e10vk
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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Mark One |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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| For the Year Ended December 31, 2004 |
Commission File Number: 1-8303 |
The Hallwood Group Incorporated
(Exact name of registrant as specified in its charter)
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Delaware |
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51-0261339 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification Number) |
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3710 Rawlins, Suite 1500, Dallas, Texas |
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75219 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
(214) 528-5588
Securities Registered Pursuant to Section 12(b) of the
Act:
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| Title of Class |
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Name of Each Exchange on Which Registered |
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Common Stock ($0.10 par value) |
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American Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the
Act:
Title of Class
Series B Redeemable Preferred Stock
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 þ No o
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. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes o No þ
The aggregate market value of the Common Stock, $0.10 par
value per share, held by non-affiliates of the registrant as of
June 30, 2004, based on the closing price of
$51.00 per share on the American Stock Exchange, was
$24,171,000.
1,326,343 shares of Common Stock, $0.10 par value per
share, were outstanding at March 18, 2005.
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, 2004.
THE HALLWOOD GROUP INCORPORATED
FORM 10-K
TABLE OF CONTENTS
1
PART I
The Hallwood Group Incorporated (“Hallwood” or the
“Company”) (AMEX:HWG), a Delaware corporation formed
in September 1981, is a holding company that operates in the
textile products and energy business segments. The
Company’s former real estate and hotel business segments
have been reclassified as discontinued operations.
Continuing Operations
Textile Products. Textile products operations are
conducted through the Company’s wholly owned, Brookwood
Companies Incorporated (“Brookwood”) subsidiary.
Brookwood is an integrated textile firm that develops and
produces innovative fabrics and related products through
specialized finishing, treating and coating processes.
Brookwood operates as a converter in the textile industry,
purchasing fabric from mills that is dyed and finished and/or
laminated at its own plants, located in Rhode Island, or by
contracting with independent finishers. Upon completion of the
finishing process, the fabric is sold to customers. Brookwood, a
large textile converter of nylon and some polyester fabrics, is
one of the largest coaters of woven nylons in the United States.
Brookwood is known for its extensive, in-house expertise in
high-tech fabric development, and is a major supplier of
specialty fabric to U.S. military contractors. Brookwood
produces fabrics that meet standards and specifications set by
both government and private industry, which are used by
consumers, military and industrial customers.
The Brookwood Roll Goods Division serves manufacturers by
maintaining an extensive in-stock, short-lot service of woven
nylon and polyester fabrics, offering an expansive inventory
stocked in a wide array of colors. As speed is essential in this
area, Brookwood Roll Goods has positioned its sales and
distribution facilities in southern California and Rhode Island
to allow shipment on a same day/next day basis.
The First Performance Fabric Division buys and sells promotional
goods, remnants and mill seconds for a vast assortment of coated
and uncoated nylon products at promotional prices. Products
include nylon for consumer uses, such as activewear, outerwear,
swimwear as well as nylons used for balloons, luggage, bags,
flags and banners.
Brookwood’s Strategic Technical Alliance, LLC
(“STA”) subsidiary markets advanced breathable,
waterproof laminate materials for military applications.
Continued development of these fabrics for military, industrial
and consumer applications is a key element of Brookwood’s
business plan.
The textile industry historically experiences cyclical swings.
Brookwood has partially offset the effect of those swings by
diversifying its product lines and business base. Brookwood has
historically enjoyed a fairly steady stream of orders that
comprise its backlog. However, the backlog is subject to market
conditions and the timing of contracts granted to its prime
government contractor customers. Management believes that
Brookwood maintains a level of inventory adequate to support its
sales requirements and has historically enjoyed a consistent
turnover ratio.
The textile products business is not interdependent with any of
the Company’s other business operations. The Company does
not guarantee the Brookwood bank debt and is not obligated to
contribute additional capital.
In January 2003, Brookwood was granted a patent for its
“breathable, waterproof laminate and method for making
same”, which is a critical process in its production of
specialty fabric for U.S. military contractors. Brookwood
has no other patents pending. Brookwood has ongoing programs of
research and development in all of its divisions adequate to
maintain the exploration, development and production of
innovative products and technologies.
Textile products accounts for substantially all of the
Company’s revenues from continuing operations.
2
Energy. Since January 2002, the Company has invested over
$20,700,000 in private energy affiliates. The Company owns
between 20% and 28% of the entities (between 16% and 22% on a
fully diluted basis) and accounts for the investments using the
equity method of accounting, recording its pro rata share of net
income (loss), stockholders’ equity/partners’ capital
transactions and comprehensive income (loss). These private
companies are or have been principally involved in drilling,
gathering and sale of natural gas in the Barnett Shale formation
of Johnson County, Texas and surrounding counties, and
conducting 3-D seismic surveys over optioned land in South
Louisiana to determine if further oil and gas exploratory
activity is warranted.
In 2002, the Company invested $3,500,000 in Hallwood Energy
Corporation (“HEC”). The Company made additional
investments of $1,997,000 in 2003 and $566,000 in 2004. The
Company owned approximately 28% (22% after consideration of
stock options) of HEC. After constructing a gas gathering
system, HEC commenced commercial production and sales of natural
gas in February 2003. As of December 15, 2004, HEC had
drilled or was in the process of drilling 46 wells in the
Barnett Shale Formation of Johnson County, Texas, 41 wells
were producing, one well was plugged and abandoned, one well was
being drilled and two wells were in various stages of completion
and/or connection to the gathering system. Additionally, HEC,
through its subsidiary Hallwood SWD, Inc., had completed one
commercial saltwater disposal well and completed a disposal
facility, which went into operation in April 2004. Natural gas
production in December 2004 was up to 20 million cubic feet
per day, net to HEC’s interest, and HEC was transporting
third party gas of approximately three million cubic feet per
day.
On December 15, 2004, HEC completed a merger and sale to
Chesapeake Energy Corporation (“Chesapeake”) for total
consideration of $292,000,000, subject to reduction for certain
transaction costs, title discrepancies and other matters. After
this adjustment and the repayment of loans and other obligations
of HEC, the Company received cash proceeds totaling $55,788,000.
Certain of the Company’s officers and directors were
investors and option holders in HEC.
In 2004, the Company invested $4,705,000 in Hallwood
Energy III, L.P. (“HE III”), a private energy
partnership. In December 2004, $1,995,000 of the Company’s
proceeds from the sale of HEC and approximately $1,250,000, its
proportionate share of HEC’s investment in its Hallwood
SWD, Inc. subsidiary, were contributed to HE III as an
additional capital investment. In March 2005, the Company
invested an additional $4,251,000. The Company owns
approximately 28% (22% after consideration of profit interests)
of HE III.
As of March 1, 2005, HE III had drilled or is drilling
22 wells in the Barnett Shale formation of Johnson County,
Texas and commenced commercial production and sales of natural
gas in June 2004. Seventeen wells are producing, two wells are
being drilled, two wells are in the completion process and one
well is a saltwater disposal well. Natural gas production was
approximately 8.8 million cubic feet per day net to
HE III’s interest. HE III holds oil and gas
leases covering approximately 27,000 gross and
14,000 net acres of undeveloped leasehold, predominantly in
Johnson County, Texas.
Certain of the Company’s officers and directors are
investors and hold a profit interest in HE III.
In September 2004, the Company invested $2,430,000 in Hallwood
Energy II, L.P. (“HE II”), a private energy
partnership. The Company owns approximately 24% (19% after
consideration of profit interests) of HE II. HE II was
formed to explore various oil and gas exploration opportunities,
primarily in Texas and in areas not associated with that of HEC
or HE III. As of March 1, 2005, HE II holds oil
and gas leases covering approximately 1,400 gross and
1,300 net acres of undeveloped leasehold. There has been no
drilling activity to date.
Certain of the Company’s officers and directors are
investors and hold a profit interest in HE II.
3
In 2004, the Company invested $1,318,000 in Hallwood
Exploration, L.P. (“Hallwood Exploration”), a private
energy partnership. Hallwood Exploration was formed to develop
an oil and gas exploration opportunity in South Louisiana.
Hallwood Exploration has acquired seismic lease options over
approximately 35,000 acres, and will conduct a 3-D seismic
survey over the optioned land in 2005 to determine if further
oil and gas exploration is warranted. The Company owns
approximately 20% (16% after consideration of profit interests)
of Hallwood Exploration.
Certain of the Company’s officers and directors are
investors and hold a profit interest in Hallwood Exploration.
In August 2004, the Company formed Hallwood Petroleum, LLC
(“HPL”) an energy operating and management company.
The Company is the sole member of HPL. Operations commenced in
October 2004. Direct costs are rebilled to the respective energy
affiliate and indirect costs are rebilled on a pro rata basis.
Discontinued Operations
Real Estate. The Company’s real estate operations
were 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 was the sole general partner
of Hallwood Realty Partners, L.P. (“HRP”), a
publicly-traded, master limited partnership.
Hallwood Realty owned a 1% general partner interest, and HWG,
LLC owned a 21% limited partner interest in HRP. Hallwood Realty
was responsible for asset management of HRP and its properties,
including the decisions regarding financing, refinancing,
acquiring and disposing of properties. It also provided general
operating and administrative services to HRP. HCRE was
responsible for property management for all HRP properties, and
properties it managed for third parties, for which it received
management, leasing and construction supervision fees. Hallwood
Realty and HWG, LLC accounted for their respective investment in
HRP using the equity method of accounting, recording their pro
rata share of net income (loss), net of an elimination for
intercompany profits, comprehensive income (loss) and
partners’ capital transactions reported by HRP.
On July 16, 2004, HRP was merged with a subsidiary of HRPT
Properties Trust (“HRPT”). As a result, HRP became a
wholly-owned subsidiary of HRPT and is no longer publicly
traded. The general partner interest in HRP was also sold to a
HRPT subsidiary in a separate transaction and the management
agreements for the properties under management were terminated.
The Company no longer holds any interest in HRP. The Company
received approximately $66,119,000 for its investments in HRP
and related assets.
Hotels. Hotel operations were conducted through the
Company’s wholly owned, Hallwood Hotels, Inc.
(“Hallwood Hotels”) and Brock Suite Hotels, Inc.
(“Brock Hotels”) subsidiaries. Hallwood Hotels held a
long-term leasehold interest in the Holiday Inn and Suites
hotel, located in Sarasota, Florida and a fee interest in the
Airport Embassy Suites hotel, located in Oklahoma City,
Oklahoma. Brock Hotels owned fee interests in two GuestHouse
Suites Plus hotels located in Tulsa, Oklahoma and Greenville,
South Carolina, and held a leasehold interest in a GuestHouse
Suites Plus hotel located in Huntsville, Alabama.
In December 2000, the Company decided to dispose of its hotel
segment, principally by allowing its non-recourse debt holders
to assume ownership of the properties through foreclosures, or
by selling or otherwise disposing of its hotel properties, and
recorded impairments to reduce the carrying value of the hotels
to estimated market value. In December 2001, the Company further
evaluated each of the hotels operated and recorded additional
impairments to reduce their carrying values to estimated fair
market values.
During 2001, the Company signed an Agreement to Terminate Lease
with the landlord of the Holiday Inn and Suites hotel in
Sarasota, Florida and entered into a settlement agreement with
the mezzanine lender of the Embassy Suites hotel, whereby the
Company transferred all of the capital stock of its entity that
owned
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the hotel to the mezzanine lender and obtained a release from
its obligations under the first mortgage and the mezzanine loan.
At that time, the Company determined it would retain its
leasehold interest in the GuestHouse Suites Plus hotel located
in Huntsville, Alabama.
In January 2002, with assistance and consent of the lender, the
Company sold the GuestHouse Suites Plus hotel in Tulsa, Oklahoma
for $3,000,000. The Company received no cash proceeds from the
sale; however, concurrently with the sale, it entered into a
loan modification and assumption agreement, which included a
release that discharged the Company from any further obligations.
In February 2002, the lender for the GuestHouse Suites Plus
hotel in Greenville, South Carolina obtained a court judgment of
foreclosure. In connection with the foreclosure, the lender
waived its right to a deficiency judgment against the Company.
The lender completed the foreclosure in June 2002.
In December 2004, Brock Hotels entered into a Lease Termination
and Mutual Release Agreement with the landlord of the GuestHouse
Suites Plus hotel in Huntsville, Alabama. In connection with the
lease termination, the remaining assets of the subsidiary were
transferred to the landlord, and the Company obtained a release
from any further obligations.
Competition, Risks and Other Factors
Influence of Significant Stockholder. The Company’s
chairman and chief executive officer, Mr. Anthony J.
Gumbiner, is a significant stockholder of the Company.
Mr. Gumbiner owns approximately 64% of the Company’s
outstanding common stock (68% including currently exercisable
stock options) as of March 2005. Accordingly, Mr. Gumbiner
can exert substantial influence over the affairs of the Company.
The Company is Dependent on its Key Personnel Whose Continued
Service Is Not Guaranteed. The Company is dependent upon its
executive officers for strategic business direction and
specialized industry experience. While the Company believes that
it could find replacements for these key personnel, loss of
their services could adversely affect the Company’s
operations.
Supplier. Brookwood purchases a significant amount of the
fabric it uses from a small number of suppliers. Brookwood
believes that the loss of any one of its suppliers would not
have a long-term material adverse effect, because other
manufacturers with which Brookwood conducts business would be
able to fulfill those requirements. However, the loss of certain
of Brookwood’s suppliers could, in the short term,
adversely affect Brookwood’s business until alternative
supply arrangements were secured. In addition, there can be no
assurance that any new supply arrangements would have terms as
favorable as those contained in current supply arrangements.
Brookwood has not experienced any significant disruptions in
supply as a result of shortages in fabrics from its suppliers.
Concentration of Revenue. Brookwood has one customer that
accounted for more than 10% of its net sales in each of the
three years ended December 31, 2004. The relationship with
the customer is ongoing, and Brookwood expects to maintain
comparable sales volumes with that customer in 2005. Sales to
that customer were $53,149,000, $30,724,000 and $18,600,000 in
2004, 2003 and 2002, respectively.
Military sales have comprised an increasing portion of
Brookwood’s total sales, 56% for 2004, and a greater share
of gross profit. The ability to continue to increase or even
maintain the current level of sales to the military depends on
the overall level of U.S. military activity and personnel
and on Brookwood’s ability to successfully obtain future
orders in a highly competitive environment. As the level of
Brookwood’s sales in this market increases, the competition
increases and competitors seek to duplicate or replace
Brookwood’s products. There can be no assurance that the
military will continue to place orders for products that
Brookwood can provide at increasing or current levels or that
Brookwood will be successful in securing any orders that are
placed.
5
Concentration of Credit. The financial instruments that
potentially subject Brookwood to concentration of credit risk
consist principally of accounts receivable. Brookwood 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. Brookwood manages its exposure to credit
risks through credit approvals, credit limits, monitoring
procedures and the use of factors.
The amount of receivables that Brookwood can factor is subject
to certain limitations as specified in individual factoring
agreements. The factoring agreements expose Brookwood to credit
risk, if any of the factors fail to meet their obligations.
Brookwood seeks to manage this risk by conducting business with
a number of reputable factors and monitoring the factors’
performance under their agreements.
Loan Covenants. Brookwood’s revolving credit
agreement requires compliance with various loan covenants and
financial ratios, principally an EBITDA to total fixed charges
ratio of 1.15 and a total debt to tangible net worth ratio of
1.75. Brookwood was in compliance with its loan covenants as of
December 31, 2004 and for all interim periods during 2004.
Environmental. Kenyon Industries, Inc.
(“Kenyon”) and Brookwood Laminating, Inc.
(“Brookwood Laminating”) are wholly owned subsidiaries
of Brookwood. Kenyon and Brookwood Laminating are subject to a
broad range of federal, state and local laws and regulations
relating to the pollution and protection of the environment.
Among the many environmental requirements applicable to Kenyon
and Brookwood Laminating are laws relating to air emissions,
ozone depletion, wastewater discharges and the handling,
disposal and release of solid and hazardous substances and
wastes. Based on continuing internal review and advice from
independent consultants, Kenyon and Brookwood Laminating believe
that they are currently in substantial compliance with
applicable environmental requirements. Kenyon and Brookwood
Laminating are also subject to laws, such as The Comprehensive
Environmental Response Compensation and Liability Act
(“CERCLA”), that may impose liability retroactively
and without fault for releases or threatened releases of
hazardous substances at on-site or off-site locations. Kenyon
and Brookwood Laminating are not aware of any releases for which
they may be liable under CERCLA or any analogous provision.
Actions by federal, state and local governments concerning
environmental matters could result in laws or regulations that
could increase the cost of producing the products manufactured
by Kenyon and Brookwood Laminating or otherwise adversely affect
demand for their products. Widespread adoption of any
prohibitions or restrictions could adversely affect the cost
and/or the ability to produce products and thereby have a
material adverse effect upon Kenyon, Brookwood Laminating or
Brookwood.
In October 2003, as a result of a voluntary disclosure by
Brookwood Laminating, The Rhode Island Department of
Environmental Management (“RIDEM”) issued a Notice of
Violation alleging violations of the Rhode Island Air Pollution
Act and seeking an administrative penalty of $379,000. Brookwood
Laminating contested the penalty and received a letter from
RIDEM in March 2004 proposing to reduce the penalty to $30,000
on the condition that on or before May 1, 2004 it submitted
to RIDEM a proposal for the acquisition of certain environmental
control equipment at a cost not less than $400,000. Brookwood
submitted a proposal to RIDEM, which approved it, and has
purchased and installed the equipment.
Brookwood does not currently anticipate any material adverse
effect on its business, results of operations, financial
condition or competitive position as a result of its efforts to
comply with environmental requirements. Some risk of
environmental liability is inherent; however, in the nature of
Brookwood’s business, there can be no assurance that
material environmental liabilities will not arise. It is also
possible that future developments in environmental regulation
could lead to material environmental compliance or cleanup costs.
Patent and Trademark. Brookwood considers its patents and
trademarks, in the aggregate, to be important to its business
and seeks to protect this proprietary know-how in part through
United States patent and trademark registrations. Brookwood has
a number of trademark applications pending, although no
assurance can be given that trademarks will ever be issued from
such applications or that any trademarks, if issued, will be
determined to be valid. No assurance can be given, however, that
such protection will give Brookwood any material competitive
advantage. In addition, Brookwood maintains certain trade
secrets for which, in order to maintain the confidentiality of
such trade secrets, it has not sought patent or trademark
6
protection and therefore such trade secrets could be infringed
upon and such infringement could have a material adverse effect
on its business, results of operations, financial condition or
competitive position.
Competition. The cyclical nature of the textile and
apparel industries, characterized by rapid shifts in fashion,
consumer demand and competitive pressures, results in both price
and demand volatility. The demand for any particular product
varies from time to time based largely upon changes in consumer
preferences and general economic conditions affecting the
textile and apparel industries, such as consumer expenditures
for non-durable goods. The textile and apparel industries are
also cyclical because the supply of particular products changes
as competitors enter or leave the market.
Brookwood sells primarily to domestic manufacturers, some of
which operate offshore sewing operations. Some of
Brookwood’s customers have moved their business offshore
during the past few years. Brookwood has responded by shipping
fabric to Asia directly and also by supplying finished products
and garments directly to manufacturers. Brookwood competes with
numerous domestic and foreign fabric manufacturers, including
companies larger in size and having greater financial resources
than Brookwood. The principal competitive factors in the woven
fabrics markets are price, service, delivery time, quality and
flexibility, with the relative importance of each factor
depending upon the needs of particular customers and the
specific product offering. Brookwood’s management believes
that Brookwood maintains its ability to compete effectively by
providing its customers with a broad array of high-quality
fabrics at competitive prices on a timely basis.
Brookwood’s competitive position varies by product line.
There are several major domestic competitors in the synthetic
fabrics business, none of which dominates the market. Brookwood
believes, however, that it has a strong competitive position. In
addition, Brookwood believes it is one of a few finishers
successful in printing camouflage on nylon for sale to apparel
suppliers of the U.S. government. Additional competitive
strengths of Brookwood include: knowledge of its customers’
business needs; its ability to produce special fabrics such as
textured blends; waterproof breathable fabrics; state of the art
fabric finishing equipment at its facilities; substantial
vertical integration; and its ability to communicate
electronically with its customers.
Imports and Worldwide Trade Practices. Imports of
foreign-made textile and apparel products are a significant
source of competition for most sectors of the domestic textile
industry. The U.S. government has attempted to regulate the
growth of certain textile and apparel imports through tariffs
and bilateral agreements, which establish quotas on imports from
lesser-developed countries that historically account for
significant shares of U.S. imports. Despite these efforts,
imported apparel, which represents the area of heaviest import
penetration, is estimated to represent in excess of 90% of the
U.S. market.
The U.S. textile industry has been and continues to be
negatively impacted by existing worldwide trade practices,
including the North American Free Trade Agreement
(“NAFTA”), anti-dumping and duty enforcement
activities by the U.S. Government and by the value of the
U.S. dollar in relation to other currencies. The
establishment of the World Trade Organization (“WTO”)
in 1995 has resulted in the phase out of quotas on textiles and
apparel, effective January 1, 2005. It remains unclear what
effect this end of quotas will have on Brookwood’s business
and the extent of such an effect. Also, by gaining admission to
the WTO, China is able to take advantage of the elimination of
quota limitations on access to the U.S. market, which could
have a significant negative impact on the North American textile
industry. Accordingly, Brookwood believes it must fully utilize
other competitive strategies to replace sales lost to importers.
One strategy is to identify new market niches. In addition to
its existing products and proprietary technologies, Brookwood
has been developing advanced breathable, waterproof laminate
materials, which have been well received by its customers.
Continued development of these fabrics for military, industrial
and consumer application is a key element of Brookwood’s
business plan. The ongoing enterprise value of Brookwood is
contingent on its ability to maintain its level of military
business and adapt to the global textile industry.
The U.S. government has recently unveiled a proposal to
eliminate worldwide tariffs for manufactured goods by 2015. The
European Union has also proposed significant reductions in
tariffs. These proposals have been discussed during the ongoing
WTO Doha Round of multilateral negotiations, and could lead to
further significant changes in worldwide tariffs beyond those
already anticipated.
7
The U.S. government has also engaged in discussions with a
number of countries or trading blocs with the intent of further
liberalizing trade; “fast track” authority to
negotiate new agreements has been granted by Congress, making
new agreements in this field more likely. The
U.S. government has also entered into a free trade
agreement with Jordan and Chile and proposed similar agreements
with Singapore and certain African countries.
Labor Relations. Brookwood’s Kenyon subsidiary has
entered into a three-year collective bargaining agreement with
the Union of Needletrades, Industrial and Textile Employees, at
its Rhode Island plant facilities, effective from March 1,
2004. Management believes that overall relations with employees
are good.
Brookwood is Dependent on its Key Personnel Whose Continued
Service Is Not Guaranteed. Brookwood is dependent upon its
executive officers for strategic business direction and
specialized industry experience. While the Company believes that
it could find replacements for these key personnel, loss of
their services could adversely affect Brookwood’s
operations.
Energy investments may be affected by the following risk
factors, each of which could adversely affect the value of the
investments.
Volatility of Natural Gas Prices. A decline in natural
gas prices could adversely affect financial results. Revenues,
operating results, profitability, future rate of growth and the
value of the natural gas properties depend primarily upon the
prices received for natural gas sold. Historically, the markets
for natural gas have been volatile and they are likely to
continue to be volatile. Wide fluctuations in natural gas prices
may result from relatively minor changes in the supply of and
demand for natural gas, market uncertainty and other factors
that are beyond our control, including: worldwide and domestic
supplies of natural gas; weather conditions; the level of
consumer demand; the price and availability of alternative
fuels; the availability of pipeline capacity; domestic and
foreign governmental regulations and taxes; and the overall
economic environment.
Drilling Activities. The energy affiliates’ success
is materially dependent upon the continued success of its
drilling program. Future drilling activities may not be
successful and, if drilling activities are unsuccessful, such
failure will have an adverse effect on the energy
affiliates’ future results of operations and financial
condition. Oil and gas drilling involves numerous risks,
including the risk that no commercially productive oil or
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 the energy
affiliates have 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.
Regulations. The oil and gas industry is subject to
regulation at the federal, state and local level, and some of
the laws, rules and regulations carry substantial penalties for
noncompliance. Such regulations include requirements for permits
to drill and to conduct other operations and for provision of
financial assurances covering drilling and well operations.
Operations are also subject to various conservation regulations.
These include the regulation of the size of drilling and spacing
units and the unitization or pooling of natural gas properties.
In addition, state conservation laws establish maximum rates of
production.
Environmental regulations concerning the discharge of
contaminates into the environment, the disposal of contaminants
and the protection of public health, natural resources and
wildlife affect exploration, development and production
operations. Under state and federal laws, the energy affiliates
could be required to remove or remedy previously disposed wastes
or suspend operations in contaminated areas or perform remedial
plugging operations to prevent future contamination.
8
These factors and the volatility of the energy markets make it
extremely difficult to predict future natural gas price
movements with any uncertainty. Declines in natural gas prices
would not only reduce revenue, but could reduce the amount of
natural gas that can be produced economically and, as a result,
could have a material adverse effect on the financial condition,
results of operations and reserves for our energy affiliates.
Competition. The Company’s energy affiliates operate
in a highly competitive area of acquisition, development and
exploration of oil and gas properties and production with
competitors who have greater financial and other resources.
Competitors from both major and independent oil and natural gas
companies may be able to pay more for development prospects than
the financial resources of our energy affiliates’ may
permit. Their ability to develop and exploit oil and gas
properties and to acquire additional properties in the future
will depend on their ability to successfully conduct operations,
evaluate and select suitable properties and consummate
transactions in this highly competitive environment.
Quantity and Present Value of Reserves. Financial results
for the energy affiliates contain estimates of proved reserves
and the estimated future net revenues for the proved reserves.
These estimates are based upon various assumptions relating to
gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. The process of
estimating natural gas reserves is complex and these estimates
are inherently imprecise. Actual results will most likely vary
from these estimates. Actual future prices and costs may be
materially higher or lower than the prices and costs as of the
date of an estimate.
Environmental. Natural gas operations are subject to many
environmental hazards and risks, including well blowouts,
cratering and explosions, pipe failures, fires, formations with
abnormal pressure, uncontrollable flows of natural gas, brine or
well fluids, and other hazards and risks. Drilling operations
involve risks from high pressures and mechanical difficulties
such as stock pipes, collapsed casings and separated cables. If
any of these risks occur, substantial losses could result from
injury or loss of life, severe damages to or destruction of
property, pollution or other environmental damage, clean-up
responsibilities, regulatory investigations and penalties and
suspension of operations. Insurance is maintained against some
of these risks, but may not adequately cover all of a
catastrophic loss.
Related Party Transactions
Hallwood Realty Partners, L.P. The Company’s former
Hallwood Realty and HCRE real estate subsidiaries earned asset
management, property management, leasing and construction
supervision fees for their management of HRP’s properties.
Hallwood Realty earned: (i) an asset management fee equal
to 1% of the net aggregate base rents of HRP’s properties;
(ii) acquisition fees equal to 1% of the purchase price of
newly acquired properties; and, (iii) disposition fees with
respect to real estate investments, other than the properties
owned at the time of HRP’s formation in 1990, equal to 10%
of the amount by which the sales price of a property exceeded
the purchase price of the property. HCRE earned (i) a
property management fee equal to 2.85% of cash receipts
collected from tenants; (ii) leasing fees equal to the
current commission market rate as applied to net aggregate rent
(none exceeding 6% of the net aggregate rent); and
(iii) construction supervision fees for administering
construction projects equal to 5% of total construction or
tenant improvement costs.
A summary of the fees earned from HRP is detailed below (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Property management fees
|
|
$ |
1,127 |
|
|
$ |
1,979 |
|
|
$ |
2,029 |
|
|
Leasing fees
|
|
|
866 |
|
|
|
1,556 |
|
|
|
2,151 |
|
|
Construction supervision fees
|
|
|
486 |
|
|
|
698 |
|
|
|
582 |
|
|
Asset management fees
|
|
|
335 |
|
|
|
605 |
|
|
|
618 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2,814 |
|
|
$ |
4,838 |
|
|
$ |
5,380 |
|
| |
|
|
|
|
|
|
|
|
|
The management contracts with HRP were terminated on
July 16, 2004 in connection with HRP’s sale to HRPT.
9
Hallwood Realty was also reimbursed for certain costs and
expenses, at cost, for administrative level salaries and
bonuses, employee and director insurance and allocated overhead
costs. In addition, since HRP did not employ any individuals,
the compensation and other costs related to approximately 90
employees rendering services on behalf of HRP and its properties
were reimbursed to Hallwood Realty and HCRE by HRP.
Hallwood Investments Limited. The Company has entered
into a financial consulting contract with Hallwood Investments
Limited (“HIL”), formerly HSC Financial Corporation, a
British Virgin Island based company with which Mr. Gumbiner
is associated, that provides for HIL 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 $996,000 ($954,000 prior
to March 2005 and $795,000 prior to March 2004). HIL is also
eligible for bonuses from the Company or its subsidiaries,
subject to approval by the Company’s or its
subsidiaries’ board of directors. Additionally, the Company
reimburses HIL for reasonable and necessary expenses of office
space and administrative services. A summary of the fees and
expenses paid to HIL are detailed below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Incentive bonus
|
|
$ |
3,000 |
|
|
$ |
33 |
|
|
$ |
33 |
|
|
Consulting fees
|
|
|
928 |
|
|
|
795 |
|
|
|
795 |
|
|
Office space and administrative services
|
|
|
324 |
|
|
|
104 |
|
|
|
98 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
4,252 |
|
|
$ |
932 |
|
|
$ |
926 |
|
| |
|
|
|
|
|
|
|
|
|
In connection with the sale of HRP and the substantial benefits
the Company received from the operations of HRP over a number of
years, a special committee, consisting of independent members of
the board of directors of the Company authorized an additional
incentive bonus of $3,000,000 to HIL.
In addition, HIL performs services for certain affiliated
entities that are not subsidiaries of the Company, for which it
receives consulting fees, bonuses or other forms of compensation
and expenses. The Company recognizes a proportionate share of
such compensation and expenses, based upon its ownership
percentage in the affiliated entities, through the utilization
of the equity method of accounting.
Strategic Technical Alliance, LLC. During 2000, Brookwood
formed STA with an unrelated party that is also in a
textile-related industry, principally to produce advanced,
breathable, waterproof laminate materials for military
applications. In September 2002, STA acquired the 50% ownership
interest not owned by Brookwood for $1,000,000 in cash, the
issuance of a $596,000 note bearing interest at the prime rate
and royalty payments for three years based upon production under
a specified contract. Accordingly, STA became a wholly owned
subsidiary of Brookwood in September 2002. Prior to October
2002, Brookwood reported sales to STA of $11,444,000 for the
nine months ended September 30, 2002.
10
Number of Employees
The Company had 514 and 584 employees as of February 28,
2005 and 2004, comprised as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
February 28, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
Continuing Operations
|
|
|
|
|
|
|
|
|
| |
|
Hallwood
|
|
|
14 |
|
|
|
5 |
|
| |
|
Brookwood
|
|
|
481 |
|
|
|
459 |
|
| |
|
HPL
|
|
|
19 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
|
514 |
|
|
|
464 |
|
| |
Discontinued Operations
|
|
|
|
|
|
|
|
|
| |
|
HCRE
|
|
|
— |
|
|
|
68 |
|
| |
|
Hotel
|
|
|
— |
|
|
|
30 |
|
| |
|
Hallwood Realty
|
|
|
— |
|
|
|
22 |
|
| |
|
|
|
|
|
|
| |
|
|
— |
|
|
|
120 |
|
| |
|
|
|
|
|
|
| |
|
|
Total
|
|
|
514 |
|
|
|
584 |
|
| |
|
|
|
|
|
|
A substantial amount of the salaries and related costs for the
employees of HCRE and Hallwood Realty were reimbursed by HRP,
prior to the July 2004 disposition.
Brookwood’s Kenyon subsidiary has entered into a three-year
collective bargaining agreement with the Union of Needletrades,
Industrial and Textile Employees, representing approximately 254
employees at its Rhode Island plant facilities, effective from
March 1, 2004. Management believes that overall relations
with employees are good.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to reports filed pursuant to Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), are available on its website at
www.hallwood.com, as soon as reasonable practicable after such
reports are electronically filed with the Securities and
Exchange Commission. Additionally, the Company’s Code of
Business Conduct and Ethics, Whistle Blower Policy and Audit
Committee Charter may be accessed through the website.
Executive Officers of the Company
In addition to Anthony J. Gumbiner, age 60, who serves as
Director, Chairman and Chief Executive Officer, (see
Item 10) the following individuals also serve as executive
officers of the Company:
William L. Guzzetti, age 61, has served as President and
Chief Operating Officer of the Company since March 9, 2005
and as Executive Vice President from October 1989 to
March 8, 2005. Mr. Guzzetti had served as President,
Chief Operating Officer and a Director of Former Hallwood Energy
from December 1998 until May 2001. He was President, Chief
Operating Officer and a Director of the general partner of
Hallwood Energy Partners, L.P. from February 1985 until June
1999 and as President, Chief Operating Officer and a Director of
Hallwood Consolidated Resources Corporation from May 1991 until
June 1999. Since November 1990 and May 1991, Mr. Guzzetti
had served as the President, Chief Operating Officer and a
Director of Hallwood Realty and HCRE, respectively. He has also
served as President, Chief Operating Officer and a Director of
each of the energy affiliates since their inception. He had
served as the President and a director of HEC from December 2002
until December 2004. He is a member of the Florida Bar and the
State Bar of Texas.
Melvin J. Melle, age 62, 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
11
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 had 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.
Amber M. Brookman, age 62, has served as President, Chief
Executive Officer and Director of Brookwood since 1989. Since
July 2004, Ms. Brookman has served as a director of Syms
Corporation, a national clothing retailer with headquarters in
Secaucus, New Jersey.
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.
Cost of real estate owned by property type and geographic
distribution (in thousands of dollars):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Operating | |
|
Non-Operating | |
|
|
| Property Type |
|
Properties | |
|
Properties | |
|
Total | |
|
Percentage | |
| |
|
| |
|
| |
|
| |
|
| |
|
Dyeing and finishing plant — Rhode Island*
|
|
$ |
5,326 |
|
|
$ |
— |
|
|
$ |
5,326 |
|
|
|
99 |
% |
|
Parking Lot — Texas
|
|
|
— |
|
|
|
50 |
|
|
|
50 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
5,326 |
|
|
$ |
50 |
|
|
$ |
5,376 |
|
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Property pledged as collateral under loan agreement. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Number of | |
|
|
| Geographic Distribution |
|
Investments | |
|
Amount | |
|
Percentage | |
| |
|
| |
|
| |
|
| |
|
Rhode Island
|
|
|
1 |
|
|
$ |
5,326 |
|
|
|
99 |
% |
|
Texas
|
|
|
1 |
|
|
|
50 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
2 |
|
|
$ |
5,376 |
|
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
As of December 31, 2004 no single real estate property
constituted 10% or more of the Company’s consolidated
assets.
The textile products’ dyeing and finishing plant 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 Key Bank Credit Agreement contains a covenant
to reasonably maintain property and equipment.
The Company shared offices with HRP in Dallas, Texas and, prior
to the July 2004 disposition, paid a pro-rata share of lease and
other office-related costs. In connection with the HRP
disposition, the Company assumed the lease obligation for the
office space, which expires in November 2008, but contains a
one-time option to terminate the lease in November 2005.
Brookwood leases its corporate headquarters in New York City
which expires in August 2006. Brookwood Laminating leases its
facility in Peacedale, RI which expires December 2006. Brookwood
Roll Goods Division leases a warehouse in Gardena, CA which
expires April 2006.
12
|
|
| 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 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.
Gotham Partners. In June 1997, an action was filed
against the Company, HRP, HRP’s general partner Hallwood
Realty Corporation, a predecessor entity to Hallwood Realty,
LLC, and the directors of Hallwood Realty Corporation by Gotham
Partners, L.P. in the Court of Chancery of the state of
Delaware, styled Gotham Partners, L.P. v. Hallwood
Realty Partners, L.P., et al (C.A. No. 15754).
This action alleged claims of breach of fiduciary duties, breach
of HRP’s partnership agreement and fraud in connection with
certain transactions involving HRP’s limited partnership
units in the mid 1990’s.
A trial was held in January 2001. In July 2001, the court ruled
that the defendants other than HRP pay a judgment to HRP in the
amount of $3,417,000, plus pre-judgment interest of
approximately $2,891,000 from August 1995. The judgment amount
represented what the court determined was an underpayment by the
Company. In August 2001, the plaintiff and certain defendants
appealed the Court of Chancery’s judgment to the Delaware
Supreme Court. In October 2001, the Company paid $6,405,000,
including post judgment interest, to HRP. In August 2002, the
Supreme Court affirmed the judgment of the trial court that the
remaining defendants other than HRP are jointly and severally
liable to HRP. The Supreme Court reversed the trial court’s
determination of damages, and remanded the case to the trial
court to fashion appropriate relief.
In July 2003, the Delaware Court of Chancery issued its decision
after remand. In the decision, the Court of Chancery determined
that the Company was required to pay an additional amount of
approximately $2,988,000 plus pre-judgment interest of
approximately $3,762,000. In July 2003, the trial court entered
its final order and judgment on remand which provided, among
other things, that HRP pay plaintiff $3,000,000 in
attorneys’ fees, costs and expenses, which was funded by
HRP to plaintiff in August 2003. In July 2003, the plaintiff
appealed the final order and judgment on remand to the Delaware
Supreme Court. In December 2003, the Delaware Supreme Court
affirmed the Court of Chancery’s final order and judgment
on remand, effectively ending the matter.
The Company entered into an Amended and Restated Credit
Agreement, which provided a Special Purpose Credit Facility in
the amount of $5,000,000, which was used to pay a portion of the
judgment in August 2003. In April 2004, the Company entered into
a commitment agreement with First Bank & Trust that
provided for an additional $1,850,000 term loan, which was
required to be used to pay the remaining amount due to HRP.
Funding of the commitment and payment of the amount due HRP
occurred in May 2004.
High River and I.G. Holdings. In April 2003, an action
was filed against HRP’s general partner, Hallwood Realty
(the “General Partner”), its directors and HRP as
nominal defendant by High River Limited Partnership, which is
indirectly wholly owned by Carl C. Icahn, in the Court of
Chancery of the State of Delaware, styled High River Limited
Partnership v. Hallwood Realty, LLC, et al, (C.A.
No. 20276). The action related to a tender offer by High
River for units of HRP. In addition, a putative class action
lawsuit was filed against the General Partner, its directors and
HRP as nominal defendant by three purported unitholders of HRP
in the Court of Chancery of the State of Delaware, styled
I.G. Holdings, Inc., et al, v. Hallwood Realty LLC,
et al, (C.A. No. 20283) also relating to the High
River tender offer.
On June 30, 2004, the parties to the I. G. Holdings,
Inc., et al. v. Hallwood Realty, LLC, et al.,
action entered into a Memorandum of Understanding providing for
the settlement of that putative class action. As contemplated by
the Memorandum of Understanding, the parties entered into a
Stipulation and Agreement of Compromise, Settlement and Release
on July 29, 2004. Pursuant to the Stipulation of
Settlement, the parties agreed that the action would be
certified, for purposes of settlement only, as a class action
consisting of all record and beneficial owners of partnership
interests in HRP (other than defendants and their affiliates and
associates) on July 16, 2004, the effective date of the
merger, that the action would be dismissed with prejudice, and
that plaintiffs could make an application for attorneys’
fees and expenses in an amount not to
13
exceed $2,500,000. Defendants agreed not to oppose the fee
application. With respect to any fees and expenses awarded by
the Court of Chancery, the first $2,000,000 of such amount would
be paid by defendants’ insurer and the balance of the
amount awarded by the court, if any, would be paid from a
$500,000 fund escrowed from the merger consideration pursuant to
a court order dated July 15, 2004. On October 25,
2004, the Delaware Court of Chancery held a hearing on the
proposed settlement of the class action and determined that the
settlement was fair, reasonable, adequate and in the best
interests of the class and approved it. There was one objection
to the settlement but the Court rejected it. The Court also
ruled that counsel for the class was entitled to a fee award in
an amount of $2,000,000 (which defendants’ insurer had
committed to pay), plus recovery of approximately $181,000 in
expenses which would be paid from a $500,000 escrow fund
established in connection with the effectuation of the merger.
This escrow fund reflected withholding of $0.31 per unit of
merger consideration payable to HRP unitholders. On
October 29, 2004, the Delaware Court of Chancery entered an
Order and Final Judgment reflecting (among other things) these
determinations and its approval of the settlement as well as its
approval of the form and manner of notice of the settlement,
certification of the class, release of all defendants and their
affiliates and dismissal of the class action litigation with
prejudice and on the merits.
The Court of Chancery also determined that a portion of the
$500,000 in escrowed funds should be returned to High River,
based on its pro rata ownership of HRP units, and that the
balance of the fund would be returned to HRP’s other
unitholders (including the Company) based on their pro rata
ownership of HRP units. Taking into account the $181,000 payable
to class counsel based on their expenses and the approximately
$74,000 that was required to be returned to High River, a
balance of $245,000 plus interest remained to be distributed to
HRP unitholders other than High River. This amount was reduced
by the administrative costs and expenses associated with
returning this money to the HRP unitholders. The Company
received its allocable share of the remaining escrow account
balance of approximately $59,000 in February 2005.
Other. The Company was a defendant in two lawsuits
regarding guaranties of certain obligations of the Embassy
Suites and Holiday Inn hotels. In February 2003, the Company
settled both matters. The Company agreed (i) to pay
$150,000 in cash and issue a non-interest bearing promissory
note in the amount of $250,000 payable in equal monthly
installments over 18 months, in exchange for a full release
regarding the Embassy Suites hotel in Oklahoma City, Oklahoma
and (ii) to pay $250,000 in cash in exchange for a full
release regarding the Holiday Inn hotel in Sarasota, Florida. In
December 2002, the Company recorded an additional loss provision
in the amount of $247,000 to fully accrue for these two
litigation matters. The Company has made all scheduled payments
in accordance with the settlement agreements and the final
payment for the aforementioned promissory note was paid in
December 2004.
|
|
| Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during
the period.
14
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
The Company’s shares of common stock, $0.10 par value
per share (the “Common Stock”), are traded on the
American Stock Exchange under the symbol of HWG. There were 661
stockholders of record as of March 18, 2005.
The following table sets forth a two-year record, by quarter, of
high and low closing prices on the American Stock Exchange.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| Quarters |
|
High | |
|
Low | |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
| |
|
| |
|
First
|
|
$ |
39.30 |
|
|
$ |
19.20 |
|
|
$ |
6.60 |
|
|
$ |
6.25 |
|
|
Second
|
|
|
51.00 |
|
|
|
28.00 |
|
|
|
17.00 |
|
|
|
6.50 |
|
|
Third
|
|
|
85.75 |
|
|
|
43.50 |
|
|
|
19.88 |
|
|
|
14.30 |
|
|
Fourth
|
|
|
120.50 |
|
|
|
82.05 |
|
|
|
20.95 |
|
|
|
17.51 |
|
The Company did not pay cash dividends in 2004 or 2003. The
closing price per share of the Common Stock on the American
Stock Exchange on March 18, 2005 was $134.00.
15
Item 6. Selected
Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Revenues
|
|
$ |
137,280 |
|
|
$ |
104,720 |
|
|
$ |
84,770 |
|
|
$ |
68,894 |
|
|
$ |
73,852 |
|
|
Expenses
|
|
|
125,609 |
|
|
|
100,145 |
|
|
|
84,702 |
|
|
|
71,383 |
|
|
|
73,996 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
11,671 |
|
|
|
4,575 |
|
|
|
68 |
|
|
|
(2,489 |
) |
|
|
(144 |
) |
|
Other income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain from disposition of HEC(a)
|
|
|
62,288 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
2,918 |
|
|
|
2,390 |
|
|
|
2,940 |
|
|
|
(467 |
) |
|
|
35 |
|
| |
Equity income (loss) from investments in energy affiliates
|
|
|
(9,901 |
) |
|
|
50 |
|
|
|
(187 |
) |
|
|
— |
|
|
|
— |
|
| |
Interest expense
|
|
|
(1,197 |
) |
|
|
(1,636 |
) |
|
|
(1,392 |
) |
|
|
(3,116 |
) |
|
|
(4,284 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
54,108 |
|
|
|
804 |
|
|
|
1,361 |
|
|
|
(3,583 |
) |
|
|
(4,249 |
) |
|
Income (loss) from continuing operations before income taxes
|
|
|
65,779 |
|
|
|
5,379 |
|
|
|
1,429 |
|
|
|
(6,072 |
) |
|
|
(4,393 |
) |
|
Income tax expense (benefit)
|
|
|
11,079 |
|
|
|
1,725 |
|
|
|
1,435 |
|
|
|
1,658 |
|
|
|
(1,224 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
54,700 |
|
|
|
3,654 |
|
|
|
(6 |
) |
|
|
(7,730 |
) |
|
|
(3,169 |
) |
|
Income (loss) from discontinued operations, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income from real estate operations(b)
|
|
|
39,002 |
|
|
|
4,339 |
|
|
|
3,720 |
|
|
|
2,402 |
|
|
|
3,741 |
|
| |
Income (loss) from hotel operations(c)
|
|
|
783 |
|
|
|
(568 |
) |
|
|
3,080 |
|
|
|
(1,521 |
) |
|
|
(8,265 |
) |
| |
Income from energy operations(d)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,134 |
|
|
|
2,826 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
39,785 |
|
|
|
3,771 |
|
|
|
6,800 |
|
|
|
12,015 |
|
|
|
(1,698 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principles
|
|
|
94,485 |
|
|
|
7,425 |
|
|
|
6,794 |
|
|
|
4,285 |
|
|
|
(4,867 |
) |
|
Income (loss) from cumulative effect of change in accounting
principles(e)
|
|
|
— |
|
|
|
— |
|
|
|
568 |
|
|
|
(40 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$ |
94,485 |
|
|
$ |
7,425 |
|
|
$ |
7,362 |
|
|
$ |
4,245 |
|
|
$ |
(4,867 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Continuing Operations Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
41.24 |
|
|
$ |
2.68 |
|
|
$ |
(0.04 |
) |
|
$ |
(5.48 |
) |
|
$ |
(2.26 |
) |
| |
Assuming dilution
|
|
|
36.79 |
|
|
|
2.59 |
|
|
|
(0.02 |
) |
|
|
(5.48 |
) |
|
|
(2.26 |
) |
|
Net Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
71.24 |
|
|
$ |
5.47 |
|
|
$ |
5.37 |
|
|
$ |
2.95 |
|
|
$ |
(3.45 |
) |
| |
Assuming dilution
|
|
|
63.55 |
|
|
|
5.30 |
|
|
|
5.19 |
|
|
|
2.95 |
|
|
|
(3.45 |
) |
|
Dividends Per Common Share
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
1,326 |
|
|
|
1,347 |
|
|
|
1,361 |
|
|
|
1,420 |
|
|
|
1,425 |
|
| |
Assuming dilution
|
|
|
1,487 |
|
|
|
1,390 |
|
|
|
1,415 |
|
|
|
1,420 |
|
|
|
1,425 |
|
|
Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets
|
|
$ |
157,317 |
|
|
$ |
83,554 |
|
|
$ |
69,548 |
|
|
$ |
77,567 |
|
|
$ |
95,923 |
|
| |
Loans and capital lease obligations
|
|
|
9,136 |
|
|
|
23,938 |
|
|
|
17,130 |
|
|
|
30,750 |
|
|
|
61,628 |
|
| |
Redeemable preferred stock
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
| |
10% Debentures
|
|
|
— |
|
|
|
6,569 |
|
|
|
6,625 |
|
|
|
6,677 |
|
|
|
6,725 |
|
| |
Common stockholders’ equity
|
|
|
124,541 |
|
|
|
29,829 |
|
|
|
23,136 |
|
|
|
15,883 |
|
|
|
11,814 |
|
16
|
|
| (a) |
In December 2004, the Company sold its common stock investment
in Hallwood Energy Corporation. |
|
|
|
|
(b) |
|
In July 2004, the Company sold its investment in Hallwood Realty
Partners, L.P., which has been reclassified and reported as
discontinued for all periods presented herein. |
| |
|
(c) |
|
In December 2000, the Company decided to dispose of its hotel
business segment and reclassified it as a discontinued
operation; however, it retained a leasehold interest in one
hotel which remained as a continuing asset. It was subsequently
discontinued in December 2004; therefore, results for all hotels
have been reclassified as discontinued for all periods presented
herein. |
| |
|
(d) |
|
In May 2001, the Company sold its investment in Former Hallwood
Energy which had been reclassified and reported as a
discontinued operation. |
| |
|
(e) |
|
SFAS No. 142 became effective on January 1, 2002,
which resulted in the Company recording income in 2002 of
$568,000, which represented negative goodwill associated with
the Company’s HRP investment. 2001 results included a loss
from adoption of SFAS No. 133. |
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
General. Until July 2004, the Company was a diversified
holding company with interests in textiles, real estate and
energy. During 2004, the Company disposed of its interests in
Hallwood Realty Partners, L.P., which constituted substantially
all of its real estate activities, and Hallwood Energy
Corporation, in connection with which it received total cash
proceeds of approximately $123,000,000. After payment of debt
and other obligations, at December 31, 2004, the Company
held approximately $78,000,000 in cash and marketable
securities. Although the Company’s textile activities have
generated positive cash flow in recent years, there is no
assurance that this trend will continue. In addition, the
remaining energy entities will require significant additional
capital investment over the next few years to acquire additional
properties and to adequately explore and develop existing and
any new properties. Therefore, the Board of Directors is
considering various proposals to enable the Company and its
shareholders to best realize the value of the Company’s
assets and businesses, which may include a return of capital to
shareholders. No determinations have yet been made and there can
be no assurance that any changes in the Company will result from
the deliberations.
Continuing Operations. The Company derives substantially
all of its revenues from continuing operations from its
Brookwood subsidiary, and, consequently, the Company’s
success is highly dependent upon Brookwood’s success. In
the long-run, Brookwood’s success will be influenced in
varying degrees by its response to legislation and
administrative actions restricting or liberalizing trade among
world textile producing and consuming countries such as the
NAFTA, the WTO, the effectiveness of anti-dumping and
countervailing duty remedies and of enforcement activities by
the U.S. Government, and the value of the United States
dollar in relation to other currencies and world economic
developments. However, under NAFTA with Mexico and Canada, there
are no textile and apparel quotas between the United States and
either Mexico or Canada for products that meet certain origin
criteria. Tariffs among the three countries are either already
zero or are being phased out. Also, the WTO recently phased out
textile and apparel quotas.
Brookwood continues to identify new market niches to replace
sales lost to importers. In addition to its existing products
and proprietary technologies, Brookwood has been developing
advanced breathable, waterproof laminate materials, which have
been well received by its customers. Continued development of
these fabrics for military, industrial and consumer applications
is a key element of Brookwood’s business plan. The ongoing
enterprise value of Brookwood is contingent on its ability to
adapt to the global textile industry; however, there can be no
assurance that the positive results of the past can be sustained.
The textile products business is not interdependent with any of
the Company’s other business operations. The Company does
not guarantee the Brookwood bank debt and is not obligated to
contribute additional capital.
17
The Company’s HPL subsidiary commenced operations in
October 2004 as an operating and management company for the
benefit of all energy affiliates. Direct costs are rebilled to
the respective energy affiliate and indirect costs are rebilled
on a pro rata basis.
Discontinued Operations. The Company’s real estate
activities were conducted primarily through the Company’s
wholly owned subsidiaries. One of the subsidiaries served as the
general partner of HRP, a publicly traded master limited
partnership. Revenues were generated from the receipt of
management fees, leasing commissions and other fees from HRP and
third parties and the Company’s 22% pro rata share of
earnings of HRP using the equity method of accounting.
On July 16, 2004, HRP was merged with a subsidiary of HRPT.
As a result, HRP became a wholly-owned subsidiary of HRPT and
was no longer a publicly traded limited partnership. The general
partner interest in HRP was also sold to a HRPT subsidiary in a
separate transaction and the management agreements for the
properties were terminated. The Company no longer holds any
interest in HRP. The Company received $66,119,000 for its
investments in HRP and related assets.
In December 2000, the Company decided to discontinue and dispose
of its hotel segment, which at that time consisted of five hotel
properties. Accordingly, the Company’s hotel operations
were reclassified as a discontinued operation. Two hotels were
disposed of in 2001 and two hotels were disposed of in 2002. The
Company continued to operate a leasehold interest in one hotel
until December 2004, when the hotel subsidiary entered into a
Lease Termination and Mutual Release Agreement. As of
December 31, 2004 the Company has no further operations
associated with the hotel segment.
Critical Accounting Policies
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and judgments that
affect the reported amounts of certain assets, liabilities,
revenues, expenses, and related disclosures. Actual results may
differ from these estimates under different assumptions or
conditions.
In December 2001, the SEC requested that registrants identify
“critical accounting policies” in
Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations. The
SEC indicated that a “critical accounting policy” is
one that is both important to the portrayal of an entity’s
financial condition and results and requires management’s
most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters
that are inherently uncertain. The Company believes that the
following of its accounting policies fit this description:
Revenue Recognition. Textile products sales are
recognized upon shipment or release of product, when title
passes to the customer. Brookwood provides allowances for
expected cash discounts, returns, claims and doubtful accounts
based upon historical bad debt and claims experience and
periodic evaluation of the aging of accounts receivable. If the
financial condition of Brookwood’s customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required. On occasion,
Brookwood receives instructions from some of its customers to
finish fabric, invoice the full amount and hold the finished
inventory until the customer sends shipping instructions. In
those cases, Brookwood records the sale and sends the customer
an invoice containing normal and usual payment terms and
segregates the inventory from Brookwood’s inventory.
Equity Method of Accounting. The Company accounts for its
investments in various energy related entities and HRP using the
equity method of accounting. The equity investments in HRP and
HEC were sold in July 2004 and December 2004, respectively. The
equity method is used because the Company has the ability to
exercise significant influence over the operating and financial
policies of each entity. The Company records its pro rata share
of each entity’s net income (loss) adjusted for certain
items, such as the elimination of intercompany profits, as well
as a pro rata share of partners’ capital and
stockholders’ equity transactions and comprehensive income
(loss).
Deferred Income Tax Asset. A deferred income tax asset is
recognized for net operating loss and certain other tax
carryforwards, tax credits and temporary differences, reduced by
a valuation allowance, which is
18
established when it is more likely then not that some portion or
all of the asset will not be realized. The Company’s
management is required to estimate taxable income for future
years and to use its judgement to determine whether or not to
record a valuation allowance for part or all of a deferred tax
asset. Management considers various tax planning strategies,
anticipated gains from the potential sale of investments and
projected income from operations to determine the valuation
allowance to be recorded. As a result of the significant income
earned in 2004 and projected income in the future, management
eliminated the valuation allowance during 2004.
Impairment of Long-Lived Assets. 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. Unforeseen
events and changes in circumstances and market conditions could
negatively affect the fair value of assets and result in an
impairment charge. In the event such indicators exist for assets
held for use, if undiscounted cash flows before interest charges
are less than carrying value, the asset is written down to
estimated fair value. For assets held for sale, these assets are
carried at the lower of cost or estimated sales price less costs
of sale. Fair value is the amount at which the asset could be
bought or sold in a current transaction between willing parties
and may be estimated using a number of techniques, including
quoted market prices or valuations by third parties, present
value techniques based on estimates of cash flows, or multiples
of earnings or revenues performance measures. The fair value of
the asset could be different using different estimates and
assumptions in these valuation techniques. Significant
assumptions used in this process depend upon the nature of the
investment, but would include an evaluation of the future
business opportunities, sources of competition, advancement of
technology and its impact on patents and processes, future
rental and occupancy rates, and the level of expected operating
expenses.
Inventories. Inventories at the Brookwood subsidiary are
valued at the lower of cost (first-in, first-out or specific
identification method) or market. Inventories are reviewed and
adjusted for changes in market value based on assumptions
related to future demand and worldwide and local market
conditions. If actual demand and market conditions vary from
those projected by management, adjustments to lower of cost or
market value may be required.
The policies listed are not intended to be a comprehensive list
of all of our accounting policies. In most cases, the accounting
treatment of a particular transaction is specifically dictated
by accounting principles generally accepted in the United States
of America, with no need for management’s judgment in the
application. There are also areas in which management’s
judgment in selecting any available alternative would not
produce a materially different result than those recorded and
reported.
Presentation
The Company intends the discussion of its financial condition
and results of operations that follows to provide information
that will assist in understanding its financial statements, the
changes in certain key items in those financial statements from
year to year, and the primary factors that accounted for those
changes, as well as how certain accounting principles, policies
and estimates affect its financial statements.
Following the disposition of its real estate and hotel business
segments, the Company determined that its financial statements
should be changed from a segmented format to a classified
format; therefore, substantial reclassifications have been made
to all periods presented herein.
Results of Operations
The Company reported net income of $94,485,000 for the year
ended December 31, 2004, compared to $7,425,000 for 2003,
and $7,362,000 for 2002.
The Company reported income from continuing operations of
$54,700,000 for 2004, compared to income of $3,654,000 for 2003
and a loss of $6,000 for 2002. Revenue from continuing
operations was $137,280,000 for 2004, $104,720,000 for 2003 and
$84,770,000 for 2002.
19
Textile products sales of $136,276,000 in 2004 increased by
$31,556,000, or 30%, compared to $104,720,000 in 2003 which was
an increase of $19,950,000, or 24%, compared to $84,770,000 in
2002. The increases were principally due to additional sales of
specialty fabric to U.S. military contractors. Military
sales accounted for $76,474,000, $46,231,000 and $25,098,000 in
2004, 2003 and 2002, respectively, which represented 56%, 44%
and 30% of its sales.
Brookwood had one customer that accounted for more than 10% of
its net sales during the three years ended December 31,
2004. The relationship with the customer is ongoing and
Brookwood expects to maintain comparable sales volumes with that
customer in 2005. Sales to that customer were $53,149,000,
$30,724,000 and $18,600,000 in 2004, 2003 and 2002, respectively.
The Company’s HPL subsidiary commenced operations in
October 2004 as an operating and management company for the
benefit of all energy affiliates. Direct costs are rebilled to
the respective energy affiliate and indirect costs are rebilled
on a pro rata basis, the total of which was $1,004,000 for the
three months ended December 31, 2004.
Textile products cost of sales increased $19,510,000 to
$102,772,000, or 23%, in 2004. The 2003 cost of sales of
$83,262,000 increased by $11,781,000, or 16%, compared to
$71,481,000 in 2002. The increase in cost of sales was
principally the result of the increased sales. The gross profit
margin was 24.6%, 20.5% and 15.7% in 2004, 2003 and 2002,
respectively. The improved gross profit margins resulted from
the sales increase of specialty fabric to U.S. military
contractors and improved manufacturing efficiencies.
Administrative and selling expenses were comprised of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Textile products
|
|
$ |
15,043 |
|
|
$ |
14,787 |
|
|
$ |
11,243 |
|
|
Corporate
|
|
|
6,792 |
|
|
|
2,096 |
|
|
|
1,978 |
|
|
Energy
|
|
|
1,002 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
22,837 |
|
|
$ |
16,883 |
|
|
$ |
13,221 |
|
| |
|
|
|
|
|
|
|
|
|
Textile products administrative and selling expenses of
$15,043,000 for 2004 increased by $256,000, or 2%, from the 2003
amount of $14,787,000, which increased $3,544,000, or 32%,
compared to the 2002 amount of $11,243,000. The 2004 increase
was primarily attributable to higher royalty and payroll costs
and costs associated with the implementation of the
Sarbanes-Oxley Act of 2002. The 2003 increase was primarily
attributable to royalties to Brookwood’s former joint
venture partner in STA and payroll.
Corporate administrative expenses were $6,792,000 for 2004,
compared to $2,096,000 for 2003 and $1,978,000 for 2002. The
2004 expenses include increased professional fees, travel
expenses and costs associated with the merger of HRP with HRPT,
including costs of $2,465,000 associated with a plan to offer
employment and pay retention bonuses to eight former Hallwood
Realty employees to remain available for assisting in the
winding up of HRP’s business and to assist the Company in
the pursuit of new real estate opportunities in the future and
executive bonuses associated with the disposition of HEC. The
increase of $118,000, or 6%, in 2003 was primarily attributable
to increased consulting and professional fees.
Administrative costs for the Company’s HPL subsidiary were
$1,002,000 for the three months ended December 31, 2004.
Other Income (Loss)
The Company reported a gain from sale of investment in HEC of
$62,288,000 in 2004. On December 15, 2004, HEC completed a
merger to Chesapeake Energy Corporation for $292,000,000,
subject to reduction for
20
certain transaction costs, title discrepancies and other
matters. After their adjustment and the repayment of certain
loans and other obligations of HEC, the Company received cash
proceeds totaling $55,788,000. The gain from sale exceeded the
proceeds, due to the recording of equity losses from HEC
operations which reduced the carrying value of the HEC
investment below zero.
Interest and other income was $1,536,000 in 2004, compared to
$(27,000) in 2003 and $360,000 in 2002. The 2004 increase was
due to realized and unrealized gains from investments in
marketable securities and interest income earned on cash and
cash equivalents. The 2002 amount included gain of $296,000 from
the exercise of an option and sale of a marketable security.
Amortization of deferred revenue in the amount of $1,007,000 in
2004, $2,417,000 in 2003 and $2,417,000 in 2002 was attributable
to the noncompetition agreement associated with the sale of the
Company’s investment in Former Hallwood Energy in May 2001.
Under the noncompetition agreement, the Company agreed to
refrain from taking certain actions without prior consent,
including, among other items, directly or indirectly engaging in
certain oil and gas activities in certain geographic areas, for
a period of three years. The $7,250,000 cash payment was
amortized over a three year period which ended in May 2004.
In 1999, the Company entered into a separation agreement
(“the Separation Agreement”) with a former officer and
director. The Separation Agreement provided that the former
officer and director and related trust exchange 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 Former Hallwood Energy, all of the Company’s
interest in its condominium hotel business and future cash
payments contingent on the net cash flow from the Company’s
real estate management activities, that being the lesser of 20%
of the net cash flow from its real estate management activities
for the preceding quarter, or $125,000. These future cash
payments were subject to termination in certain circumstances.
The additional cost of the Separation Agreement recorded in 2002
in the amount of $1,000,000 represented future cash payments to
the trust through the period ending December 2004. The Company
had an option to extinguish the future cash payments at any time
prior to December 21, 2004 upon the payment of $3,000,000.
In June 2004, the Company exercised the option. The Company
recognized a gain from extinguishment of the Separation
Agreement in the amount of $375,000, which was the excess of the
remaining obligation over the $3,000,000 exercise price.
Equity income (loss) from investments in energy affiliates
relating to the Company’s pro rata share of income (loss)
in the affiliates was comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
HEC
|
|
$ |
(9,444 |
) |
|
$ |
50 |
|
|
$ |
(187 |
) |
|
HE III
|
|
|
(223 |
) |
|
|
— |
|
|
|
— |
|
|
HE II
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
Hallwood Exploration
|
|
|
(228 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
(9,901 |
) |
|
$ |
50 |
|
|
$ |
(187 |
) |
| |
|
|
|
|
|
|
|
|
|
HEC, which was formed in 2002, commenced commercial production
and sales of natural gas in February 2003. The Company’s
proportionate share of HEC’s 2004 loss was principally
attributable to compensation expense, in connection with the
settlement of stock options concurrent with the completion of
the merger and sale in December 2004.
HE III commenced commercial production and sales of natural
gas in June 2004, while HE II and Hallwood Exploration
remain in the development stage.
21
Interest expense was comprised of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Corporate
|
|
$ |
799 |
|
|
$ |
995 |
|
|
$ |
850 |
|
|
Textile products
|
|
|
398 |
|
|
|
641 |
|
|
|
542 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
1,197 |
|
|
$ |
1,636 |
|
|
$ |
1,392 |
|
| |
|
|
|
|
|
|
|
|
|
Corporate interest expense principally relates to the
Company’s Amended and Restated Credit Agreement, the former
Term Loan and Revolving Credit Facility, and the
10% Debentures. Interest expense of $799,000 in 2004
decreased by $196,000, or 20%, due to the repayment of the
Amended and Restated Credit Agreement in July 2004 and the
redemption of the 10% Debentures in September 2004.
Interest expense of $995,000 for 2003 increased by $145,000, or
17%, compared to 2002 interest of $850,000, primarily due to
borrowings under the Amended and Restated Credit Agreement.
Textile products interest expense principally relates to
Brookwood’s Key Bank revolving credit facility.
Fluctuations in interest expense year to year were principally
due to changes in the average outstanding amounts.
During 2000, Brookwood formed STA with an unrelated third party
that is also in a textile-related industry. STA acquired the 50%
ownership interest not owned by Brookwood in September 2002.
Accordingly, STA became a wholly owned subsidiary in September
2002. Prior to the acquisition, Brookwood utilized the equity
method of accounting for its investment in STA. Brookwood’s
equity income from STA in 2002 was $1,163,000 (prior to
acquisition). Since September 2002, the results of STA have been
fully consolidated.
Income Taxes
Following is a schedule of the income tax expense (benefit) (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| Continuing Operations |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
10,390 |
|
|
$ |
(5 |
) |
|
$ |
15 |
|
| |
Deferred
|
|
|
(900 |
) |
|
|
822 |
|
|
|
822 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Sub-total
|
|
|
9,490 |
|
|
|
817 |
|
|
|
837 |
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
1,783 |
|
|
|
908 |
|
|
|
598 |
|
| |
Deferred
|
|
|
(194 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Sub-total
|
|
|
1,589 |
|
|
|
908 |
|
|
|
598 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
11,079 |
|
|
$ |
1,725 |
|
|
$ |
1,435 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| Discontinued Operations |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
1,207 |
|
|
$ |
73 |
|
|
$ |
35 |
|
| |
Deferred
|
|
|
5,143 |
|
|
|
(5,307 |
) |
|
|
2,434 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Sub-total
|
|
|
6,350 |
|
|
|
(5,234 |
) |
|
|
2,469 |
|
| |
State
|
|
|
212 |
|
|
|
40 |
|
|
|
215 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
6,562 |
|
|
$ |
(5,194 |
) |
|
$ |
2,684 |
|
| |
|
|
|
|
|
|
|
|
|
During 2004, the Company utilized all of its available NOLs,
depletion carryforwards and tax credits to offset taxable
income. Accordingly, at December 31, 2004, the deferred tax
asset is attributable solely to temporary differences which can
be utilized to offset projected income from operations.
22
Although the use of such carryforwards in 2004 to offset taxable
income could have been limited under certain circumstances, the
Company is not aware of the occurrence of any event which would
have resulted in such limitations. In addition, utilization of
NOLs in 2004 could have been limited if changes in the
Company’s stock ownership had created a change of control,
as provided in Section 382 of the Internal Revenue Code of
1986, as amended. The Company believes no such changes have
occurred.
The Company recorded a federal current tax expense (benefit) of
$10,390,000, $(5,000) and $15,000 from continuing operations for
the three years ended December 31, 2004, respectively. The
2004 amount is attributable to significant taxable income,
principally related to the sale of HEC. The Company recorded
state tax expense from continuing operations of $1,589,000,
$908,000 and $598,000 for the three years ended
December 31, 2004. Although the Company reported
significant taxable income in 2002, it incurred no federal
alternative minimum tax, due to a change in the tax law
affecting the calculation of the alternative minimum tax that
expired in 2002.
The Company recorded a federal deferred tax expense or (benefit)
of $5,143,000 $(5,307,000) and $2,434,000 from discontinued
operations for the three years ended December 31, 2004,
respectively. The 2004 amount is attributable to significant
taxable income offset by NOLs and tax credits, principally
related to the sale of HRP.
Discontinued Operations — Real Estate
A summary of discontinued real estate operations (through the
date of sale) is provided below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Related parties
|
|
$ |
2,814 |
|
|
$ |
4,838 |
|
|
$ |
5,380 |
|
| |
|
Other
|
|
|
247 |
|
|
|
238 |
|
|
|
287 |
|
| |
Equity income (loss) from investments in HRP
|
|
|
(2,769 |
) |
|
|
(436 |
) |
|
|
1,428 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
292 |
|
|
|
4,640 |
|
|
|
7,095 |
|
| |
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Administrative expenses
|
|
|
877 |
|
|
|
1,564 |
|
|
|
1,819 |
|
| |
Litigation costs
|
|
|
50 |
|
|
|
3,371 |
|
|
|
— |
|
| |
Amortization
|
|
|
— |
|
|
|
560 |
|
|
|
672 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
927 |
|
|
|
5,495 |
|
|
|
2,491 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) from operations
|
|
|
(635 |
) |
|
|
(855 |
) |
|
|
4,604 |
|
|
Gain from sale
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain from sale of investments in HRP
|
|
|
52,703 |
|
|
|
— |
|
|
|
— |
|
| |
Incentive compensation and transaction costs
|
|
|
(6,629 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
46,074 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes
|
|
|
45,439 |
|
|
|
(855 |
) |
|
|
4,604 |
|
| |
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Current federal and state income tax expense
|
|
|
1,294 |
|
|
|
113 |
|
|
|
250 |
|
| |
|
Deferred federal income tax expense (benefit)
|
|
|
5,143 |
|
|
|
(5,307 |
) |
|
|
634 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
6,437 |
|
|
|
(5,194 |
) |
|
|
884 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income from discontinued real estate operations
|
|
$ |
39,002 |
|
|
$ |
4,339 |
|
|
$ |
3,720 |
|
| |
|
|
|
|
|
|
|
|
|
23
Revenues. Real estate revenues of $292,000 for 2004,
$4,640,000 for 2003 and $7,095,000 for 2002, include fee income
and equity income (loss) from the Company’s investments in
HRP.
Fee income of $3,061,000 for 2004 decreased by $2,015,000, or
40%, compared to $5,076,000 for 2003. The 2003 fee income
decreased by $591,000, or 10%, compared to $5,667,000 for 2002.
The decrease in 2004 was principally due to the sale of HRP in
July 2004. The decrease in 2003 was principally due to lower
leasing fees which are cyclical in nature. The Company’s
Hallwood Realty subsidiary was the general partner of HRP and
earned an asset management fee and other fees from HRP
properties, which amounted to $335,000 for 2004, $605,000 for
2003 and $618,000 for 2002. The Company’s HCRE subsidiary
was responsible for day-to-day on-site property management at
all of HRP’s properties and other properties it managed for
third parties, for which HCRE received management fees, leasing
commissions and certain other fees, which amounted to $2,479,000
for 2004, $4,233,000 for 2003 and $4,762,000 for 2002.
The equity income (loss) from investments in HRP represents the
Company’s pro-rata share of the net income (loss) reported
by HRP, adjusted for the elimination of intercompany income. The
Company recorded an equity loss of $2,769,000 for 2004, compared
to a loss of $436,000 in 2003 and income of $1,428,000 for 2002.
The 2004 decrease resulted principally from costs at HRP
attributed to expenses associated with the settlement of unit
options by HRP executives, employee severance costs, costs
associated with the completion of the sale and resolution of
litigation matters. The 2003 decrease resulted principally from
HRP’s litigation costs and other costs associated with a
tender offer for the HRP limited partner units by High River in
2003.
Expenses. Real estate expenses of $927,000 for 2004,
$5,495,000 for 2003 and $2,491,000 for 2002, include
administrative expenses, litigation costs and amortization.
Administrative expenses decreased by $687,000, or 44%, to
$877,000 for 2004, compared to $1,564,000 for 2003. The 2003
expenses decreased by $255,000, or 14%, compared to $1,819,000
for 2002. The decrease in 2004 was principally due to the sale
of HRP in July 2004. The 2003 decrease was primarily
attributable to reduced payments of commissions associated with
leasing income, which can vary significantly from year to year
due to the transactional nature of the services.
Litigation expense of $3,371,000 in 2003 represented the
interest component of the judgment on remand in the Gotham
Partners, L.P. vs. Hallwood Realty Partners, L.P. et al
matter discussed in Note 20, net of the Company’s
pro rata share of that amount which was recorded as income by
HRP, and the Company’s share of attorneys’ fees paid
by HRP to plaintiff’s attorneys recorded as expenses by
HRP. Pursuant to the judgment on remand, the Company was
required to pay a judgment of $2,988,000 plus pre-judgment
interest of approximately $3,762,000. The Company paid
$5,000,000 of the combined amount in August 2003. In May 2004,
the Company made an additional payment of $1,877,000, including
interest, in full satisfaction and obligation.
Amortization expense of $-0-, $560,000 and $672,000 for each of
the three years 2004, 2003 and 2002, respectively, related to
Hallwood Realty’s general partner interest in HRP to the
extent allocated to management rights, which was amortized over
a ten year period and became fully amortized in October 2003.
Gain from Sale of Investments in HRP. The gain from sale
of investments in HRP of $52,703,000 resulted from the net
proceeds of approximately $66,119,000 received in the merger
less the carrying value of the investments in the general
partnership and limited partnership interests of approximately
$13,416,000.
Incentive Compensation and Transaction Costs. In
connection with the sale of HRP and the substantial benefits the
Company received from the operations of HRP over a number of
years, a special committee, consisting of independent members of
the board of directors of the Company authorized an additional
incentive compensation payment of $1,622,000 to Mr. William
L. Guzzetti, the Company’s President, and payments of
$1,908,000 to Mr. Gumbiner and $3,000,000 to HIL.
Transaction costs were $99,000.
24
Discontinued Operations — Hotels
Dispositions. In December 2000, the Company decided to
discontinue its hotel operations and dispose of its hotel
segment, principally by allowing its non-recourse debtholders to
assume ownership of the properties through foreclosures or by
selling or otherwise disposing of its hotel properties. The
Company’s former hotel segment consisted of three owned
properties and two leased properties. As part of the planned
disposition, the Company evaluated the operations and economic
environment in which each of the hotels operated and in December
2001 and December 2000 recorded impairments to reduce hotel
carrying values to estimated fair market values.
As of June 2002, the Company completed the disposition of all
four hotel properties it had previously designated as
discontinued operations. The Company determined that it would
retain its leasehold interest in the GuestHouse Suites hotel in
Huntsville, Alabama. Effective December 31, 2004, the
Company’s Brock Suites Huntsville, Inc. subsidiary entered
into a Lease Termination and Mutual Release Agreement with the
landlord of the GuestHouse Suites Plus hotel in Huntsville,
Alabama. In connection with the lease termination, the remaining
net assets of the subsidiary were transferred to the landlord,
and the Company obtained a release from any further obligations.
Operating results for the this hotel have been reclassified to
discontinued operations for all years presented.
A summary of the discontinued hotel operations for the three
years ended December 31, 2004 is presented below (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain from extinguishment of debt
|
|
$ |
1,598 |
|
|
$ |
— |
|
|
$ |
5,789 |
|
| |
Sales
|
|
|
1,499 |
|
|
|
1,414 |
|
|
|
1,858 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
3,097 |
|
|
|
1,414 |
|
|
|
7,647 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating expenses
|
|
|
1,987 |
|
|
|
1,799 |
|
|
|
2,046 |
|
| |
Depreciation and amortization
|
|
|
188 |
|
|
|
115 |
|
|
|
117 |
|
| |
Interest expense
|
|
|
10 |
|
|
|
37 |
|
|
|
242 |
|
| |
Litigation and other disposition costs
|
|
|
5 |
|
|
|
31 |
|
|
|
362 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
2,190 |
|
|
|
1,982 |
|
|
|
2,767 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) before income taxes
|
|
|
907 |
|
|
|
(568 |
) |
|
|
4,880 |
|
| |
Income tax expense
|
|
|
124 |
|
|
|
— |
|
|
|
1,800 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) from discontinued hotel operations
|
|
$ |
783 |
|
|
$ |
(568 |
) |
|
$ |
3,080 |
|
| |
|
|
|
|
|
|
|
|
|
Revenues. In December 2004, the Company’s Brock
Suites Huntsville, Inc. subsidiary entered into a Lease
Termination and Mutual Release Agreement with the landlord of
the GuestHouse Suites Plus hotel in Huntsville, Alabama. In
connection with the lease termination, the remaining assets of
the subsidiary were transferred to the landlord, and the Company
obtained a release from any further obligations. The Company
recognized a gain from extinguishment of debt of $1,598,000.
In January 2002, with assistance and consent of the mortgage
lender, the Company sold the GuestHouse Suites hotel in Tulsa,
Oklahoma for $3,000,000. The Company received no cash proceeds
from the sale. In connection with the sale, the parties entered
into a loan modification and assumption agreement, which
included a release that discharges the Company from any further
loan obligation associated with the Tulsa hotel. The Company
recognized a gain from extinguishment of debt of $2,552,000. In
February 2002, the mortgage lender for the GuestHouse Suites
hotel in Greenville, South Carolina obtained a court judgment of
foreclosure. In connection with the foreclosure, the lender
waived its right to a deficiency judgment against the
25
Company and completed the foreclosure in June 2002. The Company
recognized a gain from extinguishment of debt of $3,237,000.
Hotel sales from the leased GuestHouse Suites Plus hotel in
Huntsville, Alabama was $1,499,000 in 2004, compared to
$1,414,000 in 2003 and $1,576,000 in 2002. The $85,000 increase,
or 6%, in 2004 and the $162,000 decrease, or 10%, in 2003 were
attributable to fluctuations in the occupancy level, partially
offset by an increased average daily rate. Hotel sales in 2002
includes $282,000 from two GuestHouse Suites hotels that were
disposed of during 2002.
Expenses. Hotel expenses were $2,190,000 for 2004,
$1,982,000 for 2003 and $2,767,000 in 2002.
Hotel expenses include operating expenses, depreciation and
interest costs associated with the GuestHouse Suites Plus hotel
in Huntsville, Alabama, for the three years ended
December 31, 2004 and include $324,000 in 2002 for the two
Guesthouse Suites hotel that were disposed of during 2002.
Operating expenses increased by $188,000, or 10%, to $1,987,000
in 2004, compared to $1,799,000 in 2003, and 2003 expenses
decreased by $247,000, or 12%, from $2,046,000 in 2002. The
increase in 2004 was principally due to higher repairs and
maintenance expense at the Huntsville hotel and the decrease in
2003 was principally due to the disposition of the two hotels.
Depreciation and amortization expense of $188,000, $115,000 and
$117,000 for the three years ended December 31, 2004,
respectively, relates to the Huntsville hotel. The increased
expense in 2004 is due to the write-off of the carrying value of
certain capitalized lease costs.
The income tax expense of $124,000 in 2004 relates to the
operating results and gain from extinguishment of debt from the
GuestHouse Suites hotel in Huntsville, AL. The deferred tax
charge of $1,800,000 in 2002 is associated with the gains from
extinguishment of debt of the GuestHouse Suites hotels in
Greenville, SC and Tulsa, OK.
Interest expense was $10,000 for 2004, $37,000 for 2003 and
$242,000 in 2002. The decrease in 2004 was due to the repayment
of a loan payable, and the decrease in 2003 was due to the
extinguishment of mortgage debt in 2002 upon disposition of the
two hotels.
Litigation and other disposition costs principally relate to
legal fees and other expenses in connection with the
dispositions and the resolution of the two litigation matters
discussed above, including a loss provision of $247,000 in 2002
for the settlement costs. The Company was a defendant in two
lawsuits regarding guaranties of certain obligations of the
Holiday Inn and Embassy Suites hotels. In February 2003, the
Company settled both matters. The Company agreed (i) to pay
$150,000 in cash and to issue a non-interest bearing promissory
note in the amount of $250,000 payable in equal monthly
installments over 18 months, in exchange for a full release
regarding the Embassy Suites hotel and (ii) to pay $250,000
in cash in exchange for a full release regarding the Holiday Inn
hotel. In December 2002, the Company recorded an additional loss
provision in the amount of $247,000 to fully accrue for these
two litigation matters.
Cumulative Effect of Changes in Accounting Principles
SFAS No. 142 became effective January 1, 2002 and
specifies that goodwill and some intangible assets will no
longer be amortized but instead will be subject to periodic
impairment testing. The effect of adopting
SFAS No. 142 by the Company resulted in the recording
of income from the cumulative effect of a change in accounting
principle in the amount of $568,000, which represented the
unamortized amount of negative goodwill associated with the
Company’s equity investment in HRP.
Liquidity and Capital Resources
The Company’s cash position increased by $68,882,000 during
2004 to $71,767,000 as of December 31, 2004. The principal
sources of cash were $59,488,000 from the sale of HRP and
$55,788,000 from the sale of HEC . The principal uses of cash
were $14,802,000 for net repayment of bank borrowings,
$6,468,000 for the redemption of the 10% Debentures,
$11,032,000 for investments in energy affiliates, $5,000,000 for
investments in marketable securities and $3,361,000 for property
plant and equipment.
26
Following the sale of its investments in HRP and HEC, the
Company operates principally in the textile products and energy
business segments.
Textiles. Brookwood maintains a $22,000,000 revolving
line of credit facility and a $3,000,000 equipment facility with
Key Bank. The facilities have a maturity of January 2007. At
December 31, 2004, Brookwood had $13,999,000 of unused
borrowing capacity on its revolving line of credit facility. In
the years ended December 31, 2004, 2003 and 2002, Brookwood
made payments to the Company of $5,373,000, $1,987,000 and
$250,000, respectively, under its tax sharing agreement and a
cash dividend of $3,000,000 in 2004 and $600,000 in 2003. In
March 2005, Brookwood made tax sharing and dividend payments of
$1,748,000 and $2,500,000, respectively. Future cash dividends
and tax sharing payments are contingent upon Brookwood’s
compliance with the covenants contained in the credit facility.
Brookwood was in compliance with its loan covenants for all
periods in 2004 and 2003. There were no significant capital
requirements as of December 31, 2004.
Energy. On December 15, 2004, HEC completed a merger
with Chesapeake under which Chesapeake acquired HEC. The merger
agreement provided for a total price of $292,000,000, which was
subject to reduction for certain transaction costs, title
discrepancies and other matters, and adjustments for changes in
working capital. After these reductions and adjustments,
Chesapeake paid a total of $277,100,000 at the closing,
including debt owed by HEC. In addition, stockholders of HEC
received a distribution of a receivable in the amount of
$7,040,000 and the approximate $4,400,000 carrying value of
HEC’s investment in its Hallwood SWD, Inc. subsidiary which
were then contributed to HE III as an additional capital
contribution. The amounts received by HEC stockholders were
reduced by additional transaction costs. As a result, the
Company received $55,788,000 from the transaction on
December 15, 2004.
The Company has invested $11,014,000, $1,997,000, and $3,500,000
in its various energy affiliates in 2004, 2003 and 2002,
respectively, and $4,251,000 to date in 2005. The energy
affiliates anticipate that substantial additional capital will
be required over the next few years to complete projected
property acquisition, exploration and development costs. As a
result, the Company has projected up to $15,000,000 for
additional capital investment in the energy affiliates for the
remainder of 2005. The Company believes these contributions can
be made from existing cash. The actual level of investment,
however, will depend on a number of factors that cannot be
determined at this time, including future gas prices, costs of
field operations, the ability to successfully identify and
acquire prospective properties and drill and complete wells, and
the availability of alternative sources of capital, such as
loans from third parties.
Financial Covenants
The Company’s former Amended and Restated Credit Agreement
and 10% Debentures required compliance with various loan
covenants and financial ratios, which, if not met, would have
triggered a default. Additionally, Brookwood’s Key Working
Capital Revolving Credit Facility requires compliance with
various loan covenants and financial ratios, principally a debt
service coverage ratio and a net worth ratio.
Amended and Restated Credit Agreement and
10% Debentures. The Amended and Restated Credit
Agreement and 10% Debentures were repaid in 2004. Prior to
their repayment, the Company was in compliance with the
covenants for both borrowings in 2004 and 2003.
Key Working Capital Revolving Credit Facility. The
principal ratios, as defined in the Key Working Capital
Revolving Credit Facility as of December 31, 2004 and the
end of the interim quarters in the year ended December 31,
2004 are provided below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Quarters Ended in 2004 | |
| |
|
|
|
| |
| Description |
|
Requirement |
|
December 31, | |
|
September 30, | |
|
June 30, | |
|
March 31, | |
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
EBITDA to total fixed charges
|
|
must exceed 1.15 |
|
|
1.41 |
|
|
|
1.28 |
|
|
|
1.62 |
|
|
|
1.71 |
|
|
Total debt to tangible net worth
|
|
must be less than 1.75 |
|
|
0.89 |
|
|
|
0.90 |
|
|
|
0.95 |
|
|
|
1.08 |
|
Brookwood was in compliance with its loan covenants under the
Key Working Capital Revolving Credit Facility as of
December 31, 2004 and for all interim periods during 2004.
27
Contractual Obligations and Commercial Commitments
The Company and its subsidiaries have entered into various
contractual obligations and commercial commitments in the
ordinary course of conducting its business operations, which are
provided below as of December 31, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due During the Year Ending December 31, | |
| |
|
| |
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Long term debt
|
|
$ |
347 |
|
|
$ |
352 |
|
|
$ |
8,258 |
|
|
$ |
152 |
|
|
$ |
27 |
|
|
|
— |
|
|
$ |
9,136 |
|
| |
Operating leases
|
|
|
897 |
|
|
|
428 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,325 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
1,244 |
|
|
$ |
780 |
|
|
$ |
8,258 |
|
|
$ |
152 |
|
|
$ |
27 |
|
|
|
— |
|
|
$ |
10,461 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount of Commitment Expiration | |
| |
|
During the Year Ending December 31, | |
| |
|
| |
| |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Employment contracts
|
|
$ |
518 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
518 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Purpose Entities
The Company has, in certain situations, created Special Purpose
Entities (“SPE”). These SPEs were formed to hold title
to specific assets and accomplish various objectives. In 1998,
the Company formed several SPEs to complete a consolidation of
its real estate assets into a new structure to facilitate
possible financing opportunities. In other situations, SPEs were
formed at the request of lenders for the express purpose of
strengthening the collateral for the loans by isolating (for
Federal bankruptcy law purposes) the assets and liabilities of
the SPEs. In all cases and since their various formation dates,
these wholly owned entities (including their assets, liabilities
and results of operations) have been fully consolidated into the
financial statements of the Company.
New Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 123(R),
Share-Based Payments, which establishes accounting
standards for all transactions in which an entity exchanges its
equity instruments for goods and services.
SFAS No. 123(R) focuses primarily on accounting for
transactions with employees, and carries forward without change
prior guidance for share-based payments for transactions with
non employees.
The Company is required to apply SFAS No. 123(R) to
all awards granted, modified or settled in our first reporting
period under U.S. Generally Accepted Accounting Principles
after June 15, 2005. The Company is also required to use
either the “modified prospective method” or the
“modified retrospective method”. Under the modified
prospective method, the Company must recognize compensation cost
for all awards granted after we adopt the standard and for the
unvested portion of previously granted awards that are
outstanding on that date. Under the modified retrospective
method, the Company must restate our previously issued financial
statements to recognize the amounts we previously calculated and
reported on a pro forma basis, as if the prior standard had been
adopted. Under both methods, the Company is permitted to use
either a straight line or an accelerated method to amortize the
cost as an expense for awards with graded vesting.
Management commenced its analysis of the impact of
SFAS 123(R), but has not yet decided whether it will use
the modified prospective method or elect to use the modified
retrospective method, or whether it will elect to use straight
line amortization or an accelerated method. Additionally, it
cannot predict with reasonable certainty the number of options
that will be unvested and outstanding on July 1, 2005.
Accordingly, it cannot currently quantify with precision the
effect that this standard would have on our financial position or
28
results of operations in the future, except that it probably
will recognize a greater expense for any awards that it may
grant in the future than we would using the current guidance.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an amendment of ARB No. 43,
Chapter 4, which amends Chapter 4 of ARB No. 43
that deals with inventory pricing. The Statement clarifies the
accounting for abnormal amounts of idle facility expenses,
freight, handling costs and spoilage. Under previous guidance,
paragraph 5 of ARB No. 43, Chapter 4, items such
as idle facility expense, excessive spoilage, double freight and
re-handling costs might be considered to be so abnormal, under
certain circumstances, as to require treatment as current period
charges. This Statement eliminates the criterion of “so
abnormal” and requires that those items be recognized as
current period charges. Also, this Statement requires that
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005,
although earlier application is permitted for fiscal years
beginning after the date of issuance of this Statement.
Retroactive application is not permitted. Management is
analyzing the requirements of this new Statement and believes
that its adoption will not have any significant impact on the
Company’s financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB
No. 29. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The
Statement specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement
is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application
is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date this Statement is issued.
Retroactive application is not permitted. Management is
analyzing the requirements of this new Statement and believes
that its adoption will not have any significant impact on the
Company’s financial position, results of operations or cash
flow.
Inflation
Inflation did not have a significant impact on the Company in
the three years ended December 31, 2004, and is not
anticipated to have a material impact in 2005.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
The Company has no foreign operations, and it does not enter
into financial instrument transactions for trading or other
speculative purposes.
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 fixed rate and variable rate debt at
December 31, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expected Maturities as of December 31, | |
|
|
| |
|
| |
|
Fair | |
| Debt Classification |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Total | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Fixed Rate
|
|
$ |
347 |
|
|
$ |
352 |
|
|
$ |
281 |
|
|
$ |
152 |
|
|
$ |
27 |
|
|
$ |
1,159 |
|
|
$ |
1,118 |
|
| |
Average Interest Rate
|
|
|
4.39 |
% |
|
|
4.37 |
% |
|
|
4.20 |
% |
|
|
3.84 |
% |
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
Variable Rate
|
|
|
— |
|
|
|
— |
|
|
$ |
7,977 |
|
|
|
— |
|
|
|
— |
|
|
$ |
7,977 |
|
|
$ |
7,977 |
|
| |
Average Interest Rate
|
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
5.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 one
percentage point would cause a loss in income and cash flows of
approximately $91,000 during 2005, assuming that outstanding
debt remained at current levels.
29
Forward-Looking Statements
In the interest of providing stockholders and debentureholders
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,
objectives and expectations. Such statements 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 those described in “Item 1.
Business — Competition, Risks and Other Factors”.
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 report of independent registered public accounting firm
are included elsewhere herein. Reference is made to
Item 15. “Financial Statements, Financial Statement
Schedules and Exhibits”.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
None.
Item 9A. Controls and
Procedures
Disclosure Controls and Procedures. It is the conclusion
of the Company’s principal executive officer and principal
financial officer that the Company’s disclosure controls
and procedures (as defined in Exchange Act rules 13a-15(e) and
15d-15(e)), based on their evaluation of these controls and
procedures as of the end of the period covered by this Annual
Report, are effective in timely alerting them to the material
information relating to the Company required to be included in
its periodic filings with the Securities and Exchange
Commission. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures
which, by their nature, can provide only reasonable assurance
regarding management’s control objectives. The design of
any system of controls and procedures is based in part upon
certain assumptions about the likelihood of future events. There
can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions,
regardless of how remote.
In August 2003, the Company’s independent registered public
accounting firm provided written communications to management
and the audit committee on the need to improve the financial
closing process at the Brookwood subsidiary. In April 2004, the
Company received a further written communications from the
independent registered public accounting firm to management and
the audit committee on the continued need to improve the
Brookwood financial closing process. With the addition of new
staff, Brookwood’s management believes it has made
substantial progress both in the timeliness and accuracy of the
closing process. In March 2005, the Company received
communication from their independent registered public
accounting firm that further improvements in the financial
systems and processes at its Brookwood subsidiary are still
required.
Internal Controls. Other than the suggested improvements
noted above, there were no significant changes in the
Company’s internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation.
30
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, 2004. Additional information concerning the
executive officers of the Company is included under
“Item 1. Business — Executive Officers of
the Company”.
|
|
| Item 11. |
Executive Compensation |
Information with respect to executive compensation is contained
in the Proxy Statement under the headings “Executive
Compensation,” “Compensation of Directors” and
“Certain Relationships and Related Transactions,” and
such information is incorporated herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The following table provides information as of December 31,
2004 about the Company’s Common Stock that may be issued
upon the exercise of options granted pursuant to the 1995 Stock
Option Plan, as amended:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Equity Compensation Plan Information | |
| |
|
| |
| |
|
|
|
Number of Securities | |
| |
|
Number of Securities | |
|
|
|
Available for Future | |
| |
|
to Be Issued | |
|
Weighted-average | |
|
Issuance Under Equity | |
| |
|
Upon Exercise of | |
|
Exercise Price of | |
|
Compensations Plans, | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Excluding Securities | |
| Plan Category |
|
Warrants and Rights(1) | |
|
Warrants and Rights | |
|
Reflected in First Column | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by stockholders
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
40,800 |
|
|
Equity compensation plans not approved by stockholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
40,800 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The number of shares is subject to adjustment for changes
resulting from stock dividends, stock splits, recapitalizations
and similar events. The Board of Directors in its discretion may
make adjustments, as appropriate, in connection with any
transaction. |
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. Information regarding equity
compensation plans are contained in the Proxy Statement under
the heading “Executive Compensation”.
|
|
| 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.
|
|
| Item 14. |
Principal Accounting Fees and Services |
Information concerning principal auditor fees and services is
contained in the Proxy Statement under the heading “Audit
Fees and Pre-Approval Policy” and such information is
incorporated herein by reference.
31
PART IV
|
|
| Item 15. |
Financial Statements, Financial Statement Schedules and
Exhibits |
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 |
|
|
| |
Report of Independent Registered Public Accounting Firm |
| |
| |
Consolidated Balance Sheets, December 31, 2004 and 2003 |
| |
| |
Consolidated Statements of Operations, Years ended
December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Comprehensive Income, Years ended
December 31, 2004, 2003 and 2002 |
| |
| |
Consolidated Statements of Changes in Stockholders’ Equity,
Years ended December 31, 2002, 2003 and 2004 |
| |
| |
Consolidated Statements of Cash Flows, Years ended
December 31, 2004, 2003 and 2002 |
|
|
| |
Notes to Consolidated Financial Statements |
2. Financial Statement Schedules.
|
|
| |
Independent Registered Public Accounting Firm’s Report on
Schedules |
|
|
| |
I. Condensed Financial Information of Registrant |
| |
| |
II. Valuation and Qualifying Accounts and Reserves |
| |
| |
All other schedules are omitted since the required information
is not applicable or is included in the consolidated financial
statements or related notes. |
3. Exhibits.
| |
|
|
|
|
|
|
| |
3 |
.1 |
|
— |
|
Second Restated Certificate of Incorporation of The Hallwood
Group Incorporated, is incorporated herein by reference to
Exhibit 4.2 to the Company’s Form S-8
Registration Statement, File No. 33-63709. |
| |
| |
3 |
.2 |
|
— |
|
Restated Bylaws of the Company 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. |
| |
| |
*10 |
.1 |
|
— |
|
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 |
.2 |
|
— |
|
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 |
.3 |
|
— |
|
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 |
.4 |
|
— |
|
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. |
32
| |
|
|
|
|
|
|
| |
10 |
.5 |
|
— |
|
Financial Consulting Agreement, dated as of December 31,
1996, between the Company and Hallwood Investments Limited,
formerly HSC Financial Corporation, is incorporated herein by
reference to Exhibit 10.22 to the Company’s Form 10-K
for the year ended December 31, 1996, File No. 1-8303. |
| |
| |
*10 |
.6 |
|
— |
|
Amendment to Financial Consulting Agreement, dated as of
May 16, 2001, between the Company and Hallwood Investments
Limited is incorporated herein by reference to Exhibit 10.9
to the Company’s Form 10-K for the year ended
December 31, 2001, File No. 1-8303. |
| |
| |
10 |
.7 |
|
— |
|
Amendment to Financial Consulting Agreement, dated as of
January 1, 2000, between the Company and Hallwood
Investments Limited, is incorporated herein by refinance to
Exhibit 10.15 to the Company’s Form 10-Q for the
quarter ended March 31, 2000, File No. 1-8303. |
| |
| |
10 |
.8 |
|
— |
|
Promissory Note and Security Agreement regarding equipment term
loan in the amount of $1,000,000.00, dated as of
September 29, 2000, between Brookwood Companies
Incorporated, Kenyon Industries, Inc., Brookwood Laminating,
Inc., Ashford Bromely, Inc., Xtramile, Inc., and Land
Ocean III, Inc. and Key Leasing, a division of Key
Corporate Capital, Inc., fixed interest — 9.37%, due
September 29, 2005, is incorporated herein by reference to
exhibit 10.19 to the Company’s Form 10-Q for the
quarter ended March 31, 2002, File No. 1-8303. |
| |
| |
10 |
.9 |
|
— |
|
Promissory Note and Security Agreement regarding equipment term
loan in the amount of $541,976.24, dated as of February 25,
2002, between Brookwood Companies Incorporated, Kenyon
Industries, Inc., Brookwood Laminating, Inc., Ashford Bromely,
Inc., Xtramile, Inc., and Land Ocean III, Inc. and Key
Leasing, a division of Key Corporate Capital, Inc., Libor plus
325 basis points-floating, due February 25, 2007, is
incorporated herein by reference to exhibit 10.20 to the
Company’s Form 10-Q for the quarter ended March 31,
2002, File No. 1-8303. |
| |
| |
10 |
.10 |
|
— |
|
Promissory Note and Security Agreement regarding equipment term
loan in the amount of $298,018, dated as of December 20,
2002, between Brookwood Companies Incorporated, Kenyon
Industries, Inc., Brookwood Laminating, Inc., Ashford Bromely,
Inc., Xtramile, Inc., Land Ocean III, Inc. and Strategic
Technical Alliance LLC and Key Leasing, a division of Key
Corporate Capital, Inc., fixed interest — 4.67%, due
December 20, 2007, is incorporated herein by reference to
Exhibit 10.16 to the Company’s Form 10-K for the year
ended December 31, 2002, File No. 1-8303. |
| |
| |
10 |
.11 |
|
— |
|
Subordinated Secured Promissory Note, dated September 28,
2002, Between Strategic Technical Alliance, LLC, as Maker, and
Burlington Industries, Inc., as Holder, in the amount of
$685,695, payable in eight quarterly installments beginning
January 31, 2003, is incorporated herein by reference to
Exhibit 10.18 to the Company’s Form 10-K for the year
ended December 31, 2002, File No. 1-8303. |
| |
| |
10 |
.12 |
|
— |
|
Second Amended and Restated Revolving Credit Loan and Security
Agreement, dated as of January 30, 2004, by and among Key
Bank National Association, Brookwood Companies Incorporated and
certain subsidiaries, is incorporated by reference to
Exhibit 10.21 to the Company’s Form 10-K for the year
ended December 31, 2003, File No. 1-8303. |
| |
| |
*10 |
.13 |
|
— |
|
Amendment to Financial Consulting Agreement, dated
March 10, 2004, by and between the Company and Hallwood
Investments Limited, is incorporated by reference to
Exhibit 10.22 to the Company’s Form 10-K for the year
ended December 31, 2003, File No. 1-8303. |
| |
| |
*10 |
.14 |
|
— |
|
Compensation Letter, dated May 11, 1998, between Brookwood
Companies Incorporated and Amber M. Brookman is incorporated by
reference to Exhibit 10.24 to the Company’s
Form 10-Q for the quarter ended March 31, 2004, File
No. 1-8303. |
| |
| |
*10 |
.15 |
|
— |
|
Amended 1995 Stock Option Plan for The Hallwood Group
Incorporated is incorporated by reference to Annex B of the
Company’s Proxy Statement, as filed on April 18, 2001,
File No. 001-08303. |
| |
| |
*10 |
.16 |
|
— |
|
Form of Stock Option Agreement to 1995 Stock Option Plan for The
Hallwood Group Incorporated, filed herewith. |
| |
| |
*10 |
.17 |
|
— |
|
Amendment to Financial Consulting Agreement, dated March 9,
2005, by and between the Company and Hallwood Investments
Limited, filed herewith. |
33
| |
|
|
|
|
|
|
| |
*10 |
.18 |
|
— |
|
Brookwood Companies Incorporated Stock Option Plan, dated
June 12, 1989, as amended April 5, 1993 and
May 3, 1999, filed herewith. |
| |
| |
*10 |
.19 |
|
— |
|
Form of Stock Option Agreement to The Brookwood Companies
Incorporated Stock Option Plan, filed herewith. |
| |
| |
21 |
|
|
— |
|
Active subsidiaries of the Registrant as of February 28,
2005, filed herewith. |
| |
| |
23 |
.1 |
|
— |
|
Independent Registered Public Accounting Firm’s Consent,
dated March 30, 2005, filed herewith. |
| |
| |
31 |
.1 |
|
— |
|
Certification of the Chief Executive Officer, pursuant to
Section 302 of Sarbanes-Oxley Act of 2002, filed
herewith. |
| |
| |
31 |
.2 |
|
— |
|
Certification of the Chief Financial Officer, pursuant to
Section 302 of Sarbanes-Oxley Act of 2002, filed
herewith. |
| |
| |
32 |
.1 |
|
— |
|
Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, filed herewith. |
|
|
| * |
Constitutes a compensation plan or agreement for executive
officers. |
34
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
|
|
|
| |
|
| |
Melvin J. Melle |
| |
Vice President — Finance |
| |
(Principal Financial and Accounting Officer) |
Dated:
March 30, 2005
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 30th day of March 2005.
| |
|
|
|
|
| |
/s/ Melvin J. Melle
(Melvin
J. Melle) |
|
Vice President — Finance
(Principal Financial and Accounting Officer) |
| |
/s/ Anthony J. Gumbiner
(Anthony
J. Gumbiner) |
|
Director and Chairman of the Board
(Principal Executive Officer) |
| |
/s/ Charles A.
Crocco, Jr.
(Charles
A. Crocco, Jr.) |
|
Director |
| |
/s/ A. Peter Landolfo
(A.
Peter Landolfo) |
|
Director |
| |
/s/ M. Garrett Smith
(M.
Garrett Smith) |
|
Director |
| |
/s/ J. Thomas Talbot
(J.
Thomas Talbot) |
|
Director |
35
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
| |
|
|
|
|
|
| |
|
Page | |
| |
|
| |
|
|
|
|
37 |
|
|
Financial Statements:
|
|
|
|
|
| |
|
|
|
38 |
|
| |
|
|
|
39 |
|
| |
|
|
|
40 |
|
| |
|
|
|
41 |
|
| |
|
|
|
42 |
|
| |
|
|
|
43 |
|
| |
|
Independent Registered Public Accounting Firm’s Report on
Schedules
|
|
|
74 |
|
| |
|
Schedules:
|
|
|
|
|
| |
|
|
|
75 |
|
| |
|
|
|
82 |
|
| |
| |
All other schedules are omitted since the required information
is not applicable or is included in the financial statements or
related notes |
|
|
|
|
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Directors of
The Hallwood Group Incorporated
We have audited the accompanying consolidated balance sheets of
The Hallwood Group Incorporated and subsidiaries (the
“Company”) as of December 31, 2004 and 2003, and
the related consolidated statements of operations, comprehensive
income, changes in stockholders’ equity, and cash flows for
each of the three years in the period ended December 31,
2004. 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. An audit includes
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
goodwill in 2002, as required by Statement of Financial
Accounting Standards No. 142, “Goodwill and Other
Intangible Assets” and its method of accounting for
redeemable preferred stock in 2003, as required by Statement of
Financial Accounting Standards No. 150, “Accounting
for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity.”
Deloitte & Touche
LLP
Dallas, Texas
March 30, 2005
37
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current Assets
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
71,767 |
|
|
$ |
2,885 |
|
| |
Marketable securities
|
|
|
6,100 |
|
|
|
— |
|
| |
Accounts receivable
|
|
|
|
|
|
|
|
|
| |
|
Trade and other
|
|
|
25,340 |
|
|
|
18,474 |
|
| |
|
Related parties
|
|
|
165 |
|
|
|
132 |
|
| |
Inventories
|
|
|
23,581 |
|
|
|
21,222 |
|
| |
Deferred income tax
|
|
|
2,213 |
|
|
|
— |
|
| |
Prepaids, deposits and other assets
|
|
|
1,314 |
|
|
|
437 |
|
| |
|
|
|
|
|
|
| |
|
|
130,480 |
|
|
|
43,150 |
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
| |
Investments in energy affiliates
|
|
|
12,491 |
|
|
|
5,360 |
|
| |
Property, plant and equipment, net
|
|
|
11,070 |
|
|
|
9,372 |
|
| |
Deferred income tax
|
|
|
2,444 |
|
|
|
1,362 |
|
| |
Other assets
|
|
|
503 |
|
|
|
372 |
|
| |
|
|
|
|
|
|
| |
|
|
26,508 |
|
|
|
16,466 |
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
| |
Real estate
|
|
|
329 |
|
|
|
23,616 |
|
| |
Hotels
|
|
|
— |
|
|
|
322 |
|
| |
|
|
|
|
|
|
| |
|
|
329 |
|
|
|
23,938 |
|
| |
|
|
|
|
|
|
| |
|
Total Assets
|
|
$ |
157,317 |
|
|
$ |
83,554 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current Liabilities
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
15,095 |
|
|
$ |
10,192 |
|
| |
Accrued expenses and other current liabilities
|
|
|
5,722 |
|
|
|
3,376 |
|
| |
Income taxes payable
|
|
|
1,167 |
|
|
|
543 |
|
| |
Related party payables
|
|
|
490 |
|
|
|
1,827 |
|
| |
Current portion of loans and capital lease obligations
|
|
|
347 |
|
|
|
2,631 |
|
| |
|
|
|
|
|
|
| |
|
|
22,821 |
|
|
|
18,569 |
|
|
Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
| |
Long term portion of loans and capital lease obligations
|
|
|
8,789 |
|
|
|
21,307 |
|
| |
Redeemable preferred stock
|
|
|
1,000 |
|
|
|
1,000 |
|
| |
10% Collateralized Subordinated Debentures
|
|
|
— |
|
|
|
6,569 |
|
| |
Separation Agreement obligation
|
|
|
— |
|
|
|
3,500 |
|
| |
Deferred revenue — noncompetition agreement
|
|
|
— |
|
|
|
1,007 |
|
| |
|
|
|
|
|
|
| |
|
|
9,789 |
|
|
|
33,383 |
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
| |
Real estate
|
|
|
166 |
|
|
|
493 |
|
| |
Hotels
|
|
|
— |
|
|
|
1,280 |
|
| |
|
|
|
|
|
|
| |
|
|
166 |
|
|
|
1,773 |
|
| |
|
|
|
|
|
|
| |
|
Total Liabilities
|
|
|
32,776 |
|
|
|
53,725 |
|
|
Contingencies and Commitments
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
| |
Common stock, $0.10 par value; authorized
10,000,000 shares; issued 2,396,103 shares in both
years; outstanding 1,326,343 shares in both years
|
|
|
240 |
|
|
|
240 |
|
| |
Additional paid-in capital
|
|
|
54,792 |
|
|
|
54,430 |
|
| |
Retained earnings (deficit)
|
|
|
85,443 |
|
|
|
(9,042 |
) |
| |
Accumulated other comprehensive income
|
|
|
— |
|
|
|
135 |
|
| |
Treasury stock, 1,069,760 shares in both years; at cost
|
|
|
(15,934 |
) |
|
|
(15,934 |
) |
| |
|
|
|
|
|
|
| |
|
Total Stockholders’ Equity
|
|
|
124,541 |
|
|
|
29,829 |
|
| |
|
|
|
|
|
|
| |
|
Total Liabilities and Stockholders’ Equity
|
|
$ |
157,317 |
|
|
$ |
83,554 |
|
| |
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
38
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Textile products sales
|
|
$ |
136,276 |
|
|
$ |
104,720 |
|
|
$ |
84,770 |
|
| |
Administrative fees from energy affiliates
|
|
|
1,004 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
137,280 |
|
|
|
104,720 |
|
|
|
84,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Textile products cost of sales
|
|
|
102,772 |
|
|
|
83,262 |
|
|
|
71,481 |
|
| |
Administrative and selling expenses
|
|
|
22,837 |
|
|
|
16,883 |
|
|
|
13,221 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
125,609 |
|
|
|
100,145 |
|
|
|
84,702 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Operating income
|
|
|
11,671 |
|
|
|
4,575 |
|
|
|
68 |
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain from disposition of HEC
|
|
|
62,288 |
|
|
|
— |
|
|
|
— |
|
| |
Interest and other income (expense)
|
|
|
1,536 |
|
|
|
(27 |
) |
|
|
360 |
|
| |
Amortization of deferred revenue noncompetition agreement
|
|
|
1,007 |
|
|
|
2,417 |
|
|
|
2,417 |
|
| |
Separation Agreement income (expense)
|
|
|
375 |
|
|
|
— |
|
|
|
(1,000 |
) |
| |
Interest expense
|
|
|
(1,197 |
) |
|
|
(1,636 |
) |
|
|
(1,392 |
) |
| |
Equity income (loss) from investments in energy affiliates
|
|
|
(9,901 |
) |
|
|
50 |
|
|
|
(187 |
) |
| |
Equity income from investment in textile affiliate
|
|
|
— |
|
|
|
— |
|
|
|
1,163 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
54,108 |
|
|
|
804 |
|
|
|
1,361 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income from continuing operations before income tax
|
|
|
65,779 |
|
|
|
5,379 |
|
|
|
1,429 |
|
| |
Income tax expense
|
|
|
11,079 |
|
|
|
1,725 |
|
|
|
1,435 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) from continuing operations
|
|
|
54,700 |
|
|
|
3,654 |
|
|
|
(6 |
) |
| |
Income (loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Real estate
|
|
|
39,002 |
|
|
|
4,339 |
|
|
|
3,720 |
|
| |
|
Hotels
|
|
|
783 |
|
|
|
(568 |
) |
|
|
3,080 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
39,785 |
|
|
|
3,771 |
|
|
|
6,800 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income before cumulative effect of change in accounting principle
|
|
|
94,485 |
|
|
|
7,425 |
|
|
|
6,794 |
|
| |
Income from cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
568 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
94,485 |
|
|
|
7,425 |
|
|
|
7,362 |
|
| |
Cash dividend on redeemable preferred stock
|
|
|
— |
|
|
|
(50 |
) |
|
|
(50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Stockholders
|
|
$ |
94,485 |
|
|
$ |
7,375 |
|
|
$ |
7,312 |
|
| |
|
|
|
|
|
|
|
|
|
|
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) from continuing operations after preferred
dividends
|
|
$ |
41.24 |
|
|
$ |
2.68 |
|
|
$ |
(0.04 |
) |
| |
|
Income from discontinued operations, net of tax
|
|
|
30.00 |
|
|
|
2.79 |
|
|
|
4.99 |
|
| |
|
Income from cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
0.42 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net income available to common stockholders
|
|
$ |
71.24 |
|
|
$ |
5.47 |
|
|
$ |
5.37 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Assuming Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (loss) from continuing operations after preferred
dividends
|
|
$ |
36.79 |
|
|
$ |
2.59 |
|
|
$ |
(0.02 |
) |
| |
|
Income from discontinued operations, net of tax
|
|
|
26.76 |
|
|
|
2.71 |
|
|
|
4.81 |
|
| |
|
Income from cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
0.40 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net income available to common stockholders
|
|
$ |
63.55 |
|
|
$ |
5.30 |
|
|
$ |
5.19 |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
1,326 |
|
|
|
1,347 |
|
|
|
1,361 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Assuming Dilution
|
|
|
1,487 |
|
|
|
1,390 |
|
|
|
1,415 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
39
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net Income
|
|
$ |
94,485 |
|
|
$ |
7,425 |
|
|
$ |
7,362 |
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pro rata share of other comprehensive income from equity
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Sale of real estate investments
|
|
|
(105 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Amortization of interest rate swap
|
|
|
(30 |
) |
|
|
(56 |
) |
|
|
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(135 |
) |
|
|
(56 |
) |
|
|
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$ |
94,350 |
|
|
$ |
7,369 |
|
|
$ |
7,303 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
Years Ended December 31, 2002, 2003 and 2004
(Amounts in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
Retained | |
|
Other | |
|
Treasury Stock | |
|
Total | |
| |
|
| |
|
Paid-In | |
|
Earnings | |
|
Comprehensive | |
|
| |
|
Stockholders’ | |
| |
|
Shares | |
|
Par Value | |
|
Capital | |
|
(Deficit) | |
|
Income | |
|
Shares | |
|
Cost | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance, January 1, 2002
|
|
|
2,396 |
|
|
$ |
240 |
|
|
$ |
54,452 |
|
|
$ |
(23,729 |
) |
|
$ |
250 |
|
|
|
1,035 |
|
|
$ |
(15,330 |
) |
|
$ |
15,883 |
|
| |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,362 |
|
| |
Pro rata share of partners’ capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Transactions from equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortization of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
(59 |
) |
| |
Cash dividend on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
2,396 |
|
|
|
240 |
|
|
|
54,452 |
|
|
|
(16,417 |
) |
|
|
191 |
|
|
|
1,035 |
|
|
|
(15,330 |
) |
|
|
23,136 |
|
| |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,425 |
|
| |
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
(604 |
) |
|
|
(604 |
) |
| |
Pro rata share of partners’ capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Transactions from equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
| |
|
Amortization of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
(56 |
) |
| |
Cash dividend on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
2,396 |
|
|
|
240 |
|
|
|
54,430 |
|
|
|
(9,042 |
) |
|
|
135 |
|
|
|
1,070 |
|
|
|
(15,934 |
) |
|
|
29,829 |
|
| |
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,485 |
|
| |
Pro rata share of partners’ capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Transactions from equity investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Sale of real estate investments
|
|
|
|
|
|
|
|
|
|
|
362 |
|
|
|
|
|
|
|
(105 |
) |
|
|
|
|
|
|
|
|
|
|
257 |
|
| |
|
Amortization of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( 30 |
) |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
2,396 |
|
|
$ |
240 |
|
|
$ |
54,792 |
|
|
$ |
85,443 |
|
|
$ |
— |
|
|
|
1,070 |
|
|
$ |
(15,934 |
) |
|
$ |
124,541 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
41
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
94,485 |
|
|
$ |
7,425 |
|
|
$ |
7,362 |
|
| |
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gain from sale of HEC
|
|
|
(62,288 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Equity income/loss from investments in energy affiliates
|
|
|
9,901 |
|
|
|
(50 |
) |
|
|
187 |
|
| |
|
Investments in marketable securities
|
|
|
(5,000 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Payment to exercise option of Separation Agreement
|
|
|
(3,000 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Depreciation, amortization and impairment
|
|
|
1,870 |
|
|
|
2,175 |
|
|
|
2,162 |
|
| |
|
Deferred tax expense (benefit)
|
|
|
(1,094 |
) |
|
|
822 |
|
|
|
822 |
|
| |
|
Amortization of deferred revenue — noncompetition
agreement
|
|
|
(1,007 |
) |
|
|
(2,417 |
) |
|
|
(2,417 |
) |
| |
|
Unrealized income from investments in marketable securities
|
|
|
(944 |
) |
|
|
|
|
|
|
|
|
| |
|
Gain from extinguishment of Separation Agreement
|
|
|
(375 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Amortization of deferred gain from debenture exchange
|
|
|
(101 |
) |
|
|
(56 |
) |
|
|
(52 |
) |
| |
|
Increase (decrease) in accounts payable
|
|
|
4,903 |
|
|
|
1,101 |
|
|
|
(2,730 |
) |
| |
|
Increase in accrued expenses and other current liabilities
|
|
|
3,460 |
|
|
|
1,716 |
|
|
|
975 |
|
| |
|
(Increase) decrease in accounts receivable
|
|
|
(6,899 |
) |
|
|
(2,695 |
) |
|
|
5,659 |
|
| |
|
(Increase) decrease in inventories
|
|
|
(2,359 |
) |
|
|
(2,337 |
) |
|
|
(391 |
) |
| |
|
Equity income from textile products joint venture
|
|
|
— |
|
|
|
— |
|
|
|
(1,163 |
) |
| |
|
Income from cumulative effect of change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
(568 |
) |
| |
|
Increase (decrease) in other assets and liabilities
|
|
|
(821 |
) |
|
|
602 |
|
|
|
1,157 |
|
| |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Gain from sale of investments in HRP, net
|
|
|
(46,074 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
Deferred tax expense
|
|
|
5,143 |
|
|
|
(5,307 |
) |
|
|
2,434 |
|
| |
|
|
Equity income/loss from investments in HRP
|
|
|
2,769 |
|
|
|
436 |
|
|
|
(1,428 |
) |
| |
|
|
Payment of litigation judgement to HRP
|
|
|
(1,877 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
Gain from extinguishment of hotel debt
|
|
|
(1,598 |
) |
|
|
— |
|
|
|
(5,789 |
) |
| |
|
|
Increase in accrued litigation expense to HRP
|
|
|
50 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Net change in other real estate and hotel assets and liabilities
|
|
|
190 |
|
|
|
890 |
|
|
|
456 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(10,666 |
) |
|
|
2,305 |
|
|
|
6,676 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from sale of investment in HEC, net
|
|
|
55,788 |
|
|
|
— |
|
|
|
— |
|
| |
Investment in energy affiliates
|
|
|
(11,032 |
) |
|
|
(1,997 |
) |
|
|
(3,500 |
) |
| |
Investments in property, plant and equipment, net
|
|
|
(3,361 |
) |
|
|
(1,561 |
) |
|
|
(950 |
) |
| |
Textile products business acquisition
|
|
|
— |
|
|
|
— |
|
|
|
(1,000 |
) |
| |
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Proceeds from sale of investments in HRP, net
|
|
|
59,488 |
|
|
|
— |
|
|
|
— |
|
| |
|
Investment in leased hotel property
|
|
|
(65 |
) |
|
|
(13 |
) |
|
|
— |
|
| |
|
Investment in HRP partnership interests
|
|
|
— |
|
|
|
(3,037 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) investing activities
|
|
|
100,818 |
|
|
|
(6,608 |
) |
|
|
(5,450 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from loans
|
|
|
6,963 |
|
|
|
8,972 |
|
|
|
4,714 |
|
| |
Repayment of loans and capital lease obligations
|
|
|
(21,765 |
) |
|
|
(2,413 |
) |
|
|
(7,433 |
) |
| |
Redemption of 10% Debentures
|
|
|
(6,468 |
) |
|
|
— |
|
|
|
— |
|
| |
Purchase of common stock for treasury
|
|
|
— |
|
|
|
(604 |
) |
|
|
— |
|
| |
Deferred loan costs
|
|
|
— |
|
|
|
(94 |
) |
|
|
(86 |
) |
| |
Cash dividend on preferred stock
|
|
|
— |
|
|
|
(50 |
) |
|
|
(50 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(21,270 |
) |
|
|
5,811 |
|
|
|
(2,855 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
68,882 |
|
|
|
1,508 |
|
|
|
(1,629 |
) |
|
Cash and Cash Equivalents, Beginning of Year
|
|
|
2,885 |
|
|
|
1,377 |
|
|
|
3,006 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year
|
|
$ |
71,767 |
|
|
$ |
2,885 |
|
|
$ |
1,377 |
|
| |
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| Note 1 — |
Organization and Significant Accounting Policies |
Continuing Operations. The Hallwood Group Incorporated
(“Hallwood” or the “Company”) (AMEX:HWG), a
Delaware corporation, is a holding company that operates in the
textile products and the energy business segments. The
Company’s former real estate and hotel business segments
have been reclassified as discontinued operations.
Textile products operations are conducted through the
Company’s wholly owned Brookwood Companies Incorporated
(“Brookwood”) subsidiary. Brookwood, which was formed
in 1989 to acquire certain assets and assume certain liabilities
of a nylon textile converting and finishing company, is an
integrated textile firm that develops and produces innovative
fabrics and related products through specialized finishing,
treating and coating processes. Brookwood’s subsidiary,
Strategic Technical Alliance, LLC (“STA”) markets
advanced breathable, waterproof laminate fabrics primarily for
military applications. Continued development of these fabrics
for military, industrial and consumer applications is a key
element of Brookwood’s business plan.
Since January 2002, the Company has invested approximately
$20,700,000 in private energy affiliates. The principal
affiliates are Hallwood Energy Corporation (“HEC”),
Hallwood Energy II, L.P. (“HE II”), Hallwood
Energy III, L.P. (“HE III”) and Hallwood
Exploration, L.P. (“Hallwood Exploration”). The
Company has an interest of between 20% and 28% of the entities
(between 16% and 22% on a fully diluted basis) and accounts for
the investments using the equity method of accounting. These
private energy companies are or have been principally involved
in drilling of wells in the Barnett Shale formation of Johnson
County, Texas and surrounding counties and conducting a 3-D
seismic survey over optioned land in South Louisiana to
determine if further oil and gas exploratory activity is
warranted. Certain of the Company’s officers and directors
are investors in and hold stock options and/or profit interests
in the energy affiliates.
Energy operations are conducted through the Company’s
wholly owned Hallwood Petroleum, LLC (“HPL”)
subsidiary, which commenced operations on October 1, 2004
as an operating and management company for the benefit of all
energy affiliates. Previously, each energy affiliate conducted
its own business operations independently.
Discontinued Operations. The Company’s real estate
activities were conducted primarily through the Company’s
wholly owned subsidiaries. Hallwood Realty, LLC (“Hallwood
Realty”) served as the general partner of Hallwood Realty
Partners, L.P. (“HRP”), a publicly traded master
limited partnership. Hallwood Commercial Real Estate, LLC
(“HCRE”) served as property manager. Revenues were
generated from the receipt of management fees, leasing
commissions and other fees from HRP and third parties and the
Company’s 22% pro rata share of earnings of HRP using the
equity method of accounting.
In April 2004, HRP announced that it and certain of its
affiliates had entered into an Agreement and Plan of Merger (the
“Agreement and Plan of Merger”) with HRPT Properties
Trust (“HRPT”), pursuant to which HRP would merge with
a subsidiary of HRPT. The merger and sale were completed on
July 16, 2004. As a result, HRP became a wholly-owned
subsidiary of HRPT and was no longer a publicly traded limited
partnership. The general partner interest in HRP was also sold
to a HRPT subsidiary in a separate transaction. The Company no
longer holds any interest in HRP. The Company received
$66,119,000 for its interests in HRP.
In December 2000, the Company decided to discontinue and dispose
of its hotel segment, which at that time consisted of five hotel
properties. Accordingly, the Company’s hotel operations
were reclassified as a discontinued operation. Two hotels were
disposed of in 2001 and two hotels were disposed of in 2002. The
Company continued to operate a leasehold interest in one hotel
until December 2004, when the hotel subsidiary entered into a
Lease Termination and Mutual Release Agreement. As of
December 31, 2004 the Company has no further operations
associated with the hotel segment.
43
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Significant accounting policies, which are in accordance with
accounting principles generally accepted in the United States of
America, are as follows:
|
|
|
Principles of Consolidation |
The consolidated financial statements include the accounts of
the Company and its subsidiaries:
|
|
| |
Brock Suite Greenville, Inc. (until October 2004) |
| |
Brock Suite Hotels, Inc. |
| |
Brock Suite Huntsville, Inc. (until December 2004) |
| |
Brock Suite Tulsa, Inc. (until October 2004) |
| |
Brookwood Companies Incorporated and subsidiaries |
| |
HCRE California, Inc. |
| |
HSC Securities Corporation |
| |
HWG, LLC |
| |
HWG 95 Advisors, Inc. (until September 2004) |
| |
HWG 98 Advisors, Inc (until September 2004) |
| |
HWG Holding One, Inc. |
| |
HWG Holding Two, Inc. |
| |
HWG Realty Investors, LLC |
| |
Hallwood Commercial Real Estate, LLC |
| |
Hallwood Investment Company |
| |
Hallwood Petroleum LLC (from October 2004) |
| |
Hallwood Realty, LLC |
The Company fully consolidates all of the above subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Textile products sales are recognized upon shipment or release
of product, when title passes to the customer. Brookwood
provides allowances for expected cash discounts, returns, claims
and doubtful accounts based upon historical bad debt and claims
experience and periodic evaluation of the aging of accounts
receivable. If the financial condition of Brookwood’s
customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required.
On occasion, Brookwood receives instructions from some of its
customers to finish fabric, invoice the full amount and hold the
finished inventory until the customer sends shipping
instructions. In those cases, Brookwood records the sale and
sends the customer an invoice containing normal and usual
payment terms and segregates the inventory from Brookwood’s
inventory.
|
|
|
Carrying Value of Investments |
Investments are recorded at fair value determined as of the date
acquired. Thereafter, for less than 50% owned investments,
equity accounting is utilized where the Company exercises
significant influence over the issuer’s operating and
financial policies.
The Company utilizes the equity method of accounting for
investments in non-consolidated affiliates, since the Company
exercises significant influence over their operating and
financial policies.
44
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s management reviews its investments for
impairment losses when events and circumstances indicate that
the carrying amount of an asset may not be recoverable. In the
event such indicators exist for assets held for use, and if
undiscounted cash flows before interest charges are less than
carrying value, the asset is written down to estimated fair
value. Assets held for sale are carried at the lower of cost or
estimated sales price less costs of sale.
|
|
|
Depreciation and Amortization |
Depreciation of textile products buildings, equipment and
improvements is computed on the straight-line method. Buildings
and improvements are depreciated over a period of 15 to
20 years. Equipment is depreciated over a period of 3 to
10 years.
Depreciation of fee-owned hotel properties was computed on the
straight-line method over a period of 20 to 25 years for
buildings, 5 to 20 years for improvements, and 3 to
10 years for furniture and equipment. The Company completed
the disposition of its fee-owned hotels in 2002. Depreciation
and amortization of the hotels held for sale were discontinued
in January 2001. Amortization of hotel leasehold interests was
computed on the straight-line method over the remaining lease
term and varied from 6 to 10 years. The one remaining
leasehold interest, which had earlier been written down to a new
cost basis at December 31, 2000, was being amortized on the
straight line basis over 4 years prior to the termination
of the lease in December 2004.
The excess of the Company’s share of the underlying equity
in the net assets of HRP over its investment was amortized on a
straight line basis over a period of 19 years. Such
amortization was discontinued, effective January 1, 2002,
upon the adoption of Statement of Financial Accounting Standards
No. 142 -“Goodwill and Other Intangibles”
(“SFAS No. 142”). The effect of adopting
SFAS No. 142 resulted in the recording of income from
cumulative effect of a change in accounting principle of
$568,000, which represented the unamortized amount of negative
goodwill associated with the Company’s equity investment in
HRP.
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 and the amount of net
operating loss carryforwards and tax credits reduced by a
valuation allowance as considered appropriate. Provision is made
for deferred taxes relating to temporary differences in the
recognition of income and expense for financial reporting.
Inventories are valued at the lower of cost (first-in, first-out
or specific identification method) or market.
|
|
|
Cash and Cash Equivalents |
The Company considers highly liquid investments with original
maturities of three months or less at the time of purchase to be
cash equivalents.
Marketable securities are classified as “trading” and
are carried at fair value on the balance sheet. Unrealized gains
and losses are included in continuing operations.
45
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
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.
Statement of Financial Accounting Standards (“SFAS”)
No. 123, “Accounting for Stock-Based
Compensation” establishes a method of accounting whereby
recognized option pricing models are used to estimate the fair
value of stock-based compensation, including options. The
Company has elected, as provided by SFAS No. 123, not
to recognize employee stock-based compensation expense as
calculated under SFAS No. 123, but has recognized such
expense in accordance with the provisions of Accounting
Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees”. As all of the options are fully
vested, there would be no difference between the historical
operations and pro forma operations for each of the three years
ended December 31, 2004 had the expense provisions of
SFAS No. 123 been adopted.
|
|
|
Other Comprehensive Income |
Other comprehensive income items are revenues, expenses, gains
and losses that under accounting principles generally accepted
in the United States of America are excluded from current period
net income and reflected as a component of stockholders’
equity. The Company records a pro-rata share of comprehensive
income items reported by its investments accounted for using the
equity method of accounting.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
|
|
|
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 the use of factors.
The Company accounts for derivative instruments in accordance
with Statement of Financial Accounting Standards
No. 133 — “Accounting for Derivative
Instruments and Hedging Activities”
(“SFAS No. 133”). The Company does not
directly have any derivative instruments, however HRP did have
such instruments. Accordingly, the Company recorded its
proportional share of any impact of these instruments in
accordance with the equity method of accounting.
HRP had one derivative, an interest rate cap. Since this
derivative was designated as a cash flow hedge, changes in the
fair value of the derivative, were recognized in other
comprehensive income until the hedged
46
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
item was recognized in earnings. Hedge effectiveness was
measured based on the relative changes in the fair value between
the derivative contract and the hedged item over time. Any
changes in fair value resulting from ineffectiveness, as defined
by SFAS No. 133, were recognized immediately in
current earnings.
|
|
|
Per Common Share Calculations |
Basic income per share was computed by dividing net income
available to common stockholders by the weighted average shares
outstanding.
Income per common share assuming dilution was computed by
dividing net income available to common stockholders, adjusted
for the interest expense (net of tax) of the convertible loan
and by the weighted average of shares and potential shares
outstanding.
Convertible loans are considered to be potential common shares.
The number of potential common shares from assumed loan
conversion is computed using the “if-converted method”
for the period during which the loans are outstanding. Stock
options are also considered to be potential common shares. The
number of potential common shares from assumed exercise of
options is computed using the “treasury stock method”.
Following the disposition of its real estate and hotel business
segments, the Company determined that its financial statements
should be changed from a segmented format to a classified
format, therefore, substantial reclassifications have been made
to all periods presented herein.
|
|
|
New Accounting Pronouncements |
In December 2004, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 123(R),
Share-Based Payments, which establishes accounting
standards for all transactions in which an entity exchanges its
equity instruments for goods and services.
SFAS No. 123(R) focuses primarily on accounting for
transactions with employees, and carries forward without change
prior guidance for share-based payments for transactions with
non employees.
The Company is required to apply SFAS No. 123(R) to
all awards granted, modified or settled in our first reporting
period under U.S. Generally Accepted Accounting Principles
after June 15, 2005. The Company is also required to use
either the “modified prospective method” or the
“modified retrospective method”. Under the modified
prospective method, the Company must recognize compensation cost
for all awards granted after we adopt the standard and for the
unvested portion of previously granted awards that are
outstanding on that date. Under the modified retrospective
method, the Company must restate our previously issued financial
statements to recognize the amounts we previously calculated and
reported on a pro forma basis, as if the prior standard had been
adopted. Under both methods, the Company is permitted to use
either a straight line or an accelerated method to amortize the
cost as an expense for awards with graded vesting.
Management commenced its analysis of the impact of
SFAS 123(R), but has not yet decided whether it will elect
the modified prospective method or the modified retrospective
method, or whether it will elect the straight line amortization
or an accelerated method. Additionally, it cannot predict with
reasonable certainty the number of options that will be unvested
and outstanding on July 1, 2005. Accordingly, it cannot
currently quantify with precision the effect that this standard
would have on our financial position or results of operations in
the future, except that it probably will recognize a greater
expense for any awards that it may grant in the future than we
would using the current guidance.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs an amendment of ARB No. 43,
Chapter 4, which amends Chapter 4 of ARB No. 43
that deals with inventory pricing. The Statement clarifies the
accounting for abnormal amounts of idle facility expenses,
freight, handling costs and spoilage. Under
47
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
previous guidance, paragraph 5 of ARB No. 43,
Chapter 4, items such as idle facility expense, excessive
spoilage, double freight and re-handling costs might be
considered to be so abnormal, under certain circumstances, as to
require treatment as current period charges. This Statement
eliminates the criterion of “so abnormal” and requires
that those items be recognized as current period charges. Also,
this Statement requires that allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. This Statement is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005, although earlier application
is permitted for fiscal years beginning after the date of
issuance of this Statement. Retroactive application is not
permitted. Management is analyzing the requirements of this new
Statement and believes that its adoption will not have any
significant impact on the Company’s financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets, an amendment of APB
No. 29. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The
Statement specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement
is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application
is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date this Statement is issued.
Retroactive application is not permitted. Management is
analyzing the requirements of this new Statement and believes
that its adoption will not have any significant impact on the
Company’s financial position, results of operations or cash
flow.
Note 2 — Cash and Cash Equivalents
Cash and cash equivalents as of the balance sheet dates were as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Cash
|
|
$ |
675 |
|
|
$ |
1,323 |
|
|
Cash equivalents
|
|
|
71,092 |
|
|
|
1,562 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
71,767 |
|
|
$ |
2,885 |
|
| |
|
|
|
|
|
|
Cash equivalents consisted of secured bank repurchase
agreements, money market funds (consisting of AAA rated
institutional commercial paper), government securities and
interest-bearing demand deposits.
Inventories as of the balance sheet dates were as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Raw materials
|
|
$ |
8,353 |
|
|
$ |
5,087 |
|
|
Work in progress
|
|
|
6,883 |
|
|
|
6,480 |
|
|
Finished goods
|
|
|
9,446 |
|
|
|
10,538 |
|
| |
|
|
|
|
|
|
| |
|
|
24,682 |
|
|
|
22,105 |
|
|
Less: Obsolescence reserve
|
|
|
(1,101 |
) |
|
|
(883 |
) |
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
23,581 |
|
|
$ |
21,222 |
|
| |
|
|
|
|
|
|
48
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 4 — Property, Plant and Equipment
Property, plant and equipment consists of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Machinery and equipment
|
|
$ |
15,743 |
|
|
$ |
15,171 |
|
|
Buildings and improvements
|
|
|
4,935 |
|
|
|
4,672 |
|
|
Office furniture and equipment
|
|
|
4,672 |
|
|
|
3,436 |
|
|
Construction in progress
|
|
|
1,338 |
|
|
|
514 |
|
|
Leasehold improvements
|
|
|
449 |
|
|
|
407 |
|
|
Land
|
|
|
391 |
|
|
|
391 |
|
| |
|
|
|
|
|
|
| |
|
|
27,528 |
|
|
|
24,591 |
|
| |
Less: Accumulated depreciation
|
|
|
(16,458 |
) |
|
|
(15,219 |
) |
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
11,070 |
|
|
$ |
9,372 |
|
| |
|
|
|
|
|
|
Note 5 — Operations of Brookwood Companies
Incorporated
Receivables. 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 $615,000, $479,000 and $297,000 for
the years ended December 31, 2004, 2003 and 2002,
respectively. Factor receivables were $19,818,000 and
$15,120,000 at December 31, 2004 and 2003, which were net
of an allowance for doubtful accounts of $94,000 and $100,000,
respectively.
Trade receivables were $5,352,000 and $3,284,000 at
December 31, 2004 and 2003, which were net of an allowance
for doubtful accounts of $253,000 and $509,000, respectively.
Strategic Technical Alliance, LLC. During 2000, Brookwood
formed STA with an unrelated third party that is also in a
textile related industry, principally to produce advanced,
breathable, waterproof laminate materials for military
applications. In September 2002, STA acquired the 50% ownership
interest not owned by Brookwood for $1,000,000 in cash, the
issuance of a $596,000 promissory note and royalty payments for
three years based upon production under a specified contract.
Accordingly, STA became a wholly owned subsidiary of Brookwood
in September 2002. For the first three quarters of 2002,
Brookwood accounted for its investment under the equity method
of accounting. Since that date, the results of STA have been
fully consolidated.
The following table sets forth summarized financial data of STA
for the nine months ended September 30, 2002 (in thousands):
| |
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
Revenue
|
|
$ |
15,380 |
|
|
Net income
|
|
|
2,429 |
|
Sales Concentration. Brookwood had one customer that
accounted for more than 10% of its net sales during 2004, 2003
and 2002. The relationship with the customer is ongoing and
Brookwood expects to maintain comparable sales volumes with that
customer in 2005. Sales to that customer were $53,149,000,
$30,724,000 and $18,600,000 in 2004, 2003 and 2002, respectively.
Stockholder’s Equity. The Company is the holder of
all of Brookwood’s outstanding $13,500,000 Series A,
$13.50 annual dividend par share, redeemable preferred stock and
all of its 10,000,000 outstanding
49
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
shares of common stock. At December 31, 2004 cumulative
dividends in arrears on the preferred stock amounted to
approximately $21,000,000.
Brookwood has a stock option plan which terminates on
May 2, 2009. The total number of Brookwood’s,
$0.01 per value value, shares of common stock that may be
purchased pursuant to the exercise of options granted under the
plan shall not exceed 2,500,000 in the aggregate. The exercise
price shall be the fair market value determined by
Brookwood’s board of directors on the date of the grant. At
December 31, 2004 there were 287,500 options outstanding,
all with an exercise price of $0.10 per share and all of
which were fully vested.
|
|
| Note 6 — |
Investment in Energy Affiliates |
Investments in energy affiliates as of the balance sheet dates
were as follows (in thousands):
|
|
|
Hallwood Energy Corporation |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount at Which | |
|
|
| |
|
Carried at | |
|
Equity Income (Loss) for | |
| |
|
December 31, | |
|
Years Ended December 31, | |
| |
|
| |
|
| |
| Description of Investment |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hallwood Energy Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Common stock
|
|
|
— |
|
|
$ |
5,360 |
|
|
$ |
(9,444 |
) |
|
$ |
50 |
|
|
$ |
(187 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company owned approximately 28% (22% after consideration of
stock options) of HEC. It accounted for the investment using the
equity method of accounting and recorded its pro rata share of
HEC’s net income (loss), stockholder’s equity
transactions and comprehensive income (loss) adjustments, if
any. Certain of the Company’s officers and directors were
investors in HEC. In addition, individual members of management
of HEC, including one director and officer and one officer of
the Company, had stock options in HEC. The Company invested
$3,500,000 in HEC during 2002, $1,997,000 in 2003, and $566,000
in 2004. After constructing a gas gathering system, HEC
commenced commercial production and sales of natural gas in
February 2003. As of December 15, 2004, HEC had drilled or
was in the process of drilling 46 wells in the Barnett
Shale Formation of Johnson County, Texas. Forty-one wells were
producing, one well was plugged and abandoned, one well was
being drilled and two wells were in various stages of completion
and/or connection to the gathering system. Additionally, HEC
through its subsidiary Hallwood SWD, Inc., had completed one
commercial saltwater disposal well and completed a disposal
facility that went into operation in April 2004. In June 2004,
HEC sold to HEC III approximately 15,000 net acres of
undeveloped leasehold, three proven developed, non-producing
natural gas properties, a limited amount of gas transmission
line and various other assets. As the sale was to a related
entity, for accounting purposes the assets were treated as being
transferred to HEC III at net carrying value of $1,232,000
and no gain or loss was reported from the transaction.
HEC III limited partnership interests are owned in
identical proportion to the common share ownership of HEC.
Natural gas production in December 2004 was up to
20 million cubic feet per day, net to HEC’s interest
and HEC was transporting third party gas of approximately three
million cubic feet per day. As of December 1, 2004, HEC
held oil and gas leases covering approximately 18,000 gross
and 16,000 net acres of undeveloped leasehold,
predominantly in Johnson County, Texas.
The Company’s proportionate share of HEC’s 2004 loss
was principally attributable to compensation expense in
connection with the settlement of stock options concurrent with
the completion of the merger and sale in December 2004.
Loan Participation Agreement. In September 2004, the
Company entered into a $6,000,000 pari passu Loan
Participation Agreement in connection with HEC’s
$36,000,000 loan facility. The Company advanced $2,000,000 to
HEC under the Loan Participation Agreement in September 2004 and
the remainder of
50
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$4,000,000 in October 2004. The loan was fully repaid in
December 2004. The Company earned $159,000 in interest and fees
from the loan in 2004.
Sale of HEC. On December 15, 2004, HEC completed a
merger with Chesapeake Energy Corporation and one of its
subsidiaries (“Chesapeake”), under which Chesapeake
acquired HEC. The merger agreement provided for a total price of
$292,000,000, which was subject to reduction for certain
transaction costs, title discrepancies and other matters, and
adjustments for changes in working capital. After these
reductions and adjustments, Chesapeake paid a total of
$277,100,000 at the closing, including debt owed by HEC, and
management of HEC anticipated that an additional amount would be
paid upon final calculation of working capital. In addition, the
stockholders of HEC received a distribution of debt payable by
HE III to its lender in a total amount of $7,040,000, which
was then contributed to HE III as an additional capital
contribution, and the entity that holds the Worthington salt
water disposal well. The amounts received by HEC stockholders
were reduced by additional transaction costs.
Accordingly, in exchange for its interest in HEC, the Company
received a cash payment of $53,793,000 on December 15, 2004
and expects to receive an additional amount in 2005. The Company
also received its proportionate share of the HE III debt in
the amount of $1,995,000, which it contributed to HE III as
an additional capital contribution. The Company also received
its proportionate interest in Hallwood SWD, Inc., the entity
that owns the Worthington saltwater disposal well, with a
carrying value of approximately $1,250,000, which it contributed
to HE III as an additional capital contribution.
|
|
|
Hallwood Energy III, L.P. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
Amount at Which | |
|
|
| |
|
| |
|
Carried at | |
|
Equity Income (Loss) for the | |
| |
|
|
|
Cost or | |
|
December 31, | |
|
Years Ended December 31, | |
| |
|
Number of | |
|
Ascribed | |
|
| |
|
| |
| Description of Investment |
|
Units Held | |
|
Value | |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hallwood Energy III, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Limited partner interest
|
|
|
— |
|
|
$ |
9,182 |
|
|
$ |
8,959 |
|
|
|
— |
|
|
$ |
(223 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company owns approximately 28% (22% after consideration of
profit interests) of HE III. It accounts for this
investment using the equity method of accounting and records its
pro rata share of HE III’s net income (loss), partner
capital transactions and comprehensive income (loss)
adjustments, if any. In 2004, the Company invested $4,705,000 in
HE III, which was formed primarily to acquire and develop
oil and gas lease holdings in the Barnett Shale formation of
Johnson and Hill Counties, Texas. In June 2004, HE III
acquired from HEC approximately 15,000 acres of undeveloped
leasehold, three proven developed, non-producing natural gas
properties, a limited amount of gas transmission line and
various other assets. As the purchase was from a related entity,
for accounting purposes the assets were recorded at net carrying
value of approximately $4,400,000, of which the Company’s
proportionate share was approximately $1,232,000. During July
2004, HE III entered into an agreement with Chesapeake,
which owned approximately 12,000 net acres contiguous to
that of HE III, wherein it assigned a 45% interest in its
lease holdings to Chesapeake, which in turn assigned a 55%
interest in its lease holdings to HE III. Under the joint
operating agreement between the two entities, HE III has
been designated as operator for all future development.
HE III commenced commercial production and sales of natural
gas in June 2004. In December 2004, $1,995,000 was contributed
directly to HE III as an additional capital investment,
which was a portion of the Company’s proceeds from the sale
of HEC. In addition, its proportionate share of HEC’s
investment in its Hallwood SWD, Inc. subsidiary, with a carrying
value of approximately $1,250,000, was contributed to
HE III as an additional capital investment in December
2004. In March 2005, the Company funded an additional
$4,251,000. As of March 1, 2005, HE III has drilled,
acquired or is in the process of drilling 22 wells in the
Barnett Shale formation in Johnson County, Texas. Seventeen
wells are producing, two wells are being drilled, two wells are
in the completion process and one well is a saltwater disposal
well. As of March 1, 2005, HE III holds oil and
51
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
gas leases covering approximately 27,000 gross and
14,000 net acres of undeveloped leasehold, predominantly in
Johnson County, Texas. Natural gas production was approximately
8.8 million cubic feet per day, net to HE III’s
interest. Certain of the Company’s officers and directors
are investors in HE III. In addition, individual members of
management of HE III, including one director and officer
and one officer of the Company, hold a profit interest in
HE III.
The following table sets forth summarized financial data of
HE III as of and for the year ended December 31, 2004
(in thousands):
| |
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
| |
Oil and gas properties, net
|
|
$ |
28,028 |
|
| |
Total assets
|
|
|
40,499 |
|
| |
Total liabilities
|
|
|
18,370 |
|
| |
Partners’ capital
|
|
|
22,129 |
|
|
Statement of Operations Data
|
|
|
|
|
| |
Revenue
|
|
$ |
3,085 |
|
| |
Net loss
|
|
|
(788 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
Amount at Which | |
|
|
| |
|
| |
|
Carried at | |
|
Equity Income (Loss) for the | |
| |
|
|
|
Cost or | |
|
December 31, | |
|
Years Ended December 31, | |
| |
|
Number of | |
|
Ascribed | |
|
| |
|
| |
| Description of Investment |
|
Units Held | |
|
Value | |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hallwood Energy II, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Limited partner interest
|
|
|
— |
|
|
$ |
2,430 |
|
|
$ |
2,424 |
|
|
|
— |
|
|
$ |
(6 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company owns approximately 24% (19% after consideration of
profit interests) of HE II. It accounts for this investment
using the equity method of accounting and records its pro rata
share of HE II’s net income (loss), partner capital
transactions and comprehensive income (loss) adjustments, if
any. In September 2004, the Company invested $2,430,000 in
HE II, which was formed to explore various oil and gas
exploration opportunities, primarily in Texas, and in areas not
associated with HEC and HE III. As of March 1, 2005,
HE II holds oil and gas leases covering approximately
1,400 gross and 1,300 net acres of undeveloped
leasehold. There has been no drilling activity to date. Certain
of the Company’s officers and directors are investors in
and hold a profit interest in HE II.
|
|
|
Hallwood Exploration, L.P. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
Amount at Which | |
|
|
| |
|
| |
|
Carried at | |
|
Equity Income (Loss) for the | |
| |
|
|
|
Cost or | |
|
December 31, | |
|
Years Ended December 31, | |
| |
|
Number of | |
|
Ascribed | |
|
| |
|
| |
| Description of Investment |
|
Units Held | |
|
Value | |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hallwood Exploration, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— Limited partner interest
|
|
|
— |
|
|
$ |
1,318 |
|
|
$ |
1,090 |
|
|
|
— |
|
|
$ |
(228 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company owns approximately 20% (16% after consideration of
profit interests) of Hallwood Exploration. It accounts for this
investment using the equity method of accounting and records its
pro rata share of Hallwood Exploration’s net income (loss),
partner capital transactions and comprehensive income (loss)
adjustments, if any. In 2004, the Company invested $1,318,000 in
Hallwood Exploration, which was formed to develop an oil and gas
opportunity in South Louisiana. Hallwood Exploration has
acquired seismic lease options over approximately
28,000 acres, and will conduct a 3-D seismic survey over
the optioned land in
52
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2005 to determine if further oil and gas exploratory activity is
warranted. Certain of the Company’s officers and directors
are investors in Hallwood Exploration. In addition, individual
members of management of Hallwood Exploration, including one
director and officer and one officer of the Company, hold a
profit interest in Hallwood Exploration.
The Company’s HPL subsidiary commenced operations in
October 2004 as an operating and management company for the
benefit of all energy affiliates. Direct costs are rebilled to
the respective energy affiliate and indirect costs are rebilled
on a pro rata basis.
The Company has invested nominal amounts in other affiliated
entities which serve as general partners for the energy
affiliates.
|
|
| Note 7 — |
Loans and Capital Lease Obligations |
Loans and capital lease obligations at the balance sheet dates
are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Textile Products
|
|
|
|
|
|
|
|
|
| |
Bank Debt
|
|
|
|
|
|
|
|
|
| |
|
Revolving credit facility, prime + 0.25% or Libor + 1.75% -
3.00%, due January 2007
|
|
$ |
7,977 |
|
|
$ |
10,000 |
|
| |
|
Equipment term loans, 2.84% - 5.60% interest, due at various
dates from October 2005 through February 2009
|
|
|
1,149 |
|
|
|
1,483 |
|
| |
|
Acquisition credit facility, prime + 1.00% or Libor + 3.25%
|
|
|
— |
|
|
|
1,000 |
|
| |
|
|
|
|
|
|
| |
|
|
9,126 |
|
|
|
12,483 |
|
| |
Subordinated secured promissory note, prime rate, repaid July
2004
|
|
|
— |
|
|
|
135 |
|
| |
Subordinated secured promissory note, non-interest bearing,
repaid February 2005
|
|
|
10 |
|
|
|
253 |
|
| |
|
|
|
|
|
|
| |
|
|
Sub-total
|
|
|
9,136 |
|
|
|
12,871 |
|
|
Other
|
|
|
|
|
|
|
|
|
| |
Bank Debt
|
|
|
|
|
|
|
|
|
| |
|
Special Purpose Credit Facility, prime + 0.50% or Libor + 3.25%,
but not less than 4.25%, repaid July 2004
|
|
|
— |
|
|
|
5,000 |
|
| |
|
Revolving credit facility, prime + 0.50% or Libor + 3.25%,
repaid July 2004
|
|
|
— |
|
|
|
4,000 |
|
| |
|
Term loan, 7% fixed, repaid July 2004
|
|
|
— |
|
|
|
1,338 |
|
| |
|
|
|
|
|
|
| |
|
|
— |
|
|
|
10,338 |
|
| |
Capital lease obligations, 12.18% fixed, repaid June 2004
|
|
|
— |
|
|
|
563 |
|
| |
Promissory note, non-interest bearing, repaid December 2004
|
|
|
— |
|
|
|
166 |
|
| |
|
|
|
|
|
|
| |
|
|
Sub-total
|
|
|
— |
|
|
|
11,067 |
|
| |
|
|
|
|
|
|
| |
|
|
Total
|
|
|
9,136 |
|
|
|
23,938 |
|
| |
|
|
Less: Current portion
|
|
|
(347 |
) |
|
|
(2,631 |
) |
| |
|
|
|
|
|
|
| |
|
|
Noncurrent portion
|
|
$ |
8,789 |
|
|
$ |
21,307 |
|
| |
|
|
|
|
|
|
53
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Revolving Credit Facility. The Company’s Brookwood
subsidiary had a revolving credit facility in an amount up to
$17,000,000 with Key Bank National Association (the “Key
Working Capital Revolving Credit Facility”). Availability
for direct borrowings and letter of credit obligations under the
Key Working Capital Revolving Credit Facility were limited to
the lesser of the facility amount or the borrowing base as
defined in the agreement. Borrowings were collateralized by
accounts receivable, certain finished goods inventory, machinery
and equipment and all of the issued and outstanding capital
stock of Brookwood and its subsidiaries.
The Key Working Capital Revolving Credit Facility had a maturity
date of January 2, 2004, bore interest at Brookwood’s
option of prime plus 0.25% or Libor + 1.75% to 3.00% (variable
depending on compliance ratios), contained various covenants,
including maintenance of certain financial ratios and
restrictions on dividends and repayment of debt or cash
transfers to the Company.
This facility was renewed in January 2004 and increased to
$22,000,000 with a maturity date of January 2007. The interest
rate was 5.00% at December 31, 2004. The outstanding
balance was $7,977,000 at December 31, 2004 and Brookwood
had approximately $13,999,000 of borrowing base availability.
Acquisition Credit Facility. The Key Working Capital
Revolving Credit Facility provided for a $2,000,000 acquisition
revolving credit line. This facility bore interest at
Brookwood’s option of prime plus 1.00% or Libor plus 3.25%.
Brookwood had borrowed $1,000,000 under this facility. This
facility was canceled and rolled into the working capital
revolving credit facility in connection with the renewal of the
Key Working Capital Revolving Credit Facility in January 2004.
Equipment Term Loans. The Key Working Capital Revolving
Credit Facility provided for a $2,000,000 equipment revolving
credit line. The facility bore interest at Libor plus 2.75%. In
May 2000, Brookwood borrowed $1,000,000 under this credit line,
which was converted into a term loan, at a fixed rate of 9.37%,
with a maturity date of October 2005. This term loan was repaid
in the 2004 third quarter. In February and December 2002,
Brookwood borrowed an additional $542,000 and $298,000 under
this facility and converted those amounts into term loans, at
fixed rates of 5.10% and 4.67%, with maturities of March and
December 2007, respectively. In April 2003 and September 2003,
Brookwood borrowed $142,000 and $330,000 under this facility and
converted those amounts into term loans, at fixed rates of 4.57%
and 5.60% with maturities in April 2008 and September 2008,
respectively. This facility was increased to $3,000,000 in
connection with the renewal of the Key Working Capital Revolving
Credit Facility in January 2004. In March 2004, Brookwood
borrowed $386,000 under this facility, which was converted into
a term loan at a fixed rate of 2.84%, with a maturity in
February 2009.
The outstanding balance at December 31, 2004 was
$1,149,000. Brookwood had $1,851,000 availability under this
equipment revolving credit facility.
Loan Covenants. As of the end of all interim periods
in 2003 and 2004 and as of December 31, 2004 and 2003,
Brookwood was in compliance with its loan covenants. The Key
Working Capital Revolving Credit Facility includes a total debt
to tangible net worth ratio covenant and an EBITDA to total
fixed charges covenant. Cash dividends and tax sharing payments
are contingent upon Brookwood’s compliance with the loan
covenants.
Term Loan and Revolving Credit Facility. In March 2002,
the Company and its HWG, LLC subsidiary entered into a
$7,000,000 credit agreement with First Bank & Trust,
N.A. The facility consisted of a $3,000,000 term loan and a
$4,000,000 revolving credit facility (the “Term Loan and
Revolving Credit Facility”). The term loan bore interest at
a fixed rate of 7%, matured April 2005 and was fully amortizing,
54
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
requiring a monthly payment of $92,631. The revolving credit
facility bore interest at the Company’s option of one-half
percent over prime, or Libor plus 3.25%, and matured April 2005.
The Company borrowed $500,000 under the facility in 2002 and an
additional $3,500,000 in 2003, principally in connection with
investments in HEC. This facility was repaid in July 2004 and
the facility was canceled.
Amended and Restated Credit Agreement. In July 2003, the
Company and its HWG, LLC subsidiary entered into an amended and
restated credit agreement with First Bank and Trust, N.A. (the
“Amended and Restated Credit Agreement”). In addition
to incorporating the terms of the Term Loan and Revolving Credit
Facility, this facility provided for an additional $3,000,000
term loan and an additional $5,000,000 credit facility. Proceeds
from the $3,000,000 term loan (the “Special Purpose Term
Loan”) were restricted and were to be used solely to
exercise the option associated with the Separation Agreement
discussed in Note 12. In January 2004, the Company entered
into the First Amendment to Amended and Restated Credit
Agreement, whereby terms of the Special Purpose Term Loan were
revised and an additional credit facility was obtained. The
amendment stipulated that the $3,000,000 commitment would be
reduced by $50,000 per month beginning February 2004, and
would expire on December 15, 2004, if unused. The revised
Special Purpose Term Loan required monthly payments of $50,000
for principal amortization plus interest at the Company’s
option of prime plus 0.50%, or Libor plus 3.25%, but could not
be less than 4.25%. In June 2004, the Company borrowed
$2,750,000 under this loan facility to exercise the option
associated with the Separation Agreement. This facility was
repaid in July 2004.
Proceeds from a $5,000,000 credit facility (the “Special
Purpose Credit Facility”), drawn in August 2003, were
restricted to pay a substantial portion of the litigation
judgment in August 2003 in the Gotham Partners v.
Hallwood Realty Partners, L.P., et al matter discussed
in Note 18. The Special Purpose Credit Facility bore
interest at the Company’s option of prime plus 0.50%, or
Libor plus 3.25%, but could not be less than 4.25%, and matured
May 2005. The Special Purpose Credit Facility did not require
principal payments; however, interest was payable monthly. This
facility was repaid in July 2004.
Capital Lease Obligations. 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 three GuestHouse Suites Plus properties. The
Company had pledged 30,035 HRP limited partner units as
additional collateral to secure the leases. The lease terms
commenced January 2000 and were scheduled to expire in December
2004. The combined monthly lease payment was $46,570 and the
effective interest rate was 12.18%. In June 2004, the Company
repaid the capital leases.
Schedule of Maturities. Maturities of loans payable for
the next five years are presented below (in thousands):
| |
|
|
|
|
|
| Years Ending December 31, |
|
Amount | |
| |
|
| |
|
2005
|
|
$ |
347 |
|
|
2006
|
|
|
352 |
|
|
2007
|
|
|
8,258 |
|
|
2008
|
|
|
152 |
|
|
2009
|
|
|
27 |
|
| |
|
|
|
| |
Total
|
|
$ |
9,136 |
|
| |
|
|
|
|
|
| Note 8 — |
10% Collateralized Subordinated Debentures |
Description. The Company had an issue of 10%
Collateralized Subordinated Debentures (the
“10% Debentures”) outstanding, due July 31,
2005. The 10% Debentures were listed on The New York Stock
Exchange. For financial reporting purposes, a pro rata portion
of an unamortized gain in the original amount of
55
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$353,000 was allocated to the 10% Debentures from a
previous debenture issue and was amortized over its term. As a
result, the effective interest rate was 8.9%. Prior to
redemption, the 10% Debentures were secured by a junior
lien on the capital stock of Brookwood.
Redemption. In August 2004, the Company called and on
September 30, 2004 redeemed the 10% Debentures.
Debenture holders were paid 100% of the principal amount plus
interest through the redemption date. Balance sheet amounts are
presented below (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
10% Debentures (face amount)
|
|
|
— |
|
|
$ |
6,468 |
|
|
Unamortized gain, net of accumulated amortization
|
|
|
— |
|
|
|
101 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
|
— |
|
|
$ |
6,569 |
|
| |
|
|
|
|
|
|
|
|
| Note 9 — |
Deferred Revenue — Noncompetition Agreement |
In March 2001, the Company agreed to sell its investment in its
former subsidiary, Hallwood Energy Corporation (“Former
Hallwood Energy”), which represented the Company’s
former energy operations, to Pure Resources II, Inc., an
indirect wholly owned subsidiary of Pure Resources, Inc.
(“Pure”). The Company received $18,000,000 for the
tender of its 1,440,000 shares of common stock in May 2001
and received an additional amount of $7,250,000, pursuant to the
terms of a noncompetition agreement that was paid by Pure upon
the completion of the merger in June 2001.
The Company began amortizing the deferred revenue from the
noncompetition agreement in the amount of $7,250,000, over a
three-year period commencing June 2001. The amortization, was
$1,007,000, $2,417,000 and $2,417,000 in the years ended
December 31, 2004, 2003 and 2002, respectively. The
deferred revenue was fully amortized in May 2004.
|
|
| Note 10 — |
Redeemable Preferred Stock |
The Company has outstanding 250,000 shares of preferred
stock (the “Series B Preferred Stock”). The
holders of Series B Preferred Stock are entitled to cash
dividends in an annual amount of $0.20 per share (total
annual amount of $50,000), which have been paid in each of the
years beginning in 1996 through and including 2003. No dividend
was paid during 2004. For the first five years, dividends were
cumulative and the payment of cash dividends on any common stock
was prohibited before the full payment of any accrued dividends.
Beginning in 2001 dividends will accrue and be payable only if
and when declared by the Board of Directors. The Series B
Preferred Stock has dividend and liquidation preferences to the
Company’s common stock. The shares are subject to mandatory
redemption fifteen years from the date of issuance, at 100% of
the liquidation preference of $4.00 per share plus all
accrued and unpaid dividends, and may be redeemed at any time on
the same terms at the option of the Company. The holders of the
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.
In connection with the adoption of SFAS No. 150, the
Company reclassified its Series B Preferred Stock as a
liability at the balance sheet dates. In addition,
SFAS No. 150 requires that future payments of
preferred dividends shall be classified within continuing
operations.
|
|
| Note 11 — |
Stockholders’ Equity |
Common Stock. Previously, the Company’s Second
Restated Certificate of Incorporation contained a provision that
restricted transfers of the Company’s common stock in order
to protect certain federal income tax benefits. The restriction
prohibited any transfer of common stock to any person that
resulted in ownership
56
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
in excess of 4.75% of the then outstanding shares. At the May
2004 annual meeting for the Company, the shareholders of the
Company voted to amend the Second Restated Certificate of
Incorporation by deleting this restriction.
Preferred Stock. Under its Second Restated Certificate of
Incorporation the Company is authorized to issue
500,000 shares of preferred stock, par value $0.10 per
share, and did issue 250,000 shares of Redeemable
Series B Preferred Stock.
Treasury Stock. In August 2003, the Company purchased
35,000 of its common shares in a private transaction for
$604,000. As of December 31, 2004 and 2003, the Company
held 1,069,760 treasury shares.
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. In March 2001, the
board of directors increased the number of options by
40,800 shares to 244,800, which was approved by
stockholders at the May 2001 annual meeting. These options
remain available for grant as of December 31, 2004.
A summary of options granted and the changes therein during the
three years ended December 31, 2004 are presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
| |
|
Number | |
|
Average | |
|
Number | |
|
Average | |
|
Number | |
|
Average | |
| |
|
of | |
|
Exercise | |
|
of | |
|
Exercise | |
|
of | |
|
Exercise | |
| |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding, beginning of year
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Forfeited
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Reacquired
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
204,000 |
|
|
$ |
12.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, at end of year
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
204,000 |
|
|
$ |
12.23 |
|
|
|
204,000 |
|
|
$ |
12.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is the status of the 1995 Stock Option Plan as of
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
Total authorized
|
|
|
244,800 |
|
|
|
|
Less: Number granted, not exercised:
|
|
|
|
|
|
|
| |
May 2000
|
|
|
(70,800 |
) |
|
Exercise price of $10.31, expiring May 2010 |
| |
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 |
| |
|
|
|
|
|
| |
|
Sub-total
|
|
|
(204,000 |
) |
|
|
| |
|
|
|
|
|
|
Total available
|
|
|
40,800 |
|
|
|
| |
|
|
|
|
|
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
57
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
compensation cost has been recognized for the options. The
Company did not grant any stock options in the three year period
ended December 31, 2004, therefore no pro forma amounts are
required to be reported.
|
|
| Note 12 — |
Separation Agreement |
In 1999, the Company entered into a separation agreement (the
“Separation Agreement”) with a former officer and
director. The Separation Agreement provided that the former
officer and director and related trust exchange 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 Former Hallwood Energy, all of the Company’s
interest in its condominium hotel business and future cash
payments contingent on the net cash flow from the Company’s
real estate management activities, that being the lesser of 20%
of the net cash flow from its real estate management activities
for the preceding quarter or $125,000. These future cash
payments were subject to termination in certain circumstances.
The additional cost of the Separation Agreement recorded in 2002
in the amount of $1,000,000 represented an additional accrual of
future cash payments to the trust through the period ending
December 2004. The Company had an option to extinguish the
future cash payments at any time prior to December 21, 2004
upon the payment of $3,000,000. In June 2004, the Company
exercised the option. The Company recognized a gain from
extinguishment of the Separation Agreement in the amount of
$375,000, which was the excess of the obligation over the
$3,000,000 exercise price.
Following is a schedule of the income tax expense (benefit) (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| Continuing Operations |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
10,390 |
|
|
$ |
(5 |
) |
|
$ |
15 |
|
| |
Deferred
|
|
|
(900 |
) |
|
|
822 |
|
|
|
822 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Sub-total
|
|
|
9,490 |
|
|
|
817 |
|
|
|
837 |
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
1,783 |
|
|
|
908 |
|
|
|
598 |
|
| |
Deferred
|
|
|
(194 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Sub-total
|
|
|
1,589 |
|
|
|
908 |
|
|
|
598 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
11,079 |
|
|
$ |
1,725 |
|
|
$ |
1,435 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| Discontinued Operations |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
1,207 |
|
|
$ |
73 |
|
|
$ |
35 |
|
| |
Deferred
|
|
|
5,143 |
|
|
|
(5,307 |
) |
|
|
2,434 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Sub-total
|
|
|
6,350 |
|
|
|
(5,234 |
) |
|
|
2,469 |
|
|
State
|
|
|
212 |
|
|
|
40 |
|
|
|
215 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
6,562 |
|
|
$ |
(5,194 |
) |
|
$ |
2,684 |
|
| |
|
|
|
|
|
|
|
|
|
58
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Reconciliations of the expected tax or (benefit) at the
statutory tax rate to the recorded (tax) or benefit are as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Expected tax at the statutory tax rate
|
|
$ |
39,244 |
|
|
$ |
1,345 |
|
|
$ |
3,903 |
|
|
Decrease in deferred tax asset valuation allowance
|
|
|
(19,167 |
) |
|
|
(5,725 |
) |
|
|
(1,218 |
) |
|
Other
|
|
|
(3,731 |
) |
|
|
287 |
|
|
|
884 |
|
|
State taxes
|
|
|
1,297 |
|
|
|
625 |
|
|
|
537 |
|
|
Foreign income (loss) not taxable
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
13 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Recorded tax or (benefit)
|
|
$ |
17,641 |
|
|
$ |
(3,469 |
) |
|
$ |
4,119 |
|
| |
|
|
|
|
|
|
|
|
|
The deferred tax asset (net of valuation allowance) was
$4,657,000 and $8,706,000 at December 31, 2004 and 2003,
respectively. Prior to 2004, the deferred tax asset was
principally attributable to the anticipated utilization of the
Company’s net operating loss carryforwards
(“NOLs”), percentage depletion carryovers, tax credits
and timing differences from the implementation of various tax
planning strategies, which included anticipated gains from the
potential sale of investments and projected income from
operations. During 2004, the Company utilized its available
NOLs, depletion carryforward and tax credits to offset taxable
income. Accordingly, at December 31, 2004, the deferred tax
asset is attributable solely to timing differences which can be
utilized to offset projected income from operations.
As a result of the appreciation in market value of the HRP
limited partner units during 2004 and the establishment of a
value for the general partner interest in HRP, principally due
to the terms of the Agreement and Plan of Merger with HRPT, and
an increase in projected income from operations due to improved
results at Brookwood and the Company’s energy investments,
management determined that its valuation allowance should be
eliminated to reflect the anticipated increase in utilization of
NOLs and other tax attributes prior to their expiration.
Deferred tax expense in 2004 was reduced by the elimination of
the valuation allowance, which was $19,167,000 at
December 31, 2003. To the extent that the elimination of
the valuation allowance was attributable to the appreciation in
market value of the investments in HRP, the deferred tax benefit
was allocated to discontinued operations. The deferred tax asset
and related tax expense (benefit) in 2003 and 2002 were impacted
by anticipated and realized gains related to the Company’s
discontinued real estate and hotel operations. Accordingly, the
Company recorded a deferred tax expense (benefit) of $4,049,000,
$(4,485,000) and $3,256,000 in 2004, 2003 and 2002, respectively.
The Company reported significant taxable income in 2004,
including gains from the disposition of its interests in HRP and
HEC, net of the utilization of available NOLs, tax carryovers
and tax credits and incurred federal current tax expense of
$11,597,000. The Company reported taxable income in 2003 and
incurred federal current tax expense of $70,000, including
federal alternative minimum tax of $20,000. Although the Company
reported significant taxable income in 2002 from continuing
operations and hotel dispositions, it incurred no federal
alternative minimum tax due to a change in the tax law affecting
the calculation of the alternative minimum tax that expired in
2002, however, current federal taxes of $50,000 were incurred by
subsidiaries in 2002. The accrued federal income tax payable was
$1,019,000 and $4,000 and state taxes payable were $148,000 and
$539,000 at December 31, 2004 and 2003, respectively.
59
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A schedule of the types and amounts of existing temporary
differences and NOLs, at the blended statutory tax rate of 35%
(34% at December 31, 2003), tax credits and valuation
allowance as of the balance sheet dates are as follows (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Deferred Tax Asset, Net | |
| |
|
| |
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Assets | |
|
Liabilities | |
|
Assets | |
|
Liabilities | |
| |
|
| |
|
| |
|
| |
|
| |
|
Basis differences
|
|
$ |
7,167 |
|
|
$ |
— |
|
|
$ |
13,292 |
|
|
$ |
— |
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
— |
|
|
|
3,667 |
|
|
|
1,072 |
|
|
|
— |
|
|
Depreciation and amortization
|
|
|
— |
|
|
|
737 |
|
|
|
414 |
|
|
|
— |
|
|
State taxes
|
|
|
194 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net operating loss carryforward
|
|
|
— |
|
|
|
— |
|
|
|
9,917 |
|
|
|
— |
|
|
Tax credits
|
|
|
— |
|
|
|
— |
|
|
|
2,249 |
|
|
|
— |
|
|
Reserves recorded for financial statement purposes and not for
tax purposes
|
|
|
1,054 |
|
|
|
— |
|
|
|
— |
|
|
|
228 |
|
|
Original issue discounts and cancellation of debt income on
debentures
|
|
|
— |
|
|
|
— |
|
|
|
1,241 |
|
|
|
— |
|
|
Other temporary differences
|
|
|
646 |
|
|
|
— |
|
|
|
— |
|
|
|
84 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities
|
|
|
9,061 |
|
|
$ |
4,404 |
|
|
|
28,185 |
|
|
$ |
312 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deferred tax liabilities
|
|
|
(4,404 |
) |
|
|
|
|
|
|
(312 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
4,657 |
|
|
|
|
|
|
|
27,873 |
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
— |
|
|
|
|
|
|
|
(19,167 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deferred tax asset, net
|
|
$ |
4,657 |
|
|
|
|
|
|
$ |
8,706 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003, the Company reported NOLs for tax
purposes of $29,166,000, $2,249,000 of alternative minimum tax
credits and a depletion carryforward of $6,323,000. All
available amounts were utilized in 2004.
|
|
| Note 14 — |
Organization, Operations and Disposition of Real Estate
Operations |
Organization. In 1990, the Company, through a wholly
owned subsidiary, 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 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 was owned by Hallwood Realty and the limited
partner interest was owned by HWG, LLC. The consolidation did
not affect the carrying value of the investments.
Operations. The Company’s real estate subsidiaries
earned asset management, property management, leasing and
construction supervision fees for their management of HRP’s
real estate properties. Hallwood Realty earned: (i) an
asset management fee equal to 1% of the net aggregate base rents
of HRP’s properties, (ii) acquisition fees equal to 1%
of the purchase price of newly acquired properties and;
(iii) disposition fees with respect to real estate
investments, other than the properties owned at the time of
HRP’s formation in 1990, equal to 10% of the amount by
which the sales price of a property exceeds the purchase price
of such property. HCRE earned property management, leasing and
construction supervision fees. The management contracts with
HRP, which were scheduled to expire on June 30, 2004, were
amended in April 2004 to expire on the closing date of the
merger with HRPT, which was completed July 16, 2004. The
management contracts
60
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
provided for: (i) a property management fee equal to 2.85%
of cash receipts collected from tenants; (ii) leasing fees
equal to the current commission market rate as applied to net
aggregate rent (none exceeding 6% of the net aggregate rent);
and (iii) construction supervision fees for administering
construction projects equal to 5% of total construction or
tenant improvement costs. A summary of the fees earned from HRP
is detailed below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Property management fees
|
|
$ |
1,127 |
|
|
$ |
1,979 |
|
|
$ |
2,029 |
|
|
Leasing fees
|
|
|
866 |
|
|
|
1,556 |
|
|
|
2,151 |
|
|
Construction supervision fees
|
|
|
486 |
|
|
|
698 |
|
|
|
582 |
|
|
Asset management fees
|
|
|
335 |
|
|
|
605 |
|
|
|
618 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2,814 |
|
|
$ |
4,838 |
|
|
$ |
5,380 |
|
| |
|
|
|
|
|
|
|
|
|
The management contracts with HRP were terminated on
July 16, 2004 in connection with HRP’s sale to HRPT.
Hallwood Realty was also reimbursed for certain costs and
expenses, at cost, for administrative level salaries and
bonuses, employee and director insurance and allocated overhead
costs. In addition, since HRP did not employ any individuals,
the compensation and other costs related to approximately 90
employees rendering services on behalf of HRP and its properties
were reimbursed to Hallwood Realty and HCRE by HRP.
Disposition. The Company’s real estate business
segment has been reclassified to discontinued operations as a
result of the sale of its investments in HRP and the termination
of the associated management contracts. A summary of
discontinued real estate operations (through date of sale) is
provided below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Related parties
|
|
$ |
2,814 |
|
|
$ |
4,838 |
|
|
$ |
5,380 |
|
| |
|
Other
|
|
|
247 |
|
|
|
238 |
|
|
|
287 |
|
| |
Equity income (loss) from investments in HRP
|
|
|
(2,769 |
) |
|
|
(436 |
) |
|
|
1,428 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
292 |
|
|
|
4,640 |
|
|
|
7,095 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Administrative expenses
|
|
|
877 |
|
|
|
1,564 |
|
|
|
1,819 |
|
| |
Litigation costs
|
|
|
50 |
|
|
|
3,371 |
|
|
|
— |
|
| |
Amortization
|
|
|
— |
|
|
|
560 |
|
|
|
672 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
927 |
|
|
|
5,495 |
|
|
|
2,491 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(635 |
) |
|
|
(855 |
) |
|
|
4,604 |
|
|
Gain from sale
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain from sale of investments in HRP
|
|
|
52,703 |
|
|
|
— |
|
|
|
— |
|
| |
Incentive compensation and transaction costs
|
|
|
(6,629 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
46,074 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
45,439 |
|
|
|
(855 |
) |
|
|
4,604 |
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current federal and state income tax expense
|
|
|
1,294 |
|
|
|
113 |
|
|
|
250 |
|
| |
Deferred federal income tax expense (benefit)
|
|
|
5,143 |
|
|
|
(5,307 |
) |
|
|
634 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
6,437 |
|
|
|
(5,194 |
) |
|
|
884 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from discontinued real estate operations
|
|
$ |
39,002 |
|
|
$ |
4,339 |
|
|
$ |
3,720 |
|
| |
|
|
|
|
|
|
|
|
|
61
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Gain from Sale of Investments in HRP. The gain from sale
of investments in HRP of $52,703,000 resulted from the receipt
of $66,119,000 in the merger less the carrying value of the
investments in the general partnership and limited partnership
interests of approximately $13,416,000. In connection with the
sale of HRP and the substantial benefits the Company received
from the operations of HRP over a number of years, a special
committee, consisting of independent members of the board of
directors of the Company authorized an additional incentive
compensation payment of $1,622,000 to Mr. Guzzetti, the
Company’s executive vice president and payments of
$1,908,000 to Mr. Gumbiner and $3,000,000 to Hallwood
Investments Limited (“HIL”), formerly HSC Financial
Corporation, a British Virgin Island based company associated
with Mr. Gumbiner. Transaction costs were $99,000.
The following table sets forth summarized financial data of HRP,
obtained from Securities and Exchange Commission filings on
Form 10-K, as of and for each of the two years ended
December 31, 2003, Form 10-Q for the first quarter
2004 and internal financial statements through the date of sale
(in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Real estate property, net
|
|
|
— |
|
|
$ |
209,882 |
|
|
$ |
209,838 |
|
| |
Total assets
|
|
|
— |
|
|
|
291,237 |
|
|
|
274,420 |
|
| |
Mortgages payable
|
|
|
— |
|
|
|
209,554 |
|
|
|
197,552 |
|
| |
Total partners’ capital
|
|
|
— |
|
|
|
68,234 |
|
|
|
60,675 |
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue
|
|
$ |
40,429 |
|
|
$ |
72,456 |
|
|
$ |
73,739 |
|
| |
|
Net income (loss)
|
|
|
(12,949 |
) |
|
|
2,806 |
|
|
|
6,931 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amount at Which | |
|
|
| |
|
Carried at | |
|
Equity Income (Loss) for | |
| |
|
December 31, | |
|
Years Ended December 31, | |
| |
|
| |
|
| |
| Description of Investment |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Hallwood Realty Partners, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
General partner interest
|
|
|
— |
|
|
$ |
876 |
|
|
$ |
(111 |
) |
|
$ |
38 |
|
|
$ |
81 |
|
| |
Limited partner interest
|
|
|
— |
|
|
|
15,079 |
|
|
|
(2,658 |
) |
|
|
(474 |
) |
|
|
1,347 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Totals
|
|
|
— |
|
|
$ |
15,955 |
|
|
$ |
(2,769 |
) |
|
$ |
(436 |
) |
|
$ |
1,428 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to its sale in July 2004, the Hallwood Realty and HWG,
LLC, wholly owned subsidiaries of the Company, owned a 1%
general partner interest and a 21% limited partner interest,
respectively, in its HRP affiliate.
The Company accounted for its investment in HRP using the equity
method of accounting. In addition to recording its share of
HRP’s net income (loss), the Company also recorded non-cash
adjustments for the elimination of intercompany profits with a
corresponding adjustment to equity income (loss), its pro rata
share of HRP’s partner capital transactions with
corresponding adjustments to additional paid-in capital and its
pro rata share of HRP’s comprehensive income (loss). The
cumulative amount of such non-cash adjustments, from the
original date of investment through the disposition date,
resulted in a $1,849,000 decrease in the carrying value of the
HRP investment. Prior to January 1, 2002, the Company
recorded amortization of the amount that the Company’s
share of the underlying equity in net assets of HRP exceeded its
investment on the straight line basis over 19 years, which
was $568,000 as of January 1, 2002. In accordance with
SFAS No. 142, the unamortized amount of such
“negative goodwill” was recorded as income from
cumulative effect of a change in accounting principle on
January 1, 2002.
62
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The carrying value of the Company’s investment in the
general partner interest of HRP included the value of intangible
rights to provide asset management and property management
services. Beginning in November 1993, the Company commenced
amortization, over a ten-year period, of that portion of the
general partner interest ascribed to the management rights and
such amortization was $560,000 and $672,000 and for the years
ended December 31, 2003 and 2002, respectively. The value
of the intangible rights became fully amortized in October 2003.
Agreement and Plan of Merger with HRPT Properties Trust.
On July 15, 2004, the merger with a subsidiary of HRPT was
approved by the HRP unitholders at the special meeting of
unitholders with holders of 53.74% of the outstanding units
voting to approve the merger, and on July 16, 2004, HRP
announced the completion of the merger. The total cash price
HRPT paid under the merger agreement and the purchase agreement
was approximately $247,000,000. In addition, HRPT assumed or
prepaid all of HRP’s outstanding debt. In its announcement,
HRP indicated that unitholders received an amount in cash equal
to $136.70 per unit of limited partnership. Of this amount
$0.31 per unit was withheld subject to the award of
attorneys’ fees to the class counsel in the I.G.
Holdings Inc. et al v. Hallwood Realty, LLC
et al. litigation discussed below.
Proceeds of Sale. The Company had also entered into a
purchase agreement, pursuant to which HRPT would purchase the
general partner interest in HRP, the 330,432 limited partnership
units indirectly owned by the Company, and the interests in each
of the other entities through which the Company held interests
in HRP, for an aggregate purchase price which was estimated to
be approximately $67,000,000, subject to adjustment
corresponding to any adjustments in the price being paid for the
units in the merger. In addition, the Company and HRP had agreed
that the contracts for the management of HRP’s properties
by the Company’s affiliates would be terminated at the time
of the merger. In the purchase agreement, the Company also
agreed to vote all of the units it owned in favor of the merger.
On July 16, 2004, the Company received proceeds of
approximately $66,119,000, of which $18,500,000 was placed into
an escrow account described below. Proceeds were also reduced by
approximately $102,000 for the Company’s share of the award
of attorneys’ fees to the class counsel in the I.G.
Holdings litigation. The Company used approximately
$14,400,000 of the proceeds to repay principal, accrued interest
and fees associated with the Amended and Restated Credit
Agreement. See Note 7.
Escrow Agreement. In accordance with the purchase
agreement, the Company deposited $18,500,000 of proceeds from
the sale of its interests in HRP into an escrow account pending
the resolution of outstanding claims associated with, among
others, (i) any breach of the representations and
warranties of the Company and its affiliates contained in the
purchase agreement, (ii) the transactions contemplated by
the purchase agreement or the merger agreement, including the
approval of the payment of the purchase price by Hallwood
Realty’s audit committee and its board of directors,
(iii) the litigation initiated by High River and I.G.
Holdings, Inc.; and (iv) any actions incident to any of the
above. In December 2004, the pending claims were resolved, and
the Company received the full amount of the $18,500,000 escrow
deposit plus accrued interest.
Litigation related to HRP. See Note 20 for a
discussion of litigation related to HRP.
|
|
| Note 15 — |
Discontinued Hotel Operations |
In December 2000, the Company decided to discontinue its hotel
operations and to dispose of its hotel segment, principally by
allowing its non-recourse debtholders to assume ownership of the
properties through foreclosure or by selling or otherwise
disposing of its hotel properties. The Company’s former
hotel segment consisted of three owned properties and two leased
properties.
As of June 2002, the Company completed the disposition of four
hotel properties it had previously designated as discontinued
operations. The Company determined that it would retain its
leasehold interest in the GuestHouse Suites hotel in Huntsville,
Alabama. In December 2004, the Company’s Brock Suites
Huntsville, Inc. subsidiary entered into a Lease Termination and
Mutual Release Agreement with the
63
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
landlord of the GuestHouse Suites Plus hotel in Huntsville,
Alabama. In connection with the lease termination, the remaining
assets of the subsidiary were transferred to the landlord, and
the Company obtained a release from any further obligations. The
Company recognized a gain from extinguishment of debt of
$1,598,000. Operating results for the Huntsville hotel have been
reclassified to discontinued operations for all years presented.
A summary of discontinued hotel operations for the three years
ended December 31, 2004 is provided below (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain from extinguishment of debt
|
|
$ |
1,598 |
|
|
$ |
— |
|
|
$ |
5,789 |
|
| |
Sales
|
|
|
1,499 |
|
|
|
1,414 |
|
|
|
1,858 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
3,097 |
|
|
|
1,414 |
|
|
|
7,647 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating expenses
|
|
|
1,987 |
|
|
|
1,799 |
|
|
|
2,046 |
|
| |
Depreciation and amortization
|
|
|
188 |
|
|
|
115 |
|
|
|
117 |
|
| |
Interest expense
|
|
|
10 |
|
|
|
37 |
|
|
|
242 |
|
| |
Litigation and other disposition costs
|
|
|
5 |
|
|
|
31 |
|
|
|
362 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
2,190 |
|
|
|
1,982 |
|
|
|
2,767 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
907 |
|
|
|
(568 |
) |
|
|
4,880 |
|
|
Income tax expense
|
|
|
124 |
|
|
|
— |
|
|
|
1,800 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued hotel operations
|
|
$ |
783 |
|
|
$ |
(568 |
) |
|
$ |
3,080 |
|
| |
|
|
|
|
|
|
|
|
|
During 2001, the Company entered into an Agreement to Terminate
Lease with the landlord of the Holiday Inn and Suites Hotel in
Sarasota, Florida and entered into a settlement agreement with
the mezzanine lender for the Embassy Suites hotel whereby the
Company transferred all of the capital stock of the entity that
owned the hotel, to the mezzanine lender and obtained a release
from its obligations under the first mortgage and the mezzanine
loan.
In January 2002, with assistance and consent of the lender, the
Company sold the GuestHouse Suites Plus hotel in Tulsa, Oklahoma
for $3,000,000. The Company received no cash proceeds from the
sale; however, concurrently with the sale, it entered into a
loan modification and assumption agreement, which included a
release that discharged the Company from any further loan
obligations. The Company recognized a gain from extinguishment
of debt of $2,552,000.
In February 2002, the lender for the GuestHouse Plus Suites
hotel in Greenville, South Carolina obtained a court judgment of
foreclosure. In connection with the foreclosure, the lender
waived its right to a deficiency judgment against the Company.
The lender completed the foreclosure in June 2002 and the
Company recognized a gain from extinguishment of debt of
$3,237,000.
64
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 16 — |
Supplemental Disclosures to the Consolidated Statements of
Cash Flows |
The following transactions affected recognized assets or
liabilities but did not result in cash receipts or cash payments
(in thousands):
|
|
|
Supplemental schedule of non-cash investing and financing
activities. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Issuance of promissory note in litigation settlement
|
|
|
— |
|
|
$ |
250 |
|
|
|
— |
|
|
Proportionate share of partners’ capital transactions of
equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sale of real estate investments
|
|
$ |
257 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Exercise of stock options
|
|
|
— |
|
|
|
(23 |
) |
|
|
— |
|
| |
Amortization of interest rate swap
|
|
|
(30 |
) |
|
|
(56 |
) |
|
|
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
227 |
|
|
$ |
(79 |
) |
|
$ |
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Hotel assets and liabilities relinquished in connection with
debt extinguishment:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other liabilities, net
|
|
$ |
1,598 |
|
|
|
— |
|
|
$ |
837 |
|
| |
Loans payable
|
|
|
— |
|
|
|
— |
|
|
|
11,609 |
|
| |
Hotel properties
|
|
|
— |
|
|
|
— |
|
|
|
(6,552 |
) |
| |
Deferred tax asset
|
|
|
— |
|
|
|
— |
|
|
|
(1,800 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
1,598 |
|
|
|
— |
|
|
$ |
4,094 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
1,299 |
|
|
$ |
1,680 |
|
|
$ |
1,606 |
|
|
Income taxes paid
|
|
|
12,903 |
|
|
|
967 |
|
|
|
168 |
|
|
|
| Note 17 — |
Per Common Share |
The following table reconciles weighted average shares
outstanding from basic to assuming dilution and reconciles
income from continuing operations after preferred dividend and
net income (available to common stockholders) used in the
calculation of basic and assuming dilution methods (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
1,326 |
|
|
|
1,347 |
|
|
|
1,361 |
|
| |
Potential shares from assumed exercise of stock options
|
|
|
204 |
|
|
|
125 |
|
|
|
— |
|
| |
Potential repurchase of shares from stock options proceeds
|
|
|
(43 |
) |
|
|
(82 |
) |
|
|
— |
|
| |
Potential shares from assumed loan conversion
|
|
|
— |
|
|
|
— |
|
|
|
54 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Assuming dilution
|
|
|
1,487 |
|
|
|
1,390 |
|
|
|
1,415 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income From Continuing Operations (after preferred
dividend)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
54,700 |
|
|
$ |
3,604 |
|
|
$ |
(56 |
) |
| |
Interest expense (net of tax) from assumed loan conversion
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Assuming dilution
|
|
$ |
54,700 |
|
|
$ |
3,604 |
|
|
$ |
(28 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Income (available to common stockholders)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
94,485 |
|
|
$ |
7,375 |
|
|
$ |
7,312 |
|
| |
Interest expense (net of tax) from assumed loan conversion
|
|
|
— |
|
|
|
— |
|
|
|
28 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Assuming dilution
|
|
$ |
94,485 |
|
|
$ |
7,375 |
|
|
$ |
7,340 |
|
| |
|
|
|
|
|
|
|
|
|
65
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| Note 18 — |
Fair Value of Financial Instruments |
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.
Management has reviewed the carrying value of its loans payable
and former 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 $9,095,000 and $24,009,000 at December 31,
2004 and 2003, compared to the carrying value of $9,136,000 and
$23,939,000, respectively.
The fair value information presented as of December 31,
2004 and 2003 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 19 — Related Party Transactions
Hallwood Investments Limited. The Company has entered
into a financial consulting contract with HIL. The contract
provides for HIL 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 $996,000 ($954,000 prior to March 2005 and
$795,000 prior to March 2004). The annual amount is payable in
monthly installments, as a retainer to secure the availability
of HIL to perform such services as and when required by the
Company. This contract had an original termination date of July
1998, however, it automatically renews for one-year periods if
not terminated by the parties beforehand. Additionally, HIL is
also eligible for bonuses from the Company or its subsidiaries,
subject to approval by the Company or its subsidiaries’
board of directors. The board of directors awarded HIL a bonus
in March 2004 and 2003, in the same amount of $33,000 from its
HCRE subsidiary, of which both amounts were accrued in the
previous year.
Pursuant to the HIL financial consulting agreement, the Company
reimburses HIL for reasonable expenses in providing office space
and administrative services. The Company reimbursed HIL
$497,000, $417,000 and $392,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. Of the
amounts paid, the Company incurred $324,000, $104,000 and
$98,000 of expense for the years ended December 31, 2004,
2003 and 2002, respectively. The remainder was reimbursed by HRP
prior to its disposition in July 2004.
In addition, HIL performs services for certain affiliated
entities that are not subsidiaries of the Company, for which it
receives consulting fees, bonuses or other forms of compensation
and expenses. The Company recognizes a proportionate share of
such compensation and expenses, based upon its ownership
percentage in the affiliated entities, through the utilization
of the equity method of accounting.
In connection with the sale of HRP and the substantial benefits
the Company received from the operations of HRP over a number of
years, a special committee, consisting of independent members of
the board of directors of the Company, authorized additional
incentive compensation payments of $1,908,000 to
Mr. Gumbiner and $3,000,000 to HIL.
66
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Hallwood Realty Partners, L.P. The Company earned
management fees, leasing commissions and other fees from HRP
prior to the sale of its investments in July 2004.
Note 20 — 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.
Gotham Partners. In June 1997, an action was filed
against the Company, HRP, HRP’s general partner Hallwood
Realty Corporation, a predecessor entity to Hallwood Realty,
LLC, and the directors of Hallwood Realty Corporation by Gotham
Partners, L.P. in the Court of Chancery of the state of
Delaware, styled Gotham Partners, L.P. v. Hallwood
Realty Partners, L.P., et al (C.A. No. 15754).
This action alleged claims of breach of fiduciary duties, breach
of HRP’s partnership agreement and fraud in connection with
certain transactions involving HRP’s limited partnership
units in the mid 1990’s.
A trial was held in January 2001. In July 2001, the court ruled
that the defendants other than HRP pay a judgment to HRP in the
amount of $3,417,000, plus pre-judgment interest of
approximately $2,891,000 from August 1995. The judgment amount
represented what the court determined was an underpayment by the
Company. In August 2001, the plaintiff and certain defendants
appealed the Court of Chancery’s judgment to the Delaware
Supreme Court. In October 2001, the Company paid $6,405,000,
including post judgment interest, to HRP. In August 2002, the
Supreme Court affirmed the judgment of the trial court that the
remaining defendants other than HRP are jointly and severally
liable to HRP. The Supreme Court reversed the trial court’s
determination of damages, and remanded the case to the trial
court to fashion appropriate relief.
In July 2003, the Delaware Court of Chancery issued its decision
after remand. In the decision, the Court of Chancery determined
that the Company was required to pay an additional amount of
approximately $2,988,000 plus pre-judgment interest of
approximately $3,762,000. In July 2003, the trial court entered
its final order and judgment on remand which provided, among
other things, that HRP pay plaintiff $3,000,000 in
attorneys’ fees, cost and expenses, which was funded by HRP
to plaintiff in August 2003. In July 2003, the plaintiff
appealed the final order and judgment on remand to the Delaware
Supreme Court. In December 2003, the Delaware Supreme Court
affirmed the Court of Chancery’s final order and judgment
on remand, effectively ending the matter.
As discussed in Note 7, the Company entered into an Amended
and Restated Credit Agreement, which provided a Special Purpose
Credit Facility in the amount of $5,000,000, which was used to
pay a portion of the judgment in August 2003. In April 2004, the
Company entered into a commitment agreement with First
Bank & Trust that provided for an additional $1,850,000
term loan, which was required to be used to pay the remaining
amount due to HRP. Funding of the commitment and payment of the
amount due HRP occurred in the May 2004.
High River and I.G. Holdings. In April 2003, an action
was filed against HRP’s general partner, Hallwood Realty
(the “General Partner”), its directors and HRP as
nominal defendant by High River Limited Partnership, which is
indirectly wholly owned by Carl C. Icahn, in the Court of
Chancery of the State of Delaware, styled High River Limited
Partnership v. Hallwood Realty, LLC, et al, (C.A.
No. 20276). The action related to a tender offer by High
River for units of HRP. In addition, a putative class action
lawsuit was filed against the General Partner, its directors and
HRP as nominal defendant by three purported unitholders of HRP
in the Court of Chancery of the State of Delaware, styled
I.G. Holdings, Inc., et al, v. Hallwood Realty LLC,
et al, (C.A. No. 20283) also relating to the High
river tender offer.
67
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On June 30, 2004, the parties to the I. G. Holdings,
Inc., et al. v. Hallwood Realty, LLC, et al.,
action entered into a Memorandum of Understanding providing for
the settlement of that putative class action. As contemplated by
the Memorandum of Understanding, the parties entered into a
Stipulation and Agreement of Compromise, Settlement and Release
on July 29, 2004. Pursuant to the Stipulation of
Settlement, the parties agreed that the action would be
certified, for purposes of settlement only, as a class action
consisting of all record and beneficial owners of partnership
interests in HRP (other than defendants and their affiliates and
associates) on July 16, 2004, the effective date of the
merger, that the action would be dismissed with prejudice, and
that plaintiffs could make an application for attorneys’
fees and expenses in an amount not to exceed $2,500,000.
Defendants agreed not to oppose the fee application. With
respect to any fees and expenses awarded by the Court of
Chancery, the first $2,000,000 of such amount would be paid by
defendants’ insurer and the balance of the amount awarded
by the court, if any, would be paid from a $500,000 fund
escrowed from the merger consideration pursuant to a court order
dated July 15, 2004. On October 25, 2004, the Delaware
Court of Chancery held a hearing on the proposed settlement of
the class action and determined that the settlement was fair,
reasonable, adequate and in the best interests of the class and
approved it. This was one objection to the settlement but the
Court rejected it. The Court also ruled that counsel for the
class was entitled to a fee award in an amount of $2,000,000
(which defendants’ insurer had committed to pay), plus
recovery of approximately $181,000 in expenses which would be
paid from a $500,000 escrow fund established in connection with
the effectuation of the merger. These escrow fund reflected
withholding of $0.31 per unit of merger consideration
payable to HRP unitholders. On October 29, 2004, the
Delaware Court of Chancery entered an Order and Final Judgment
reflecting (among other things) these determinations and its
approval of the settlement as well as its approval of the form
and manner of notice of the settlement, certification of the
class, release of all defendants and their affiliates and
dismissal of the class action litigation with prejudice and on
the merits.
The Court of Chancery also determined that a portion of the
$500,000 in escrowed funds should be returned to High River,
based on its pro rata ownership of HRP units, and that the
balance of the fund would be returned to HRP’s other
unitholders (including the Company) based on their pro rata
ownership of HRP units. Taking into account the $181,000 payable
to class counsel based on their expenses and the approximately
$74,000 that was required to be returned to High River, a
balance of $245,000 plus interest remained to be distributed to
HRP unitholders other than High River. This amount was reduced
by the administrative costs and expenses associated with
returning this money to the HRP unitholders. The Company
received its allocable share of the remaining escrow account
balance of approximately $59,000 in February 2005.
Other. The Company was a defendant in two lawsuits
regarding guaranties of certain obligations of the Embassy
Suites and Holiday Inn hotels. In February 2003, the Company
settled both matters. The Company agreed (i) to pay
$150,000 in cash and issue a non-interest bearing promissory
note in the amount of $250,000 payable in equal monthly
installments over 18 months, in exchange for a full release
regarding the Embassy Suites hotel in Oklahoma City, Oklahoma
and (ii) to pay $250,000 in cash in exchange for a full
release regarding the Holiday Inn hotel in Sarasota, Florida. In
December 2002, the Company recorded an additional loss provision
in the amount of $247,000 to fully accrue for these two
litigation matters. The Company has made all scheduled payments
in accordance with the settlement agreements and the final
payment for the aforementioned promissory note was made in
December 2004.
Contingencies. In October 2003, as a result of a
voluntary disclosure by Brookwood Laminating, The Rhode Island
Department of Environmental Management (“RIDEM”)
issued a Notice of Violation alleging violations of the Rhode
Island Air Pollution Act and seeking an administrative penalty
of $379,000. Brookwood Laminating contested the penalty and
received a letter from RIDEM in March 2004 proposing to reduce
the penalty to $30,000 on the condition that on or before
May 1, 2004 it submitted to RIDEM a proposal for the
acquisition of certain environmental control equipment at a cost
not less than $400,000.
68
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Brookwood submitted a proposal to RIDEM, which approved it, and
has purchased and installed the equipment.
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 $1,515,000, $1,431,000 and $1,518,000 for
the years ended December 31, 2004, 2003 and 2002,
respectively. The Company leases certain textile manufacturing
equipment and certain hotel property (prior to its disposition
in December 2004), including land, buildings and equipment. The
leases generally require the Company to pay property taxes,
insurance and maintenance of the leased assets. The Company
shares certain executive office facilities with HRP and pays a
proportionate share of the lease expense.
At December 31, 2004 aggregate minimum annual rental
commitments under noncancelable operating leases having an
initial or remaining term of more than one year, were as follows
(in thousands):
| |
|
|
|
|
|
| Years Ending December 31, |
|
Amount | |
| |
|
| |
|
2005
|
|
$ |
897 |
|
|
2006
|
|
|
428 |
|
| |
|
|
|
| |
Total
|
|
$ |
1,325 |
|
| |
|
|
|
Employment Contracts. The Company’s Brookwood
subsidiary has various employment agreements. The approximate
minimum annual compensation due under these agreements was
$518,000.
|
|
| Note 21 — |
Segment and Related Information |
The Company is a holding company and classifies its continuing
business operations into two reportable segments; textile
products and energy. Both segments have different management
teams and infrastructures that engage in different businesses
and offer different services. See Notes 5 and 6.
The Company’s discontinued operations are comprised of its
former real estate and hotel segments. See Notes 14 and 15.
69
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following represents the Company’s reportable amounts
by business segment and for discontinued operations, as of and
for the three years ended December 31, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Textile | |
|
|
|
|
|
Discontinued | |
|
|
| |
|
Products | |
|
Energy | |
|
Other | |
|
Operations | |
|
Consolidated | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external sources
|
|
$ |
136,276 |
|
|
$ |
1,004 |
|
|
|
|
|
|
|
|
|
|
$ |
137,280 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
18,460 |
|
|
|
— |
|
|
$ |
(6,789 |
) |
|
|
|
|
|
$ |
11,671 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
|
$ |
(398 |
) |
|
$ |
52,387 |
|
|
$ |
2,119 |
|
|
|
|
|
|
|
54,108 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,779 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,785 |
|
|
$ |
39,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets, December 31, 2004
|
|
$ |
60,238 |
|
|
$ |
13,347 |
|
|
|
|
|
|
$ |
329 |
|
|
$ |
73,914 |
|
|
Cash allocable to segment
|
|
|
228 |
|
|
|
218 |
|
|
$ |
71,321 |
|
|
|
— |
|
|
|
71,767 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
60,466 |
|
|
$ |
13,565 |
|
|
$ |
71,321 |
|
|
$ |
329 |
|
|
|
145,681 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
$ |
11,636 |
|
|
|
|
|
|
|
11,636 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
157,317 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
1,618 |
|
|
$ |
57 |
|
|
$ |
7 |
|
|
$ |
188 |
|
|
$ |
1,870 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures/acquisitions
|
|
$ |
2,651 |
|
|
$ |
689 |
|
|
$ |
21 |
|
|
|
|
|
|
$ |
3,361 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external sources
|
|
$ |
104,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
104,720 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
6,672 |
|
|
|
|
|
|
$ |
(2,097 |
) |
|
|
|
|
|
$ |
4,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
|
$ |
(641 |
) |
|
$ |
50 |
|
|
$ |
1,395 |
|
|
|
|
|
|
|
804 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,379 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,771 |
|
|
$ |
3,771 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets, December 31, 2003
|
|
$ |
49,603 |
|
|
$ |
5,360 |
|
|
|
|
|
|
$ |
23,938 |
|
|
$ |
78,901 |
|
|
Cash allocable to segment
|
|
|
916 |
|
|
|
— |
|
|
$ |
1,884 |
|
|
|
85 |
|
|
|
2,885 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
50,519 |
|
|
$ |
5,360 |
|
|
$ |
1,884 |
|
|
$ |
24,023 |
|
|
|
81,786 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
$ |
1,768 |
|
|
|
|
|
|
|
1,768 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
83,554 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$ |
1,504 |
|
|
|
|
|
|
|
|
|
|
$ |
671 |
|
|
$ |
2,175 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures/acquisitions
|
|
$ |
1,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,561 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Textile | |
|
|
|
|
|
Discontinued | |
|
|
| |
|
Products | |
|
Energy | |
|
Other | |
|
Operations | |
|
Consolidated | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Year ended December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external sources
|
|
$ |
84,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
84,770 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$ |
2,667 |
|
|
|
|
|
|
$ |
(2,599 |
) |
|
|
|
|
|
$ |
68 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
$ |
621 |
|
|
$ |
(187 |
) |
|
$ |
927 |
|
|
|
|
|
|
|
1,361 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,429 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,800 |
|
|
$ |
6,800 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets, December 31, 2002
|
|
$ |
44,519 |
|
|
$ |
3,313 |
|
|
|
|
|
|
$ |
18,832 |
|
|
$ |
66,664 |
|
|
Cash allocable to segment
|
|
|
869 |
|
|
|
— |
|
|
$ |
1,370 |
|
|
|
120 |
|
|
|
2,359 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
45,388 |
|
|
$ |
3,313 |
|
|
$ |
1,370 |
|
|
$ |
18,952 |
|
|
|
69,023 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
|
$ |
525 |
|
|
|
|
|
|
|
525 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets, December 31, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,548 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and impairment
|
|
$ |
1,373 |
|
|
|
|
|
|
|
|
|
|
$ |
789 |
|
|
$ |
2,162 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures/acquisitions
|
|
$ |
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,950 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 22 — 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 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 two years ended December 31, 2003, vest at a rate of
20% per year of service and become fully vested after five
years. The Company did not provide a matching contribution in
2004. Employees of Hallwood Realty, HCRE and salaried hotel
employees also participated in the Company’s 401(k) plan.
Employer contributions paid on behalf of Hallwood Realty
employees were substantially paid by HRP. Brookwood has a
separate 401(k) plan which is similar to the Company’s
plan. Brookwood did not provide a matching employer contribution
to its 401(k) plan in 2002. Aggregate contributions to the plans
for the years ended December 31, 2004, 2003 and 2002,
respectively, excluding contributions from HRP, were $205,000 ,
$291,000, and $71,000, respectively.
Brookwood’s union employees belong to a pension fund
maintained by their union. The Company contributes $90 per
month per employee to the fund. Total contributions for the
three years ended December 31, 2004 were $302,000, $281,000
and $268,000, respectively.
71
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note 23 — Cumulative Effect of Changes in
Accounting Principles
SFAS No. 142 became effective January 1, 2002 and
specifies that goodwill and some intangible assets will no
longer be amortized but instead will be subject to periodic
impairment testing. The effect of adopting
SFAS No. 142 by the Company resulted in the recording
of income from the cumulative effect of a change in accounting
principle in the amount of $568,000, which represented the
unamortized amount of negative goodwill associated with the
Company’s equity investment in HRP.
Note 24 — Summary of Quarterly Financial
Information (Unaudited)
Results of operations by quarter for the years ended
December 31, 2004 and 2003, are summarized below (in
thousands, except per share amounts):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2004 | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Operating revenues
|
|
$ |
31,240 |
|
|
$ |
35,554 |
|
|
$ |
31,277 |
|
|
$ |
39,209 |
|
|
Other Income
|
|
|
298 |
|
|
|
827 |
|
|
|
528 |
|
|
|
52,455 |
|
|
Gross profit
|
|
|
7,017 |
|
|
|
9,713 |
|
|
|
8,539 |
|
|
|
9,239 |
|
|
Income from continuing operations
|
|
|
5,318 |
|
|
|
10,660 |
|
|
|
803 |
|
|
|
37,919 |
|
|
Income from discontinued operations
|
|
|
8,401 |
|
|
|
2,967 |
|
|
|
27,813 |
|
|
|
604 |
|
|
Net income
|
|
|
13,719 |
|
|
|
13,627 |
|
|
|
28,616 |
|
|
|
38,523 |
|
|
Comprehensive income
|
|
|
13,704 |
|
|
|
13,612 |
|
|
|
28,616 |
|
|
|
38,523 |
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
4.01 |
|
|
|
8.04 |
|
|
|
0.61 |
|
|
|
28.60 |
|
| |
Assuming dilution
|
|
|
3.68 |
|
|
|
7.27 |
|
|
|
0.54 |
|
|
|
25.18 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
10.35 |
|
|
|
10.28 |
|
|
|
21.58 |
|
|
|
29.05 |
|
| |
Assuming dilution
|
|
|
9.50 |
|
|
|
9.30 |
|
|
|
19.24 |
|
|
|
25.58 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, 2003 | |
| |
|
| |
| |
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Operating revenues
|
|
$ |
24,799 |
|
|
$ |
24,266 |
|
|
$ |
26,174 |
|
|
$ |
29,481 |
|
|
Other Income (loss)
|
|
|
303 |
|
|
|
260 |
|
|
|
294 |
|
|
|
(53 |
) |
|
Gross profit
|
|
|
4,589 |
|
|
|
5,393 |
|
|
|
5,876 |
|
|
|
5,600 |
|
|
Income from continuing operations
|
|
|
491 |
|
|
|
1,096 |
|
|
|
1,570 |
|
|
|
497 |
|
|
Income (loss) from discontinued operations
|
|
|
862 |
|
|
|
(265 |
) |
|
|
3,250 |
|
|
|
(76 |
) |
|
Net income
|
|
|
1,353 |
|
|
|
831 |
|
|
|
4,820 |
|
|
|
421 |
|
|
Comprehensive income
|
|
|
1,340 |
|
|
|
817 |
|
|
|
4,806 |
|
|
|
406 |
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.36 |
|
|
|
0.77 |
|
|
|
1.17 |
|
|
|
0.38 |
|
| |
Assuming dilution
|
|
|
0.36 |
|
|
|
0.75 |
|
|
|
1.12 |
|
|
|
0.36 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.99 |
|
|
|
0.57 |
|
|
|
3.60 |
|
|
|
0.32 |
|
| |
Assuming dilution
|
|
|
0.99 |
|
|
|
0.56 |
|
|
|
3.44 |
|
|
|
0.30 |
|
72
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Year ended December 31, 2004. In July 2004, the
Company completed a sale of its former investments in HRP and
reported a gain from the sale in the amount of $46,074,000. The
gain is reported in discontinued operations.
In December 2004, the Company completed a sale of its investment
in HEC and reported a gain from the sale in the amount of
$62,288,000. The gain is reported in continuing operations.
In December 2004, the Company entered into a lease termination
agreement for its one remaining hotel. Accordingly, hotel
results are reported in discontinued operations.
Year ended December 31, 2003. In June 2003, the
Company recorded litigation expense of $3,602,000 in connection
with the decision after remand by the Delaware Court of Chancery
in the Gotham Partners, L.P. vs. Hallwood Realty Partners,
L.P., et al, matter.
73
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S 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 subsidiaries as of December 31, 2004
and 2003 and the related consolidated statements of operations,
comprehensive income, changes in stockholders’ equity and
cash flows for each of the three years in the period ended
December 31, 2004 and have issued our report thereon dated
March 30, 2005, which contained an explanatory paragraph
referring to the Company’s change in its method of
accounting for goodwill in 2002 as required by Statement of
Financial Accounting Standards No. 142, “Goodwill and
Other Intangible Assets,” and its change in its method of
accounting for redeemable preferred stock in 2003 as required by
Statement of Financial Accounting Standards No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” and which
report is included elsewhere in this Form 10-K. Our audits
also included the financial statement schedules of The Hallwood
Group Incorporated and subsidiaries, listed in the accompanying
index at Item 15. 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 30, 2005
74
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT
COMPANY)
BALANCE SHEETS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current Assets
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
71,196 |
|
|
$ |
1,761 |
|
| |
Marketable securities
|
|
|
6,100 |
|
|
|
— |
|
| |
Deferred income tax
|
|
|
2,213 |
|
|
|
— |
|
| |
Receivables and other current assets
|
|
|
732 |
|
|
|
152 |
|
| |
|
|
|
|
|
|
| |
|
|
80,241 |
|
|
|
1,913 |
|
|
Noncurrent Assets
|
|
|
|
|
|
|
|
|
| |
Investments in subsidiaries
|
|
|
33,006 |
|
|
|
36,380 |
|
| |
Investments in energy affiliates
|
|
|
12,491 |
|
|
|
5,360 |
|
| |
Deferred tax asset
|
|
|
2,250 |
|
|
|
1,362 |
|
| |
Other noncurrent assets
|
|
|
124 |
|
|
|
221 |
|
| |
|
|
|
|
|
|
| |
|
|
47,871 |
|
|
|
43,323 |
|
| |
|
|
|
|
|
|
| |
|
Total Assets
|
|
$ |
128,112 |
|
|
$ |
45,236 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
Current Liabilities
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued expenses
|
|
$ |
1,394 |
|
|
$ |
2,601 |
|
| |
Income taxes payable
|
|
|
1,177 |
|
|
|
— |
|
| |
Current portion of loans payable
|
|
|
— |
|
|
|
730 |
|
| |
|
|
|
|
|
|
| |
|
|
2,571 |
|
|
|
3,331 |
|
| |
|
|
|
|
|
|
|
Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
| |
Redeemable preferred stock
|
|
|
1,000 |
|
|
|
1,000 |
|
| |
10% Collateralized Subordinated Debentures
|
|
|
— |
|
|
|
6,569 |
|
| |
Separation Agreement obligation
|
|
|
— |
|
|
|
3,500 |
|
| |
Deferred revenue — noncompetition agreement
|
|
|
— |
|
|
|
1,007 |
|
| |
|
|
|
|
|
|
| |
|
|
1,000 |
|
|
|
12,076 |
|
| |
|
|
|
|
|
|
| |
|
Total Liabilities
|
|
|
3,571 |
|
|
|
15,407 |
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
| |
Common stock
|
|
|
240 |
|
|
|
240 |
|
| |
Additional paid-in capital
|
|
|
54,792 |
|
|
|
54,430 |
|
| |
Retained earnings (deficit)
|
|
|
85,443 |
|
|
|
(9,042 |
) |
| |
Accumulated other comprehensive income
|
|
|
— |
|
|
|
135 |
|
| |
Treasury stock, at cost
|
|
|
(15,934 |
) |
|
|
(15,934 |
) |
| |
|
|
|
|
|
|
| |
|
Total Stockholders’ Equity
|
|
|
124,541 |
|
|
|
29,829 |
|
| |
|
|
|
|
|
|
| |
|
Total Liabilities and Stockholders’ Equity
|
|
$ |
128,112 |
|
|
$ |
45,236 |
|
| |
|
|
|
|
|
|
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”.
75
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT
COMPANY)
STATEMENTS OF OPERATIONS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
Expenses
|
|
|
4,305 |
|
|
|
2,086 |
|
|
|
1,967 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Operating Loss
|
|
|
(4,305 |
) |
|
|
(2,086 |
) |
|
|
(1,967 |
) |
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain from disposition of HEC
|
|
|
62,288 |
|
|
|
— |
|
|
|
— |
|
| |
Equity income (loss) from investments in energy affiliates
|
|
|
(9,901 |
) |
|
|
50 |
|
|
|
(187 |
) |
| |
Dividend income from subsidiaries — continuing
operations
|
|
|
3,000 |
|
|
|
600 |
|
|
|
— |
|
| |
Interest and other income (expense)
|
|
|
1,434 |
|
|
|
(27 |
) |
|
|
355 |
|
| |
Amortization of deferred revenue — noncompetition
agreement
|
|
|
1,007 |
|
|
|
2,417 |
|
|
|
2,417 |
|
| |
Equity in net income of subsidiaries — continuing
operations
|
|
|
5,511 |
|
|
|
2,387 |
|
|
|
1,459 |
|
| |
Interest expense
|
|
|
(504 |
) |
|
|
(672 |
) |
|
|
(622 |
) |
| |
Separation Agreement income (expense)
|
|
|
375 |
|
|
|
— |
|
|
|
(1,000 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
63,210 |
|
|
|
4,755 |
|
|
|
2,422 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income from continuing operations before income tax
|
|
|
58,905 |
|
|
|
2,669 |
|
|
|
455 |
|
| |
Income tax expense (benefit)
|
|
|
4,205 |
|
|
|
( 985 |
) |
|
|
(107 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income from continuing operations
|
|
|
54,700 |
|
|
|
3,654 |
|
|
|
562 |
|
| |
Income from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Real estate
|
|
|
39,002 |
|
|
|
4,339 |
|
|
|
3,720 |
|
| |
|
Hotels
|
|
|
783 |
|
|
|
(568 |
) |
|
|
3,080 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
39,785 |
|
|
|
3,771 |
|
|
|
6,800 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
94,485 |
|
|
|
7,425 |
|
|
|
7,362 |
|
| |
Cash dividend on redeemable preferred stock
|
|
|
— |
|
|
|
(50 |
) |
|
|
(50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net Income Available to Common Stockholders
|
|
$ |
94,485 |
|
|
$ |
7,375 |
|
|
$ |
7,312 |
|
| |
|
|
|
|
|
|
|
|
|
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”.
76
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT
COMPANY)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net Income
|
|
$ |
94,485 |
|
|
$ |
7,425 |
|
|
$ |
7,362 |
|
|
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pro rata share of other comprehensive income from equity
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Sale of real estate investments
|
|
|
(105 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Amortization of interest rate swap
|
|
|
(30 |
) |
|
|
(56 |
) |
|
|
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(135 |
) |
|
|
(56 |
) |
|
|
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$ |
94,350 |
|
|
$ |
7,369 |
|
|
$ |
7,303 |
|
| |
|
|
|
|
|
|
|
|
|
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”.
77
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT
COMPANY)
STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net Cash Provided by (Used in) Operating Activities
|
|
$ |
(17,020 |
) |
|
$ |
2,673 |
|
|
$ |
(317 |
) |
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Return of investment in subsidiaries
|
|
|
48,897 |
|
|
|
2,029 |
|
|
|
2,019 |
|
| |
Investments in energy affiliates
|
|
|
(11,032 |
) |
|
|
(1,997 |
) |
|
|
(3,500 |
) |
| |
Proceeds from sale of HEC stock
|
|
|
55,788 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by (used in) investing activities
|
|
|
93,653 |
|
|
|
32 |
|
|
|
(1,481 |
) |
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Redemption of 10% Debentures
|
|
|
(6,468 |
) |
|
|
— |
|
|
|
— |
|
| |
Repayment of bank borrowings and loans payable
|
|
|
(730 |
) |
|
|
(586 |
) |
|
|
(320 |
) |
| |
Purchase of common stock for treasury
|
|
|
— |
|
|
|
(604 |
) |
|
|
— |
|
| |
Payment of cash dividend on preferred stock
|
|
|
— |
|
|
|
(50 |
) |
|
|
(50 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash (used in) financing activities
|
|
|
(7,198 |
) |
|
|
(1,240 |
) |
|
|
(370 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
69,435 |
|
|
|
1,465 |
|
|
|
(2,168 |
) |
|
Cash and Cash Equivalents, Beginning of Year
|
|
|
1,761 |
|
|
|
296 |
|
|
|
2,464 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year
|
|
$ |
71,196 |
|
|
$ |
1,761 |
|
|
$ |
296 |
|
| |
|
|
|
|
|
|
|
|
|
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”.
78
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):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| Description |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Issuance of promissory note in litigation settlement
|
|
|
— |
|
|
$ |
250 |
|
|
|
— |
|
|
Proportionate share of partners’ capital transactions of
equity investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of real estate investments
|
|
$ |
257 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Amortization of interest rate swap
|
|
|
(30 |
) |
|
|
(56 |
) |
|
|
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
227 |
|
|
$ |
(56 |
) |
|
$ |
(59 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
594 |
|
|
$ |
675 |
|
|
$ |
653 |
|
|
Income taxes paid (refunded)
|
|
|
10,483 |
|
|
|
223 |
|
|
|
(202 |
) |
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”.
79
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT
COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
|
|
| 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 accounting principles generally accepted in the
United States of America. 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 accounting principles generally accepted in
the United States of America. 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 — |
10% Collateralized Subordinated Debentures |
The Registrant’s 10% Collateralized Subordinated Debentures
due were called in August 2004 and redeemed on
September 30, 2004 (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
10% Debentures (face amount)
|
|
|
— |
|
|
$ |
6,468 |
|
|
Unamortized gain, net of accumulated amortization
|
|
|
— |
|
|
|
101 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
|
— |
|
|
$ |
6,569 |
|
| |
|
|
|
|
|
|
|
|
| Note 3 — |
Income From Discontinued Operations |
In July 2004, the Company sold its real estate business segment.
Accordingly, results for the real estate operations have been
reclassified to discontinued operations. Discontinued real
estate operations for the three years ended December 31,
2004 consist of the following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Equity in net income of real estate subsidiaries
|
|
$ |
51,908 |
|
|
$ |
2,403 |
|
|
$ |
4,354 |
|
|
Income tax (expense) benefit
|
|
|
(6,226 |
) |
|
|
5,307 |
|
|
|
(634 |
) |
|
Incentive compensation and transaction costs
|
|
|
(6,629 |
) |
|
|
— |
|
|
|
— |
|
|
Provision for loss
|
|
|
(51 |
) |
|
|
(3,371 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income from discontinued real estate operations
|
|
$ |
39,002 |
|
|
$ |
4,339 |
|
|
$ |
3,720 |
|
| |
|
|
|
|
|
|
|
|
|
In December 2000, the Company decided to discontinue its hotel
operations and to dispose of its hotel segment, principally by
allowing its non-recourse debt holders to assume ownership of
the properties through foreclosure or by selling or otherwise
disposing of its hotel properties. The Company’s former
hotel segment consisted of three owned properties and two leased
properties. The Company determined that it would retain its
leasehold interest in the GuestHouse Suites Plus hotel in
Huntsville, Alabama. The Company continued to operate the hotel,
subject to a lease concession, from the owner, until it entered
into a lease termination
80
agreement in December 2004. Discontinued hotel operations for
the three years ended December 31, 2004 consists of the
following (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Gain from extinguishment of debt
|
|
$ |
1,598 |
|
|
$ |
— |
|
|
$ |
5,789 |
|
|
Equity in net loss of hotel subsidiaries
|
|
|
(686 |
) |
|
|
(537 |
) |
|
|
(547 |
) |
|
Income tax expense
|
|
|
(124 |
) |
|
|
— |
|
|
|
(1,800 |
) |
|
Litigation and other disposition costs
|
|
|
(5 |
) |
|
|
(31 |
) |
|
|
(362 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income (loss) from discontinued hotel operations
|
|
$ |
783 |
|
|
$ |
(568 |
) |
|
$ |
3,080 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 4 — |
Litigation, Contingencies and Commitments |
See Note 20 to the consolidated financial statements.
81
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Charged to | |
|
|
|
|
|
|
|
|
| |
|
Balance, | |
|
(Recovery of) | |
|
Charged | |
|
|
|
Balance, | |
| |
|
Beginning | |
|
Costs and | |
|
to Other | |
|
|
|
End of | |
| |
|
of Year | |
|
Expenses | |
|
Accounts | |
|
Deductions | |
|
Year | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Textile Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for losses — accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, 2004
|
|
$ |
509 |
|
|
$ |
29 |
|
|
|
— |
|
|
$ |
(285 |
)(a) |
|
$ |
253 |
|
| |
|
Year ended December 31, 2003
|
|
|
310 |
|
|
|
252 |
|
|
|
— |
|
|
|
(53 |
)(a) |
|
|
509 |
|
| |
|
Year ended December 31, 2002
|
|
|
498 |
|
|
|
181 |
|
|
|
— |
|
|
|
(369 |
)(a) |
|
|
310 |
|
Notes:
|
|
|
|
(a) |
|
Write-offs, net of recoveries |
82
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
| |
10 |
.16 |
|
Form of Stock Option Agreement to 1995 Stock Option Plan for The
Hallwood Group Incorporated |
| |
10 |
.17 |
|
Amendment to Financial Consulting Agreement, dated March 9,
2005, by and between the Company and Hallwood Investments Limited |
| |
| |
10 |
.18 |
|
Brookwood Companies Incorporated Stock Option Plan, dated
June 12, 1989, as amended April 5, 1993 and
May 3, 1999. |
| |
| |
10 |
.19 |
|
Form of Stock Option Agreement to the Brookwood Companies
Incorporated Stock Option Plan |
| |
| |
21 |
|
|
Active subsidiaries of the Registrant as of February 28,
2005 |
| |
| |
23 |
.1 |
|
Independent Registered Public Accounting Firm’s Consent,
dated March 30, 2005 |
| |
| |
31 |
.1 |
|
Certification of the Chief Executive Officer, pursuant to
Section 302 of Sarbanes-Oxley Act of 2002 |
| |
| |
31 |
.2 |
|
Certification of the Chief Financial Officer, pursuant to
Section 302 of Sarbanes-Oxley Act of 2002 |
| |
32 |
.1 |
|
Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
83