPTION>
Income
(Loss) Shares Per Share
---------- ---------- ----------
(In thousands except per Share data)
<S> <C> <C> <C>
For the Year Ended December 31, 1999
Net income per share - basic $ 512 8,083 $ .06
---------- ---------- ==========
Net income per share - diluted $ 512 8,083 $ .06
========== ========== ==========
For the Year Ended December 31, 1998
Net loss per share - basic $ (16,359) 5,600 $ (2.92)
---------- ---------- ==========
Net loss per share - diluted $ (16,359) 5,600 $ (2.92)
========== ========== ==========
For the Year Ended December 31, 1997
Net income per share - basic $ 12,139 5,600 $ 2.17
==========
Effect of options 83
---------- ----------
Net income per share - diluted $ 12,139 5,683 $ 2.14
========== ========== ==========
</TABLE>
Use of Estimates
The preparation of the financial statements for the Company in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Significant Customers
Although the Company sells the majority of its oil and gas production to a few
purchasers, there are numerous other purchasers in the area in which HEC sells
its production; therefore, the loss of its significant customers would not
adversely affect HEC's operations. For the years ended December 31, 1999, 1998
and 1997, purchases by the following companies exceeded 10% of the total oil and
gas revenues of the Company:
<PAGE> 146
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Conoco Inc. 19% 23% 20%
El Paso Field Services Company 14% 11% 11%
Plains All American Inc. 14%
Marathon Petroleum Company 16%
</TABLE>
Environmental Concerns
HEC is continually taking actions it believes are necessary in its operations to
ensure conformity with applicable federal, state and local environmental
regulations. As of December 31, 1999, HEC has not been fined or cited for any
environmental violations which would have a material adverse effect upon capital
expenditures, earnings or the competitive position of HEC in the oil and gas
industry.
Other Comprehensive Income
The Company does not have any items of other comprehensive income for the years
ended December 31, 1999, 1998 and 1997. Therefore, total comprehensive income
(loss) is the same as net income (loss) for those periods.
<PAGE> 147
Segments
The Company engages in the development, production and sale of oil and gas, and
the acquisition, exploration, development and operation of oil and gas
properties in the continental United States. In addition, the Company's
activities exhibit similar economic characteristics and involve the same
products, production processes, class of customers, and methods of distribution.
Management of the Company evaluates its performance as a whole rather than by
product or geographically. As a result, HEC's operations consist of one
reportable segment.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (gains and losses) depends on the intended use
of the derivative and the resulting designation. The Company is required to
adopt SFAS 133 on January 1, 2001. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 133.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to
the classifications used in the current year.
NOTE 2 - OIL AND GAS PROPERTIES
The following table summarizes cost information related to HEC's oil and gas
activities:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Property acquisition costs:
Proved $ 85,235 $ 28,397 $ 1,942
Unproved 3,849 379 1,071
Development costs 7,302 8,087 7,607
Exploration costs 5,767 6,043 6,950
-------- -------- --------
Total $102,153 $ 42,906 $ 17,570
======== ======== ========
</TABLE>
Depreciation, depletion, amortization and impairment expense related to proved
oil and gas properties per equivalent mcf of production for the years ended
December 31, 1999, 1998 and 1997, was $.88, $1.58 and $.73, respectively.
<PAGE> 148
At December 31, unproved properties consist of the following:
<TABLE>
<CAPTION>
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Texas $4,898 $1,857
North Dakota 1,009 499
Other 636 338
------ ------
$6,543 $2,694
====== ======
</TABLE>
NOTE 3 - PRINCIPAL ACQUISITIONS AND SALES
On October 20, 1999, HEC acquired oil and gas properties located principally in
the Yoakum Gorge area of Lavaca County, Texas for $7,230,000 and future
contingent consideration. The acquisition was comprised of interests in 34
wells, drilling locations, exploration acreage and 3-D seismic data.
As a result of the arbitration discussed in Note 12, HEC completed an $8,200,000
acquisition of properties located primarily in Texas during October 1998. The
acquisition included interests in 570 wells, numerous proven and unproven
drilling locations, exploration acreage and 3-D seismic data.
In July 1996, HEC and its affiliate, HCRC, acquired interests in 38 wells
located primarily in LaPlata County, Colorado. An unaffiliated large East Coast
financial institution formed an entity to utilize the tax credits generated from
the wells. The project was financed by an affiliate of Enron Corp. through a
volumetric production payment. During May 1998, a limited liability company
owned equally by HEC and HCRC purchased the volumetric production payment from
the affiliate of Enron Corp. HEC funded its $17,257,000 share of the acquisition
price from operating cash flow and borrowings under its Credit Agreement.
During 1997, HEC had no individually significant property acquisitions or sales.
Subsequent to December 31, 1999 and through March 6, 2000, HEC sold
approximately 145 oil and gas properties located in Texas, Oklahoma and North
Dakota for approximately $7,100,000. HEC used $6,000,000 of the sales proceeds
to pay down its outstanding debt and the remainder was used for general
operations and capital projects.
NOTE 4 - DERIVATIVES
As part of its risk management strategy, HEC enters into financial contracts to
hedge the price of its oil and natural gas. HEC does not use these hedges for
trading purposes, but rather for the purpose of providing protection against
price decreases and to provide a measure of stability in the volatile
environment of oil and natural gas spot pricing. The amounts received or paid
upon settlement of these contracts is recognized as oil or gas revenue at the
time the hedged volumes are sold.
The financial contracts used by HEC to hedge the price of its oil and natural
gas production are swaps, collars and participating hedges. Under the swap
contracts, HEC sells its oil and gas production at spot market prices and
receives or makes payments based on the differential between the contract price
and a floating price which is based on spot market indices. As of March 6, 2000,
HEC was a party to 16 financial contracts with three different counterparties.
<PAGE> 149
The following table provides a summary of HEC's financial contracts:
Oil
Quantity of Production
Period Hedged Contract Floor Price
------ ---------------- --------------------
(bbls) (per bbl)
1997 346,000 $17.78
1998 175,000 16.62
1999 325,000 15.43
2000 372,000 18.47
2001 73,000 19.16
<PAGE> 150
Gas
Quantity of Production
Period Hedged Contract Floor Price
------ ---------------- --------------------
(mcf) (per mcf)
1997 5,386,000 $1.97
1998 7,101,000 2.09
1999 15,574,000 1.85
2000 9,040,000 1.97
2001 7,355,000 1.99
2002 4,848,000 1.95
From 1999 forward, between 11% and 13% of the gas volumes hedged in each year
are subject to a collar agreement whereby HEC will receive the contract price if
the spot price is lower than the contract price, the cap price if the spot price
is higher than the cap price, and the spot price if that price is between the
contract price and the cap price. The cap price ranges from $2.54 per mcf to
$2.65 per mcf.
In the event of nonperformance by the counterparties to the financial contracts,
HEC is exposed to credit loss, but has no off-balance sheet risk of accounting
loss. The Company anticipates that the counterparties will be able to satisfy
their obligations under the contracts because the counterparties consist of
well-established banking and financial institutions which have been in operation
for many years. Certain of HEC's hedges are secured by the lien on HEC's oil and
gas properties which also secures HEC's Credit Agreement described in Note 6.
NOTE 5 - INVESTMENT IN AFFILIATED CORPORATION
During 1998 and 1997, HEC accounted for its approximate 46% interest in HCRC
using the equity method of accounting. As a result of the Consolidation, HEC's
investment in HCRC was eliminated. The following presents summarized financial
information for HCRC at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Current assets $12,566 $15,145
Noncurrent assets 88,601 77,226
Current liabilities 18,262 11,007
Noncurrent liabilities 53,316 32,678
Revenue 32,410 32,411
Net income (loss) (20,279) 5,585
</TABLE>
No other individual entity in which HEC owns an interest comprises in excess of
10% of the revenues, net income or assets of HEC.
<PAGE> 151
The following amounts represent HEC's share of the property related costs and
reserve quantities and values of its equity investee HCRC as of December 31,
1998 and 1997, prior to its elimination on June 8, 1999 (in thousands):
Capitalized Costs Relating to Oil and Gas Activities:
<TABLE>
<CAPTION>
As of December 31,
1998 1997
--------- ---------
<S> <C> <C>
Unproved properties $ 1,286 $ 1,040
Proved properties 147,600 118,966
Accumulated depreciation, depletion,
amortization and property impairment (100,890) (92,511)
--------- ---------
Net property $ 47,996 $ 27,495
========= =========
</TABLE>
Costs Incurred in Oil and Gas Activities:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997
------- -------
<S> <C> <C>
Acquisition costs $12,879 $ 1,303
Development costs 2,636 2,060
Exploration costs 2,606 2,851
------- -------
Total $18,121 $ 6,214
======= =======
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
For the Year Ended December 31,
1998 1997
-------- --------
<S> <C> <C>
Oil and gas revenue $ 10,372 $ 10,889
Production operating expense (4,272) (3,746)
Depreciation, depletion, amortization
and property impairment expense (13,773) (3,336)
Income tax benefit (expense) (761)
-------- --------
Net income (loss) from oil and gas activities $ (7,673) $ 3,046
======== ========
</TABLE>
Proved Oil and Gas Reserve Quantities:
<TABLE>
<CAPTION>
Gas Oil
Mcf Bbl
(unaudited)
<S> <C> <C>
Balance, December 31, 1998 32,000 1,470
====== =====
Balance, December 31, 1997 27,268 2,065
====== =====
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows:
<TABLE>
<CAPTION>
(unaudited)
<S> <C>
December 31, 1998 $30,134
=======
December 31, 1997 $31,245
=======
</TABLE>
<PAGE> 153
NOTE 6 - DEBT
HEC's long-term debt at December 31, 1999 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(In thousands)
<S> <C> <C>
Credit Agreement $ 86,200 $ 49,700
Note Agreement 25,000
Debt discount (1,843)
--------- ---------
Total debt 109,357 49,700
Less current maturities (9,319)
--------- ---------
Long-term debt $ 109,357 $ 40,381
========= =========
</TABLE>
On June 8, 1999, HEC and its lenders entered into an Amended and Restated Credit
Agreement (as amended, the "Credit Agreement") to extend the term date of its
line of credit to May 31, 2002. The lenders are Morgan Guaranty Trust Company,
First Union National Bank and Bank of America. The terms of the Credit Agreement
were amended on October 15, 1999, to, among other matters, increase HEC's
borrowing base to $90,000,000. At December 31, 1999, HEC had amounts outstanding
of $86,200,000.
HEC's plans are to sell its interests in approximately 500 non-strategic oil and
gas wells during 2000. These property sales will enable HEC to better focus on
its core areas while at the same time reduce its level of outstanding debt.
Subsequent to December 31, 1999 and through March 6, 2000, approximately 145 oil
and gas properties have been sold and HEC has repaid $6,000,000 of its
borrowings under the Credit Agreement. On January 27, 2000, the Credit Agreement
was further amended to reduce HEC's borrowing base to reflect the property sales
made by the Company and to waive compliance with an asset sale covenant. On
February 9, 2000, HEC's borrowing base was further reduced to $84,479,000 to
reflect the most recent property sales, and therefore HEC's unused borrowing
base totaled $4,279,000 at March 6, 2000.
Borrowings against the Credit Agreement bear interest at the lower of the
Certificate of Deposit rate plus from 1.375% to 2.125%, prime plus 1/2% or the
Euro-Dollar rate plus from 1.25% to 2.0%. The applicable interest rate was 8.5%
at December 31, 1999. Interest is payable monthly. Quarterly principal payments
of $11,457,000 are calculated to include the repayments of the borrowing made
subsequent to December 31, 1999 and commence May 31, 2002.
The borrowing base for the Credit Agreement is typically redetermined
semiannually, although the lenders have the right to make a redetermination at
anytime. The Credit Agreement is secured by a first lien on approximately 80% in
value of HEC's oil and gas properties. Additionally, aggregate dividends paid
and stock repurchased by HEC in any 12 month period are limited to 50% of cash
flow from operations before working capital changes and distributions received
from affiliates, if the principal amount of debt of HEC is 50% or more of the
borrowing base. Aggregate dividends paid and stock repurchased by HEC are
limited to 65% of cash flow from operations before working capital changes and
distributions received from affiliates, if the principal amount of debt is less
than 50% of the borrowing base.
At the time of the Consolidation, HCRC had $25,000,000 of 10.32% Senior
Subordinated Notes ("Subordinated Notes") due December 23, 2007 and warrants to
purchase common stock which were held by The Prudential Insurance Company of
America ("Prudential"). On June 8, 1999, the Amended and Restated Subordinated
Note and Warrant Purchase Agreement (the "Note Agreement") was amended to issue
warrants to Prudential to purchase 309,278 shares of HEC's Common Stock at an
exercise price of $7.00 per share. The terms of the Note Agreement were further
amended on October 15, 1999 to exclude certain hedging transactions of the
subsidiaries of HEC from the calculation of indebtedness. In connection with
this amendment, the Company received a written waiver under the Credit Agreement
of the restriction on amendment to the Note Agreement. The Subordinated Notes
bear interest at the rate of 10.32% per annum on the unpaid balance, payable
quarterly. Annual principal payments of $5,000,000 are due December 23, 2003
through December 23, 2007.
<PAGE> 154
HEC recorded the Subordinated Notes and the warrants based upon the relative
fair values of the Subordinated Notes without the warrants and of the warrants
themselves at the time of Consolidation. The allocated value of the warrants of
$1,956,000 was recorded as additional paid-in-capital. The discount on the
Subordinated Notes is being amortized over the term of the Subordinated Notes
using the interest method of amortization.
At December 31, 1999, HEC's debt maturity schedule is as follows.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 $ --
2001 --
2002 36,943
2003 54,257
2004 5,000
Thereafter 13,157
--------
Total $109,357
========
</TABLE>
As part of its risk management strategy, HEC enters into financial contracts to
hedge the interest rate payments under its Credit Agreement. HEC does not use
the hedges for trading purposes, but rather to protect against the volatility of
the cash flows under its Credit Agreement, which has a floating interest rate.
The amounts received or paid upon settlement of these transactions are
recognized as interest expense at the time the interest payments are due.
All contracts are interest rate swaps with fixed rates. As of March 6, 2000, HEC
was a party to eight contracts with three different counterparties.
The following table provides a summary of HEC's financial contracts.
<TABLE>
<CAPTION>
Average
Amount of Contract
Period Debt Hedged Floor Rate
<S> <C> <C>
1997 $15,000,000 6.56%
1998 15,000,000 6.84%
1999 40,000,000 5.70%
2000 45,000,000 5.65%
2001 36,000,000 5.23%
2002 37,500,000 5.23%
2003 37,500,000 5.23%
2004 6,000,000 5.23%
</TABLE>
NOTE 7 - STOCKHOLDERS' EQUITY
HEC's stock trades on the NASDAQ under the symbol "HECO" for Common Stock and
"HECOP" for Series A Cumulative Preferred Stock.
Common Stock
Under its charter, HEC is authorized to issue up to 25,000,000 shares of HEC
common stock with a par value of $.01 per share. The common shareholders are
entitled to one vote per share on all matters voted on by shareholders. After
giving effect to any preferential rights of any series of preferred stock
outstanding, the holders of HEC common stock are entitled to participate in
dividends, if any, as may be declared from time to time by the board of
directors of HEC. Upon liquidation, the common shareholders are entitled to
receive a pro rata share of all of the assets of HEC that are available for
distribution to such holders. The holders of HEC common stock have no preemptive
rights with respect to future issuances of HEC common stock. Preferred Stock
HEC is authorized to issue up to 5,000,000 shares of preferred stock from time
to time, in one or more series, without shareholder approval and to fix the
designation, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of any series that may be established by the HEC Board
of Directors.
In connection with the Consolidation, the Board of Directors of HEC has
authorized the issuance of 2,334,165 shares of Series A cumulative preferred
stock. Each share of preferred stock is entitled to one vote on all matters on
which shareholders may vote. The preferred shareholders vote together with the
common shareholders in the election of directors and vote as a separate class on
all other matters.
Preferred shareholders are entitled to receive cumulative cash dividends at the
rate of $1.00 per share per year, if declared by the HEC Board of Directors.
Dividends are paid quarterly in arrears commencing on June 30, 1999. The
dividends are fully cumulative and accumulate, whether or not earned or declared
and whether or not HEC has funds legally available to pay them, without interest
on a daily basis. HEC may not declare or pay dividends to common shareholders
unless full cumulative dividends have been paid on the preferred stock.
Upon liquidation or dissolution of HEC, all accrued dividends must be paid to
the preferred shareholders before any assets may be distributed to the common
shareholders. Once all accrued preferred dividends are paid, the preferred
shareholders are entitled to participate equally with the common shareholders in
the distribution of the remaining assets of HEC in a liquidation or dissolution.
The HEC preferred stock is redeemable at the option of HEC after December 31,
2003. After that date, HEC may redeem shares of preferred stock in whole or in
part at any time at a redemption price of $10.00 per share, plus accrued
dividends which are unpaid on the redemption date. Preferred stock may not be
redeemed in part if full cumulative dividends have not been paid or set aside
for payment with respect to all prior dividend periods.
Rights Plan
During the second quarter of 1999, the board of directors of HEC approved the
adoption of a rights plan designed to protect shareholders in the event of a
takeover action that would otherwise deny them the full value of their
investment.
Under the terms of the rights plan, one right was distributed for each common
share of HEC to holders of record at the close of business on June 8, 1999. The
rights trade with the common stock. The rights will become exercisable only in
the event, with certain exceptions, that an acquiring party accumulates 15% or
more of HEC's outstanding common stock. The rights will expire on June 7, 2009.
HEC will generally be entitled to redeem the rights at one cent per right at any
time until the tenth day following the acquisition of a 15% position in its
common shares.
Issuance of HEP Units
On February 17, 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 expenses,
were approximately $16,518,000. HEP used $14,000,000 of the net proceeds to
repay borrowings under its Credit Agreement and applied the remaining proceeds
toward the repayment of HEP's outstanding contract settlement obligation.
<PAGE> 155
NOTE 8 - INCOME TAXES
The following is a summary of the income tax provision for the year ended
December 31, 1999 (in thousands). HEC was not a taxable entity prior to the
Consolidation on June 8, 1999:
<TABLE>
<S> <C>
State $338
Federal - Current
Deferred
Total $338
====
</TABLE>
Reconciliation of the expected tax at the statutory tax rate to the effective
tax is as follows for the year ended December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Expected tax expense at the
statutory rate $ 1,094
State taxes net of federal benefit 223
Taxes on income prior to June 8, 1999 (440)
Change in valuation allowance (789)
Other 250
-------
Effective tax expense $ 338
=======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
significant items comprising the Company's deferred tax assets and liabilities
as of December 31, 1999 (in thousands) are as follows:
<TABLE>
<S> <C>
Deferred tax assets and (liabilities):
Net operating loss carryforward $ 7,758
Capital loss carryforward 1,458
Minimum tax credit carryforward 534
Temporary differences between
book and tax basis of property (215)
----------
Total 9,535
Valuation allowance (9,535)
----------
Net deferred tax asset $ -0-
==========
</TABLE>
The Company's net operating loss carryforwards expire between 2008 and 2019, the
capital loss carryforward expires in 2001 and the minimum tax credit
carryforward has no expiration date.
<PAGE> 156
NOTE 9 - EMPLOYEE INCENTIVE PLANS
Every year beginning in 1992, the Boards of Directors of HEP and HCRC have
adopted an incentive plan. Each year the Boards of Directors determine the
percentage of each entities interest in the cash flow from certain wells
drilled, recompleted or enhanced during the year allocated to the incentive plan
for that year. The specified percentage was 2.80% for 1999, 2.75% for 1998, and
2.40% for 1997. The specified percentage of cash flow is then allocated among
certain key employees who are designated by the boards as participants in the
plan for that year. Each award under the plan (with regard to domestic
properties) represents the right to receive for five years a portion of the
specified share of the cash award, at the conclusion of which the participants
are each paid a share of an amount equal to a specified percentage (80% for
1999, 1998 and 1997) of the remaining net present value of the qualifying wells,
and the award for that year terminates. The expenses attributable to the plans
were $220,000 in 1999, $125,000 in 1998 and $277,000 in 1997 and are included in
general and administrative expense in the accompanying financial statements.
On June 9, 1999, the Compensation Committee of HEC adopted an incentive plan
that is substantially the same as the incentive plan of HEP and HCRC, and
specified that the percentage of cash flow allocated to the new plan for the
remainder of 1999 be 2.80%, the same as was allocated for the 1999 plan by HEP
and HCRC.
On June 9, 1999, the Compensation Committee of HEC granted options to purchase
600,000 shares of common stock at an exercise price of $7.00 per share which was
equal to the fair market value on the date of grant. On November 22, 1999, HEC
granted an additional 61,500 options to purchase common stock at an exercise
price of $7.00 per share which was greater than the fair market value of the
common stock on the date of the grant. The options expire on June 9, 2006,
unless sooner terminated pursuant to the provisions of the plan. One-third of
the options vested on the grant date, and the remainder vest one-third on June
8, 2000 and one-third on June 8, 2001.
On January 28, 2000, the Compensation Committee of HEC granted options to
purchase 238,500 shares of common stock at an exercise price of $4.625 per share
which was equal to the fair market value of the common stock on the date of
grant. The options expire on January 28, 2007, unless sooner terminated pursuant
to the provisions of the plan. One-third of the options vested on the grant date
and the remainder vest one-third on January 28, 2001 and one-third on January
28, 2002.
Prior to the Consolidation, the following HEP options were outstanding. All of
these options were cancelled on June 8, 1999.
<TABLE>
<CAPTION>
Number of Options
Outstanding Exercisable Exercise Price
<S> <C> <C> <C>
Class A Unit Options 390,400 390,400 $ 5.75
Class A Unit Options 25,500 17,000 $ 6.625
Class C Unit Options 120,000 120,000 $ 10.00
</TABLE>
A summary of options granted to purchase HEC common stock and the changes
therein during the year-ended December 31, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
<S> <S> <C>
Outstanding at beginning of year -- $ --
Granted 661,500 7.00
------- ----
Outstanding at end of year 661,500 $7.00
======= =====
Options exercisable 220,500 $7.00
======= =====
</TABLE>
A summary of options granted to purchase Class A Units and the changes therein
during the years-ended December 31, 1999, 1998, and 1997 is presented below:
<PAGE> 157
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Units Price Units Price Units Price
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 415,900 $ 5.80 425,000 $ 5.75 425,000 $5.75
Granted 25,500 6.625
Exercised (34,600) 5.75
Cancelled (415,900) $ 5.80
-------- ------- ------- ------ ------- -----
Outstanding at end of year -- $ -- 415,900 $ 5.80 425,000 $5.75
======== ======= ======= ====== ======= =====
Options exercisable at year-end -- $ -- 398,900 $ 5.80 425,000 $5.75
======== ======= ======= ====== ======= =====
</TABLE>
A summary of options granted to purchase Class C Unit Options and the changes
therein during the year ended December 31, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
----------------------- ----------------------
Weighted Weighted
Average Exercise Average Exercise
Units Price Units Price
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 120,000 $ 10.00 -- $ --
Granted 120,000 10.00
Cancelled (120,000) 10.00
-------- -------- -------- --------
Outstanding at end of year -- $ -- 120,000 $ 10.00
======== ======== ======== ========
Options exercisable at year-end -- $ -- 60,000 $ 10.00
======== ======== ======== ========
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation cost has been recognized for the options
granted. Had compensation expense for options granted been determined based on
the fair value at the grant date for the options, consistent with the provisions
of SFAS 123, HEC's net income (loss) and net income (loss) per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ -----------
<S> <C> <C> <C>
Net income(loss): as reported $2,880,000 $(13,895,000) $12,803,000
pro forma 930,000 (14,022,000) 12,730,000
Net income (loss) per share - basic:
as reported $ .06 $ (2.92) $ 2.17
pro forma $ (.18) $ (2.94) $ 2.15
Net income (loss) per share - diluted:
as reported $ .06 $ (2.92) $ 2.14
pro forma $ (.18) $ (2.94) $ 2.12
</TABLE>
<PAGE> 158
The fair value of the common stock options granted during 1999, for disclosure
purposes was estimated on the dates of grant using the Black-Scholes Model using
the following assumptions.
<TABLE>
<CAPTION>
Common Stock Options
Granted Granted
June 9, 1999 November 22, 1999
------------ -----------------
<S> <C> <C>
Expected dividend yield -- --
Expected price volatility 68% 68%
Risk-free interest rate 5.8% 6.4%
Expected life of options 7 years 7 years
</TABLE>
The fair value of the unit options granted during 1998 and 1995, for disclosure
purposes was estimated on the dates of grant using the Binomial Option Pricing
Model using the following assumptions:
<TABLE>
<CAPTION>
1995 Class A 1998 Class A 1998 Class C
Options Options Options
<S> <C> <C> <C>
Expected dividend yield 6% 8% 11%
Expected price volatility 28% 27% 29%
Risk-free interest rate 7.6% 6.4% 6.4%
Expected life of options 10 years 10 years 10 years
</TABLE>
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company manages and operates certain oil and gas properties on behalf of
independent joint interest owners and its affiliates. In such capacity, the
Company pays all costs and expenses of operations and distributes all revenues
associated with such properties. HEC has receivables from affiliates of $704,000
and $119,000 at December 31, 1999 and 1998, respectively, which represent net
revenues net of operating costs and expenses. The balances with affiliates are
settled monthly.
During the years ended December 31, 1999, 1998 and 1997, HEC incurred
approximately $124,000, $274,000 and $275,000, respectively, of consulting fees
under a consulting agreement with Hallwood Group. The consulting agreement was
terminated effective June 8, 1999 in connection with the Consolidation. HEC also
incurred $195,000, $317,000 and $301,000 in 1999, 1998 and 1997, respectively,
representing costs incurred by Hallwood Group and its affiliates on behalf of
the Company.
On February 18, 2000, HEC repurchased and retired 43,816 shares of Series A
Preferred Stock from it affiliate, Hallwood Group for $303,426. The shares were
repurchased for $6.925 per share which represented the average of the closing
prices of the stock during the five days prior to February 18, 2000.
<PAGE> 159
NOTE 11 - STATEMENT OF CASH FLOWS
In connection with the Consolidation, the purchase of the common stock of HCRC
and the direct energy interests of Hallwood Group was recorded through the
issuance of approximately 2,600,000 shares of HEC common stock to HCRC and
1,800,000 shares of HEC common stock to Hallwood Group based on the estimated
fair value of the assets acquired and the liabilities assumed as of the date of
purchase. This noncash investing activity is summarized as follows:
<TABLE>
<CAPTION>
Fair Value of
Acquired Interest
-----------------
(In thousands)
<S> <C>
Current assets $ 4,823
Oil and gas properties 81,348
Other assets 1,140
Current liabilities (2,606)
Long-term debt (49,544)
Other noncurrent liabilities (62)
</TABLE>
Cash paid during 1999, 1998 and 1997 for interest totaled $6,583,000, $2,700,000
and $2,775,000, respectively. Cash paid for income taxes during 1999 was
$375,000. There was no cash paid for income taxes during 1998 and 1997 as HEC
was not a tax paying entity.
NOTE 12 - ARBITRATION
In connection with the Demand for Arbitration filed by Arcadia Exploration and
Production Company ("Arcadia") with the American Arbitration Association against
Hallwood Energy Partners, L.P., Hallwood Consolidated Resources Corporation,
E.M. Nominee Partnership Company and Hallwood Consolidated Partners, L.P.
(collectively referred to as "Hallwood"), the arbitrators ruled that the
original agreement entered into in August 1997 to purchase oil and gas
properties for $16,400,000 should proceed, with a reduction in the total
purchase price of approximately $2,500,000 for title defects. The arbitrators
also ruled that Arcadia was not entitled to enforce its claim that Hallwood was
required to purchase an additional $8,000,000 in properties and denied Arcadia's
claim for attorneys fees. The arbitrators granted Arcadia prejudgment interest
on the adjusted purchase price, in the amount of $904,000 of which HEC's share
was $452,000. That amount was accrued in the December 31, 1998 financial
statements of the Company and was paid during the second quarter of 1999.
In October 1998, HEC closed the acquisition of oil and gas properties from
Arcadia pursuant to the ruling which included interests in approximately 570
wells, numerous proven and unproven drilling locations, exploration acreage, and
3-D seismic data. HEC's share of the purchase price was $8,200,000.
NOTE 13 - LEGAL SETTLEMENTS
In connection with the Consolidation, HEC assumed the liability for two lawsuits
filed against Hallwood Group and certain individuals and related to the direct
energy interests acquired from Hallwood Group. These lawsuits, both filed in
federal court in Denver, Colorado, have been settled. HEC was obligated to pay
approximately $673,000 in connection with these lawsuits, and that amount was
accrued as a liability on the Company's balance sheet in connection with the
Consolidation. The court gave its final approval for the settlement during
January 2000 and the settlement amount was paid by HEC during February 2000.
<PAGE> 160
Concise Oil and Gas Partnership ("Concise"), a wholly owned subsidiary of HEC
was a defendant in a lawsuit styled Dr. Allen J. Ellender, Jr. et al. vs.
Goldking Production Company, et al., filed in the Thirty-Second Judicial
District Court, Terrebonne Parish, Louisiana on May 30, 1996. The portion of the
lawsuit against Concise was settled in consideration of the payment by Concise
of $600,000. This amount was recorded as litigation settlement expense in the
second quarter of 1998. Concise has been dismissed with prejudice from the
lawsuit.
In addition to the litigation noted above, the Company and its subsidiaries are
from time to time subject to routine litigation and claims incidental to their
business, which the Company believes will be resolved without material effect on
the Company's financial condition, cash flows or operations.
NOTE 14 - COMMITMENTS
The Company currently leases office facilities in Denver, Colorado for
approximately $600,000 per year, under a lease which expires on December 31,
2006. HEC also sub-leases office space in Houston, Texas for approximately
$42,000 per year, under a lease that expires on October 14, 2001. Remaining
commitments under these leases mature as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Annual Rentals
(In thousands)
<S> <C>
2000 $ 643
2001 636
2002 601
2003 601
2004 601
Thereafter 1,379
------
$4,461
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $421,000,
$287,000 and $288,000, respectively.
NOTE 15 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ----------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Assets (Liabilities):
Interest rate hedge contracts $ -- $ 2,156 $ -- $ 4,254
Oil and gas hedge contracts -- (4,558) -- (812)
Long-term debt (109,357) (109,021) (49,700) (49,700)
</TABLE>
The estimated fair value of the interest rate hedge contracts is computed by
multiplying the difference between the quoted contract termination interest rate
and the contract interest rate by the amounts under contract. This amount has
been discounted using an interest rate that could be available to the Company.
The estimated fair value of the oil and gas hedge contracts is determined by
multiplying the difference between the quoted termination prices for oil and gas
and the hedge contract prices by the quantities under contract. This amount has
been discounted using an interest rate that could be available to the Company.
The estimated fair value of long-term debt is computed using interest rates that
could be available to the Company for similar instruments with similar terms.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1999. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively reevaluated for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
<PAGE> 161
HALLWOOD ENERGY CORPORATION
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1999
(Unaudited)
The following reserve quantity and future net cash flow information for HEC
represents proved reserves which are located in the United States. The reserves
have been estimated by the Company's in-house engineers. A majority of these
reserves has been reviewed by independent petroleum engineers. The determination
of oil and gas reserves is based on estimates which are highly complex and
interpretive. The estimates are subject to continuing change as additional
information becomes available.
The standardized measure of discounted future net cash flows provides a
comparison of HEC's proved oil and gas reserves from year to year. No
consideration has been given to future income taxes as of December 31, 1999,
because the tax basis of HEC's properties and net operating loss carryforwards
exceed future net cash flows. No consideration was given to future income taxes
as of December 31, 1998 and 1997 because HEC was not a tax paying entity during
these years. Under the guidelines set forth by the Securities and Exchange
Commission (SEC), the calculation is performed using year-end prices. The oil
and gas prices used at December 31, 1999, 1998 and 1997 were $24.32 per bbl and
$2.00 per mcf, $10.00 per bbl and $1.90 per mcf and $16.90 per bbl and $2.30 per
mcf, respectively, for HEC, including the May Partnerships. Future production
costs are based on year-end costs and include severance taxes. The present value
of future cash inflows is based on a 10% discount rate. The reserve calculations
using these December 31, 1999 prices result in 11.7 million bbls of oil, and
151.7 billion cubic feet of gas and a standardized measure of $208,000,000. The
Mays are included on a consolidated basis, and 8,000 bbls of oil and .1 billion
cubic feet of gas, representing a discounted present value of $352,000 are
attributable to the minority ownership of these entities. This standardized
measure is not necessarily representative of the market value of HEC's
properties.
HEC's standardized measure of future net cash flows has been decreased by
$3,357,000 at December 31, 1999 for the effects of its hedge contracts. This
amount represents the difference between year-end oil and gas prices and the
hedge contract prices multiplied by the quantities subject to contract,
discounted at 10%.
<PAGE> 162
HALLWOOD ENERGY CORPORATION
RESERVE QUANTITIES
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Gas Oil
------------ ------------
Mcf Bbls
<S> <C> <C>
Proved Reserves:
Balance, December 31, 1996 88,542 7,531
Extensions and discoveries 4,228 817
Revisions of previous estimates 11,578 (1,930)
Sales of reserves in place (140) (9)
Purchases of reserves in place 619 128
Production (11,774) (770)
------------ ------------
Balance, December 31, 1997 93,053 5,767
Extensions and discoveries 1,542 415
Revisions of previous estimates (9,369) (1,385)
Sales of reserves in place (244) (35)
Purchases of reserves in place 23,994 512
Production (14,037) (787)
------------ ------------
Balance, December 31, 1998 94,939 4,487
Extensions and discoveries 10,929 180
Revisions of previous estimates (10,730) 2,245
Sales of reserves in place (1,067) (185)
Purchases of reserves in place 75,860 5,879
Production (18,263) (925)
------------ ------------
Balance, December 31, 1999 151,668 11,681
============ ============
Proved Developed Reserves:
Balance, December 31, 1997 89,816 5,181
============ ============
Balance, December 31, 1998 90,915 3,577
============ ============
Balance, December 31, 1999 139,839 10,301
============ ============
</TABLE>
<PAGE> 163
HALLWOOD ENERGY CORPORATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Future cash flows $ 597,000 $ 245,000 $ 293,000
Future production and development costs (263,000) (102,000) (115,000)
--------- --------- ---------
Future net cash flows before discount 334,000 143,000 178,000
10% discount to present value (126,000) (42,000) (49,000)
--------- --------- ---------
Standardized measure of discounted
future net cash flows $ 208,000 $ 101,000 $ 129,000
========= ========= =========
</TABLE>
<PAGE> 164
HALLWOOD ENERGY CORPORATION
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Standardized measure of discounted future net
cash flows at beginning of year $ 101,000 $ 129,000 $ 206,000
Sales of oil and gas produced, net of production costs (32,919) (26,932) (30,209)
Net changes in prices and production costs 12,454 (21,211) (78,965)
Extensions and discoveries, net of future production
and development costs 11,719 3,546 9,592
Changes in estimated future development costs (12,959) (9,738) (10,012)
Development costs incurred 7,302 8,087 7,607
Revisions of previous quantity estimates 2,674 (15,547) (8)
Purchases of reserves in place 108,449 23,802 1,457
Sales of reserves in place (2,124) (399) (204)
Accretion of discount 10,136 12,936 20,600
Changes in production rates and other 2,268 (2,544) 3,142
--------- --------- ---------
Standardized measure of discounted future net
cash flows at end of year $ 208,000 $ 101,000 $ 129,000
========= ========= =========
</TABLE>
<PAGE> 165
ITEM 9 - DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be included in the definitive proxy
statement of HEC relating to HEC's 2000 Annual Meeting of Shareholders to be
filed with the SEC pursuant to Regulation 14A, which information is incorporated
herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item will be included in the definitive proxy
statement of HEC relating to HEC's 2000 Annual Meeting of Shareholders to be
filed with the SEC pursuant to Regulation 14A, which information is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the definitive proxy
statement of HEC relating to HEC's 2000 Annual Meeting of Shareholders to be
filed with the SEC pursuant to Regulation 14A, which information is incorporated
herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the definitive proxy
statement of HEC relating to HEC's 2000 Annual Meeting of Shareholders to be
filed with the SEC pursuant to Regulation 14A, which information is incorporated
herein by reference.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules.
(See Index at Item 8).
(b) Reports on Form 8-K.
HEC filed no current reports on Form 8-K during the last quarter of the
period covered by this report.
(c) Exhibits.
<PAGE> 166
(1) 3.1 - Certificate of Incorporation of Hallwood Energy Corporation
(1) 3.2 - Bylaws of Hallwood Energy Corporation
(1) 4.1 - Certificate of Designations of the Series A Cumulative
Preferred Stock of Hallwood
Energy Corporation
(2) 4.1.1 - Executed Rights Agreement dated as of June 8, 1999,
between the Company and Registrar and Transfer Company
(1) 4.2 - Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of Hallwood Energy
Corporation
(1) 10.1 - Form of Rights Agreement
(1) 10.2* - 1999 Long-Term Incentive Plan of Hallwood Energy Corporation
(1) 10.3* - 1999 Long-Term Incentive Plan Loan Program of Hallwood
Energy Corporation
(2) 10.5 - Registration Rights Agreement dated as of June 8, 1999,
between the Company and The Prudential Insurance Company
of America
(2) 10.6* - Change of Control Agreement between the Company and
Certain Executives, dated as of June 9, 1999
10.61* - Amended Schedule for Change of Control Contracts, dated as
of December 13, 1999
(2) 10.7 - Amended and Restated Credit Agreement dated as of
June 8, 1999, among the Company and certain of its
subsidiaries and the Banks listed therein
(2) 10.8 - Agreement Regarding Initial Exercise Price dated
June 9, 1999, between the Company and The Prudential
Insurance Company of America
(2) 10.9* - Phantom Working Interest Incentive Plan of Hallwood Energy
Corporation dated as of June 8, 1999
(2) 10.10 - Amended and Restated Subordinated Note and Warrant Purchase
Agreement dated as of June 8, 1999, between Hallwood
Consolidated Resources Corporation and The Prudential
Insurance Company of America
(2) 10.11 - Common Stock Purchase Warrant dated June 8, 1999 between
the Company and The Prudential Insurance Company of America
(3) 10.12 - Amendment No. 1 to Credit Agreement, dated as of
October 15, 1999
(3) 10.13 - Letter Amendment No. 1 to Note Agreement, dated as of
October 15, 1999
10.14 - Amendment No. 2 and Waiver to Credit Agreement, dated as of
January 27, 2000
(1) 21 - Subsidiaries of the Registrant
27 - Financial Data Schedule
---------------
(1) Incorporated by reference to the same Exhibit number filed with
Registrant's Registration Statement No. 33-77409.
(2) Incorporated by reference to the same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.
(3) Incorporated by reference to the same exhibit number filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
*Designates management contracts or compensatory plans or arrangements.
<PAGE> 167
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HALLWOOD ENERGY CORPORATION
Date: March 6, 2000 By: /s/William L.Guzzetti
- ----------------------- ---------------------
William L. Guzzetti
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
/s/Anthony J. Gumbiner Chairman of the Board and March 6, 2000
- ---------------------- Director (Chief Executive Officer)
Anthony J. Gumbiner
/s/William L. Guzzetti President and Director March 6, 2000
- ----------------------
William L. Guzzetti
/s/Hans-Peter Holinger Director March 6, 2000
- ----------------------
Hans-Peter Holinger
/s/Rex A. Sebastian Director March 6, 2000
- ---------------------
Rex A. Sebastian
/s/Nathan C. Collins Director March 6, 2000
- ---------------------
Nathan C. Collins
/s/John R. Isaac, Jr. Director March 6, 2000
- ---------------------
John R. Isaac, Jr.
Director March 6, 2000
- ---------------------
Jerry A. Lubliner
/s/Hamilton P. Schrauff Director March 6, 2000
- ------------------------
Hamilton P. Schrauff
Director March 6, 2000
- ------------------------
Bill M. Van Meter
/s/William J. Baumgartner Vice President March 6, 2000
- ------------------------- Chief Financial Officer
William J. Baumgartner (Principal Financial and
Accounting Officer)
<PAGE> 168
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7 -- Revolving credit loan and security agreement, related
revolving credit notes and stock pledge and security
agreements, all dated as of December 22, 1999, by and
among Brookwood Companies Incorporated, Kenyon
Industries, Inc., Brookwood Laminating, Inc. and Key Bank
National Association, filed herewith.
10.8 -- Promissory note and related credit agreement for an
$18,000,000 term loan, dated as of December 21, 1999,
among HWG, LLC, as borrower, The Hallwood Group
Incorporated, as parent guarantor, First Bank Texas,
N.A., as Administrative Agent, and Financial
Institutions, as lenders, filed herewith.
21 -- Active subsidiaries of the Registrant as of February 29,
2000
27 -- Financial data schedule
</TABLE>
<PAGE> 1
REVOLVING CREDIT LOAN AND SECURITY AGREEMENT
DATED AS OF DECEMBER 22, 1999
by and among
BROOKWOOD COMPANIES INCORPORATED
KENYON INDUSTRIES, INC.
BROOKWOOD LAMINATING, INC.
and
KEYBANK NATIONAL ASSOCIATION
<PAGE> 2
KEYBANK NATIONAL ASSOCIATION
REVOLVING CREDIT LOAN AND SECURITY AGREEMENT
This Revolving Credit Loan and Security Agreement (this "Agreement")
dated as of December 22, 1999 is entered into by and among KeyBank National
Association, a national banking association having a place of business at One
Canal Plaza, Portland, Maine 04101-4035 ("Bank") and Brookwood Companies
Incorporated, a Delaware corporation, having a place of business at 232 Madison
Avenue, 10th Floor, New York, NY 10016 ("Brookwood"), Kenyon Industries, Inc., a
Delaware corporation, having a place of business at 36 Sherman Avenue, Kenyon,
Rhode Island 02836 ("Kenyon"), and Brookwood Laminating, Inc., a Delaware
corporation, having a place of business at 1425 Kingstown Road, Peace Dale,
Rhode Island 02883 ("Laminating" and, together with Brookwood and Kenyon being
collectively referred to herein as "Borrower").
WITNESSETH:
WHEREAS, Brookwood, a wholly-owned subsidiary of The Hallwood Group
Incorporated, a Delaware corporation, having a place of business at 3710
Rawlins, Suite 1500, Dallas, Texas 75219 ("Hallwood"), owns all of the issued
and outstanding stock of Kenyon and Laminating; and
WHEREAS, Brookwood through a wholly-owned subsidiary proposes to
acquire subsequent to the date hereof, for the purchase price of $1,000,000.00,
from the business and assets of certain corporations controlled by Amos Chess
("Seller"), Uzzi Amphibious Gear, Inc., a Florida corporation, having a place of
business at 2315 Stirling Road, Fort Lauderdale, Florida 33312, TEK Sportswear,
Inc., a Florida corporation having a place of business at 2315 Stirling Road,
Fort Lauderdale, Florida 33312, and Taub Sportswear, Inc., a Florida
corporation having a place of business at 2315 Sterling Road, Dania, Florida
33312 (collectively, "Uzzi"); and
WHEREAS, the Borrower has requested that Bank make loans and provide
other financial accommodations to Borrower to support Borrower's working capital
(including the pay-off of certain debt of Borrower to The Bank of New York),
purchase and lease of equipment, and to finance the purchase price required for
the acquisition of Uzzi and the start-up of Uzzi retail stores; and
WHEREAS, Bank is willing to make such loans and provide such financial
accommodations to Borrower, subject to the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Borrower and Bank
agree as follows:
<PAGE> 3
1. DEFINITIONS
1.1. Certain Definitions. As used herein the following terms have the
meanings set forth below:
"Accounts" means all of Borrower's accounts, accounts receivable, contract
rights, and all other debts, obligations and liabilities in whatever form owing
to Borrower from any Person for goods sold by Borrower or for services rendered
by Borrower, or however otherwise established or created; all guaranties and
security therefor, all right, title and interest of Borrower in the goods or
services which gave rise thereto, including rights to reclamation and stoppage
in transit and all rights of an unpaid seller of goods or services; whether any
of the foregoing be now existing or hereafter arising, now or hereafter received
by or owing or belonging to Borrower.
"Acquisition Commitment Fee" shall have the meaning set forth in Section 2.3.4.
"Acquisition Origination Fee" shall have the meaning set forth in Section 2.3.4.
"Acquisition Revolving Credit Facility" shall have the meaning set forth in
Section 2.3.1.
"Acquisition Revolving Credit Limit" means $2,000,000.00 from the Closing Date
through and including the Acquisition Revolving Credit Maturity Date.
"Acquisition Revolving Credit Loans" shall have the meaning set forth in Section
2.3.1.
"Acquisition Revolving Credit Maturity Date" means December 22, 2002.
"Acquisition Revolving Credit Note" means the promissory note in the form of
Exhibit "C" hereto.
"Affiliate" shall mean any Person which directly or indirectly is in control of,
is controlled by, or is under common control with Borrower.
"Assignee" has the meaning set forth in Section 15.3 hereof.
"Automatic Electronic Fund Transfer Agreement" ("AFT Agreement") has the meaning
set forth in Section 10.10 hereof.
"Bank" has the meaning given such term in the preamble hereto.
"Borrower" has the meaning given such term in the preamble hereto.
"Borrowing Base" has the meaning given such term as Section 2.1.8 hereof.
2
<PAGE> 4
"Borrowing Date" as to any Loan shall mean the Business Day on which such Loan
is made.
"Brookwood" shall have the meaning set forth in the preamble hereto.
"Business Day" has the meaning given such term in Section 2.12 hereof.
"Capital Expenditures" shall mean, for any period, amounts included or required
to be included in the fixed assets account on a balance sheet of a Borrower in
accordance with GAAP and shall include Capital Leases and, in the case of a
purchase, the entire purchase price.
"Capital Leases" means capital leases, conditional sales contracts and other
title retention documents relating to the acquisition of capital assets (as
classified in accordance with GAAP).
"Closing Date" means December 22, 1999, the date initial Loans are made pursuant
to this Agreement.
"Collateral" has the meaning given such term in Section 3 hereof.
"Commitment Period" means the period from and including the Closing Date, to but
not including, the Termination Date.
"Commonly Controlled Entities" shall mean entities sharing "common control"
under ERISA.
"Contingent Liability" means any obligation of a Person guaranteeing or in
effect guaranteeing any Indebtedness, leases, dividends or other obligations of
any other Person in any manner, whether directly or indirectly or any obligation
otherwise to assure or hold harmless any other Person against any loss or cost
in respect of services rendered or products furnished and any other contingent
liability or obligation as determined in accordance with GAAP; provided,
however, that the term Contingent Liability shall not include endorsements of
negotiable instruments in the ordinary course of business.
"Current Ratio" shall mean Total Current Assets divided by Total Current
Liabilities.
"Default" means any event or occurrence which, with notice or lapse of time or
both, might become an Event of Default.
"Default Rate" shall have the meaning set forth in Section 2.10.
"Distributions" means, for the applicable period, the aggregate of all amounts
paid or payable (without duplication) as dividends, distributions or owner
withdrawals and includes any purchase, redemption or other retirement of any of
any Borrower's equity interests, directly or indirectly through a subsidiary of
any Borrower or otherwise and includes return of capital by any Borrower to its
equity holders; provided, however, that the following shall not be deemed to be
Distributions hereunder: (a) salary and other compensation paid to equity
holders in their capacities as employees and officers of any Borrower, (b)
expense reimbursement payable to
3
<PAGE> 5
officers of any Borrower, and (c) management fees as may be paid by Brookwood to
Hallwood in an amount not to exceed $120,000.00 per annum.
"Earnings" means, for any applicable period, income (loss) from continuing
operations and before all extraordinary and nonrecurring items, determined in
accordance with GAAP.
"Earnings Before Interest, Taxes, Depreciation and Amortization" ("EBITDA")
means, for the trailing twelve-month period, consolidated net income (exclusive
of any extraordinary or non-recurring non-cash gains and extraordinary or
non-recurring non-cash losses and other income which is not from the continuing
operations of the Borrower) of the Borrower and its subsidiaries plus, to the
extent deducted from such consolidated net income, net interest expenses, income
taxes and depreciation/amortization expense, all determined in accordance with
GAAP.
"Eligible Accounts Receivable" shall have the meaning set forth in Section
2.1.8(a).
"Eligible Inventory" shall have the meaning set forth in Section 2.1.8(c).
"Equipment" means all Borrower's now or hereafter acquired equipment, machinery,
plant, furnishings, fixtures, and other fixed assets now owned or hereafter
acquired by any Borrower, including (without limitation) all items of machinery
and equipment of any kind, nature and description, as well as trucks and
vehicles of every description, trailers, handling and delivery equipment and
office furniture, and all additions to, substitutions for, replacements of or
accessions to any of the foregoing items and all attachments, components, parts
(including spare parts) and accessories, whether installed thereon or affixed
thereto, and all fuel for any thereof.
"Equipment Commitment Fee" shall have the meaning set forth in Section 2.2.4.
"Equipment Origination Fee" shall have the meaning set forth in Section 2.2.4.
"Equipment Revolving Credit Facility" shall have the meaning set forth in
Section 2.2.1.
"Equipment Revolving Credit Limit" means $2,000,000 from the Closing Date
through and including the Equipment Revolving Credit Maturity Date.
"Equipment Revolving Credit Loans" shall have the meaning set forth in Section
2.2.1.
"Equipment Revolving Credit Maturity Date" means December 22, 2002.
"Equipment Revolving Credit Note" means the promissory note in the form of
Exhibit "B".
"Equipment Revolving Credit Note Maturity Date" shall mean a date five years
from the execution of an Equipment Revolving Credit Note.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
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"Event of Default" means any event specified in Section 11.
"Factor" or "Factors" as the context may require, shall mean CIT
Group/Commercial Services, Inc. and Banc of America Commercial Services
Corporation, each of which are parties to an Intercreditor Agreement with Bank.
"Factor Receivable" shall mean a receivable due from a Factor.
"GAAP" means generally accepted accounting principles in the United States of
America, consistently applied.
"General Intangibles" means all intangible personal property of Borrower not
included in Accounts or in Instruments and Documents, and Investment Property,
now or hereafter owned or acquired by Borrower, and also means and includes all
right, title and interest of Borrower now or hereafter owned or acquired in
intellectual property, patents, patent applications, goodwill, trademarks,
trademark applications, trade names, trade secrets, service marks, copyrights,
permits, licenses, federal, state, or local tax refunds, claims under insurance
policies (whether or not Proceeds), other rights (if any) to payment, rights of
set off, choses in action, rights under judgments, computer programs and all to,
or of which Borrower is a party or beneficiary, and all leasehold interests of
Borrower in real estate to the extent considered personal property under
applicable law.
"Hallwood" shall have the meaning set forth in the Recitals herein.
"Indebtedness" means (i) Indebtedness for Borrowed Money and (ii) all other
liabilities or obligations which would, in accordance with GAAP, be classified
as liabilities of such Person.
"Indebtedness for Borrowed Money" means (i) all liabilities for borrowed money,
(A) for the deferred purchase price of property or services, and (B) under
leases which are or should be, under GAAP, recorded as Capital Leases, in each
case in respect of which a Person is directly or indirectly, absolutely or
continently liable as obligor, guarantor, endorser or otherwise, or in respect
of which such Person otherwise assures a creditor against loss, and (ii) all
liabilities of the type described in (i) above which are secured by (or for
which the holder has an existing right, contingent or otherwise, to be secured
by) any Lien upon property owned by such Person, whether or not such Person has
assumed or become liable for the payment thereof.
"Instruments and Documents" means all "instruments," "documents," "deposit
accounts," and "chattel paper," as defined in ss.9-105 of the UCC, all
securities, and includes (without limitation) all warehouse receipts and other
documents of title, policies and certificates of insurance, checking, savings,
and other bank accounts, certificates of deposit, checks, notes, drafts, bills,
and acceptances, now or hereafter acquired, to the extent not included in
Accounts or Investment Property.
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<PAGE> 7
"Intangible Assets" means assets that in accordance with GAAP are properly
classified as intangible assets, including, but not limited to, goodwill,
franchises, licenses, patents, trademarks, tradenames and copyrights.
"Intellectual Property" shall have the meaning set forth in Section 4.25.
"Intercreditor Agreement" shall mean each of the Intercreditor Agreements of
even date between the Bank and each of CIT Group/Commercial Services Inc. and
Banc of America Commercial Corporation.
"Interest" means, for the applicable period, all interest paid or payable,
including, but not limited to, interest paid or payable on Indebtedness for
Borrowed Money, determined in accordance with GAAP.
"Interest Period" shall mean, with respect to any LIBOR Loans, the period
commencing on the date such Loans are made or converted from Prime Rate Loans or
the last day of the next preceding Interest Period with respect to such Loans
and ending on the numerically corresponding day in the first, second or third
calendar month thereafter, as the Borrower may select as provided in Section 2.4
hereof, except that each such Interest Period which commences on the last
Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) no Interest Period may end after the
Termination Date; (ii) each Interest Period which would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business Day (or,
if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day).
"Inventory" means all inventory of whatever name, nature, kind or description,
all goods held for sale or lease or to be furnished under contracts of service,
finished goods, work in process, raw materials, materials used or consumed by
Borrower, supplies, all wrapping, packaging, advertising, labeling, and shipping
materials, rights and documents relating to any of the foregoing, whether any of
the foregoing be now existing or hereafter arising, wherever located, now owned
or hereafter acquired by Borrower.
"Investment" means any transfer of property to, contribution to capital of,
acquisition of stock, other securities or evidences of indebtedness of,
acquisition of businesses or acquisition of property of any Person, other than
in the ordinary course of business.
"Investment Property" means all now owned or hereafter acquired securities,
financial assets, securities entitlements and investment property of the
Borrower, as such terms are defined in Article 9 of the UCC.
"Kenyon" shall have the meaning set forth in the preamble.
"KeyCorp" means Bank's parent company having a principal place of business at
127 Public Square, Cleveland, OH 44114-1306.
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"Laminating" shall have the meaning set forth in the preamble.
"LIBOR Loans" shall mean Revolving Loans which bear interest at a rate based
upon the LIBOR Rate.
"LIBOR Rate" shall mean, with respect to any LIBOR Loan, the rate per annum
(rounded upward, if necessary, to the nearest 1/32 of one percent) as determined
on the basis of the offered rates for deposits in U.S. dollars, for a period of
time comparable to such LIBOR Loan which appears on the Telerate page 3750 as of
11:00 a.m. London time on the day that is two (2) London Banking Days preceding
the first day of such LIBOR Loan; provided, however, if the rate described above
does not appear on the Telerate System on any applicable interest determination
date, the LIBOR Rate shall be the rate (rounded upwards as described above, if
necessary) for deposits in dollars for a period substantially equal to the
interest period on the Reuters Page "LIBO" (or such other page as may replace
the LIBO Page on that service for the purpose of displaying such rates), as of
11:00 a.m. (London Time), on the day that is two (2) London Banking Days prior
to the beginning of such interest period. "London Banking Day" shall mean in
respect to any city, any date on which commercial banks are open for business in
London, England.
If both the Telerate and Reuters system are unavailable, then the rate
for that date will be determined on the basis of the offered rates for deposits
in U.S. dollars for a period of time comparable to such LIBOR Loan which are
offered by four major banks in the London interbank market at approximately
11:00 a.m. London time, on the day that is two (2) London Banking Days preceding
the first day of such LIBOR Loan as selected by the Bank. The principal London
office of each of the four major London banks will be requested to provide a
quotation of its U.S. dollar deposit offered rate. If at least two such
quotations are provided, the rate for that date will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for that date will be determined on the basis of the rates quoted for loans in
U.S. dollars to leading European banks for a period of time comparable to such
LIBOR Loan offered by major banks in New York City at approximately 11:00 a.m.
New York City time, on the day that is two London Banking Days preceding the
first day of such LIBOR Loan. In the event that Bank is unable to obtain any
such quotation as provided above, it will be deemed that LIBOR pursuant to a
LIBOR Loan cannot be determined.
In the event that the Board of Governors of the Federal Reserve System
shall impose a Reserve Requirement with respect to LIBOR deposits of Bank then
for any period during which such Reserve Requirement shall apply, LIBOR shall be
equal to the amount determined above divided by an amount equal to 1 minus such
Reserve Requirement.
"Lien" means any mortgage, pledge, assignment, lien, charge, encumbrance or
security interest of any kind whatsoever, or the interest of a vendor or lessor
under a conditional sale, title retention or capital lease agreement.
"Loan" or "Loans" (as the context permits) means any or all of the Revolving
Loans.
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<PAGE> 9
"Loan Documents" means this Agreement, the Notes and any and all other
agreements, instruments and documents relating to, evidencing or securing the
Obligations.
"Material Adverse Effect" shall mean an effect that constitutes a material
adverse change in Borrower's financial condition, operations, business or
prospects, taken as a whole.
"Modified Following Business Day Convention" has the meaning given such term in
Section 2.12 hereof.
"Non-Financed Capital Expenditures" means Capital Expenditures not financed with
additional long-term debt or Capital Leases.
"Note" or "Notes" means (as the context permits) any or all notes evidencing the
Loans, including, without limitation, the Working Capital Revolving Credit Note,
the Equipment Revolving Credit Note(s) and the Acquisition Revolving Credit
Note.
"Obligations" means all loans, advances, interest, fees, debts, liabilities,
obligations (including, without limitation, contingent obligations under
indemnities and guaranties with respect thereto), agreements, undertakings,
covenants and duties owing or to be performed or observed by Borrower to or in
favor of Bank, of every kind and description (whether or not evidenced by any
note or other instrument or arising out of this Agreement, Notes, Loan Documents
or any other agreement between Bank and any Borrower or any other instrument of
any Borrower in favor of Bank), direct or indirect, absolute or contingent, due
or to become due, now existing or hereafter arising, including, without
limitation, all interest, fees, charges, and amounts chargeable to any Borrower
under Section 13. 1.
"Participant" has the meaning given such term in Section 15.7 hereof.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permitted Liens" has the meaning given such term in Section 8.3.
"Person" means any individual, partnership, firm, association, business,
enterprise, trust, estate, company, joint venture, governmental authority,
corporation or other entity.
"Plan" means any employee plan subject to Title IV of ERISA maintained for
employees of any Borrower, any subsidiary of any Borrower or any other trade or
business under common control with any Borrower within the meaning of Section
414(c) of the Internal Revenue Code or the regulations thereunder.
"Prime Rate" shall mean that interest rate established from time to time by Bank
as its Prime Rate, whether or not such rate is publicly announced; and such rate
may not be the lowest interest rate charged by Bank for commercial or other
extensions of credit.
"Prime Rate Loan" shall mean any Revolving Loan bearing interest at a rate based
on the Prime Rate.
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<PAGE> 10
"Proceeds" has the meaning given such term under the UCC and, in any event,
includes (but is not limited to) (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable from time to time with respect to any of
the Collateral, (b) any and all payments (in any form whatsoever) made or due
and payable from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
governmental authority (or any Person acting under color of governmental
authority), (c) whatever is received upon any collection, exchange, sale, lease
or other disposition of any of the Collateral and any property into which any of
the Collateral is converted, whether cash or non-cash proceeds, and (d) any and
all other products of, or any rents, profits or other amounts from time to time
paid or payable under, or in connection with, any of the Collateral.
"Purchase Agreements" means, individually and collectively, the purchase
agreement, as may be entered into between Borrower (or its wholly-owned
subsidiary), Uzzi and Seller, together with any stock certificates, stock
powers, warrants, options, bills of sale, quitclaim deeds, warranty deeds,
assignment and assumption agreements and such other instruments of transfer as
are referred to therein and all side letters with respect thereto, and all
agreements, documents and instruments executed and/or delivered in connection
therewith, as all of the foregoing may thereafter be amended, modified,
supplemented, extended, renewed, restated or replaced; provided however, that
the term "Purchase Agreements" as used herein shall not include any of the "Loan
Documents" as such term is defined herein or in other financing documents.
"Purchased Assets" means all of the business, assets and properties acquired by
Borrower from Uzzi pursuant to the Purchase Agreements.
"Related Collateral" means all of Borrower's goodwill; cash; deposit accounts;
claims under insurance policies (whether or not proceeds of other Collateral);
rights of set off; rights under judgments; tort claims and choses in action;
computer programs and software; books and records (including without limitation
all electronically recorded data); contract rights; and all contracts and
agreements to or of which it is a party or beneficiary, whether any of the
foregoing be now existing or hereafter arising, now or hereafter received by or
belonging to any Borrower.
"Reportable Event" means any reportable event as defined in ERISA.
"Reserve Requirement" shall mean for any LIBOR Loans for any Interest Period
therefor, the maximum marginal percentage prescribed by the Board of Governors
of the Federal Reserve System for determining the reserve requirements for the
Bank in respect of Eurodollar deposits having a maturity equal to the Interest
Period.
"Revolving Loans" means the loans made pursuant to Sections 2.1, 2.2, and 2.3 of
this Agreement.
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"Subsidiary" means with respect to any Person, any limited liability company,
corporation, partnership, trust or other organization, whether or not
incorporated, the majority of the voting stock or voting rights of which is
owned or controlled, directly or indirectly, by such Person.
"Termination Date" means the earlier of (a) December 22, 2002, or (b) a
termination of the Bank's commitments hereunder pursuant to Section 12.1.
"Total Capitalization" means the sum of Total Funded Debt and shareholders
equity as set forth in Borrower's balance sheet determined in accordance with
GAAP.
"Total Current Assets" shall have the meaning as defined by GAAP.
"Total Current Liabilities" shall have the meaning as defined by GAAP, except
current liabilities shall also include the outstanding balances of the Revolving
Loans.
"Total Debt Service" means the sum of interest expense and scheduled payments of
principal on all long-term debt, including payments on Capital Leases and
payments on Subordinated Debt.
"Total Fixed Charges" means the sum of interest expense, required payments of
principal, dividends paid, income taxes paid, and the cash portion of Capital
Expenditures for the trailing twelve month period.
"Total Funded Debt" means the sum of all Indebtedness for Borrowed Money and
similar monetary obligations evidenced by bonds, notes, debentures, overdrafts,
short term debt facilities, notes payable, all liabilities secured by any lien
existing on any property owned or acquired subject thereto, whether or not the
liability secured thereby shall have been assumed, all capitalized lease
obligations, all reimbursement obligations under outstanding letters of credit,
bankers acceptances and similar instruments and all guarantees and other
contingent liabilities with respect to any obligations or liabilities of the
type described above and including, without limitation, Bank debt.
"Treasury Rate" shall mean a rate per annum (computed on the basis of actual
days elapsed and a year of 360 days) equal to the rate determined by the Bank
(such determination to be conclusive, absent manifest error) on the date of such
payment to the yield on United States Treasury securities having the same term
to maturity as the remaining term of such Interest Period (such determination to
be based upon quotes obtained by the Bank from established dealers in such
market).
"UCC" means the Uniform Commercial Code, as adopted and in effect in the State
of Maine.
"Working Capital Commitment Fee" shall have the meaning given such term in
Section 2.1.4.
"Working Capital Origination Fee" shall have the meaning given such term in
Section 2.1.4.
"Working Capital Revolving Credit Facility" shall have the meaning set forth in
Section 2.1.1.
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"Working Capital Revolving Credit Limit" means $17,000,000 from the Closing Date
through and including the Working Capital Revolving Credit Maturity Date.
"Working Capital Revolving Credit Loans" shall have the meaning set forth in
Section 2.1.1.
"Working Capital Revolving Credit Maturity Date" means December 22, 2002.
"Working Capital Revolving Credit Note" means the promissory note in the form of
Exhibit "A" hereto.
1.2. General. All terms used herein which are defined in Article 1 or
Article 9 of the UCC shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural. All references to
the Borrower and Bank pursuant to the definitions set forth in the recitals
hereto, or to any other person herein, shall include their respective successors
and assigns. Any accounting term used herein unless otherwise defined in this
Agreement shall have the meanings customarily given to such term in accordance
with GAAP. The words "hereof," "herein," "hereunder," "this Agreement" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not any particular provision of this Agreement and as this Agreement
now exists or may hereafter be amended, modified, supplemented, extended,
renewed, restated or replaced.
2. LOANS.
2.1. Working Capital Revolving Credit Facility
2.1.1. Availability of Credit Facility and Purpose. During the
Commitment Period, Bank shall make available to Borrower, a Working Capital
Revolving Credit Facility, in an aggregate principal amount not to exceed
$17,000,000.00 outstanding at any one time ("Working Capital Revolving Credit
Facility"), and from time to time, at Borrower's request, shall advance Working
Capital Revolving Credit Loans ("Working Capital Revolving Credit Loans") to
Borrower subject to the terms and conditions contained in this Agreement. The
proceeds of the Working Capital Revolving Credit Loans shall be used by Borrower
to repay certain debt of Borrower to The Bank of New York and to support
Borrower's accounts receivables and inventory.
2.1.2. Working Capital Revolving Credit Note. Working Capital Revolving
Credit Loans shall be evidenced by the Working Capital Revolving Credit Note.
The Working Capital Revolving Credit Note shall be a master note, and the
principal amount of all Working Capital Revolving Loans outstanding shall be
evidenced by the Working Capital Revolving Credit Note.
2.1.3. Limitations on Advances. The aggregate principal amount of
Working Capital Revolving Credit Loans shall not exceed at any time the
aggregate principal amount of $17,000,000.00 outstanding at any one time, the
"Working Capital Revolving Credit Limit" and each advance shall be subject to
the limitations of the Borrowing Base referred to in Section 2.1.8.
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2.1.4. Fees. On the Closing Date, Borrower shall pay to Bank a
nonrefundable origination fee of $42,500.00 (against which shall be applied the
sum of $20,000.00, the retainer already paid by Borrower to Bank), which shall
be deemed fully earned on the date thereof (the "Working Capital Origination
Fee"). Borrower shall also pay to Bank a commitment fee of one quarter of one
percent (0.25%) per annum of the amount by which the Working Capital Revolving
Credit Limit exceeds the average daily principal balance of the outstanding
Working Capital Revolving Credit Loans during the immediately preceding calendar
quarter (or part thereof) during the Commitment Period, which unused credit line
commitment fee (the "Working Capital Commitment Fee") shall be payable on the
first day of each calendar quarter in arrears, commencing with March 31, 2000.
2.1.5. Repayment; Security. Working Capital Revolving Credit Loans may
be repaid and reborrowed during the Commitment Period. All Working Capital
Revolving Credit Loans shall be payable on the Termination Date and shall be
secured by all the Collateral.
2.1.6. Interest Payments. Borrower shall pay to Bank interest monthly
on the unpaid principal balance of all Working Capital Revolving Credit Loans at
the rates and in the amount calculated in accordance with Section 2.6.
2.1.7. Facility Maturity. The Working Capital Revolving Credit Facility
shall mature on December __ , 2002 ("Working Capital Revolving Credit Maturity
Date"). In no event shall Bank have any obligation to renew the Working Capital
Revolving Credit Facility after the Working Capital Revolving Credit Maturity
Date. By its execution hereof, the Borrower represents, warrants and agrees that
no representations, assurances or promises have been made regarding any
extension or renewal, or the terms of any extension or renewal, and Borrower
will not rely upon any representations, assurances or promises unless in writing
and signed by Bank.
2.1.8. Borrowing Base. All advances under the Working Capital Revolving
Credit Facility shall be limited by and subject to a Borrowing Base which shall
be the sum of: ninety percent (90%) of Factor Receivables, eighty percent (80%)
of Eligible Receivables, fifty percent (50%) of Eligible Inventory, and seventy
percent (70%) of the appraised orderly liquidation value of Equipment. A reserve
of one hundred percent (100%) of all amounts advanced under the Acquisition
Revolving Credit Facility shall be included in the Borrowing Base for the
Working Capital Revolving Credit Facility.
(a) Eligible Accounts Receivable. For the purposes of determination of
the Borrowing Base, Eligible Accounts Receivables shall be those
Accounts Receivable ("Receivable") meeting the following criteria:
(1) The Receivable arose from a bona fide outright sale of
goods or services performed under an enforceable contract, and such
goods have been shipped to the appropriate account debtor, or the sale
has otherwise been consummated or services have been performed for the
appropriate account debtors in accordance with such order or contract;
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(2) Title to the receivable is in the name of Borrower and
such title is absolute and is not subject to any prior assignment,
claim, lien or security interest;
(3) The amount shown on the books of Borrower with respect to
the Receivable and on any invoice or statement delivered to Bank is
owing to Borrower, and no partial payment has been made thereon by
anyone;
(4) The Receivable is not subject to any claim of reduction,
counterclaim, set-off, recoupment, or any claim for credits, allowances
or adjustments by the account Borrower because of returned, inferior or
damaged goods or unsatisfactory services or for any other reason;
(5) The account debtor has not returned or refused to retain
any of the goods from the sale out of which the Receivable arose;
(6) The Receivable does not arise out of a contract or order
from an account debtor that, by its terms, forbids an assignment or
makes the assignment of the Receivable to Bank void or unenforceable;
(7) Borrower has not received any note, trade acceptance,
draft or other instrument with respect to or in payment of the
receivable or any chattel paper with respect to the goods giving rise
to the receivable;
(8) Borrower has not received any notice of the death of the
account debtor or a partner thereof, nor of the dissolution,
termination of existence, insolvency, business failure, appointment of
a receiver for any part of the property of, assignment for the benefit
of creditors by, or the filing of any petition in bankruptcy or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against the account debtor of Borrower (not including, however, a
post-petition Receivable which has been ratified and reaffirmed by the
account debtor);
(9) The account debtor is not an affiliate of Borrower and is
not a subsidiary thereof, nor is it under common management or
ownership with Borrower;
(10) The Receivable is not a government receivable from any
government; provided, however, that an account payable by the United
States government may become an Eligible Receivable after compliance
with the Federal Assignment of Claims Act in a manner satisfactory to
Bank;
(11) The Receivable is not governed by the law of a
jurisdiction that does not (i) recognize and conform to the Uniform
Commercial Code with respect to secured transactions, or (ii)
acknowledge perfection of such secured transactions by the filing of a
financing statement in the jurisdiction of the chief executive office
of Borrower;
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(12) The Receivable does not arise under an agreement of
consignment a sale or return, a sale with a right to return for credit,
a "guaranteed sale" or any other arrangement other than an outright,
absolute and final sale; or
(13) The Receivable is not an account that Bank, in its sole
and reasonable discretion and having a rational basis therefor, has
determined to be ineligible in whole or in part and has notified
Borrower thereof.
(b) Ineligible Accounts Receivable. In addition to any Receivable which
does not meet the foregoing criteria, the following Receivables are also
ineligible for the purposes of determination of the Borrowing Base:
(1) Any Receivable which is sixty-one (61) days or more past
the due date, provided that the due date shall be no more than
one-hundred twenty (120) days from the invoice date;
(2) Re-aged credits which represent previously booked
Receivables;
(3) Eighty percent (80%) of "cross aged" receivables, such
that if twenty percent (20%) or more of any account debtor's
receivables are aged more than sixty (60) days from the due date, all
receivables from that account debtor shall be deemed ineligible.
(c) Eligible Inventory. For the purposes of Borrowing Base
determination, Eligible Inventory shall mean and refer to finished roll goods
inventory valued at the lower of cost or market, and having the following
characteristics:
(1) title to which is vested in Borrower free and clear of any
prior assignment, claim, lien or security interest;
(2) of a type ordinarily sold by Borrower in its business and
acquired in the ordinary course of business for resale; and
(3) not subject to any consignment agreement, sale or return
agreement or other similar agreement in any way limiting
Borrower's outright ownership of said inventory.
(d) Ineligible Inventory. In addition to any Inventory which does not
meet the foregoing criteria, the following Inventory is also ineligible for the
purposes of determination of the Borrowing Base:
(1) Fixtures and displays representing display racks sold to
customers to hold and display products of Borrower;
(2) Discontinued products;
(3) Inventory located at third party vendors;
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(4) Proprietary packaging materials that include the name of
the client or which are not of standard size.
2.2. Equipment Revolving Credit Facility
2.2.1. Availability of Credit Facility and Purpose. During the
Commitment Period, Bank shall make available to Borrower an Equipment Revolving
Credit Facility, in an aggregate principal amount not to exceed $2,000,000.00
outstanding at any one time ("Equipment Revolving Credit Facility"), and shall,
from time to time, at Borrower's request, advance Equipment Revolving Credit
Loans ("Equipment Revolving Credit Loans") to Borrower, subject to the terms and
conditions of this Agreement. Equipment Revolving Credit Loans shall be used by
Borrower to finance the purchase or lease of equipment for Borrower's ongoing
operations.
2.2.2. Equipment Revolving Credit Notes. Each advance under the
Equipment Revolving Credit Facility shall be evidenced by separate promissory
notes, individually an "Equipment Revolving Credit Note" and collectively, the
"Equipment Revolving Credit Notes".
2.2.3. Limitation on Advances. Advances under the Equipment Revolving
Credit Facility shall be limited to the lesser of:
(a) eighty percent (80%) of the invoice value for equipment purchase,
one hundred percent (100%) of the accepted collateral value for
equipment lease financing, or
(c) the remaining availability under the Equipment Revolving Credit
Facility.
2.2.4. Fees. On the Closing Date, Borrower shall pay to Bank a
non-refundable origination fee of $5,000.00 (the "Equipment Origination Fee").
Borrower shall also pay to Bank a commitment fee, of one quarter of one percent
(0.25%) per annum of the amount by which the Equipment Revolving Credit Limit
exceeds the average daily principal balance of the outstanding Equipment
Revolving Credit Loans during the immediately preceding calendar quarter (or
part thereof) during the Commitment Period, which unused credit line Commitment
Fee (the "Equipment Commitment Fee") shall be payable on the first day of each
calendar quarter in arrears, commencing with March 31, 2000.
2.2.5. Repayment of Equipment Revolving Credit Loans; Security.
(a) Term; Security. Each Equipment Revolving Credit Note shall
have a term of five years from the date of execution thereof and
Borrower promises to pay and there shall become absolutely due and
payable on the earlier of the Equipment Revolving Credit Note Maturity
Date or the termination of the Bank's commitments hereunder pursuant to
Section 12.1, all principal of such Equipment Revolving Credit Note
outstanding on such date, together with any and all accrued and unpaid
interest and other charges, if any, thereon. All Equipment Revolving
Credit Loans shall be secured by all the Collateral.
15
<PAGE> 17
(b) Principal Monthly Payments. Each Equipment Revolving
Credit Note shall be repaid in consecutive, fixed monthly installments
of principal, in accordance with an amortization period of five years,
commencing one (1) month from the date of such Equipment Revolving
Credit Note, and continuing on the 1st Business Day of each month
thereafter, plus accrued interest.
(c) Optional Prepayment of Equipment Revolving Credit Notes.
Borrower shall have the right at any time to prepay any Equipment
Revolving Credit Note on or before such Equipment Revolving Credit Note
Maturity Date, as a whole, or in part, upon not less than five (5)
Business Days prior written notice to Bank, without premium or penalty,
except for LIBOR breakage costs. Any prepayment of principal of any
Equipment Revolving Credit Note shall be applied against the scheduled
installments of principal due on such Equipment Revolving Credit Note
in inverse order of maturity.
2.2.6 Interest. Borrower shall pay to the Bank interest monthly on the
unpaid principal balance of each Equipment Revolving Credit Note at the rates
and in the amounts calculated in accordance with Section 2.6.
2.2.7. Facility Maturity. The Equipment Revolving Credit Facility shall
mature on December 22, 2002 ("Equipment Revolving Credit Facility Maturity
Date"). Any Equipment Revolving Credit Note executed prior to the Equipment
Revolving Credit Facility Maturity Date shall be repaid by Borrower in
accordance with its remaining term. In no event shall Bank have any obligation
to renew the Equipment Revolving Credit Facility after the Equipment Revolving
Credit Facility Maturity Date. By its execution hereof, the Borrower represents,
warrants and agrees that no representations, assurances or promises have been
made regarding any extension or renewal, or the terms of any extension or
renewal, and Borrower will not rely upon any representations, assurances or
promises unless in writing and signed by Bank.
2.3. Acquisition Revolving Credit Facility
2.3.1. Availability of Acquisition Revolving Credit Facility and
Purpose. During the Commitment Period, Bank shall make available to Borrower, an
Acquisition Revolving Credit Facility in an aggregate principal amount not to
exceed $2,000,000.00 outstanding at any one time ("Acquisition Revolving Credit
Facility"), and shall, from time to time, at Borrower's request, advance
Acquisition Revolving Credit Loans ("Acquisition Revolving Credit Loans") to
Borrower, subject to the terms and conditions of this Agreement. The proceeds of
the Acquisition Revolving Loans shall only be used by Borrower as follows:
(a) to finance the acquisition of Uzzi's business and assets, and any
such advance shall not exceed $1,000,000.00, and
(b) to finance the start-up of Uzzi retail stores, and any such advance
shall be expressly subject to the conditions and limitations set forth
in Sections 2.3.3 and 2.3.4 herein.
2.3.2. Acquisition Revolving Credit Note. Acquisition Revolving Credit
Loans shall be
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<PAGE> 18
evidenced by the Acquisition Revolving Credit Note. The Acquisition Revolving
Credit Note shall be a master note, and the principal amount of all Acquisition
Revolving Loans outstanding shall be evidenced by the Acquisition Revolving
Credit Note.
2.3.3. Limitations and Conditions to Advances.
(a) Conditions Precedent to Initial Advance. Prior to the
initial advance under the Acquisition Revolving Credit Facility,
Borrower shall submit for review by Bank, to Bank's satisfaction:
(1) An independent evaluation of financial projections for
Uzzi, which at a minimum shall assess key financial
assumptions in the financial projections, including sales
growth assumptions, operating margin assumptions, marketing
and operating expense budgets for both the
manufacturing-wholesale division and the retail division. Such
independent evaluation shall be performed by a national
accounting firm or other party, in each case a firm or party
satisfactory to Bank.
(2) Written information or other report of findings regarding
Borrower's due diligence, investigation or other examination
in connection with the Uzzi acquisition, including but not
limited to, Uzzi-vendor and customer checkings, manufacturing
backlog/order fulfillment status, current and next season
product lines, and management of Uzzi, and integration of Uzzi
management into Brookwood organizational structure.
(3) Written confirmation (including delivery to Bank of true,
correct and complete copies of the Purchase Agreements and all
schedules thereto) of the terms of the Uzzi acquisition
satisfactory to Bank, including the following terms, and such
other terms as Bank shall request:
(i) Purchase price of $1,000,000.00 and earnout
provisions of 48 months;
(ii) Annual salary of Seller no greater than
$200,000.00;
(iii) Hallwood contribution to Brookwood of
$500,000.00 cash prior to or at the time of
Brookwood's acquisition of Uzzi's assets;
and
(iv) Additional Hallwood contribution to
Brookwood of $500,000.00 cash no later than
one year from the date of Brookwood's
acquisition of Uzzi's assets.
(4) A Certificate, in the form substantially as Exhibit "F"
attached hereto, dated as of the date of the initial advance
under the Acquisition Revolving Credit Facility, executed by
an officer of Borrower on behalf of Borrower, stating that:
(i) The representations and warranties of
Borrower set forth in this Agreement are
true and complete in all material respects
on and as of the date of such Certificate as
though made on and as of the date of such
Certificate; and
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<PAGE> 19
(ii) The Purchase Agreements, and the
transactions contemplated thereunder have
been duly executed, delivered and performed
in accordance with their terms by the
parties thereto in all respects, including
the fulfillment of all conditions precedent
as may be set forth therein and giving
effect to the terms of the Purchase
Agreements; and
(iii) Borrower has acquired and has good and
marketable title to the Purchased Assets,
free and clear of all claims, liens, pledges
and encumbrances of any kind, except as
expressly imposed by, or permitted under
this Agreement; and
(iv) All actions and proceedings required by the
Purchase Agreements, applicable law or
regulation have been taken and the
transactions required thereunder have been
duly and validly taken and consummated; and
(v) No court of competent jurisdiction shall
have issued any injunction, restraining
order or other order which would prohibit
consummation of the transactions described
in the Purchase Agreements and no
governmental or other action or proceeding
has been threatened or commenced, seeking
any injunction, restraining order or other
order which seeks to void or otherwise
modify the transactions described in the
Purchase Agreement; and
(vi) Borrower has delivered, or caused to be
delivered, to Bank, true, correct and
complete copies of the Purchase Agreements
and all schedules thereto; and
(vii) representations and warranties as to such
other matters as Bank shall reasonably
request.
(5) A Stock Pledge and Security Agreement , in form and
substance satisfactory to Bank, pledging the stock owned by
Borrower of any subsidiary(ies) acquiring and/or operating the
business and assets of Uzzi.
(b) Limitations and Conditions to Additional Advances. Any
advance beyond the initial advance for the specific purpose of the
acquisition of Uzzi's business and assets, shall be limited to the
lesser of :
(1) fifty percent (50%) of the start-up costs for each Uzzi
retail store, or
(2) the remaining availability under the Acquisition Revolving
Credit Facility,
and shall be subject to the following conditions:
18
<PAGE> 20
(3) Borrower shall submit to Bank, for Bank's review and
approval, a business plan, including pro-forma financial
statements and development cost budget for each new Uzzi
retail store; and
(4) The balance of any start-up costs shall be provided from
cash reserves established and funded by Brookwood, with
confirmation thereof in writing in form and substance
satisfactory to Bank; and
(5) Hallwood has made a cash equity contribution to Brookwood
greater than or equal to fifty percent (50%) of the start up
budget for each Uzzi retail store, with written confirmation
thereof provided to Bank; and
(6) No financial test covenant defaults shall result from such
advance.
Notwithstanding the foregoing, Borrower covenants that in no event
shall the number of new Uzzi retail store openings exceed four per
annum during the term of the Acquisition Revolving Credit Facility.
2.3.4. Fees. On the Closing Date, Borrower shall pay to Bank a
non-refundable origination fee of $5,000.00, which shall be deemed fully earned
on the date thereof ("Acquisition Origination Fee"). Borrower shall also pay to
Bank a commitment fee of one quarter of one percent (0.25%) per annum of the
amount by which the Acquisition Revolving Credit Limit exceeds the average daily
principal balance of the outstanding Acquisition Revolving Credit Loans during
the immediately preceding calendar quarter (or part thereof) during the
Commitment Period, which unused credit line commitment fee (the "Acquisition
Commitment Fee") shall be payable on the first day of each calendar quarter in
arrears, commencing with March 31, 2000.
2.3.5. Repayment; Security. All Acquisition Revolving Loans shall be
payable on the Termination Date and shall be secured by all the Collateral.
There shall further be reserved against the Working Capital Revolving Credit
Facility, the amount of all advances under the Acquisition Revolving Credit
Facility, to secure payment of all Acquisition Revolving Credit Loans.
2.3.6. Interest Payments. Borrower shall pay to Bank interest monthly
on the unpaid principal balance of all Acquisition Revolving Loans at the rates
and in the amount calculated in accordance with Section 2.6.
2.3.7. Facility Maturity. The Acquisition Revolving Credit Facility
shall mature December ___, 2002 ("Acquisition Revolving Credit Facility Maturity
Date"). In no event shall Bank have any obligation to renew the Acquisition
Revolving Credit Facility after the Acquisition Revolving Credit Maturity Date.
By its execution hereof, Borrower represents, warrants and agrees that no
representations, assurances or promises have been made regarding any extension
or renewal, or the terms of any extension or renewal, and Borrower will not rely
upon any representations, assurances or promises unless in writing and signed by
Bank.
19
<PAGE> 21
2.4. Borrowing Procedures.
Notices to Bank of borrowings and conversions of Revolving Loans and of
the duration of Interest Periods with respect to LIBOR Loans shall be
irrevocable and shall be effective only if received by Bank in writing not later
than: (A) with respect to borrowings of Prime Rate Loans, prior to 11:00 a.m.
(Portland, Maine time) on the Business Day of the relevant borrowing, or, (B)
with respect to the borrowing of, conversion of or into, or duration of Interest
Period for, LIBOR Loans, two (2) Business Days prior to the date of the relevant
action.
Each notice of borrowing or conversion shall be delivered to Bank by
Borrower and shall specify the amount of the Revolving Loans to be borrowed or
converted, the date of borrowing or conversion (which shall be a Business Day)
and, in the case of LIBOR Loans, the duration of the Interest Period therefor.
Each such notice of duration of an Interest Period shall specify the LIBOR Loans
to which such Interest Period is to relate. In the event that the Borrower fails
to select the duration of any Interest Period for any LIBOR Loans within the
time period and otherwise as provided in this Section 2.4, such Revolving Loans
(if outstanding as LIBOR Loans) will be automatically converted into Prime Rate
Loans on the last day of the then current Interest Period for such Revolving
Loans or (if outstanding as Prime Rate Loans) will remain as, or (if not then
outstanding) will be made as, Prime Rate Loans. Each Prime Rate Loan shall be in
a minimum amount of $10,000 and each LIBOR Loan shall be in a minimum amount of
$100,000 and in integral multiples of $100,000 in excess thereof.
2.5. LIBOR Loans.
(a) Optional Conversions of Revolving Loans. Borrower shall have the
right to convert LIBOR Loans into Prime Rate Loans, or to convert Prime Rate
Loans into LIBOR Loans, at any time or from time to time, provided that: (i)
Borrower shall give Bank notice of each such conversion as provided in Section
2.4 hereof, and (ii) the conversion of any LIBOR Loan shall be subject to
Section 2.5(d) hereof. In the absence of such conversion, a Revolving Loan shall
be a Prime Rate Loan.
(b) Limitation on LIBOR Loans. Anything herein to the contrary
notwithstanding, if, with respect to any LIBOR Loans Bank determines (which
determination shall be conclusive) that the relevant rates of interest referred
to in the definition of "LIBOR Rate" in Section 1 hereof upon the basis of which
the rates of interest for such Revolving Loans are to be determined do not
accurately reflect the cost to Bank of making or maintaining such Revolving
Loans for Interest Periods therefor; then Bank shall promptly notify Borrower
(in the same manner in which Bank notifies its other customers with LIBOR loan
facilities), and so long as such condition remains in effect, Bank shall be
under no obligation to make LIBOR Loans or to convert Prime Rate Loans into
LIBOR Loans and Borrower shall, on the last day(s) of the then current Interest
Period(s) for the outstanding LIBOR Loans, convert such Revolving Loans into
Prime Rate Loans in accordance with Section 2.5(a) hereof.
(c) Illegality. Notwithstanding any other provision of this Agreement
to the contrary, in the event that it becomes unlawful for Bank to (a) honor its
obligation to make LIBOR Loans hereunder, or (b) maintain LIBOR Loans hereunder,
then Bank shall promptly notify Borrower
20
<PAGE> 22
thereof (in the same manner in which the Bank notifies its other customers with
LIBOR loan facilities), and Bank's obligation to make LIBOR Loans hereunder
shall be suspended until such time as Bank may again make and maintain LIBOR
Loans (in which case the provisions of Section 2.5(d) hereof shall be
applicable).
(d) Substitute Prime Rate Loans. If the obligation of Bank to make
LIBOR Loans shall be suspended pursuant to Sections 2.5(b), 2.5(c) or 2.5(f)
hereof, all Loans which would otherwise be made by Bank as LIBOR Loans shall be
made instead as Prime Rate Loans (and, if an event referred to in Sections
2.5(b), 2.5(c) or 2.5(f) hereof has occurred and Bank so requests by notice to
Borrower, each LIBOR Loan of Bank then outstanding shall be automatically
converted into a Prime Rate Loan on the date specified by Bank in such notice)
and, to the extent that LIBOR Loans are so made as (or converted into) Prime
Rate Loans, all payments of principal which would otherwise be applied to such
LIBOR Loans shall be applied instead to such Prime Rate Loans.
(e) Compensation for LIBOR Rate Loans. Borrower shall pay to Bank, upon
the request of Bank, such amount or amounts as shall be sufficient (in the
reasonable opinion of Bank) to compensate it for any loss, cost or expense
incurred by it as a result of:
(i) any payment, prepayment or conversion of a LIBOR Loan made
by Bank on a date earlier than the last day of an Interest Period for
such Loan; or
(ii) any failure by Borrower to borrow a LIBOR Loan to be made
by Bank on the date of such borrowing specified in the relevant notice
of borrowing under Section 2.4 hereof if Borrower fails to rescind such
notice at least one (1) Business Day prior to the specified borrowing
debt;
such compensation to include, without limitation, an
amount equal to the excess, if any, of (i) the LIBOR Rate applicable to the
principal amount so repaid, over (ii) the interest which would be earned by
reinvesting the repaid amount at the Treasury Rate for the applicable Interest
Period. A statement of Bank setting forth the formula applied to determine any
amount necessary to compensate Bank under this section shall be delivered to
Borrower and shall be conclusive, except in the case of manifest error, as to
such determination and such amount. Notwithstanding anything to the contrary
contained herein, Bank shall not be required to purchase Dollar deposits in the
London interbank market to fund any LIBOR Loans and the provisions hereof shall
be deemed to apply as if Bank had purchased such deposits to fund the LIBOR
Loans.
(f) Additional Costs.
(i) Borrower shall pay to Bank from time to time such amounts
as Bank may determine to be reasonably necessary to compensate it for any costs
incurred by Bank which Bank determines are attributable to its making or
maintaining of any LIBOR Loans hereunder or its obligation to make any of such
LIBOR Loans hereunder, or any reduction in any amount receivable by Bank
hereunder in respect of any of such LIBOR Loans or such obligation (such
increases in costs and reductions in amounts receivable being herein called
"Additional Costs"),
21
<PAGE> 23
resulting from any regulatory change in applicable statutes, regulations, rules,
orders, or decrees applicable to Bank (a "Regulatory Change") which:
(A) changes the basis of taxation of any amounts payable to
Bank under this Agreement or its Note in respect of any of
such Revolving Loans (other than changes which affect taxes
measured by or imposed on the overall net income of Bank); or
(B) imposes or modifies any reserve, special deposit,
insurance assessment or similar requirements relating to any
extensions of credit or other assets of, or any deposits with
or other liabilities of, Bank to Borrower; or
(C) imposes any other condition affecting this Agreement (or
any of such extensions of credit or liabilities).
Bank will notify Borrower of any event occurring after the date of this
Agreement which will entitle Bank to compensation pursuant to this Section
2.5(f) as promptly as practicable after it obtains knowledge thereof and
determines to request such compensation. Bank will furnish Borrower with a
statement setting forth the basis and amount of each request by Bank for
compensation under this Section 2.5(f). If Bank requests compensation from
Borrower under this Section 2.5(f), the Borrower may, by notice to Bank, suspend
the obligation of Bank to make additional LIBOR Loans to Borrower until the
Regulatory Change giving rise to such request ceases to be in effect (in which
case the provisions of Section 2.5(f) hereof shall be applicable).
(ii) Without limiting the effect of the foregoing provisions
of this Section 2.5(f), in the event that, by reason of any regulatory change,
Bank either (1) incurs Additional Costs based on or measured by the excess above
a specified level of the amount of a category of deposits or other liabilities
of Bank which includes deposits by reference to which the interest rate on LIBOR
Loans is determined as provided in this Agreement or a category of extensions of
credit or other assets of Bank which includes LIBOR Loans, or (2) becomes
subject generally to restrictions on the amount of such a category of
liabilities or assets which it may hold, then, if Bank so elects by notice to
Borrower, the obligation of Bank to make or continue, or to convert Prime Rate
Loans into LIBOR Loans hereunder shall be suspended until the date Bank
withdraws such notice or such Regulatory Change ceases to be in effect (in which
case the provisions of Section 2.5(d) hereof shall be applicable).
(iii) Determinations and allocations by Bank for purposes of
this Section 2.5(f) of the effect of any regulatory change on its costs of
maintaining its obligations to make Revolving Loans or of making or maintaining
Revolving Loans or on amounts receivable by it in respect of Revolving Loans,
and of the additional amounts required to compensate Bank in respect of any
Additional Costs, shall be conclusive absent manifest error.
2.6 Interest and Payments.
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<PAGE> 24
2.6.1. Interest Rate Pricing Formula for Working Capital
Revolving Credit Loans. The Working Capital Revolving Credit Loans shall bear
interest calculated on the basis of a 360-day year and the actual number of days
elapsed and payable monthly in arrears for the periods from the Borrowing Dates
thereof on the unpaid principal amount thereof from time to time outstanding at
a rate per annum equal to the applicable rate and pricing formula indicated
below:
<TABLE>
<CAPTION>
---------- -------------------------------- ------------------------- ------------------------------
TIER TOTAL FUNDED DEBT PRIME RATE + LIBOR +
TO EBITDA
---------- -------------------------------- ------------------------- ------------------------------
<S> <C> <C> <C>
1 >=3.00x 0.25% 2.50%
---------- -------------------------------- ------------------------- ------------------------------
2 >=2.50x <3.00x 0.25% 2.25%
---------- -------------------------------- ------------------------- ------------------------------
3 >=2.00x <2.50x 0.25% 2.00%
---------- -------------------------------- ------------------------- ------------------------------
4 <2.00x 0.25% 1.75%
---------- -------------------------------- ------------------------- ------------------------------
</TABLE>
2.6.2. Interest Rate Pricing Formula for Equipment Revolving
Credit Loans and Acquisition Revolving Credit Loans. The Equipment Revolving
Credit Loans and Acquisition Revolving Credit Loans shall bear interest
calculated on the basis of a 360-day year and the actual number of days elapsed
and payable monthly in arrears for the periods from the Borrowing Dates thereof
on the unpaid principal amount thereof from time to time outstanding at a rate
per annum equal to the applicable rate and pricing formula indicated below:
<TABLE>
<CAPTION>
---------- -------------------------------- ------------------------- ------------------------------
TIER TOTAL FUNDED DEBT PRIME RATE + LIBOR +
TO EBITDA
---------- -------------------------------- ------------------------- ------------------------------
<S> <C> <C> <C>
1 >=3.00x 0.25% 2.75%
---------- -------------------------------- ------------------------- ------------------------------
2 >=2.50x <3.00x 0.25% 2.50%
---------- -------------------------------- ------------------------- ------------------------------
3 >=2.00x <2.50x 0.25% 2.25%
---------- -------------------------------- ------------------------- ------------------------------
4 <2.00x 0.25% 2.00%
---------- -------------------------------- ------------------------- ------------------------------
</TABLE>
2.6.3. Initial Interest Rate Pricing. The interest rate for
all Loans shall be initially set at Tier 2 until Borrower submits a Compliance
Certificate covering the period for March 31, 2000. Future interest rate pricing
is to be based upon trailing twelve month EBITDA to be determined quarterly upon
receipt by Bank of quarterly management-prepared financial statements and fiscal
year-end audited financial statements.
2.6.4. LIBOR Rate Selection. Upon determination of the LIBOR
Rate for any Interest Period selected by Borrower, Bank shall promptly notify
Borrower thereof by telephone or in writing. Such determination shall, absent
manifest error, be final, conclusive and binding on all parties for all
purposes. Following and during the continuance of an Event of Default, interest
on all Loans shall accrue at the Default Rate and be paid on demand.
23
<PAGE> 25
2.6.5. Interest Payment Date. Accrued interest on each Loan
shall be payable monthly in arrears on the first Business Day of each month.
Interest on LIBOR Loans shall be due at the conclusion of the Interest Period
but in no event later than ninety (90) days from the date of the LIBOR Loan.
2.6.6. Prime Rate. The effective interest rate applicable to
the Prime Rate Loans shall change on the date of each change in the Prime Rate.
2.7. Payments. Principal and interest on all Loans and payments on all
other Obligations shall be payable at Bank's office at One Canal Plaza,
Portland, Maine in lawful money of the United States of America in immediately
available funds without set-off, deduction or counterclaim. Borrower authorizes
Bank to debit its deposit account(s) with Bank for all payments due hereunder,
whether for principal, interest or other amounts payable on account of the
Obligations. Bank will notify Borrower in writing after such debits are made.
2.8. Limitation on Interest. All agreements between Borrower and Bank
are hereby expressly limited so that in no contingency or event whatsoever,
whether by reason of acceleration of maturity of the indebtedness evidenced
hereby or otherwise, shall the amount paid or agreed to be paid to Bank for the
use or the forbearance of the indebtedness evidenced hereby exceed the maximum
permissible under applicable law. As used herein, the term "applicable law"
shall mean the law in effect as of the date hereof, provided, however that in
the event there is a change in the law which results in a higher permissible
rate of interest, then this Agreement shall be governed by such new law as of
its effective date. In this regard, it is expressly agreed that it is the intent
of Borrower and Bank in the execution, delivery and acceptance of the Notes to
contract in strict compliance with the laws of the State of Maine and any other
applicable state from time to time in effect. If, under or from any
circumstances whatsoever, fulfillment of any provision hereof or of any of the
Loan Documents at the time of performance of such provision shall be due, shall
involve transcending the limit of such validity prescribed by applicable law,
then the obligation to be fulfilled shall automatically be reduced to the limits
of such validity, and if under or from circumstances whatsoever Bank should ever
receive as interest an amount which would exceed the then highest lawful rate,
such amount which would be excessive interest shall be applied to the reduction
of the principal balance evidenced hereby and not to the payment of interest.
This provision shall control every other provision of all agreements between
Borrower and Bank.
2.9. Late Charges. If the entire amount of any required principal,
interest or other payment hereunder is not paid in full within fifteen (15) days
after the same is due, Borrower shall pay to Bank a late fee equal to five
percent (5%) of the required payment.
2.10. Default Rate. Without limitation on Bank's other rights and
remedies, upon the earliest to occur of an Event of Default (as provided in
Section 12), or the Termination Date, the Working Capital Revolving Credit
Maturity Date, the Equipment Revolving Credit Note Maturity Date, or the
Acquisition Revolving Credit Maturity Date, Borrower's right to select pricing
options shall cease, and the unpaid principal of all Obligations shall, at the
option of
24
<PAGE> 26
Bank, bear interest at a rate per annum equal to four percent (4%) in excess of
the highest applicable interest rate (the "Default Rate").
2.11. One Obligation. The Working Capital Revolving Credit Loans, the
Equipment Revolving Credit Loans, the Acquisition Revolving Credit Loans and
other Obligations shall constitute one obligation of Borrower, and the
commitments of Bank to make the Working Capital Revolving Credit Loans, the
Equipment Revolving Credit Loans and the Acquisition Revolving Credit Loans to
Borrower cannot be separately or individually terminated by Borrower. In the
event that the Borrower intends to terminate any of Bank's commitments
hereunder, the Borrower shall give the Bank thirty (30) days prior irrevocable
written notice thereof and shall repay all the Obligations on the effective date
of such termination.
2.12. Modified Following Business Day Convention. The term "Modified
Following Business Day Convention" means the convention for adjusting any
relevant date if it would not otherwise fall on a day that is not a Business
Day. All dates specified for payments to be made under this Agreement shall be
subject to the Modified Following Business Day Convention. The following terms,
when used in conjunction with the term "Modified Following Business Day
Convention" and a date shall mean that an adjustment will be made if that date
would otherwise fall on a day that is not a Business Day so that the date will
be the first following day that is a Business Day; provided that, in connection
with determining the last day of an Interest Period for a LIBOR Loan, if the
first following day that is a Business Day falls in the next succeeding calendar
month, then an adjustment will be made so that the date will be the next
preceding Business Day. A "Business Day" means, in respect of any date that is
specified in this Agreement to be subject to adjustment in accordance with
applicable Business Day Convention, a day on which commercial banks settle
payments in New York or, if the payment obligation is calculated with reference
to the LIBOR Rate, in London.
3. GRANT OF SECURITY INTEREST. As security for the prompt performance,
observance and payment in full of all Obligations, Borrower hereby grants to
Bank a continuing first priority, perfected security interest in and lien on and
assigns, transfers, sets over and pledges to the Bank all property of Borrower,
whether now owned by Borrower or hereafter acquired or existing, and wherever
located (collectively, the "Collateral"), including without limitation:
(a) all Accounts;
(b) all Inventory;
(c) all Equipment;
(d) all General Intangibles;
(e) all Contracts (as set forth in Schedule 3);
(f) all Investment Property;
(g) all Instruments and Documents;
25
<PAGE> 27
(h) all Related Collateral;
(i) all accessions to and additions to, substitutions
for, replacements, products; and
(j) products and proceeds of any and all of the
foregoing.
(k) Hallwood's shares of stock in Brookwood and
Brookwood's shares of stock in Kenyon and Laminating;
The term "Collateral" shall also refer to and include any other
property in which Bank is granted a Lien to secure any of the Obligations
pursuant to an agreement supplemental hereto or otherwise (whether or not such
agreement makes reference to this Agreement or the Obligations of Borrower
hereunder).
4. REPRESENTATIONS AND WARRANTIES. Borrower jointly and severally represents and
warrants (and at the time of each Loan hereunder shall be deemed to represent
and warrant) for itself and for each other Borrower to Bank as follows:
4.1. Organization, Existence, Good Standing. Each Borrower (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, (ii) has obtained all material licenses, permits,
approvals and consents and has filed all registrations necessary for the lawful
operation of its business, (iii) has the power and authority and the legal right
to own, lease and operate its property and to conduct the business in which it
is currently engaged, and (iv) is duly qualified to do business and is in good
standing as a foreign entity in each other jurisdiction where its ownership,
lease or operation of property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not have a
Material Adverse Effect. Schedule 4.1 lists all states and other locations where
Borrower is qualified or authorized to do business.
4.2. Consents. No consent, permit, license, approval or authorization
of, or registration, declaration or filing with or notice to, any governmental
authority, bureau or agency or any other Person is required in connection with
the execution, delivery or performance by Borrower, or the validity or
enforceability against Borrower, of any Loan Document to which it is a party,
except for the consents and approvals which have been obtained and are listed on
Schedule 4.2.
4.3. No Legal Bar. The execution, delivery and performance by Borrower
of the Loan Documents, and each agreement, certificate, document, instrument or
other paper delivered pursuant thereto, to which Borrower is a party, does not
conflict with or cause a breach of any provision of any existing law, rule or
regulation, order, judgment, award or decree of any court, arbitrator or
governmental authority, bureau or agency, or of the Certificate of Incorporation
or By-Laws of, or any security issued by Borrower or of any material mortgage,
deed of trust,
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indenture, lease, contract or other agreement or undertaking to which Borrower
is a party or by which any of its properties may be bound, and will not result
in the creation or imposition of any Lien on Borrower's revenues or properties,
except in favor of Bank.
4.4. Compliance with Charter and Agreements. Borrower (i) is subject to
no charter, organizational or other legal restriction, or any judgment, award,
decree, order, governmental rule or regulation or contractual restriction which
could have a Material Adverse Effect, and (ii) is in compliance with its
Certificate of Incorporation and By-Laws and all contractual requirements of a
material nature by which it or any of its properties may be bound.
4.5. Negative Pledges. Neither Borrower nor any of its Subsidiaries is
a party to or bound by any agreement, indenture, or other instrument which
prohibits the creation, incidence or allowance to exist of any mortgage, deed of
trust, pledge, lien, security interest or other encumbrance or conveyance upon
any of Borrower's property.
4.6. Title to Property. Borrower has good and marketable title to, or
valid leasehold interests in, all of the assets reflected in the balance sheet
(referred in 4.12), including, without limitation, the Collateral, and all such
assets are subject to no Liens except (i) in favor of Bank, or (ii) Permitted
Liens.
4.7. Books and Records. All of Borrower's charter documents have been
duly filed and are in proper order. All of Borrower's books and records,
including without limitation, minute books and books of account, are accurate
and up-to-date.
4.8. Power and Authority; Due Execution. Borrower has (i) full power,
authority and legal right to execute, deliver and perform its obligations under
the Loan Documents to which it is a party and to borrow hereunder, (ii) taken
all necessary actions to authorize the execution, delivery and performance by
Borrower of each Loan Document to which such Borrower is a party and to
authorize its borrowings hereunder, and (iii) caused to be duly executed and
delivered on behalf of such Borrower each of the Loan Documents to which
Borrower is a party.
4.9. Legal, Valid, Binding Obligation. Each of the Loan Documents and
each agreement, certificate, document, instrument or other paper to which
Borrower is a party, constitute the legal, valid, and binding obligation of
Borrower, enforceable against Borrower in accordance with its terms.
4.10. Name. Borrower's exact legal name is as set forth at the end of
this Agreement and Borrower has not used or been known by or is using any
fictitious or other name or trade name or style, except as set forth on Schedule
4.10 hereto.
4.11. Subsidiaries and Investments. Except as set forth on Schedule
4.11 hereto, Borrower has no Subsidiaries or Investments in any other Person.
Schedule 4.11 accurately sets forth the authorized capitalization and the number
of issued and outstanding membership interests and/or shares of stock for the
Borrower and each Subsidiary of Borrower.
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4.12. Financial Statements, No Change. The balance sheet of Borrower as
of September 30, 1999 attached as Schedule 4.12 hereto was prepared in
accordance with GAAP and fairly presents Brookwood's financial position as at
the date thereof, after giving effect to the initial Loans to be made hereunder.
Since the date thereof there has occurred no change that would have a Material
Adverse Effect.
4.13. Taxes. Borrower has made or filed all tax returns, reports and
declarations relating to any material tax liability required by any jurisdiction
to which it is subject (any tax liability which may result in a Lien on any
Collateral, other than a Permitted Lien, being hereby deemed material); has paid
all taxes shown or determined to be due thereon except those being contested in
good faith; and has made adequate provision for the payment of all taxes so
contested. The federal tax identification number of Borrower is set forth on
Schedule 4.13 hereto.
4.14. Litigation. Except as set forth on Schedule 4.14 hereto, there is
no action, suit, proceeding or investigation pending before or by any court or
other governmental authority or, to Borrower's knowledge, threatened against or
affecting (i) the Loan Documents or the transactions contemplated herein or (ii)
the Borrower or any of Borrower's assets which, if determined adversely to
Borrower, would have a Material Adverse Effect.
4.15. Chief Executive Office. Borrower's chief executive office and the
office where it keeps its books and records and records concerning its Accounts
and other places of business or locations where it keeps, maintains, processes
or stores its assets is set forth on Schedule 4.15 hereto. Borrower has no other
place of business or place where assets are kept, maintained, processed or
stored.
4.16. ERISA. All Plans of Borrower are set forth on Schedule 4.16
hereto. Borrower, all Commonly Controlled Entities, and all their Plans are and
have been in substantial compliance with the provisions of ERISA, the
qualification requirements of IRC Section 401(a), and the published
interpretations thereunder. No notice of intent to terminate a Plan has been
filed under Section 4041 of ERISA, nor has any Plan been terminated under
Section 4041(e) of ERISA which resulted in substantial liability to Borrower or
any of its Commonly Controlled Entities. The PBGC has not instituted proceedings
to terminate, or appointed a trustee to administer, a Plan and no event has
occurred or condition exists which might constitute grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Plan. Neither Borrower nor any Commonly Controlled Entities would be liable
for any amount pursuant to Sections 4063 or 4064 of ERISA if all Plans
terminated as of the most recent valuation dates of such Plans. Neither Borrower
nor any Commonly Controlled Entities has: withdrawn from a multi-employer Plan
during a plan year for which it was a substantial employer, as defined in
Section 4001(a)(2) of ERISA; or failed to make a payment to a Plan required
under Section 302(f)(1) of ERISA such that security would have to be provided
pursuant to Section 307 of ERISA. No lien upon the assets of Borrower has arisen
with respect to a Plan. To the best knowledge of Borrower, no prohibited
transaction or Reportable Event has occurred with respect to a Plan. Borrower
and each Commonly Controlled Entity has made all contributions required to be
made by them to any Plan or multi-employer Plan when due. There is no
accumulated funding deficiency in any Plan, whether or not waived.
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4.17. No Default. Neither Borrower nor any of Borrower's Subsidiaries
is in default in any respect in the payment or performance of any of its
Indebtedness for Borrowed Money or under any mortgage, deed of trust, indenture,
lease, contract or other agreement or undertaking to which it is a party or by
which it or any of its property may be bound or affected and no Default or Event
of Default has occurred and is continuing. Neither Borrower nor any of
Borrower's Subsidiaries is in default under any order, award or decree of any
court, arbitrator or governmental authority binding upon or affecting it or by
which any of its property may be bound or affected, and no such order, award or
decree has or could reasonably be expected to have a Material Adverse Effect.
4.18. No Burdensome Restrictions. Neither Borrower nor any of
Borrower's Subsidiaries is a party to or bound by any contract, agreement or
instrument or subject to any corporate restriction (including any restriction
set forth in its Certificate of Incorporation or By-Laws) or order, award or
decree of any court, arbitrator or governmental authority that would have a
Material Adverse Effect.
4.19. Regulation U; Etc. Neither Borrower nor any of Borrower's
Subsidiaries is engaged or will engage, principally or as one of its important
activities, in the business of extending credit for the purpose of "purchasing"
or "carrying" any "margin stock" (within the respective meanings of each of the
quoted terms under Regulations U, T, or X of the Board of Governors of the
Federal Reserve System and any successors thereto as now and from time to time
hereafter in effect), and no part of the proceeds of any Loan hereunder will be
used for "purchasing" or "carrying" any "margin stock" as so defined or for any
purpose which violates, or which would be inconsistent with, the provisions of
Regulation U or Regulation G of the Federal Reserve Board.
4.20. Investment Company Act, Etc. Borrower is not an "investment
company" registered or required to be registered under the Investment Company
Act of 1940, or a company "Controlled" (within the meaning of such Investment
Company Act) by such an "investment company". Borrower is not subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, or to any other federal or state statute or regulation limiting
Borrower's ability to borrow money.
4.21. Indebtedness. Except as set forth in Schedule 4.21, neither
Borrower nor any of Borrower's Subsidiaries has Indebtedness of any type except
Indebtedness incurred under this Agreement and that which is permitted under
Section 8.2 of this Agreement.
4.22. Compliance with Laws. Except as set forth on Schedule 4.22
hereto, Borrower is in compliance in all material respects with all laws, rules
and regulations, orders of court or other governmental bodies, applicable to it
including, without limitation, all environmental, health and safety statutes and
regulations and specifically the Federal Resource Conservation and Recovery Act,
the Federal Comprehensive Environmental Response, Compensation and Liability
Act, the Federal Clean Water Act, the Clean Air Act, the requirements and
regulations of the Nuclear Regulatory Commission, the Federal Food, Drug and
Cosmetic Act, and the Federal Occupational Safety and Health Act. Borrower is
not subject to any judicial or administrative proceedings alleging the violation
of any applicable law or regulation. Borrower, to the best of
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Borrower's knowledge, is not the subject of any federal, state or local
investigation regarding, among other matters, the release of any hazardous or
toxic chemical, material, or substance or oil into the environment, the results
of which could have a Material Adverse Effect. Borrower has not filed any notice
under any applicable law indicating past or present treatment, storage,
disposal, generation, transportation or reporting a spill or release into the
environment of any hazardous or toxic chemical, material or substance or oil
into the environment which could reasonably be expected to have a Material
Adverse Effect on Borrower's financial condition business, prospects or the
value of the Collateral. Neither Borrower nor, to the knowledge of Borrower, any
other owner of any real property owned or used by or on behalf of Borrower or
such other owner, has placed or disposed of, used, generated or transported any
hazardous or toxic chemical, material or substance or oil, in violation of any
applicable law or regulation, upon or over any of Borrower's real property and
Borrower or such other owner, as the case may be, has no knowledge of such
hazardous or toxic chemical, material or substance or oil on such real property.
4.23. Contingent Liabilities. Except as set forth on Schedule 4.23
hereto, Borrower has no Contingent Liabilities.
4.24. Bonds, Indemnities. Except as set forth on Schedule 4.24 hereto,
Borrower is not obligated under any surety or similar bond, indemnity or other
contract issued nor has Borrower entered into or any agreement to assure
payment, performance or completion of performance of any undertaking or
obligation of any Person.
4.25. Intellectual Property. Borrower owns or licenses the rights to
intellectual property necessary or used in the operation of its businesses (the
"Intellectual Property"). All of such Intellectual Property is listed on
Schedule 4.25 hereto. Except as set on Schedule 4.25, none of such Intellectual
Property is subject to any license or agreement for use by any other Person.
4.26. Leases. Schedule 4.26 hereto is a complete listing of all capital
leases and operating leases of Borrower. All such leases are in full force and
effect and no material default has occurred thereunder.
4.27. Labor Contracts/Relations. Except as described in Schedule 4.27
hereto, Borrower is not a party to any collective bargaining agreement. There
are no material grievances, disputes or controversies with any union or any
other organization of Borrower's employees, or threats of strikes, work
stoppages or any asserted pending demands for collective bargaining by any union
or organization.
4.28. Trade Relations. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower or with any material supplier, and there exists no present
condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting such business
after the consummation of the transaction contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted.
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4.29. Capitalization.
(a) All of the issued and outstanding stock of Borrower is
directly and beneficially owned and held by the Persons listed on Schedule 4.29
hereto and all of such stock has been duly authorized and is fully paid and
non-assessable, free and clear of all claims, liens, pledges and encumbrances of
any kind, except as set forth in Schedule 4.29.
(b) Borrower is solvent and will continue to be solvent after
the creation of the Obligations, the security interests of Bank and the other
transactions contemplated hereunder, is able to pay its debts as they mature and
has (and has reason to believe it will continue to have) sufficient capital (and
not unreasonably small capital) to carry on its business and all businesses in
which it is about to engage. The assets and properties of Borrower at a fair
valuation and at their present fair salable value as part of a business going
concern are, and will be, greater than the Indebtedness of Borrower, and
including subordinated and contingent liabilities computed at the amount which,
to the best of Borrower's knowledge, represents an amount which can reasonably
be expected to become an actual or matured liability.
4.30. Real Property. All of the real property owned or leased by
Borrower is listed on Schedule 4.30 (the "Real Property"). Borrower has good
record and marketable title in fee simple to all owned Real Property, or a valid
leasehold interest in all leased Real Property, free and clear of any and all
Liens, except Permitted Liens, and all such Liens are set forth on Schedule 8.3.
4.31. Accuracy of Information. All information furnished by or on
behalf of Borrower in writing to Bank in connection with the Loan Documents and
the transactions contemplated hereunder is true and correct in all material
respects on the date of which such information is dated or certified and does
not omit any material fact necessary in order to make such information not
misleading. No event or circumstance has occurred which has or could reasonably
be expected to have a Material Adverse Effect, which has not been fully and
accurately disclosed to Bank in writing.
4.32. Software; Year 2000 Compliance. Borrower has taken all reasonable
precautions to ensure that all its software, computer hardware equipment and
systems acquired, purchased, leased or utilized by Borrower, are designed to be
used prior to, during, and after the calendar year 2000 A.D., and without human
intervention will, as of the date of this Agreement, correctly recognize,
calculate, process, sequence, store and transmit date data without error or
interruption, including leap years, and including errors or interruptions from
functions which may involve date data from more than one century. Date
calculations involving either a single century or multiple centuries will
neither cause an, abnormal ending nor generate incorrect or unexpected results.
When sorting by date, all records will be sorted in accurate sequence and, when
the date is used as a key, records will be read and written in accurate
sequence. As used in the previous sentence, accurate sequence means, by way of
example, that records will be read, written, and sorted in ascending order so
that the year 1999 is before the year 2000. All such software will calculate,
process and display leap year information according to the following algorithm:
(a) leap year will have twenty-nine days in the month of February: and (b) a
leap year occurs in all years divisible by 400 or, evenly divisible by 4 and not
evenly divisible by 100. Borrower has
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taken all reasonable precautions to ensure that its software and is media will
not contain any "computer viruses" or other harmful or destructive codes and
will perform as required by Borrower's business and operations.
4.33. Business Purpose of Loans. The Working Capital Revolving Credit
Loans, the Equipment Revolving Credit Loans and the Acquisition Revolving Credit
Loans, are loans for business and commercial purposes of Borrower.
5. BORROWER'S REPORTS AND NOTICES. Borrower will deliver to Bank:
5.1. Monthly Reports. Within twenty (20) days after the end of each
month, a Monthly Borrowing Base Certificate for each Borrower, executed by the
president and/or chief financial officer of each respective Borrower, in the
form attached as Exhibit D.
5.2. [Intentionally Deleted]
5.3. Annual Financial Statements. Annually, as soon as available but in
any event within one hundred twenty (120) days after the last day of each fiscal
year of Borrower, an audited consolidated and consolidating financial statement
of Borrower including, without limitation, audited consolidated and
consolidating balance sheets of Borrower as at the end of such year and audited
consolidated and consolidating statements of income and retained earnings and of
cash flow of Borrower prepared in accordance with GAAP accurately and fairly
reflecting the results of its operations during such year prepared by and with
an unqualified opinion thereon from Borrower's independent certified public
accountants.
5.4. Annual Financial Budgets. Annually, as soon as available but in
any event prior to March 31 of each year, consolidated and consolidating
financial projections and a management-prepared budget for Borrower on a monthly
basis for each following year, with segment detail and explanation of key
assumptions.
5.5. Quarterly Financial Statements. As soon as available but in any
event within forth-five (45) days after the end of such quarterly period,
unaudited consolidated and consolidating financial statements, including,
without limitation, consolidated and consolidating balance sheets and unaudited
consolidated and consolidating income statements and retained earnings for the
fiscal quarter and year to date and unaudited consolidated statements of cash
flow of Borrower prepared in accordance with GAAP subject to year-end audit
adjustments, certified as true and correct by Borrower's Chief Financial
Officer, which quarterly statements shall compare actual period results with
results for the same period for the prior year and with budget.
5.6. Compliance Certificate. Simultaneously with the delivery of the
financial statements described in Sections 5.3 and 5.5, a Compliance Certificate
in the form of Exhibit E hereto, certified by the Chief Financial Officer of
Brookwood, and setting forth in reasonable detail computations evidencing
compliance with the covenants in Section 9, along with supporting schedules.
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5.7. Additional Information. Promptly, after reasonable notice thereof
from Bank, such other information concerning Borrower, the Collateral, the
operation of Borrower's business or its financial condition and copies of such
governmental filings and other documentation as Bank may from time to time
reasonably request;
5.8. Notices. Immediately, notice of:
(a) any Default or Event of Default;
(b) the institution or commencement of any action, suit,
proceeding or investigation against or affecting Borrower or
any of its assets which, if determined adversely to Borrower,
could result in judgment in excess of $100,000;
(c) any judgment, award, decree, order or determination
relating thereto in an amount in excess of $100,000;
(d) the imposition or creation of any Lien against any asset
of Borrower except in favor of Bank or Permitted Liens;
(e) any capital or operating lease to which Borrower becomes a
party, together with a copy of each such lease, which requires
payments in excess of $100,000 per annum;
(f) any Reportable Event, together with a statement of the
Borrower's President or Chief Financial Officer as to the
details thereof, and a copy of its notice thereof to the PBGC;
(g) any known release or potential release or threat of
release of hazardous or toxic chemicals, materials or
substances or oil from, on or onto any site owned or used by
Borrower or the incurrence of any expense or loss in
connection therewith, or upon Borrower's obtaining knowledge
of the incurrence of any expense or loss by any governmental
authority in connection with the containment or removal of any
hazardous or toxic chemical, material or substance or oil for
which expense or loss Borrower may be liable or potentially
responsible; and
(h) any loss or destruction of Collateral or other assets,
whether or not covered by insurance, if the value of such loss
or destruction or of such Collateral affected exceeds
$100,000;
5.9. ERISA Notices. Immediately after receipt or filing, a copy of (i)
any notice Borrower may receive from the PBGC relating to the PBGC's intention
to terminate or appoint a trustee to administer any Plan and (ii) any report or
notice relating to any Reportable Event which Borrower may file under ERISA with
the PBGC, the Internal Revenue Service or the United States Department of Labor;
and
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5.10. Taxes. If requested by Bank, within ten (10) days after the
accrual in accordance with applicable law of Borrower's obligation to make
deposits for F.I.C.A. and withholding taxes, evidence satisfactory to Bank that
such deposits have been made as required.
6. BANK'S REPORTS. Periodically, Bank will render to Borrower statements of
Borrower's loan account(s) with Bank hereunder, showing applicable credits and
debits. Each statement shall be considered correct and, except for manifest
error, to have been accepted by and conclusively binding upon Borrower as an
account stated in respect of all charges, debits and credits of whatsoever
nature contained therein under this Agreement, and the closing balance shown
therein, unless Borrower notifies Bank in writing of any discrepancy within
thirty (30) days from the date of any such statement.
7. BORROWER'S AFFIRMATIVE COVENANTS. Borrower agrees that it will at all times
that any amount is unpaid on any Loan or any other Obligation or any commitment
of Bank to make Loans is in effect:
7.1. Legal Existence, Compliance with Laws. Preserve, renew and keep in
full force and effect its legal existence and rights and franchises with respect
thereto and maintain in full force and effect all permits, licenses, trademarks,
tradenames, approvals, authorizations, leases and contracts necessary to carry
on its business as presently or proposed to be conducted. Borrower shall
preserve, renew and keep in full force and effect its qualification to do
business in good standing in every state or location in which such qualification
may be necessary by reason of the nature or location of its assets or
operations.
7.2. Insurance. (a) keep its properties insured against fire and other
hazards (so called "All Risk" coverage) in amounts and with companies
satisfactory to Bank to the same extent and covering such risks as is customary
in the same or a similar business, but in no event in an amount less than the
full insurable value thereof, which policies shall name Bank as additional
insured and loss payee as its interest may appear, (b) maintain public liability
coverage against claims for personal injuries or death and (c) maintain all
worker's compensation, employment or similar insurance as may be required by
applicable law. Such All Risk property and public liability insurance coverage
shall provide for a minimum of thirty (30) days written cancellation notice to
Bank (except that, if the basis for cancellation is non-payment of premiums, the
minimum written cancellation notice may be ten (10) days). Borrower agrees to
deliver copies of all of the aforesaid insurance policies to Bank. In the event
of any loss or damage to any of Borrower's assets, including any Collateral
securing the Loan, Borrower shall give immediate written notice to Bank and to
Borrower's insurers of such loss or damage and shall promptly file proofs of
loss with said insurers.
7.3. Compliance with Contracts and Laws. Comply with its Certificate of
Incorporation and By-Laws, all material contractual requirements by which it or
any of its properties may be bound and all applicable laws, rules, regulations
licenses, permits, approvals and orders of any federal, state or local
governmental authority applicable to it (including, without limitation, ERISA
and those relating to environmental protection and health and safety)
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other than contractual requirements or laws, rules or regulations the failure to
comply with which cannot reasonably be expected to have a Material Adverse
Effect.
7.4. Business. Continue to engage in its business as now conducted, and
maintain and preserve all of its properties reasonably necessary for the conduct
thereof in good working order and condition, ordinary wear and tear excepted.
7.5. Taxes. Pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it or against it or its income or properties, or
upon this Agreement or any notes evidencing Obligations, including, without
limitation, taxes, assessments, charges or levies relating to real and personal
property, the Collateral, franchises, income, unemployment, old age benefits,
withholding, or sales or use, prior to the date on which penalties attach
thereto, and all lawful claims (whether for any of the foregoing or otherwise)
which, if unpaid, might give rise to a Lien upon any property of Borrower,
except any of the foregoing which is being contested in good faith and by
appropriate proceedings, for which Borrower has established and is maintaining
adequate reserves, and as to which no Lien having priority over Bank's Liens
arises. Borrower shall indemnify and hold harmless Bank with respect to the
foregoing and agrees to pay Bank on demand the amount thereof and until paid by
Borrower such amount shall be deemed to be added to the Obligations; provided
that nothing contained herein shall be construed to require Borrower to pay any
income taxes of Bank attributable to any amounts charged or paid to Bank
hereunder. This indemnity shall survive the repayment of the Obligations.
7.6. Deposit Accounts. Maintain its primary depository, operating and
disbursement accounts at Bank.
7.7. Accounts Covenants.
(a) Notify Bank immediately of: (i) any material delay in
Borrower's performance of any of its obligations to any account debtor or the
assertion of any material claims, offsets, defenses or counterclaims by any
account debtor, or any material disputes with account debtors, or any settlement
adjustment or compromise thereof, and (ii) all material adverse information
relating to the financial condition of any account debtor. No credit, discount,
allowance or extension or agreement for any of the foregoing shall be granted to
any account debtor without Bank's consent, except in the ordinary course of
Borrower's business in accordance with practices and policies previously
disclosed in writing to Bank. So long as no Event of Default exists or has
occurred and is continuing, Borrower shall settle, adjust or compromise any
claim, offset, counterclaim or dispute with any account debtor. At any time that
an Event of Default exists or has occurred and is continuing, Bank shall, at its
option, have the exclusive right to settle, adjust or compromise any claim,
offset, counterclaim or dispute with account debtors or grant any credits,
discounts or allowances.
(b) Promptly report to Bank any return of Inventory by an
account debtor having a sales price in excess of $100,000. In the event any
account debtor returns Inventory when an Event of Default exists or has occurred
and is continuing, Borrower shall, upon Bank's request, (i) hold the returned
Inventory in trust for Bank, (ii) segregate all returned Inventory from all of
its other property, (iii) dispose of the returned Inventory solely according to
Bank's
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instructions, and (iv) not issue any credits, discounts or allowances with
respect thereto without Bank's prior written consent.
7.8. Inventory Covenants. With respect to the Inventory: (a) Borrower
shall at all times maintain inventory records reasonably satisfactory to Bank,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Bank may request on or after an Event of Default, and promptly
following such physical inventory shall supply Bank with a report in the form
and with such specificity as may be reasonably satisfactory to Bank concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Bank, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) upon Bank's request, Borrower
shall, at its expense, as Bank may request on or after an Event of Default,
deliver or cause to be delivered to Bank written reports or appraisals as to the
Inventory in form, scope and methodology acceptable to Bank and by an appraiser
acceptable to Bank, addressed to Bank or upon which Bank is expressly permitted
to rely; (e) Borrower shall produce, use, store and maintain the Inventory, with
all reasonable care and caution and in accordance with applicable standards of
any insurance and in conformity with applicable laws (including, but not limited
to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended
and all rules, regulations and orders related thereto); (f) Borrower assumes all
responsibility and liability arising from or relating to the production, use,
sale or other disposition of the Inventory; (g) other than in the ordinary
course of business as disclosed to Bank by Borrower from time to time, Borrower
shall not sell Inventory to any customer on approval, or any other basis which
entitles the customer to return or may obligate Borrower to repurchase such
Inventory; (h) Borrower shall keep the Inventory in good and marketable
condition; and (i) Borrower shall not, without prior written notice to Bank,
acquire or accept any Inventory on consignment or approval.
7.9. Equipment Covenants. With respect to the Equipment: (a) upon
Bank's request, Borrower shall, at its expense, at any time or times as Bank may
request on or after an Event of Default, deliver or cause to be delivered to
Bank written reports or appraisals as to the Equipment in form, scope and
methodology acceptable to Bank and by an appraiser acceptable to Bank; (b)
Borrower shall keep the Equipment in good order, repair, running and marketable
condition (ordinary wear and tear excepted); (c) Borrower shall use the
Equipment with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with all applicable laws; (d) the
Equipment is and shall be used in Borrower's business and not for personal,
family, household or farming use; (e) Borrower shall not remove any Equipment
from the locations set forth or permitted herein, except to the extent necessary
to have any Equipment repaired or maintained in the ordinary course of the
business of Borrower or to move Equipment directly from one location set forth
or permitted herein to another such location and except for the movement of
motor vehicles used by or for the benefit of Borrower in the ordinary course of
business; (f) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and (g) Borrower assumes all responsibility and
liability arising from the use of the Equipment.
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8. BORROWER'S NEGATIVE COVENANTS. Borrower will not at any time that
any amount is unpaid on any Loan or any other Obligation or any commitment of
the Bank to make Loans to Borrower is in effect, except with the prior written
consent of the Bank:
8.1. Disposition of Assets. Sell, assign, exchange or otherwise dispose
of any of its assets or of any stock or equity interests or Indebtedness of any
other Person held by it or any interest therein to any other Person (except for
(i) sales of Inventory in the ordinary course of Borrower's business; (ii)
dispositions of obsolete or worn out Equipment or Equipment no longer used in
its business; and (iii) sales of other Equipment, provided such Equipment is
promptly replaced with Equipment of equal or greater value and utility to the
Borrower).
8.2. Indebtedness. Create, incur, assume or allow to exist any
Indebtedness except: (i) Indebtedness owing to or held by Bank; (ii) unsecured
Indebtedness of Borrower existing on the Closing Date and disclosed in the
financial statements attached as Schedule 4.12, provided that none of such
Indebtedness shall be renewed, extended or otherwise modified in any material
respect; (iii) unsecured current liabilities (not the result of borrowing)
incurred in the ordinary course of business and not overdue; (iv) Capital Leases
and other purchase money financing of capital assets permitted under Section
8.3(vii); and (v) other Indebtedness incurred after the Closing Date with prior
notice to and the consent of Bank.
8.3. Liens. Create, permit to be created or suffer to exist any Lien
upon any of the Collateral or any other property of Borrower, now owned or
hereafter acquired, except: (i) landlords', carriers', warehousemen's,
mechanics' and other similar Liens arising by operation of law in the ordinary
course of Borrower's business; provided, however, that all such Liens shall be
discharged or bonded off within sixty (60) days from the filing thereof; (ii)
Liens arising out of pledge or deposits under worker's compensation,
unemployment insurance, old age pension, social security, retirement benefits or
other similar legislation; (iii) Liens in favor of Bank; (iv) Liens for taxes
(excluding any Lien imposed pursuant to any provision of ERISA) not yet due or
which are being contested in good faith by appropriate proceedings and Borrower
maintains appropriate reserves in respect thereto provided that in Bank's
judgment such Lien does not adversely affect Bank's rights or the priority of
Bank's Lien in the Collateral; (v) easements, rights of way, restrictions and
other similar charges or Liens relating to real property and not interfering in
a material way with the ordinary conduct of Borrower's business; (vi) Liens set
forth on Schedule 8.3 hereto; (vii) Liens to secure purchase money financing of
capital assets provided that the liens only secure payment of the Indebtedness
so incurred and extend only to the capital asset purchased (collectively,
"Permitted Liens").
8.4. Distributions. Pay any Distributions or commit or agree to do so
at any time without the prior written consent of Bank, excepting only, Brookwood
payments to Hallwood for dividends and federal income taxes per quarterly
calculations of fixed charge coverage, and only if such payments do not result
in a default of any financial covenants herein.
8.5. Loans. Make any loans or advances to any Person, including without
limitation, Hallwood, any of any Borrower's members, directors, officers,
employees, stockholders and Affiliates, except advances to employees with
respect to expenses incurred by them in the
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ordinary course of their duties which are properly reimbursable by Borrower (not
to exceed $50,000 in the aggregate during the term of this Agreement).
8.6. Guaranties. Assume, guaranty, endorse or otherwise become directly
or contingently liable in respect of (including, without limitation by way of
agreement, contingent or otherwise, to purchase, provide funds to or otherwise
invest in a debtor or otherwise to assure a creditor against loss), any
Indebtedness of any Person (except guaranties by endorsement of instruments for
deposit or collection in the ordinary course of business and guaranties in favor
of Bank).
8.7. Investments. (i) Use any Loan proceeds to purchase or carry any
"margin stock" (as defined in Regulation U of the Board of Governors of the
Federal Reserve System) or (ii) make any Investment in or otherwise purchase any
stock, Indebtedness or securities of any Person except (x) readily marketable
direct obligations of, or obligations guaranteed by, the United States of
America or any agency thereof, or (y) time deposits with or certificates of
deposit issued by Bank.
8.8. Subsidiaries. Form or acquire any Subsidiary, excepting only a
Subsidiary(ies) formed or acquired for the purpose of acquiring and/or operating
the assets of Uzzi as contemplated hereby.
8.9. Mergers and Acquisitions. Merge or consolidate with any Person, or
sell, lease, transfer or otherwise dispose of all or any substantial part of its
assets (whether in one or more transactions) or purchase or acquire all or
substantially all of the assets of any Person other than the acquisition of the
assets of Uzzi as contemplated hereby.
8.10. Affiliates. Directly or indirectly, transfer, sell, lease, assign
or otherwise dispose of any material assets to an Affiliate; purchase or acquire
any assets from an Affiliate; enter into any management agreement, service or
consulting agreement with an Affiliate or make any payment thereon; or enter
into any other transaction directly or indirectly with or for the benefit of an
Affiliate (including, without limitation, guaranties or assumptions of
obligations of an Affiliate); except, in each case, in the ordinary course of
Borrower's business and pursuant to the reasonable requirements of the
respective Borrower's business and upon fair and reasonable terms no less
favorable to the Borrower as would be obtained by Borrower in a comparable arm's
length commercial transaction with an independent non-Affiliated Person.
8.11. Limitation on Use of Proceeds. Shall not permit any of the
proceeds of the Loans to be used directly or indirectly for any purposes other
than the purposes expressly set forth in this Agreement, or by any party other
than Borrowers.
9. Financial Covenants. Borrower covenants and agrees that, as long as any
amount is unpaid with respect to the Loans or any other Obligation, and while
any commitment of Bank to make Loans is in effect, it will meet or exceed the
following financial covenants tested quarterly, on a fully consolidated basis:
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9.1. Current Ratio. Borrower shall maintain a minimum Total Current
Assets to Total Current Liabilities Ratio of 1.40:1,with
outstanding balances of the Revolving Loans treated as current
liabilities.
9.2. Total Funded Debt to Total Capitalization . Borrower shall
maintain its Total Funded Debt to no greater than 45% of its
Total Capitalization.
9.3 EBITDA to Total Fixed Charge Ratio. Borrower shall maintain a
minimum EBITDA (trailing four quarters) to Total Fixed Charge
Ratio of 1.10x. (Upon consummation of the Uzzi acquisition,
the minimum EBITDA to Total Fixed Charge Ratio shall be
1.25x.)
10. ADDITIONAL COVENANTS AND ASSURANCES.
10.1. No Overadvances. The amount of the Working Capital Revolving
Credit Loans shall not at anytime exceed the Working Capital Revolving Credit
Limit, the amount of the Equipment Revolving Credit Loans shall not at anytime
exceed the Equipment Revolving Credit Limit, and the amount of the Acquisition
Revolving Credit Loans shall not at anytime exceed the Acquisition Revolving
Credit Limit, in effect, and Borrower shall immediately make such principal
payments as may at any time be necessary to repay any such excess.
10.2. Notice of Changes. Borrower will notify Bank, at least thirty
(30) days prior to any change in Borrower's legal name, any change in its
place(s) of business or location(s) or Collateral as set forth in Section 4.15
or its establishment of any new place of business or location of its assets or
office where its records concerning Accounts and other assets are kept.
10.3. Additional Assurances. At Bank's request, Borrower at its expense
will promptly and duly execute and deliver such documents and assurances and
take such actions as may be reasonably necessary or desirable or as Bank may
reasonably request in order to correct any defect, error or omission which may
at any time be discovered or to more effectively carry out the intent and
purpose of this Agreement and to establish, perfect and protect Bank's security
interest, rights and remedies created or intended to be created hereunder.
Without limiting the generality of the above, Borrower will join with Bank in
executing financing and continuation statements pursuant to the Uniform
Commercial Code or other notices appropriate under applicable Federal or state
law in form reasonably satisfactory to Bank and filing the same in all public
offices and jurisdictions wherever and whenever requested by Bank. Moreover,
Borrower appoints Bank and its agents and designees, as Borrower's
attorney-in-fact, to execute in Borrower's name and on Borrower's behalf any UCC
financing statements or amendments thereto for any of the foregoing purposes,
which power is coupled with an interest, and irrevocable, until all Obligations
have been paid in full. Borrower releases Bank and its officers, employees,
agents and designees from any liability arising from any act or acts in
connection with such action(s) or in furtherance thereof, whether of admission
or omission except to the extent arising from the Bank's willful misconduct or
gross negligence.
10.4. Additional Collateral Actions. Borrower shall obtain for each
location that is not owned and controlled by Borrower an agreement in writing
from the Person in possession of
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Borrower's assets and/or the owner or operator of such premises, in form and
substance satisfactory to Bank, acknowledging Bank's first priority security
interest in the Collateral, waiving security interests and claims by such Person
in the Collateral and permitting the Bank access to, and the right to remain on
such premises, so as to exercise the Bank's rights and remedies and otherwise
deal with the Collateral.
10.5. Verification of Accounts. Bank may at any time in its own name or
in the name of others communicate with account debtors in order to verify with
them to Bank's satisfaction the existence, amount and terms of any Accounts and
the absence of any reductions, discounts, defenses or offsets with respect
thereto.
10.6. Power of Attorney. Upon the occurrence and continuation of an
Event of Default, Borrower does hereby make, constitute and appoint any officer
or agent of Bank as Borrower's true and lawful attorney-in-fact, with full power
of substitution: (a) to endorse the name of Borrower or any of its members,
officers or agents upon any notes, checks, drafts, money orders, or other
instruments of payment (including under any policy of insurance on Collateral)
or Collateral that may come into possession of Bank in full or part payment of
any amounts owing to Bank; (b) to sign and endorse the name of Borrower or any
of its officers or agents upon any invoice, freight or express bill, bill of
lading, storage or warehouse receipts, drafts against debtors, assignments,
verifications and notices in connection with Accounts, and any instruments or
documents relating thereto or to Borrower's rights therein; (c) to give written
notice to such offices and officials of the United States Postal Service to
effect such change or changes of address so that all mail addressed to Borrower
may be delivered directly to Bank; (d) to take any and all other actions
necessary or appropriate to collect, compromise, settle, sell or otherwise deal
with any or all of the Collateral or proceeds thereof, and (e) to obtain,
adjust, settle and cancel any insurance referred to in Section 7.2; hereby
granting to each said substitute full power to do any and all things necessary
or appropriate to be done in and about the premises as fully and effectively as
Borrower might or could do, and hereby ratifying all that any said
attorney-in-fact or his substitute shall lawfully do or cause to be done by
virtue hereof.
10.7. Insurance Assignment. Upon the occurrence and continuation of an
Event of Default, Borrower hereby assigns to Bank all sums, including without
limitation, return of premiums, which may become payable under any and all of
Borrower's policies of insurance and directs each insurance company issuing any
such policy to make payment thereof directly to Bank.
10.8. Government Accounts. If any Accounts arise from contracts with
the United States or any department, agency or instrumentality thereof, Borrower
will immediately notify Bank thereof and execute any instruments and take any
steps requested by Bank in order that all monies due and to become due
thereunder shall be assigned to Bank and notice thereof given to the Federal
authorities under the Federal Assignment of Claims Act.
10.9. Payments by Bank. In its sole discretion, Bank may upon notice to
Borrower and Borrower's failure within ten (10) business days to pay any of the
following (or such lesser period of time if imposition of a Lien, loss of
insurance or tax lien is imminent): (i) discharge taxes that Borrower fails to
pay (except taxes being contested in good faith and by appropriate
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proceedings, for which Borrower has established and is maintaining appropriate
reserves, and as to which no Lien having priority over Bank's Lien arises) and
Liens levied or placed on Collateral; (ii) pay for insurance of Borrower that
Borrower fails to pay or the maintenance and preservation thereof; or (iii) if
Borrower shall fail to make deposits in respect of F.I.C.A. and withholding
taxes referred to in Section 5.10, make such deposits or pay such taxes, in
whole or in part, or set up such reserves as Bank shall in its sole discretion
deem necessary in respect of Borrower's liability therefor. Any amount so paid,
deposited or reserved for shall constitute a Revolving Loan for all purposes
hereunder. Nothing herein shall be deemed to obligate Bank to do any of the
foregoing and the making of any one or more such payments, deposits or reserves
shall not constitute an agreement by Bank to take any further or similar action
or a waiver of any right of Bank hereunder.
10.10. Debits to Borrower's Accounts. In its sole discretion and
without notice to Borrower, Bank may at any time or from time to time debit
Borrower's account(s) at Bank in the amount of any Obligation or Obligations
then due and payable by Borrower. Nothing herein shall be deemed to obligate
Bank to do any of the foregoing and the making of any such debit shall not
constitute an agreement by Bank to take any further or similar action or a
waiver of any right of Bank hereunder. On or before the date hereof, Bank and
Borrower shall execute an Automatic Electronic Fund Transfer Agreement ("AFT
Agreement") by which Borrower has authorized Bank to electronically debit all
payments due under the Notes from Borrower's designated account.
10.11. Access to Records. Borrower will at all times keep accurate
records of the Collateral and will permit Bank or its agents or representatives
at Bank's election at any time during normal business hours from time to time in
Bank's reasonable discretion, at Borrower's expense to visit Borrower's place(s)
of business, without hindrance or delay, to inspect Collateral and examine check
audit and make copies and abstracts from Borrower's records and books of account
(including, without limitation, corporate minutes, and records, journals,
orders, receipts and correspondence relating to Collateral, account debtors,
transactions unrelated to collateral and Borrower's general financial condition,
business and affairs); to remove any of such books and records temporarily for
the purpose of having copies made; and to discuss with any of Borrower's
appropriate members, directors, officers, accountants and other agents or
representatives the Collateral and Borrower's general financial condition,
business and affairs. In connection with such examinations by Bank or its
representatives, Borrower shall pay Bank's examination fees plus such costs and
expenses as may be reasonably incurred by Bank in connection therewith.
10.12. License to Use Premises. Borrower hereby grants to Bank, for a
term commencing on the Closing Date and continuing so long as any of the
Obligations remain outstanding, at a rental of $1.00 for such entire term, the
right to the use of all premises or places of business which Borrower now or
hereafter may have and where any Collateral may be located for the purpose of
exercising its rights and remedies hereunder to realize on the Collateral;
provided that Bank agrees not to exercise such right unless and until an Event
of Default occurs and is continuing.
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10.13. Instruments Evidencing Accounts. If any Accounts are at any time
evidenced by promissory notes, trade acceptances or other instruments for the
payment of money, Borrower will immediately deliver the same to Bank
appropriately endorsed to Bank's order and, regardless of the form of such
endorsement, Borrower hereby waives presentment, demand, notice of dishonor,
protest, notice of protest and all other notices with respect thereto.
10.14. Security Interest in Deposits; Set-off. Borrower hereby grants
to Bank a lien, security interest and right of setoff as security for all
liabilities and obligations to Bank, whether now existing or hereafter arising,
upon and against all deposits, credits, collateral and property, now or
hereafter in the possession, custody, safekeeping or control of Bank or any
entity under the control of KeyCorp, or in transit to any of them. At any time
that an Event of Default exists, without demand or notice, Bank may set off the
same or any part thereof and apply the same to any liability or obligation of
Borrower even though unmatured and regardless of the adequacy of any other
collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE BANK TO
EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH
SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO
SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER OR ANY GUARANTOR, ARE
HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
10.15. No Bank Liability. Notwithstanding anything to the contrary set
forth herein, Bank shall not have any obligation or liability under any Accounts
or other Collateral arising out of this Agreement or Bank's exercise of its
rights and remedies or Borrower's performance of its obligations hereunder, nor
shall Bank have any obligation to make any inquiry as to the nature or
sufficiency of any payment received by it, or to file any claim or take any
action to enforce the payment or performance of any portion of the Collateral.
Beyond the safe custody thereof, Bank shall have no duty as to any Collateral in
its or its nominee's possession or any income thereon, or as to the preservation
of rights against other parties or otherwise.
10.16. Transfer of Investment Property to Bank's Name. Bank may
transfer Investment Property of the Borrower into its name or that of its
nominee and may receive the income and any distributions' thereon and hold the
same as Collateral for the Obligations, or apply the same to any defaulted
Obligation, whether or not a Default or an Event of Default has occurred.
11. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute
an Event of Default:
(a) failure by Borrower to pay any principal, interest or
other amount due on account of the Loans, within fifteen (15) days of
the date when due, including failure by Borrower to comply with the
terms and conditions of its AFT Agreement; provided, however, that no
Event of Default shall be created if Bank fails to electronically debit
any payment due without fault of Borrower;
(b) failure by Borrower to perform or comply with the
covenants set forth in Sections 8, 9 or 10 hereof.
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(c) failure by Borrower to pay any payment Obligation other
than those described in Section 11 (a) within fifteen (15) days of
notice by Bank that such other payment Obligation is due;
(d) failure by Borrower to perform or discharge, observe or
comply with any of its other covenants or agreements set forth herein
or in the Loan Documents, or any other Obligation, within thirty (30)
days of the date Borrower became aware of such failure or receives
notice thereof from the Bank;
(e) any representation, warranty or statement of Borrower to
Bank in connection with any Obligation (including, without limitation,
any made in any document provided by Borrower under Section 5) is found
to have been false or misleading in any material respect as of the time
when made;
(f) occurrence of any event of default (subject to any
applicable grace period) as defined in any other instrument evidencing
or governing Indebtedness for Borrowed Money in excess of, in the
aggregate, $100,000, of Borrower (other than Obligations) now or
hereafter outstanding; or any event or condition which gives any holder
or trustee of such Indebtedness for Borrowed Money the right to
accelerate its maturity;
(g) Borrower's or any guarantor's or endorser's liquidation,
termination, dissolution or ceasing to carry on actively any
substantial part of its current business or the death of any guarantor
or endorser;
(h) commencement by Borrower or any guarantor or endorser of a
voluntary proceeding seeking relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law, or seeking
appointment of a trustee, receiver, liquidator or other similar
official for it or any substantial part of its assets; or its consent
to any of the foregoing in an involuntary proceeding against it; or
Borrower or any guarantor or endorser shall generally not be paying its
debts as they become due or admit in writing its inability to do so; or
an assignment for the benefit of, or the offering to or entering into
by, Borrower or any guarantor or endorser of any composition,
extension, reorganization or other agreement or arrangement with, its
creditors;
(i) commencement of an involuntary proceeding against Borrower
or any guarantor or endorser seeking relief with respect to it or its
debts under any bankruptcy, insolvency or other similar law, or seeking
appointment of a trustee, receiver, liquidator or other similar
official for it or any substantial part of its assets, which proceeding
is not dismissed or stayed within sixty (60) days,
(j) service upon Bank of a writ of levy or attachment, or
naming Bank as trustee for Borrower, or of any other similar process of
attachment which is not dismissed within thirty (30) days;
(k) entry of any judgment(s) against Borrower in an aggregate
amount greater than $100,000 which are not covered by insurance (and
for this purpose a judgment shall
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be deemed "covered by insurance" only if the insurance company has
formally advised Borrower in writing that the judgment in its entirety
is covered by insurance and no action is being taken to execute such
judgment against any of Borrower's assets) and shall remain
undischarged or unvacated for a period in excess of sixty (60) days or
execution shall at any time not be effectively stayed;
(l) attachments of any Liens (other than a Permitted Lien)
exceeding, in the aggregate, $100,000, upon property of Borrower not in
favor of Bank without Bank's prior written consent which Lien is not
discharged in thirty (30) days;
(m) entry of any court order which enjoins, restrains, or in
any way prevents Borrower from conducting all or any substantial part
of Borrower's business;
(n) any change in the controlling ownership of Borrower;
(o) any material loss, theft, damage or destruction to or of
any asset(s) of Borrower not covered by insurance;
(p) reclamation or repossession constituting a Material
Adverse Effect of any asset(s) of Borrower;
(q) the occurrence of any event having a Material Adverse
Effect on Borrower;
(r) there shall occur and be continuing any Reportable Event
which constitutes grounds for termination of or for appointment by a
United States District Court of a trustee to administer any Plan; the
PBGC shall institute proceedings to terminate or to appoint a trustee
to administer any Plan; a United States District Court shall appoint a
trustee to administer any Plan; or any Plan shall be terminated in
circumstances giving rise to liabilities having a Material Adverse
Effect on Borrower's financial condition; or
(s) termination of, failure to make any payment required under
or any other default under any guaranty of or other instrument or
agreement securing any of the Obligations.
Borrower acknowledges and agrees that each and every Event of
Default described above shall be of equal weight and significance, and
equally and fully shall allow Bank to exercise its rights and remedies
hereunder. Borrower acknowledges and agrees that each such Event of
Default has been a material inducement for Bank to enter into this
Agreement and that Bank would be irreparably harmed if Bank, in any
way, were unable to exercise its rights and remedies on the basis that
certain Events of Default (for example, Events of Default not relating
to payment) were of less weight or significance than certain other
Events of Default (for example, Events of Default relating to payment).
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12. BANK'S RIGHTS AND REMEDIES. Upon the occurrence of an Event of Default:
12.1. Exercise of Remedies. Bank may by notice to Borrower decline to
make any or all further Revolving Loans hereunder and terminate all its
commitments hereunder; Bank may by notice to Borrower accelerate the payment of
all Obligations and demand payment thereof (provided that no such notice shall
be required if the Event of Default is under Section 11(h) or (i)); Borrower's
right to select pricing options under Section 2.4 shall cease; Bank may proceed
to enforce payment of any of the foregoing and shall have and may exercise any
and all rights under the UCC or which are afforded to Bank herein or otherwise;
and all Obligations (including, without limitation, principal, past due
interest, amounts payable under Section 12 or 13 or upon entry of any judgment)
shall bear interest, payable on demand, at the Default Rate provided under
Section 2.10.
12.2. Disposition of Collateral. Upon the occurrence of an Event of
Default, Bank may notify account debtors that the Collateral has been assigned
to Bank and that payments by such account debtors shall be made directly to
Bank. At Bank's request, Borrower will notify any or all such debtors of such
assignment, give instructions and/or indicate on billings to such debtors that
their Accounts shall be paid to Bank and/or supply such debtors with a copy of
this Agreement. Bank may sell, lease or otherwise dispose of and deliver any or
all Collateral at public or private sale, for cash, upon credit or otherwise, at
such prices and upon such terms as Bank deems advisable in its sole discretion.
Any requirement of reasonable notice shall be met if such notice is mailed
postage prepaid to Borrower at its address set forth herein at least ten (10)
days before the time of sale or other disposition. Bank may be the purchaser at
any such sale, if it is public, and in such event Bank shall have all rights of
a good faith, bona fide purchaser for value from a secured party after default.
The proceeds of any sale may be applied (in whatever order and manner Bank
elects in its sole discretion) to all costs and expenses of sale (including,
without limitation, reasonable attorneys' fees and disbursements) and to the
payment of Obligations, and any remaining proceeds shall be applied in
accordance with Article 9, Part 5 of the UCC. Borrower shall remain liable to
Bank for any deficiency.
12.3. Possession Following Event of Default. Bank will at any time
following the occurrence of an Event of Default and during the continuation
thereof have the right to take physical possession of the Collateral and to
maintain such possession on Borrower's premises or to remove the Collateral or
any part thereof to such other places as Bank may desire. If Bank exercises such
right, Borrower shall at its sole expense upon Bank's request assemble the same
and make it available to Bank at a place reasonably convenient to Bank. If any
Inventory is in the possession or control of any of Borrower's agents or
processors, Borrower shall, at Bank's request (before or after the occurrence of
an Event of Default), notify them of Bank's security interest therein and, at
Bank's request, instruct them to hold the same for Bank's account and subject to
Bank's instructions. At any time following the occurrence of an Event of Default
and during the continuation thereof, Bank shall have full power, in its own name
or that of Borrower, to collect, endorse, compromise, settle, sell or otherwise
deal with any or all of the Collateral or proceeds thereof.
13. EXPENSES; INDEMNIFICATION, ETC.
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13.1. Payment of Expenses. Borrower agrees to pay Bank on demand any
and all costs, expenses, losses, claims, damages, liabilities, penalties, suits,
judgments or disbursements of any nature (including, without limitation,
reasonable attorneys' fees and disbursements and appraisal costs) which may be
incurred by, imposed on or asserted against Bank in connection with: preparation
of this Agreement, and all instruments and documents relating hereto; all other
amendments, modifications or waivers hereof, appraisal fees and environmental
assessment fees incurred in connection with this Agreement; taxes and other
governmental charges payable by reason of this Agreement, documents and filings
relating hereto and Collateral (excluding income and franchise taxes payable by
Bank); exercise of Bank's rights with respect to Collateral or any guarantor or
surety of Borrower; any exercise of Bank's right of acceleration; any
enforcement, collection or other proceedings with respect to the Obligations or
from any negotiations or other measures to preserve Bank's rights hereunder; any
investigative, administrative or judicial proceeding (whether or not Bank is
designated as a party thereto) relating to Borrower or the Obligations, relating
to or arising out of this Agreement or any other transaction between the Bank
and the Borrower or any obligor on the Obligations; or any bankruptcy,
insolvency or other similar proceedings relating to Borrower.
13.2. Indemnification. Borrower shall indemnify and hold Bank and each
Participant and Assignee, and their directors, agents, employees and counsel,
harmless from and against any, and shall pay on demand all, losses, claims,
damages, liabilities, costs or expenses imposed on, incurred by or asserted
against any of them in connection with any litigation, investigation, claim or
proceeding commenced or threatened related to the delivery, enforcement,
performance or administration of this Agreement, any other Loan Documents, or
any undertaking or proceeding related to any of the hereby or otherwise or any
act, omission, event or transaction related or attendant thereto, including,
without limitation, amounts paid in settlement, court costs, and the reasonable
fees and expenses of counsel. To the extent that the undertaking to indemnify,
pay and hold harmless set forth in this Section may be unenforceable because it
violates any law or public policy, Borrower shall pay the maximum portion which
it is permitted to pay under applicable law to Bank in satisfaction of
indemnified matters under this Section. Borrower's obligation to make any
payments to Bank under the foregoing indemnity shall be net of any collateral
liquidation proceeds, eminent domain proceeds and insurance proceeds (not
including, however, any tax benefits) actually received by Bank. The foregoing
indemnity shall survive the payment of the Obligations and the termination or
non-renewal of this Agreement.
13.3. Authority for Loan Requests. Bank shall be authorized to make
Loans hereunder upon the oral (followed promptly by written confirmation) or
written request in the name of Borrower by: the Person executing this Agreement
on Borrower's behalf; any Person(s) from time to time holding the offices of
President or Chief Financial Officer of Borrower, and such other Persons as
Borrower may from time to time designate in appropriate documents delivered to
Bank (including, without limitation, certificates of resolutions as requested by
Bank). All such Loans shall be conclusively deemed to have been authorized by
Borrower and to have been made pursuant to duly authorized requests therefor on
their behalf. Bank shall further be entitled to rely on any communication,
instrument or document believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person(s), and with respect to all legal
matters shall be entitled to rely on advice of legal counsel.
46
<PAGE> 48
13.4. Exculpation. In the absence of willful misconduct taken or
omitted in bad faith, or gross negligence, neither Bank nor any attorney-in-fact
pursuant to Sections 10.3 or 10.6 shall be liable to Borrower or any other
Person for any act or omission, any mistake of fact or any error of judgment in
exercising any right or remedy granted herein.
13.5. Collateral Secures Indemnification. Bank shall be entitled to
retain Collateral or require substitution therefor to the extent required to
assure Bank of satisfaction of Borrower's Obligations under this Section 13.
14. CONDITIONS PRECEDENT.
14.1. Conditions to Initial Loans. Borrower acknowledges and agrees
that the satisfaction of each of the following in a manner satisfactory to Bank
is a condition precedent to the making of the Revolving Loans hereunder:
(a) Delivery of Documents. Borrower shall have delivered, or
caused to be delivered to Bank all documents, instruments and
agreements as Bank shall reasonably request in connection herewith,
duly executed by all parties thereto and substance reasonably
satisfactory to Bank and Bank's counsel, including but not limited to,
the following:
(i) this Agreement, together with all Schedules and
Exhibits hereto;
(ii) the Working Capital Revolving Credit Note;
(iii) the Equipment Revolving Credit Note;
(iv) the Acquisition Revolving Credit Note;
(v) the Stock Pledge and Security Agreement
(Brookwood stock) executed by Hallwood;
(vi) the Intercreditor Agreement (Brookwood stock)
among Bank One N.A., First Bank of Texas, N.A., and Bank;
(vii) the Stock Pledge and Security Agreement (Kenyon
stock) executed by Brookwood;
(viii) the Stock Pledge and Security Agreement
(Laminating stock) executed by Brookwood;
(ix) Hallwood's Assignment Separate from Certificate,
with delivery of Brookwood stock certificate(s);
(x) Brookwood's Assignment Separate from Certificate,
with delivery of Kenyon stock certificate(s);
47
<PAGE> 49
(xi) Brookwood's Assignment Separate from
Certificate, with delivery of Laminating stock certificate(s);
(xii) the UCC financing statements of Borrower;
(xiii) the terminations and other personal property
title clearing instruments;
(xiv) the Intercreditor Agreement among Bank and CIT
Group/Commercial Services, Inc.;
(xv) the Intercreditor Agreement among Bank and Banc
of America Commercial Corporation;
(xvi) Assignment of Credit Balances Agreement;
(xvii) Notice of Assignment (to CIT Group/Commercial
Services, Inc.)
(xviii) Notice of Assignment (to Banc of America
Commercial Corporation)
(xix) the landlord waivers and consents and similar
agreements from all owners and operators of locations at which
Collateral is stored or maintained and not owned by Borrower;
(xx) the opinion letter of counsel to Borrower with
respect to the Intercreditor Agreements, the Loan Documents
and security interest and liens of Bank with respect to the
Collateral and such other matters as Bank may reasonably
request;
(xxi) Incumbency Certificate of Borrower, with
authorizing resolutions, and certified copies of the
Certificates of Incorporation, By-Laws, certificates of legal
existence and good standing, and certificates of foreign good
standing and qualification of Borrower;
(xxii) Environmental Indemnity Agreement;
(xxiii) UCC and tax lien searches satisfactory to the
Bank;
(xxiv) Commercial Property and Casualty (All-Risk)
and Commercial General Liability certificates naming Bank as
additional insured and loss payee and containing
non-cancellation provision without ten (10) days notice to
Bank;
(xxv) the balance sheet attached hereto as Schedule
4.12;
48
<PAGE> 50
(xxvi) an Officer's Certificate for Borrower in a
form acceptable to Bank;
(xxvii) Borrowing Base Certificate in the form of
Exhibit D hereto;
(xxviii) Compliance Certificate for Borrower, as of
the date of execution, in the form of Exhibit E hereto;
(xxix) Consent in writing from Hallwood, regarding
its agreement to limitations of Distributions from Brookwood;
(xxx) all such other documents and instruments as may
be required by the Bank in its reasonable discretion.
(b) Perfection of Security Interests. Borrower shall have
taken, or caused to be taken, all action that Bank requests in order to
create and perfect Bank's Liens in the Collateral in all jurisdictions
designated by Bank and Bank shall have received evidence, satisfactory
to Bank, thereof;
(c) Required Approvals. Bank shall have received certified
copies of all consents or approvals of any governmental authority or
other person or entity which are required in connection with the
transactions contemplated by the Loan Documents;
(e) No Material Adverse Change. There shall not have occurred
any material adverse change in Borrower's business, assets, operations,
prospects and financial condition, taken as a whole, or in the value of
the Collateral, since the date of the last financial statements
provided to Bank and Bank shall have received certificates signed by
Borrower to such effect;
(f) Proceedings. All proceedings to be taken in connection
with the transactions contemplated by the Loan Documents and all
documents contemplated in connection herewith, shall be satisfactory in
form and substance to Bank and Bank's counsel; and
(g) Reimbursement of Fees and Costs. The Borrower shall have
paid to Bank all expenses, costs and fees, including legal fees,
appraisal fees and other costs, lien search fees, and filing fees
incurred by the Bank relating to the preparation of this Agreement, the
Loan Documents, all instruments and documents relating hereto, and the
closing of the transactions contemplated thereby.
14.2. Conditions Precedent to All Loans. Borrower acknowledges and
agrees that each of the following shall be conditions precedent to Bank making
any Loan or extension of credit hereunder:
49
<PAGE> 51
(a) Representations and Warranties. Borrower's representations
and warranties contained herein shall be true, correct and complete in
all material respects on the date thereof;
(b) No Defaults or Events of Default. There shall exist no
Default or Event of Default; and
(c) Reimbursement of Fees and Costs. The Borrower shall have
paid to Bank, all expenses, costs and fees, including legal fees,
appraisal fees and other costs, lien search fees, and filing fees
incurred by the Bank in connection with any advance, Loan or extension
of credit.
15. MISCELLANEOUS PROVISIONS.
15.1. Notices. Unless otherwise specified herein, all notices hereunder
shall be in writing directed to the addresses shown at the beginning of this
Agreement. Written notices and communications shall be effective and shall be
deemed received on the day when delivered by hand or sent by facsimile
transmission; on the next day, if by commercial overnight courier; and on the
third day, if by registered or certified mail, postage prepaid.
15.2. No Waiver. No failure to exercise and no delay in exercising, on
the part of Bank, any right or remedy 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 or remedy. Waiver by
Bank of any right or remedy on any one occasion shall not be construed as a bar
to or waiver thereof or of any other right or remedy on any future occasion.
Without limiting the generality of the foregoing, Borrower expressly agrees that
no failure by Bank to detect or to communicate with Borrower or take action in
response to any failure by Borrower to perform or observe any Obligation shall
operate as a waiver of any right or remedy of Bank. Any waivers by Bank must be
in writing and no officer or employee of Bank is authorized to grant any oral
waiver. Bank's rights and remedies hereunder, under any agreement or instrument
supplemental hereto or under any other agreement or instrument, shall be
cumulative, may be exercised singly or concurrently, and are not exclusive of
any rights or remedies provided by law.
15.3. Assignment. This Agreement shall be binding upon and shall inure
to the benefit of Borrower and Bank and their respective heirs, legal
representatives, successors and assigns; provided that Borrower may not assign
or transfer any rights or Obligations hereunder without Bank's prior written
consent. Bank shall have the unrestricted right at any time or from time to
time, and without Borrower's consent, to assign all or any portion of its rights
and obligations hereunder to one or more banks or other financial institutions
(each, an "Assignee"), and Borrower agrees that it shall execute, or cause to be
executed, such documents, including without limitation, amendments to this
Agreement and to any other documents, instruments and agreements executed in
connection herewith as Bank shall deem necessary to effect the foregoing. In
addition, at the request of Bank and any such Assignee, Borrower shall issue one
or more new promissory notes, as applicable, to any such Assignee and, if Bank
has retained any of its rights and obligations hereunder following such
assignment, to Bank, which new promissory
50
<PAGE> 52
notes shall be issued in replacement of, but not in discharge of, the
liability evidenced by the promissory note held by Bank prior to such assignment
and shall reflect the amount of the respective commitments and loans held by
such Assignee and Bank after giving effect to such assignment. Upon the
execution and delivery of appropriate assignment documentation, amendments and
any other documentation required by Bank in connection with such assignment and
the payment by Assignee of the purchase price agreed to by Assignee, such
Assignee shall be a party to this Agreement and shall have all of the rights and
obligations of Bank hereunder (and executed in connection herewith) to the
extent that such rights and obligations have been assigned by Bank pursuant to
the assignment documentation such Assignee, and Bank shall be released from its
obligations hereunder and thereunder to a corresponding extent.
15.4. Headings. The headings contained herein are for convenience only
and shall not affect the construction hereof. If one or more provisions of this
Agreement (or the application thereof) shall be invalid, illegal or
unenforceable in any respect in any jurisdiction, the same shall not, to the
fullest extent permitted by applicable law, invalidate or render illegal or
unenforceable such provision (or its application) in any other jurisdiction or
any other provision of this Agreement (or its application). This Agreement is
the entire agreement of the parties with respect to the subject matter hereof
and supersedes any prior written or verbal communications or instruments
relating thereof.
15.5. Waiver of Remedies. Borrower acknowledges that the transactions
contemplated hereby are commercial transactions and waives, to the fullest
extent it may do so under applicable law, such rights as it may have or
hereafter have to notices and/or hearings under applicable federal or state laws
relating to exercise of any of Bank's rights, including, without limitation, the
right to deprive Borrower of or affect Borrower's use, possession or enjoyment
of property prior to rendition of a final judgment against Borrower.
15.6. Pledge to Federal Reserve. Bank may at any time pledge all or any
portion of its rights under the Loan Documents, including any portion of the
Notes, to any of the twelve (12) Federal Reserve Banks organized under Section 4
of the Federal Reserve Act, 12 U.S.C. Section 341. No such pledge or enforcement
thereof shall release Bank from its obligations under any of the Loan Documents.
15.7. Participations. Bank shall have the unrestricted right at any
time and from time to time, and without the consent of or notice to Borrower, to
grant to one or more banks or other financial institutions (each, a
"Participant") participating interests in Bank's obligation to lend hereunder
and/or any or all of the loans held by Bank hereunder. In the event of any such
grant by Bank of a participating interest to a Participant, whether or not upon
notice to Borrower, Bank shall remain responsible for the performance of its
obligations hereunder and Borrower shall continue to deal solely and directly
with Bank in connection with Bank's rights and obligations hereunder. Bank may
furnish any information concerning Borrower in its possession from time to time
to prospective Assignees and Participants, provided that Bank shall require any
such prospective Assignee or Participant to agree in writing to maintain the
confidentiality of such information.
51
<PAGE> 53
15.8. Replacement Notes. Upon receipt of an affidavit of any officer of
Bank as to the loss, theft, destruction or mutilation of any of the Notes or any
other security document which is not of public record, and, in the case of any
such loss, theft, destruction or mutilation, upon the surrender and cancellation
of such Note or other security document, the Borrower will issue, in lieu
thereof, a replacement Note or other security document in the same principal
amount thereof and otherwise of like tenor. Bank agrees to indemnify Borrower
for any double payment or increased liability caused by Bank's loss of any
original Note.
16. GOVERNING LAW, JURISDICTION.
16.1. Governing Law. This Agreement shall take effect as a sealed
instrument and shall be governed by and construed in accordance with the laws of
the State of Maine (without giving effect to its conflict of laws rules except
as provided under the provisions of the Uniform Commercial Code with respect to
the perfection and enforcement of security interests).
16.2. Jurisdiction. Borrower irrevocably submits to the non-exclusive
jurisdiction of any federal or state court sitting in the State of Maine, over
any suit, action or proceeding arising out of or relating to this Agreement and
agrees that such courts shall have exclusive jurisdiction over any suit, action
or proceeding against Bank. Borrower irrevocably waives, to the fullest extent
it may do so under applicable law, any objection it may have or hereafter have
to the laying of the venue of any such suit, action or proceeding brought in any
such court and any claim that the same has been brought in an inconvenient
forum.
16.3. Waiver of Counterclaims. Borrower waives all rights to interpose
any claims, deductions, setoffs or counterclaims of any nature (other than
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
17. CAUTION.
Caution: Read Before Signing. Great effort has been spent to make sure
that this Agreement fully and accurately documents the understanding between the
parties. If you believe that you have an implicit or oral understanding or
agreement not fully and accurately set forth in this Agreement, DO NOT SIGN IT.
You should also understand that no officer or employee of the Bank has
any authority to modify, alter or amend this Agreement orally. Rather, any and
all changes would have to be put in writing and approved by appropriate
officials at the Bank. If at some future date you believe that this Agreement
needs to be changed in any respect, insist that the change be in writing and
signed by an appropriate officer of the Bank; otherwise, misunderstandings might
occur.
Finally, all signatories to this Agreement are urged to have their own
legal counsel review it on their behalf.
18. NOTICE.
52
<PAGE> 54
Under Maine law, no promise, contract or agreement to lend money,
extend credit, forbear from collection of a debt, or make any other
accommodation for the repayment of a debt for more than $250,000 may be enforced
in court against the Bank unless the promise, contract or agreement is in
writing and signed by the Bank. Accordingly, the Borrower cannot enforce any
oral promise unless it is contained in any of the Loan Documents signed by the
Bank, nor can any change, forbearance, or other accommodation relating to the
Loans, this Agreement or any other Loan Documents be enforced unless it is in
writing and signed by the Bank. Borrower also understands that all future
promises, contracts or agreements of the Bank relating to any other transaction
between Borrower and Bank cannot be enforced in court unless they are in writing
and signed by the Bank.
19. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each
executed counterpart constituting an original, but all counterparts when joined
together constituting but one and the same agreement.
[The balance of this page is intentionally left blank]
53
<PAGE> 55
Executed as an instrument under seal on the date set forth above.
BORROWER:
WITNESS:
BROOKWOOD COMPANIES INCORPORATED
By:
- ------------------------- -----------------------------
Name: Duane O. Schmidt
Title: Vice President Finance
Chief Financial Officer
WITNESS:
KENYON INDUSTRIES, INC.
By:
- ------------------------- -----------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
WITNESS:
BROOKWOOD LAMINATING, INC.
By:
- ------------------------- -----------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
BANK:
WITNESS: KEYBANK NATIONAL ASSOCIATION
By:
- ------------------------- -----------------------------
Name: Noel B. Graydon
Title: Senior Vice President
54
<PAGE> 56
Schedule 3
Contracts
Wholesale Maturity Factoring Agreement dated July 17, 1992, between The
CIT Group/Commercial Services, Inc. and Brookwood Companies Incorporated.
Factoring Agreement dated August 24, 1993 between The CIT
Group/Commercial Services, Inc. and Brookwood Companies Incorporated.
Factoring Agreement (Wholesale) dated February 21, 1990, between Banc
of America Commercial Corporation and Brookwood Companies Incorporated.
Factoring Agreement (Wholesale) dated February 21, 1990, between Banc
of America Commercial Corporation and First Performance Fabrics, Inc.
Factoring Agreement (Wholesale) dated February 21, 1990, between Banc
of America Commercial Corporation and Brookwood Roll Goods Incorporated.
Factoring Agreement (Wholesale) dated February 21, 1990, between Banc
of America Commercial Corporation and Kenyon Industries, Inc.
Factoring Agreement (Export Receivables) dated February 20, 1991,
between Banc of America Commercial Corporation and Brookwood Companies
Incorporated.
Factoring Agreement (Export Receivables) dated February 22, 1991,
between Banc of America Commercial Corporation and First Performance Fabrics,
Inc.
Factoring Agreement (Export Receivables) dated February 20, 1991,
between Banc of America Commercial Corporation and Brookwood Roll Goods
Incorporated.
Factoring Agreement (Export Receivables) dated February 20, 1991,
between Banc of America Commercial Corporation and Kenyon Industries, Inc.
55
<PAGE> 57
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.1
States And Other Locations Where Authorized to do Business
<TABLE>
<CAPTION>
BORROWER JURISDICTIONS WHERE
AUTHORIZED TO DO BUSINESS
<S> <C>
1. Brookwood Companies Incorporated, New York, Rhode Island,
a Delaware Corporation New Jersey, California
2. Kenyon Industries, Inc., Rhode Island
a Delaware Corporation
3. Brookwood Laminating, Inc., Rhode Island
a Delaware Corporation
</TABLE>
56
<PAGE> 58
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.2
Consents
None Required.
57
<PAGE> 59
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.10
Name
<TABLE>
<CAPTION>
BORROWER ASSUMED NAME
<S> <C>
1. Brookwood Companies Incorporated Brookwood; Brookwood Roll Goods;
First Performance Fabrics
2. Kenyon Industries, Inc. Kenyon; KDP INC.
3. Brookwood Laminating, Inc. [None]
</TABLE>
58
<PAGE> 60
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.11
Subsidiaries and Investments
<TABLE>
<CAPTION>
BORROWER SUBSIDIARIES AUTHORIZED CAPITALIZATION # OF SHARES OF ISSUED AND
OUT-STANDING STOCK
<S> <C> <C> <C>
1. Brookwood Companies See below. Preferred 200,000 130,000
Incorporated Common 15,000,000 10,000,000
2. Kenyon Industries, Inc. None 3,000 3,000
3. Brookwood Laminating, None 3,000 100
Inc.
</TABLE>
<TABLE>
<CAPTION>
NO. OF SHARES HELD/OWNED BY
BROOKWOOD COMPANIES
INCORPORATED
<S> <C> <C>
1. Brookwood Companies Kenyon Industries, Inc. 3,000
Incorporated*
Brookwood Laminating, 100
Inc.
</TABLE>
*Brookwood plans to form a subsidiary(ies) to acquire and/or operate the
business and assets of Uzzi.
59
<PAGE> 61
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.12
Financial Statements; No Change
Attached hereto is Balance Sheet of Borrower as of September 30, 1999 and 1998.
60
<PAGE> 62
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.13
Taxes
<TABLE>
<CAPTION>
BORROWER TAX I.D. NO.
<S> <C>
1. Brookwood Companies 22-295 8309
Incorporated
2. Kenyon Industries, Inc. 22-295 8305
3. Brookwood Laminating, Inc. 05-048 6843
</TABLE>
61
<PAGE> 63
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.14
Litigation
None
62
<PAGE> 64
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.15
Chief Executive Office of Each Borrower
<TABLE>
<CAPTION>
BORROWER OFFICES
<S> <C>
1. Brookwood Companies Incorporated 232 Madison Avenue, 10th Floor
New York, NY 10016
Building 14 Warehouse 36 Sherman Avenue
Kenyon, RI 02836
Roll Goods Warehouse 445 West Walnut Street
Gardena, CA 90248
Books and Records 36 Sherman Avenue
Kenyon, RI 02836
2. Kenyon Industries, Inc. 36 Sherman Avenue
Kenyon, RI 02836
3. Brookwood Laminating, Inc. 1425 Kingstown Road
Peace Dale, RI 02883
</TABLE>
63
<PAGE> 65
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.16
ERISA
1. Textile Workers Pension Fund National Plan Sub-Fund
2. Textile Workers Pension Fund National Plus Plan
3. Brookwood Companies Incorporated Tax Favored Savings Plan
64
<PAGE> 66
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.21
Indebtedness
THE BANK OF NEW YORK
ONE WALL STREET, 22ND FLOOR
NEW YORK, NEW YORK 10286
<TABLE>
<CAPTION>
Amount Date Due Reference No.
- ------ -------- -------------
<S> <C> <C>
$32,593.54 1/07/00 Bankers Acceptance/Letter of Credit
No. 00142029
$ 9,204.00 1/10/00 Bankers Acceptance/Letter of Credit
No. 00142052
$31,173.05 1/24/00 Bankers Acceptance No. 00142030
$27,608.68 2/3/00 Bankers Acceptance No. 00142029(b)
</TABLE>
KEYBANK NATIONAL ASSOCIATION
ONE CANAL PLAZA
PORTLAND, ME 04101
<TABLE>
<CAPTION>
Amount Date Due Reference No.
- ------ -------- -------------
<S> <C> <C>
$49,855.00 Letter of Credit No. NIL 994694
$23,250.00 Letter of Credit No. NIL 994693
Contingent Payable
$51,907.14 Due 1/29/00 Bill of Exchange for Documents
accepted No. ICE 71654
</TABLE>
65
<PAGE> 67
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.22
Compliance with Laws
Environmental Matters
1. Notice of Violation #R10-177. Kenyon Industries, Inc. ("Kenyon") is
presently the subject of a Notice of Violation issued by the Rhode Island
Department of Environmental Management for wastewater treatment violations.
Kenyon is diligently pursuing the terms and conditions of a Consent Agreement
entered into to settle the Notice of Violation and order by way of adhering to
the modified order of Approval dated July 21, 1997.
2. The Rose Hill Superfund site in South Kingstown, Rhode Island names
Kenyon's predecessor, Kenyon Piece and Dye, as a Potentially Responsible Party.
Kenyon Industries, Inc. (a Delaware corporation) may be a potential party in the
event the United States Government, State or other Potentially Responsible
parties choose to bring Kenyon in as a successor in interest.
3. The Department of Health ("DOH") has issued a Notice of Violation
for drinking water contamination. The Kenyon facility and a small number of
private homes supplied by the Kenyon wells must use bottled water. Kenyon is
complying with this request. The long-term resolution to this problem remains
open.
4. Amended Letter of Responsibility, Case No. 99-021, dated September
20, 1999. Brookwood Companies, Inc. d/b/a Kenyon industries received an amended
letter of Responsibility from the Rhode Island Department of Environmental
Management dated September 20, 1999 alleging that the corporation is a
"responsible party" under the rules and regulation for the investigation or
remediation of hazardous materials. This Letter of Responsibility also requires
the company to undertake certain investigative studies at the site located at
Sherman Avenue, Charlestown, Rhode Island. The corporation is complying with
this request and has engaged environmental consultants to that end.
5. Rhode Island Department of Health Notice of Violation. Kenyon
received a February 16, 1999 Notice of Violation from the Rhode Island
Department of Health for the property at 37 Sherman Avenue in Richmond, Rhode
Island based on the presence of lead exposure hazards disclosed during the
January 18, 1999 inspection. Kenyon is diligently pursuing compliance and has
been in contact with the Department of Health on a periodic basis. Kenyon is
considering demolition of the subject property, which would obviate the need to
do the work requested in the Notice of Violation.
6. OSHA has investigated an accident on November 11, 1999 and will
probably issue a citation. It is expected that any possible fine will not exceed
$10,000.
66
<PAGE> 68
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.23
Contingent Liabilities
See Schedule 4.21 Indebtedness
67
<PAGE> 69
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.24
Bonds, Indemnities
None
68
<PAGE> 70
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.25
Intellectual Property
<TABLE>
<CAPTION>
Trademark
- ---------
<S> <C> <C>
ECO-KOTE Reg. No. 1,899,506 June 13, 1995
CYCLED PREMIER Reg. No. 2,070,551 June 10, 1997
ENVIRO-KOTE Reg. No. 1,960,695 March 5, 1996
STORM-TECH Reg. No. 2,076,074 July 1, 1997
WEATHER TEK Reg. No. 2,074,394 June 24, 1997
HYDRO-TEX Reg. No. 2084932 July 29, 1997
</TABLE>
Patent Application pending:
Breathable Waterproof Laminate App. No. 60/099,446
69
<PAGE> 71
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.26
Leases
<TABLE>
<CAPTION>
LESSOR LEASED ITEM MONTHLY PAYMENT EXPIRATION
------ ----------- --------------- ----------
<S> <C> <C> <C>
Dashal Madison LLC 10th Floor $12,187.02 8/31/06
222 Madison Avenue
New York, NY
Peacedale Mill Associates 49,390 Sq. Ft. $16,424.97 12/31/00
Quagletti Family Trust Warehouse Building $7,217.45 4/30/01
445 West Walnut St. (2-year renewal option)
Gardena, CA 90248
Woon P. Ma Apt. 9H $1,600.00 12/19/00
415 East 37th St.
New York, NY
</TABLE>
70
<PAGE> 72
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.27
Labor Contracts/Relations
Agreement between Kenyon Industries, Inc. and Union of Needletrades, Industrial
and Textile Employees dated February 28, 1998.
71
<PAGE> 73
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.29
Capitalization
<TABLE>
<S> <C>
Brookwood Companies Incorporated 100% of issued and outstanding stock is owned by
The Hallwood Group Incorporated, which issued
and outstanding stock is subject to that certain
Intercreditor Agreement of even date by and among
Bank, Bank One N.A., and First Bank Texas N.A.
Kenyon Industries, Inc. 100% of the issued and outstanding stock is owned by
Brookwood Companies Incorporated.
Brookwood Laminating, Inc. 100% of the issued and outstanding stock is owned by
Brookwood Companies Incorporated.
</TABLE>
72
<PAGE> 74
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 4.30
Real Property
Real Property Owned
<TABLE>
<CAPTION>
Town Map Description
<S> <C> <C>
Charlestown, RI 029-006 N/S South County Trail
029-007 10 Sherman Avenue
029-008 Arnold Lot
029-014 Hutchins Place
028-167 Clarke Land
Richmond, RI 10E-12 36 Sherman Avenue (factory)
10E-12-13C Parking Lot and right of way
10E-11 Sherman Avenue
10E-12 37 Sherman Avenue (post office)
10E-10 48 Sherman Avenue (residence)
10E-4 1 Lewiston Avenue (13 acres)
10E-42 Lewiston Avenue (barn)
</TABLE>
Real Property Leased
For leased space see Schedule 4.26, Leases
73
<PAGE> 75
KeyBank National Association/Brookwood Companies Incorporated, et al.
Schedule 8.3
Liens
1. Factors' Liens as reported by CT Corporation System in Search Reports dated
November 22, 1999, November 23, 1999 and November 29,1999:
CIT Group/Commercial Services , Inc.
CIT Group/Commercial Services, Inc. (as successor in interest to Heller
Financial, Inc.)
Banc of America Commercial Corporation
2. Federal Tax Lien as reported by CT Corporation System:
August 5, 1991 No. 166775 Internal Revenue Service $5,749.02
Borrower has represented and warranted that the Federal Tax Lien set forth above
shall be discharged and released, with written evidence of such discharge and
release, in form and substance satisfactory to Bank, to be provided to Bank
within thirty (30) days of this Agreement, unless extended in writing by Bank.
74
<PAGE> 76
EXHIBIT A
KEYBANK NATIONAL ASSOCIATION
Revolving Credit Note
December ___, 1999
$17,000,000.00 Portland, Maine
The undersigned (collectively, the "Borrower"), for value received,
hereby promise to pay to KEYBANK NATIONAL ASSOCIATION, a national banking
association (the "Bank"), or order, on or before December __, 2002, the
principal amount of SEVENTEEN MILLION DOLLARS ($17,000,000.00) (the "Working
Capital Revolving Credit Limit"), or such lesser amount as may, at the maturity
hereof, whether by declaration, acceleration or otherwise, be the aggregate
unpaid principal amount of all Working Capital Revolving Credit Loans made by
the Bank to the Borrower pursuant to the Loan Agreement referred to below.
This Note shall bear interest (computed on the basis of the actual
number of days elapsed over a 360-day year) on the unpaid principal amount
hereof at the rate or rates per annum specified in the Loan Agreement referred
to below, payable monthly in arrears on the first Business Day of each month
commencing on January 1, 2000 (Except as to LIBOR Loans having an Interest
Period of 180 days, which shall be payable on the last Business Day of every
third month of said Interest Period and on the last day of said Interest Period;
otherwise, LIBOR loans are payable on the last day of the applicable Interest
Period), and at maturity (whether by declaration, acceleration or otherwise);
provided that during the continuance of any Event of Default, at the election of
the Bank, the Borrower shall pay the holder of this Note, on demand by such
holder, interest on the unpaid and overdue principal of and (to the extent
permitted by law) on the unpaid interest on this Note at a rate per annum equal
to the Default Rate; and provided further that in no event shall the amount
contracted for and agreed to be paid by the Borrower as interest on this Note
exceed the highest lawful rate permissible under any law applicable hereto.
This Note evidences a loan or loans under, and is expressly subject to
the provisions of, a certain Revolving Credit Loan and Security Agreement dated
as of December __, 1999 (as amended from time to time, the "Loan Agreement") by
and between the Borrower and the Bank. The holder of this Note is entitled to
the benefits of the Loan Agreement, and to the benefits of the other Loan
Documents referred to therein. Neither this reference to such Loan Agreement nor
any provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
otherwise provided herein. All payments of principal of and interest on this
Note shall be payable in immediately available funds at the address of the Bank
set forth in the Loan Agreement without deduction, setoff or counterclaim.
Capitalized terms used herein without definition shall have the respective
meanings ascribed to them in the Loan Agreement.
This Note is subject to prepayment in whole or in part and to
acceleration on Default at the times and in the manner specified in the Loan
Agreement. The maker and all endorsers of this Note hereby waive presentment
demand, notice, protest, notice of intent to accelerate, notice to accelerate,
and all other demands and notices in connection with the delivery, acceptance,
performance or enforcement of this Note. In case of an Event of Default
including, without
75
<PAGE> 77
limitation, a Default in the payment of any principal of or interest on this
Note, the Borrower will pay to the Bank such further amount as shall be
sufficient to cover the cost and expense of collection including, without
limitation, reasonable attorneys' fees, expenses and disbursements.
The Borrower hereby grants to Bank, a lien, security interest and right
of set off as security for all liabilities and obligations to Bank, whether now
existing or hereafter arising, upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of KeyCorp, or in
transit to any of them. At any time that an Event of Default exists, without
demand or notice, Bank may set off the same or any part thereof and apply the
same to any liability or obligation of the Borrower and any guarantor even
though unmatured and regardless of the adequacy of any other collateral securing
the Loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SET OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.
This Note shall be construed in accordance with and governed by the
internal laws of the State of Maine (without giving effect to conflicts of laws
principles) and is executed as a sealed instrument as of the date first above
written.
WITNESS: BROOKWOOD COMPANIES
INCORPORATED
By:
- ---------------------------- -----------------------------------
Name: Duane O. Schmidt
Title: Vice President Finance
Chief Financial Officer
WITNESS:
KENYON INDUSTRIES, INC.
By:
- ---------------------------- -----------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
WITNESS:
BROOKWOOD LAMINATING, INC.
By:
- ---------------------------- -----------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
76
<PAGE> 78
EXHIBIT B
KEYBANK NATIONAL ASSOCIATION
Revolving Credit Note
[date]
$[amount] Portland, Maine
The undersigned (collectively, the "Borrower"), for value received,
hereby promise to pay to KEYBANK NATIONAL ASSOCIATION, a national banking
association (the "Bank"), or order, on or before ______________, a maturity date
five years from the date hereof, the principal amount of ____________ DOLLARS
($___________.00), or such lesser amount as may, at the maturity hereof, whether
by declaration, acceleration or otherwise, be the aggregate unpaid principal
amount of the Equipment Revolving Credit Loan made by the Bank to the Borrower
pursuant to the Loan Agreement referred to below.
This Note shall bear interest (computed on the basis of the actual
number of days elapsed over a 360-day year) on the unpaid principal amount
hereof at the rate or rates per annum specified in the Loan Agreement referred
to below. Commencing on _________________, and on the 1st Business Day of each
month thereafter, Borrower agrees to pay to Bank fixed monthly payments of
principal, based upon a standard five-year amortization schedule, in the amount
of $____________, plus accrued interest, until and including the maturity
(whether by declaration, acceleration or otherwise). During the continuance of
any Event of Default, at the election of the Bank, the Borrower shall pay the
holder of this Note on demand by such holder, interest on the unpaid and overdue
principal of and (to the extent permitted by law) on the unpaid interest on this
Note at a rate per annum equal to the Default Rate; and provided further that in
no event shall the amount contracted for and agreed to be paid by the Borrower
as interest on this Note exceed the highest lawful rate permissible under any
law applicable hereto.
This Note evidences a loan or loans under, and is expressly subject to
the provisions of, a certain Revolving Credit Loan and Security Agreement dated
as of December __, 1999 (as amended from time to time, the "Loan Agreement") by
and between the Borrower and the Bank. The holder of this Note is entitled to
the benefits of the Loan Agreement, and to the benefits of the other Loan
Documents referred to therein. Neither this reference or such Loan Agreement nor
any provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
otherwise provided herein. All payments of principal of and interest on this
Note shall be payable in immediately available funds at the address of the Bank
set forth in the Loan Agreement without deduction, setoff or counterclaim.
Capitalized terms used herein without definition shall have the respective
meanings ascribed to them in the Loan Agreement.
This Note is subject to prepayment in whole or in part and to
acceleration on Default at times and in the manner specified in the Loan
Agreement. The maker and all endorsers of this Note hereby waive presentment,
demand, notice, protest, notice of intent to accelerate, notice to accelerate,
and all other demands and notices in connection with the delivery, acceptance,
77
<PAGE> 79
performance or enforcement of this Note. In case of an Event of Default
including, without limitation, a Default in the payment of any principal of or
interest on this Note, the Borrower will pay to the Bank such further amount as
shall be sufficient to cover the cost and expense of collection including,
without limitation, reasonable attorneys' fees, expenses and disbursements.
The Borrower hereby grants to Bank, a lien, security interest and right
of set off as security for all liabilities and obligations to Bank, whether now
existing or hereafter arising, upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of KeyCorp, or in
transit to any of them. At any time that an Event of Default exists, without
demand or notice, Bank may set off the same or any part thereof and apply the
same to any liability or obligation of the Borrower and any guarantor even
though unmatured and regardless of the adequacy of any other collateral securing
the Loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SET OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.
This Note shall be construed in accordance with and governed by the
internal laws of the State of Maine (without giving effect to conflicts of laws
principles) and is executed as a sealed instrument as of the date first above
written.
WITNESS:
BROOKWOOD COMPANIES INCORPORATED
By:
- ---------------------------- -----------------------------------
Name:
Title:
WITNESS:
KENYON INDUSTRIES, INC.
By:
- ---------------------------- -----------------------------------
Name:
Title:
WITNESS:
BROOKWOOD LAMINATING, INC.
By:
- ---------------------------- -----------------------------------
Name:
Title:
78
<PAGE> 80
EXHIBIT C
KEYBANK NATIONAL ASSOCIATION
Revolving Credit Note
December __, 1999
$2,000,000.00 Portland, Maine
The undersigned (collectively, the "Borrower"), for value received,
hereby promise to pay to KEYBANK NATIONAL ASSOCIATION, a national banking
association (the "Bank"), or order, on or before December __, 2002, the
principal amount of TWO MILLION DOLLARS ($2,000,000.00) (the "Acquisition
Revolving Credit Limit"), or such lesser amount as may, at the maturity hereof,
whether by declaration, acceleration or otherwise, be the aggregate unpaid
principal amount of all Acquisition Revolving Credit Loans made by the Bank to
the Borrower pursuant to the Loan Agreement referred to below.
This Note shall bear interest (computed on the basis of the actual
number of days elapsed over a 360-day year) on the unpaid principal amount
hereof at the rate or rates per annum specified in the Loan Agreement referred
to below, payable monthly in arrears on the first Business Day of each month
commencing on January 1, 2000 (Except as to LIBOR Loans having an Interest
Period of 180 days, which shall be payable on the last Business Day of every
third month of said Interest Period and on the last day of said Interest Period;
otherwise, LIBOR loans are payable on the last day of the applicable Interest
Period), and at maturity (whether by declaration, acceleration or otherwise);
provided that during the continuance of any Event of Default, at the election of
the Bank, the Borrower shall pay the holder of this Note, on demand by such
holder, interest on the unpaid and overdue principal of and (to the extent
permitted by law) on the unpaid interest on this Note at a rate per annum equal
to the Default Rate; and provided further that in no event shall the amount
contracted for and agreed to be paid by the Borrower as interest on this Note
exceed the highest lawful rate permissible under any law applicable hereto.
This Note evidences a loan or loans under, and is expressly subject to
the provisions of, a certain Revolving Credit Loan and Security Agreement dated
as of December __, 1999 (as amended from time to time, the "Loan Agreement") by
and between the Borrower and the Bank. The holder of this Note is entitled to
the benefits of the Loan Agreement, and to the benefits of the other Loan
Documents referred to therein. Neither this reference to such Loan Agreement nor
any provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
otherwise provided herein. All payments of principal of and interest on this
Note shall be payable in immediately available funds at the address of the Bank
set forth in the Loan Agreement without deduction, setoff or counterclaim.
Capitalized terms used herein without definition shall have the respective
meanings ascribed to them in the Loan Agreement.
This Note is subject to prepayment in whole or in part and to
acceleration on Default at the times and in the manner specified in the Loan
Agreement. The maker and all endorsers of this Note hereby waive presentment
demand, notice, protest, notice of intent to accelerate, notice to accelerate,
and all other demands and notices in connection with the delivery, acceptance,
79
<PAGE> 81
performance or enforcement of this Note. In case of an Event of Default
including, without limitation, a Default in the payment of any principal of or
interest on this Note, the Borrower will pay to the Bank such further amount as
shall be sufficient to cover the cost and expense of collection including,
without limitation, reasonable attorneys' fees, expenses and disbursements.
The Borrower hereby grants to Bank, a lien, security interest and right
of set off as security for all liabilities and obligations to Bank, whether now
existing or hereafter arising, upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of KeyCorp, or in
transit to any of them. At any time that an Event of Default exists, without
demand or notice, Bank may set off the same or any part thereof and apply the
same to any liability or obligation of the Borrower and any guarantor even
though unmatured and regardless of the adequacy of any other collateral securing
the Loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SET OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.
This Note shall be construed in accordance with and governed by the
internal laws of the State of Maine (without giving effect to conflicts of laws
principles) and is executed as a sealed instrument as of the date first above
written.
WITNESS:
BROOKWOOD COMPANIES INCORPORATED
By:
- ---------------------------- -----------------------------------
Name: Duane O. Schmidt
Title: Vice President Finance
Chief Financial Officer
WITNESS:
KENYON INDUSTRIES, INC.
By:
- ---------------------------- -----------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
WITNESS:
BROOKWOOD LAMINATING, INC.
By:
- ---------------------------- -----------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
80
<PAGE> 82
EXHIBIT D
KEYBANK NATIONAL ASSOCIATION
ONE CANAL PLAZA, PORTLAND, MAINE 04101
FAX (207) 874-7739
BORROWING BASE CERTIFICATE
In furtherance of the requirements of the Revolving Credit Loan and Security
Agreement dated as of December __, 1999 ("Agreement") by and among Brookwood
Companies Incorporated, Kenyon Industries, Inc., Brookwood Laminating, Inc. and
KeyBank National Association, the undersigned certifies that, as of the close of
business on _______________, the following computations are true and correct:
Borrowing Base is defined in the Agreement.
Maximum Credit Available: $17,000,000
<TABLE>
<CAPTION>
WORKING CAPITAL REVOLVER:
- -------------------------
AMOUNT PERCENT TOTAL
<S> <C> <C> <C>
DUE FROM FACTORS
BROOKWOOD COMPANIES
------------------
UZZI
------------------
TOTAL 90% $
------------------ ------------------
ELIGIBLE RECEIVABLES (<60
DAYS)
BROOKWOOD COMPANIES 80% $
------------------ ------------------
UZZI NONE
FINISHED ROLL GOODS
INVENTORY 50% $
------------------ ------------------
ORDERLY LIQUIDATION VALUE
OF 70% $
------------------ ------------------
EQUIPMENT PER APPRAISAL
GROSS W/C REVOLVER
AVAILABILITY $
----------------------------
LESS:
ACQUISITION REVOLVER OUTSTANDING $
----------------------------
(RESERVE AS CALCULATED BELOW)
</TABLE>
81
<PAGE> 83
NET W/C REVOLVER AVAILABILITY $
----------------------------
<TABLE>
<CAPTION>
ACQUISITION REVOLVER:
- ---------------------
<S> <C> <C> <C> <C>
INITIAL DRAW AMOUNT FOR PURCHASE (UP TO $1,000,000) $
-----------------
START UP COSTS FOR EACH STORE: AMOUNT PERCENT ACTUAL DRAW
AMOUNT
#1 50% $
------------------ ------------------ -----------------
#2 50% $
------------------ ------------------ -----------------
#3 50% $
------------------ ------------------ -----------------
#4 50% $
------------------ ------------------ -----------------
ACQUISITION REVOLVER OUTSTANDING: $
---------------------
</TABLE>
The undersigned, authorized to act and acting for and on behalf of Brookwood
Companies Incorporated hereby certifies that the foregoing Borrowing Base
Certificate is true and correct to the best of his/her knowledge.
Date: Authorized Signature:
------------------- -----------------------
Name:
Title: Vice President Finance and Chief
Financial Officer
Brookwood Companies Incorporated
The undersigned, authorized to act and acting for and on behalf of Kenyon
Industries, Inc. hereby certifies that the foregoing Borrowing Base Certificate
is true and correct to the best of his/her knowledge.
Date: Authorized Signature:
------------------- -----------------------
Name:
Title: Treasurer and Secretary
Kenyon Industries, Inc.
The undersigned, authorized to act and acting for and on behalf of Brookwood
Laminating, Inc. hereby certifies that the foregoing Borrowing Base Certificate
is true and correct to the best of his/her knowledge.
Date: Authorized Signature:
------------------- -----------------------
Name:
Title: Treasurer and Secretary
Brookwood Laminating, Inc.
82
<PAGE> 84
EXHIBIT E
BROOKWOOD COMPANIES INCORPORATED
KENYON INDUSTRIES, INC.
BROOKWOOD LAMINATING, INC.
Compliance Certificate
The undersigned, Duane O. Schmidt, Vice President and Chief Financial
Officer of Brookwood Companies Incorporated, the Treasurer and Secretary of
Kenyon Industries, Inc., and the Treasurer and Secretary of Brookwood
Laminating, Inc. (the "Borrower"), hereby certifies on behalf of the Borrower as
of the date hereof the following:
1. No Defaults. I have read a copy of the Revolving Credit Loan and
Security Agreement dated December 22, 1999 (the "Loan Agreement")
between the Borrower and KeyBank National Association ("Bank"). Terms
used herein and not otherwise defined herein shall have the meanings
set forth in Section I of the Loan Agreement. The Borrower is not in
default in the performance or observance of any of the covenants, terms
or provisions of the Loan Agreement or any of the other Loan Documents.
Attached hereto as Appendix I are all relevant calculations needed to
determine whether the Borrower is in compliance with Section 9 of the
Loan Agreement.
2. No Material Changes, Etc. Except as disclosed on Appendix II hereto,
since ________________ [Date of most recent financial statements
furnished to the Bank], there have occurred no materially adverse
changes in the financial condition or business of the Borrower as shown
on or reflected in the balance sheet of the Borrower as at such date
other than (a) changes in the ordinary course of business that have not
had any materially adverse effect, either individually or in the
aggregate, on the business or financial condition of the Borrower, and
(b) changes resulting from the making of the Loan and the transactions
contemplated by the Loan Agreement.
3. No Materially Adverse Contracts, Etc. The Borrower is not subject to
any charter, organizational, or other legal restriction, or any
judgment, decree, order, rule or regulation, that has or is expected,
in the reasonable judgment of the Borrower's members, managers,
officers and directors, in the future to have a materially adverse
effect on the business, assets or financial condition of the Borrower.
The Borrower is not a party to any contract or ,agreement that has or
is expected, in the reasonable judgment of the Borrower's officers and
directors, to have any materially adverse effect on the business,
assets of financial condition of the Borrower.
83
<PAGE> 85
Date: BROOKWOOD COMPANIES
INCORPORATED
By:
------------------------------
Name: Duane O. Schmidt
Title: Vice President Finance
Chief Financial Officer
KENYON INDUSTRIES, INC.
By:
------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
BROOKWOOD LAMINATING, INC.
By:
------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
84
<PAGE> 86
APPENDIX I
BROOKWOOD COMPANIES INCORPORATED
KENYON INDUSTRIES, INC.
BROOKWOOD LAMINATING, INC.
LENDING REVOLVING CREDIT LOAN AND SECURITY AGREEMENT (DATED AS OF DECEMBER
__, 1999) WITH KEYBANK, N.A.
COMPLIANCE CERTIFICATE
For the Period Ended: __________
All covenants applying to Brookwood Companies Incorporated, Inc. and its
subsidiaries are on a fully consolidated basis.
QUARTERLY CURRENT RATIO
<TABLE>
<S> <C>
Current Assets
---------------
DIVIDED BY:
Current Liabilities*
---------------
*Revolving Lines treated as current
liability. =
---------------
MINIMUM REQUIRED: 1.40X COMPLIANCE: ___Y ___N
QUARTERLY TOTAL FUNDED DEBT / TOTAL CAPITALIZATION
Total Liabilities
---------------
Plus:
All Letters of Credit +
---------------
Less:
Trade Accounts Payable -
---------------
Accrued Expenses -
---------------
TOTAL FUNDED DEBT (A) =
---------------
DIVIDED BY:
Total Funded Debt (as defined above)
---------------
Plus:
Shareholders Equity +
---------------
TOTAL CAPITALIZATION (B) =
---------------
</TABLE>
85
<PAGE> 87
<TABLE>
<S> <C> <C>
A / B =
---------------
MAXIMUM ALLOWED 45% COMPLIANCE: ___Y___N
</TABLE>
QUARTERLY EBITDA / TOTAL FIXED CHARGES (TRAILING 12 MONTH BASIS)
<TABLE>
<CAPTION>
4th Previous Q 3rd Previous Q 2nd Previous Q Current Q Total
<S> <C> <C> <C> <C> <C>
Net Income
-------------- -------------- -------------- -------------- --------------
Plus:
Interest +
-------------- -------------- -------------- -------------- --------------
Income Taxes +
-------------- -------------- -------------- -------------- --------------
Depreciation +
-------------- -------------- -------------- -------------- --------------
EBITDA (C) =
--------------
DIVIDED BY:
4th Previous Q 3rd Previous Q 2nd Previous Q Current Q Total
Interest
-------------- -------------- -------------- -------------- --------------
Plus:
Required
Principal +
-------------- -------------- -------------- -------------- --------------
Cash CAPEX +
-------------- -------------- -------------- -------------- --------------
Dividends* +
-------------- -------------- -------------- -------------- --------------
Income Taxes* +
-------------- -------------- -------------- -------------- --------------
TOTAL FIXED CHARGES (D) =
--------------
C / D =
--------------
MINIMUM REQUIRED WITHOUT UZZI ACQUISITION 1.10X COMPLIANCE: ___Y ___N
MINIMUM REQUIRED WITH UZZI ACQUISITION 1.25X COMPLIANCE: ___Y ___N
</TABLE>
*Payment of dividends and/or federal income tax liabilities to Hallwood will be
allowed only to the extent that said cash outflows do not constitute a default
of the quarterly Fixed Charge covenant or TFD/TC ratio.
86
<PAGE> 88
QUARTERLY PRICING TIER
Total Funded Debt (as calculated above--A)
---------------
DIVIDED BY:
EBITDA (as calculated above--C)
---------------
TOTAL FUNDED DEBT / EBITDA =
---------------
<TABLE>
<CAPTION>
TIER TFD / EBITDA FACILITY #1 FACILITY #2 AND #3
<S> <C> <C> <C>
I > = 3.00x LIB + 2.50% LIB + 2.75%
II > = 2.50x and < 3.00x LIB + 2.25% LIB + 2.50%
III > = 2.00 and < 2.50x LIB + 2.00% LIB + 2.25%
IV < 2.00x LIB + 1.75% LIB + 2.00%
</TABLE>
APPROPRIATE PRICING TIER: _____I _____II _____ III _____ IV
AFFIRMATIONS
1) ACQUISITION OF UZZI IS SUBSTANTIALLY COMPLETE AS OF __________.
COMPLIANCE: ___ Y ___ N
2) INJECTION OF $500,000 MADE BY THE HALLWOOD GROUP, INC. AT TIME OF ACQUISITION
OF UZZI. COMPLIANCE: ___ Y ___ N
3) INJECTION OF $500,000 MADE BY THE HALLWOOD GROUP, INC. DURING FIRST YEAR
AFTER ACQUISITION OF UZZI. COMPLIANCE: ___ Y ___ N
4) LOANS OR ADVANCES TO THE HALLWOOD GROUP, INC. (PARENT CORPORATION) ARE
EXPRESSLY FORBIDDEN WITHOUT THE PRIOR CONSENT IN WRITING OF KEYBANK, N.A. ANY
UPSTREAM PAYMENTS OF DIVIDENDS AND/OR CALCULATED FEDERAL INCOME TAX LIABILITY
WILL BE LIMITED SUCH THAT SAID PAYMENTS DO NOT CREATE A DEFAULT OF ANY FINANCIAL
COVENANT BETWEEN BROOKWOOD COMPANIES INCORPORATED, INC. AND THE BANK.
COMPLIANCE: ___ Y ____ N
87
<PAGE> 89
- --------------------------------------------------------------------------------
REASONS FOR COVENANT DEFAULTS AND MANAGEMENT'S REMEDIES TO CURE:
- --------------------------------------------------------------------------------
THE UNDERSIGNED CERTIFIES THAT THE INFORMATION PRESENTED ABOVE IS CORRECT.
DATE
------------------------ ------------------------------
SIGNATURE
NAME:
TITLE: VICE PRESIDENT FINANCE
CHIEF FINANCIAL OFFICER
BROOKWOOD COMPANIES INCORPORATED
DATE
------------------------ ------------------------------
SIGNATURE
NAME:
TITLE: TREASURER AND SECRETARY
KENYON INDUSTRIES, INC.
DATE
------------------------ ------------------------------
SIGNATURE
NAME:
TITLE: TREASURER AND SECRETARY
BROOKWOOD LAMINATING, INC.
88
<PAGE> 90
APPENDIX II
89
<PAGE> 91
Exhibit F
Certificate
Reference is made to the Revolving Credit Loan and Security Agreement,
dated as of December 22, 1999 ("Loan Agreement") by and among Brookwood
Companies Incorporated, Kenyon Industries, Inc. ("Kenyon"), Brookwood
Laminating, Inc. ("Laminating" and together with Brookwood and Kenyon,
collectively referred to herein as "Borrower"), and KeyBank National Association
("Bank").
This Certificate is being delivered to the Bank pursuant to Section
2.3.3(a)(4) of the Loan Agreement. Terms not otherwise defined herein have the
meaning assigned in the Loan Agreement.
The undersigned, _________________________, the duly qualified and
elected ______________ of Borrower and authorized representative of Borrower,
hereby certifies on behalf of Borrower that, to his/her knowledge:
(i) The representations and warranties of Borrower set forth
in the Loan Agreement are true and complete in all material respects as
though each such representation and warranty were made on and as of the
date hereof; there exists no Default or Event of Default;
(ii) The Purchase Agreements, and the transactions
contemplated thereunder, have been duly executed, delivered and
performed in accordance with their terms by the parties thereto in all
respects, including the fulfillment of all conditions precedent as may
be set forth therein and giving effect to the terms of the Purchase
Agreements; and
(iii) Borrower has acquired and has good and marketable title
to the Purchased Assets, free and clear of all claims, liens, pledges
and encumbrances of any kind, except as expressly imposed by, or
permitted under the Loan Agreement; and
(iv) All actions and proceedings required by the Purchase
Agreements, applicable law and regulation have been taken and the
transactions required thereunder have been duly and validly taken and
consummated; and
(v) No court of competent jurisdiction has issued any
injunction, restraining order or other order which would prohibit
consummation of the transactions described in the Purchase Agreements
and no governmental or other action or proceeding has been threatened
or commenced, seeking any injunction, restraining order or other order
which seeks to void or otherwise modify the transactions described in
the Purchase Agreements; and
(vi) Attached hereto as Exhibit A are true, correct and
complete copies of the Purchase Agreements and all schedules thereto;
and
90
<PAGE> 92
(vii) The undersigned is authorized to sign this Certificate
by each of the Borrower.
Dated: BROOKWOOD COMPANIES INCORPORATED
-----------------------
By:
------------------------------
Name:
Its:
KENYON INDUSTRIES, INC.
By:
------------------------------
Name:
Its:
BROOKWOOD LAMINATING, INC.
By:
------------------------------
Name:
Its:
91
<PAGE> 93
KEYBANK NATIONAL ASSOCIATION
Revolving Credit Note
December ___, 1999
$17,000,000.00 Portland, Maine
The undersigned (collectively, the "Borrower"), for value received,
hereby promise to pay to KEYBANK NATIONAL ASSOCIATION, a national banking
association (the "Bank"), or order, on or before December __, 2002, the
principal amount of SEVENTEEN MILLION DOLLARS ($17,000,000.00) (the "Working
Capital Revolving Credit Limit"), or such lesser amount as may, at the maturity
hereof, whether by declaration, acceleration or otherwise, be the aggregate
unpaid principal amount of all Working Capital Revolving Credit Loans made by
the Bank to the Borrower pursuant to the Loan Agreement referred to below.
This Note shall bear interest (computed on the basis of the actual
number of days elapsed over a 360-day year) on the unpaid principal amount
hereof at the rate or rates per annum specified in the Loan Agreement referred
to below, payable monthly in arrears on the first Business Day of each month
commencing on January 1, 2000 (Except as to LIBOR Loans having an Interest
Period of 180 days, which shall be payable on the last Business Day of every
third month of said Interest Period and on the last day of said Interest Period;
otherwise, LIBOR loans are payable on the last day of the applicable Interest
Period), and at maturity (whether by declaration, acceleration or otherwise);
provided that during the continuance of any Event of Default, at the election of
the Bank, the Borrower shall pay the holder of this Note, on demand by such
holder, interest on the unpaid and overdue principal of and (to the extent
permitted by law) on the unpaid interest on this Note at a rate per annum equal
to the Default Rate; and provided further that in no event shall the amount
contracted for and agreed to be paid by the Borrower as interest on this Note
exceed the highest lawful rate permissible under any law applicable hereto.
This Note evidences a loan or loans under, and is expressly subject to
the provisions of, a certain Revolving Credit Loan and Security Agreement dated
as of December __, 1999 (as amended from time to time, the "Loan Agreement") by
and between the Borrower and the Bank. The holder of this Note is entitled to
the benefits of the Loan Agreement, and to the benefits of the other Loan
Documents referred to therein. Neither this reference to such Loan Agreement nor
any provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
otherwise provided herein. All payments of principal of and interest on this
Note shall be payable in immediately available funds at the address of the Bank
set forth in the Loan Agreement without deduction, setoff or counterclaim.
Capitalized terms used herein without definition shall have the respective
meanings ascribed to them in the Loan Agreement.
This Note is subject to prepayment in whole or in part and to
acceleration on Default at the times and in the manner specified in the Loan
Agreement. The maker and all endorsers of this Note hereby waive presentment
demand, notice, protest, notice of intent to accelerate, notice to accelerate,
and all other demands and notices in connection with the delivery, acceptance,
performance or enforcement of this Note. In case of an Event of Default
including, without limitation, a Default in the payment of any principal of or
interest on this Note, the Borrower will
<PAGE> 94
pay to the Bank such further amount as shall be sufficient to cover the cost and
expense of collection including, without limitation, reasonable attorneys' fees,
expenses and disbursements.
The Borrower hereby grants to Bank, a lien, security interest and right
of set off as security for all liabilities and obligations to Bank, whether now
existing or hereafter arising, upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of KeyCorp, or in
transit to any of them. At any time that an Event of Default exists, without
demand or notice, Bank may set off the same or any part thereof and apply the
same to any liability or obligation of the Borrower and any guarantor even
though unmatured and regardless of the adequacy of any other collateral securing
the Loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SET OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.
This Note shall be construed in accordance with and governed by the
internal laws of the State of Maine (without giving effect to conflicts of laws
principles) and is executed as a sealed instrument as of the date first above
written.
WITNESS:
BROOKWOOD COMPANIES INCORPORATED
By:
- ---------------------------- -------------------------------
Name: Duane O. Schmidt
Title: Vice President Finance
Chief Financial Officer
WITNESS:
KENYON INDUSTRIES, INC.
By:
- ---------------------------- -------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
WITNESS:
BROOKWOOD LAMINATING, INC.
By:
- ---------------------------- -------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
2
<PAGE> 95
KEYBANK NATIONAL ASSOCIATION
Revolving Credit Note
[date]
$[amount] Portland, Maine
The undersigned (collectively, the "Borrower"), for value received, hereby
promise to pay to KEYBANK NATIONAL ASSOCIATION, a national banking association
(the "Bank"), or order, on or before ______________, a maturity date five years
from the date hereof, the principal amount of ____________ DOLLARS
($___________.00), or such lesser amount as may, at the maturity hereof, whether
by declaration, acceleration or otherwise, be the aggregate unpaid principal
amount of the Equipment Revolving Credit Loan made by the Bank to the Borrower
pursuant to the Loan Agreement referred to below.
This Note shall bear interest (computed on the basis of the actual number of
days elapsed over a 360 -day year) on the unpaid principal amount hereof at the
rate or rates per annum specified in the Loan Agreement referred to below.
Commencing on _________________, and on the 1st Business Day of each month
thereafter, Borrower agrees to pay to Bank fixed monthly payments of principal,
based upon a standard five-year amortization schedule, in the amount of
$____________, plus accrued interest, until and including the maturity (whether
by declaration, acceleration or otherwise). During the continuance of any Event
of Default, at the election of the Bank, the Borrower shall pay the holder of
this Note on demand by such holder, interest on the unpaid and overdue principal
of and (to the extent permitted by law) on the unpaid interest on this Note at a
rate per annum equal to the Default Rate; and provided further that in no event
shall the amount contracted for and agreed to be paid by the Borrower as
interest on this Note exceed the highest lawful rate permissible under any law
applicable hereto.
This Note evidences a loan or loans under, and is expressly subject to the
provisions of, a certain Revolving Credit Loan and Security Agreement dated as
of December __, 1999 (as amended from time to time, the "Loan Agreement") by and
between the Borrower and the Bank. The holder of this Note is entitled to the
benefits of the Loan Agreement, and to the benefits of the other Loan Documents
referred to therein. Neither this reference or such Loan Agreement nor any
provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
otherwise provided herein. All payments of principal of and interest on this
Note shall be payable in immediately available funds at the address of the Bank
set forth in the Loan Agreement without deduction, setoff or counterclaim.
Capitalized terms used herein without definition shall have the respective
meanings ascribed to them in the Loan Agreement.
This Note is subject to prepayment in whole or in part and to acceleration
on Default at times and in the manner specified in the Loan Agreement. The maker
and all endorsers of this Note hereby waive presentment, demand, notice,
protest, notice of intent to accelerate, notice to accelerate, and all other
demands and notices in connection with the delivery, acceptance, performance or
enforcement of this Note. In case of an Event of Default including, without
limitation, a Default in the payment of any principal of or interest on this
Note, the Borrower will
<PAGE> 96
pay to the Bank such further amount as shall be sufficient to cover the cost and
expense of collection including, without limitation, reasonable attorneys' fees,
expenses and disbursements.
The Borrower hereby grants to Bank, a lien, security interest and right of
set off as security for all liabilities and obligations to Bank, whether now
existing or hereafter arising, upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of KeyCorp, or in
transit to any of them. At any time that an Event of Default exists, without
demand or notice, Bank may set off the same or any part thereof and apply the
same to any liability or obligation of the Borrower and any guarantor even
though unmatured and regardless of the adequacy of any other collateral securing
the Loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SET OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.
This Note shall be construed in accordance with and governed by the internal
laws of the State of Maine (without giving effect to conflicts of laws
principles) and is executed as a sealed instrument as of the date first above
written.
WITNESS:
BROOKWOOD COMPANIES INCORPORATED
By:
- ----------------------------- ---------------------------------
Name:
Title:
WITNESS:
KENYON INDUSTRIES, INC.
By:
- ----------------------------- ---------------------------------
Name:
Title:
WITNESS:
BROOKWOOD LAMINATING, INC.
By:
- ----------------------------- ---------------------------------
Name:
Title:
2
<PAGE> 97
KEYBANK NATIONAL ASSOCIATION
Revolving Credit Note
December __, 1999
$2,000,000.00 Portland, Maine
The undersigned (collectively, the "Borrower"), for value received,
hereby promise to pay to KEYBANK NATIONAL ASSOCIATION, a national banking
association (the "Bank"), or order, on or before December __, 2002, the
principal amount of TWO MILLION DOLLARS ($2,000,000.00) (the "Acquisition
Revolving Credit Limit"), or such lesser amount as may, at the maturity hereof,
whether by declaration, acceleration or otherwise, be the aggregate unpaid
principal amount of all Acquisition Revolving Credit Loans made by the Bank to
the Borrower pursuant to the Loan Agreement referred to below.
This Note shall bear interest (computed on the basis of the actual
number of days elapsed over a 360-day year) on the unpaid principal amount
hereof at the rate or rates per annum specified in the Loan Agreement referred
to below, payable monthly in arrears on the first Business Day of each month
commencing on January 1, 2000 (Except as to LIBOR Loans having an Interest
Period of 180 days, which shall be payable on the last Business Day of every
third month of said Interest Period and on the last day of said Interest Period;
otherwise, LIBOR loans are payable on the last day of the applicable Interest
Period), and at maturity (whether by declaration, acceleration or otherwise);
provided that during the continuance of any Event of Default, at the election of
the Bank, the Borrower shall pay the holder of this Note, on demand by such
holder, interest on the unpaid and overdue principal of and (to the extent
permitted by law) on the unpaid interest on this Note at a rate per annum equal
to the Default Rate; and provided further that in no event shall the amount
contracted for and agreed to be paid by the Borrower as interest on this Note
exceed the highest lawful rate permissible under any law applicable hereto.
This Note evidences a loan or loans under, and is expressly subject to
the provisions of, a certain Revolving Credit Loan and Security Agreement dated
as of December __, 1999 (as amended from time to time, the "Loan Agreement") by
and between the Borrower and the Bank. The holder of this Note is entitled to
the benefits of the Loan Agreement, and to the benefits of the other Loan
Documents referred to therein. Neither this reference to such Loan Agreement nor
any provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal of and interest on this Note as
otherwise provided herein. All payments of principal of and interest on this
Note shall be payable in immediately available funds at the address of the Bank
set forth in the Loan Agreement without deduction, setoff or counterclaim.
Capitalized terms used herein without definition shall have the respective
meanings ascribed to them in the Loan Agreement.
This Note is subject to prepayment in whole or in part and to
acceleration on Default at the times and in the manner specified in the Loan
Agreement. The maker and all endorsers of this Note hereby waive presentment
demand, notice, protest, notice of intent to accelerate, notice to accelerate,
and all other demands and notices in connection with the delivery, acceptance,
performance or enforcement of this Note. In case of an Event of Default
including, without
<PAGE> 98
limitation, a Default in the payment of any principal of or interest on this
Note, the Borrower will pay to the Bank such further amount as shall be
sufficient to cover the cost and expense of collection including, without
limitation, reasonable attorneys' fees, expenses and disbursements.
The Borrower hereby grants to Bank, a lien, security interest and right
of set off as security for all liabilities and obligations to Bank, whether now
existing or hereafter arising, upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of KeyCorp, or in
transit to any of them. At any time that an Event of Default exists, without
demand or notice, Bank may set off the same or any part thereof and apply the
same to any liability or obligation of the Borrower and any guarantor even
though unmatured and regardless of the adequacy of any other collateral securing
the Loan. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES
WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO
EXERCISING ITS RIGHT OF SET OFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND
IRREVOCABLY WAIVED.
This Note shall be construed in accordance with and governed by the
internal laws of the State of Maine (without giving effect to conflicts of laws
principles) and is executed as a sealed instrument as of the date first above
written.
WITNESS:
BROOKWOOD COMPANIES INCORPORATED
By:
- ------------------------------ ---------------------------------
Name: Duane O. Schmidt
Title: Vice President Finance
Chief Financial Officer
WITNESS:
KENYON INDUSTRIES, INC.
By:
- ------------------------------ ---------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
WITNESS:
BROOKWOOD LAMINATING, INC.
By:
- ------------------------------ ---------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
2
<PAGE> 99
STOCK PLEDGE AND SECURITY AGREEMENT
This Stock Pledge and Security Agreement ("Agreement") made by
Brookwood Companies Incorporated, a Delaware corporation with a principal place
of business at 232 Madison Avenue - 10th Floor, New York, NY 10016 ("Pledgor"),
in favor of KeyBank National Association, a national banking association having
a place of business at One Canal Plaza, Portland, Maine 04101-4035 ("Pledgee").
RECITALS:
The following facts set forth the background to this Agreement:
A. The Pledgor is owner of 3,000 shares of the outstanding
common stock of Kenyon Industries, Inc. (the "Corporation"), a Delaware
corporation, which shares constitute 100% of the total issued and outstanding
common stock of the Corporation.
B. As part of a Revolving Credit Loan and Security Agreement
between Pledgor and Pledgee, inter alia, dated December ___, 1999 ("Loan
Agreement"), the Pledgor has agreed to grant the Pledgee the security interests
hereinafter described.
NOW, THEREFORE, in consideration of the premises, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Pledgor agrees with the Pledgee as follows:
Section 1. Pledge of Stock. In consideration of the Loans from Pledgee
to Pledgor, evidenced by the Notes executed and delivered by Pledgor to Pledgee
in accordance with the terms and conditions of the Loan Agreement, Pledgor
hereby pledges, assigns, grants a security interest in, and delivers to the
Pledgee, at its address specified above, the 3,000 shares of the common stock
of the Corporation owned by the Pledgor as evidenced by Certificate No. 1 in
the Corporation's Stock Register book, which Stock Certificate, accompanied by
instruments of assignment thereof duly executed in blank by the Pledgor, have
been delivered contemporaneously herewith to the Pledgee.
<PAGE> 100
In the event the Pledgor shall acquire any additional shares of the
capital stock of any class of the Corporation, or of any corporation which is
the successor of the Corporation, or any securities exchangeable for or
convertible into shares of such capital stock of any class of the Corporation,
or of any successor to the Corporation, by purchase, stock dividend,
distribution of capital or otherwise, the Pledgor shall forthwith pledge such
additional shares to the Pledgee under this Agreement (all such stock being
hereinafter collectively referred to as the "Stock" or the "Collateral").
Section 2. Definitions. Unless otherwise defined herein, capitalized
terms used herein without definition shall have the respective meanings
ascribed to them in the Loan Agreement.
Section 3. Security for Obligations. This Agreement and the pledge of
the Collateral hereunder is made with the Pledgee as security for the
Obligations.
Section 4. Liquidation, Recapitalization, Etc. All sums of money and
property paid or distributed in respect of the Stock, whether by dividend or
sums paid upon such a liquidation, dissolution, recapitalization or
reclassification of the Corporation, may be paid or distributed to Pledgor as
long as there is no Event of Default under the Loan Agreement and provided such
payment or distribution does not cause or create an Event of Default;
otherwise, all such payments and distributions which are received by the
Pledgor shall, until paid or delivered to the Pledgee, be held in trust for the
Pledgee as security for the Obligations.
Section 5. Warranty of Title. The Pledgor warrants that Pledgor has
good and marketable title to the Stock described in Section 1 hereof, subject
to no pledges, liens, security interests, charges, options, restrictions or
other encumbrances except (a) such liens as shall be released upon and in
connection with the closing of the Loan Agreement and (b) the security interest
created by this Agreement, and any other agreements executed in connection
herewith, and that Pledgor has full power, authority and legal right to pledge
all of such Stock pursuant to this Agreement. The Pledgor covenants that
Pledgor will defend the Pledgee's rights and security interest in such Stock
against the claims and demands of all persons whomsoever, and
2
<PAGE> 101
the Pledgor covenants that Pledgor will have the like title to and right to
pledge any other Collateral hereunder and will likewise defend the Pledgee's
rights and security interest therein.
Section 6. Voting, Etc., Prior to Maturity. Unless and until a Default
shall have occurred and be continuing, the Pledgee shall be entitled to vote
the Stock and to give consents, waivers and ratifications in respect of the
Stock; provided, however, that no vote shall be cast, or consent, waiver or
ratification given or action taken, which would be inconsistent with or violate
any provisions of this Agreement or any instrument or agreement evidencing or
securing any of the Obligations; and provided further that the Pledgee after
Default, which Default is not cured within any applicable grace period, may
cause the Stock to be transferred into Pledgee's own name as collateral
security. All such rights of the Pledgor to vote and give consents, waivers and
ratifications with respect to the Stock shall, at the Pledgee's option, as
evidenced by the Pledgee's notifying Pledgor of such election, cease in case a
Default shall have occurred and be continuing.
Section 7. Remedies. If any Default shall have occurred and be
continuing, the Pledgee shall thereafter have the following rights and remedies
(to the extent permitted by applicable law), in addition to the rights and
remedies of a secured party under the Uniform Commercial Code as adopted in the
State of Maine, all such rights and remedies being cumulative, not exclusive,
and enforceable alternatively, successively or concurrently, at such time or
times as the Pledgee deems expedient:
(a) If the Pledgee so elects and gives notice of such
election to the Pledgor, the Pledgee may vote any or all of the Stock (whether
or not the same shall have been transferred into Pledgee's name or the name of
its nominee or nominees) and give all consents, waivers and ratifications in
respect of the Stock and otherwise act with respect thereto as though it were
the outright owner thereof (the Pledgor hereby irrevocably constituting and
appointing the Pledgee the proxy and attorney-in-fact of the Pledgor, with full
power of substitution, to do so);
3
<PAGE> 102
(b) the Pledgee may demand, sue for, collect or make any
compromise or settlement the Pledgee deems suitable in respect of any
Collateral held by it hereunder;
(c) the Pledgee may sell, resell, assign and deliver, or
otherwise dispose of any or all of the Collateral, for cash and/or credit, and
upon such terms, at such place or places and at such time or times and to such
persons, firms, companies or corporations as the Pledgee deems expedient, all
without demand for performance by the Pledgor or any notice or advertisement
whatsoever except as may be required by law; and
(d) the Pledgee may cause all or any part of the Stock held
by it to be transferred into Pledgee's name or the name of its nominee or
nominees, if it has not already done so. The Pledgee may buy any part or all of
the Collateral at any public sale, and if any part or all of the Collateral is
of a type customarily sold in a recognized market or is of the type which is
the subject of widely-distributed standard price quotations, the Pledgee may
buy at private sale and may make payments thereof by any means. The Pledgee may
apply the cash proceeds actually received from any sale or other disposition to
the expenses of retaking, holding, preparing for sale, selling and the like, to
reasonable attorneys' fees and all reasonable legal, travel and other expenses
which may be incurred by the Pledgee in attempting to collect the Obligations
or to enforce this Agreement, or in the prosecution or defense of any action or
proceeding related to the subject matter of this Agreement and to the
Obligations secured hereby.
The Pledgor recognizes that the Pledgee may be unable to effect a
public sale of the Stock by reason of certain prohibitions contained in the
Securities Act of 1933, as amended, but may be compelled to resort to one or
more private sales thereof to a restricted group of purchasers. The Pledgor
agrees that any such private sales may be at prices and other terms less
favorable to the Seller than if sold at public sales and that such private
sales shall not by reason thereof be deemed not to have been made in a
commercially reasonable manner. The Pledgee shall be under no obligation to
delay a sale of any of the Stock for the period of time necessary to permit the
issuer of such securities to register such securities for public sale under the
Securities Act of 1933, as amended, even if the issuer would agree to do so.
4
<PAGE> 103
Section 8. Marshalling. The Pledgee shall not be required to marshall
any present or future security for (including, but not limited to, this
Agreement and the Collateral pledged hereunder), or guaranties of, the
Obligations or any of them, or to resort to such security or guaranties in any
particular order. All of Pledgee's rights hereunder and in respect of such
securities and guaranties shall be cumulative and in addition to all other
rights, however existing or arising. To the extent that Pledgor lawfully may do
so, the Pledgor hereby agrees that Pledgor will not invoke any law relating to
the marshalling of collateral which might cause delay in or impede the
enforcement of the Pledgee's rights under this Agreement or under any other
instrument evidencing any of the Obligations or under which any of the
Obligations is outstanding or by which any the Obligations is secured or
guaranteed. To the extent that Pledgor lawfully may do so, the Pledgor hereby
irrevocably waives the benefits of all such laws.
Section 9. Pledgor's Obligations Not Affected. The Obligations of the
Pledgor hereunder shall remain in full force and effect without regard to, and
shall not be impaired by: (a) any bankruptcy, insolvency, reorganization,
arrangement, readjustment, composition, liquidation, or the like of any
Borrower or the Pledgor; (b) any exercise or nonexercise, or any waiver, by the
Pledgee of any right, remedy, power or privilege under or in respect of any of
the Obligations or any security thereof (including this Agreement); (c) any
amendment to or modification of any of the instruments or agreements evidencing
or securing any of the Obligations; or (d) the taking of additional security
for, or any guaranty of, any of the Obligations, or the release or discharge or
termination of any security or guaranty for any of the Obligations, whether or
not the Pledgor shall have notice or knowledge of any of the foregoing.
Section 10. Transfer, Etc., By Pledgor. Without the prior written
consent of the Pledgee, the Pledgor will not sell, assign, transfer or
otherwise dispose of, grant any option with respect to, or pledge or grant any
security interest in or otherwise encumber any of the Collateral or any
interest therein, except for the pledge thereof provided for in this Agreement.
Section 11. Further Assurances. The Pledgor will do all such acts, and
will furnish to the Pledgee all such financing statements, certificates, legal
opinions and other documents and
5
<PAGE> 104
will obtain all such governmental consents and corporate approvals and will do
or cause to be done all such other things as the Pledgee may reasonably request
from time to time in order to give full effect to this Agreement and to secure
the rights of the Pledgee hereunder.
Section 12. Pro-Rata Security. All amounts owing with respect to the
Obligations shall be equally and ratably secured by, and proportionately
entitled to the benefits of, the Collateral, provided that the reasonable
costs, fees and expenses of the Pledgee in enforcing its rights hereunder,
including reasonable attorneys' fees, shall constitute a first claim on all the
Collateral and be entitled to priority over all other Obligations in respect of
all distributions of any proceeds from any portion of the Collateral.
Section 13. Pledgee's Exoneration. Under no circumstances shall the
Pledgee be deemed to assume any responsibility for or obligation or duty with
respect to any part of all of the Collateral of any nature or kind, other than
the physical custody thereof, or any matter or proceedings arising out of or
relating thereto. The Pledgee shall not be required to take any action of any
kind to collect, preserve or protect the Pledgee's or the Pledgor's rights in
the Collateral or against other parties thereto. The Pledgee's prior recourse
to any part of all of the Collateral shall not constitute a condition of any
demand, suit or proceeding for payment of collection of the Obligations.
Section 14. No Waiver, Etc. No act, failure or delay by the Pledgee
shall constitute a waiver of its rights and remedies hereunder or otherwise. No
single or partial waiver by the Pledgee of any default, right or remedy which
it may have shall operate as a waiver of any other default, right or remedy or
of the same default, right or remedy on a future occasion. The Pledgor hereby
waives presentment, notice of dishonor and protest of all instruments, included
in or evidencing any of the Obligations or the Collateral, and any and all
other notices and demands whatsoever (except as expressly provided herein).
Section 15. Notice, Etc. All notices, requests and other
communications hereunder shall be in conformity with the terms and conditions
of the Loan Agreement, addressed to the Pledgor and the Pledgee at their
respective addresses indicated at the beginning of this Agreement or to
6
<PAGE> 105
such other address as the party to receive any such communication or notice may
have designated by written notice to the other party.
Section 16. Termination. Upon the payment and performance in full of
the Obligations in accordance with their terms and the performance by the
Pledgor of all of its covenants and agreements hereunder, this Agreement shall
terminate and the Pledgor shall be entitled to the return of such Collateral in
the possession or control of the Pledgee as has not theretofore been disposed
of pursuant to the provisions hereof, together with any moneys and other
property at the time held by the Pledgee hereunder.
Section 17. Miscellaneous Provisions. Neither this Agreement nor any
term hereof may be changed, waived, discharged or terminated except by a
written instrument expressly referring to this Agreement and to the provisions
so modified or limited, and executed by the party to be charged. This Agreement
and all Obligations of the Pledgor shall be binding upon the successors and
assigns of the Pledgor, and shall, together with the rights and remedies of the
Pledgee hereunder, inure to the benefit of the Pledgee, and its successors and
assigns. This Agreement and the Obligations of the Pledgor hereunder shall be
governed by and construed in accordance with the laws of State of Maine.
Pledgor agrees that the venue for adjudication of any dispute or controversy
arising under this Agreement shall be any court of competent jurisdiction in
the State of Maine, all as more specifically set forth in the Loan Agreement.
The descriptive section headings have been inserted for convenience of
reference only and do not define or limit the provisions hereof. If any term of
this Agreement shall be held to be invalid, illegal or unenforceable, the
validity of all other terms hereof shall be in no way affected thereby, and
this Agreement shall be construed and be enforceable as if such invalid,
illegal or unenforceable term had not been included herein. The Pledgor
acknowledges receipt of a copy of this Agreement. Terms used herein without
definition which are defined in the Uniform Commercial Code have such defined
meanings herein, unless the context otherwise indicates or requires. This
Agreement is intended to take effect as a sealed instrument.
7
<PAGE> 106
IN WITNESS WHEREOF, the Pledgor and Pledgee have executed this
Agreement under seal on the _____ day of December, 1999.
WITNESS: PLEDGOR:
Brookwood Companies Incorporated
By:
- ---------------------------------- ---------------------------------
Name:
Title:
PLEDGEE:
KeyBank National Association
By:
- ---------------------------------- ---------------------------------
Name:
Title:
8
<PAGE> 107
CONSENT AND AGREEMENT
This Consent and Agreement ("Agreement") is made as of the ___ day of
December, 1999 by The Hallwood Group Incorporated, a corporation organized
under the laws of the State of Delaware, having a place of business at 3710
Rawlins, Suite 1500, Dallas, Texas 75219 ("Hallwood").
WITNESSETH:
WHEREAS, Brookwood Companies Incorporated, a corporation organized
under the laws of the State of Delaware and having a place of business at 232
Madison Avenue, 10th Floor, New York, NY 10016 ("Brookwood") is a wholly owned
subsidiary of Hallwood; and
WHEREAS, Brookwood and its wholly owned subsidiaries, Kenyon
Industries, Inc., a corporation organized under the laws of the State of
Delaware, having a place of business at 36 Sherman Avenue, Kenyon, Rhode Island
02836 ("Kenyon"), and Brookwood Laminating, Inc., a corporation organized under
the laws of the State of Delaware, having a place of business at 1425 Kingstown
Road, Peace Dale, Rhode Island 02883 ("Laminating"), have requested that
KeyBank National Association, a national banking association having a place of
business at One Canal Plaza, Portland, Maine 04101-4035 ("Bank") make loans and
provide other financial accommodations; and
WHEREAS, Bank is willing to make such loans and provide such financial
accommodations to Brookwood, Kenyon and Laminating subject to the terms and
conditions of that certain Revolving Credit Loan and Security Agreement by and
among Bank, Brookwood, Kenyon and Laminating, dated as of December ___, 1999
("Loan Agreement"); and
WHEREAS, to induce Bank to make such loans and provide such financial
accommodations to Brookwood, Kenyon and Laminating, Hallwood desires to provide
its consent and agreement as provided herein;
NOW, THEREFORE, in consideration of the loans and financial
accommodations to Brookwood, Kenyon and Laminating, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Hallwood agrees as follows:
1. Hallwood hereby consents and agrees that so long as any amount
remains outstanding and unpaid under the Loan Agreement, Brookwood shall not
make any Distributions to Hallwood; provided, however, that payments to
Hallwood of dividends or for federal income taxes based upon quarterly
calculations of fixed charge coverage as may have been paid or payable by
Brookwood to Hallwood, may be made so long as such payment by Brookwood does
not result in a default of any financial covenants as described in the Loan
Agreement.
<PAGE> 108
2. Hallwood agrees that so long as any amounts remain outstanding and
unpaid under the Loan Agreement, there shall be no loans or advances to
Hallwood from Brookwood, Kenyon or Laminating; nor shall any part of advances
or loan proceeds to Brookwood, Kenyon or Laminating under the Loan Agreement,
be utilized by Hallwood.
3. This Agreement shall be binding upon Hallwood and its successors
and assigns and shall inure to the benefit of the Bank and its successors and
assigns.
4. Capitalized terms not defined herein shall have the meaning set
forth in the Loan Agreement.
IN WITNESS WHEREOF, this Agreement is executed as of the date first
above written.
THE HALLWOOD GROUP INCORPORATED
By:
--------------------------------
Its:
<PAGE> 1
===============================================================================
CREDIT AGREEMENT
dated as of
December 21, 1999
among
HWG LLC,
as the Borrower,
THE HALLWOOD GROUP INCORPORATED,
as Parent Guarantor,
FIRST BANK TEXAS, N.A.,
as the Administrative Agent,
and
THE FINANCIAL INSTITUTIONS
NOW OR HEREAFTER PARTIES HERETO
to the Lenders
$18,000,000 Term Loan
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
ARTICLE 1
DEFINITIONS; CONSTRUCTION
<S> <C> <C>
Section 1.1 Definitions ..................................... 1
Section 1.2 Accounting Terms and Determinations ............. 12
Section 1.3 Other Definitional Terms ........................ 12
ARTICLE 2
AMOUNT AND TERMS OF TERM LOANS
Section 2.1 Term Loans and Commitments ...................... 12
(a) Term Loans ............................................... 12
(b) Term Loan Commitments .................................... 12
(c) Availability ............................................. 12
(d) Funds to the Administrative Agent ........................ 12
(e) Lenders' Responsibilities ................................ 13
Section 2.2 Term Notes and Amortization ..................... 13
Section 2.3 Interest ........................................ 13
(a) Term Loans ............................................... 13
(b) Default Interest ......................................... 13
Section 2.4 Accounts and Register ........................... 13
(a) Lender Accounts .......................................... 13
(b) Register ................................................. 14
Section 2.5 Prepayments ..................................... 14
(a) Mandatory Prepayments .................................... 14
(b) Voluntary Prepayments .................................... 14
(c) Prepayment Penalty ....................................... 14
Section 2.6 Fees ............................................ 15
Section 2.7 Payments, etc. .................................. 15
(a) Without Setoff, etc. ..................................... 15
(b) Non-Business Days ........................................ 15
(c) Computations ............................................. 15
Section 2.8 Capital Adequacy ................................ 15
Section 2.9 Sharing of Payments, etc. ....................... 16
Section 2.10 Taxes ........................................... 16
(a) Payments Free and Clear .................................. 16
(b) Other Taxes .............................................. 16
(c) Indemnification .......................................... 16
(d) Receipts ................................................. 16
(e) Survival ................................................. 17
(f) Lender Representations and Agreements .................... 17
Section 2.11 Pro Rata Treatment .............................. 17
Section 2.12 Replacement of Lenders .......................... 17
</TABLE>
i
<PAGE> 3
<TABLE>
ARTICLE 3
CLOSING
<S> <C> <C>
(a) Term Notes ............................................... 17
(b) Resolutions and Incumbency Certificates .................. 17
(c) Opinions of Counsel ...................................... 18
(d) The Security Instruments ................................. 18
(e) Intercreditor Agreement .................................. 18
(f) Closing Transactions ..................................... 19
(g) Insurance ................................................ 19
(h) Financial Statements and Projections ..................... 19
(i) Collateral Value Certificate ............................. 19
(j) Form U-1 Purpose Statement ............................... 20
(k) Certificate of Chief Financial Officer. .................. 20
(l) Structure ................................................ 20
(m) Lien Searches ............................................ 20
(n) Fees and Expenses ........................................ 20
(o) Documentation ............................................ 20
ARTICLE 4
SECURITY
Section 4.1 Security Granted ................................ 20
Section 4.2 Collateral Value ................................ 21
Section 4.3 Benchmark Collateral Deficiency ................. 21
Section 4.4 Benchmark Marketable Collateral Deficiency ...... 21
Section 4.5 Substitution of Collateral ...................... 21
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
Section 5.1 Existence ....................................... 22
Section 5.2 Power and Authorization ......................... 22
Section 5.3 Binding Obligations ............................. 22
Section 5.4 No Legal Bar or Resultant Lien .................. 22
Section 5.5 No Consent ...................................... 22
Section 5.6 Financial Information ........................... 22
(a) Pro-Forma Financial Statements and Projections ........... 22
(b) Financial Statements ..................................... 23
(c) Audited Annual Financial Statements ...................... 23
(d) Unaudited Quarterly Financial Statements ................. 23
(e) No Material Adverse Effect ............................... 23
Section 5.7 Investments and Guaranties ...................... 23
Section 5.8 Litigation ...................................... 23
Section 5.9 Use of Proceeds ................................. 24
Section 5.10 Employee Benefits ............................... 24
Section 5.11 Taxes; Governmental Charges ..................... 25
Section 5.12 Titles, etc. .................................... 25
Section 5.13 Defaults ........................................ 25
Section 5.14 Casualties; Taking of Properties ................ 25
Section 5.15 Compliance with the Law ......................... 25
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 5.16 No Material Misstatements ....................... 25
Section 5.17 Investment Company Act .......................... 26
Section 5.18 Public Utility Holding Company Act .............. 26
Section 5.19 Subsidiaries .................................... 26
Section 5.20 Insurance ....................................... 26
Section 5.21 Environmental Matters ........................... 26
(a) Environmental Laws, etc. ................................. 26
(b) No Litigation ............................................ 26
(c) Notices, Permits, etc. ................................... 27
(d) Hazardous Substances Carriers ............................ 27
(e) Hazardous Substances Disposal ............................ 27
(f) No Contingent Liability .................................. 27
Section 5.22 Solvency ........................................ 28
Section 5.23 Employee Matters ................................ 28
Section 5.24 Subordinated Debenture Documents, etc. .......... 28
Section 5.25 Ownership ....................................... 28
Section 5.26 Senior Indebtedness ............................. 28
Section 5.27 Year 2000 Matters ............................... 28
ARTICLE 6
AFFIRMATIVE COVENANTS
Section 6.1 Maintenance and Compliance, etc. ................ 29
Section 6.2 Payment of Taxes and Claims, etc. ............... 29
Section 6.3 Further Assurances .............................. 29
Section 6.4 Performance of Obligations ...................... 29
Section 6.5 Insurance ....................................... 29
Section 6.6 Accounts and Records ............................ 29
Section 6.7 Right of Inspection ............................. 30
Section 6.8 Operation and Maintenance of Property ........... 30
Section 6.9 [Intentionally Deleted] ......................... 30
Section 6.10 Reporting Covenants ............................. 30
(a) Annual Financial Statements .............................. 30
(b) Quarterly Financial Statements ........................... 30
(c) No Default; Compliance Certificate ....................... 31
(d) Management Letters ....................................... 31
(e) [Intentionally Deleted] .................................. 31
(f) Events or Circumstances with respect to Collateral ....... 31
(g) Notice of Certain Events ................................. 31
(h) Shareholder Communications, Filings ...................... 31
(i) Litigation ............................................... 32
(j) ERISA .................................................... 32
(k) Insurance Coverage ....................................... 32
(l) Annual Budget ............................................ 32
(m) Collateral Value Certificate ............................. 32
(n) Notices to Holders of Subordinated Debentures ............ 32
(o) Other Information ........................................ 32
Section 6.11 Year 2000 Compatibility ......................... 32
</TABLE>
iii
<PAGE> 5
<TABLE>
ARTICLE 7
NEGATIVE COVENANTS
<S> <C> <C>
Section 7.1 Financial Covenants ............................. 33
Section 7.2 Indebtedness .................................... 33
Section 7.3 Liens ........................................... 33
Section 7.4 Mergers, Sales, etc. ............................ 34
Section 7.5 Restricted Payments ............................. 35
Section 7.6 Investments, Loans, etc. ........................ 35
Section 7.7 Sales and Leasebacks ............................ 36
Section 7.8 Nature of Business .............................. 36
Section 7.9 ERISA Compliance ................................ 36
Section 7.10 Sale or Discount of Receivables ................. 37
Section 7.11 Negative Pledge Agreements ...................... 37
Section 7.12 Transactions with Affiliates .................... 37
Section 7.13 Unconditional Purchase Obligations .............. 37
Section 7.14 [Intentionally Deleted .......................... 37
Section 7.15 [Intentionally Deleted .......................... 37
Section 7.16 Intercompany Transactions ....................... 38
Section 7.17 [Intentionally Deleted .......................... 38
Section 7.18 Modifications to Organizational Documents ....... 38
Section 7.19 Modifications to Subordinated Debentures; Payment
Restrictions .................................. 38
ARTICLE 8
EVENTS OF DEFAULT
Section 8.1 Payments ........................................ 38
Section 8.2 Covenants Without Notice ........................ 38
Section 8.3 Other Covenants ................................. 38
Section 8.4 Other Financing Document Obligations ............ 38
Section 8.5 Representations ................................. 39
Section 8.6 Non-Payments of Other Indebtedness .............. 39
Section 8.7 Defaults Under Other Agreements ................. 39
Section 8.8 Bankruptcy ...................................... 39
Section 8.9 Money Judgment .................................. 39
Section 8.10 Discontinuance of Business ...................... 40
Section 8.11 Financing Documents ............................. 40
Section 8.12 Change of Control ............................... 40
Section 8.13 Subordination of Lender Indebtedness ............ 40
Section 8.14 Default Under Subordinated Indebtedness ......... 40
ARTICLE 9
THE ADMINISTRATIVE AGENT
Section 9.1 Appointment of Administrative Agent ............. 40
Section 9.2 Limitation of Duties of Administrative Agent .... 41
Section 9.3 Lack of Reliance on the Administrative Agent .... 41
(a) Independent Investigation ................................ 41
(b) Administrative Agent Not Responsible ..................... 41
Section 9.4 Certain Rights of the Administrative Agent ...... 41
Section 9.5 Reliance by Administrative Agent ................ 41
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C> <C>
Section 9.6 INDEMNIFICATION OF ADMINISTRATIVE AGENT ......... 42
Section 9.7 The Administrative Agent in its Individual
Capacity ...................................... 42
Section 9.8 May Treat Lender as Owner ....................... 42
Section 9.9 Successor Administrative Agent .................. 42
(a) Administrative Agent Resignation ......................... 42
(b) Rights, Powers, etc. ..................................... 43
ARTICLE 10
MISCELLANEOUS
Section 10.1 Notices ......................................... 43
Section 10.2 Amendments and Waivers .......................... 43
Section 10.3 No Waiver; Remedies Cumulative .................. 44
Section 10.4 Payment of Expenses, Indemnities, etc. .......... 44
(a) Expenses ................................................. 44
(b) Indemnification .......................................... 44
(c) Environmental Indemnification ............................ 45
(d) ENVIRONMENTAL WAIVER ..................................... 45
Section 10.5 Right of Setoff ................................. 46
Section 10.6 Benefit of Agreement ............................ 46
Section 10.7 Successors and Assigns; Participations and
Assignments ................................... 46
Section 10.8 Governing Law; Submission to Jurisdiction; etc... 48
(a) Governing Law ............................................ 48
(b) Submission to Jurisdiction ............................... 48
(c) Waiver of Consequential Damages .......................... 48
(d) Process Agent ............................................ 49
(e) Service of Process ....................................... 49
Section 10.9 Independent Nature of Lenders' Rights ........... 49
Section 10.10 Invalidity ...................................... 49
Section 10.11 Renewal, Extension or Rearrangement ............. 49
Section 10.12 Confidentiality ................................. 49
Section 10.13 Interest ........................................ 50
Section 10.14 Entire Agreement ................................ 51
Section 10.15 Attachments ..................................... 51
Section 10.16 Counterparts .................................... 51
Section 10.17 Survival of Indemnities ......................... 51
Section 10.18 Headings Descriptive ............................ 51
Section 10.19 Satisfaction Requirement ........................ 51
Section 10.20 Exculpation Provisions .......................... 51
</TABLE>
v
<PAGE> 7
ANNEXES
Annex I - Term Loan and Commitments
SCHEDULES
Schedule 1.1 - Hotel Mortgages
Schedule 5.7 - Investments
Schedule 5.8 - Litigation
Schedule 5.13 - Existing Defaults
Schedule 5.19 - Subsidiaries
Schedule 5.20 - Insurance
Schedule 5.21 - Environmental Matters
Schedule 5.23 - Employment Contracts
Schedule 5.25 - Ownership
Schedule 7.2 - Existing Indebtedness
Schedule 7.3 - Liens
Schedule 7.9 - ERISA Compliance
Schedule 7.16 - Intercompany Transactions
EXHIBITS
Exhibit A - Form of Term Note
Exhibit B - Form of Opinion of Jenkens & Gilchrist
Exhibit C-1 - Form of Facility Guaranty
Exhibit C-2 - Forms of Pledge Agreements
Exhibit C-3 - Form of Collateral Assignment of Intercompany Note
Exhibit D - Form of Assignment and Acceptance
Exhibit E - Form of Compliance Certificate
Exhibit F - Form of Collateral Value Certificate
vi
<PAGE> 8
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "Agreement") is made and entered into as
of this 21st day of December, 1999, among HWG LLC, a Delaware limited liability
company (the "Borrower"), THE HALLWOOD GROUP INCORPORATED, a Delaware
corporation ("Parent"), FIRST BANK TEXAS, N.A., individually as a Lender, and as
Administrative Agent, and each of the lenders that is a signatory hereto or
which becomes a party hereto as provided in Section (individually, a "Lender"
and, collectively, the "Lenders").
RECITALS:
The Borrower and Parent have requested that the Lenders provide the
Borrower with a term credit facility, and the Lenders are willing to provide
such a credit facility upon the terms and subject to the conditions set forth
herein.
(c) Proceeds of the Term Loan (as herein defined) will be used solely
to retire in full the Original Series Debentures (as herein defined), to
refinance certain existing indebtedness of the Borrower and Parent, to finance
certain fees and expenses actually incurred relating to the Term Loan, (d) to
provide for the release of certain HRY (as herein defined) limited partnership
units held in escrow, (e) to make the loan from the Borrower to Parent evidenced
by the Parent Intercompany Note (as herein defined), and (f) for working
capital.
AGREEMENT:
In consideration of the mutual covenants and agreements herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the Borrower, Parent, the Administrative Agent
and the Lenders agree as follows:
ARTICLE 1
DEFINITIONS; CONSTRUCTION
Section 1.1 Definitions. As used herein, the following terms shall
have the meanings herein specified (to be equally applicable to both the
singular and plural forms of the terms defined). Reference to any party to a
Financing Document means that party and its successors and assigns.
"Administrative Agent" shall mean First Bank Texas, N.A.,
acting in the manner and to the extent described in Article .
"Affiliate" shall mean, with respect to a specified Person,
another Person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the Person
specified.
"Agreement" shall mean this Credit Agreement, as amended,
modified or supplemented from time to time.
"Alpha Trust" shall mean Alpha Trust, a trust formed under the
laws of the Island of Jersey, Channel Islands.
<PAGE> 9
"Assignment and Acceptance" shall have the meaning provided
in Section.
"Bankruptcy Code" shall have the meaning provided in Section
8.8.
"Benchmark Collateral Value" shall mean, as of any date of
determination, an amount equal to 166.67% of the then outstanding principal
balance of the Term Loan.
"Benchmark Collateral Value Deficiency" shall mean, as of any
date, the amount by which (a) the aggregate value of all Marketable Equity and
Non-Marketable Equity (as reflected in the most recent Collateral Value
Certificate delivered by Parent to the Administrative Agent in accordance with
Section hereof) pledged to the Administrative Agent as security for the Lender
Indebtedness is less than (b) the Benchmark Collateral Value.
"Benchmark Marketable Collateral Value" shall mean, as of any
date of determination, an amount equal to 105% of the then outstanding principal
balance of the Term Loan.
"Benchmark Marketable Collateral Value Deficiency" shall mean,
as of any date, the amount by which (a) the aggregate value of all Marketable
Equity (as reflected in the most recent Collateral Value Certificate delivered
by Parent to the Administrative Agent in accordance with Section hereof) pledged
to the Administrative Agent as security for the Lender Indebtedness is less than
(b) the Benchmark Marketable Collateral Value.
"Borrower" shall have the meaning set forth in the initial
paragraph hereof.
"Borrower Pledge Agreement" shall mean the Pledge Agreement
executed by the Borrower, substantially in the applicable form attached as
Exhibit C-2, as amended, modified, renewed, supplemented or amended from time to
time, pursuant to which the Borrower shall pledge to the Administrative Agent,
for the ratable benefit of the Lenders, the issued and outstanding Equity owned
by the Borrower of HRY, Hallwood Realty and HCRE described therein to secure the
Lender Indebtedness.
"Brock" shall mean Brock Suite Hotels, Inc., a Kansas
corporation.
"Brookwood" shall mean Brookwood Companies Incorporated, a
Delaware corporation.
"Business Day" shall mean any day excluding Saturday, Sunday
and any other day on which banks are required or authorized to close in Houston,
Texas.
"Capital Expenditures" shall mean, for any period, all
expenditures (whether paid in cash or accrued as a liability, including the
portion of Capital Lease Obligations originally incurred during such period that
are capitalized on the consolidated balance sheet of Parent) by Parent and its
Subsidiaries during such period, that, in conformity with GAAP, are included in
"capital expenditures," "additions to property, plant or equipment" or
comparable items in the consolidated financial statements of Parent, but
excluding expenditures for the restoration, repair or replacement of any fixed
or capital asset that was destroyed or damaged, in whole or in part, in an
amount equal to any insurance proceeds received in connection with such
destruction or damage.
"Capital Lease Obligations" shall mean, as to any Person, the
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) real and/or personal property which
obligations are required to be classified and accounted for as a liability for a
capital lease on a balance sheet of such Person and, for purposes of this
Agreement, the amount of such obligations shall be the capitalized amount
thereof.
2
<PAGE> 10
"Change of Control" shall mean (a) the acquisition of
ownership, directly or indirectly, beneficially or of record, by any Person or
group (within the meaning of the Securities Exchange Act of 1934 and the rules
of the Securities and Exchange Commission thereunder as in effect on the date
hereof) of shares representing more than fifty percent (50%) of the aggregate
ordinary voting power represented by the issued and outstanding capital stock of
Parent; (b) the occupation of a majority of the seats (other than vacant seats)
on the board of directors of Parent by Persons who were neither (i) nominated by
the board of directors of Parent nor (ii) appointed by directors so nominated;
(c) the acquisition of direct or indirect Control of Parent by any Person or
group other than Anthony J. Gumbiner, the Alpha Trust and their Affiliates, or
(d) the Borrower shall cease to be a wholly owned Subsidiary of Parent.
"Closing Date" shall mean the "as of" date of this Agreement
set forth in the first paragraph hereof.
"Closing Transactions" shall mean the transactions to occur on
the Closing Date including, without limitation, (a) the termination of the
Original Series Indenture and the retirement in full of the Original Series
Debentures and release of the Liens securing same, (b) the repayment in full of
existing Indebtedness of Parent owing to First Union National Bank in the
current principal outstanding amount approximately equal to $667,000, and the
release of the Liens securing same, (c) the release of 89,269 HRY limited
partnership units securing that certain promissory note dated March 8, 1994,
executed by Parent and payable to Corporate Property Associates 6 and Corporate
Property Associates 7, in the original principal amount of $500,000, (d) the
disbursement by the Borrower to Parent of the proceeds of the Parent
Intercompany Note, and (e) consummation of the transactions contemplated by
Sections 2 and 4 of the Shareholder Agreement. Closing Transactions expressly
includes the Transactions.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and any successor statute.
"Collateral" shall mean each Credit Party's Properties
described in and subject to the Liens, privileges, priorities and security
interests purported to be created by any Security Instrument.
"Collateral Assignment of Intercompany Note" shall mean the
Collateral Assignment of Intercompany Note executed by the Borrower,
substantially in the form attached as Exhibit C-3, as amended, modified,
renewed, supplemented or amended from time to time, pursuant to which the
Borrower shall assign to the Administrative Agent and grant to the
Administrative Agent for the ratable benefit of the Lenders a first and prior
Lien in and to all rights, title and interest in and to the Parent Intercompany
Note to secure the Lender Indebtedness.
"Control" shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies of a
Person, whether through the ability to exercise voting power, by contract or
otherwise. "Controlling" and "Controlled" shall have the meanings correlative
thereto.
"Credit Parties" shall mean, collectively, Parent, the
Borrower, Integra and HEPGP.
"Current Information" shall mean, as of any day, the
financial statements and other related information for any applicable period
most recently required to be delivered to the Lenders pursuant to Sections
6.10(a), 6.10(b) and 6.10(c).
"Debt Offering" shall mean the incurrence by any Person of
Indebtedness whether or not occurring in connection with the issuance or sale of
notes, bonds, debentures or other debt securities; provided, that the incurrence
of any Indebtedness by any Person expressly permitted by Section hereof will not
constitute a Debt Offering for purposes of this Agreement.
3
<PAGE> 11
"Debt Service Coverage Ratio" shall mean, as to Parent and its
Subsidiaries on a consolidated basis, determined for the Rolling Period ending
on the most recent Quarterly Date as of the date of determination, the ratio of
(a) Net Cash Flow to (b) the sum of (1) scheduled principal payments on Funded
Indebtedness plus (2) Interest Expense minus (3) scheduled principal and
interest payments with respect to Hotel Mortgage Indebtedness; provided,
however, Debt Service Coverage Ratio shall be computed to give pro forma effect
to the principal and interest payments required by Section 2.2 as if such
payments were required on each Monthly Date commencing April 30, 1999.
"Default" shall mean an Event of Default or any condition or
event which, with notice or lapse of time or both, would constitute an Event of
Default.
"Dollar" and the sign "$" shall mean lawful money of the
United States of America.
"EBITDA" shall mean, as to any Person, for any period, without
duplication, an amount equal to net income determined in accordance with GAAP,
plus to the extent deducted from net income, Interest Expense, depreciation,
other non-cash expenses, and income tax expenses; provided, that, extraordinary
gains or losses for any such period, including, but not limited to, gains or
losses on the disposition of assets, shall not be included in EBITDA.
"Environmental Laws" shall mean any and all laws, statutes,
ordinances, rules, regulations, or orders of any Governmental Authority
pertaining to health or the environment in effect in any and all jurisdictions
in which Parent or its Subsidiaries are conducting or at any time have conducted
business, or where any Property of Parent or its Subsidiaries is located, or
where any hazardous substances generated by or disposed of by Parent or its
Subsidiaries or are located, including, but not limited to, the Oil Pollution
Act of 1990 ("OPA"), the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation, and Liability Act of 1980 ("CERCLA"), as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking Water Act, as
amended, the Toxic Substances Control Act, as amended, the Superfund Amendments
and Reauthorization Act of 1986, as amended, and other environmental
conservation or protection laws. The term "oil" shall have the meaning specified
in OPA; the terms "hazardous substance," "release" and "threatened release" have
the meanings specified in CERCLA, and the terms "solid waste" and "disposal" (or
"disposed") have the meanings specified in RCRA; provided, however, in the event
either CERCLA or RCRA is amended so as to change the meaning of any term defined
thereby, such changed meaning shall apply subsequent to the effective date of
such amendment; and provided, further, that, to the extent the laws of the state
in which any Property of Parent or its Subsidiaries or is located establish a
meaning for "oil," "hazardous substance," "release," "solid waste" or "disposal"
which is broader than that specified in either OPA, CERCLA or RCRA, such broader
meaning shall apply.
"Epsilon Trust" shall mean Epsilon Trust, a trust formed under
the laws of the Island of Jersey, Channel Islands.
"Equity" shall mean shares of capital stock or a partnership,
profits, capital or member interest, or options, warrants or any other right to
subscribe for or otherwise acquire the capital stock or a partnership, profits,
capital or member interest, of Parent, the Borrower, or their Subsidiaries.
"Equity Contribution" shall mean any contribution to the
equity capital of any Credit Party by any Person other than Parent or its
Subsidiaries, whether or not occurring in connection with the issuance or sale
of Equity securities by any such Credit Party.
4
<PAGE> 12
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended, and any successor statute.
"ERISA Affiliate" shall mean each trade or business (whether
or not incorporated) which together with Parent or a Subsidiary of Parent would
be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of
ERISA or Subsections 414(b), (c), (m) or (o) of the Code.
"ERISA Termination Event" shall mean (a) a "Reportable Event"
described in Section 4043 of ERISA and the regulations issued thereunder (other
than a "Reportable Event" not subject to the provision for 30-day notice to the
PBGC under Subsections .14, .18, .19 or .20 of Part 2615 of the PBGC
regulations), (b) the withdrawal of Parent, a Subsidiary of Parent or any ERISA
Affiliate from a Plan during a plan year in which it was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice
of intent to terminate a Plan or the treatment of a Plan amendment as a
termination under Section 4041(c) of ERISA, (d) the institution of proceedings
to terminate a Plan by the PBGC, or (e) any other event or condition which could
reasonably be expected to constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan.
"Event of Default" shall have the meaning provided in
Article 8.
"Excluded Taxes" means, with respect to the Administrative
Agent, any Lender, or any other recipient of any payment to be made by or on
account of any obligation of the Borrower hereunder, (a) income or franchise
taxes imposed on (or measured by) its net income by the United States of
America, or by the jurisdiction under the laws of which such recipient is
organized or in which its principal office is located or, in the case of any
Lender, in which its applicable Lending Office is located, (b) any branch
profits taxes imposed by the United States of America or any similar tax imposed
by any other jurisdiction in which the Borrower is located, and (c) in the case
of a Foreign Lender any withholding tax that is imposed on amounts payable to
such Foreign Lender at the time such Foreign Lender becomes a party to this
Agreement (or designates a new lending office) or is attributable to such
Foreign Lender's failure to comply with Section 2.10(f), except to the extent
that such Foreign Lender (or its assignor, if any) was entitled, at the time of
designation of a new Lending Office (or assignment), to receive additional
amounts from the Borrower with respect to such withholding tax pursuant to
Section 2.10(a).
"Facility Guaranty" shall mean a Guaranty executed by Parent,
substantially in the form of Exhibit C-1, as amended, modified, renewed,
supplemented or restated from time to time, pursuant to which Parent guarantees
payment and performance in full of the Lender Indebtedness.
"Federal Funds Effective Rate" shall mean, for any day, the
per annum rate equal to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds brokers, as published for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for such day on such transactions
received by the Administrative Agent from three Federal funds brokers of
recognized standing selected by it.
"Financial Statements" shall mean, collectively, (i) the
audited consolidated financial statements of Parent for the twelve month period
ended December 31, 1998, and (ii) the unaudited consolidated financial
statements of Parent for the Fiscal Quarter ended September 30, 1999.
"Financing Documents" shall mean this Agreement, the Term
Notes, the Security Instruments, and the other documents, instruments or
agreements described in Article 3, together with any other document, instrument
or agreement now or hereafter entered into in connection with the Term Loans,
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the Lender Indebtedness or the Collateral, as such documents, instruments or
agreements may be amended, modified or supplemented from time to time.
"First Bank" shall mean First Bank Texas, N.A., in its
individual capacity and not as Administrative Agent.
"Fiscal Quarter" shall mean the three (3) month periods ending
on the last day of each March, June, September and December of each Fiscal Year.
"Fiscal Year" shall mean a twelve (12) month period ending on
December 31st of each year.
"Fixed Rate" shall mean 10.25% per annum.
"Foreign Lender" means any Lender that is organized under the
laws of a jurisdiction other than that in which the Borrower is located. For
purposes of this definition, the United States of America, each State thereof
and the District of Columbia shall be deemed to constitute a single
jurisdiction.
"Funded Indebtedness" shall mean, as to any Person, without
duplication, all Indebtedness for borrowed money, all obligations evidenced by
bonds, debentures, notes, or other similar instruments, all Capital Lease
Obligations, and all guaranties of Funded Indebtedness of other Persons.
"GAAP" shall mean generally accepted accounting principles as
applied in accordance with Section 1.2.
"Governmental Authority" shall mean any (domestic or foreign)
federal, state, province, county, city, municipal or other political subdivision
or government, department, commission, board, bureau, court, agency or any other
instrumentality of any of them, which exercises jurisdiction over Parent or its
Subsidiaries, or any Property (including, but not limited to, the use and/or
sale thereof) of Parent or its Subsidiaries, or any Plan.
"Governmental Requirement" shall mean any law, statute, code,
ordinance, order, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate, license, authorization or other direction or requirement
(including but not limited to any of the foregoing which relate to Environmental
Laws, energy regulations and occupational, safety and health standards or
controls) of any Governmental Authority.
"Hallwood Hotels" shall mean Hallwood Hotels, Inc., a Delaware
corporation.
"Hallwood Realty" shall mean Hallwood Realty, LLC, a Delaware
limited liability company.
"HCRE" shall mean Hallwood Commercial Real Estate, LLC, a
Delaware limited liability company.
"HECO" shall mean Hallwood Energy Corporation, a Delaware
corporation.
"HEPGP" shall mean HEPGP, Ltd., a Delaware limited
partnership.
"HEPGP Pledge Agreement" shall mean the Pledge Agreement
executed by HEPGP, substantially in the applicable form attached as Exhibit C-2,
as amended, modified, renewed, supplemented or amended from time to time,
pursuant to which HEPGP shall pledge to the Administrative Agent, for the
ratable benefit of the Lenders, the issued and outstanding Equity owned by HEPGP
of HECO described therein to secure the Lender Indebtedness.
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"Highest Lawful Rate" shall mean, with respect to each Lender,
the maximum nonusurious interest rate, if any, that at any time or from time to
time may be contracted for, taken, reserved, charged or received on the Term
Notes or on other Lender Indebtedness, as the case may be, owed to it under the
law of any jurisdiction whose laws may be mandatorily applicable to such Lender
notwithstanding other provisions of this Agreement, or law of the United States
of America applicable to such Lender and the Transactions, which would permit
such Lender to contract for, charge, take, reserve or receive a greater amount
of interest than under such jurisdiction's law.
"Hotel Mortgage Indebtedness" shall mean Nonrecourse
Indebtedness of Brock and Hallwood Hotels which is secured by the mortgages
described on Schedule 1.1.
"HRY" shall mean Hallwood Realty Partners, L.P., a Delaware
limited partnership.
"Indebtedness" of any Person shall mean:
(a) all obligations of such Person for borrowed money and
obligations evidenced by bonds, debentures, notes or other similar
instruments;
(b) all obligations of such Person (whether contingent or
otherwise) in respect of bankers' acceptances, letters of credit,
surety or other bonds and similar instruments;
(c) all obligations of such Person to pay the deferred
purchase price of Property or services (other than for borrowed money);
(d) all Capital Lease Obligations in respect of which such
Person is liable, contingently or otherwise, as obligor, guarantor or
otherwise, or in respect of which obligations such Person otherwise
assures a creditor against loss;
(e) all guaranties (direct or indirect), and other contingent
obligations of such Person in respect of, or obligations to purchase or
otherwise acquire or to assure payment of, Indebtedness of other
Persons;
(f) Indebtedness of others secured by any Lien upon Property
owned by such Person, whether or not assumed;
(g) all obligations or undertakings of such Person to maintain
or cause to be maintained the financial position or financial covenants
of other Persons; and
(h) all obligations to deliver goods or services in
consideration of advance payments, excluding such obligations incurred
in the ordinary course of business as conducted by any Credit Party as
of the Closing Date.
"Indemnified Taxes" shall mean Taxes other than Excluded
Taxes.
"Integra" shall mean Integra Hotels, Inc., a Delaware
corporation.
"Integra Pledge Agreement" shall mean the Pledge Agreement
executed by Integra, substantially in the applicable form attached as Exhibit
C-2, as amended, modified, renewed, supplemented or amended from time to time,
pursuant to which Integra shall pledge to the Administrative Agent, for the
ratable benefit of the Lenders, the issued and outstanding Equity owned by
Integra of Brock described therein to secure the Lender Indebtedness.
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"Intercreditor Agreement" shall mean an Intercreditor
Agreement in form and substance acceptable to the Administrative Agent to be
entered into by and among The Bank of New York, Bank One, N.A. and the
Administrative Agent with respect to the Subordinated Debentures.
"Interest Expense" shall mean, as to Parent and its
Subsidiaries on a consolidated basis and for any period, without duplication,
total interest expenses, whether paid or accrued as liabilities (including the
interest component of Capital Lease Obligations), with respect to all
outstanding Indebtedness, including, without limitation, all commissions,
discounts and other fees and charges owed with respect to any financing.
"Lender" shall have the meaning set forth in the opening
paragraph hereof.
"Lender Indebtedness" shall mean any and all amounts owing or
to be owing by the Borrower to the Administrative Agent or the Lenders with
respect to or in connection with the Term Loans, the Term Notes, this Agreement,
or any other Financing Document.
"Lending Office" shall mean for each Lender the office
specified beneath such Lender's name on the signature pages hereof, or in the
Assignment and Acceptance pursuant to which it became a Lender or such other
office as such Lender may designate in writing from time to time to Parent, the
Borrower and the Administrative Agent.
"Lien" shall mean any interest in Property securing an
obligation owed to, or a claim by, a Person other than the owner of the
Property, whether such interest is based on contract, constitutional, common, or
statutory law, and including but not limited to the lien or security interest
arising from a mortgage, encumbrance, pledge, security agreement, conditional
sale or trust receipt or a lease, consignment or bailment for security purposes.
The term "Lien" shall include reservations, exceptions, encroachments,
easements, rights of way, covenants, conditions, restrictions, liens and other
statutory, constitutional, or common law rights of landlords, leases and other
title exceptions and encumbrances affecting Property. For the purposes of this
Agreement, any Credit Party shall be deemed to be the owner of any Property
which it has acquired or holds subject to a conditional sale agreement,
financing lease or other arrangement pursuant to which title to the Property has
been retained by or vested in some other Person for security purposes.
"Margin Stock" shall have the meaning provided in Regulations
U and X.
"Marketable Equity" shall mean the Equity of HECO and HRY
owned by HEPGP and the Borrower, respectively, and pledged to the Administrative
Agent to secure the Lender Indebtedness pursuant to the terms of the HEPGP
Pledge Agreement and the Borrower Pledge Agreement, respectively.
"Material Adverse Effect" shall mean any material and adverse
effect on (a) the business, operations, assets, liabilities, condition
(financial or otherwise), prospects, or results of operations of Parent or any
other Credit Party, individually, or Parent and any Subsidiary of Parent, taken
as a whole, (b) the ability of the Credit Parties to perform any of their
respective obligations under the Term Notes, this Agreement or the other
Financing Documents in accordance with their respective terms, or (c) the rights
of, or benefits available to, Lenders under the Term Notes, this Agreement or
the other Financing Documents.
"Monthly Date" shall mean the last Business Day of each
calendar month.
"Net Cash Flow" shall mean, as to any Person for any period,
without duplication, an amount equal to (a) EBITDA for such period, minus (b)
for each such period, the sum of (1) scheduled principal and interest payments
with respect to all Hotel Mortgage Indebtedness, (2) dividends actually made by
Parent during such period with respect to its Series B Preferred Stock, (3)
required or scheduled deferred purchase payments actually made by Parent during
such period pursuant to the terms of the Shareholder Agreement,
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<PAGE> 16
and (4) actual Capital Expenditures for such period for the maintenance of any
fixed or capital asset, plus (c) dividends actually received by Parent and/or
HEPGP from HECO during such period with respect to HECO's preferred and common
stock, plus (d) distributions actually received by the Borrower from HRY during
such period with respect to HRY's limited partnership units and general
partnership interests.
"Net Cash Proceeds" shall mean the remainder of (a) the gross
proceeds received by any Person from any Equity Contribution or Debt Offering,
less (b) underwriter discounts and commissions, investment banking fees, legal,
accounting and other professional fees and expenses, and other usual and
customary transaction costs, in each case only to the extent paid or payable by
such Person in cash and related to such Equity Contribution or Debt Offering.
"Non-Marketable Equity" shall mean all Equity, other than the
Marketable Equity, pledged to the Administrative Agent to secure the Lender
Indebtedness pursuant to the terms of the Pledge Agreements.
"Nonrecourse Indebtedness" shall mean Indebtedness with
respect to which neither Parent nor its Subsidiaries has any liability for
repayment beyond the assets pledged.
"Original Series Debentures" shall mean Parent's 7%
Collateralized Senior Subordinated Debentures due July 31, 2000. The Original
Series Debentures shall be retired in full on the Closing Date with a portion of
the proceeds of the Term Loans.
"Original Series Debentures Indenture" shall mean that certain
Indenture dated as of March 2, 1993 by and between the Original Series Debenture
Trustee and Parent with respect to the Original Series Debentures, as such
agreement may have heretofore been amended or modified. The Original Series
Debenture Indenture shall be terminated as of the Closing Date.
"Original Series Debentures Trustee" shall mean Norwest Bank
Minnesota, National Association, as trustee under the Original Series Debentures
Indenture, or any duly appointed and acting successor thereof.
"Other Taxes" shall mean any and all present or future stamp
or documentary taxes or any other excise or property taxes, charges or similar
levies arising from any payment made hereunder or from the execution, delivery
or enforcement of, or otherwise with respect to, this Agreement.
"Parent" shall have the meaning set forth in the initial
paragraph hereof.
"Parent Intercompany Note" shall mean a demand promissory note
in form and substance acceptable to the Administrative Agent executed by Parent
as maker and payable to the order of the Borrower as payee in the original
principal amount of $18,000,000.
"Parent Pledge Agreement" shall mean the Pledge Agreement
executed by Parent, substantially in the applicable form attached as Exhibit
C-2, as amended, modified, renewed, supplemented or amended from time to time,
pursuant to which Parent shall pledge to the Administrative Agent, for the
ratable benefit of the Lenders, the issued and outstanding Equity owned by
Parent in HECO and Hallwood Hotels described therein to secure the Lender
Indebtedness.
"Payment Office" shall mean the Administrative Agent's office
located at 8820 Westheimer, Houston, Texas 77063, Attention: Alan Cott (or such
other office or individual as the Administrative Agent may hereafter designate
in writing to the other parties hereto).
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"PBGC" shall mean the Pension Benefit Guaranty Corporation, or
any successor thereto.
"Person" shall mean any individual, partnership, firm,
corporation, limited liability company (including, but not limited to Parent and
the Borrower), association, joint venture, trust or other entity, or any
government or political subdivision or agency, department or instrumentality
thereof; provided, however, for the purpose of the definition of "Change of
Control," "Person" shall mean a "person" or group of persons within the meaning
of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended.
"Plan" shall mean any employee pension benefit plan, as
defined in Section 3(2) of ERISA (including, but not limited to, an employee
pension benefit plan, such as a foreign plan, which is not subject to the
provisions of ERISA), which (a) is currently or hereafter sponsored, maintained
or contributed to by Parent, a Subsidiary of Parent or an ERISA Affiliate, or
(b) was at any time during the six (6) preceding Fiscal Years sponsored,
maintained or contributed to by Parent, a Subsidiary of Parent or an ERISA
Affiliate.
"Pledge Agreements" shall mean, collectively, the Borrower
Pledge Agreement, the Integra Pledge Agreement, the Parent Pledge Agreement and
the HEPGP Pledge Agreement.
"Property" shall mean any interest in any kind of property or
asset, whether real, personal or mixed, or tangible or intangible.
"Quarterly Dates" shall mean the last day of each March, June,
September and December in each year.
"Register" shall have the meaning assigned in Section 10.7(c).
"Regulation D", "Regulations U and X" shall mean,
respectively, Regulation D under the Securities Act of 1933, as amended or
modified from time to time, and Regulation U and Regulation X of the Board of
Governors of the Federal Reserve System, as such regulations are from time to
time in effect and any successor regulations thereto.
"Required Lenders" shall mean, at any time, the Lenders having
66 2/3% or more of the combined aggregate amount at such time of Term Loans then
outstanding.
"Responsible Officer" shall mean, with respect to any
corporation or limited liability company, the chairman of the board, the
president, any vice president, the chief executive officer, or the chief
operating officer, any authorized member, any authorized manager, or any
equivalent officer (regardless of his or her title), and, in respect of
financial or accounting matters, the chief financial officer, the vice president
of finance, the treasurer, the controller, or any equivalent officer (regardless
of his or her title). Unless otherwise specified, all references to a
Responsible Officer herein shall mean a Responsible Officer of Parent and the
Borrower.
"Restricted Payment" shall mean, with respect to any Person,
including Parent and the Borrower, (a) the declaration or payment of dividends
on any class of Equity of such Person, (b) any other distribution of assets or
property on shares of any class of Equity of such Person, or (c) the redemption,
retirement or purchase of any shares of Equity of such Person.
"Restricted Payment Limit" shall mean, as of any date (the
"measurement date") on and after the Closing Date, the sum of (a) $1,000,000,
plus (b) an amount equal to fifty percent (50%) of Parent's consolidated net
income determined in accordance with GAAP for the period commencing on the
Closing Date and ending on the last day of the Fiscal Quarter most recently
ended as of the measurement date for which Parent's Current Information has been
delivered to the Lenders, plus (c) an amount equal to the
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aggregate Net Cash Proceeds actually received by Parent from any Equity
Contribution consummated from and after the Closing Date until the measurement
date.
"Rolling Period" shall mean any period of four consecutive
Fiscal Quarters.
"Security Instruments" shall mean the Pledge Agreements, the
Facility Guaranty, the Collateral Assignment of Intercompany Note and any and
all other agreements or instruments now or hereafter executed and delivered by
any Credit Party or any other Person as security for the payment or performance
of the Lender Indebtedness, as any of the foregoing may be amended, modified or
supplemented.
"Series B Preferred Stock" shall mean Parent's Series B
Preferred Stock.
"Shareholder Agreement" shall mean that certain Agreement
dated as of May 5, 1999 by and among Parent, Epsilon Trust and Troup.
"Solvent" shall mean with respect to any Person on a
particular date, the condition that, on such date, (a) the fair value of the
property of such Person is greater than the total amount of liabilities,
including, without limitation, contingent liabilities, of such Person, (b) the
present fair salable value of the assets of such Person is not less than the
amount that will be required to pay the probable liabilities of such Person on
its debts as they become absolute and matured, (c) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature, and (d) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's property would constitute
an unreasonably small amount of capital.
"Subordinated Debentures" shall mean Parent's 10%
Collateralized Subordinated Debentures due July 31, 2005.
"Subordinated Debentures Indenture" shall mean that certain
Indenture dated as of August 31, 1998 by and between the Subordinated Debentures
Trustee and Parent with respect to the Subordinated Debentures, as such
agreement may be amended or modified and in effect from time to time.
"Subordinated Debentures Trustee" shall mean Bank One, N.A.,
as trustee under the Subordinated Debentures Indenture, or any duly appointed
and acting successor thereof.
"Subsidiary" of any Person shall mean a corporation, limited
liability company, partnership or other entity of which a majority of the
outstanding shares of stock or other equity or ownership interests of each class
having ordinary voting power is owned by such Person, by one or more
Subsidiaries of such Person, or by such Person and one or more of its
Subsidiaries.
"Taxes" means any and all present or future taxes, levies,
imposts, duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Term Loan" shall have the meaning set forth in Section
2.1(a).
"Term Loan Commitment" shall have the meaning set forth in
Section 2.1(b).
"Term Loan Maturity Date" shall mean December 21, 2004.
"Term Loan Percentage" shall mean as to any Lender, at any
time after the Closing Date, the percentage which such Lender's Term Loans then
outstanding constitutes of all Term Loans then outstanding.
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"Term Note" shall mean a promissory note of the Borrower
described in Section 2.2 payable to any Lender and being substantially in the
form of Exhibit B, evidencing the aggregate Indebtedness of the Borrower to such
Lender resulting from the Term Loans made by such Lender.
"Transactions" shall mean the transactions provided for in and
contemplated by this Agreement and the other Financing Documents.
"Troup" shall mean Brian M. Troup.
"UCC" shall mean the Uniform Commercial Code as from time to
time in effect in the State of Texas or, where applicable as to specific
Collateral, any other relevant state.
Section 1.2 Accounting Terms and Determinations. Unless otherwise
defined or specified herein, all accounting terms shall be construed herein, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP
applied on a basis consistent with the Financial Statements.
Section 1.3 Other Definitional Terms. The words "hereof," "herein" and
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, and article, section, schedule, exhibit and like references are to
this Agreement unless otherwise specified.
ARTICLE 2
AMOUNT AND TERMS OF TERM LOANS
Section 2.1 Term Loans and Commitments.
(a) Term Loans. Subject to the terms and conditions and
relying on the representations and warranties contained herein, each Lender
severally agrees to make, on the Closing Date, a term loan pursuant to its Term
Loan Commitment (each a "Term Loan") to the Borrower.
(b) Term Loan Commitments. The Term Loans made pursuant hereto
by each Lender shall not exceed in aggregate principal amount outstanding the
amount set forth opposite such Lender's name on Annex I under the caption "Term
Loan Commitment" (its "Term Loan Commitment," and collectively for all Lenders,
the "Term Loan Commitments"). Any portion of each such Lender's Term Loan
Commitment not utilized on the Closing Date shall be permanently canceled. Any
Term Loans that are repaid or prepaid may not be reborrowed.
(c) Availability. No later than 11:00 a.m. (Houston, Texas
time) on the Closing Date, each Lender will make available to the Administrative
Agent such Lender's Term Loan Percentage of the aggregate amount of Term Loans
to be made on the Closing Date by such Lender, in Dollars and in immediately
available funds at the Payment Office. The Administrative Agent will make
available to the Borrower at the Payment Office the aggregate of the amounts so
made available by the Lenders by either (i) depositing such amounts, in
immediately available funds, to an account of the Borrower at the Administrative
Agent designated by the Borrower for such purpose, or (ii) disbursing such
amounts in accordance with such other lawful instructions of the Borrower as the
Borrower shall specify in writing to the Administrative Agent.
(d) Funds to the Administrative Agent. Unless the
Administrative Agent shall have been notified by any Lender not less than three
(3) Business Days prior to the Closing Date that such Lender does
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not intend to make available to the Administrative Agent such Lender's Term Loan
Percentage of the aggregate amount of Term Loans to be made on the Closing Date,
the Administrative Agent may assume that such Lender has made such amount
available to the Administrative Agent on the Closing Date, and the
Administrative Agent may make available to the Borrower a corresponding amount.
If such corresponding amount is not in fact made available to the Administrative
Agent by such Lender on the Closing Date, the Administrative Agent shall be
entitled to recover such corresponding amount on demand from such Lender
together with interest at the Federal Funds Effective Rate. Nothing in this
Section 2.1(d) shall be deemed to relieve any Lender from its obligation to
fulfill its Term Loan Commitment hereunder or to prejudice any rights which the
Borrower may have against any Lender as a result of any default by such Lender
hereunder.
(e) Lenders' Responsibilities. No Lender shall be responsible
for any default by any other Lender in its obligation to make Term Loans
hereunder, and each Lender shall be obligated to make only such Term Loans
provided to be made by it hereunder, regardless of the failure of any other
Lender to fulfill its Term Loan Commitment hereunder.
Section 2.2 Term Notes and Amortization. The Borrower's obligation to
pay the principal of, and interest on, the Term Loans maintained outstanding by
each Lender shall be further evidenced by the Borrower's issuance, execution and
delivery of a Term Note payable to the order of each such Lender in the amount
of such Lender's Term Loan Commitment (if issued prior to the Closing Date) or
in the principal amount of such Lender's Term Loans (if issued after the Closing
Date), and dated as of the date of issuance of such Term Note. The aggregate
amount of the Term Notes applicable to the aggregate Term Loans of all Lenders
shall be payable in monthly installments of principal and interest in the amount
of $384,665 each. Each such installment shall be applied first to accrued but
unpaid interest and then to principal. The first such monthly installment shall
be payable on January 31, 2000, and the remaining monthly installments shall be
payable on each Monthly Date thereafter, with the final installment in the
amount of the aggregate unpaid principal balance then owing, together with all
accrued and unpaid interest, being payable on or before the Term Loan Maturity
Date. Notwithstanding anything to the contrary contained herein, the Borrower
shall make a payment of all accrued and unpaid interest on the outstanding
principal balance of the Term Loans on December 31, 1999.
Section 2.3 Interest. In all cases subject to Section 10.13:
(a) Term Loans. Subject to Section 2.3(b), the Borrower agrees
to pay interest in respect of the unpaid principal amount of each Term Loan from
the date thereof until payment in full thereof at a rate per annum which shall
be, for any day, equal to the Fixed Rate, but in no event to exceed the Highest
Lawful Rate.
(b) Default Interest. If the Borrower shall default in the
payment of the principal of or interest on any Term Loan or any other amount
becoming due hereunder or under any Financing Document, by acceleration or
otherwise, the Borrower shall on demand from time to time pay interest, to the
extent permitted by law, on such defaulted amount to but excluding the date of
actual payment (after as well as before judgment) at a rate per annum equal to
fifteen percent (15%) per annum, but in no event to exceed the Highest Lawful
Rate.
Section 2.4 Accounts and Register.
(a) Lender Accounts. Each Lender shall maintain in accordance
with its usual practice an account or accounts evidencing Indebtedness of the
Borrower to such Lender resulting from each Term Loan of such Lender from time
to time, including, without limitation, the amounts of principal and interest
payable and paid to such Lender from time to time under this Agreement.
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(b) Register. The Administrative Agent shall maintain the
Register pursuant to Section 10.7(c), and a subaccount therein for each Lender,
in which shall be recorded (1) the amount of each Term Loan made hereunder, (2)
the amount of any principal or interest due and payable or to become due and
payable from the Borrower to each Lender hereunder and (3) both the amount of
any sum received by the Administrative Agent hereunder from the Borrower and
each Lender's Term Loan Percentage thereof. The entries made in the Register and
the accounts of each Lender maintained pursuant to this Section 2.4(b) shall, to
the extent permitted by applicable law, be prima facie evidence of the existence
and amounts of the obligations of the Borrower therein recorded; provided,
however, that the failure of any Lender or the Administrative Agent to maintain
the Register or any such account, or any error therein, shall not in any manner
affect the obligation of the Borrower to repay (with applicable interest) the
Term Loans made to the Borrower by such Lender in accordance with the terms of
this Agreement.
Section 2.5 Prepayments.
(a) Mandatory Prepayments.
(1) At any time Parent becomes obligated to prepay all
or part of the Subordinated Debentures, the Borrower shall pay prior to
any prepayment of the Subordinated Debentures, all Lender Indebtedness
owed by the Borrower in full.
(2) At any time any Credit Party shall receive Net
Cash Proceeds from any Debt Offering, a mandatory prepayment of the
Term Loans shall be due on such date in an amount equal to the amount
of such Net Cash Proceeds, to the extent necessary to pay such Term
Loans in full.
(3) At any time a Benchmark Collateral Value
Deficiency or Benchmark Marketable Collateral Deficiency shall occur or
be in existence, a mandatory prepayment of the Term Loans shall be due
in accordance with the terms of Sections 4.3 and 4.4.
(b) Voluntary Prepayments. The Borrower may, at its option, at
any time and from time to time, prepay the Term Loans, in whole or in part, upon
giving, five Business Days' prior written notice to the Administrative Agent of
the date and amount of prepayment; provided, that, any partial prepayment of the
Term Loans shall be in an amount not less than $500,000, and shall be in an
amount which is an integral multiple of $100,000. Upon receipt of such notice,
the Administrative Agent shall promptly notify each Lender of the contents
thereof and of such Lender's Term Loan Percentage of such prepayment. If any
such notice is given, the amount specified in such notice shall be due and
payable on the date specified therein. Prepayments of the Term Loans pursuant to
this Section 2.5(b) shall be applied in the inverse order of maturity of the
remaining scheduled installment payments of the Term Loans required pursuant to
Section 2.2.
(c) Prepayment Penalty. In the event that the Term Loans are
prepaid in whole or in part on or prior to December 21, 2002, including, without
limitation, pursuant to a mandatory prepayment required by Article 8 hereof, but
excluding, however, pursuant to a mandatory prepayment required by Section 2.5
or Section 7.4 hereof, the Borrower shall also pay to the Lenders at the time of
such prepayment, a prepayment penalty equal to a percentage of the amount
prepaid in accordance with the following schedule:
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<PAGE> 22
<TABLE>
<CAPTION>
Penalty as Percentage
Time of Prepayment of Amount Prepaid
------------------ ---------------------
<S> <C>
On or prior to December 21, 2000 3%
On or prior to December 21, 2001 2%
On or prior to December 21, 2002 1%
After December 21, 2002 0%
</TABLE>
Furthermore, in the event any Credit Party shall (a) receive Net Cash Proceeds
from any Equity Contribution, and (b) apply, on or prior to December 21, 2002,
all or a portion of such Net Cash Proceeds as a prepayment of more than thirty
five percent (35%) of the then outstanding principal balance of the Term Loans
(any portion prepaid in excess of thirty-five percent (35%) of the then
outstanding principal balance of the Term Loans being referred to herein as the
"Excess Prepaid Amount"), the Borrower shall also pay to the Lenders at the time
of such prepayment, a prepayment penalty equal to a percentage of the Excess
Prepaid Amount in accordance with the foregoing schedule.
Section 2.6 Fees. The Borrower shall pay to the Administrative Agent
such servicing and other fees as are set forth in any separate letter agreement
by and between Parent and/or the Borrower and the Administrative Agent.
Section 2.7 Payments, etc.
(a) Without Setoff, etc. Except as otherwise specifically
provided herein, all payments under this Agreement shall be made to the
Administrative Agent for the account of the Lenders without defense, set-off or
counterclaim to the Administrative Agent not later than 11:00 a.m. Houston,
Texas time on the date when due and shall be made in Dollars in immediately
available funds at the Payment Office. The Administrative Agent will promptly
thereafter distribute funds in the form received relating to the payment of
principal or interest ratably to the Lenders for the account of their respective
Lending Offices, and funds in the form received relating to the payment of any
other amount payable to any Lender to such Lender for the account of its
applicable Lending Office.
(b) Non-Business Days. Whenever any payment to be made
hereunder or under any Term Note shall be stated to be due on a day which is not
a Business Day, the due date thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the applicable rate during such extension.
(c) Computations. All computations of interest shall be made
on the basis of a year of 360 days, as if each month consisted of 30 days.
Section 2.8 Capital Adequacy. If, by reason of (1) the introduction of
or any change (including, but not limited to, any change by way of imposition or
increase of reserve requirements) in or in the interpretation of any law or
regulation, or (2) the compliance with any guideline or request issued by any
central bank or other governmental authority or quasi-governmental authority
exercising control over banks or financial institutions generally (whether or
not having the force of law), affects or would affect the amount of capital
required to be maintained by any Lender or any corporation controlling such
Lender, and the amount of such capital is increased by or based upon the
existence of such Lender's Term Loans or such Lender's Term Loan Commitment,
then, upon written request therefor by such Lender (with a copy of such request
to the Administrative Agent), the Borrower shall pay to such Lender, from time
to time as specified by such Lender, additional amounts sufficient to compensate
such Lender for the increased cost of such
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<PAGE> 23
additional capital in light of such circumstances, to the extent that such
Lender reasonably determines such increase in capital to be allocable to the
existence of such Lender's Term Loans or such Lender's Term Loan Commitment. A
certificate as to such amounts and the calculation thereof, submitted to the
Borrower and the Administrative Agent by such Lender, shall be conclusive and
binding for all purposes, absent manifest error.
Section 2.9 Sharing of Payments, etc. If any Lender shall obtain any
payment or reduction (including, but not limited to, any amounts received as
adequate protection of a deposit treated as cash collateral under the Bankruptcy
Code) of any obligation of the Borrower hereunder (whether voluntary,
involuntary, through the exercise of any right of set-off, or otherwise) in
excess of its ratable share of payments or reductions on account of such
obligations obtained by all the Lenders, such Lender shall forthwith (a) notify
each of the other Lenders and the Administrative Agent of such receipt, and (b)
purchase from the other Lenders such participations in the affected obligations
as shall be necessary to cause such purchasing Lender to share the excess
payment or reduction, net of costs incurred in connection therewith, ratably
with each of them, provided that if all or any portion of such excess payment or
reduction is thereafter recovered from such purchasing Lender or additional
costs are incurred, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery or such additional costs, but without
interest. The Borrower agrees that any Lender so purchasing a participation from
another Lender pursuant to this Section 2.9 may, to the fullest extent permitted
by law, exercise all its rights of payment (including the right of set-off) with
respect to such participation as fully as if such Lender were the direct
creditor of the Borrower in the amount of such participation.
Section 2.10 Taxes.
(a) Payments Free and Clear. Any and all payments by or on
account of any obligation of the Borrower hereunder shall be made free and clear
of and without deduction for any Indemnified Taxes or Other Taxes; provided that
if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes
from such payments, then (1) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.10) the Administrative Agent or
Lender (as the case may be) receives an amount equal to the sum it would have
received had no such deductions been made, (2) the Borrower shall make such
deductions, and (3) the Borrower shall pay the full amount deducted to the
relevant Governmental Authority in accordance with applicable law.
(b) Other Taxes. In addition, the Borrower shall pay any Other
Taxes to the relevant Governmental Authority in accordance with applicable law.
(c) Indemnification. The Borrower shall indemnify the
Administrative Agent and each Lender, upon written demand therefor, for the full
amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent
or such Lender, as the case may be, on or with respect to any payment by or on
account of any obligation of the Borrower hereunder (including Indemnified Taxes
or Other Taxes imposed or asserted on or attributable to amounts payable under
this Section 2.10) and any penalties, interest and reasonable expenses arising
therefrom or with respect thereto, whether or not such Indemnified Taxes or
Other Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. A certificate as to the amount of such payment or
liability delivered to the Borrower by a Lender, or by the Administrative Agent
on its own behalf or on behalf of a Lender, shall be conclusive absent manifest
error.
(d) Receipts. As soon as practicable after any payment of
Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority,
the Borrower shall deliver to the Administrative Agent the original or a
certified copy of a receipt issued by such Governmental Authority evidencing
such payment,
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<PAGE> 24
a copy of the return reporting such payment or other evidence of such payment
reasonably satisfactory to the Administrative Agent.
(e) Survival. Without prejudice to the survival of any other
agreement contained herein, the agreements and obligations contained in this
Section 2.10 shall survive the payment in full of principal and interest
hereunder.
(f) Lender Representations and Agreements. Any Foreign Lender
that is entitled to an exemption from or reduction of withholding tax under the
law of the jurisdiction in which the Borrower is located, or any treaty to which
such jurisdiction is a party, with respect to payments under this Agreement
shall deliver to the Borrower (with a copy to the Administrative Agent), at the
time or times prescribed by applicable law, such properly completed and executed
documentation prescribed by applicable law or reasonably requested by the
Borrower as will permit such payments to be made without withholding or at a
reduced rate.
Section 2.11 Pro Rata Treatment. Each payment on account of principal
of and interest on any Term Loans shall be allocated by the Administrative Agent
pro rata according to the respective outstanding principal amounts of such Term
Loans then held by the Lenders. All proceeds (including proceeds from the
realization upon the Collateral) received after acceleration of the maturity of
the Term Loans, shall be applied first to reimbursement of expenses and
indemnities provided for in this Agreement and the Financing Documents; second,
to other Lender Indebtedness until repaid in full pro rata to each Lender; and,
third, to any other Person entitled to receive such proceeds in accordance with
applicable law.
Section 2.12 Replacement of Lenders. If any Lender is subject to
increased costs pursuant to Section 2.8, or is owed or reasonably anticipates
being owed additional amounts pursuant to Section 2.10, the Borrower shall have
the right, if no Default then exists, to replace such Lender with another bank
or financial institution with the consent of the Administrative Agent, which
consent shall not be unreasonably withheld or delayed, provided that (a) the
obligations of the Borrower owing to the Lender being replaced (including such
increased costs) that are not being assigned to the replacement lender shall be
paid in full to the Lender being replaced concurrently with such replacement
lender, (b) the replacement lender shall execute an Assignment and Acceptance
pursuant to which it shall become a party hereto as provided in Section 10.7,
and (c) upon compliance with the provisions for assignment provided in Section
10.7 and the payment of amounts referred to in clause (a), the replacement
lender shall constitute a "Lender" hereunder and the Lender being so replaced
shall no longer constitute a "Lender" hereunder.
ARTICLE 3
CLOSING
The obligation of each Lender to make its Term Loan on the Closing Date
hereunder is subject to (1) receipt by the Administrative Agent of the following
items which are to be delivered, in form and substance satisfactory to each
Lender, with a copy (except for the Term Notes and this Agreement) for each
Lender and (2) the satisfaction of the following conditions:
(a) Term Notes. A duly completed and executed Term Note for
each Lender and in each case dated as of the Closing Date, and payable to the
order of such Lender.
(b) Resolutions and Incumbency Certificates.
(1) certified copies of the resolutions of the
applicable board of directors and operating board of each Credit Party
(or the general partner thereof) a party to a Financing
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<PAGE> 25
Document, dated as of the Closing Date and approving, as appropriate,
the Term Loans, the Term Notes, this Agreement, the Security
Instruments and the other Financing Documents to which such Person is a
party, and all other documents, if any, to which such Person is a party
and evidencing limited liability company, corporate or partnership
authorization with respect to such documents;
(2) a certificate of the Secretary or an Assistant
Secretary of each Credit Party (or the general partner thereof) a party
to any Financing Document, dated as of the Closing Date and certifying
(A) the name, title and true signature of each officer of such Person
authorized to execute the Term Notes, this Agreement, the Security
Instruments and the other Financing Documents to which it is a party,
(B) the name, title and true signature of each officer of such Person
authorized to provide the certifications required pursuant to this
Agreement including, but not limited to, certifications required
pursuant to Section 6.10, and that attached thereto is a true and
complete copy of (i) the certificate of incorporation, certificate of
formation, certificate of limited partnership and/or the articles of
organization of each such Person (as applicable), certified by the
Secretary of State of the applicable state of formation, and (ii) the
bylaws, partnership agreement, operating agreement or regulations of
each such Person (as applicable), each as amended to date, recent good
standing certificates and certificates of existence for each such
Person and certificates of foreign qualification for each such Person
in such jurisdictions as the Administrative Agent shall require; and
(3) a certificate of limited partnership of HRY,
together with the limited partnership agreement of HRY and a
certificate of existence for HRY in the applicable state of its
formation, issued by the Secretary of State of the applicable state of
formation.
(c) Opinions of Counsel. An opinion of Jenkens &
Gilchrist, a Professional Corporation, counsel to the Credit Parties dated as of
the Closing Date and substantially in the form of Exhibit B hereto, addressed to
the Administrative Agent and the Lenders and covering such matters as the
Administrative Agent or the Lenders may reasonably request, together with such
other opinions of local counsel satisfactory to the Administrative Agent,
addressed to the Administrative Agent and the Lenders opining as to the
enforceability of any Security Instruments to be filed in such local
jurisdiction and covering such other matters as the Administrative Agent or the
Lenders may reasonably request.
(d) The Security Instruments.
(1) a duly completed and executed Facility Guaranty
dated as of the Closing Date and duly delivered by Parent;
(2) a duly completed and executed Borrower Pledge
Agreement, dated as of the Closing Date and duly delivered by the
Borrower granting to the Administrative Agent a first priority security
interest in certain of the Equity owned by the Borrower in HRY,
Hallwood Realty and HCRE (as more particularly described therein) as
security for the Lender Indebtedness;
(3) a duly completed and executed Parent Pledge
Agreement, dated as of the Closing Date and duly delivered by Parent,
granting to the Administrative Agent a first and prior security
interest in certain of the Equity owned by Parent in Hallwood Hotels
(as more particularly described therein) as security for the Lender
Indebtedness;
(4) a duly completed and executed Integra Pledge
Agreement, dated as of the Closing Date and duly delivered by Integra,
granting to the Administrative Agent a first and prior security
interest in certain of the Equity owned by Integra in Brock (as more
particularly described therein) as security for the Lender
Indebtedness;
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<PAGE> 26
(5) a duly completed and executed HEPGP Pledge
Agreement, dated as of the Closing Date and duly delivered by HEPGP,
granting to the Administrative Agent a first and prior security
interest in certain of the Equity owned by HEPGP in HECO (as more
particularly described therein) as security for the Lender
Indebtedness;
(6) duly completed and executed UCC-1 financing
statements necessary to perfect the Liens and security interests
created by the Pledge Agreements and the Collateral Assignment of
Intercompany Note;
(7) in addition to the UCC-1 financing statements
required by clause (6) preceding, such other documents, instruments and
agreements as the Administrative Agent shall reasonably request to
fully evidence and perfect the Liens created by the Security
Instruments;
(8) a duly completed and executed Collateral
Assignment of Intercompany Note, dated as of the Closing Date and duly
delivered by the Borrower;
(9) a duly completed and executed Parent Intercompany
Note dated as of the Closing Date and duly delivered by the Borrower,
and duly endorsed by the Borrower to the Administrative Agent for the
ratable benefit of the Lenders; and
(10) all Property in which the Administrative Agent
shall, at such time, be entitled to have a Lien pursuant to this
Agreement or any other Financing Document shall have been physically
delivered to the possession of the Administrative Agent to the extent
that such possession is necessary for the purpose of perfecting the
Administrative Agent's Lien in such Collateral, including, without
limitation, the Parent Intercompany Note, stock certificates,
certificates of limited partnership interests and certificates of
membership interests representing the issued and outstanding Equity in
HECO, Hallwood Hotels, HRY, Brock, Hallwood Realty and HCRE described
in the Pledge Agreements, duly endorsed for transfer to the
Administrative Agent or such other duly executed assignments of such
Equity as are acceptable to the Administrative Agent, the Lenders or
their counsel.
(e) Intercreditor Agreement. A duly completed and executed
Intercreditor Agreement, dated as of the Closing Date, and delivered by each
applicable party thereto.
(f) Closing Transactions. Subject only to the funding,
disbursement and application of the proceeds of the Term Loans, the Closing
Transactions shall have occurred and been consummated.
(g) Insurance. Copies of all insurance binders together with a
certificate of insurance coverage, dated as of the Closing Date evidencing that
the Credit Parties are carrying insurance in accordance with Section 6.5 hereof.
(h) Financial Statements and Projections. The financial
condition of Parent and each of its Subsidiaries in the financial information
and projections of Parent and its Subsidiaries that have been delivered to the
Lenders prior to the Closing Date by Parent and the Borrower, have not changed
as of the Closing Date in such a way as to materially and adversely affect the
prospects of Parent or any of its Subsidiaries, or otherwise cause or result in
a Material Adverse Effect (after giving effect to the Closing Transactions).
(i) Collateral Value Certificate. A duly completed and
executed Collateral Value Certificate in the form attached hereto as Exhibit F,
dated as of the Closing Date and duly delivered by the Chief Financial Officer
(or similar officer) of Parent.
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<PAGE> 27
(j) Form U-1 Purpose Statement. A duly completed and executed
Federal Reserve Form U-1 Purpose Statement dated as of the Closing Date and duly
delivered by Parent and the Borrower.
(k) Certificate of Chief Financial Officer. A duly completed
and executed certificate of the Chief Financial Officer (or similar officer) of
Parent dated as of the Closing Date and certifying, before and after giving
effect to the Closing Transactions and before and after the making of the Term
Loans, that (A) each Credit Party is Solvent, and (B) no Default then exists, or
thereafter would exist.
(l) Structure. Each Lender shall be satisfied in its sole
judgment with the corporate, partnership, limited liability company, capital,
legal and management structure and tax liabilities of each Credit Party.
(m) Lien Searches. Lien searches reflecting no prior Liens on
the Collateral other than Liens set forth on Schedule 7.2.
(n) Fees and Expenses. Payment and/or reimbursement of (1) the
Administrative Agent's counsel's fees and expenses rendered through the Closing
Date, to the extent invoiced, and (2) any fees or expenses required to be paid
pursuant to Section 2.6.
(o) Documentation. The Administrative Agent shall have
received such other documents as the Administrative Agent (or any Lender acting
through the Administrative Agent) may reasonably request, all in form and
substance reasonably satisfactory to the Administrative Agent.
ARTICLE 4
SECURITY
Section 4.1 Security Granted. The Lender Indebtedness shall be secured
by (a) perfected, first priority Liens covering and encumbering the issued and
outstanding Equity owned by the Credit Parties (as applicable) in HECO, Hallwood
Hotels, Brock, HRY, Hallwood Realty and HCRE as described in the Pledge
Agreements, and (b) a collateral assignment of the Parent Intercompany Note. In
furtherance thereof, Parent and the Borrower hereby agree to execute and deliver
(and cause each other Credit Party to execute and deliver) to the Administrative
Agent for the benefit of the Lenders, on the Closing Date and thereafter
promptly upon request by the Administrative Agent, such Security Instruments
(including, without limitation, the Pledge Agreements and the Collateral
Assignment of Intercompany Note), and other documents, instruments, agreements
and certificates (including, without limitation, (i) such UCC-1 financing
statements as the Administrative Agent shall request to fully evidence and
perfect the Liens created by the Pledge Agreements and the Collateral Assignment
of Intercompany Note, and (ii) the certificates evidencing the issued and
outstanding Equity owned by the Credit Parties (as applicable) in HECO, Hallwood
Hotels, Brock, HRY, Hallwood Realty and HCRE as described in the Pledge
Agreements, endorsed or accompanied by appropriate blank stock powers), as the
Administrative Agent shall deem necessary or appropriate in its sole discretion
to create, evidence and perfect the Liens contemplated by this Section 4.1. In
addition to the foregoing, in the event the Borrower submits additional
Collateral hereunder pursuant to Sections 4.2, 4.3, 4.5 or 7.4, or otherwise
pursuant to the terms of this Agreement or the other Financing Documents, the
Borrower shall simultaneously with the delivery of such Collateral execute and
deliver (or cause the execution and delivery) to the Administrative Agent for
the benefit of the Lenders such Security Instruments and other documents,
instruments, agreements and certificates as the Administrative Agent shall deem
necessary or appropriate in its sole discretion to create, evidence and perfect
the Liens encumbering such Collateral.
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Section 4.2 Collateral Value. As soon as available, and in any event by
the 21st day of each calendar month, Parent shall deliver to the Administrative
Agent and each Lender, a certificate (the "Collateral Value Certificate") of the
Chief Financial Officer (or similar officer) of Parent in the form of Exhibit F
attached hereto (a) setting forth in reasonable detail the calculations required
to establish the value of (i) the Marketable Equity, and (ii) the Non-Marketable
Equity as of the last day of the immediately preceding calendar month, (b)
stating whether there exists on such date a Benchmark Collateral Deficiency or
Benchmark Marketable Collateral Deficiency, and (c) in the event a Benchmark
Collateral Deficiency or Benchmark Marketable Collateral Deficiency exists,
stating the action which Parent proposes to take to remedy such Benchmark
Collateral Deficiency or Benchmark Marketable Collateral Deficiency in
accordance with Sections 4.3 and 4.4. All calculations provided in the
aforementioned certificate shall be made utilizing historical methodology and
based on underlying assumptions consented to by the Administrative Agent and
previously utilized by Parent in the financial information delivered to each
Lender on or prior to the Closing Date.
Section 4.3 Benchmark Collateral Deficiency. If a Benchmark Collateral
Deficiency exists at any time, the Borrower shall, within ten (10) days
following the occurrence of such Benchmark Collateral Deficiency (a) make a
prepayment of principal on the Term Loan in an amount sufficient to eliminate
such Benchmark Collateral Deficiency, or (b) eliminate such Benchmark Collateral
Deficiency by submitting additional Collateral owned by Parent or the Borrower
and consisting of cash or marketable Equity, together with a Collateral Value
Certificate covering the existing pledged Collateral and such additional
proposed Collateral, for consideration in connection with the determination of
the value of the Collateral consisting of marketable Equity which the
Administrative Agent and the Required Lenders deem sufficient in their sole
discretion to eliminate such Benchmark Collateral Deficiency.
Section 4.4 Benchmark Marketable Collateral Deficiency. If a Benchmark
Marketable Collateral Deficiency exists at any time, the Borrower shall, within
ten (10) days following the occurrence of such Benchmark Marketable Collateral
Deficiency (a) make a prepayment of principal on the Term Loan in an amount
sufficient to eliminate such Benchmark Marketable Collateral Deficiency, or (b)
eliminate such Benchmark Marketable Collateral Deficiency by submitting
additional Collateral owned by Parent or the Borrower and consisting of cash or
marketable Equity, together with a Collateral Value Certificate covering the
existing pledged Collateral and such additional proposed Collateral, for
consideration in connection with the determination of the value of the
Collateral consisting of marketable Equity which the Administrative Agent and
the Required Lenders deem sufficient in their sole discretion to eliminate such
Benchmark Marketable Collateral Deficiency.
Section 4.5 Substitution of Collateral. The Borrower may, at any time
and from time to time, make written request of the Administrative Agent for the
substitution of existing Collateral with new Collateral of equal or greater
value. Upon receipt of such request, together with a Collateral Value
Certificate covering such proposed new Collateral, the Administrative Agent
shall promptly deliver notice of such request to each Lender, and the Lenders
shall, within fifteen (15) days following receipt of such notice, and in their
sole discretion, approve or disapprove of such proposed substitution. If at the
end of such fifteen (15) day period, the Lenders have not communicated their
approval or disapproval, such silence shall be deemed a disapproval of the
requested substitution of Collateral.
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<PAGE> 29
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
In order to induce the Lenders to enter into this Agreement, Parent and
the Borrower represent and warrant to the Administrative Agent and each Lender
(which representations and warranties (a) will survive the delivery of the Term
Notes, and (b) were made assuming that the Closing Transactions had each
occurred on or before the Closing Date) that:
Section 5.1 Existence. Each Credit Party is a limited liability
company, corporation or partnership duly organized, legally existing and, as
applicable, in good standing under the laws of the jurisdictions in which they
are formed or incorporated and is duly qualified as a foreign limited liability
company, or partnership or corporation in all jurisdictions wherein the Property
owned or the business transacted by them makes such qualification necessary,
except where the failure to be so qualified could not reasonably be expected to
have a Material Adverse Effect.
Section 5.2 Power and Authorization. The Borrower is authorized and
empowered to create and issue the Term Notes; each Credit Party is duly
authorized and empowered to execute, deliver and perform the Financing
Documents, including this Agreement, to which they respectively are parties; and
all limited liability company action on the Borrower's part requisite for the
due creation and issuance of the Term Notes, and all limited liability company,
corporate or partnership action on each Credit Party's respective part requisite
for the due execution, delivery and performance of the Financing Documents,
including this Agreement, to which each such Credit Party respectively is a
party has been duly and effectively taken.
Section 5.3 Binding Obligations. This Agreement does, and the Term
Notes and other material Financing Documents to which each Credit Party
respectively is a party upon their creation, issuance, execution and delivery
will, when issued and delivered under this Agreement, constitute legal, valid
and binding obligations of each such Credit Party that is a party thereto,
respectively, and will be enforceable in accordance with their respective terms
(except that enforcement may be subject to any applicable bankruptcy, insolvency
or similar laws generally affecting the enforcement of creditors' rights and
subject to the availability of equitable remedies).
Section 5.4 No Legal Bar or Resultant Lien. The execution, delivery and
performance of the Term Notes and the other Financing Documents, including this
Agreement, to which each Credit Party is a party do not and will not violate or
create a default under any provisions of the articles of organization, articles
or certificate of incorporation, bylaws, operating agreement, regulations or
other charter documents of any such Credit Party, or any contract, agreement,
instrument or Governmental Requirement to which any such Credit Party is
subject, or result in the creation or imposition of any Lien upon any Properties
of any such Credit Party.
Section 5.5 No Consent. Each Credit Party's respective execution,
delivery and performance of the Term Notes and the other Financing Documents,
including this Agreement, to which each such Credit Party respectively is a
party, do not require notice to or filing or registration with, or the
authorization, consent or approval of or other action by any other Person,
including, but not limited to, any Governmental Authority, except those obtained
or made or where the failure to do so could not reasonably be expected to have a
Material Adverse Effect.
Section 5.6 Financial Information.
(a) Pro-Forma Financial Statements and Projections. The pro
forma consolidated balance sheets of Parent and its Subsidiaries, and
the related consolidated statements of income, retained
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<PAGE> 30
earnings and cash flow, including, in each case the related schedules
and notes, heretofore delivered to the Lenders fairly present the
estimated consolidated financial condition of Parent and its
Subsidiaries as of the dates set forth therein, the estimated results
of operations for the twelve-month period then ended on a pro forma
basis and the projected results of operations through the dates set
forth therein; provided, that, the financial information with respect
to Parent's projections, copies of which have been delivered to each
Lender prior to the Closing Date, were prepared in good faith on the
basis of the assumptions stated therein, which assumptions were
believed by Parent to be reasonable in all material respects at the
time made.
(b) Financial Statements. The Financial Statements heretofore
delivered to the Lenders were prepared consistent with GAAP and fairly
present the consolidated financial condition of Parent at such date and
the consolidated results of operations for the periods then ended
(subject to, with respect to the unaudited consolidated financial
statements included in the definition of Financial Statements, audit
adjustments and the fact that such unaudited financial statements do
not contain footnotes).
(c) Audited Annual Financial Statements. The most recent
annual audited consolidated balance sheets of Parent and its
Subsidiaries, and the related audited consolidated statements of
income, retained earnings and cash flows for the Fiscal Year then
ended, including in each case the related schedules and notes, true
copies of which have been previously delivered to each of the Lenders,
fairly present the consolidated financial condition of Parent and its
Subsidiaries for such Fiscal Year, and the consolidated results of
operations for such Fiscal Year, in accordance with GAAP applied on a
consistent basis (this representation and warranty will not be
applicable until the first annual audited statement of Parent is
delivered pursuant to Section 6.10(a)).
(d) Unaudited Quarterly Financial Statements. The most recent
unaudited consolidated balance sheets of Parent and its Subsidiaries,
and the related consolidated statements of income, retained earnings
and cash flows for the portion of Parent's Fiscal Year then ended,
including in each case the related schedules and notes, true copies of
which have been previously delivered to each of the Lenders, fairly
present the consolidated financial condition of Parent and its
Subsidiaries as of such date, and the consolidated results of
operations for such portion of Parent's Fiscal Year, in accordance with
GAAP (subject to audit adjustments and the fact that such financial
statements do not contain footnotes) applied on a consistent basis
(this representation and warranty will not be applicable until the
first unaudited quarterly statement of Parent is delivered pursuant to
Section 6.10(b)).
(e) No Material Adverse Effect. Since November 13, 1999, there
has been no event or occurrence that could reasonably be expected to
have a Material Adverse Effect.
Section 5.7 Investments and Guaranties. No Credit Party has an
ownership interest in any Person, or guaranteed the obligations of any Person
that is not a Credit Party, except those reflected in Schedule 5.7 or Schedule
7.2.
Section 5.8 Litigation. Except as set forth in Schedule 5.8, there is
no material action, suit or proceeding, or any governmental investigation or any
arbitration, in each case pending or, to the knowledge of Parent or the
Borrower, threatened against Parent or its Subsidiaries or any Property of any
of them before any court or arbitrator or any Governmental Authority. There is
no action, suit or proceeding, or any governmental investigation or any
arbitration, in each case pending or, to the knowledge of Parent or the
Borrower, threatened against Parent or its Subsidiaries or any Property of any
of them before any court or arbitrator or any Governmental Authority which (a)
challenges the validity of this Agreement, any Term
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Note, the Facility Guaranty, any Security Instrument or any of the other
Financing Documents or (b) could reasonably be expected to have a Material
Adverse Effect.
Section 5.9 Use of Proceeds. The Borrower will use the proceeds of the
Term Loans only for the purposes specified in the Recitals to this Agreement.
Neither Parent nor any of its Subsidiaries is engaged principally, or as one of
its important activities, in the business of extending credit for the purpose,
whether immediate, incidental or ultimate, of buying or carrying Margin Stock
(within the meaning of Regulations U or X) and no part of the proceeds of any
Term Loan hereunder will be used to buy or carry any Margin Stock in violation
of Regulation U or X. Neither Parent nor any of its Subsidiaries, nor any Person
acting on behalf of any such Person, has taken or will take any action which
could reasonably be expected to cause the Term Notes or any of the Financing
Documents, including this Agreement, to violate Regulations U or X or any other
regulation of the Board of Governors of the Federal Reserve System, in each case
as now in effect or as the same may hereinafter be in effect.
Section 5.10 Employee Benefits.
(a) (1) Parent, its Subsidiaries and each ERISA Affiliate have
complied in all material respects with all applicable laws regarding each Plan;
(2) each Plan is, and has been, maintained and administered in substantial
compliance with its terms, applicable collective bargaining agreements, and all
applicable laws; and (3) no act, omission or transaction has occurred which
could result in an imposition on Parent, any Subsidiary of Parent or any ERISA
Affiliate (whether directly or indirectly) of either (A) a civil penalty
assessed pursuant to Subsections (c), (i) or (l) of Section 502 of ERISA or a
tax imposed pursuant to Chapter 43 of Subtitle D of the Code or (B) breach of
fiduciary duty liability damages under Section 409 of ERISA, in either case
which could reasonably be expected to have a Material Adverse Effect.
(b) There exists no outstanding liability of Parent, any of
its Subsidiaries or any ERISA Affiliate with respect to any Plan that has been
terminated. No material liability to the PBGC (other than for the payment of
current premiums which are not past due) by Parent, any Subsidiary of Parent or
any ERISA Affiliate has been or is expected by Parent, any Subsidiary of Parent
or any ERISA Affiliate to be incurred with respect to any Plan. No ERISA
Termination Event with respect to any Plan which could result in any liability
to Parent, its Subsidiaries or any ERISA Affiliate has occurred or is reasonably
expected to occur.
(c) Full payment when due has been made of all amounts which
Parent, any of its Subsidiaries or any ERISA Affiliate is required under the
terms of each Plan or applicable law to have paid as contributions to such Plan
(excluding any nonpayment involving an amount that is not material), and no
accumulated funding deficiency (as defined in Section 302 of ERISA and Section
412 of the Code), whether or not waived, exists with respect to any Plan.
(d) The actuarial present value of the benefit liabilities
(computed on an accumulated benefit obligation basis in accordance with GAAP)
under all Plans in the aggregate that are subject to Title IV of ERISA does not,
as of the end of the most recently ended fiscal year of such Plans, exceed the
current value of the assets of all Plans in the aggregate that are allocable to
such benefit liabilities. The term "actuarial present value of the benefit
liabilities" shall have the meaning specified in Section 4041 of ERISA.
(e) Except as set forth on Schedule 5.10, neither Parent, any
Subsidiary of Parent nor any ERISA Affiliate sponsors, maintains or contributes
to, or has at any time in the preceding six-year period sponsored, maintained or
contributed to, any "multiemployer plan" (as defined in Section 3(37) or
4001(a)(3) of ERISA).
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(f) Neither Parent, any Subsidiary of Parent nor any ERISA
Affiliate is required to provide security to a Plan pursuant to Section
401(a)(29) of the Code.
Section 5.11 Taxes; Governmental Charges. Parent and its Subsidiaries
have filed all tax returns and reports required to be filed and have paid all
taxes, assessments, fees and other governmental charges levied upon any of them
or upon any of their respective Properties or income which are due and payable,
including interest and penalties, except where failure to so pay or file could
not reasonably be expected to have a Material Adverse Effect, or have provided
adequate reserves for the payment thereof if required in accordance with GAAP
for the payment thereof, except such interest and penalties as are being
contested in good faith by appropriate actions or proceedings and for which
adequate reserves for the payment thereof as required by GAAP have been
provided.
Section 5.12 Titles, etc. Each Credit Party has indefeasible title to
their respective Properties, and with respect to leased Properties, indefeasible
title to the leasehold estate with respect thereto, pursuant to valid and
enforceable leases, free and clear of all Liens except Liens otherwise permitted
or contemplated by this Agreement or the other Financing Documents.
Section 5.13 Defaults. Neither Parent nor any of its Subsidiaries is in
default nor has any event or circumstance occurred which, but for the passage of
time or the giving of notice, or both, would constitute a default (in any
respect that could, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect) under any loan or credit agreement, indenture,
mortgage, deed of trust, security agreement or other instrument or agreement
evidencing or pertaining to any Indebtedness of any such Person, or under any
agreement or instrument to which any such Person is a party or by which any such
person is bound, except as set forth on Schedule 5.13. No Default hereunder has
occurred and is continuing.
Section 5.14 Casualties; Taking of Properties. Neither the business nor
the Properties of Parent or its Subsidiaries has been affected in a manner that
has had or could reasonably be expected to have a Material Adverse Effect as a
result of any fire, explosion, earthquake, flood, drought, windstorm, accident,
strike or other labor disturbance, embargo, requisition or taking of Property or
cancellation of contracts, permits or concessions by any domestic or foreign
government or any agency thereof, riot, activities of armed forces or acts of
God or of any public enemy.
Section 5.15 Compliance with the Law. Neither Parent nor its
Subsidiaries:
(a) is in violation of any Governmental Requirement; and
(b) has failed to obtain any license, permit, right-of-way,
franchise or other right or governmental authorization necessary to the
ownership of any of their respective Properties or the conduct of their
respective business;
which violation or failure could, individually or in the aggregate, reasonably
be expected to have (in the event that such a violation or failure were asserted
by any Person through appropriate action) a Material Adverse Effect.
Section 5.16 No Material Misstatements. No written information,
exhibit, schedule or report prepared by or on behalf of Parent or the Borrower
and furnished to the Administrative Agent or the Lenders by or at the direction
of Parent and/or the Borrower or any of Parent's Subsidiaries in connection with
the negotiation of this Agreement contained any material misstatement of fact
or, when such statement is considered with all other written statements
furnished to the Lenders in that connection, omitted to state a material fact or
any fact necessary to make the statement contained therein not misleading;
provided, that, the financial information with respect to Parent's projections,
copies of which have been furnished to each
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Lender prior to the Closing Date, were prepared in good faith on the basis of
the assumptions stated therein, which assumptions were believed by Parent to be
reasonable in all material respects at the time made.
Section 5.17 Investment Company Act. No Credit Party is an "investment
company" or a company "controlled" by an "investment company" that is
incorporated in or organized under the laws of the United States or any "State,"
as those terms are defined in the Investment Company Act of 1940, as amended.
The execution and delivery by each Credit Party of this Agreement and the other
Financing Documents to which they respectively are parties and their respective
performance of the obligations provided for therein, will not result in a
violation of the Investment Company Act of 1940, as amended.
Section 5.18 Public Utility Holding Company Act. No Credit Party is a
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," or a "public utility" within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
Section 5.19 Subsidiaries. Schedule 5.19 hereto accurately reflects, as
of the Closing Date, (a) the jurisdiction of incorporation or organization of
Parent and its Subsidiaries, and (b) each jurisdiction in which each such Person
is qualified to transact business as a foreign corporation, foreign partnership
or foreign limited liability company. As of the Closing Date, Parent has no
Subsidiaries except those shown in Schedule 5.19, which schedule was complete
and accurate on such date.
Section 5.20 Insurance. All policies of insurance owned or held by
Parent and its Subsidiaries are sufficient for compliance with all requirements
of law and of all agreements to which any such Person is a party, except where
any insufficiency could not reasonably be expected to have a Material Adverse
Effect; are valid, outstanding and enforceable policies; provide adequate
insurance coverage in at least such amounts and against at least such risks (but
including in any event public liability) as are usually insured against in the
same general area by companies engaged in the same or a similar business for the
assets and operations of each such Person; and will not in any way be affected
by, or terminate or lapse by reason of, the transactions contemplated by this
Agreement. All such policies are in full force and effect, all premiums with
respect thereto have been paid in accordance with their respective terms, and no
notice of cancellation or termination has been received with respect to any such
policy. Neither Parent nor any of its Subsidiaries maintains any formalized
self-insurance program with respect to its assets or operations or risks with
respect thereto. Schedule 5.20 contains a complete and accurate list of all such
insurance policies, copies of which have previously been made available to
Lenders.
Section 5.21 Environmental Matters. Except as set forth on Schedule
5.21:
(a) Environmental Laws, etc. Neither Parent, nor any
Subsidiary of Parent, nor the operations conducted on the Property of
Parent or any Subsidiary of Parent, violate any applicable order of any
court or Governmental Authority or applicable Environmental Laws, which
violation could reasonably be expected to have a Material Adverse
Effect or which could reasonably be expected to result in remedial
obligations having a Material Adverse Effect assuming disclosure to the
applicable Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant Property.
(b) No Litigation. Without limitation of Section (a) above, no
Property of Parent or any Subsidiary of Parent, nor the operations
currently conducted thereon or, to the knowledge of Parent or any
Subsidiary of Parent, by any prior owner or operator of such Property
or operation, are in violation of or subject to any existing, pending
or threatened action, suit, investigation, inquiry or proceeding by or
before any court or Governmental Authority or, to the knowledge of any
Credit Party, to any remedial obligations under applicable
Environmental Laws, which violation, action,
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suit, investigation, inquiry or proceeding could reasonably be expected
to have a Material Adverse Effect or which could reasonably be expected
to result in remedial obligations having a Material Adverse Effect
assuming disclosure to the applicable Governmental Authority of all
relevant facts, conditions and circumstances, if any, pertaining to the
relevant Property.
(c) Notices, Permits, etc. All notices, permits, licenses or
similar authorizations, if any, required to be obtained or filed by
Parent or any Subsidiary of Parent in connection with the operation or
use of any and all Property of Parent or any Subsidiary of Parent,
including, but not limited to, past or present treatment, storage,
disposal or release of a hazardous substance or solid waste into the
environment, have been duly obtained or filed except to the extent the
failure to obtain or file such notices, permits, licenses or similar
authorizations could not reasonably be expected to have a Material
Adverse Effect or which could reasonably be expected to result in
remedial obligations having a Material Adverse Effect assuming
disclosure to the applicable Governmental Authority of all relevant
facts, conditions and circumstances, if any, pertaining to the relevant
Property.
(d) Hazardous Substances Carriers. All hazardous substances or
solid waste generated at any and all Property by Parent or any
Subsidiary of Parent have in the past been transported, treated and
disposed of only by carriers maintaining valid permits under RCRA and
any other applicable Environmental Law, except to the extent the
failure to have such substances or waste transported, treated or
disposed by such carriers could not reasonably be expected to have a
Material Adverse Effect, and, to the knowledge of any Credit Party,
only at treatment, storage and disposal facilities maintaining valid
permits under RCRA and any other applicable Environmental Law, which
carriers and facilities have been and are operating in compliance with
such permits, except to the extent the failure to have such substances
or waste treated, stored or disposed at such facilities, or the failure
of such carriers or facilities to so operate, could not reasonably be
expected to have a Material Adverse Effect or which could reasonably be
expected to result in remedial obligations having a Material Adverse
Effect assuming disclosure to the applicable Governmental Authority of
all relevant facts, conditions and circumstances, if any, pertaining to
the relevant Property.
(e) Hazardous Substances Disposal. Parent and each Subsidiary
of Parent have taken all reasonable steps necessary to determine and
have determined that no hazardous substances or solid waste have been
disposed of or otherwise released and there has been no threatened
release of any hazardous substances on or to any Property by Parent or
any Subsidiary of Parent except in compliance with applicable
Environmental Laws, except to the extent the failure to do so could not
reasonably be expected to have a Material Adverse Effect or which could
reasonably be expected to result in remedial obligations having a
Material Adverse Effect assuming disclosure to the applicable
Governmental Authority of all relevant facts, conditions and
circumstances, if any, pertaining to the relevant Property.
(f) No Contingent Liability. To its knowledge, neither Parent
nor any Subsidiary of Parent has any contingent liability in connection
with any release or threatened release of any hazardous substance or
solid waste into the environment other than such contingent liabilities
at any one time and from time to time which could reasonably be
expected to exceed $50,000 in excess of applicable insurance coverage
and for which adequate reserves for the payment thereof as required by
GAAP have not been provided, or which could reasonably be expected to
result in remedial obligations having a Material Adverse Effect
assuming disclosure to the applicable Governmental Authority of all
relevant facts, conditions and circumstances, if any, pertaining to
such release or threatened release.
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Section 5.22 Solvency. Parent and each Subsidiary of Parent,
individually, and Parent and its Subsidiaries, taken as a whole, are Solvent,
both before and after taking into account the Closing Transactions.
Section 5.23 Employee Matters. None of the Credit Parties, or any of
their respective employees, is subject to any collective bargaining agreement.
There are no strikes, slowdowns, work stoppages or controversies pending or, to
the best knowledge of Parent or the Borrower, threatened against Parent or its
Subsidiaries, or their respective employees, which could reasonably be expected
to have, either individually or in the aggregate, a Material Adverse Effect.
Except as set forth in Schedule 5.23, no employees are subject to an employment
contract.
Section 5.24 Subordinated Debenture Documents, etc. Parent and the
Borrower have provided Administrative Agent with a true and correct copy of the
Subordinated Debentures Indenture, including all amendments and modifications
thereto. No party to the Subordinated Debentures Indenture is in default of its
obligations thereunder.
Section 5.25 Ownership. Schedule 5.25 hereto accurately reflects (a)
the authorized, issued and outstanding Equity securities of Parent, the
Borrower, Brock, Hallwood Hotels, Hallwood Realty, HCRE, and HRY (and the names
of, and number of shares or other Equity securities held by, the legal and
beneficial owners of such Equity securities), after giving effect to the
consummation of the Closing Transactions, and (b) all outstanding warrants,
options, subscription rights, convertible securities or other rights to purchase
Equity securities or other membership, partnership or ownership interests of
each such Person. Except as set forth on Schedule 5.25, there are no outstanding
shareholders agreements, voting agreements, voting trusts or other agreements,
commitments or understandings of any nature which in any way restrict or effect
the transfer, pledge or voting of any of the Equity securities of such Persons,
or subject any of such Equity securities to any put, call, redemption obligation
or similar right or obligation of any nature.
Section 5.26 Senior Indebtedness. The Lender Indebtedness constitutes
"Senior Indebtedness" of Parent under and as defined in the Subordinated
Debentures Indenture.
Section 5.27 Year 2000 Matters. Any reprogramming required to permit
the proper functioning (but only to the extent that such proper functioning
would otherwise be impaired by the occurrence of the year 2000) in and following
the year 2000 of computer systems and other equipment containing embedded
microchips, in either case owned or operated by any Credit Party or used or
relied upon in the conduct of their business (including any such systems and
other equipment supplied by others or with which the computer systems of any
Credit Party interface), and the testing of all such systems and other equipment
as so reprogrammed, has been completed. The costs to the Credit Parties that
have not been incurred as of the date hereof for such reprogramming and testing
and for the other reasonably foreseeable consequences to them of any improper
functioning of other computer systems and equipment containing embedded
microchips due to the occurrence of the year 2000 could not reasonably be
expected to result in a Default of Event of Default or to have a Material
Adverse Effect. Except for any reprogramming referred to above, the computer
systems of the Credit Parties are and, with ordinary course upgrading and
maintenance, will continue for the term of this Agreement to be sufficient for
the conduct of their business as currently conducted.
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ARTICLE 6
AFFIRMATIVE COVENANTS
So long as any Term Loan remains unpaid, Parent and the
Borrower jointly and severally covenant and agree that they will at all times
comply with the following covenants:
Section 6.1 Maintenance and Compliance, etc. Parent will, and will
cause its Subsidiaries to, (a) preserve and maintain its limited liability
company, corporate or partnership existence, and (b) except where failure to do
so could not reasonably be expected to have a Material Adverse Effect, observe
and comply with all Governmental Requirements.
Section 6.2 Payment of Taxes and Claims, etc. Parent will pay, and
cause its Subsidiaries to pay, (a) all material taxes, assessments and
governmental charges imposed upon it or upon its Property, and (b) all material
claims (including, but not limited to, claims for labor, materials, supplies or
services) which could reasonably be expected, if unpaid, to become a Lien upon
its Property, unless, in each case, the validity or amount thereof is being
contested in good faith by appropriate action or proceedings and such Person has
established adequate reserves in accordance with GAAP with respect thereto.
Section 6.3 Further Assurances. Parent will, and will cause each other
Credit Party to, cure promptly any defects in the creation and issuance of the
Term Notes, and the execution and delivery of the Financing Documents, including
this Agreement. Parent and the Borrower at their expense will, as promptly as
practical, execute and deliver to the Administrative Agent upon request all such
other and further documents, agreements and instruments (or cause any other
Credit Party to take such action) in compliance with or performance of the
covenants and agreements of such Credit Parties in the Financing Documents,
including this Agreement, or to further evidence and more fully describe the
Collateral, or to correct any omissions in the Financing Documents, or more
fully to state the security obligations set out herein or in any of the
Financing Documents, or to perfect, protect or preserve any Liens created
pursuant to any of the Financing Documents, or to make any recordings, to file
any notices, or obtain any consents, all as may be necessary or appropriate in
connection therewith.
Section 6.4 Performance of Obligations. The Borrower will pay the Term
Notes according to the reading, tenor and effect thereof; and Parent and the
Borrower will do and perform every act and discharge all of the obligations
provided to be performed and discharged by Parent and the Borrower under the
Financing Documents, including this Agreement, at the time or times and in the
manner specified, and cause each of the other Credit Parties to take such action
with respect to their obligations to be performed and discharged under the
Financing Documents to which they respectively are parties.
Section 6.5 Insurance. Parent will, and will cause its Subsidiaries to,
maintain or cause to be maintained, with financially sound and reputable
insurers, insurance with respect to their respective Properties and business
against such liabilities, casualties, risks and contingencies and in such types
(including business interruption insurance and flood insurance) and amounts as
is customary in the case of Persons engaged in the same or similar businesses
and similarly situated and in accordance with any Governmental Requirement.
Parent and the Borrower will obtain endorsements to the policies naming the
Administrative Agent as a loss payee and/or additional insured, as applicable,
and containing provisions that such policies will not be canceled without 30
days prior written notice having been given by the insurance company to the
Administrative Agent.
Section 6.6 Accounts and Records. Parent will keep, and will cause each
of the other Credit Parties to keep, proper books of record and account in
accordance with GAAP.
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Section 6.7 Right of Inspection. Parent will permit, and will cause
each of the other Credit Parties to permit, any officer, employee or agent of
the Administrative Agent or any Lender to visit and inspect any of the
Properties of any Credit Party, examine such Credit Party's books of record and
accounts, take copies and extracts therefrom, and discuss the affairs, finances
and accounts of Parent or any other Credit Party with Parent's or such other
Credit Party's officers, accountants and auditors, as often and all at such
reasonable times during normal business hours (and, provided no Default or Event
of Default has occurred and is continuing, upon not less than one day's prior
notice), as may be reasonably requested by the Administrative Agent or any of
the Lenders.
Section 6.8 Operation and Maintenance of Property. Parent will, and
will cause its Subsidiaries to, operate its Properties or cause its Properties
to be operated and maintained (a) in accordance with prudent industry practice
in all material respects and in compliance in all material respects with the
terms and provisions of all applicable leases, contracts and agreements and (b)
except where the noncompliance therewith could not reasonably be expected to
cause or result in a Material Adverse Effect, in compliance with all applicable
laws of the jurisdiction in which such Properties may be situated, and all
applicable laws, rules and regulations of every other Governmental Authority
from time to time constituted to regulate the ownership and operation of such
Properties.
Section 6.9 [Intentionally Deleted].
Section 6.10 Reporting Covenants. So long as any Term Loan remains
unpaid, Parent and the Borrower will furnish the following to each of the
Lenders:
(a) Annual Financial Statements. As soon as available and in
any event within 105 days after the end of each Fiscal Year, a consolidated
balance sheet of Parent and its Subsidiaries as at the end of such year and the
related consolidated statements of income, retained earnings and cash flows of
Parent and its Subsidiaries for such Fiscal Year, setting forth in each case in
comparative form the figures for the previous Fiscal Year, all in reasonable
detail and accompanied by a report thereon of independent public accountants of
recognized national standing, which such report shall state that such
consolidated financial statements present fairly the consolidated financial
condition as at the end of such Fiscal Year, and the consolidated results of
operations and cash flows for such Fiscal Year, of Parent and its Subsidiaries
in accordance with GAAP, applied on a consistent basis, and shall be
unqualified. At the same time, a consolidating balance sheet of Parent and its
Subsidiaries as at the end of such year and related consolidating statements of
income and cash flows for such Fiscal Year (in each case consolidating on the
basis of principal lines of business of Parent and its Subsidiaries),
accompanied by a certification thereon of a Responsible Officer, stating that
such consolidating financial statements form the basis of Parent's consolidated
financial statements and are fairly stated in all material respects when
considered in relation thereto.
(b) Quarterly Financial Statements. As soon as available and
in any event within 50 days after the end of each Fiscal Quarter, a consolidated
balance sheet of Parent and its Subsidiaries as at the end of such quarter and
the related consolidated statements of income, retained earnings and cash flows
of Parent and its Subsidiaries for such Fiscal Quarter and for the portion of
Parent's Fiscal Year ended at the end of such quarter, setting forth in each
case in comparative form the figures for the corresponding quarter and the
corresponding portion of Parent's previous Fiscal Year, all in reasonable detail
and certified by a Responsible Officer that such financial statements are
complete and correct and fairly present the consolidated financial condition as
at the end of such Fiscal Quarter, and the consolidated results of operations
and cash flows for such Fiscal Quarter and such portion of Parent's Fiscal Year,
of Parent and its Subsidiaries in accordance with GAAP (subject to normal,
year-end adjustments). At the same time, a consolidating balance sheet of Parent
and its Subsidiaries at the end of such Fiscal Quarter and related consolidating
statements of income and cash flows, for the portion of Parent's Fiscal Year
ended at such quarter (in each case consolidating on the basis of principal
lines of business of Parent and its Subsidiaries),
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accompanied by a certification from a Responsible Officer that such
consolidating financial statements form the basis of Parent's consolidated
financial statements and are fairly stated in all material respects when
considered in relation thereto.
(c) No Default; Compliance Certificate. Together with the
financial statements required pursuant to Sections 6.10(a) and 6.10(b) above, a
certificate of Parent substantially in the form of Exhibit G, signed by a
Responsible Officer (1) stating that a review of such financial statements
during the period covered thereby and of the activities of Parent and its
Subsidiaries has been made under such Responsible Officer's supervision with a
view to determining whether Parent and its Subsidiaries have fulfilled all of
their obligations under this Agreement, the other Financing Documents, and the
Term Notes; (2) stating that Parent and its Subsidiaries have fulfilled their
obligations under such instruments and that all representations made in this
Agreement continue to be true and correct (or specifying the nature of any
change), or if there shall be a Default or Event of Default, specifying the
nature and status thereof and Parent's proposed response thereto; (3)
demonstrating in reasonable detail compliance (including, but not limited to,
showing all material calculations) as at the end of such Fiscal Year or such
Fiscal Quarter with Sections 7.1(a) and 7.1(b); and (4) containing or
accompanied by such financial or other details, information and material as the
Administrative Agent may reasonably request to evidence such compliance.
(d) Management Letters. Together with the financial statements
required pursuant to Section (a) above, copies of each management letter (if
any) issued to Parent by such accountants promptly following consideration or
review by the Board of Directors of Parent, or any committee thereof (together
with any response thereto prepared by Parent).
(e) [Intentionally Deleted].
(f) Events or Circumstances with respect to Collateral.
Promptly after the occurrence of any event or circumstance concerning or
changing any of the Collateral that could have a Material Adverse Effect, notice
of such event or circumstance in reasonable detail.
(g) Notice of Certain Events. Promptly after Parent or the
Borrower learns of the receipt or occurrence of any of the following, a
certificate of Parent, signed by a Responsible Officer specifying (1) any
official notice of any violation, possible violation, non-compliance or possible
non-compliance, or claim made by any Governmental Authority pertaining to all or
any part of the Properties of Parent or any Subsidiary of Parent which could
reasonably be expected to have a Material Adverse Effect; (2) any event which
constitutes a Default or Event of Default, together with a detailed statement
specifying the nature thereof and the steps being taken to cure such Default or
Event of Default; (3) the receipt of any notice from, or the taking of any other
action by, the holder of any promissory note, debenture or other evidence of
indebtedness in excess of $500,000 of Parent or any Subsidiary of Parent with
respect to a claimed default, together with a detailed statement specifying the
notice given or other action taken by such holder and the nature of the claimed
default and what action such Person is taking or proposes to take with respect
thereto; (4) any default or noncompliance of any party to any of the Financing
Documents with any of the terms and conditions thereof or any notice of
termination or other proceedings or actions which could reasonably be expected
to adversely affect any of the Financing Documents; (5) the creation,
dissolution, merger or acquisition of Parent or any Subsidiary of Parent; (6)
any event or condition not previously disclosed to the Administrative Agent,
which violates any Environmental Law and which could have a Material Adverse
Effect; (7) any material amendment to, termination of, or default under any
material contract or any execution of, or material amendment to, termination of,
or material default under, any material collective bargaining agreement; or (8)
any event or condition which could reasonably be expected to have a Material
Adverse Effect.
(h) Shareholder Communications, Filings. Promptly upon the
mailing, filing, or making thereof, copies of all registration statements,
periodic reports and other documents (excluding the related
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exhibits except to the extent expressly requested by the Administrative Agent)
filed by Parent or any Subsidiary of Parent with the Securities and Exchange
Commission (or any successor thereto) or any national securities exchange.
(i) Litigation. Promptly after the occurrence thereof, notice
of the institution of or any material adverse development in any action, suit or
proceeding or any governmental investigation or any arbitration, before any
court or arbitrator or any governmental or administrative body, agency or
official, against Parent, any Subsidiary of Parent, HRY or any material Property
of any thereof, in which the amount involved is material and not covered by
insurance or which, if adversely determined, would have a Material Adverse
Effect.
(j) ERISA. Promptly after (1) Parent's or the Borrower's
obtaining knowledge of the occurrence thereof, notice that an ERISA Termination
Event or a "prohibited transaction," as such term is defined in Section 406 of
ERISA or Section 4975 of the Code, with respect to any Plan has occurred which
could result in liability to Parent, its Subsidiaries or any ERISA Affiliate,
which such notice shall specify the nature thereof, Parent's proposed response
thereto (and, if applicable, the proposed response thereto of any Subsidiary of
Parent and of any ERISA Affiliate) and, where known, any action taken or
proposed by the Internal Revenue Service, the Department of Labor or the PBGC
with respect thereto, (2) Parent's or the Borrower's obtaining knowledge
thereof, copies of any notice of the PBGC's intention to terminate or to have a
trustee appointed to administer any Plan, and (3) the filing thereof with any
Governmental Authority (if requested by the Administrative Agent), copies of
each annual and other report (including applicable schedules) with respect to
each Plan or any trust created thereunder.
(k) Insurance Coverage. Upon request, a summary of the
insurance coverages of Parent and each other Credit Party in form and substance
reasonably satisfactory to the Administrative Agent; upon renewal of any such
insurance policy, a copy of an insurance certificate summarizing the terms of
such policy; and upon request of the Administrative Agent, copies of the
applicable policies.
(l) Annual Budget. As soon as available and in any event not
later than February 1 of each Fiscal Year, a budget of Parent and its
Subsidiaries on a consolidating and consolidated basis for such Fiscal Year
(prepared on a quarterly basis), reviewed by the Board of Directors of Parent,
setting forth in reasonable detail, the projected revenues and expenses of
Parent and its Subsidiaries for such Fiscal Year.
(m) Collateral Value Certificate. On or before the 21st day of
each calendar month, a Collateral Value Certificate in the form attached hereto
as Exhibit F, prepared as of the last day of the immediately preceding calendar
month.
(n) Notices to Holders of Subordinated Debentures. Copies of
any material financial or other material report or material notice delivered to,
or received from, any holders of Subordinated Debentures, which such report or
notice has not been delivered to the Lenders hereunder.
(o) Other Information. With reasonable promptness, such other
information about the business and affairs and financial condition of Parent and
its Subsidiaries as the Administrative Agent may reasonably request from time to
time.
Section 6.11 Year 2000 Compatibility. Parent and the Borrower shall
take all actions reasonably necessary to assure that Parent's and each of the
other Credit Parties' computer based systems are able to operate and effectively
process data which includes dates on and after January 1, 2000. At the request
of Administrative Agent, Parent and the Borrower shall provide reasonable
assurances satisfactory to the Administrative Agent of Parent's and such other
Credit Parties' Year 2000 compatibility.
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ARTICLE 7
NEGATIVE COVENANTS
So long as any Term Loan remains unpaid, Parent and the Borrower
covenant and agree that they will not:
Section 7.1 Financial Covenants.
(a) Permit the Net Cash Flow of Hallwood Realty and HCRE on a
consolidated basis for the Rolling Period ending on the most recent Quarterly
Date to be less than $3,500,000.
(b) Permit the Debt Service Coverage Ratio at the end of any
Fiscal Quarter to be less than 1.15 to 1.00.
Section 7.2 Indebtedness.
(a) Permit Hallwood Realty (in its individual capacity and not
as the general partner of HRY) or HCRE to create, incur or suffer to exist, any
Indebtedness, or (b) create, incur, assume or suffer to exist, or permit any
other Credit Party to create, incur, assume or suffer to exist, any
Indebtedness, other than:
(i) the Lender Indebtedness;
(ii) Indebtedness outstanding on the date hereof which is set
forth on Schedule 7.2, and any refinancings, refundings, renewals or extensions
thereof (without any (1) increase in the principal amount thereof or rate of
interest thereon, or (2) acceleration of the date of, or increase in the amount
of, any payment of principal thereon);
(iii) Indebtedness evidenced by the Subordinated Debentures;
(iv) Indebtedness evidenced by the Parent Intercompany Note;
(v) obligations for current taxes, assessments and other
governmental charges and taxes, assessments or other governmental charges which
are not yet due or are being contested in good faith by appropriate action or
proceeding promptly initiated and diligently conducted, if reserves as shall be
required by GAAP shall have been made therefor;
(vi) Indebtedness referenced in Section 7.6(f);
(vii) purchase money Indebtedness referenced in Section
7.3(h); and
(viii) other Indebtedness so long as immediately after giving
effect thereto and the application of the proceeds therefrom, the Debt Service
Coverage Ratio would be greater than 1.30 to 1.00 (computed to give pro forma
effect to the creation, incurrence or assumption of such Indebtedness).
Section 7.3 Liens. Create, incur, assume or suffer to exist, or permit
any other Credit Party to create, incur, assume or suffer to exist, any Lien on
any of its Property now owned or hereafter acquired to secure any Lender
Indebtedness of any Credit Party or any other Person, other than:
(a) Liens existing on the date hereof and set forth on
Schedule 7.3;
(b) Liens securing the Lender Indebtedness; and
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(c) Liens for taxes, assessments or other governmental charges
or levies not yet due or which are being contested in good faith by appropriate
action or proceedings and with respect to which adequate reserves are being
maintained;
(d) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, materialmen, repairmen, workmen, and other Liens
imposed by law created in the ordinary course of business for amounts which are
not past due for more than 30 days or which are being contested in good faith by
appropriate action or proceedings and with respect to which adequate reserves in
accordance with GAAP are being maintained;
(e) Liens incurred or deposits or pledges made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security, old age or other similar
obligations, or to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of obligations
for the payment of borrowed money);
(f) minor irregularities in title, easements, rights-of-way,
restrictions, servitudes, permits, reservations, exceptions, conditions,
covenants and other similar charges or encumbrances not materially interfering
with the occupation, use and enjoyment by any Credit Party of any of their
respective Properties in the normal course of business or materially impairing
the value thereof;
(g) any obligations or duties affecting any of the Property of
any Credit Party to any municipality or public authority with respect to any
franchise, grant, license or permit which do not materially impair the use of
such Property for the purposes for which it is held;
(h) Liens encumbering Property of any Credit Party securing
Indebtedness incurred to finance the purchase price of such Property; provided,
that (1) no such Lien shall encumber any Property of any Credit Party other than
the Property acquired with the proceeds of such Indebtedness, and (2) the
Indebtedness secured by any such Lien shall not exceed the purchase price of the
Property purchased with the proceeds of such indebtedness; and
(i) extensions, renewals or replacements of any Lien referred
to in Section 7.3(a), provided that the principal amount of the Indebtedness or
obligation secured thereby is not increased and that any such extension, renewal
or replacement is limited to the Property originally encumbered thereby.
Section 7.4 Mergers, Sales, etc. Merge into or with or consolidate
with, or permit any other Credit Party to merge into or with or consolidate
with, any other Person, or sell, lease or otherwise dispose of all or
substantially all of its Property to any other Person. In addition to the
foregoing, Parent and the Borrower will not, nor will Parent or the Borrower
permit any other Credit Party to, sell, lease, transfer, abandon or otherwise
dispose of any Collateral; provided, that, any Credit Party may sell, transfer
or otherwise dispose of any such Collateral or all or substantially all of its
Property if each of the following conditions is satisfied: (i) the Borrower
shall have provided the Administrative Agent with not less than ten (10)
Business Days notice of such sale, transfer or other disposition, (ii) no
Benchmark Collateral Value Deficiency or Benchmark Marketable Collateral Value
Deficiency exists prior to the consummation of such sale, transfer or other
disposition, (iii) no Default has occurred which is continuing, and (iv) the
Borrower will immediately upon the consummation of such sale, transfer or other
disposition either (a) make a prepayment of principal on the Term Loan in an
amount sufficient to eliminate any resulting Benchmark Collateral Deficiency, or
(b) submit additional Collateral owned by Parent or the Borrower consisting of
cash, marketable Equity or other Equity reasonably acceptable to the
Administrative Agent and Required Lenders with a value sufficient to increase
the aggregate value of all Collateral securing the Lender Indebtedness to an
amount not less than 166.67% of the then outstanding principal balance of the
Term Loan. Simultaneously with the submission of additional Collateral pursuant
to clause (b) above, the
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Borrower shall deliver to the Administrative Agent and each Lender a Collateral
Value Certificate covering the existing and additional proposed Collateral.
Section 7.5 Restricted Payments. Declare, pay or make, or agree to
declare, pay or make, directly or indirectly, any Restricted Payment, except
that
(a) Parent may declare and pay dividends with respect to (i)
its Series B Preferred Stock in cash, and (ii) its capital stock solely in
additional shares of its common stock;
(b) Parent may make payments to Epsilon Trust and Troup
pursuant to the terms of the Shareholder Agreement; and
(c) provided no Default, Event of Default, Benchmark
Collateral Deficiency or Benchmark Marketable Collateral Deficiency then exists,
and provided further no Default or Event of Default would result from any such
Restricted Payment, other Restricted Payments as long as at any date and
immediately after giving effect thereto, the sum of the aggregate amount of all
Restricted Payments made from and after the Closing Date to and including such
date shall not exceed the Restricted Payment Limit in effect at such date.
Section 7.6 Investments, Loans, etc. Make or permit any loans to or
investments in any Person, other than:
(a) investments, loans or advances, the material details of
which have been set forth on Schedule 5.7;
(b) investments in direct obligations of, or obligations the
principal of and interest on which are unconditionally guaranteed by, the United
States of America (or by any agency thereof to the extent such obligations are
backed by the full faith and credit of the United States of America), in each
case maturing within one year from the date of acquisition thereof;
(c) investments in certificates of deposit of maturities less
than one year, issued by commercial banks in the United States having capital
and surplus in excess of $100,000,000 and having short-term credit ratings of at
least A1 and P1 by Standard & Poor's Ratings Group and Moody's Investors
Service, Inc., respectively;
(d) investments in commercial paper of maturities of not more
than 180 days rated the highest credit rating obtainable from Standard & Poor's
Ratings Group and Moody's Investors Service, Inc.;
(e) investments in securities that are obligations of the
United States government purchased by Parent or any Subsidiary of Parent under
fully collateralized repurchase agreements pursuant to which arrangements are
made with selling financial institutions (being a financial institution having
unimpaired capital and surplus of not less than $100,000,000 and with short-term
credit ratings of at least A1 and P1 by Standard & Poor's Ratings Group and
Moody's Investors Service, Inc., respectively) for such financial institutions
to repurchase such securities within 30 days from the date of purchase by Parent
or such Subsidiary, and other similar short-term investments made in connection
with Parent's or any of its Subsidiary's cash management practices; provided
that Parent shall take possession of all securities purchased by Parent or any
Subsidiary under repurchase agreements and shall adhere to customary margin and
mark-to-market procedures with respect to fluctuations in value;
(f) investments, contributions, loans or advances to Parent or
any Subsidiary of Parent; provided, that such loans or advances are subordinated
to the repayment of the Lender Indebtedness on terms and conditions satisfactory
to the Administrative Agent; and
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(g) investments, loans or advances (in addition to those
contemplated by subsections (a), (b), (c), (d), (e) and (f) of this Section 7.6)
measured at cost on a cumulative basis from and after the date of this Agreement
not exceeding $500,000.
Section 7.7 Sales and Leasebacks. Enter into, or permit any other
Credit Party to enter into, any arrangement, directly or indirectly, with any
Person whereby Parent or any other Credit Party shall sell or transfer any
Property, whether now owned or hereafter acquired, and whereby Parent or any
other Credit Party shall then or thereafter rent or lease as lessee such
Property or any part thereof or other Property which Parent or any other Credit
Party intends to use for substantially the same purpose or purposes as the
Property sold or transferred.
Section 7.8 Nature of Business. Except with the consent of the Lenders,
engage in, or permit any Subsidiary of Parent to engage in, any business other
than the businesses in which they are engaged in as of the Closing Date or that
are directly related thereto.
Section 7.9 ERISA Compliance. Except for matters described in
paragraphs (a), (b), (c), (g) and (i) below that could not reasonably be
expected, individually or in the aggregate, to result in any material liability
of Parent, any Subsidiary of Parent or any ERISA Affiliate.
(a) Engage in, or permit a Subsidiary of Parent or any ERISA
Affiliate to engage in, any transaction in connection with which Parent, a
Subsidiary of Parent or any ERISA Affiliate could be subjected to either a civil
penalty assessed pursuant to Sections 502(c), (i) or (l) of ERISA or a tax
imposed by Chapter 43 of Subtitle D of the Code;
(b) Terminate, or permit a Subsidiary of Parent or any ERISA
Affiliate to terminate, any Plan in a manner, or take any other action with
respect to any Plan, which could reasonably be expected to result in any
material liability of Parent, a Subsidiary of Parent or any ERISA Affiliate to
the PBGC or any other Governmental Authority;
(c) Fail to make, or permit a Subsidiary of Parent or any
ERISA Affiliate to fail to make, full payment when due of all amounts which,
under the provisions of any Plan, agreement relating thereto or applicable law,
Parent, a Subsidiary of Parent or any ERISA Affiliate is required to pay as
contributions thereto;
(d) Permit to exist, or allow a Subsidiary of Parent or any
ERISA Affiliate to permit to exist, any accumulated funding deficiency within
the meaning of Section 302 of ERISA or Section 412 of the Code, whether or not
waived, with respect to any Plan;
(e) Contribute to or assume an obligation to contribute to, or
permit a Subsidiary of Parent or any ERISA Affiliate to contribute to or assume
an obligation to contribute to, any "multiemployer plan" as such term is defined
in Section 3(37) or 4001(a)(3) of ERISA;
(f) Acquire, or permit a Subsidiary of Parent or any ERISA
Affiliate to acquire, an interest in any Person that causes such Person to
become an ERISA Affiliate with respect to Parent or a Subsidiary of Parent or
with respect to any ERISA Affiliate of Parent or a Subsidiary of Parent if such
Person sponsors, maintains or contributes to, or at any time in the six-year
period preceding such acquisition has sponsored, maintained, or contributed to,
any "multiemployer plan" as such term is defined in Section 3(37) or 4001(a)(3)
of ERISA;
(g) Fail to pay, or cause to be paid, to the PBGC in a timely
manner, and without incurring any late payment or underpayment charge or
penalty, all premiums required pursuant to
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Sections 4006 and 4007 of ERISA;
(h) Amend, or permit a Subsidiary of Parent or any ERISA
Affiliate to amend, a Plan resulting in an increase in current liability such
that Parent, a Subsidiary of Parent or any ERISA Affiliate is required to
provide security to such Plan under Section 401(a)(29) of the Code;
(i) Incur, or permit a Subsidiary of Parent or any ERISA
Affiliate to incur, a material liability to or on account of a Plan under
Sections 515, 4062, 4063, 4064, 4201 or 4204 of ERISA; or
(j) Permit, or allow a Subsidiary of Parent or any ERISA
Affiliate to permit, the actuarial present value of the benefit liabilities
(computed on an accumulated benefit obligation basis in accordance with GAAP)
under all Plans in the aggregate to exceed the current value of the assets of
all Plans in the aggregate that are allocable to such benefit liabilities.
Section 7.10 Sale or Discount of Receivables. Sell, with or without
recourse, for discount or otherwise, or permit any other Credit Party to
discount or sell, with or without recourse, for discount or otherwise, any notes
or accounts receivable.
Section 7.11 Negative Pledge Agreements. Create, incur, assume or
suffer to exist, or permit any other Credit Party to create, incur, assume or
suffer to exist, any contract, agreement or understanding which in any way
prohibits or restricts the granting, conveying, creation or imposition of any
Lien on any Collateral of any Credit Party, or which requires the consent of or
notice to other Persons in connection therewith other than (a) this Agreement
and the other Financing Documents, and (b) the Subordinated Debentures Indenture
and the Subordinated Debentures.
Section 7.12 Transactions with Affiliates. Enter into any transaction
or series of transactions, or permit any Subsidiary of Parent to enter into any
transaction or series of transactions, with Affiliates of any such Person (other
than Subsidiaries of Parent) which involve an outflow of money or other Property
from Parent or any other such Person to an Affiliate of Parent or any other such
Person (other than Subsidiaries of Parent), including, but not limited to,
repayment of Indebtedness, management fees, compensation, salaries, bonuses,
asset purchase payments or any other type of fees or payments similar in nature
except for (a) payments described in Section 7.5(b), and (b) those which are in
the ordinary course of business of Parent and such other Person and are on fair
and reasonable terms no less favorable than would be obtained in a comparable
arm's length transaction with a Person not an Affiliate.
Section 7.13 Unconditional Purchase Obligations. Enter into or be a
party to, or permit any other Credit Party to enter into or be a party to, any
material contract for the purchase of materials, supplies or other property or
services, if such contract requires that payment be made by it regardless of
whether or not delivery is ever made of such materials, supplies or other
property or services.
Section 7.14 [Intentionally Deleted].
Section 7.15 [Intentionally Deleted].
Section 7.16 Intercompany Transactions. Create, or permit any
Subsidiary of Parent (other than Brookwood) to create, or otherwise cause or
permit to exist or become effective, except as may be expressly permitted or
required by the Financing Documents, any consensual encumbrance or restriction
of any kind on the ability of any such Person to (a) pay dividends or make any
other distribution to Parent or any Subsidiary of Parent in respect of such
Person's capital stock, membership interests or with respect to any other
interest or participation in, or measured by, its profits, (b) pay any
indebtedness owed to Parent or any Subsidiary of Parent, (c) make any loan or
advance to Parent or any Subsidiary of Parent, or (d) sell, lease or transfer
any of its Property to Parent or any Subsidiary of Parent.
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Section 7.17 [Intentionally Deleted].
Section 7.18 Modifications to Organizational Documents. Amend, modify
or waive (or permit the amendment, modification or waiver of) any provision or
covenant contained in the organizational or charter documents of Parent or any
Subsidiary of Parent if such amendment, modification or waiver would cause or
result in a Material Adverse Effect.
Section 7.19 Modifications to Subordinated Debentures; Payment
Restrictions.
(a) Amend, modify or waive any term or provision of the
Subordinated Debentures or the Subordinated Debentures Indenture if the effect
of such amendment, modification or waiver (1) subjects Parent or any Subsidiary
of Parent to any additional material obligation, (2) increases the principal of
or rate of interest on any Subordinated Debenture, (3) accelerates the date
fixed for any payment of principal or interest on any Subordinated Debenture, or
(4) relates to the subordination provisions thereof.
(b) Make any payment on or defeasance of any part of the
Subordinated Debentures (whether a voluntary or mandatory prepayment, a payment
at scheduled maturity or otherwise), except, provided no Default, Event of
Default, Benchmark Collateral Deficiency or Benchmark Marketable Collateral
Deficiency has occurred and is continuing, regularly scheduled payments of
interest on the Subordinated Debentures.
ARTICLE 8
EVENTS OF DEFAULT
Upon the occurrence and during the continuance of any of the following
specified events (each an "Event of Default"):
Section 8.1 Payments. (a) The Borrower shall fail to pay when due
(including, but not limited to, by mandatory prepayment required pursuant to
Section 2.5) any principal of, or interest on, any Term Loan or any Term Note,
or (b) the Borrower or Parent shall fail to pay any fee or any other amount
payable hereunder or under any other Financing Document, and such failure to pay
shall continue unremedied for a period of five days;
Section 8.2 Covenants Without Notice. Parent and/or the Borrower shall
fail to observe or perform any covenant or agreement contained in Sections 4.3,
4.4, 6.1, 6.5, 6.7 or 6.9;
Section 8.3 Other Covenants. Parent and/or the Borrower shall fail to
observe or perform any covenant or agreement contained in (a) Section 6.10 or
Article 7 and, if capable of being remedied, such failure shall remain
unremedied for 10 days after the earlier of (i) Parent's or the Borrower's
obtaining knowledge thereof, or (ii) written notice thereof shall have been
given to Parent or the Borrower by the Administrative Agent, or (b) this
Agreement, other than those referred to in Sections 8.1, 8.2 or 8.3(a) and, if
capable of being remedied, such failure shall remain unremedied for 30 days
after the earlier of (i) Parent's or the Borrower's obtaining knowledge thereof,
or (ii) written notice thereof shall have been given to Parent or the Borrower
by the Administrative Agent;
Section 8.4 Other Financing Document Obligations. Default is made in
the due observance or performance by Parent or any other Credit Party of any of
the covenants or agreements contained in any Financing Document other than this
Agreement, and such default continues unremedied beyond the expiration of any
applicable grace period which may be expressly allowed under such Financing
Document;
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Section 8.5 Representations. Any representation, warranty or statement
made or deemed to be made by Parent or any other Credit Party or any of Parent's
or such other Credit Party's officers herein or in any other Financing Document,
or in any certificate, request or other document furnished pursuant to or under
this Agreement or any other Financing Document, shall have been incorrect in any
material respect as of the date when made or deemed to be made;
Section 8.6 Non-Payments of Other Indebtedness. Parent or any other
Credit Party shall fail to make any payment or payments of principal of or
interest on any Indebtedness of Parent or such other Credit Party in excess of
$500,000 in the aggregate when due (whether at stated maturity, by acceleration,
on demand or otherwise) after giving effect to any applicable grace period;
Section 8.7 Defaults Under Other Agreements. Parent or any other Credit
Party shall fail to observe or perform any covenant or agreement contained in
any agreement(s) or instrument(s) relating to Indebtedness of Parent or such
other Credit Party of $1,000,000 or more in the aggregate within any applicable
grace period, or any other event shall occur, if the effect of such failure or
other event is to accelerate, or, with respect to Parent and such other Credit
Parties, to permit the holder of such Indebtedness or any other Person to
accelerate, the maturity of $1,000,000 or more in the aggregate of such
Indebtedness; or $100,000 or more in the aggregate of any such Indebtedness
shall be, or if as a result of such failure or other event may be, required to
be prepaid (other than prepayments resulting from excess cash flow) in whole or
in part prior to its stated maturity;
Section 8.8 Bankruptcy. Parent or any Subsidiary of Parent shall
commence a voluntary case concerning itself under Title 11 of the United States
Code entitled "Bankruptcy" as now or hereafter in effect, or any successor
thereto (the "Bankruptcy Code"); or an involuntary case is commenced against
Parent or any Subsidiary of Parent and the petition is not controverted within
10 days, or is not stayed or dismissed within 60 days, after commencement of the
case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or
takes charge of, all or any substantial part of the property of Parent or any
Subsidiary of Parent; or Parent or any Subsidiary of Parent commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to Parent or any
Subsidiary of Parent or there is commenced against Parent or any Subsidiary of
Parent any such proceeding which remains unstayed or undismissed for a period of
60 days; or Parent or any Subsidiary of Parent is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or Parent or any Subsidiary of Parent suffers any
appointment of any custodian or the like for it or any substantial part of its
Property to continue undischarged or unstayed for a period of 60 days; or Parent
or any Subsidiary of Parent makes a general assignment for the benefit of
creditors; or Parent or any Subsidiary of Parent shall fail to pay, or shall
state in writing that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or Parent or any Subsidiary of Parent shall by any
act or failure to act indicate its consent to, approval of or acquiescence in
any of the foregoing; or any corporate, limited liability company or other
action is taken by Parent or any Subsidiary of Parent for the purpose of
effecting any of the foregoing;
Section 8.9 Money Judgment. Judgments or orders for the payment of
money involving in the aggregate at any time a liability (net of any insurance
proceeds or indemnity payments actually received in respect thereof prior to or
within 60 days from the entry thereof, or to be received in respect thereof in
the event any appeal thereof shall be unsuccessful) of more than $500,000, or
that would otherwise have a Material Adverse Effect shall be rendered against
Parent or any other Credit Party and such judgment or order shall continue
unsatisfied in accordance with the terms of such judgment or order (in the case
of a money judgment) and in effect for a period of 60 days during which
execution shall not be effectively stayed or deferred (whether by action of a
court, by agreement or otherwise);
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Section 8.10 Discontinuance of Business. Any Credit Party shall cease
to be principally engaged in the businesses and operations in which such Persons
were principally engaged on the Closing Date;
Section 8.11 Financing Documents. Any Material Provision of any of the
Financing Documents after delivery thereof shall for any reason, except to the
extent permitted by the terms thereof, cease to be in full force and effect and
valid, binding and enforceable (except as enforceability may be limited as
stated in Section 5.3) in accordance with its terms, or, in the case of any of
the Security Instruments, cease to create a valid and perfected Lien of the
priority contemplated thereby on any of the collateral purported to be covered
thereby, or Parent or any other Credit Party (or any other Person who may have
granted or purported to grant such Lien) shall so state in writing. As used in
this Section 8.11, "Material Provision" shall mean (a) with respect to this
Agreement, the Term Notes, or the Facility Guaranty, any material term,
covenant, or agreement set forth therein, and (b) with respect to any other
Financing Document, any provision if the validity and enforceability thereof is
necessary for such Financing Document to accomplish its stated, or clearly
intended, purpose or otherwise necessary in order for any Lender to enforce any
material right or remedy under any Financing Document;
Section 8.12 Change of Control. The occurrence of a Change of Control;
Section 8.13 Subordination of Lender Indebtedness. The Subordinated
Debentures shall cease, for any reason, to be validly subordinated to the Lender
Indebtedness, as provided in the Subordinated Debentures Indenture and the
Intercreditor Agreement, or Parent, any Subsidiary of Parent, any Affiliate of
any such party, or any holder of Subordinated Debentures shall violate the
subordination provisions of the Subordinated Debentures Indenture or the
Intercreditor Agreement, or contest the validity thereof in any legal,
arbitration, mediation or similar proceeding; or
Section 8.14 Default Under Subordinated Indebtedness. The occurrence of
an event of default under the Subordinated Debentures Indenture;
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Administrative Agent, upon the written or telex
request of the Required Lenders, shall, by written notice to Parent and the
Borrower, take any or all of the following actions, without prejudice to the
rights of the Administrative Agent, any Lender or the holder of any Term Note,
to enforce its claims against Parent and the other Credit Parties: declare the
entire principal amount of and all accrued interest on all Lender Indebtedness
then outstanding to be, whereupon the same shall become, forthwith due and
payable without presentment, demand, protest, notice of protest or dishonor,
notice of acceleration, notice of intent to accelerate or other notice of any
kind, all of which are hereby expressly waived by Parent and the Borrower, and
thereupon take such action as it may deem desirable under and pursuant to the
Financing Documents; provided, that, if an Event of Default specified in Section
8.8 shall occur, the result which would occur upon the giving of written notice
by the Administrative Agent to Parent and the Borrower, as specified above,
shall occur automatically without the giving of any such notice.
ARTICLE 9
THE ADMINISTRATIVE AGENT
Section 9.1 Appointment of Administrative Agent. Each Lender hereby
designates First Bank Texas, N.A., as Administrative Agent to act as herein
specified and as specified in the other Financing Documents. Each Lender hereby
irrevocably authorizes the Administrative Agent to take such action on its
behalf under the provisions of this Agreement, the Term Notes, and the other
Financing Documents and to exercise such powers and to perform such duties
hereunder and thereunder as are specifically delegated to or required of the
Administrative Agent by the terms hereof and thereof and such other powers as
are
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reasonably incidental thereto. The Administrative Agent may perform any of
its duties hereunder by or through its agents or employees.
Section 9.2 Limitation of Duties of Administrative Agent. The
Administrative Agent shall have no duties or responsibilities except those
expressly set forth with respect to the Administrative Agent in this Agreement
and as specified in the other Financing Documents. Neither the Administrative
Agent nor any of its officers, directors, employees or agents shall be liable
for any action taken or omitted by it as such hereunder or in connection
herewith, unless caused by its or their gross negligence or willful misconduct.
The duties of the Administrative Agent shall be mechanical and administrative in
nature; the Administrative Agent shall not have by reason of this Agreement a
fiduciary relationship in respect of any Lender; and nothing in this Agreement,
expressed or implied, is intended to or shall be so construed as to impose upon
the Administrative Agent any obligations in respect of this Agreement except as
expressly set forth herein.
Section 9.3 Lack of Reliance on the Administrative Agent.
(a) Independent Investigation. Independently and without
reliance upon the Administrative Agent, each Lender, to the extent it deems
appropriate, has made and shall continue to make, (1) its own independent
investigation of the financial condition and affairs of the Credit Parties in
connection with the taking or not taking of any action in connection herewith,
and (2) its own appraisal of the creditworthiness of the Credit Parties, and,
except as expressly provided in this Agreement, and the other Financing
Documents, the Administrative Agent shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Lender with any credit or
other information with respect thereto, whether coming into its possession
before the consummation of the transactions contemplated herein or at any time
or times thereafter.
(b) Administrative Agent Not Responsible. The Administrative
Agent shall not be responsible to any Lender for any recitals, statements,
information, representations or warranties herein or in any document,
certificate or other writing delivered in connection herewith or for the
execution, effectiveness, genuineness, validity, enforceability, collectibility,
priority or sufficiency of this Agreement, the Term Notes, or the other
Financing Documents or the financial condition of the Credit Parties or be
required to make any inquiry concerning either the performance or observance of
any of the terms, provisions or conditions of this Agreement, the Term Notes or
the other Financing Documents, or the financial condition of the Credit Parties,
or the existence or possible existence of any Default or Event of Default.
Section 9.4 Certain Rights of the Administrative Agent. If the
Administrative Agent shall request instructions from the Required Lenders with
respect to any act or action (including the failure to act) in connection with
this Agreement, the Term Notes and the other Financing Documents, the
Administrative Agent shall be entitled to refrain from such act or taking such
action unless and until the Administrative Agent shall have received
instructions from the Required Lenders; and the Administrative Agent shall not
incur liability to any Person by reason of so refraining. Without limiting the
foregoing, no Lender shall have any right of action whatsoever against the
Administrative Agent as a result of the Administrative Agent acting or
refraining from acting under this Agreement, the Term Notes and the other
Financing Documents in accordance with the instructions of the Required Lenders,
or to the extent required by Section 10.2, all of the Lenders.
Section 9.5 Reliance by Administrative Agent. The Administrative Agent
shall be entitled to rely, and shall be fully protected in relying, upon any
note, writing, resolution, notice, statement, certificate, telex, teletype or
telecopier message, cablegram, radiogram, order or other documentary
teletransmission or telephone message believed by it to be genuine and correct
and to have been signed, sent or made by the proper Person. The Administrative
Agent may consult with legal counsel (including counsel for Parent and the
Borrower), independent public accountants and other experts selected by it and
shall not be liable for any
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action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
Section 9.6 INDEMNIFICATION OF ADMINISTRATIVE AGENT. TO THE EXTENT THE
ADMINISTRATIVE AGENT IS NOT REIMBURSED AND INDEMNIFIED BY PARENT OR THE
BORROWER, EACH LENDER WILL REIMBURSE AND INDEMNIFY THE ADMINISTRATIVE AGENT ON A
PRO RATA BASIS, FOR AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES (INCLUDING
REASONABLE COUNSEL FEES AND DISBURSEMENTS) OR DISBURSEMENTS OF ANY KIND OR
NATURE WHATSOEVER WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE
ADMINISTRATIVE AGENT IN PERFORMING ITS DUTIES HEREUNDER, IN ANY WAY RELATING TO
OR ARISING OUT OF THIS AGREEMENT AND BY REASON OF THE ORDINARY NEGLIGENCE OF THE
ADMINISTRATIVE AGENT; PROVIDED THAT NO LENDER SHALL BE LIABLE TO THE
ADMINISTRATIVE AGENT FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES,
DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS
RESULTING FROM, AS TO THE ADMINISTRATIVE AGENT, THE ADMINISTRATIVE AGENT'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.
Section 9.7 The Administrative Agent in its Individual Capacity. With
respect to their obligations under this Agreement, the Term Loans made by it and
the Term Notes issued to it, the Administrative Agent shall have the same rights
and powers hereunder as any other Lender or holder of a Term Note and may
exercise the same as though it were not performing the duties, if any, specified
herein; and the terms "Lenders," "Required Lenders," "holders of Term Notes" or
any similar terms shall, unless the context clearly otherwise indicates, include
the Administrative Agent in its individual capacity. The Administrative Agent
may accept deposits from, lend money to, and generally engage in any kind of
banking, trust, financial advisory or other business with Parent, the Borrower
or any affiliate of Parent as if it were not performing the duties, if any,
specified herein, and may accept fees and other consideration from Parent or the
Borrower for services in connection with this Agreement and otherwise without
having to account for the same to the Lenders.
Section 9.8 May Treat Lender as Owner. Parent, the Borrower and the
Administrative Agent may deem and treat each Lender as the owner of such
Lender's Term Note for all purposes hereof unless and until a written notice of
the assignment or transfer thereof shall have been filed with the Administrative
Agent. Any request, authority or consent of any Person who at the time of making
such request or giving such authority or consent is the owner of a Term Note
shall be conclusive and binding on any subsequent owner, transferee or assignee
of such Term Note or any promissory note or notes issued in exchange therefor.
Section 9.9 Successor Administrative Agent.
(a) Administrative Agent Resignation. The Administrative Agent
may resign at any time by giving written notice thereof to the Lenders, Parent
and the Borrower and may be removed at any time with or without cause by the
Required Lenders. Upon any such resignation or removal, the Required Lenders
shall have the right, upon five days' notice to Parent and the Borrower, to
appoint a successor Administrative Agent, subject to the approval of Parent and
the Borrower, such approval not to be unreasonably withheld. If no successor
Administrative Agent shall have been so appointed by the Required Lenders, and
shall have accepted such appointment, within thirty (30) days after the retiring
Administrative Agent's giving of notice of resignation or the Required Lenders'
removal of the retiring Administrative Agent, then, upon five (5) days' notice
to Parent and the Borrower, the retiring Administrative Agent may, on behalf of
the Lenders, appoint a successor Administrative Agent (subject to approval of
Parent and the Borrower, such approval not to be unreasonably withheld), which
shall be a bank which maintains an office in the United States, or a commercial
bank organized under the laws of the United States of America or of
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any State thereof, or any Affiliate of such bank, having a combined capital and
surplus of at least $200,000,000.
(b) Rights, Powers, etc. Upon the acceptance of any
appointment as Administrative Agent hereunder by a successor Administrative
Agent, such successor Administrative Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring
Administrative Agent, and the retiring Administrative Agent shall be discharged
from its duties and obligations under this Agreement. After any retiring
Administrative Agent's resignation or removal hereunder as Administrative Agent,
the provisions of this Article 9 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent under this
Agreement.
ARTICLE 10
MISCELLANEOUS
Section 10.1 Notices. All notices, requests and other communications to
any party hereunder shall be in writing (including, telecopy or similar
teletransmission or writing) and shall be given to such party at its address or
telecopy number set forth on the signature pages hereof or such other address or
telecopy number as such party may hereafter specify by notice to the
Administrative Agent and the Borrower. Each such notice, request or other
communication shall be effective (a) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid, or (b) if given by any other means (including, but not
limited to, by air courier), when delivered at the address specified in this
Section 10.1; provided, that notices to the Administrative Agent shall not be
effective until actually and physically received.
Section 10.2 Amendments and Waivers. Neither this Agreement nor any
other Financing Document, nor any terms hereof or thereof, may be amended,
supplemented or modified except in accordance with the provisions of this
Section 10.2. The Required Lenders may, or, with the written consent of the
Required Lenders, the Administrative Agent shall, from time to time, (x) enter
into with Parent and the Borrower, written amendments, supplements or
modifications hereto and to the other Financing Documents for the purpose of
adding any provisions to this Agreement or to the other Financing Documents or
changing in any manner the rights or obligations of the Lenders, Parent or the
Borrower hereunder or thereunder or (y) waive at Parent's or the Borrower's
request, on such terms and conditions as the Required Lenders or the
Administrative Agent, as the case may be, may specify in such instrument, any of
the requirements of this Agreement or the other Financing Documents or any
Default and its consequences; provided, however, that no such waiver and no such
amendment, supplement or modification shall:
(a) reduce the amount or extend the scheduled date of maturity
of any Term Loan or of any scheduled installment thereof or reduce the stated
rate of any interest or fee payable hereunder or extend the scheduled date of
any payment thereof or modify any provision that provides for the ratable
sharing by the Lenders of any payment or prepayment of Lender Indebtedness to
provide for a non-ratable sharing thereof or increase the amount or extend the
expiration date of any Lender's Term Loan Commitment or amend, modify or waive
any provision of Section 2.9, in each case without the prior written consent of
each Lender directly affected thereby;
(b) change the currency in which any Term Loan is payable or
amend, modify or waive any provision of this Section 10.2 or reduce the
percentage specified in the definition of Required Lenders, in each case without
the written consent of all of the Lenders;
(c) release (1) Parent from its obligations under the Facility
Guaranty, or (2) any material part of the Collateral, without the written
consent of all of the Lenders, except as expressly permitted hereby; provided
that the Administrative Agent shall release (without consent from the Lenders)
any Collateral sold, transferred or otherwise disposed of as permitted by
Section 7.4; and
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(d) amend, modify or waive any provision of Article 9 without
the written consent of the Administrative Agent.
Any waiver and any amendment, supplement or modification
pursuant to this Section 10.2 shall apply to each of the Lenders and shall be
binding upon Parent, the Borrower, the Lenders, the Administrative Agent and all
future holders of the Term Loans. In the case of any waiver, Parent, the
Borrower, the Lenders and the Administrative Agent shall be restored to their
former position and rights hereunder and under the other Financing Documents,
and any Default waived shall be deemed to be cured and not continuing; but no
such waiver shall extend to any subsequent or other Default, or impair any right
consequent thereon.
Section 10.3 No Waiver; Remedies Cumulative. No failure or delay on the
part of Parent, the Borrower or the Administrative Agent or any Lender or any
holder of any Term Note in exercising any right or remedy under this Agreement
or any other Financing Document and no course of dealing between Parent, the
Borrower, the Administrative Agent or any Lender or any holder of any Term Note
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right or remedy under the Term Notes, this Agreement or any other Financing
Document preclude any other or further exercise thereof or the exercise of any
other right or remedy under the Term Notes, this Agreement or any other
Financing Document. The rights and remedies herein expressly provided are
cumulative and not exclusive of any rights or remedies which Parent, the
Borrower, the Administrative Agent or any Lender would otherwise have. No notice
to or demand on Parent or the Borrower not required under the Term Notes, this
Agreement or any other Financing Document in any case shall entitle Parent or
the Borrower to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Administrative Agent
or the Lenders to any other or further action in any circumstances without
notice or demand.
Section 10.4 Payment of Expenses, Indemnities, etc. Parent and the
Borrower agree to (and shall be jointly and severally liable for):
(a) Expenses. Whether or not the transactions hereby
contemplated are consummated, pay all reasonable out-of-pocket costs and
expenses of the Administrative Agent in the administration (both before and
after the execution hereof and including advice of counsel for the
Administrative Agent as to the rights and duties of the Administrative Agent and
the Lenders with respect thereto) of, and in connection with the preparation,
execution and delivery of, recording or filing of, preservation of rights under,
enforcement of, and, after a Default, refinancing, renegotiation or
restructuring of, this Agreement, the Term Notes, and the other Financing
Documents and any amendment, waiver or consent relating thereto (including, but
not limited to, the reasonable fees and disbursements of counsel for the
Administrative Agent and in the case of enforcement for any of the Lenders) and,
to the extent permitted by the Financing Documents, promptly reimburse the
Administrative Agent for all amounts expended, advanced, or incurred by the
Administrative Agent or the Lenders to satisfy any obligation of Parent, the
Borrower, or the other Credit Parties under this Agreement or any other
Financing Document;
(b) INDEMNIFICATION. INDEMNIFY THE ADMINISTRATIVE AGENT AND
EACH LENDER, EACH OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES,
REPRESENTATIVES, AGENTS AND AFFILIATES FROM, HOLD EACH OF THEM HARMLESS AGAINST,
AND PROMPTLY UPON DEMAND PAY OR REIMBURSE EACH OF THEM FOR, ANY AND ALL ACTIONS,
SUITS, PROCEEDINGS (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES),
CLAIMS, COSTS, LOSSES, LIABILITIES, DAMAGES OR EXPENSES OF ANY KIND OR NATURE
WHATSOEVER WHICH MAY BE INCURRED BY OR ASSERTED AGAINST OR INVOLVE ANY OF THEM
(WHETHER OR NOT ANY OF THEM IS DESIGNATED A PARTY THERETO) AS A RESULT OF,
ARISING OUT OF OR IN ANY WAY RELATED TO (1) ANY ACTUAL OR PROPOSED USE BY THE
BORROWER OF THE PROCEEDS OF ANY OF THE TERM LOANS; OR (2) ANY OTHER ASPECT OF
THIS AGREEMENT, THE TERM NOTES, AND THE FINANCING DOCUMENTS, INCLUDING BUT NOT
LIMITED TO THE
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REASONABLE FEES AND DISBURSEMENTS OF COUNSEL AND ALL OTHER EXPENSES INCURRED IN
CONNECTION WITH INVESTIGATING, DEFENDING OR PREPARING TO DEFEND ANY SUCH ACTION,
SUIT, PROCEEDING (INCLUDING ANY INVESTIGATIONS, LITIGATION OR INQUIRIES) OR
CLAIM, AND INCLUDING ALL ACTIONS, SUITS, PROCEEDINGS (INCLUDING ANY
INVESTIGATIONS, LITIGATION OR INQUIRIES), CLAIMS, COSTS, LOSSES, LIABILITIES,
DAMAGES OR EXPENSES ARISING BY REASON OF ORDINARY NEGLIGENCE OF ANY OF THE
ADMINISTRATIVE AGENT AND EACH LENDER, EACH OF THEIR RESPECTIVE OFFICERS,
DIRECTORS, EMPLOYEES, REPRESENTATIVES, AGENTS AND AFFILIATES; PROVIDED, HOWEVER,
THE PROVISIONS OF THIS SECTION 10.4(B) SHALL NOT APPLY TO ANY ACTION, SUITS,
PROCEEDINGS, CLAIMS, COSTS, LOSSES, LIABILITIES, DAMAGES, OR EXPENSES TO THE
EXTENT, BUT ONLY TO THE EXTENT, CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE PARTY SEEKING INDEMNIFICATION;
(c) ENVIRONMENTAL INDEMNIFICATION. INDEMNIFY AND HOLD HARMLESS
FROM TIME TO TIME THE ADMINISTRATIVE AGENT AND THE LENDERS, EACH PERSON CLAIMING
BY, THROUGH, UNDER OR ON ACCOUNT OF ANY OF THE FOREGOING AND THE RESPECTIVE
DIRECTORS, OFFICERS, COUNSEL, EMPLOYEES, AGENTS, AFFILIATES, SUCCESSORS AND
ASSIGNS OF EACH OF THE FOREGOING FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS,
COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR PROCEEDINGS, DAMAGES AND
LIABILITIES (WHICH RELATE TO OR ARISE AS A RESULT OF THE TERM LOANS OR ANY
FINANCING DOCUMENT) TO WHICH ANY SUCH PERSON MAY BECOME SUBJECT AND INCLUDING
ANY AND ALL LOSSES, CLAIMS, COST RECOVERY ACTIONS, ADMINISTRATIVE ORDERS OR
PROCEEDINGS, DAMAGES AND LIABILITIES (WHICH RELATE TO OR ARISE AS A RESULT OF
THE TERM LOANS OR ANY FINANCING DOCUMENT) ARISING BY REASON OF THE ORDINARY
NEGLIGENCE OF THE ADMINISTRATIVE AGENT AND THE LENDERS, EACH PERSON CLAIMING BY,
THROUGH, UNDER OR ON ACCOUNT OF ANY OF THE FOREGOING AND THE RESPECTIVE
DIRECTORS, OFFICERS, COUNSEL, EMPLOYEES, AGENTS, AFFILIATES, SUCCESSORS AND
ASSIGNS OF EACH OF THE FOREGOING (1) UNDER ANY ENVIRONMENTAL LAW APPLICABLE TO
PARENT OR ANY OTHER CREDIT PARTY OR ANY OF THEIR RESPECTIVE PROPERTIES,
INCLUDING WITHOUT LIMITATION, THE TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES
ON ANY OF THEIR RESPECTIVE PROPERTIES, (2) AS A RESULT OF THE BREACH OR
NON-COMPLIANCE BY PARENT OR ANY OTHER CREDIT PARTY WITH ANY ENVIRONMENTAL LAW
APPLICABLE TO PARENT OR ANY OTHER CREDIT PARTY, (3) DUE TO PAST OWNERSHIP BY
PARENT OR ANY OTHER CREDIT PARTY OF ANY OF THEIR RESPECTIVE PROPERTIES OR PAST
ACTIVITY ON ANY OF THEIR RESPECTIVE PROPERTIES WHICH, THOUGH LAWFUL AND FULLY
PERMISSIBLE AT THE TIME, COULD RESULT IN PRESENT LIABILITY, (4) THE PRESENCE,
USE, RELEASE, STORAGE, TREATMENT OR DISPOSAL OF HAZARDOUS SUBSTANCES ON OR AT
ANY OF THE PROPERTIES OWNED OR OPERATED BY PARENT OR ANY OTHER CREDIT PARTY, OR
(5) ANY OTHER ENVIRONMENTAL, HEALTH OR SAFETY CONDITION IN CONNECTION WITH THIS
AGREEMENT, THE TERM NOTES OR ANY OTHER FINANCING DOCUMENT; PROVIDED, HOWEVER, NO
INDEMNITY SHALL BE AFFORDED UNDER THIS SECTION 10.4(C) IN RESPECT OF ANY
PROPERTY FOR ANY OCCURRENCE ARISING PRIMARILY FROM THE ACTS OR OMISSIONS OF THE
ADMINISTRATIVE AGENT OR ANY LENDER DURING THE PERIOD AFTER WHICH SUCH PERSON,
ITS SUCCESSORS OR ASSIGNS SHALL HAVE OBTAINED ACTUAL PHYSICAL POSSESSION OF SUCH
PROPERTY (WHETHER BY FORECLOSURE OR DEED IN LIEU OF FORECLOSURE, AS
MORTGAGEE-IN-POSSESSION OR OTHERWISE); AND
(d) ENVIRONMENTAL WAIVER. WITHOUT LIMITING THE FOREGOING
PROVISIONS, PARENT AND THE BORROWER DO EACH HEREBY WAIVE, RELEASE AND COVENANT
NOT TO BRING AGAINST ANY OF THE PERSONS INDEMNIFIED IN THIS SECTION 10.4 ANY
DEMAND, CLAIM, COST RECOVERY ACTION OR LAWSUIT THEY MAY NOW OR HEREAFTER HAVE OR
ACCRUE (WHICH RELATE TO OR ARISE AS A RESULT OF THE TERM LOANS OR ANY FINANCING
DOCUMENT) ARISING FROM (1) ANY ENVIRONMENTAL LAW NOW OR HEREAFTER ENACTED
(INCLUDING THOSE APPLICABLE TO PARENT OR ANY OTHER CREDIT PARTY) UNLESS THE ACTS
OR OMISSIONS OF ANY SUCH PERSON OR THEIR RESPECTIVE SUCCESSORS AND ASSIGNS ARE
THE PRIMARY CAUSE OF THE CIRCUMSTANCES GIVING RISE TO SUCH DEMAND, COST RECOVERY
ACTION OR LAWSUIT, (2) THE PRESENCE, USE, RELEASE, STORAGE, TREATMENT OR
DISPOSAL OF
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HAZARDOUS SUBSTANCES ON OR AT ANY OF THE PROPERTIES OWNED OR OPERATED BY PARENT
OR ANY OTHER CREDIT PARTY, OR (3) THE BREACH OR NON-COMPLIANCE BY PARENT OR ANY
OTHER CREDIT PARTY WITH ANY ENVIRONMENTAL LAW OR ENVIRONMENTAL COVENANT
APPLICABLE TO PARENT OR ANY OTHER CREDIT PARTY, UNLESS THE ACTS OR OMISSIONS OF
SUCH PERSON, ITS SUCCESSORS AND ASSIGNS ARE THE PRIMARY CAUSE OF THE
CIRCUMSTANCES GIVING RISE TO SUCH DEMAND, CLAIM, COST RECOVERY ACTION OR
LAWSUIT.
If and to the extent that the obligations of Parent and the Borrower under this
Section 10.4 are unenforceable for any reason, Parent and the Borrower each
hereby agree to make the maximum contribution to the payment and satisfaction of
such obligations which is permissible under applicable law. Parent's and the
Borrower's obligations under this Section 10.4 shall survive any termination of
this Agreement and the payment of the Term Notes.
Section 10.5 Right of Setoff. In addition to and not in limitation of
all rights of offset that any Lender may have under applicable law, each Lender
or other holder of a Term Note, or any other Lender Indebtedness shall, upon the
occurrence of any Event of Default and at any time during the continuance
thereof and whether or not such Lender, or such holder has made any demand or
the Borrower's obligations are matured, have the right at any time and from time
to time, without notice to Parent or the Borrower (any such notice being
expressly waived by Parent and the Borrower) 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 any Lender to or for the credit
or the account of Parent or the Borrower against any and all of the Lender
Indebtedness owing to such Lender then outstanding, subject to the provisions of
Section 2.9.
Section 10.6 Benefit of Agreement. The Term Notes, this Agreement and
the other Financing Documents shall be binding upon and inure to the benefit of
and be enforceable by the respective successors and assigns of the parties
hereto, provided, that neither Parent nor the Borrower may assign or transfer
any of their interest hereunder or thereunder without the prior written consent
of the Lenders.
Section 10.7 Successors and Assigns; Participations and Assignments.
(a) The provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns permitted hereby, except that neither Parent nor the Borrower may assign
or otherwise transfer any of their rights or obligations hereunder without the
prior written consent of each Lender (and any attempted assignment or transfer
by Parent or the Borrower without such consent shall be null and void). Nothing
in this Agreement, expressed or implied, shall be construed to confer upon any
Person (other than the parties hereto, their respective successors and assigns
permitted hereby) any legal or equitable right, remedy or claim under or by
reason of this Agreement.
(b) Any Lender may assign to one or more assignees all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Term Loan Commitment and the Term Loans at the time owing to it);
provided that (i) except in the case of an assignment to a Lender or an
Affiliate of a Lender, each of the Borrower and the Administrative Agent must
give their prior written consent to such assignment (which consent shall not be
unreasonably withheld), (ii) except in the case of an assignment to a Lender or
an Affiliate of a Lender or an assignment of the entire remaining amount of the
assigning Lender's Term Loan Commitment, the amount of the Term Loan Commitment
of the assigning Lender subject to each such assignment (determined as of the
date the Assignment and Acceptance with respect to such assignment is delivered
to the Administrative Agent) shall not be less than $250,000 unless each of the
Borrower and the Administrative Agent otherwise consent, (iii) each partial
assignment shall be made as an assignment of a proportionate part of all the
assigning Lender's rights and obligations under this Agreement, (iv) the parties
to each assignment shall execute and deliver to the Administrative Agent an
Assignment and Acceptance, together with a processing fee of $500 and
all applicable recordation fees, and
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(v) the assignee, if it shall not be a Lender, shall deliver to the
Administrative Agent such information relevant to such assignee as the
Administrative Agent shall request to evidence such assignee as a Lender
hereunder; and provided further that any consent of the Borrower otherwise
required under this paragraph shall not be required if an Event of Default has
occurred and is continuing. Subject to acceptance and recording thereof pursuant
to Section 10.7(d), from and after the effective date specified in each
Assignment and Acceptance the assignee thereunder shall be a party hereto and,
to the extent of the interest assigned by such Assignment and Acceptance, have
the rights and obligations of a Lender under this Agreement, and the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all of the assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto but shall continue to be entitled to the benefits of Sections
2.10 and 10.4). Any assignment or transfer by a Lender of rights or obligations
under this Agreement that does not comply with this paragraph shall be treated
for purposes of this Agreement as a sale by such Lender of a participation in
such rights and obligations in accordance with this Section 10.7(b).
(c) The Administrative Agent, acting for this purpose as an
agent of the Borrower, shall maintain at its offices in Houston, Texas a copy of
each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Term Loan
Commitment of, and principal amount of the Term Loans owing to, each Lender
pursuant to the terms hereof from time to time (the "Register"). The entries in
the Register shall be conclusive, and the Borrower, the Administrative Agent and
the Lenders may treat each Person whose name is recorded in the Register
pursuant to the terms hereof as a Lender hereunder for all purposes of this
Agreement, notwithstanding notice to the contrary. The Register shall be
available for inspection by the Borrower and any Lender, at any reasonable time
and from time to time upon reasonable prior notice.
(d) Upon its receipt of a duly completed Assignment and
Acceptance executed by an assigning Lender and an assignee, the assignee's
completed Administrative Questionnaire (unless the assignee shall already be a
Lender hereunder), the processing and recordation fees referred to in Section
10.7(b) and any written consent to such assignment required by Section 10.7(b),
the Administrative Agent shall accept such Assignment and Acceptance and record
the information contained therein in the Register. No assignment shall be
effective for purposes of this Agreement unless it has been recorded in the
Register as provided in this paragraph.
(e) Any Lender may, without the consent of Parent, the
Borrower or the Administrative Agent, sell participations to one or more banks
or other entities (a "Participant") in all or a portion of such Lender's rights
and obligations under this Agreement (including all or a portion of its Term
Loan Commitment and the Term Loans owing to it); provided that (i) such Lender's
obligations under this Agreement shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (iii) Parent, the Borrower, the Administrative Agent and
the other Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement. Any
agreement or instrument pursuant to which a Lender sells such a participation
shall provide that such Lender shall retain the sole right to enforce this
Agreement and to approve any amendment, modification or waiver of any provision
of this Agreement; provided that such agreement or instrument may provide that
such Lender will not, without the consent of the Participant, agree to any
amendment, modification or waiver described in Sections 10.2(a) or 10.2(b) that
affects such Participant. Subject to this Section 10.7(e), Parent and the
Borrower each agree that each Participant shall be entitled to the benefits of
Section 2.10 to the same extent as if it were a Lender and had acquired its
interest by assignment pursuant to Section 10.7(b). To the extent permitted by
law, each Participant also shall be entitled to the benefits of Section 10.5 as
though it were a Lender, provided such Participant agrees to be subject to
Section 2.9 as though it were a Lender.
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(f) A Participant shall not be entitled to receive any greater
payment under Section 2.10 than the applicable Lender would have been entitled
to receive with respect to the participation sold to such Participant, unless
the sale of the participation to such Participant is made with the Borrower's
prior written consent. A Participant that would be a Foreign Lender if it were a
Lender shall not be entitled to the benefits of Section 2.10 unless the Borrower
is notified of the participation sold to such Participant and such Participant
agrees, for the benefit of the Borrower, to comply with Section 2.10(f) as
though it were a Lender.
(g) Any Lender may at any time pledge or assign a security
interest in all or any portion of its rights under this Agreement to secure
obligations of such Lender, including any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section 10.7 shall not apply to
any such pledge or assignment of a security interest; provided that no such
pledge or assignment of a security interest shall release a Lender from any of
its obligations hereunder or substitute any such pledgee or assignee for such
Lender as a party hereto.
(h) Parent and the Borrower each authorize each Lender to
disclose to any participant or Assignee (each, a "Transferee") and any
prospective Transferee any and all information in such Lender's possession
concerning Parent, the Borrower and Parent's Affiliates which has been delivered
to such Lender by or on behalf of Parent or the Borrower pursuant to this
Agreement or which has been delivered to such Lender by or on behalf of Parent
or the Borrower in connection with such Lender's credit evaluation of Parent,
the Borrower and Parent's Affiliates prior to becoming a party to this
Agreement, provided that, each such Transferee agrees to be bound by the
confidentiality provisions of Section 10.12. No assignment or participation made
or purported to be made to any Transferee shall be effective without the prior
written consent of Parent and the Borrower if it would require it to make any
filing with any Governmental Authority or qualify any Term Loan or Term Note
under the laws of any jurisdiction, and Parent and the Borrower shall be
entitled to request and receive such information and assurances as it may
reasonably request from any Lender or any Transferee to determine whether any
such filing or qualification is required or whether any assignment or
participation is otherwise in accordance with applicable law.
Section 10.8 Governing Law; Submission to Jurisdiction; etc.
(a) GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND UNDER THE TERM NOTES SHALL BE CONSTRUED
IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND, TO THE
EXTENT CONTROLLING, LAWS OF THE UNITED STATES OF AMERICA.
(b) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT, THE TERM NOTES OR THE OTHER FINANCING DOCUMENTS
MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY EXECUTION AND DELIVERY OF
THIS AGREEMENT, PARENT AND THE BORROWER EACH HEREBY ACCEPT FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. PARENT AND THE BORROWER EACH HEREBY IRREVOCABLY WAIVE ANY
OBJECTION, INCLUDING, BUT NOT LIMITED TO, ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE
JURISDICTIONS.
(c) WAIVER OF CONSEQUENTIAL DAMAGES. TO THE MAXIMUM EXTENT
ALLOWED BY APPLICABLE LAW, EACH OF PARENT, THE BORROWER, THE ADMINISTRATIVE
AGENT AND THE LENDERS (i) IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES, OR DAMAGES OTHER THAN, OR IN
48
<PAGE> 56
ADDITION TO, ACTUAL DAMAGES; (ii) CERTIFIES THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE 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 WAIVER; AND (iv) ACKNOWLEDGES THAT IT HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER FINANCING DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BASED UPON, AMONG OTHER THINGS, THE
MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION 10.8.
(d) Process Agent. CT Corporation System, with an office on
the date hereof at 350 N. St. Paul, Suite 2900, Dallas, Texas 75201, is the
designee, appointee and process agent of Parent and the Borrower designated to
receive, for and on behalf of Parent and the Borrower, service of process in
such respective jurisdictions in any legal action or proceeding with respect to
this Agreement, the Term Notes, or the other Financing Documents. It is
understood that a copy of such process served on such agent will be promptly
forwarded by mail to Parent and the Borrower at its address set forth opposite
its signature below, but the failure of Parent or the Borrower to receive such
copy shall not affect in any way the service of such process. Parent and the
Borrower each further irrevocably consent to the service of process of any of
the aforementioned courts in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to Parent and
the Borrower at its said address, such service to become effective 30 days after
such mailing.
(e) Service of Process. Nothing herein shall affect the right
of the Administrative Agent or any Lender or any holder of a Term Note to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against Parent or the Borrower in any other jurisdiction.
Section 10.9 Independent Nature of Lenders' Rights. The amounts payable
at any time hereunder to each Lender shall be a separate and independent debt,
and, subject to the other terms and provisions hereof and of the Financing
Documents, each Lender shall be entitled to protect and enforce its rights
arising out of this Agreement, and it shall not be necessary for any other
Lender to be joined as an additional party in any proceeding for such purpose.
Section 10.10 Invalidity. In the event that any one or more of the
provisions contained in the Term Notes, this Agreement or in any other Financing
Document shall, for any reason, be held invalid, illegal or unenforceable in any
respect, (a) Parent and the Borrower each agree that such invalidity, illegality
or unenforceability shall not affect any other provision of the Term Notes, this
Agreement or any other Financing Document, and (b) Parent, the Borrower and the
Administrative Agent (acting on behalf and at the direction of the Lenders) will
negotiate in good faith to amend such provision so as to be legal, valid, and
enforceable.
Section 10.11 Renewal, Extension or Rearrangement. All provisions of
this Agreement and of any other Financing Documents relating to the Term Notes
or other Lender Indebtedness shall apply with equal force and effect to each and
all promissory notes hereafter executed which in whole or in part represent a
renewal, extension for any period, increase or rearrangement of any part of the
Lender Indebtedness originally represented by the Term Notes, or of any part of
such other Lender Indebtedness.
Section 10.12 Confidentiality. Each of the Administrative Agent and the
Lenders agrees to maintain the confidentiality of the Information (as defined
below), except that Information may be disclosed (a) to its and its Affiliates'
directors, officers, employees and agents, including accountants, legal counsel
and other advisors (it being understood that the Persons to whom such disclosure
is made will be informed of the confidential nature of such Information and
instructed to keep such Information confidential), (b) to the extent requested
by any regulatory authority, (c) to the extent required by applicable laws or
regulations or by any subpoena or similar legal process, (d) to any other party
to this Agreement, (e) in connection with the exercise of any remedies hereunder
or any suit, action or proceeding relating to
49
<PAGE> 57
this Agreement or the enforcement of rights hereunder, (f) subject to an
agreement containing provisions substantially the same as those of this Section
10.12, to any assignee of or Participant in, or any prospective assignee of or
Participant in, any of its rights or obligations under this Agreement, (g) with
the consent of Parent or the Borrower or (h) to the extent such Information (i)
becomes publicly available other than as a result of a breach of this Section
10.12 or (ii) becomes available to the Administrative Agent or any Lender on a
nonconfidential basis from a source other than Parent or the Borrower. For the
purposes of this Section 10.12, "Information" means all information received
from Parent or the Borrower relating to Parent or the Borrower or their
businesses, other than any such information that is available to the
Administrative Agent or any Lender on a nonconfidential basis prior to
disclosure by Parent or the Borrower; provided that, in the case of information
received from Parent or the Borrower after the date hereof, such information is
clearly identified at the time of delivery as confidential. Any Person required
to maintain the confidentiality of Information as provided in this Section 10.12
shall be considered to have complied with its obligation to do so if such Person
has exercised the same degree of care to maintain the confidentiality of such
Information as such Person would accord to its own confidential information.
Section 10.13 Interest. It is the intention of the parties hereto to
conform strictly to usury laws applicable to the Administrative Agent and the
Lenders (collectively, the "Financing Parties") and the Transactions.
Accordingly, if the Transactions would be usurious as to any Financing Party
under laws applicable to it, then, notwithstanding anything to the contrary in
the Term Notes, this Agreement or in any other Financing Document or agreement
entered into in connection with the Transactions or as security for the Term
Notes, it is agreed as follows: (a) the aggregate of all consideration which
constitutes interest under law applicable to any Financing Party that is
contracted for, taken, reserved, charged or received by such Financing Party
under the Term Notes, this Agreement or under any of such other Financing
Documents or agreements or otherwise in connection with the Transactions shall
under no circumstances exceed the maximum amount allowed by such applicable law,
(b) in the event that the maturity of the Term Notes is accelerated for any
reason, or in the event of any required or permitted prepayment, then such
consideration that constitutes interest under law applicable to any Financing
Party may never include more than the maximum amount allowed by such applicable
law, and (c) excess interest, if any, provided for in this Agreement or
otherwise in connection with the Transactions shall be canceled automatically by
such Financing Party and, if theretofore paid, shall be credited by such
Financing Party on the principal amount of the Borrower's Indebtedness to such
Financing Party (or, to the extent that the principal amount of the Borrower's
Indebtedness to such Financing Party shall have been or would thereby be paid in
full, refunded by such Financing Party to the Borrower). The right to accelerate
the maturity of the Term Notes does not include the right to accelerate any
interest which has not otherwise accrued on the date of such acceleration, and
the Financing Parties do not intend to collect any unearned interest in the
event of acceleration. All sums paid or agreed to be paid to the Financing
Parties for the use, forbearance or detention of sums included in the Lender
Indebtedness shall, to the extent permitted by law applicable to such Financing
Party, be amortized, prorated, allocated and spread throughout the full term of
the Term Notes until payment in full so that the rate or amount of interest on
account of the Lender Indebtedness does not exceed the applicable usury ceiling,
if any. As used in this Section 10.13, the terms "applicable law" or "laws
applicable to any Financing Party" shall mean the law of any jurisdiction whose
laws may be mandatorily applicable notwithstanding other provisions of this
Agreement, or law of the United States of America applicable to any Financing
Party and the Transactions which would permit such Financing Party to contract
for, charge, take, reserve or receive a greater amount of interest than under
such jurisdiction's law. To the extent that Chapter 303 of the Texas Finance
Code, as amended, substituted for or restated is relevant to any Financing Party
for the purpose of determining the Highest Lawful Rate, such Financing Party
hereby elects to determine the applicable rate ceiling under such Chapter 303 by
the interest (weekly) rate ceiling from time to time in effect, subject to such
Financing Party's right subsequently to change such method in accordance with
applicable law.
50
<PAGE> 58
Section 10.14 Entire Agreement. THE TERM NOTES, THIS AGREEMENT AND THE
OTHER FINANCING DOCUMENTS EMBODY THE ENTIRE AGREEMENT AND UNDERSTANDING AMONG
THE ADMINISTRATIVE AGENT OR THE LENDERS AND THE OTHER RESPECTIVE PARTIES HERETO
AND THERETO AND SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS AMONG SUCH
PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
Section 10.15 Attachments. The exhibits, schedules and annexes attached
to this Agreement are incorporated herein and shall be considered a part of this
Agreement for the purposes stated herein, except that in the event of any
conflict between any of the provisions of such exhibits and the provisions of
this Agreement, the provisions of this Agreement shall prevail.
Section 10.16 Counterparts. This Agreement may be executed in any
number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original
but all of which shall together constitute one and the same instrument.
Section 10.17 Survival of Indemnities. Each of Parent's and the
Borrower's obligations under Sections 2.10 and 10.4 shall survive the payment in
full of the Term Loans.
Section 10.18 Headings Descriptive. The headings of the several
sections and subsections of this Agreement, and the Table of Contents, are
inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Agreement.
Section 10.19 Satisfaction Requirement. Unless otherwise specifically
stated, if any agreement, certificate, instrument or other writing, or any
action taken or to be taken, is by the terms of this Agreement required to be
satisfactory to any party, the determination of such satisfaction shall be made
by such party in its sole and exclusive judgment exercised reasonably and in
good faith.
Section 10.20 Exculpation Provisions. EACH OF THE PARTIES HERETO
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER
FINANCING DOCUMENTS AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF
THE TERMS OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS; THAT IT HAS IN
FACT READ THIS AGREEMENT AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE
OF THE TERMS, CONDITIONS AND EFFECTS OF THIS AGREEMENT; THAT IT HAS BEEN
REPRESENTED BY LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS; AND HAS
RECEIVED THE ADVICE OF ITS ATTORNEYS IN ENTERING INTO THIS AGREEMENT AND THE
OTHER FINANCING DOCUMENTS; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF
THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS RESULT IN ONE PARTY ASSUMING
THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE
OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY. EACH PARTY HERETO AGREES
AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY
EXCULPATORY PROVISION OF THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS ON THE
BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE
PROVISION IS NOT "CONSPICUOUS."
51
<PAGE> 59
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed as of the date first above written.
[SIGNATURE PAGES FOLLOW]
52
<PAGE> 60
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
THE HALLWOOD GROUP INCORPORATED
By:
---------------------------------
Melvin J. Melle,
Vice President
Address: 3710 Rawlins, Suite 1500
Dallas, Texas 75219
Attention: Melvin J. Melle
Telephone: (214) 528-5588
Telecopy: (214) 528-8855
[Signature Page]
<PAGE> 61
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
HWG LLC
By:
---------------------------------
William L. Guzzetti,
President
Address: 3710 Rawlins, Suite 1500
Dallas, Texas 75219
Attention: Melvin J. Melle
Telephone: (214) 528-5588
Telecopy: (214) 528-8855
[Signature Page]
<PAGE> 62
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
FIRST BANK TEXAS, N.A., individually and
as Administrative Agent
By:
---------------------------------
Alan Cott,
Senior Vice President
Address: 8820 Westheimer
Houston, Texas 77063
Attention: Alan Cott
Telephone: (713) 954-2486
Telecopy: (713) 954-2472
[Signature Page]
<PAGE> 63
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
WALHALLA STATE BANK
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 407 12th Street
Walhalla, North Dakota 58282
Attention: Brian Johnson
Telephone: (701) 549-3761
Telecopy: (701) 549-3622
[Signature Page]
<PAGE> 64
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
FIRST INTERNATIONAL BANK & TRUST
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 100 North Main Street
Watford City, North Dakota
58854
Attention: Brad Thompson
Telephone: (701) 842-2381
Telecopy: (701) 842-4147
[Signature Page]
<PAGE> 65
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
BREMER BUSINESS FINANCE CORPORATION
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 445 Minnesota Street, Suite
2000
St. Paul, Minnesota 55101
Attention: Susan Woodhall
Telephone: (651) 312-3742
Telecopy: (651) 312-3750
[Signature Page]
<PAGE> 66
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
MIDSTATES BANK, N.A.
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 812 Durant Street
Harlan, Iowa 51537
Attention: Larry Peterson
Telephone: (712) 755-2126
Telecopy: (712) 755-2683
[Signature Page]
<PAGE> 67
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
HERITAGE NATIONAL BANK
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 2700 7th Avenue East
North St. Paul, Minnesota
55109
Attention: Thomas Jacobson
Telephone: (651) 770-2341
Telecopy: (651) 770-6843
[Signature Page]
<PAGE> 68
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
FIRST NATIONAL BANK OF DEERWOOD
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 20 Archibald Road
Deerwood, Minnesota 56444
Attention: Vern Smith
Telephone: (218) 534-3111
Telecopy: (218) 534-3454
[Signature Page]
<PAGE> 69
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
ROSEMOUNT NATIONAL BANK
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 15055 Chippendale Avenue
South Rosemount, Minnesota
55068
Attention: Sid Aarestad
Telephone: (651) 423-5000
Telecopy: (651) 423-5148
[Signature Page]
<PAGE> 70
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
SAND RIDGE BANK
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 2611 Highway Avenue
Highland, Indiana 46322
Attention: Don Harris
Telephone: (219) 972-7344
Telecopy: (219) 972-7360
[Signature Page]
<PAGE> 71
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
FIRST NATIONAL BANK & TRUST CO. OF
WILLISTON
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 22 East 4th Street
Williston, North Dakota
58802
Attention: Terry Lee
Telephone: (701) 572-2113
Telecopy: (701) 572-9763
[Signature Page]
<PAGE> 72
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
BREMER BANK, NATIONAL ASSOCIATION
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 3100 South Columbia Road
Grand Forks, North Dakota
58201
Attention: Mike Porter
Telephone: (701) 795-4502
Telecopy: (701) 795-4568
[Signature Page]
<PAGE> 73
SCHEDULE 1.1
HOTEL MORTGAGES
Schedule 1.1-1
<PAGE> 74
SCHEDULE 5.7
INVESTMENTS
Schedule 5.7- 1
<PAGE> 75
SCHEDULE 5.8
LITIGATION
Schedule 5.8-1
<PAGE> 76
SCHEDULE 5.13
EXISTING DEFAULTS
Schedule 5.13-1
<PAGE> 77
SCHEDULE 5.19
SUBSIDIARIES
Schedule 5.19-1
<PAGE> 78
SCHEDULE 5.20
INSURANCE
Schedule 5.20-1
<PAGE> 79
SCHEDULE 5.23
EMPLOYMENT CONTRACTS
Schedule 5.23-1
<PAGE> 80
SCHEDULE 5.25
OWNERSHIP/CAPITALIZATION
Schedule 5.25-1
<PAGE> 81
SCHEDULE 7.2
EXISTING INDEBTEDNESS
Schedule 7.2-1
<PAGE> 82
SCHEDULE 7.3
LIENS
Schedule 7.3-1
<PAGE> 83
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
SECURITY STATE BANK
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 400 2nd Avenue South West
Jamestown, North Dakota 58402
Attention: Tom Watson
Telephone: (701) 251-2040
Telecopy: (701) 251-9187
[Signature Page]
<PAGE> 84
SIGNATURE PAGE
TO
CREDIT AGREEMENT
BY AND AMONG HWG LLC, AS THE BORROWER,
THE HALLWOOD GROUP INCORPORATED, AS PARENT GUARANTOR,
THE FINANCIAL INSTITUTIONS PARTIES THERETO AS
LENDERS, AND FIRST BANK TEXAS, N.A., AS
ADMINISTRATIVE AGENT
BREMER BANK, NATIONAL ASSOCIATION
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Address: 208 East College Drive
Marshall, Minnesota 56258
Attention: Roger Tjosaas
Telephone: (507) 537-0224
Telecopy: (507) 537-1308
[Signature Page]
<PAGE> 85
ANNEX I
<TABLE>
<CAPTION>
LENDER TERM LOAN COMMITMENT
- ------ --------------------
<S> <C>
First Bank Texas, N.A. $9,000,000
Walhalla State Bank $250,000
First International Bank & Trust $500,000
Bremer Business Finance Corporation $3,000,000
Midstates Bank, N.A. $500,000
Heritage National Bank $500,000
First National Bank of Deerwood $500,000
Rosemount National Bank $250,000
Sand Ridge Bank $1,000,000
First National Bank & Trust Co. of Williston $500,000
Bremer Bank, National Association $1,000,000
Security State Bank $250,000
Bremer Bank, National Association $750,000
Total Term Loan Commitment $18,000,000
</TABLE>
Annex I-1
<PAGE> 86
EXHIBIT A
FORM OF TERM NOTE
$__________ ______________, 1999
HWG LLC, a Delaware limited liability company (the "Borrower"), for
value received, promises and agrees to pay to ___________ (the "Lender"), or
order, at the Payment Office of FIRST BANK TEXAS, N.A., at 8820 Westheimer,
Houston, Texas 77263, the principal sum of ___________________________________
DOLLARS ($___________________), in lawful money of the United States of America
and in immediately available funds, in installments on the dates and in the
principal amounts provided in the Credit Agreement referred to below, and to pay
interest on the unpaid principal amount of the Term Loans made by the Lender to
the Borrower under the Credit Agreement, at such office, in like money and
funds, for the period commencing on the date of such Term Loans until such Term
Loans shall be paid in full, at the rates per annum and on the dates provided in
the Credit Agreement.
In addition to and cumulative of any payment required to be made
against this note pursuant to the Credit Agreement, this note, including all
principal and accrued interest then unpaid thereon, shall be due and payable on
the Term Loan Maturity Date. All payments shall be applied first to accrued
interest and the balance to principal, except as otherwise expressly provided in
the Credit Agreement. Prepayments on this note shall be applied in the manner
set forth in the Credit Agreement.
This note is one of the Term Notes referred to in the Credit Agreement
dated as of December 21, 1999, by and among the Borrower, The Hallwood Group
Incorporated, as Parent Guarantor, First Bank Texas, N.A., individually, and as
Administrative Agent, and the financial institutions parties thereto (including
the Lender) (such Credit Agreement, together with all amendments or supplements
thereto, being the "Credit Agreement"). This note evidences the Term Loans made
by the Lender thereunder and shall be governed by the Credit Agreement.
Capitalized terms used but not defined in this note and which are defined in the
Credit Agreement shall have the meanings herein as are assigned in the Credit
Agreement.
The Lender is hereby authorized by the Borrower to endorse on Schedule
A (or a continuation thereof) attached to this note, the amount and date of each
payment or prepayment of principal of the Term Loans received by the Lender and
the interest rates applicable to the Term Loans, provided that any failure by
the Lender to make any such endorsement shall not affect the obligations of the
Borrower under the Credit Agreement or under this note in respect of the Term
Loans.
Except only for any notices which are specifically required by the
Credit Agreement or the other Financing Documents, the Borrower and any and all
co-makers, endorsers, guarantors and sureties severally waive notice (including
but not limited to notice of intent to accelerate and notice of acceleration,
notice of protest and notice of dishonor), demand, presentment for payment,
protest, diligence in collecting and the filing of suit for the purpose of
fixing liability, and consent that the time of payment hereof may be extended
and re-extended from time to time without notice to any of them. Each such
person agrees that his, her or its liability on or with respect to this note
shall not be affected by any release of or change in any guaranty or security at
any time existing or by any failure to perfect or maintain perfection of any
lien against or security interest in any such security or the partial or
complete enforceability of any guaranty or other surety obligation, in each case
in whole or in part, with or without notice and before or after maturity.
A-1
<PAGE> 87
The Credit Agreement provides for the acceleration of the maturity of
this note upon the occurrence of certain events and for prepayment of Term Loans
upon the terms and conditions specified therein. Reference is made to the Credit
Agreement for all other pertinent purposes.
This note is issued pursuant to and is entitled to the benefits of the
Credit Agreement and is secured by the Security Instruments.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA FROM TIME TO TIME IN
EFFECT.
HWG LLC
By:
------------------------------
Name:
------------------------
Title:
-----------------------
A-2
<PAGE> 88
SCHEDULE A
This Note evidences Term Loans made by the Lender under the within-described
Credit Agreement to the Borrower, which Term Loans are in the principal amounts,
at the interest rates (and interest periods), and were made and repaid or
prepaid on the dates set forth below:
<TABLE>
<CAPTION>
Principal Amount
Date Amount Interest Maturity Date of Payment Paid or Balance
Made of Loan Rate Date or Prepayment Prepaid Outstanding
- ---- -------- -------- -------- ---------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
Schedule A-1
<PAGE> 89
EXHIBIT B
FORM OF OPINION OF JENKENS & GILCHRIST
B-1
<PAGE> 90
EXHIBIT C-1
FORM OF FACILITY GUARANTY
C-1-1
<PAGE> 91
EXHIBIT C-2
FORMS OF PLEDGE AGREEMENTS
C-2-1
<PAGE> 92
EXHIBIT C-3
FORM OF COLLATERAL ASSIGNMENT OF INTERCOMPANY NOTE
C-3-1
<PAGE> 93
EXHIBIT D
FORM OF ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement, dated as of December 21, 1999
(as amended, supplemented, waived or otherwise modified from time to time, the
"Credit Agreement"), among HWG LLC, as the Borrower, THE HALLWOOD GROUP
INCORPORATED, as Parent Guarantor, FIRST BANK TEXAS, N.A., Individually, and as
Administrative Agent, and the Lenders now or hereafter parties thereto. Unless
otherwise defined herein, terms defined in the Credit Agreement and used herein
shall have the meanings given to them in the Credit Agreement.
______________________ (the "Assignor") and _________________ (the
"Assignee") agree as follows:
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Transfer Effective Date (as defined below), a percentage interest (the "Assigned
Interest") as set forth in Schedule 1 in and to all the Assignor's rights and
obligations under the Credit Agreement and the other Financing Documents with
respect to the credit facilities provided for in the Credit Agreement (the
"Assigned Facilities"), in a principal amount for each Assigned Facility as set
forth on Schedule 1.
2. The Assignor (a) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with the Credit Agreement, any other Financing Document
or any other instrument or document furnished pursuant thereto or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of the
Credit Agreement, any other Financing Document or any other instrument or
document furnished pursuant thereto, other than that it has not created any
adverse claim upon the interest being assigned by it hereunder and that such
interest is free and clear of any such adverse claim; (b) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of Parent, the Borrower, any other Credit Party or any other
obligor or the performance or observance by Parent, the Borrower, any other
Credit Party or any other obligor of any of their respective obligations under
the Credit Agreement, any other Financing Document or any other instrument or
document furnished pursuant hereto or thereto; and (c) attaches the Term Notes
held by it evidencing the Assigned Facilities and requests that the
Administrative Agent exchange such Term Notes for new Term Notes payable to the
Assignee and (if the Assignor has retained any interest in the Assigned
Facilities) new Term Notes payable to the Assignor in the respective amounts
which reflect the assignment being made hereby (and after giving effect to any
other assignments which have become effective on the Transfer Effective
Date).(1)
3. The Assignee (a) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (b) confirms that it
has received a copy of the Credit Agreement together with copies of the
Financial Statements and/or such other documents and information as it has
deemed appropriate to make its own credit analysis and decision to enter into
this Assignment and Acceptance; (c) agrees that it will, independently and
without reliance upon the Assignor, the Administrative Agent or any other Lender
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under the Credit Agreement, the other Financing Documents or any other
instrument or document furnished pursuant hereto or thereto; (d) appoints and
- -----------------
(1) Term Notes should only be requested when specifically required by
the Assignee and/or the Assignor, as the case may be.
D-1
<PAGE> 94
authorizes the Administrative Agent to take such action as agent on its behalf
and to exercise such power and discretion under the Credit Agreement, the other
Financing Documents or any other instrument or document furnished pursuant
hereto or thereto as are delegated to the Administrative Agent by the terms
thereof, together with such powers as are incidental thereto; (e) hereby affirms
the acknowledgments of such Assignee as a Lender contained in Section 9.3 of the
Credit Agreement; and (f) agrees that it will be bound by the provisions of the
Credit Agreement and will perform in accordance with the terms of the Credit
Agreement all the obligations which by the terms of the Credit Agreement are
required to be performed by it as a Lender, including, but not limited to, if it
is organized under the laws of a jurisdiction outside the United States, its
obligations pursuant to Section 2.10(f) of the Credit Agreement.
4. The effective date of this Assignment and Acceptance shall be
____________, ____ (the "Transfer Effective Date"). Following the execution of
this Assignment and Acceptance, it will be delivered to the Administrative Agent
for acceptance by it and recording by the Administrative Agent pursuant to
Section 10.7 of the Credit Agreement, effective as of the Transfer Effective
Date (which shall not, unless otherwise agreed to by the Administrative Agent,
be earlier than five Business Days after the date of such acceptance and
recording by the Administrative Agent).
5. Upon such acceptance and recording, from and after the Transfer
Effective Date, the Administrative Agent shall make all payments in respect of
the Assigned Interest (including payments of principal, interest, fees and other
amounts) to the Assignee whether such amounts have accrued prior to the Transfer
Effective Date or accrued subsequent to the Transfer Effective Date. The
Assignor and the Assignee shall make all appropriate adjustments in payments by
the Administrative Agent for the periods prior to the Transfer Effective Date or
with respect to the making of this assignment directly between themselves.
6. From and after the Transfer Effective Date, (a) the Assignee shall
be a party to the Credit Agreement and, to the extent provided in this
Assignment and Acceptance, have the rights and obligations of a Lender
thereunder and under the other Financing Documents and shall be bound by the
provisions thereof and (b) the Assignor shall, to the extent provided in this
Assignment and Acceptance, relinquish its rights and be released from its
obligations under the Credit Agreement, but shall nevertheless continue to be
entitled to the benefits of Sections 2.10 and 10.4 thereof.
7. Notwithstanding any other provision hereof, if the consents of
Parent, the Borrower and the Administrative Agent hereto are required under
Section 10.7 of the Credit Agreement, this Assignment and Acceptance shall not
be effective unless such consents shall have been obtained.
8. This Assignment and Acceptance shall be governed by and construed in
accordance with the laws of the State of Texas without regard to the principles
of conflict of laws thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed as of the date first above written by their respective
duly authorized officers on Schedule 1 hereto.
D-2
<PAGE> 95
SCHEDULE 1
TO THE
ASSIGNMENT AND ACCEPTANCE
Re: Credit Agreement, dated as of December 21, 1999 among HWG LLC, as the
Borrower, The Hallwood Group Incorporated, as Parent Guarantor, First
Bank Texas, N.A., Individually, and as Administrative Agent, and the
Lenders now or hereafter parties thereto
Name of Assignor:
Name of Assignee:
Transfer Effective Date of Assignment:
<TABLE>
<CAPTION>
Percentage of
Assignor's
Interest in
Credit Credit Principal Commitment
Facility Facility Amount Percentage
Assigned Assigned Assigned Assigned
- -------- ------------- --------- ----------
<S> <C> <C> <C>
--------% $-------- --.----%
</TABLE>
<TABLE>
<CAPTION>
[NAME OF ASSIGNEE] [NAME OF ASSIGNOR]
<S> <C>
By: By:
--------------------------- ---------------------------
Title: Title:
Accepted for recording in the Consented To:
Register:
FIRST BANK TEXAS, N.A., HWG LLC
as Administrative Agent
By: By:
--------------------------- ---------------------------
Title: Title:
FIRST BANK TEXAS, N.A.,
as Administrative Agent
By:
----------------------------
Title:
</TABLE>
Schedule 1-1
<PAGE> 96
EXHIBIT E
FORM OF COMPLIANCE CERTIFICATE
E-1
<PAGE> 97
EXHIBIT F
FORM OF COLLATERAL VALUE CERTIFICATE
F-1
<PAGE> 98
PROMISSORY NOTE
$18,000,000.00 December 21, 1999
FOR VALUE RECEIVED, payable on demand, the undersigned, THE HALLWOOD
GROUP INCORPORATED, a Delaware corporation ("Maker"), promises to pay to the
order of HWG LLC, a Delaware limited liability company ("Payee") at the offices
of Payee at 3710 Rawlins, Suite 1500, Dallas, Texas 75219, in immediately
available funds and in lawful money of the United States of America, the
principal amount of EIGHTEEN MILLION AND NO/100 DOLLARS ($18,000,000.00) ("Total
Principal Amount"), together with interest on such Total Principal Amount from
the date hereof at a rate per annum which shall from day to day be equal to the
lesser of (a) the Maximum Lawful Rate (as hereinafter defined), or (b) the Fixed
Rate (as hereinafter defined), calculated on the basis of the actual days
elapsed but computed as if each year consisted of three hundred sixty (360)
days, each change in the rate to be charged on this Promissory Note (this
"Note") to become effective without notice to Maker on the effective date of
each change in the Maximum Lawful Rate or Fixed Rate, as the case may be;
provided, however, that if at any time the rate of interest calculated with
reference to the Fixed Rate shall exceed the Maximum Lawful Rate, thereby
causing the interest on this Note to be limited to the Maximum Lawful Rate, then
any subsequent increase of the Maximum Lawful Rate in excess of the Fixed Rate
shall not reduce the rate of interest on this Note below the Maximum Lawful Rate
to the Fixed Rate until the total amount of interest accrued on this Note equals
the amount of interest which would have accrued on this Note if the Fixed Rate
had at all times been in effect.
The term "Fixed Rate," as used herein, shall mean ten and one quarter
percent (10.25%) per annum.
The term "Maximum Lawful Rate," as used herein, shall mean, at the
particular time in question, the maximum rate of interest which, under
applicable law, may then be charged on this Note. If such maximum rate of
interest changes after the date hereof, the Maximum Lawful Rate shall be
automatically increased or decreased, as the case may be, without notice to
Maker from time to time as of the effective date of each change in such maximum
rate. If applicable law ceases to provide for such a maximum rate of interest,
the Maximum Lawful Rate shall be equal to fifteen percent (15.00%) per annum.
The entire unpaid principal balance of this Note, and all accrued and
unpaid interest on the unpaid principal balance of this Note, shall be due and
payable in full on demand.
All payments of the indebtedness evidenced by this Note shall be
applied to such indebtedness in such order and manner as the holder of this Note
may from time to time determine in its sole discretion. All payments and
prepayments of principal of or interest on this Note shall be made in lawful
money of the United States of America in immediately available funds, at the
address of Payee indicated above, or such other place as the holder of this Note
shall designate in writing to Maker. Any portion of the principal of this Note
that is repaid or prepaid may not be reborrowed. If any payment of principal of
or interest on this Note shall become due on a day which is not a Business Day
(as hereinafter defined) such payment shall be made on the next succeeding
Business Day and any such extension of time shall be included in computing
interest in connection with such payment. As used herein, the term "Business
Day" shall mean any day except a Saturday, Sunday
<PAGE> 99
or other date on which national banks in Houston, Texas are authorized by law to
close. The books and records of Payee shall be prima facia evidence of all
outstanding principal of and accrued and unpaid interest on this Note.
Maker agrees that no proceeds of this Note shall be used for personal,
family or household purposes, and that all proceeds hereunder shall be used
solely for general corporate purposes.
In connection with this Note, Maker hereby represents and warrants to
Payee as follows:
a. The execution, delivery, and performance of this Note by Maker have
been duly authorized by all necessary action by Maker, and constitute the legal,
valid and binding obligations of Maker, enforceable in accordance with its
terms, except as limited by bankruptcy, insolvency or similar laws of general
application relating to the enforcement of creditors' rights and except to the
extent specific remedies may generally be limited by equitable principles; and
b. The execution, delivery and performance of this Note by Maker, and
the consummation of the transactions contemplated hereby, do not (i) conflict
with, result in a violation of, or constitute a default under (A) any provision
of Maker's certificate of incorporation or bylaws, or any agreement or other
instrument binding upon Maker, or (B) any law, governmental regulation, court
decree or order applicable to Maker, or (ii) require the consent, approval or
authorization of any third party.
Until this Note is fully paid and satisfied, Maker will furnish to
Payee such information respecting the business, properties, condition or
operations, financial or otherwise, of Maker as Payee may from time to time
reasonably request.
Each of the following shall constitute an "Event of Default" under this
Note:
(a) The failure, refusal or neglect of Maker to pay when due any part
of the principal of, or interest on, this Note after such payment has become due
and payable; or
(b) Any representation contained herein made by Maker is false or
misleading in any material respect; or
(c) If Maker (i) becomes insolvent, or makes a transfer in fraud of
creditors, or makes an assignment for the benefit of creditors, or admits in
writing its inability to pay its debts as they become due; (ii) generally is not
paying its debts as such debts become due; (iii) has a receiver or custodian
appointed for, or take possession of, all or substantially all of the assets of
such party, either in a proceeding brought by such party or in a proceeding
brought against such party and such appointment is not discharged or such
possession is not terminated within thirty (30) days after the effective date
thereof such party consents or acquiesces in such appointment or possession;
(iv) files a petition for relief under the United States Bankruptcy Code or any
other present or future federal or state insolvency, bankruptcy or similar laws
(all of the foregoing hereinafter collectively called "Applicable Bankruptcy
Law") or an involuntary petition for relief is filed against such party under
any Applicable Bankruptcy Law and such involuntary petition is not dismissed
within thirty (30)days after the filing thereof, or an order for relief naming
such party is entered under any Applicable Bankruptcy Law, or any composition,
rearrangement, extension, reorganization or other relief of
<PAGE> 100
debtors now or hereafter existing is requested or consented to by such party;
(v) fails to have discharged within a period of thirty (30) days any attachment,
sequestration or similar writ levied upon any property of such party; or (vi)
fails to pay within thirty (30) days any final money judgment against such
party.
Nothing contained in this Note shall be construed to limit the events
of default enumerated hereinabove and all such events of default shall be
cumulative.
Maker agrees that upon the occurrence of any Event of Default, the
holder of this Note may, at its option, without further notice or demand, (i)
declare the outstanding principal balance of and accrued but unpaid interest on
this Note at once due and payable, (ii) pursue any and all other rights,
remedies and recourses available to the holder hereof, including, but not
limited to, any such rights, remedies or recourses, at law or in equity, or
(iii) pursue any combination of the foregoing.
The failure to exercise the option to accelerate the maturity of this
Note or any other right, remedy or recourse available to the holder hereof upon
the occurrence of an Event of Default hereunder shall not constitute a waiver of
the right of the holder of this Note to exercise the same at that time or at any
subsequent time with respect to such uncured Event of Default or any other Event
of Default. The rights, remedies and recourses of the holder hereof, as provided
in this Note, shall be cumulative and concurrent and may be pursued separately,
successively or together as often as occasion therefor shall arise, at the sole
discretion of the holder hereof. The acceptance by the holder hereof of any
payment under this Note which is less than the payment in full of all amounts
due and payable at the time of such payment shall not (i) constitute a waiver of
or impair, reduce, release or extinguish any right, remedy or recourse of the
holder hereof, or nullify any prior exercise of any such right, remedy or
recourse, or (ii) impair, reduce, release or extinguish the obligations of any
party liable under this Note as originally provided herein.
This Note is intended to be performed in accordance with, and only to
the extent permitted by, all applicable usury laws. If any provision hereof or
the application thereof to any person or circumstance shall, for any reason and
to any extent, be invalid or unenforceable, neither the application of such
provision to any other person or circumstance nor the remainder of the
instrument in which such provision is contained shall be affected thereby and
shall be enforced to the greatest extent permitted by law. It is expressly
stipulated and agreed to be the intent of the holder hereof to at all times
comply with the usury and other applicable laws now or hereafter governing the
interest payable on the indebtedness evidenced by this Note. If the applicable
law is ever revised, repealed or judicially interpreted so as to render usurious
any amount called for under this Note, or contracted for, charged, taken,
reserved or received with respect to the indebtedness evidenced by this Note, or
if Payee's exercise of the option to accelerate the maturity of this Note, or if
any prepayment by Maker results in Maker having paid any interest in excess of
that permitted by law, then it is the express intent of Maker and Payee that all
excess amounts theretofore collected by Payee be credited on the principal
balance of this Note (or, if this Note has been paid in full, refunded to
Maker), and the provisions of this Note immediately be deemed reformed and the
amounts thereafter collectable hereunder reduced, without the necessity of the
execution of any new document, so as to comply with the then 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, by Maker for the
use, forbearance, detention, taking, charging, receiving or reserving of the
indebtedness of Maker to Payee under this Note shall, to the maximum extent
permitted by
<PAGE> 101
applicable law, be amortized, prorated, allocated and spread throughout the full
term of such indebtedness until payment in full so that the rate or amount of
interest on account of such indebtedness does not exceed the usury ceiling from
time to time in effect and applicable to such indebtedness for so long as such
indebtedness is outstanding. 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.
If this Note is placed in the hands of an attorney for collection, or
is collected in whole or in part by suit or through probate, bankruptcy or other
legal proceedings of any kind, Maker agrees to pay, in addition to all other
sums payable hereunder, all costs and expenses of collection, including but not
limited to reasonable attorneys' fees. Maker hereby agrees to pay on demand all
reasonable fees and expenses of counsel to Payee incurred by Payee in connection
with the preparation, negotiation and execution of this Note and all related
documents.
Maker and any and all endorsers and guarantors of this Note severally
waive presentment for payment, notice of nonpayment, protest, demand, notice of
protest and dishonor, diligence in enforcement and indulgences of every kind and
without further notice hereby agree to renewals, extensions, exchanges or
releases of collateral, taking of additional collateral, indulgences or partial
payments, either before or after maturity.
THIS NOTE HAS BEEN EXECUTED UNDER, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT AS SUCH LAWS ARE
PREEMPTED BY APPLICABLE FEDERAL LAWS.
This Promissory Note is executed as of the 21st day of December, 1999
MAKER:
-----
THE HALLWOOD GROUP INCORPORATED
By:
--------------------------------
Melvin J. Melle,
Vice President
<PAGE> 102
ALLONGE ENDORSEMENT TO PROMISSORY NOTE,
DATED DECEMBER 21, 1999, EXECUTED BY
THE HALLWOOD GROUP INCORPORATED,
AND PAYABLE TO THE ORDER OF
HWG LLC
Pay to the order of FIRST BANK TEXAS, N.A., as Administrative Agent for
the ratable benefit of itself, and each other Lender a party to the Credit
Agreement dated as of December 21, 1999, by and among HWG LLC, The Hallwood
Group Incorporated, First Bank Texas, N.A., as Administrative Agent, and the
Lenders a party thereto WITH RECOURSE AND WARRANTY.
HWG LLC,
a Delaware limited liability company
By:
---------------------------------
William L. Guzzetti,
President
<PAGE> 103
- --------------------------------------------------------------------------------
PLEDGE AGREEMENT
Between
HWG LLC,
as Pledgor
and
FIRST BANK TEXAS, N.A.,
as Administrative Agent and Secured Party
December 21, 1999
- --------------------------------------------------------------------------------
<PAGE> 104
PLEDGE AGREEMENT
THIS PLEDGE AGREEMENT (this "Agreement") is made as of December 21,
1999, by HWG LLC, a Delaware limited liability company ("Pledgor"), in favor of
FIRST BANK TEXAS, N.A., as Administrative Agent (in such capacity, "Secured
Party") for the ratable benefit of itself, and each other Lender a party to the
Credit Agreement described below.
1. AGREEMENT.
(a) Pledge. Upon the terms hereof, for value received, Pledgor hereby
irrevocably and unconditionally pledges, assigns, hypothecates and transfers to
Secured Party, for the ratable benefit of itself, the other Lenders a party to
the Credit Agreement, a first and prior pledge and security interest in (1) all
membership, limited liability company, limited partnership and other ownership
interests of (i) Hallwood Realty, LLC, a Delaware limited liability company
("Hallwood Realty"), now or hereafter owned beneficially or of record by
Pledgor, including, without limitation, the ownership interests described on
Exhibit A attached hereto (together with any certificate or instrument
evidencing such interest), (ii) Hallwood Commercial Real Estate, LLC, a Delaware
limited liability company ("HCRE"), now or hereafter owned beneficially or of
record by Pledgor, including, without limitation, the ownership interests
described on Exhibit A attached hereto (together with any certificate or
instrument evidencing such interest), and (iii) Hallwood Realty Partners, L.P.,
a Delaware limited partnership ("HRY"; and together with Hallwood Realty and
HCRE, collectively referred to herein as the "Companies" and individually as a
"Company"), owned beneficially or of record by Pledgor, and described on Exhibit
A attached hereto (together with any certificate or instrument evidencing such
interest) (all of the foregoing being referred to herein as the "Pledged
Equity"), (2) any and all proceeds or other sums arising from or by virtue of,
and all dividends and distributions (cash or otherwise) payable and/or
distributable with respect to, all or any of the Pledged Equity, and all cash,
securities, dividends and other property at any time and from time to time
receivable or otherwise distributed in respect of or in exchange for any or all
of the Pledged Equity and any other property substituted or exchanged therefor
(all of the foregoing described in clauses (1), (2) and (3) being collectively
referred to herein as the "Collateral"). Unless otherwise defined in this
Agreement, terms used herein shall have the meanings set forth in the Credit
Agreement, dated as of December 21, 1999, among Pledgor, The Hallwood Group
Incorporated, a Delaware corporation ("Parent"), Secured Party, and the Lenders
(such agreement, together with all amendments, modifications and restatements,
including, without limitation, those that increase the amount of indebtedness
thereunder, being referred to herein as the "Credit Agreement"). Notwithstanding
any contrary provision in this Agreement, however, the pledge hereunder is
limited to the extent, if any, required so that such pledge is not subject to
avoidance under applicable bankruptcy or other debtor relief laws.
2. OBLIGATIONS.
(a) Description of Obligation. The following obligations (collectively,
the "Obligations") are secured by this Agreement:
(1) All debt, obligations, liabilities and agreements
of any nature of Pledgor and Parent to Secured Party and each Lender,
whether matured or unmatured, fixed or contingent, including all future
advances, now or hereafter existing, arising pursuant to or in
connection with (A) this Agreement; (B) the Credit Agreement; (C) all
other Financing Documents; and (D) all amendments, modifications,
renewals, extensions, increases, substitutions or rearrangements of any
of the foregoing.
1
<PAGE> 105
(b) All costs incurred by Secured Party to obtain, preserve, perfect
and enforce this Agreement, the other Financing Documents, and the pledge and
security interest granted hereby, collect the Obligations, and maintain,
preserve, collect and enforce the Collateral, including, without limitation,
taxes, assessments, attorneys' fees and legal expenses, and expenses of sale.
(c) Interest on the above amounts as agreed to by Pledgor under the
Financing Documents, including, without limitation, interest, fees and other
charges that would accrue or become owing both prior to and subsequent to and
but for the commencement of any proceeding against or with respect to Pledgor
under any chapter of the Bankruptcy Code of 1978, 11 U.S.C. Section 101 et seq.
whether or not a claim is allowed for the same in any such proceeding.
3. COVENANTS, REPRESENTATIONS AND WARRANTIES.
(a) Representations and Warranties.
(1) Representations and Warranties Concerning
Pledgor. Pledgor represents and warrants that (A) the chief place of
business and chief executive office of Pledgor and the office where
Pledgor keeps all of its records is located at 3710 Rawlins, Suite
1500, Dallas, Texas 75219; (B) no consent of any other Person and no
authorization, approval or other action by, and no notice to or filing
with, any Governmental Authority is required (i) for the pledge by
Pledgor of the Collateral pledged by it hereunder, for the grant by
Pledgor of the security interest granted hereby or for the execution,
delivery or performance of this Agreement by Pledgor, (ii) for the
perfection or maintenance of the pledge, assignment and security
interest created hereby (including the first priority nature of such
pledge, assignment and security interest), or (iii) for the exercise by
Secured Party of the rights provided for in this Agreement or the
remedies in respect of the Collateral pursuant to this Agreement; (C)
Pledgor possesses all material licenses and permits, required for its
ownership of the Collateral and the operations of its business; (D)
Pledgor is not, nor will the execution, delivery and performance and
compliance with the terms of this Agreement cause Pledgor to be in
violation of any applicable material law or in default (nor has any
event occurred which, with notice or lapse of time or both, could
constitute a default) under any debt or other contractual obligation of
Pledgor; (E) except as disclosed in the Credit Agreement, there is no
litigation, arbitration or other proceeding pending or threatened
against or affecting Pledgor or its assets or properties; and (F)
Pledgor has full power, authority and legal right to execute, deliver
and perform this Agreement.
(2) Representations and Warranties Concerning the
Collateral. Pledgor represents and warrants that (A) the ownership
interests pledged hereunder are duly authorized, validly issued, fully
paid and nonassessable; (B) Pledgor is the sole legal and beneficial
owner of the Collateral pledged by it and the pledge, assignment and
delivery of the Collateral create a valid first and prior perfected
security interest in the Collateral and no other security agreement
covering the Collateral, or any part thereof, has been made, and no
pledge or security interest, other than the one herein created, has
attached or been perfected in the Collateral or in any part thereof;
and (C) no dispute, right of setoff, counterclaim or defense exists
with respect to any part of the Collateral. The delivery at any time by
Pledgor to Secured Party of Collateral shall constitute a
representation and warranty by Pledgor under this Agreement that, (i)
with respect to such Collateral, and each item thereof, Pledgor is the
sole legal and beneficial owner of, with good title to, the Collateral,
and (ii) the matters warranted in this paragraph are true and correct.
(b) Covenants.
(1) Affirmative Covenants. Pledgor covenants and
agrees (A) promptly to deliver to Secured Party all instruments,
certificates, documents or agreements evidencing any of the
2
<PAGE> 106
Collateral; (B) from time to time promptly to execute and deliver to
Secured Party all such other assignments, certificates, supplemental
writings and financing statements, and do all other acts or things, as
Secured Party or any Lender may reasonably request in order more fully
to evidence and perfect the security interest and pledge herein created
or to effect the purposes of this Agreement; (C) promptly to furnish
Secured Party with any information or writings which Secured Party or
any Lender may reasonably request concerning the Collateral; (D) to
allow Secured Party or any Lender to inspect all records of Pledgor
relating to the Collateral, and to make and take away copies of such
records, at Pledgor's expense, at such reasonable times and as often as
may be reasonably requested by Secured Party or such Lender; (E)
promptly to notify Secured Party of any change in any fact or
circumstances warranted or represented by Pledgor in this Agreement or
in any other writings furnished by or on behalf of Pledgor to Secured
Party or any Lender in connection with the Collateral; (F) promptly to
notify Secured Party of any claim, action or proceeding affecting title
to the Collateral, or any part thereof, or the security interest
therein, and, at the request of Secured Party, appear in and defend, at
Pledgor's expense, any such action or proceeding; and (G) promptly to
pay to Secured Party the amount of all costs and attorneys' fees
incurred by Secured Party and each Lender hereunder or in connection
with the enforcement hereof.
(2) Negative Covenants. Except as otherwise provided
in the Credit Agreement, Pledgor covenants and agrees that Pledgor will
not (A) sell, assign or transfer any of Pledgor's rights in the
Collateral; (B) create any other security interest or pledge in,
mortgage or otherwise encumber the Collateral or any part thereof, or
permit the same to be or become subject to any Lien, attachment,
execution, sequestration, other legal or equitable process, or any
encumbrance of any kind or character, except for Liens permitted by
Section 7.3 of the Credit Agreement; (C) cause, permit, or suffer the
Companies to take any action that would dilute any of the Collateral,
including issuance of any ownership interests which is not pledged to
Secured Party; or (D) approve any amendment to the articles of
organization, certificate of formation, operating agreement,
partnership agreement or other organizational documents of any of the
Companies (other than ministerial amendments which would not adversely
affect the rights of Secured Party or the Lenders hereunder).
Notwithstanding anything to the contrary contained herein, in the event
of any conflict between the terms and provisions of this Section 3.(b)
and the terms and provisions of Article 6 or Article 7 of the Credit
Agreement, the terms and provisions of Article 6 and/or Article 7 shall
control.
4. RIGHTS OF SECURED PARTY.
(a) Rights to Dividends, Distributions, and Payments. With
respect to such instruments which are certificates, bonds or other securities,
Secured Party may demand of the obligor issuing the same, and may receive and
receipt for, any and all dividends and other distributions (other than cash
dividends) payable in respect thereof, whether ordinary or extraordinary.
Secured Party shall have the authority, following the occurrence and during the
continuance of an Event of Default and without notice to Pledgor, to have such
certificates, bonds or other securities registered either in Secured Party's
name or in the name of a nominee. If, while this Agreement is in effect, Pledgor
shall become entitled to receive or shall receive any certificate (including,
without limitation, any certificate representing a stock or ownership interest
dividend or a distribution in connection with any reclassification, increase or
reduction of capital, or issued in connection with any reorganization), option
or rights, whether as an addition to, in substitution of, as a conversion of or
in exchange for any of the Collateral, or otherwise, Pledgor agrees to accept
the same as Secured Party's agent and to hold the same in trust on behalf of and
for the benefit of Secured Party, and to deliver the same forthwith to Secured
Party in the exact form received, with appropriate undated stock powers, duly
executed in blank, to be held by Secured Party, subject to the terms hereof, as
additional collateral security for the Obligations. Until and unless an Event of
Default shall have occurred and be continuing, Pledgor shall be entitled to
receive and utilize all cash dividends, principal, and interest paid in
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respect of the Collateral. After the occurrence and during the continuance of an
Event of Default, Secured Party shall be entitled to all cash dividends and to
any sums paid upon or in respect of the Collateral upon the liquidation,
dissolution or reorganization of the issuer thereof which shall be paid to
Secured Party to be held by it as additional collateral security for the
Obligations. In case any distribution shall be made on or in respect of the
Collateral pursuant to the reorganization, liquidation or dissolution of the
issuer thereof, the property so distributed shall be delivered to Secured Party
to be held by it as additional collateral security for the Obligations. After
the occurrence and during the continuance of an Event of Default, all sums of
money and property so paid or distributed in respect of the Collateral (other
than proceeds of any liquidation or similar proceeding) which are received by
Pledgor shall, until paid or delivered to Secured Party, be held by Pledgor in
trust as additional Collateral for the Obligations.
(b) Preservation of Collateral. Neither Secured Party nor any
Lender shall have any duty to fix or preserve rights against prior parties to
the Collateral, nor be liable for any delay in the collection of, or failure to
use diligence to collect on, the Obligations or any amount payable in respect of
the Collateral.
(c) Performance by Secured Party. Should any covenant, duty or
agreement of Pledgor fail to be performed in accordance with its terms
hereunder, Secured Party may, but shall never be obligated to, perform or
attempt to perform such covenant, duty or agreement on behalf of Pledgor, and
any amount expended by Secured Party in such performance or attempted
performance shall become a part of the Obligations, shall be payable upon demand
and shall bear interest at a per annum rate equal to the lesser of the Highest
Lawful Rate or the sum of the Fixed Rate plus two percent.
(d) Voting Rights. It is expressly understood and agreed that
Pledgor shall retain all voting rights to the Collateral until the occurrence
and during the continuance of an Event of Default, at which time such voting
rights for purposes of collateral preservation shall transfer to Secured Party,
at its sole discretion and in accordance with Paragraph 4(e) hereof; provided,
however, that no voting, partnership, corporate or management rights shall be
exercised or vote cast or consent, waiver or ratification given or action taken
by Pledgor that would impair the Collateral or be inconsistent with or violate
any provision of this Agreement or any other Financing Documents.
(e) POWER OF ATTORNEY. PLEDGOR HEREBY IRREVOCABLY GRANTS TO
SECURED PARTY PLEDGOR'S PROXY (EXERCISABLE FROM AND AFTER THE OCCURRENCE AND
DURING THE CONTINUANCE OF AN EVENT OF DEFAULT WHICH IS CONTINUING) TO VOTE ANY
COLLATERAL AND APPOINTS SECURED PARTY PLEDGOR'S ATTORNEY-IN-FACT TO PERFORM ALL
OBLIGATIONS OF PLEDGOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF SECURED
PARTY'S RIGHTS HEREUNDER. THE PROXY AND POWER OF ATTORNEY HEREIN GRANTED, AND
EACH STOCK POWER AND SIMILAR POWER NOW OR HEREAFTER GRANTED (INCLUDING ANY
EVIDENCED BY A SEPARATE WRITING) ARE COUPLED WITH AN INTEREST AND ARE
IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF THE OBLIGATIONS.
5. DEFAULT.
(a) Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, in addition to any and all other rights and
remedies which Secured Party or any Lender may then have hereunder, under any
other Financing Documents, under applicable law or otherwise, Secured Party at
its option may, subject to any limitation or restriction imposed by any
applicable bankruptcy, insolvency or other law relating to the relief of
debtors, (1) obtain from any Person information regarding Pledgor, any issuer of
the Collateral, or any of their businesses, which information any such Person
may furnish without liability to Pledgor; (2) require Pledgor to give possession
or control of any of the Collateral to Secured Party; (3) unless earlier
permitted hereunder, take control of funds generated by the Collateral and any
other
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proceeds and exercise all other rights which an owner of such Collateral may
exercise; (4) declare the entire unpaid balance of principal and interest on the
Obligations immediately due and payable, without notice, demand or presentment,
which are hereby expressly waived; (5) reduce its claim to judgment, foreclose
or otherwise enforce its security interest in all or any part of the Collateral
by any available judicial procedure; (6) after notification, if any, provided
for in this Agreement or any other Financing Documents, sell or otherwise
dispose of, at the office of Secured Party, all or any part of the Collateral,
and any such sale or other disposition shall be in accordance with applicable
law, and may be as a unit or in parcels, by public or private proceedings, and
by way of one or more contracts (it being agreed that the sale of any part of
the Collateral shall not exhaust Secured Party's power of sale, but sales may be
made from time to time until all of the Collateral has been sold or until the
Obligations have been paid in full), and at any such sale it shall not be
necessary to exhibit the Collateral; (7) at its discretion, retain the
Collateral in satisfaction of the Obligations whenever the circumstances are
such that Secured Party is entitled to do so under applicable law; (8) apply by
appropriate judicial proceedings for appointment of a receiver for the
Collateral, or any part hereof, and Pledgor hereby consents to any appointment;
(9) buy the Collateral at any public sale; and (10) buy the Collateral at any
private sale, subject to any restrictions imposed by applicable law. Any Lender
may buy the Collateral at any public sale and buy the Collateral at any private
sale, subject to the restrictions imposed by applicable law. Pledgor agrees
that, if notice is required to be given by applicable law, 10 days' advance
written notice shall constitute reasonable notice. Secured Party shall apply the
proceeds of any collection, sale, disposition or other realization upon any
Collateral as follows:
First, to the payment of the costs and expenses of such
collection, sale, disposition, or other realization, including
reasonable out-of-pocket costs and expenses of Secured Party
and the fees and expenses of its agents and counsel;
Next, to the payment of the Obligations, as provided in the
Credit Agreement and in such order and in such manner
consistent with applicable laws as Secured Party in its
discretion shall decide; and
Finally, to the payment to Pledgor, or its successors or
assigns, or as a court of competent jurisdiction may direct,
of any surplus then remaining.
If the proceeds of collection, sale, disposition, or other realization
are insufficient to cover the costs and expenses of such realization
and the payment in full of the Obligations, Pledgor shall remain liable
for any deficiency.
(b) Securities Laws; Transfer.
(1) Immediately upon the occurrence and during the continuance
of an Event of Default, Pledgor hereby grants to Secured Party the
right to have the Collateral, or any portion thereof, registered and
sold under the Securities Act of 1933, as amended ("Securities Act"),
or under any applicable state blue sky laws. If Secured Party shall
determine to exercise its right to sell any or all of the Collateral
pursuant to the terms hereof, and if in the reasonable opinion of
Secured Party it is necessary or advisable to have the Collateral (or
that portion thereof to be sold) registered under the provisions of the
Securities Act, Pledgor will cause the issuer of the Collateral to
execute and deliver, and cause the directors and officers thereof to
execute and deliver, all at Pledgor's and/or such issuer's expense, all
such instruments and documents, and to do or cause to be done all such
other acts and things as may be necessary or, in the opinion of Secured
Party, advisable to register such Collateral under the provisions of
the Securities Act and to cause the registration statement relating
thereto to become effective and to remain effective for a period of one
year from the date of the first public offering of such Collateral, or
that portion thereof to be sold, and to make all amendments thereto
and/or to the related prospectus which, in the opinion of Secured
Party, are
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necessary or advisable, all in conformity with the requirements of
applicable law. Pledgor agrees to cause the issuer of the Collateral to
comply with the provisions of the securities or "blue sky" laws of any
jurisdiction which Secured Party shall designate and to cause the
issuer of the Collateral to make available to its security holders, as
soon as practicable, an earnings statement which will satisfy the
provisions of Section 11(a) of the Securities Act.
(2) Pledgor recognizes that Secured Party may be unable to
effect a public sale of any or all of the Collateral by reason of
certain prohibitions contained in the Securities Act and applicable
state securities laws, but may be compelled to resort to one or more
private sales thereof to a restricted group of purchasers who will be
obliged to agree, among other things, to acquire such Collateral for
their own account for investment and not with a view to the
distribution or resale thereof. Pledgor acknowledges and agrees that
any such private sale conducted in the manner described herein may
result in prices and other terms less favorable to the seller than if
such sale were a public sale and, notwithstanding such circumstances,
agrees that any private sale shall be made in a commercially reasonable
manner. Secured Party shall be under no obligation to delay a sale of
any of the Collateral for the period of time necessary to permit the
issuer of the Collateral to register such Collateral for public sale
under the Securities Act, or under applicable state securities laws,
even if the issuer of the Collateral would agree to do so.
(3) Pledgor further agrees to do or cause to be done all such
other acts and things as may be necessary to make any sales of any
portion or all of the Collateral pursuant to paragraphs (b)(1)(a) and
(b)(2)(b) of this Section 5 valid and binding and in compliance with
any and all applicable laws (including, without limitation, the
Securities Exchange Act of 1933, as amended, and the rules and
regulations of the Securities and Exchange Commission applicable
thereto), regulations, orders, writs, injunctions, decrees or awards of
any and all courts, arbitrators or governmental instrumentalities,
domestic or foreign, having jurisdiction over any such sale or sales,
all at Pledgor's expense. Pledgor further agrees that a breach of any
of the covenants contained in this Section 5 will cause irreparable
injury to Secured Party and the Lenders and that Secured Party and
Lenders may not have an adequate remedy at law in respect of such
breach. As a consequence, Pledgor agrees that each and every covenant
contained in this Section shall be specifically enforceable against
Pledgor. To the extent permitted by applicable law, Pledgor hereby
waives and agrees not to assert any defenses against an action for
specific performance of such covenants.
(4) Pledgor agrees (A) that in the event Secured Party shall,
upon any Event of Default, sell the Collateral or any portion thereof,
at a private sale or sales, Secured Party shall have the right to rely
upon the advice and opinion of a member of a nationally recognized
investment banking firm acceptable to Secured Party, as to the best
price reasonably obtainable upon such a private sale thereof, and (B)
in the absence of fraud, wilful misconduct and gross negligence, that
such reliance shall be conclusive evidence that Secured Party handled
such matter in a commercially reasonable manner under the UCC.
(c) Governmental Approvals. In connection with the exercise by Secured
Party of its rights hereunder, it may be necessary to obtain the prior consent
or approval of a Governmental Authority or other Persons to the exercise of
rights with respect to the Collateral, and any representations and warranties
made by Pledgor herein shall be deemed appropriately amended to reflect this
fact. Pledgor hereby agrees to execute, deliver and file, and hereby appoints
(to the extent permitted under applicable law) Secured Party as its attorney to
execute, deliver and file on Pledgor's behalf and in Pledgor's name, all
applications, certificates, filings, instruments and other documents (including
without limitation any application for an assignment or transfer of control or
ownership) that may be necessary or appropriate, in Secured Party's opinion, to
obtain such consents or approvals. Pledgor further agrees to use its best
efforts to obtain such consents or approvals. Pledgor acknowledges that there is
no adequate remedy at law for failure by it to
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comply with the provisions of this Section and that such failure would not be
adequately compensable in damages, and therefore agrees that Pledgor's efforts
to obtain any approval required by this Section may be specifically enforced.
(d) Notice. Notification of the time and place of any public sale of
the Collateral, or reasonable notification of the time after which any private
sale or other intended disposition of the Collateral is to be made, shall be
sent to Pledgor and to any other Person entitled under applicable law to notice.
6. GENERAL.
(a) Secured Party's Duties. The Lenders hereby appoint Secured Party to
act as their agent as provided herein. In the event Secured Party is replaced
pursuant to Section 9.9 of the Credit Agreement, the successor Secured Party
appointed in accordance with Section 9.9 of the Credit Agreement shall be
Secured Party hereunder. The powers conferred on Secured Party hereunder are
solely to protect the Lenders' interest in the Collateral and shall not impose
any duty upon it to exercise any such powers. Except for the safe custody of any
Collateral in its possession and the accounting for moneys actually received by
it hereunder, Secured Party shall have no duty as to any Collateral, as to
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders, or other matters relative to any Collateral, whether or not
Secured Party or any Lender has or is deemed to have knowledge of such matters,
or as to the taking of any necessary steps to preserve rights against prior
parties or any other rights pertaining to any reasonable care in the custody and
preservation of any Collateral in its possession if such Collateral is accorded
treatment substantially equal to that which Secured Party accords its own
property. Except as set forth herein Secured Party shall not have any duty or
liability to protect or preserve any Collateral or to preserve rights pertaining
thereto. Nothing contained in this Agreement shall be construed as requiring or
obligating Secured Party, and Secured Party shall not be required or obligated,
(1) to present or file any claim or notice or take any action, with respect to
any Collateral or in connection therewith or (2) to notify Pledgor of any
decline in the value of any Collateral.
(b) Cumulative Rights. All rights and remedies of Secured Party
hereunder are cumulative of each other and of every other right or remedy which
Secured Party may otherwise have at law or in equity or under any other contract
or other writing for the enforcement of the security interest herein or the
collection of the Obligations, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
(c) Waiver. Should any part of the Obligations be payable in
installments, the acceptance by any Lender at any time and from time to time of
partial payment of the aggregate amount of all installments then matured shall
not be deemed as a waiver of any Event of Default then existing. No waiver by
Secured Party or any Lender of any Event of Default shall be deemed to be a
waiver of any other subsequent Event of Default, nor shall any such waiver by
Secured Party or any Lender be deemed to be a continuing waiver. No delay or
omission by Secured Party or any Lender in exercising any right or power
hereunder, or under any other Financing Documents, shall impair any such right
or power or be construed as a waiver thereof or an acquiescence therein, nor
shall any single or partial exercise of any such right or power preclude other
or further exercise thereof, or the exercise of any other right or power of
Secured Party or any Lender hereunder or under such other writings.
(d) Interest; Limitation of Law. No provision herein or in any
Financing Documents shall require the payment or permit the collection of
interest in excess of the maximum permitted by applicable law. If, in any
contingency whatsoever, Secured Party or any Lender shall receive anything of
value from Pledgor deemed interest under applicable law which would exceed the
maximum amount of interest permissible under applicable law, the provisions of
the Credit Agreement shall govern.
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(e) Parties Bound. This Agreement shall be binding on Pledgor and its
successors, assigns and legal and personal representatives, administrators,
executors, beneficiaries and heirs and shall inure to the benefit of Secured
Party and the Lenders, and their successors, assigns and legal representatives;
provided, however, that Pledgor may not assign its rights or obligations
hereunder without the prior written consent of Secured Party. The rights, powers
and interests held by Secured Party hereunder may be transferred and assigned by
Secured Party, in whole or in part, at such time and upon such terms as
permitted by the Credit Agreement.
(f) Notice. All notices, requests and other communications to any party
hereunder shall be in writing (including, telecopy or similar teletransmission
or writing) and shall be given to such party at its address or telecopy number
set forth on the signature pages hereof or such other address or telecopy number
as such party may hereafter specify by notice to the other party. Each such
notice, request or other communication shall be effective (1) if given by mail,
72 hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid, or (2) if given by any other means
(including, but not limited to, by air courier), when delivered at the address
specified in this Section 6(f); provided that notices to Secured Party shall not
be effective until actually and physically received.
(g) Waivers by Pledgor. Pledgor waives notices of the creation,
advance, increase, existence, extension or renewal of, and of any indulgence
with respect to, the Obligations; waives presentment, demand, notice of dishonor
and protest; waives notice of the amount of the Obligations outstanding at any
time, notice of any change in financial condition of any Person liable for the
Obligations or any part thereof, notice of any Event of Default and all other
notices respecting the Obligations; waives all rights of redemption, appraisal,
or valuation; and agrees that maturity of the Obligations and any part thereof
may be accelerated, increased, extended or renewed one or more times by the
Lenders in their discretion, without notice to Pledgor.
(h) Modifications. No provision hereof shall be modified or limited
except by a written agreement expressly referring hereto and to the provisions
so modified or limited and signed by Secured Party, nor by course of conduct,
usage of trade or mercantile law.
(i) Control. Notwithstanding anything herein to the contrary, this
Agreement and the transactions contemplated hereby do not and will not
constitute, create, or have the effect of constituting or creating, directly or
indirectly, actual or practical ownership of Pledgor or the issuer of the
Collateral by Secured Party, or control, affirmative or negative, direct or
indirect, by Secured Party or the Lenders, over the management or any aspect of
the day-to-day operation of Pledgor or the issuer of the Collateral, which
control remains in Pledgor, the issuer of the Collateral, and their respective
shareholders and boards of directors.
(j) GOVERNING LAW; SUBMISSION TO JURISDICTION; ETC.
(1) GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAWS OF THE STATE OF TEXAS AND, TO THE EXTENT CONTROLLING, LAWS OF THE UNITED
STATES OF AMERICA.
(2) SUBMISSION TO JURISDICTION. ANY LEGAL ACTION OR PROCEEDING WITH
RESPECT TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR
OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, PLEDGOR HEREBY ACCEPTS FOR ITSELF AND
IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF
THE AFORESAID COURTS. PLEDGOR
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HEREBY IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, BUT NOT LIMITED TO, ANY
OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH
ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.
(3) WAIVER OF JURY TRIAL AND CONSEQUENTIAL DAMAGES. TO THE MAXIMUM
EXTENT ALLOWED BY APPLICABLE LAW, EACH OF PLEDGOR AND SECURED PARTY (I)
IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT OR ANY FINANCING DOCUMENT AND FOR ANY
COUNTERCLAIM THEREIN, (II) IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR
RECOVER IN ANY SUCH LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL
DAMAGES, OR DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; (III)
CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE 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 WAIVER; AND (IV)
ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED HEREBY BASED UPON, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.
(4) Designation of Process Agent. CT Corporation System, with an office
on the date hereof at 350 N. St. Paul, Suite 2900, Dallas, Texas 75201, is the
designee, appointee and process agent of Pledgor designated to receive, for and
on behalf of Pledgor, service of process in such respective jurisdictions in any
legal action or proceeding with respect to this Agreement. It is understood that
a copy of such process served on such agent will be promptly forwarded by mail
to Pledgor at its address set forth opposite its signature below, but the
failure of Pledgor to receive such copy shall not affect in any way the service
of such process. Pledgor further irrevocably consents to the service of process
of any of the aforementioned courts in any such action or proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
Pledgor at its said address, such service to become effective 30 days after such
mailing.
(5) Service of Process. Nothing herein shall affect the right of
Secured Party or any Lender or any holder of a Term Note to serve process in any
other manner permitted by law or to commence legal proceedings or otherwise
proceed against Pledgor in any other jurisdiction.
(k) ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE OTHER FINANCING
DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR,CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
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IN WITNESS WHEREOF, Pledgor has executed this Agreement as of the date
first above written.
HWG LLC
By:
---------------------------------------
William L. Guzzetti,
President
Address of Pledgor:
HWG LLC 3710 Rawlins, Suite 1500
Dallas, Texas 75219
Telephone: 214-528-5588
Telecopy: 214-528-8855
FIRST BANK TEXAS, N.A., as Administrative
Agent and as Secured Party
By:
---------------------------------------
Alan Cott,
Senior Vice President
Address of Secured Party:
FIRST BANK TEXAS, N.A.
8820 Westheimer
Houston, Texas 77063
Telephone:(713) 954-2486
Telecopy: (713) 954-2472
[Signature Page]
<PAGE> 114
EXHIBIT A
Entity Certificate No. Record Owner Number of Interests
------ --------------- ----------- -------------------
Hallwood Realty
Partners, L.P. HRP 29410 HWG LLC 211,128 limited
partnership units
Hallwood Realty
Partners, L.P. HRP 20018 HWG LLC 17,440 limited partnership
units
Hallwood Realty
Partners, L.P. HRP 20019 HWG LLC 71,829 limited partnership
units
Hallwood Commercial
Real Estate, LLC N/A HWG LLC 100% of all outstanding
limited partnership
interests
Hallwood Realty, LLC N/A HWG LLC 100% of all outstanding
general partnership
interests
A-1
<PAGE> 115
GUARANTY
THIS GUARANTY (this "Guaranty") is executed and effective as of the
21st day of December, 1999, by THE HALLWOOD GROUP INCORPORATED, a Delaware
corporation ("Guarantor"), in favor of FIRST BANK TEXAS, N. A. and the other
financial institutions a party to the Credit Agreement (as hereinafter defined)
(First Bank Texas, N.A. and such other financial institutions are collectively
referred to herein as "Noteholders").
W I T N E S S E T H:
WHEREAS, HWG LLC, a Delaware limited liability company ("Borrower"),
Guarantor, Noteholders and First Bank Texas, N.A., as Administrative Agent
("Administrative Agent") are parties to that certain Credit Agreement (as now or
hereafter amended, the "Credit Agreement") dated as of December 21, 1999,
pursuant to which Noteholders have agreed to make a term loan to Borrower
(unless otherwise defined herein, or unless the context otherwise requires, each
term used herein with its initial letter capitalized shall have the meaning
given such terms in the Credit Agreement); and
WHEREAS, Noteholders have required, as a condition to the extension of
credit under the Credit Agreement, that Guarantor execute and deliver this
Guaranty; and
WHEREAS, Guarantor has determined that valuable benefits will be
derived by it as a result of the Credit Agreement and the extension of credit
made by Noteholders thereunder; and
WHEREAS, Guarantor has further determined that the benefits accruing to
it from the Credit Agreement exceed Guarantor's anticipated liability under this
Guaranty.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged and confessed, Guarantor hereby covenants and
agrees as follows:
1. Guarantor hereby absolutely and unconditionally guarantees the
prompt, complete and full payment when due, no matter how such shall become due,
of the Lender Indebtedness, and further guarantees that Borrower will properly
and timely perform its obligations under the Credit Agreement.
2. If Guarantor is or becomes liable for any indebtedness owing by
Borrower to Noteholders by endorsement or otherwise than under this Guaranty,
such liability shall not be in any manner impaired or affected hereby, and the
rights of Noteholders hereunder shall be cumulative of any and all other rights
that Noteholders may ever have against Guarantor. The exercise by Noteholders of
any right or remedy hereunder or under any other instrument, at law or in
equity, shall not preclude the concurrent or subsequent exercise of any other
right or remedy.
3. In the event of default by Borrower in payment of the Lender
Indebtedness, or any part thereof, when such Lender Indebtedness, or any part
thereof, becomes due, either by its terms or as the result of the exercise of
any power to accelerate, Guarantor shall, on demand, and without
<PAGE> 116
further notice of dishonor and without any notice having been given to Guarantor
previous to such demand of the acceptance by Noteholders of this Guaranty, and
without any notice having been given to Guarantor previous to such demand of the
creating or incurring of such Lender Indebtedness, pay the amount due thereon to
Noteholders at Administrative Agent's office as set forth in the Credit
Agreement, and it shall not be necessary for any Noteholder, in order to enforce
such payment by Guarantor, first, to institute suit or exhaust its remedies
against Borrower or others liable on such Lender Indebtedness, to have Borrower
joined with Guarantor in any suit brought under this Guaranty or to enforce
their rights against any security which shall ever have been given to secure
such indebtedness; provided, however, that in the event Noteholders elect to
enforce and/or exercise any remedies they may possess with respect to any
security for the Lender Indebtedness prior to demanding payment from Guarantor,
Guarantor shall nevertheless be obligated hereunder for any and all sums still
owing Noteholders on the Lender Indebtedness and not repaid or recovered
incident to the exercise of such remedies.
4. Notice to Guarantor of the acceptance of this Guaranty and of the
making, renewing or assignment of the Lender Indebtedness and each item thereof,
are hereby expressly waived by Guarantor.
5. Each payment on the Lender Indebtedness shall be deemed to have been
made by Borrower unless express written notice is given to Administrative Agent
at the time of such payment that such payment is made by Guarantor as specified
in such notice.
6. If all or any part of the Lender Indebtedness at any time be
secured, Guarantor agrees that Noteholders may at any time and from time to
time, at their discretion and with or without valuable consideration, allow
substitution or withdrawal of collateral or other security and release
collateral or other security or compromise or settle any amount due or owing
under the Credit Agreement or amend or modify in whole or in part the Credit
Agreement or any Financing Documents executed in connection with same without
impairing or diminishing the obligations of Guarantor hereunder. Guarantor
further agrees that if Borrower executes in favor of Noteholders any collateral
agreement, mortgage or other security instrument, the exercise by Noteholders of
any right or remedy thereby conferred on Noteholders shall be wholly
discretionary with Noteholders, and that the exercise or failure to exercise any
such right or remedy shall in no way impair or diminish the obligations of
Guarantor hereunder. Guarantor further agrees that Noteholders and
Administrative Agent shall not be liable for their failure to use diligence in
the collection of the Lender Indebtedness or in preserving the liability of any
Person liable for the Lender Indebtedness, and Guarantor hereby waives
presentment for payment, notice of nonpayment, protest and notice thereof
(including, notice of acceleration), and diligence in bringing suits against any
Person liable on the Lender Indebtedness, or any part thereof.
7. Guarantor agrees that Noteholders, in their discretion, may (i)
bring suit against all guarantors (including, without limitation, Guarantor
hereunder) of the Lender Indebtedness jointly and severally or against any one
or more of them, (ii) compound or settle with any one or more of such guarantors
for such consideration as Noteholders may deem proper, and (iii) release one or
more of such guarantors from liability hereunder, and that no such action shall
impair the rights of Noteholders to collect the Lender Indebtedness (or the
unpaid balance thereof) from other such guarantors of the Lender Indebtedness,
or any of them, not so sued, settled with or released. Guarantor agrees,
however, that nothing contained in this Paragraph 7, and no action by
Noteholders
2
<PAGE> 117
permitted under this Paragraph 7, shall in any way affect or impair the rights
or obligations of such guarantors among themselves.
8. Guarantor represents and warrants to Noteholders that (i) Guarantor
is a corporation duly incorporated and validly existing under the laws of the
State of Delaware; (ii) Guarantor possesses all requisite authority and power to
authorize, execute, deliver and comply with the terms of this Guaranty; this
Guaranty has been duly authorized and approved by all necessary action on the
part of Guarantor and constitutes a valid and binding obligation of Guarantor
enforceable in accordance with its terms, except as the enforcement thereof may
be limited by applicable Debtor Relief Laws (as hereinafter defined); and no
approval or consent of any court or governmental entity is required for the
authorization, execution, delivery or compliance with this Guaranty which has
not been obtained (and copies thereof delivered to Noteholders); and (iii)
Guarantor is neither involved in, nor aware of the threat of, any litigation
which, in the event of an outcome unfavorable to Guarantor, could have a
material adverse effect on the financial position, business operations, or
prospects of Guarantor, nor are there any outstanding or unpaid judgments
against Guarantor. As used herein, the term "Debtor Relief Laws" means the
Bankruptcy Code of the United States of America and all other applicable
liquidation, conservatorship, bankruptcy, moratorium, rearrangement,
receivership, insolvency, reorganization, suspension of payments, or similar
debtor relief laws from time to time in effect affecting the rights of creditors
generally.
9. This Guaranty is for the benefit of Noteholders, their successors
and assigns, and in the event of an assignment by Noteholders (or their
successors or assigns) of the Lender Indebtedness, or any part thereof, the
rights and benefits hereunder, to the extent applicable to the Lender
Indebtedness so assigned, may be transferred with such Lender Indebtedness.
Subject to the preceding paragraph hereof, this Guaranty is binding, not only on
Guarantor, but on the successors and assigns of Guarantor.
10. No modification, consent, amendment or waiver of any provision of
this Guaranty, nor consent to any departure by Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by the Required Lenders
(or all Lenders as required by the Credit Agreement), and then shall be
effective only in the specific instance and for the purpose for which given. No
notice to or demand on Guarantor in any case shall, of itself, entitle Guarantor
to any other or further notice or demand in similar or other circumstances. No
delay or omission by Noteholders in exercising any power or right hereunder
shall impair any such right or power or be construed as a waiver thereof or any
acquiescence therein, nor shall any single or partial exercise of any such power
preclude other or further exercise thereof, or the exercise of any other right
or power hereunder. All rights and remedies of Noteholders hereunder are
cumulative of each other and of every other right or remedy which Noteholders
may otherwise have at law or in equity or under any other contract or document,
and the exercise of one or more rights or remedies shall not prejudice or impair
the concurrent or subsequent exercise of other rights or remedies.
11. No provision herein or in any promissory note, instrument or any
other Financing Document executed by Borrower or Guarantor evidencing the Lender
Indebtedness shall require the payment or permit the collection of interest in
excess of the maximum permitted by law. If any excess of interest in such
respect is provided for herein or in any such promissory note, instrument, or
any other Financing Document, the provisions of this Paragraph 11 shall govern,
and neither Borrower nor Guarantor shall be obligated to pay the amount of such
interest to the extent that it is
3
<PAGE> 118
in excess of the amount permitted by law. The intention of the parties being to
conform strictly to any applicable federal or state usury laws now in force, all
promissory notes, instruments and other Financing Documents executed by Borrower
or Guarantor evidencing the Lender Indebtedness shall be held subject to
reduction to the amount allowed under said usury laws as now or hereafter
construed by the courts having jurisdiction.
12. If Guarantor should breach or fail to perform any provision of this
Guaranty, Guarantor agrees to pay Noteholders all costs and expenses (including
court costs and reasonable attorneys fees) incurred by Noteholders in the
enforcement hereof.
13. The liability of Guarantor under this Guaranty shall in no manner
be impaired, affected or released by the insolvency, bankruptcy, making of an
assignment for the benefit of creditors, arrangement, compensation, composition
or readjustment of Borrower, or any proceedings affecting the status, existence
or assets of Borrower or other similar proceedings instituted by or against
Borrower and affecting the assets of Borrower.
14. Guarantor understands and agrees that any amounts of Guarantor on
account with Noteholders may be offset to satisfy the obligations of Guarantor
hereunder.
15. Guarantor hereby subordinates and makes inferior any and all
indebtedness now or at any time hereafter owed by Borrower to Guarantor to the
Lender Indebtedness evidenced by the Credit Agreement and agrees after the
occurrence of a Default or Event of Default under the Credit Agreement, or any
event which with notice, lapse of time, or both, would constitute a Default or
Event of Default under the Credit Agreement, not to permit Borrower to repay, or
to accept payment from Borrower of, such indebtedness or any part thereof
without the prior written consent of Noteholders.
16. During the period that any amount payable under any Term Note
remains unpaid, and throughout any additional preferential period subsequent
thereto, Guarantor hereby waives any and all rights of subrogation to which
Guarantor may otherwise be entitled against Borrower, or any other guarantor of
the Lender Indebtedness, as a result of any payment made by Guarantor pursuant
to this Guaranty.
17. As of the date hereof the fair saleable value of the property of
Guarantor is greater than the total amount of liabilities (including contingent
and unliquidated liabilities) of Guarantor, and Guarantor is able to pay all of
its liabilities as such liabilities mature and Guarantor does not have
unreasonably small capital within the meaning of Section 548, Title 11, United
States Code, as amended. In computing the amount of contingent or liquidated
liabilities, such liabilities have been computed at the amount which, in light
of all the facts and circumstances existing as of the date hereof, represents
the amount that can reasonably be expected to become an actual or matured
liability.
18. If any provision of this Guaranty is held to be illegal, invalid,
or unenforceable, such provision shall be fully severable; this Guaranty shall
be construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part hereof; and the remaining provisions hereof
shall remain in full force and effect and shall not be affected by the illegal,
invalid, or unenforceable provision or by its severance herefrom. Furthermore,
in lieu of such illegal, invalid,
4
<PAGE> 119
or unenforceable provision there shall be added automatically as a part of this
Guaranty a provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible and be legal, valid and enforceable.
19. (a) Except to the extent required for the exercise of the
remedies provided in the other security instruments, Guarantor hereby
irrevocably submits to the nonexclusive jurisdiction of any Texas state or
federal court over any action or proceeding arising out of or relating to this
Guaranty or any other Financing Document, and Guarantor hereby irrevocably
agrees that all claims in respect of such action or proceeding may be heard and
determined in such Texas state or federal court. Guarantor hereby irrevocably
waives, to the fullest extent permitted by law, any objection which it may now
or hereafter have to the laying of venue of any litigation arising out of or in
connection with this Guaranty or any of the Financing Documents brought in
district courts of Harris County, Texas, or in the United States District Court
for the Southern District of Texas. Guarantor hereby irrevocably waives any
claim that any litigation brought in any such court has been brought in an
inconvenient forum. Guarantor hereby irrevocably consents to the service of
process out of any of the aforementioned courts in any such litigation by the
mailing of copies thereof by certified mail, return receipt requested, postage
prepaid, to Guarantor's office at 3710 Rawlins, Suite 1500, Dallas, Texas 75219.
Guarantor irrevocably agrees that any legal proceeding against Noteholders shall
be brought in the district courts of Harris County, Texas, or in the United
States District Court for the Southern District of Texas. Nothing herein shall
affect the right of Noteholders to commence legal proceedings or otherwise
proceed against Guarantor in any jurisdiction or to serve process in any manner
permitted by applicable law.
(b) Nothing in this Paragraph 19 shall affect any right of
Noteholders to serve legal process in any other manner permitted by law or
affect the right of any Noteholder to bring any action or proceeding against
Guarantor either jointly or severally in the courts of any other jurisdictions.
(c) To the extent that Guarantor has or hereafter may acquire
any immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property,
Guarantor hereby irrevocably waives such immunity in respect of its obligations
under this Guaranty and the other Financing Documents.
20. THIS GUARANTY AND THE OTHER FINANCING DOCUMENTS COLLECTIVELY
REPRESENT THE FINAL AGREEMENT BY AND AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT AND
GUARANTOR AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF NOTEHOLDERS, ADMINISTRATIVE AGENT AND GUARANTOR.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG NOTEHOLDERS, ADMINISTRATIVE AGENT
AND GUARANTOR.
21. GUARANTOR, FOR ITSELF, ITS SUCCESSORS AND ASSIGNS, AND THE
NOTEHOLDERS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
THEIR RIGHT TO A JURY TRIAL, IN ANY LITIGATION ARISING OUT OF OR IN CONNECTION
WITH THIS GUARANTY OR ANY OF THE OTHER FINANCING DOCUMENTS.
5
<PAGE> 120
23. THIS GUARANTY AND THE OTHER FINANCING DOCUMENTS SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS.
[Signature Page to Follow]
6
<PAGE> 121
EXECUTED as of the date first above written.
GUARANTOR:
THE HALLWOOD GROUP INCORPORATED
By:
----------------------------
Melvin J. Melle,
Vice President
[Signature Page]
<PAGE> 1
EXHIBIT 21
ACTIVE SUBSIDIARIES OF THE REGISTRANT
AS OF FEBRUARY 29, 2000
<TABLE>
<CAPTION>
NAME STATE OR COUNTRY
---- ----------------
<S> <C>
Brock Suite Hotels, Inc. and subsidiaries................. Delaware
Brookwood Companies Incorporated and subsidiaries......... Delaware
HEPGP Ltd................................................. Colorado
HSC Securities Corporation................................ Delaware
HWG, LLC.................................................. Delaware
HWG Holding One, Inc...................................... Delaware
HWG Holding Two, Inc...................................... Delaware
HWG Realty Investors, LLC and subsidiaries................ Delaware
Hallwood Commercial Real Estate, LLC...................... Delaware
Hallwood Hotels, Inc. and subsidiaries.................... Delaware
Hallwood Investment Company............................... Grand Cayman Island
Hallwood Realty, LLC...................................... Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 926
<SECURITIES> 13,159
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 18,782
<CURRENT-ASSETS> 0
<PP&E> 61,320
<DEPRECIATION> 20,814
<TOTAL-ASSETS> 101,718
<CURRENT-LIABILITIES> 0
<BONDS> 6,768
1,000
0
<COMMON> 240
<OTHER-SE> 16,818
<TOTAL-LIABILITY-AND-EQUITY> 101,718
<SALES> 0
<TOTAL-REVENUES> 115,340
<CGS> 0
<TOTAL-COSTS> 107,725
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,769
<INTEREST-EXPENSE> 4,936
<INCOME-PRETAX> 910
<INCOME-TAX> (569)
<INCOME-CONTINUING> 1,479
<DISCONTINUED> 0
<EXTRAORDINARY> 240
<CHANGES> 0
<NET-INCOME> 1,719
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.88
</TABLE>
