e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-8303
The Hallwood Group Incorporated
(Exact name of registrant as specified in its charter)
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|
Delaware
(State or other jurisdiction of
incorporation or organization)
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51-0261339
(I.R.S. Employer
Identification No.) |
|
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3710 Rawlins, Suite 1500, Dallas, Texas
(Address of principal executive offices)
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|
75219
(Zip Code) |
214-528-5588
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
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Class
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Outstanding at October 31, 2010 |
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Common Stock, $0.10 par value per share
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|
1,525,166 shares |
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
Page 2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
|
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|
|
|
|
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September 30, |
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December 31, |
|
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2010 |
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2009 |
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|
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|
ASSETS |
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|
|
|
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Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
16,317 |
|
|
$ |
7,838 |
|
Accounts receivable, net |
|
|
|
|
|
|
|
|
Factors |
|
|
17,017 |
|
|
|
26,375 |
|
Trade and other |
|
|
11,360 |
|
|
|
11,800 |
|
Related parties |
|
|
21 |
|
|
|
35 |
|
Inventories, net |
|
|
20,969 |
|
|
|
23,592 |
|
Deferred income tax, net |
|
|
796 |
|
|
|
970 |
|
Prepaids, deposits and other assets |
|
|
602 |
|
|
|
612 |
|
Prepaid state income taxes |
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
67,571 |
|
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|
71,222 |
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|
|
|
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|
|
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Noncurrent Assets |
|
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|
|
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|
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Property, plant and equipment, net |
|
|
20,280 |
|
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|
16,342 |
|
Deferred income tax, net |
|
|
728 |
|
|
|
728 |
|
Other assets |
|
|
148 |
|
|
|
148 |
|
Investments in Hallwood Energy, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,156 |
|
|
|
17,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
88,727 |
|
|
$ |
88,440 |
|
|
|
|
|
|
|
|
|
|
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|
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|
LIABILITIES AND STOCKHOLDERS EQUITY |
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|
|
|
|
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Current Liabilities |
|
|
|
|
|
|
|
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Accounts payable |
|
$ |
10,212 |
|
|
$ |
14,477 |
|
Accrued expenses and other current liabilities |
|
|
4,864 |
|
|
|
6,645 |
|
Payable contingent additional investment in Hallwood Energy |
|
|
3,201 |
|
|
|
3,201 |
|
Income taxes payable |
|
|
1,406 |
|
|
|
1,076 |
|
Redeemable preferred stock |
|
|
|
|
|
|
1,000 |
|
Current portion of loans payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
19,683 |
|
|
|
26,399 |
|
|
|
|
|
|
|
|
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Noncurrent Liabilities |
|
|
|
|
|
|
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Long term portion of loans payable |
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|
3,000 |
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|
6,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
22,683 |
|
|
|
32,849 |
|
|
|
|
|
|
|
|
|
|
Contingencies and Commitments (Note 12) |
|
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|
|
|
|
|
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|
|
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Stockholders Equity |
|
|
|
|
|
|
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Common stock, issued 2,396,105 shares for both periods;
outstanding 1,525,166 shares for both periods |
|
|
240 |
|
|
|
240 |
|
Additional paid-in capital |
|
|
51,700 |
|
|
|
51,700 |
|
Retained earnings |
|
|
27,508 |
|
|
|
17,055 |
|
Treasury stock, 870,939 shares for both periods; at cost |
|
|
(13,404 |
) |
|
|
(13,404 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
66,044 |
|
|
|
55,591 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total Liabilities and Stockholders Equity |
|
$ |
88,727 |
|
|
$ |
88,440 |
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|
|
|
|
|
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|
See accompanying notes to condensed consolidated financial statements.
Page 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Nine Months Ended |
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September 30, |
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|
2010 |
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|
2009 |
|
|
|
|
|
|
|
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Revenues |
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|
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|
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Textile products sales |
|
$ |
131,848 |
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$ |
128,166 |
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|
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|
|
|
|
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|
Expenses |
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|
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|
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|
Textile products cost of sales |
|
|
95,498 |
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|
93,322 |
|
Administrative and selling expenses |
|
|
19,636 |
|
|
|
17,988 |
|
|
|
|
|
|
|
|
|
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|
115,134 |
|
|
|
111,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating income |
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|
16,714 |
|
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|
16,856 |
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|
|
|
|
|
|
|
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|
Other Income (Loss) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(207 |
) |
|
|
(171 |
) |
Interest and other income |
|
|
8 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
16,515 |
|
|
|
16,718 |
|
Income tax expense |
|
|
6,062 |
|
|
|
6,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net Income |
|
$ |
10,453 |
|
|
$ |
10,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net Income Per Common Share |
|
|
|
|
|
|
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|
Basic |
|
$ |
6.85 |
|
|
$ |
6.94 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
6.85 |
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|
$ |
6.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
1,525 |
|
|
|
1,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
1,525 |
|
|
|
1,525 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
Page 4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
Textile products sales |
|
$ |
36,771 |
|
|
$ |
44,182 |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Textile products cost of sales |
|
|
28,454 |
|
|
|
31,816 |
|
Administrative and selling expenses |
|
|
7,361 |
|
|
|
6,121 |
|
|
|
|
|
|
|
|
|
|
|
35,815 |
|
|
|
37,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
956 |
|
|
|
6,245 |
|
|
|
|
|
|
|
|
|
|
Other Income (Loss) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(89 |
) |
|
|
(44 |
) |
Interest and other income |
|
|
2 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
(87 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
869 |
|
|
|
6,217 |
|
Income tax expense |
|
|
462 |
|
|
|
2,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
407 |
|
|
$ |
4,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.27 |
|
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.27 |
|
|
$ |
2.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
1,525 |
|
|
|
1,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
1,525 |
|
|
|
1,525 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
Page 5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
407 |
|
|
$ |
4,068 |
|
|
$ |
10,453 |
|
|
$ |
10,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
407 |
|
|
$ |
4,068 |
|
|
$ |
10,453 |
|
|
$ |
10,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
Page 6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury Stock |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Earnings |
|
|
Shares |
|
|
Cost |
|
|
Equity |
|
|
Balance, January 1, 2010 |
|
|
2,396 |
|
|
$ |
240 |
|
|
$ |
51,700 |
|
|
$ |
17,055 |
|
|
|
871 |
|
|
$ |
(13,404 |
) |
|
$ |
55,591 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,453 |
|
|
|
|
|
|
|
|
|
|
|
10,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
|
2,396 |
|
|
$ |
240 |
|
|
$ |
51,700 |
|
|
$ |
27,508 |
|
|
|
871 |
|
|
$ |
(13,404 |
) |
|
$ |
66,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
Page 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,453 |
|
|
$ |
10,591 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,684 |
|
|
|
1,712 |
|
Provision for obsolete inventory |
|
|
219 |
|
|
|
384 |
|
Deferred tax expense |
|
|
174 |
|
|
|
4,198 |
|
Provision for doubtful accounts and factor dilution |
|
|
|
|
|
|
137 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable |
|
|
9,812 |
|
|
|
(15,693 |
) |
Increase (decrease) in accounts payable |
|
|
(3,999 |
) |
|
|
4,804 |
|
(Increase) decrease in inventories |
|
|
2,404 |
|
|
|
(1,444 |
) |
Increase (decrease) in accrued expenses and other current liabilities |
|
|
(1,553 |
) |
|
|
82 |
|
Net change in income taxes receivable/payable |
|
|
(159 |
) |
|
|
1,003 |
|
Net change in other assets and liabilities |
|
|
10 |
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
19,045 |
|
|
|
6,065 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Investments in property, plant and equipment, net |
|
|
(6,116 |
) |
|
|
(1,578 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,116 |
) |
|
|
(1,578 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility |
|
|
11,745 |
|
|
|
38,032 |
|
Repayments of revolving credit facility |
|
|
(15,195 |
) |
|
|
(39,440 |
) |
Redemption of redeemable preferred stock |
|
|
(1,000 |
) |
|
|
|
|
Repayments of other bank borrowings and loans payable |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(4,450 |
) |
|
|
(1,435 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
8,479 |
|
|
|
3,052 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
7,838 |
|
|
|
6,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
16,317 |
|
|
$ |
9,068 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
Page 8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
Note 1 Interim Condensed Consolidated Financial Statements, Organization and New
Accounting Pronouncements
Interim Condensed Consolidated Financial Statements. The interim condensed consolidated
financial statements of The Hallwood Group Incorporated and its subsidiaries (the Company) (NYSE
Amex: HWG), a Delaware corporation, have been prepared in accordance with the instructions to Form
10-Q and do not include all of the information and disclosures required by accounting principles
generally accepted in the United States of America. Although condensed, in the opinion of
management, all adjustments considered necessary for a fair presentation have been included. These
condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related disclosures thereto included in the Companys Form
10-K for the year ended December 31, 2009.
Organization. The Company operates as a holding company. The principal remaining business is
in the textile products industry, following the bankruptcy reorganization of its former Hallwood
Energy, L.P. affiliate in 2009.
Textile Products. Textile products operations are conducted through the Companys wholly
owned subsidiary, Brookwood Companies Incorporated (Brookwood). Brookwood is an integrated
textile firm that develops and produces innovative fabrics and related products through specialized
finishing, treating and coating processes. Brookwood has two principal subsidiaries at September
30, 2010:
|
|
|
Kenyon Industries, Inc. (Kenyon). Kenyon, located in Rhode Island, uses the latest
technologies and processes in dyeing, finishing, coating and printing of woven synthetic
products. Kenyon provides quality finishing services for fabrics used in a variety of
markets, such as military, luggage and knapsacks, flag and banner, apparel, industrial and
sailcloth. |
|
|
|
Brookwood Laminating Inc. (Brookwood Laminating). Brookwood Laminating, located in
Connecticut, uses the latest in processing technology to provide quality laminating
services for fabrics used in military clothing and equipment, sailcloth, medical equipment,
industrial applications and consumer apparel. Up to five layers of textile materials can be
processed using both wet and dry lamination techniques. |
Textile products accounts for all of the Companys operating revenues. See Note 3 for
additional information on Brookwood.
Energy. The Companys investment in the energy segment was conducted through Hallwood Energy,
L.P. (Hallwood Energy). Hallwood Energy was a privately held independent oil and gas limited
partnership and operated as an upstream energy company engaged in the acquisition, development,
exploration, production, and sale of hydrocarbons, with a primary focus on natural gas assets. The
Company accounted for the investment in Hallwood Energy using the equity method of accounting,
recording its pro rata share of Hallwood Energys net income (loss), partners capital
transactions and comprehensive income (loss), as appropriate. As further discussed in Note 4,
Hallwood Energy filed for bankruptcy in March 2009. In connection with the confirmation of Hallwood
Energys bankruptcy plan of reorganization in October 2009, the Companys ownership interest in
Hallwood Energy was extinguished and the Company no longer accounts for the investment in Hallwood
Energy using the equity method of accounting.
Consolidation Policy. The Companys Brookwood subsidiary operates on a 5-4-4 accounting cycle
with its months always ending on a Saturday for accounting purposes, while the parent company, The
Hallwood Group Incorporated, operates on a traditional fiscal month accounting cycle. For purposes
of the year-end financial statements the Brookwood cycle always ends on December 31, however,
quarterly interim financial statements may not correspond to the fiscal quarter-end. The Companys
condensed consolidated financial statements as of September 30, 2010 and 2009 include Brookwoods
operations through September 25, 2010 and September 26, 2009, respectively. Estimated operating
results of Brookwood for the intervening periods to September 30, 2010 and 2009, respectively, are
provided below (in thousands):
Page 9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Amounts in Intervening Periods |
|
|
Nine Months Ended September 30, |
|
|
2010 |
|
2009 |
|
|
(four business days) |
|
(three business days) |
|
|
|
|
|
|
|
|
|
Textile products sales |
|
$ |
2,293 |
|
|
$ |
823 |
|
Textile products costs of sales |
|
|
1,780 |
|
|
|
604 |
|
Administrative and selling expenses |
|
|
404 |
|
|
|
293 |
|
Condensed Consolidated Statements of Cash Flows. The Company has corrected the presentation of
borrowings and repayments on its revolving credit facility for 2009 within the condensed
consolidated statements of cash flows. Related amounts had previously been presented on a net
basis, rather than on a gross basis in accordance with FASB ASC Topic 230, Statement of Cash Flows
(formerly SFAS No. 95, Statement of Cash Flows). The correction had no effect on net cash used in
financing activities.
New Accounting Pronouncements. In June 2009, the FASB issued FASB ASC Topic 860 (formerly
SFAS No. 166) Accounting for Transfers of Financial Assets an amendment of FASB Statement No.
140, that relates to accounting for transfers of financial assets. FASB ASC Topic 860 improves the
information that a reporting entity provides in its financial reports about a transfer of financial
assets; the effects of a transfer on its financial position, financial performance and cash flows;
and a continuing interest in transferred financial assets. In addition, this guidance amends
various ASC concepts with respect to accounting for transfers and servicing of financial assets and
extinguishments of liabilities, including removing the concept of qualified special purpose
entities. FASB ASC Topic 860 is effective for interim and annual reporting periods that begin after
November 15, 2009. FASB ASC Topic 860 must be applied to transfers occurring on or after the
effective date. The adoption of FASB ASC Topic 860 did not have a material impact on the Companys
financial statements.
Note 2Inventories
All inventories relate to Brookwood. Inventories as of the balance sheet dates were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
5,630 |
|
|
$ |
5,839 |
|
Work in progress |
|
|
6,178 |
|
|
|
8,703 |
|
Finished goods |
|
|
10,764 |
|
|
|
10,434 |
|
|
|
|
|
|
|
|
|
|
|
22,572 |
|
|
|
24,976 |
|
Less: Obsolescence reserve |
|
|
(1,603 |
) |
|
|
(1,384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,969 |
|
|
$ |
23,592 |
|
|
|
|
|
|
|
|
Note 3 Operations of Brookwood Companies Incorporated
Receivables. Brookwood maintains factoring agreements with several factors, which provide that
receivables resulting from credit sales to customers, excluding the U.S. Government, may be sold to
the factor, subject to a commission and the factors prior approval.
Brookwood continues to monitor its factors and the effect the current economic conditions may
have upon their ability to fulfill their obligations to Brookwood in a timely manner. As of
November 12, 2010, all of Brookwoods factors were complying with payment terms in accordance with
factor agreements.
Trade receivables were $10,885,000 and $11,427,000 at September 30, 2010 and December 31,
2009, which were net of an allowance for doubtful accounts of $267,000 and $155,000, respectively.
The trade receivable balance at September 30, 2010 and December 31, 2009 included approximately
$4,900,000, which was the balance remaining related to fabric sold in two products to a Brookwood
customer that supplies the U.S. military for which payment has been delayed due to a pending
compliance issue (see also Note 12). Brookwood resolved the issue with respect to one of the
products and received payment at full value in 2009. Additionally, resolution on the second product
with one of the procurement entities was achieved in July 2010 and Brookwood
Page 10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
received payment at
full value of $3,242,000 in October 2010. Efforts are continuing to structure a resolution with
the final procurement entity and Brookwood believes it is likely to collect the remaining amount
due of approximately $1,600,000 following resolution of the remaining issues.
Sales Concentration. Brookwood has two customers who accounted for more than 10% of
Brookwoods sales in the 2010 and 2009 periods. Sales to one Brookwood customer, Tennier
Industries, Inc. (Tennier), accounted for more than 10% of Brookwoods sales during both the 2010
and 2009 periods. Its relationship with Tennier is ongoing. Sales to Tennier, which are included in
military sales, were $8,296,000 and $44,064,000 in the 2010 third quarter and nine month periods,
respectively, compared to $16,933,000 and $40,298,000 in 2009. Sales to Tennier represented 22.6%
and 38.3% of Brookwoods net sales in the 2010 and 2009 third quarters, respectively, and 33.4% and
31.4% in the 2010 and 2009 nine month periods, respectively. Sales to another customer, ORC
Industries, Inc. (ORC), accounted for more than 10% of Brookwoods sales in 2009. Its
relationship with ORC is ongoing. Sales to ORC, which are included in military sales, were
$2,583,000 and $12,662,000 in the 2010 third quarter and nine month periods, respectively, compared
to $3,926,000 and $18,925,000 in 2009. Sales to ORC represented 7.0% and 8.9% of Brookwoods net
sales in the 2010 and 2009 third quarters, respectively, and 9.6% and 14.8% in the 2010 and 2009
nine month periods, respectively.
Military sales accounted for $23,295,000 and $93,246,000 in the 2010 third quarter and nine
month periods, respectively, compared to $32,415,000 and $92,845,000 in 2009. The military sales
represented 63.4% and 73.4% of Brookwoods net sales in the 2010 and 2009 quarters, respectively,
and 70.7% and 72.4% in the 2010 and 2009 nine month periods, respectively.
Flood at Kenyon Facility. On March 31, 2010, Kenyon was affected by the general flooding that
took place in the State of Rhode Island and in particular from the Pawcatuck River. Kenyon was
closed for a period of seven days after which it reinstituted production of unaffected production
lines. Only certain production lines were affected and production capacity was restored within a
few weeks. Brookwood has filed claims with its insurance carriers, through its Kenyon subsidiary,
and is working closely with the carriers toward recovery of its losses. Brookwood recognized the
$100,000 insurance policy deductible in the 2010 second quarter and has received from its carriers
approximately 77% of its submitted building and contents claims of $1,304,000 and anticipates
recovery of the remaining claim, subject to final review by the insurance carrier, by December 31,
2010. Brookwood has also filed a claim under its business interruption insurance policy, however,
the status of the claim is uncertain.
Purchase of Connecticut Production Facility. In May 2010, Brookwood Laminating completed the
purchase of its Connecticut production facility pursuant to the exercise of an option contained in
its lease agreement. The purchase price of $3,200,000 was funded with operating cash flows.
Stockholders Equity. The Company is the holder of all of Brookwoods outstanding
$13,500,000 Series A, $13.50 annual dividend per share, redeemable preferred stock and all of its
10,000,000 outstanding shares of common stock. The preferred stock has a liquidation preference of
$13,500,000 plus accrued but unpaid dividends. At September 30, 2010, cumulative dividends in
arrears on the preferred stock amounted to approximately $456,000.
2005 Long-Term Incentive Plan for Brookwood. In December 2005, the Company adopted The
Hallwood Group Incorporated 2005 Long-Term Incentive Plan for Brookwood Companies Incorporated (the
2005 Long-Term Incentive Plan for Brookwood) to encourage employees of Brookwood to increase the
value of Brookwood and to be employed by Brookwood. The terms of the incentive plan provide for a
total award amount to participants equal to 15% of the fair market value of consideration received
by the Company in a change of control transaction, as defined, in excess of the sum of the
liquidation preference plus accrued unpaid dividends on the Brookwood preferred stock
(approximately $13,956,000 at September 30, 2010). The base amount will fluctuate in accordance
with a formula that increases by the amount of the annual dividend on the preferred stock,
currently $1,823,000, and decreases by the amount of the actual preferred dividends paid by
Brookwood to the Company. However, if the Companys board of directors determines that certain
specified Brookwood officers, or other persons performing similar functions do not have, prior to
the change of control transaction, in the aggregate an equity or debt interest of at least two
percent in the entity with whom the change of control transaction is completed, then the minimum
amount to be awarded under the plan shall be $2,000,000. In addition, the Company agreed that, if
members of Brookwoods senior management do not have, prior to a change of control transaction in
the aggregate an equity or debt interest of at least two percent in the entity with whom the change
of control transaction is completed (exclusive of any such interest any such individual receives
with respect to his or her employment following the change of control transaction), then the
Company will be obligated to pay an additional $2,600,000.
Page 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
Note 4 Investments in Hallwood Energy, L.P.
Investments in Hallwood Energy as of the balance sheet dates were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 |
|
|
Amount at |
|
|
|
Percent |
|
|
|
|
|
|
which carried at |
|
|
|
of Class |
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
Description |
|
Owned |
|
|
Cost |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Class A limited partner interest |
|
|
|
(a) |
|
$ |
50,384 |
|
|
$ |
|
|
|
$ |
|
|
- Class C limited partner interest |
|
|
|
(a) |
|
|
11,084 |
|
|
|
|
|
|
|
|
|
- General partner interest |
|
|
|
(a) |
|
|
13 |
|
|
|
|
|
|
|
|
|
- First Convertible Note |
|
|
17 |
%(b) |
|
|
5,000 |
|
|
|
|
|
|
|
|
|
- Second Convertible Note |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash investment |
|
|
96 |
%(b) |
|
|
9,300 |
|
|
|
|
|
|
|
|
|
Less: portion invested by third parties |
|
|
|
|
|
|
(380 |
) |
|
|
|
|
|
|
|
|
Contingent commitment to invest additional funds |
|
|
|
|
|
|
3,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78,601 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
ownership interests extinguished in confirmed plan of reorganization |
|
(b) |
|
subordinated to recovery in favor of HPI in confirmed plan of reorganization |
Hallwood Energy was a privately held independent oil and gas limited partnership and
operated as an upstream energy company engaged in the acquisition, development, exploration,
production, and sale of hydrocarbons, with a primary focus on natural gas assets.
Prior to the confirmation of Hallwood Energys plan of reorganization in Bankruptcy Court
(discussed below), the Company accounted for the investment in Hallwood Energy using the equity
method of accounting and recorded its pro rata share of Hallwood Energys net income (loss),
partner capital transactions and comprehensive income (loss), as appropriate. In connection with
Hallwood Energys bankruptcy reorganization, the Companys ownership interests in Hallwood Energy
were extinguished and the Company no longer accounts for the investment in Hallwood Energy using
the equity method of accounting. Certain of the Companys officers and directors were investors in
Hallwood Energy. In addition, as a former member of management of Hallwood Energy, one officer of
the Company held a profit interest in Hallwood Energy that was also extinguished in the bankruptcy.
Bankruptcy Reorganization by Hallwood Energy. On March 1, 2009, Hallwood Energy, Hallwood
Energy Management, LLC (the general partner of Hallwood Energy (HEM)) and Hallwood Energys
subsidiaries, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. The
cases were adjudicated in the United States Bankruptcy Court for the Northern District of Texas,
Dallas Division, in In re Hallwood Energy, L.P., et al Case No. 09-31253. On October 16, 2009, the
Bankruptcy Court confirmed a plan of reorganization of the debtors that, among other things,
extinguished Hallwood Energys general partnership and limited partnership interests, including
those held by the Company. In addition, Hallwood Energys convertible notes, including those held
by the Company, are subordinated to recovery in favor of Hall Phoenix/Inwood, Ltd. (HPI), the
secured lender to Hallwood Energy. As a result of these developments, the Company does not
anticipate that it will recover any of its investments in Hallwood Energy. The carrying value of
the Companys investment in Hallwood Energy has been reflected as zero since December 31, 2007. The
Company was only an investor in and creditor of Hallwood Energy. The bankruptcy filing did not
include the Company or any other of its assets.
Contingent Commitment to Invest Additional Funds. In connection with the then ongoing efforts
to complete the farmout transaction with FEI Shale, L.P., a subsidiary of Talisman Energy, Inc.
(the Talisman Energy Transaction), the Company loaned Hallwood Energy $2,961,000 in May 2008.
Concurrent with the completion of the Talisman Energy Transaction in June 2008, the Company entered
into an equity support agreement (the Equity Support Agreement) with Hallwood Energy under which
the Company committed under certain conditions to contribute equity or debt capital to Hallwood
Energy to maintain a reasonable liquidity position for Hallwood Energy or prevent or cure any
default under Hallwood Energys credit facilities with respect to interest payments, up to a
maximum amount of $12,500,000. The Company contributed $2,039,000 at the completion date (for a
Page 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
total amount of $5,000,000) to Hallwood Energy and committed to provide an additional amount of up
to $7,500,000 in certain circumstances, in return for which Hallwood Energy would issue its Second
Convertible Notes. The Company loaned $4,300,000 to Hallwood Energy during September 2008 pursuant
to the Equity Support Agreement.
An obligation and related additional equity loss were recorded in 2008 to the extent of the
Companys contingent commitment to provide additional financial support to Hallwood Energy pursuant
to the Equity Support Agreement, in accordance with generally accepted accounting principles.
Subject to certain defenses raised by the Company, the remaining commitment amount under the Equity
Support Agreement was $3,201,000 at September 30, 2010 and an adversary proceeding is pending
against the Company demanding that the Company fund the additional $3,201,000.
Litigation. In connection with Hallwood Energys bankruptcy proceeding, Hallwood Energy and
other parties have filed lawsuits and threatened to assert additional claims against the Company
and certain related parties alleging actual, compensatory and exemplary damages in excess of
$200,000,000, based on purported breach of contract, fraud, breach of fiduciary duties, neglect,
negligence and various misleading statements, omissions and misrepresentations. See Note 12. The
Company believes that the allegations and claims are without merit and intends to defend the
lawsuits and any future claims vigorously.
Other. For further information on Hallwood Energys activities, including its bankruptcy
reorganization, refer to the Companys Form 10-K for the year ended December 31, 2009.
Note 5 Loans Payable
Loans payable, all of which relate to Brookwood, at the balance sheet dates were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Working Capital Revolving Credit Facility |
|
$ |
3,000 |
|
|
$ |
6,450 |
|
Current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent portion |
|
$ |
3,000 |
|
|
$ |
6,450 |
|
|
|
|
|
|
|
|
Working Capital Revolving Credit Facility. The Companys Brookwood subsidiary has
a revolving credit facility in an amount up to $25,000,000 with Key Bank National Association (the
Working Capital Revolving Credit Facility). In October 2009, Brookwood entered into an
amendment to this facility to extend the term to January 31, 2011, with an increase in the interest
rate, at Brookwoods option, of Key Banks Base Rate, typically prime rate, + 1.25% or LIBOR +
2.75%. Previously the facility had a maturity date of January 31, 2010 and an interest rate, at
Brookwoods option, of Prime, or LIBOR + 1.25% - 1.75%. Borrowings are collateralized by all
accounts receivable, certain finished goods inventory, machinery and equipment and all of the
issued and outstanding capital stock of Brookwood and its subsidiaries. The interest rate was a
blended rate of 3.02% and 3.32% at September 30, 2010 and December 31, 2009, respectively. The
outstanding balance was $3,000,000 at September 30, 2010 and Brookwood had $21,879,000 of borrowing availability under this facility, which is
net of a standby letter of credit for $121,000.
Renewal of Credit Facility. On September 30, 2010, Brookwood entered into an amendment of the
Working Capital Revolving Credit Facility, to extend the term to January 31, 2014. The interest
rate payable on the facility is dependent on the leverage ratio, as defined, and can vary from
LIBOR + 1.50% - 2.00% and Key Banks Base Rate, typically prime rate + 0.50% - 1.00%, at
Brookwoods option. The principal amount of $25,000,000 and the loan covenants were not changed.
Equipment Term Loans. Brookwood had a revolving equipment credit facility in an amount up to
$3,000,000 with Key Bank. In connection with the October 2009 renewal of the Working Capital
Revolving Credit Facility, the revolving equipment credit facility was not renewed. Brookwood
repaid the facility in the 2009 third quarter.
Loan Covenants. The Working Capital Revolving Credit Facility provides for a maximum total
debt to tangible net worth ratio of 1.50 and a covenant that Brookwood shall maintain a quarterly
minimum net income of not less than one dollar. In October 2009, an additional covenant was added
that provides for a total funded debt to EBITDA (earnings before interest, taxes,
Page 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
depreciation and
amortization), for the trailing four quarters, ratio of not greater than 2.00 to be calculated on a
quarterly basis, commencing December 31, 2009. As of the end of all interim periods in 2010 and
2009 and as of December 31, 2009, Brookwood was in compliance with its loan covenants. Cash
dividends and tax sharing payments by Brookwood to the Company are contingent upon
Brookwoods compliance with the loan covenants contained in the Working Capital Revolving
Credit Facility.
Restricted Net Assets. Cash dividends and tax sharing payments by Brookwood to the Company
are contingent upon compliance with the Key Bank loan covenants. This limitation on the
transferability of assets constitutes a restriction of Brookwoods net assets, which were
$60,470,000 and $48,821,000 as of September 30, 2010 and December 31, 2009, respectively.
Note 6 Redeemable Preferred Stock
The Companys board of directors adopted a resolution on March 9, 2010 providing for the
redemption of the Series B Preferred Stock, at $4.00 per share, on or before July 20, 2010, the
mandatory redemption date, in the total amount of $1,000,000. The Company completed the redemption
on July 20, 2010 and the Series B Preferred Stock was canceled on the stock records of the Company.
As of the redemption date, the holders of the Series B Preferred Stock had no continuing rights as
stockholders of the Company, other than the right to receive payment of the redemption value.
Note 7 Stockholders Equity
Stock Options. At September 30, 2010, there were no outstanding stock options. The Companys
former stock option plan terminated in 2005 and no stock options are available for issuance.
Note 8 Income Taxes
Following is a schedule of the income tax expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
152 |
|
|
$ |
1,198 |
|
|
$ |
5,157 |
|
|
$ |
1,260 |
|
Deferred |
|
|
174 |
|
|
|
899 |
|
|
|
174 |
|
|
|
4,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
326 |
|
|
|
2,097 |
|
|
|
5,331 |
|
|
|
5,457 |
|
|
State |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
136 |
|
|
|
332 |
|
|
|
731 |
|
|
|
950 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
136 |
|
|
|
332 |
|
|
|
731 |
|
|
|
950 |
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
(280 |
) |
|
|
|
|
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
462 |
|
|
$ |
2,149 |
|
|
$ |
6,062 |
|
|
$ |
6,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net deferred tax asset was $1,524,000 and $1,698,000 at September 30, 2010 and
December 31, 2009, respectively. The deferred tax asset at September 30, 2010 was comprised of
$1,099,000 attributable to temporary differences (including $1,120,000 associated with the
Companys investment in Hallwood Energy) and $425,000 of state tax credits. The deferred tax asset
at December 31, 2009 was comprised of $1,273,000 attributable to temporary differences and $425,00
of state tax credits. The statutory federal tax rate in both periods was 35% while state taxes were
determined based upon taxable income apportioned to those states in which the Company does business
at their respective tax rates.
Page 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
The income tax payable (net) of $917,000 and $1,076,000 at September 30, 2010 and December 31,
2009, respectively, includes estimated amounts due to or from the U.S. federal government and
various state tax agencies. For 2009, the Company fully utilized its remaining federal net
operating loss carryforward and alternative minimum tax credits when completing the Companys 2009
U.S. income tax return, which was filed in September 2010, and reported taxable income of
approximately $16,839,000 for the year ended December 31, 2009, principally attributable to
operating income from Brookwood.
Note 9 Supplemental Disclosures to the Condensed 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):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
Description |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures in accounts payable: |
|
|
|
|
|
|
|
|
Amount at end of period |
|
$ |
234 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
6,061 |
|
|
$ |
879 |
|
Interest paid |
|
|
181 |
|
|
|
152 |
|
Note 10 Computation of Income (Loss) Per Common Share
The following table reconciles weighted average shares outstanding from basic to diluted methods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
Description |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1,525 |
|
|
|
1,525 |
|
|
|
1,525 |
|
|
|
1,525 |
|
Potential shares from assumed exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential repurchase of shares from stock option proceeds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
1,525 |
|
|
|
1,525 |
|
|
|
1,525 |
|
|
|
1,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
407 |
|
|
$ |
4,068 |
|
|
$ |
10,453 |
|
|
$ |
10,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months and nine months ended September 30, 2010 and 2009, there were no
outstanding stock options. No shares were excluded from the calculation of diluted earnings per
share.
Note 11 Related Party Transactions
Hallwood Investments Limited. The Company has entered into a financial consulting contract
with Hallwood Investments Limited (HIL), a corporation associated with Mr. Anthony J.
Gumbiner, the Companys chairman and principal stockholder. 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. The annual amount is payable in monthly
Page 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
installments. The contract automatically renews
for one-year periods if not terminated by the parties beforehand. Additionally, HIL and Mr.
Gumbiner are also eligible for bonuses from the Company or its subsidiaries, subject to approval by
the Companys or its subsidiaries board of directors. The Company also reimburses HIL
for reasonable expenses in providing office space and administrative services and for travel and
related expenses to and from the Companys corporate office and Brookwoods facilities and health
insurance premiums.
A summary of the fees and expenses related to HIL and Mr. Gumbiner are detailed below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees |
|
$ |
249 |
|
|
$ |
249 |
|
|
$ |
747 |
|
|
$ |
747 |
|
Office space and administrative services |
|
|
62 |
|
|
|
24 |
|
|
|
192 |
|
|
|
160 |
|
Travel and other expenses |
|
|
20 |
|
|
|
85 |
|
|
|
110 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
331 |
|
|
$ |
358 |
|
|
$ |
1,049 |
|
|
$ |
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, from time to time, HIL and Mr. Gumbiner have performed services for certain
affiliated entities that are not subsidiaries of the Company, for which they receive consulting
fees, bonuses, stock options, profit interests 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. HIL or Mr. Gumbiner received no compensation from these affiliated entities during 2010
or 2009.
HIL and certain of its affiliates in which Mr. Gumbiner has an indirect financial interest
share common offices, facilities and certain staff in the Companys Dallas office for which these
companies reimburse the Company. The Company pays certain common general and administrative
expenses and charges the companies an overhead reimbursement fee for the share of the expenses
allocable to these companies. For the three months ended September 30, 2010 and 2009, these
companies reimbursed the Company $28,000 and $19,000, respectively, for such expenses. For the
nine months ended September 30, 2010 and 2009, these companies reimbursed the Company $82,000 and
$55,000, respectively.
Hallwood Financial Limited. Hallwood Financial Limited (Hallwood Financial), a corporation
associated with Mr. Gumbiner, announced on April 20, 2009 that it had advised the Companys Board
of Directors that it intended to make an offer to acquire all of the outstanding common stock of
the Company not already beneficially owned by Hallwood Financial. On June 17, 2009, Hallwood
Financial announced that it had determined that it would not proceed with the offer.
Hallwood Energy. Prior to July 31, 2009, Hallwood Energy shared common offices, facilities
and certain staff in its Dallas office with the Company and Hallwood Energy was obligated to
reimburse the Company for its allocable share of the expenses and certain direct expenses. For the
three months and nine months ended September 30, 2009, Hallwood Energy reimbursed the Company
$9,000 and $124,000 for such expenses, respectively. Hallwood Energy completed its move from the
office space by July 31, 2009 and no longer shares such expenses.
Page 16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
Note
12 Litigation, Contingencies and Commitments
Reference is made to Note 16 to the consolidated financial statements contained in the
Companys Form 10-K for the year ended December 31, 2009.
Litigation. From time to time, the Company, its subsidiaries, certain of its affiliates and
others have been named as defendants in lawsuits relating to various transactions in which it or
its affiliated entities participated. Although the Company does not believe that the results of any
of these matters are likely to have a material adverse effect on its financial position, results of
operations or cash flows, it is possible that any of the matters could result in material liability
to the Company. In addition, the Company has spent and will likely continue to spend significant
amounts in professional fees and other associated costs in connection with these matters. The
Company expenses professional fees and other costs associated with litigation matters as incurred.
On July 31, 2007, Nextec Applications, Inc. filed Nextec Applications, Inc. v. Brookwood
Companies Incorporated and The Hallwood Group Incorporated in the United States District Court for
the Southern District of New York (SDNY No. CV 07-6901) claiming that the defendants infringed five
United States patents pertaining to internally-coated webs: U.S. Patent No. 5,418,051; 5,856,245;
5,869,172; 6,071,602 and 6,129,978. On October 3, 2007, the U.S. District Court dismissed The
Hallwood Group Incorporated from the lawsuit. Brookwood timely answered the lawsuit. Nextec sought
leave of Court to add two additional patents to the lawsuit: U.S. Patent No. 5,954,902 and
6,289,841. The Court granted leave to Nextec, and Nextec filed its amended complaint on September
19, 2008. On April 1, 2010, the Court issued its initial Order, following a hearing held on
February 17, 2010 on various motions for summary judgment filed by both parties. In the Order, the
Court dismissed Nextecs claims of infringement based on seven of the ten remaining patent claims
asserted in the action. Thereafter, Brookwood requested reconsideration with respect to the
remaining claims. In an Order entered on June 8, 2010, the Court denied Brookwoods request with
respect to one of the remaining patents, but granted Brookwood leave to renew its motion for
summary judgment with respect to an additional patent, the 902 patent. As a result, Brookwood
filed a renewed motion for summary judgment of patent invalidity with respect to that patent on
June 28, 2010, which is currently pending with the Court. Brookwood intends to vigorously defend
against any remaining claims. While Brookwood believes it possesses valid defenses to these claims,
due to the nature of litigation, the ultimate outcome of this case is indeterminable at this time.
In April 2009, a claim was filed against, but not served on, the Company, each of its
directors and Hallwood Financial in the state district court in Dallas County, Texas by a purported
stockholder of the Company on behalf of the stockholders of the Company other than Hallwood
Financial. The plaintiff alleged that in connection with the announcement by Hallwood Financial
that it intended to commence an offer to acquire the remaining outstanding shares of the Companys
common stock not beneficially owned by Hallwood Financial, each of the directors breached their
fiduciary duties to the minority stockholders, and that the Company and Hallwood Financial aided
and abetted that breach. The plaintiff also sought to enjoin the proposed offer. The case is
styled as Gottlieb v. The Hallwood Group, Inc., et al, No. 9-05042, 134th Judicial
District, Dallas County, Texas. The Company believes the claim is without merit. On June 17, 2009,
Hallwood Financial announced that it had determined that it would not proceed with the offer.
Hallwood Energy. On March 1, 2009, Hallwood Energy, HEM (the general partner of Hallwood
Energy) and Hallwood Energys subsidiaries, filed petitions for relief under Chapter 11 of the
United States Bankruptcy Code. The cases were adjudicated in the United States Bankruptcy Court for
the Northern District of Texas, Dallas Division, in In re Hallwood Energy, L.P., et al Case No.
09-31253. The Company was only an investor in and creditor of Hallwood Energy. The bankruptcy
filing did not include the Company or any other of its assets.
On October 16, 2009, the Bankruptcy Court confirmed a plan of reorganization of the debtors
that, among other things, extinguished Hallwood Energys general partnership and limited
partnership interests, including those held by the Company. In addition, Hallwood Energys
convertible notes, including those held by the Company, are subordinated to recovery in favor of
HPI.
As a result of these developments, the Company does not anticipate that it will recover any of
its investments in Hallwood Energy. The carrying value of the Companys investment in Hallwood
Energy has been reflected as zero since December 31, 2007.
The confirmed plan of reorganization in the Hallwood Energy bankruptcy proceeding also
provides that a creditors trust created by the plan will pursue various claims against the
Company, its officers, directors and affiliates and Hallwood Energys officers and directors,
including claims assigned to the creditors trust by HPI.
Page 17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
In connection with an Acquisition and Farmout Agreement entered into between Hallwood Energy
and FEI Shale, L.P. (FEI), in June 2008, the Company and Hallwood Energy entered into an Equity
Support Agreement dated June 9, 2008, under which the Company agreed, under certain conditions, to
contribute to Hallwood Energy up to $12,500,000, in consideration for which the Company would
receive equity or debt securities of Hallwood Energy. As of February 25, 2009, the Company had
contributed $9,300,000 to Hallwood Energy pursuant to the Equity Support Agreement. On that date,
Hallwood Energy demanded that the Company fund the additional $3,200,000, which the Company has not
done. On March 30, 2009, Hallwood Energy filed an adversary proceeding against the Company seeking
a judgment for the additional $3,200,000. The case was originally styled Hallwood Energy, L.P. v.
The Hallwood Group Incorporated, Adversary No. 09-03082, and is pending in the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division.
HPI and FEI intervened in the lawsuit and filed their respective complaints in intervention.
Among the arguments advanced in the complaints in intervention is that the Companys failure to
fund $3,200,000 under the Equity Support Agreement damaged Hallwood Energy in an amount in excess
of $3,200,000. FEI generally claims that, in addition to not paying the $3,200,000, the Company
defrauded FEI and tortiously interfered with its rights under the Acquisition and Farmout
Agreement, and it seeks approximately $38,000,000 in additional damages. In their most recent
amended complaint, HPI and the trustee for the creditors trust contend that the additional damage
is at least $20,000,000 because they allege that the failure of the Company to fund the $3,200,000
caused FEI to not fund $20,000,000 due under the Farmout Agreement between Hallwood Energy and FEI.
HPI and the trustee also assert that the Company is liable for exemplary damages of $100,000,000
on account of its failure to fund the last $3,200,000 under the Equity Support Agreement. Finally,
in the second amended complaint, HPI and the trustee had named as additional defendants Hallwood
Family (BVI) L.P., Hallwood Investments Limited, Hallwood Company Limited, the Hallwood Trust,
Hallwood Financial Limited and Brookwood Companies Incorporated contending that the additional
defendants are liable to the plaintiffs under the remedy of substantive consolidation. On May 5,
2010, the Court dismissed with prejudice the substantive consolidation and abuse of the bankruptcy
process claims against all parties, resulting in the Company remaining as the sole Defendant. In
light of the Courts disposition of the theories advanced in the second amended complaint, the
adversary proceeding is now styled as Ray Balestri, Trustee of the Hallwood Energy I Creditors
Trust, as successor in interest to Hallwood Energy, L.P., Plaintiffs and FEI Shale L.P. and Hall
Phoenix/Inwood LTD., Plaintiffs in Intervention vs. The Hallwood Group Incorporated, Defendant;
Adversary No. 09-03082-SGJ. The parties participated in a Court-ordered mediation, held on July 8,
2010, but the parties were unable to reach a settlement of all or part of the lawsuit. The trial
began during the week of October 18, 2010 and is scheduled to resume for three days in November
2010 and four days in December 2010, to the extent those dates are necessary.
On August 3, 2009, the Company was served with a complaint in Hall Phoenix/Inwood Ltd. and
Hall Performance Energy Partners 4, Ltd. v. The Hallwood Group Incorporated, et al. filed in the
298th District of Texas, No. 09-09551. The other defendants include Anthony J.
Gumbiner, the Chairman and Chief Executive Officer of the Company, Bill Guzzetti, the President of
the Company, certain affiliates of Mr. Gumbiner and certain officers of Hallwood Energy. The
complaint alleges that the defendants defrauded plaintiffs in connection with plaintiffs acquiring
interests in and providing loans to Hallwood Energy and seeks unspecified actual and exemplary
damages. On November 5, 2010, this case was removed to the United States Bankruptcy Court for the
Northern District of Texas, Dallas Division.
On July 30, 2010, Hallwood Energys trustee filed a complaint captioned Ray Balestri, Trustee
of the Hallwood Energy I Creditors Trust v. Anthony J. Gumbiner, et al in the Dallas County Court
at Law No. 4, No. CC-10-05212D. The other defendants
include certain current and former directors, officers and employees of the Company, certain
of Hallwood Energys former officers and directors, as well as outside legal counsel. The complaint
alleges, among other things, claims against the defendants for breach of fiduciary duties, gross
negligence and willful misconduct and seeks unspecified actual and exemplary damages. The Company
believes that the allegations and claims are without merit and intends to defend the lawsuit and
any future claims vigorously. This case has been removed to the United States Bankruptcy Court for
the Northern District of Texas, Dallas Division, Adversary No. 10-03263, but is subject to a
pending motion to remand filed by the plaintiff.
Claims Filed by Company with Insurance Carrier for Directors and Officers Liability
Insurance Policy. The Company has incurred significant legal fees and associated costs in
connection with these actions. The Company has filed claims with the carrier for directors and
officers liability insurance policies maintained by the Company. The policy has an aggregate limit
of liability of $10,000,000 per annual policy period. The Companys insurance carrier indicated
that it would reimburse the Company pursuant to the terms of its directors and officers liability
insurance policies for a portion of these expenses, subject to a reservation of rights. The Company
received reimbursement of legal fees and associated costs of approximately $820,000 in the nine
month period ended September 30, 2010, which were recorded as expense recoveries in administrative
and selling expenses. Additionally, through September 30, 2010, the insurance carrier also paid
approximately $1,120,000 in reimbursement of legal fees and associated costs
Page 18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
on behalf of other defendants in connection with the Hall Phoenix/Inwood Ltd. and Hall Performance
Energy Partners 4 Ltd v The Hallwood Group Incorporated, et al matter. The insurance carrier had
indicated that it would pay future legal fees and associated costs incurred on behalf of the
Company directly to the service providers.
Significant additional costs in excess of insurance reimbursements have been incurred by the
Company and on behalf of other defendants for the three months and nine months ended September 30,
2010. On August 17, 2010, the insurance carrier informed the Company of a change in its coverage
position whereby coverage was denied in reliance on the insured vs. insured exclusion in the
policy. The Company believes it has demonstrated that the exclusion does not apply and has made
demand that the insurance carrier provide coverage for these actions. In November 2010, the
insurance carrier informally agreed to pay the previously unreimbursed defense costs of the Company
and another insured party, in exchange for an agreement not to initiate a coverage lawsuit if the
carrier performs promptly. The Company is awaiting performance by the carrier and will continue to
forbear from initiating a coverage lawsuit if the carrier performs promptly.
Environmental Contingencies. A number of jurisdictions in which the Company or its
subsidiaries operate 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
Companys or its subsidiaries business to date, it is possible that such considerations may
have a significant and adverse impact in the future. The Company and its subsidiaries actively
monitor their environmental compliance and while certain matters currently exist, management is not
aware of any compliance issues which will significantly impact the financial position, results of
operations or cash flows of the Company or its subsidiaries.
In August 2005, the Rhode Island Department of Health (RIDOH) issued a compliance order to
Kenyon, alleging that Kenyon is a non-community water system and ordering Kenyon to comply with the
RIDOH program for public water supply systems. Kenyon contested the compliance order and an
administrative hearing was held in November 2005. No decision was ever rendered by RIDOH. However,
by letter dated July 23, 2008, the United States Environmental Protection Agency (EPA) advised
Kenyon that it is the EPAs position that the Kenyon facility is a Public Water System and
subject to regulation under the Safe Drinking Water Act. As a result, in January 2009, Kenyon
entered into a Consent Order with RIDOH agreeing to apply for a public water license and submit
plans to comply with the aforementioned regulations. While Kenyon has complied with the terms of
the Consent Order to apply for a public water license, the Company has decided to install a new
water line and connect to the neighboring Shannock Water District water supply, at an estimated
cost of $170,000. Once this is completed, Kenyon will no longer be regulated
as a public water system nor will the Company be required to have a public water license. Work
on the installation of the new water line began in October 2010. The tie-in to the Shannock Water
District water supply is expected to be completed during late 2010 or early 2011.
In June 2007, the Rhode Island Department of Environmental Management (RIDEM) issued a
Notice of Alleged Violation (NOV) to Kenyon, alleging that Kenyon violated certain provisions of
its wastewater discharge permit and seeking an administrative penalty of $79,000. Kenyon filed an
Answer and Request for Hearing in which it disputed certain allegations in the NOV and the amount
of the penalty. An informal meeting was held with RIDEM in August 2007. Following settlement
negotiations, a Consent Agreement was executed in June 2008. The Consent Agreement required the
Company to pay a $5,000 fine and perform two Supplemental Environmental Projects (SEPs) at a cost
of approximately $161,000. As of March 2009, one SEP had been completed. Work on the second SEP
began in July 2010 and was completed as of the end of October 2010. Kenyon expects to receive a
written confirmation from RIDEM acknowledging that Kenyon has satisfied all of the requirements of
the 2008 Consent Agreement, in full settlement of the issue.
On July 20, 2010, RIDEM issued Kenyon a new Rhode Island Pollutant Discharge Elimination
System (RIPDES) permit. This permit reauthorizes Kenyons existing wastewater discharges to the
Pawcatuck River. The new permit contains certain lowered effluent limitations that Kenyon is not
currently able to achieve. As is customary practice in these circumstances, Kenyon has filed an
appeal and has requested a stay of the contested effluent limitations. It is expected that the
contested limitations will be addressed through a Consent Agreement that will require Kenyon to
undertake certain studies and investigations, the results of which may indicate a need for Kenyon
to install additional wastewater treatment technologies and/or modify the way certain process
wastewaters are managed at the site. On September 24, 2010, RIDEM granted Kenyons request for a
stay and established a date for a formal hearing in regards to Kenyons appeal of the contested
effluent limitations. As of November 2010, Kenyon and RIDEM were negotiating the terms of a Consent
Agreement that will establish interim effluent limitations and set a schedule for the subsequent
steps to be undertaken by Kenyon in an effort to achieve the contested effluent limitations.
Page 19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
Other Contingencies. In May 2009, one of Brookwoods suppliers advised Brookwood that
shipments to Brookwood during the period from September 2008 to April 2009 of a quantity of greige
fabric from the supplier incorporated some fiber that was not of domestic origin in some yarn from
the vendor. The fabric in question was ordered to fill contracts in support of the United States
military, was required to be domestic and is subject to the preference for domestic source required
flow down provisions of the Department of Defense Supplement to the Federal Acquisition Regulations
implementing the provisions of 10 USC 2533a. Brookwoods suppliers have advised that the greige
fabric containing the non-compliant yarn was supplied inadvertently to Brookwood in limited
quantity. Brookwood determined that this yarn affects two of their greige products. Brookwood
advised its affected customers and the United States military of this circumstance. Brookwood
resolved the issue with respect to one of the products and received payment at full value in 2009.
Additionally, resolution on the second product with one of the procurement entities was achieved in
July 2010 and Brookwood received payment at full value of $3,242,000 in October 2010. Efforts are
continuing to structure a resolution with the final procurement entity and Brookwood believes it is
likely to collect the remaining amount due following resolution of the remaining issues. The trade
receivable balance at September 30, 2010 and December 31, 2009 included approximately $4,900,000
related to this issue. Following the October 2010 payment, the remaining balance due is
approximately $1,600,000.
Page 20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2010 and 2009
(unaudited)
Note
13 Segments and Related Information
The
following represents the Companys reportable segment operations for the three
months and nine months ended September 30, 2010 and 2009, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Textile |
|
|
|
|
|
|
|
|
|
Products |
|
|
Other |
|
|
Consolidated |
|
Three months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external sources |
|
$ |
36,771 |
|
|
|
|
|
|
$ |
36,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
4,063 |
|
|
$ |
(3,107 |
) |
|
$ |
956 |
|
Other income (loss), net |
|
|
(56 |
) |
|
|
(31 |
) |
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
4,007 |
|
|
$ |
(3,138 |
) |
|
$ |
869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external sources |
|
$ |
44,182 |
|
|
|
|
|
|
$ |
44,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
8,125 |
|
|
$ |
(1,880 |
) |
|
$ |
6,245 |
|
Other income (loss), net |
|
|
(44 |
) |
|
|
16 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
8,081 |
|
|
$ |
(1,864 |
) |
|
$ |
6,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external sources |
|
$ |
131,848 |
|
|
|
|
|
|
$ |
131,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
23,064 |
|
|
$ |
(6,350 |
) |
|
$ |
16,714 |
|
Other income (loss), net |
|
|
(174 |
) |
|
|
(25 |
) |
|
|
(199 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
22,890 |
|
|
$ |
(6,375 |
) |
|
$ |
16,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from external sources |
|
$ |
128,166 |
|
|
|
|
|
|
$ |
128,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
21,723 |
|
|
$ |
(4,867 |
) |
|
$ |
16,856 |
|
Other income (loss), net |
|
|
(171 |
) |
|
|
33 |
|
|
|
(138 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
21,552 |
|
|
$ |
(4,834 |
) |
|
$ |
16,718 |
|
|
|
|
|
|
|
|
|
|
|
No differences have occurred in the basis or methodologies used in the preparation of this
interim segment information from those used in the December 31, 2009 annual report. The total
assets for the Companys operating segments have not materially changed since the December
31, 2009 annual report.
Page 21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
General. The Company operates as a holding company. The principal remaining business is in
the textile products industry, following the bankruptcy reorganization of its former Hallwood
Energy, L.P. (Hallwood Energy) affiliate in 2009.
Textile Products. In 2009 and 2010, the Company derived all of its operating revenues from
the textile activities of its Brookwood Companies Incorporated (Brookwood) subsidiary;
consequently, the Companys success is highly dependent upon Brookwoods success. Brookwoods
success will be influenced in varying degrees by its ability to continue sales to existing
customers, cost, availability of supplies, its response to competition, its ability to generate new
markets and products and the effect of global trade regulation. Although the Companys textile
activities have generated positive cash flow in recent years, there is no assurance that this trend
will continue.
While Brookwood has enjoyed substantial growth in its military business, there is no assurance
that this trend will continue. Brookwoods sales to the customers from whom it derives its military
business have been volatile and difficult to predict, a trend the Company believes will continue.
In recent years, orders from the military for goods generally were significantly affected by the
increased activity of the U.S. military. If this activity does not continue or declines, then
orders from the military generally, including orders for Brookwoods products, may be similarly
affected. Military sales of $23,295,000 and $93,246,000 for the 2010 third quarter and nine month
periods, respectively, were 28.1% lower and 0.4% higher than the comparable periods in 2009 of
$32,415,000 and $92,845,000.
From time to time, the military limits orders for existing products and adopts revised
specifications for new products to replace the products for which Brookwoods customers have been
suppliers. The U.S. government released orders in recent years that include Brookwoods products,
which resulted in a substantial increase in military sales over prior periods. Changes in
specifications or orders present a potential opportunity for additional sales; however, it is a
continuing challenge to adjust to changing specifications and production requirements. Brookwood
has regularly conducted research and development on various processes and products intended to
comply with the revised specifications and participates in the bidding process for new military
products. However, to the extent Brookwoods products are not included in future purchases by the
U.S. government for any reason, Brookwoods sales could be adversely affected. A provision of U.S.
federal law, known as the Berry Amendment, generally requires the Department of Defense to give
preference in procurement to domestically produced products, including textiles. Brookwoods sales
of products to the U.S. military market is highly dependent upon the continuing application and
enforcement of the Berry Amendment by the U.S. government. In addition, the U.S. government is
releasing contracts for shorter periods than in the past. The Company acknowledges the
unpredictability in revenues and margins due to military sales and is unable at this time to
predict future sales trends.
Unstable global nylon and chemical pricing and volatile domestic energy costs, coupled with a
varying product mix, have continued to cause fluctuations in Brookwoods margins, a trend that will
potentially continue.
Brookwood continues to identify new market niches intended to replace sales lost to imports.
In addition to its existing products and proprietary technologies, Brookwood has been developing
advanced breathable, waterproof laminates and other 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 Brookwoods business plan. The ongoing success of Brookwood is
contingent on its ability to maintain its level of military business and adapt to the global
textile industry. There can be no assurance that the positive results of the past can be sustained
or that competitors will not aggressively seek to replace products developed by Brookwood.
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 (ANAFTA@),
the Central American Free Trade Agreement (CAFTA), 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 (AWTO@) in 1995 has generally
resulted in the phase out of quotas on textiles and apparel, effective January 1, 2005. Brookwood
does not believe these developments will have a material impact on its business.
Under NAFTA and CAFTA there are no textile and apparel quotas between the U. S. and the other
parties for products that meet certain origin criteria. Tariffs among the countries are either
already zero or are being phased out. Although these actions have the effect of exposing
Brookwoods market to the lower price structures of the other countries and, therefore, continuing
to increase competitive pressures, management is not able to predict their specific impact.
Page 22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The textile products business is not interdependent with the Companys other business
operations. The Company does not guarantee the Brookwood bank facility and is not obligated to
contribute additional capital. Conversely, Brookwood does not guarantee debts of the Company or any
of the Companys other subsidiaries and is not obligated to contribute additional capital to the
Company beyond dividend payments and the tax sharing agreement.
On March 31, 2010, Kenyon was affected by the general flooding that took place in the State of
Rhode Island and in particular from the Pawcatuck River. Kenyon was closed for a period of seven
days after which it reinstituted production of unaffected production lines. Only certain production
lines were affected and production capacity was restored within a few weeks. Brookwood has filed
claims with its insurance carriers, through its Kenyon subsidiary, and is working closely with the
carriers toward recovery of its losses. Brookwood recognized the $100,000 insurance policy
deductible in the 2010 second quarter and has currently received from its carriers approximately
77% of its submitted building and contents claims of $1,304,000 and anticipates receipt of the
remaining claim, subject to final review by the insurance carrier, by December 31, 2010. Brookwood
has also filed a claim under its business interruption insurance policy, however, the status of the
claim is uncertain.
In May 2010, Brookwood Laminating completed the purchase of its Connecticut production
facility pursuant to the exercise of an option contained in its lease agreement. The purchase price
of $3,200,000 was funded with operating cash flows.
Energy. Hallwood Energy was a privately held independent oil and gas limited partnership and
operated as an upstream energy company engaged in the acquisition, development, exploration,
production, and sale of hydrocarbons, with a primary focus on natural gas assets.
On March 1, 2009, Hallwood Energy, HEM (the general partner of Hallwood Energy) and Hallwood
Energys subsidiaries, filed petitions for relief under Chapter 11 of the United States Bankruptcy
Code. The cases were adjudicated in the United States Bankruptcy Court for the Northern District of
Texas, Dallas Division, in In re Hallwood Energy, L.P., et al Case No. 09-31253. The Company was
only an investor in and creditor of Hallwood Energy. The bankruptcy filing did not include the
Company or any other of its assets. On October 16, 2009, the Bankruptcy Court confirmed the plan or
reorganization of the debtors.
Refer to the section Investments in Hallwood Energy for a further description of the
Companys former energy activities, including the bankruptcy case.
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.
Results of Operations
The Company reported net income for the 2010 third quarter of $407,000, compared to net income
of $4,068,000 in 2009. Revenue for the 2010 third quarter was $36,771,000, compared to $44,182,000
in 2009.
Net income for the 2010 nine month period was $10,453,000, compared to net income of
$10,591,000 in 2009. Revenue for the 2010 nine month period was $131,848,000, compared to
$128,166,000 in 2009.
Revenues
Textile products sales of $36,771,000 decreased by $7,411,000, or 16.8%, in the 2010 third
quarter, compared to $44,182,000 in 2009. Sales for the 2010 nine month period increased by
$3,682,000, or 2.9%, to $131,848,000, compared to $128,166,000 in 2009. The fluctuations in the
2010 periods were principally due to changes in sales of specialty fabric to U.S. military
contractors as a result of orders from the military to Brookwoods customers, as well as increased
sales in the commercial market segment, sail cloth and flag products. Military sales accounted for
$23,295,000 and $93,246,000 in the 2010 third quarter and nine month periods, respectively,
compared to $32,415,000 and $92,845,000 in 2009. The military sales represented 63.4% and 73.4% of
Brookwoods net sales in the 2010 and 2009 third quarters, respectively, and 70.7% and 72.4% in the
2010 and 2009 nine month periods, respectively. While the aforementioned flood at the Kenyon plant
negatively affected production in the 2010 second quarter, the impact was not material.
Page 23
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Sales Concentration. Brookwood has two customers who accounted for more than 10% of
Brookwoods sales during both the 2010 and 2009 periods. Sales to one Brookwood customer, Tennier
Industries, Inc. (Tennier), accounted for more than 10% of Brookwoods sales during both the 2010
and 2009 periods. Its relationship with Tennier is ongoing. Sales to Tennier, which are included in
military sales, were $8,296,000 and $44,064,000 in the 2010 third quarter and nine month periods,
respectively, compared to $16,933,000 and $40,298,000 in 2009. Sales to Tennier represented 22.6%
and 38.3% of Brookwoods net sales in the 2010 and 2009 third quarters, respectively, and 33.4% and
31.4% in the 2010 and 2009 nine month periods, respectively. Sales to another customer, ORC
Industries, Inc. (ORC), accounted for more than 10% of Brookwoods sales in 2009. Its
relationship with ORC is ongoing. Sales to ORC, which are included in military sales, were
$2,583,000 and $12,662,000 in the 2010 third quarter and nine month periods, respectively, compared
to $3,926,000 and $18,925,000 in 2009. Sales to ORC represented 7.0% and 8.9% of Brookwoods net
sales in the 2010 and 2009 third quarters, respectively, and 9.6% and 14.8% in the 2010 and 2009
nine month periods, respectively.
Expenses
Textile products cost of sales of $28,454,000 for the 2010 third quarter decreased by
$3,362,000, or 10.6%, compared to $31,816,000 in 2009. For the nine month periods, textile products
cost of sales of $95,498,000 for 2010 increased by $2,176,000, or 2.3%, compared to $93,322,000 in
2009. The 2010 fluctuations principally resulted from material and labor costs associated with the
varied sales volume, changes in product mix, and royalty costs related to a military product. Cost
of sales includes all costs associated with the manufacturing process, including but not limited
to, materials, labor, utilities, royalties, depreciation on manufacturing equipment and all costs
associated with the purchase, receipt and transportation of goods and materials to Brookwoods
facilities, including inbound freight, purchasing and receiving costs, inspection costs, internal
transfer costs and other costs of the distribution network and associated manufacturers rebates.
Brookwood believes that the reporting and composition of cost of sales and gross margin is
comparable with similar companies in the textile converting and finishing industry.
The gross profit margin decreased for the third quarter for 2010 versus 2009, 22.6% and 28.0%,
respectively, and increased for the nine month period for 2010 and 2009, 27.6% and 27.2%,
respectively. The fluctuating gross profit margins were attributed to changes in sales volumes,
changes in product mix, and manufacturing efficiencies.
Administrative and selling expenses were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Textile products |
|
$ |
4,253 |
|
|
$ |
4,241 |
|
|
$ |
13,285 |
|
|
$ |
13,121 |
|
Corporate |
|
|
3,108 |
|
|
|
1,880 |
|
|
|
6,351 |
|
|
|
4,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,361 |
|
|
$ |
6,121 |
|
|
$ |
19,636 |
|
|
$ |
17,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Textile products administrative and selling expenses of $4,253,000 for the 2010 third
quarter increased by $12,000, or 0.3%, from 2009. For the 2010 nine months, selling and
administrative expenses increased by $164,000, or 1.2%, compared to 2009. The increase for the 2010
third quarter from the 2009 quarter was attributable to an increase of $142,000 of employee related
expenses (e.g. salaries and benefits) and was offset by a decline in professional services of
$283,000, principally legal fees and a decrease of $90,000 related to performance and other related
payroll costs. The increase for the 2010 nine month period was attributable to the insurance
deductible related to the aforementioned flood at the Kenyon plant of $100,000, an increase in
employee related expenses of $322,000 and an increase of $315,000 related to performance and other
related payroll costs, which was partially offset by a decline in professional services of
$597,000.
The textile products administrative and selling expenses include items such as payroll,
professional fees, sales commissions, factor commissions, marketing, rent, insurance and travel.
Brookwood conducts research and development activities related to the exploration, development and
production of innovative products and technologies. Research and development costs were
approximately $165,000 and $598,000 for the three months and nine months ended September 30, 2010
compared to $161,000 and $574,000 for the three months and nine months ended September 30, 2009,
respectively.
Corporate administrative expenses increased $1,228,000, or 65.3%, for the 2010 third quarter,
compared to 2009. For the 2010 nine months, corporate expenses increased $1,484,000, or 30.5%,
compared to 2009. The increases were principally attributable to
Page 24
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
higher professional fees of $1,490,000 for the 2010 three month period and higher professional
fees of $1,247,000 for the 2010 nine month period, respectively. The increases in professional fees
during the 2010 periods was principally attributable to legal costs related to various matters
involving Hallwood Energy, and net of $820,000 received in the 2010 second quarter from the
insurance carrier for the Companys directors and officers liability insurance policy for costs
related to the Hallwood Energy litigation matters.
Significant additional costs in excess of insurance reimbursements have been incurred by the
Company and on behalf of other defendants for the three months and nine months ended September 30,
2010. On August 17, 2010, the insurance carrier informed the Company of a change in its coverage
position whereby coverage was denied in reliance on the insured vs. insured exclusion in the
policy. The Company believes it has demonstrated that the exclusion does not apply and has made
demand that the insurance carrier provide coverage for these actions. In November 2010, the
insurance carrier informally agreed to pay the previously unreimbursed defense costs of the Company
and another insured party, in exchange for an agreement not to initiate a coverage lawsuit if the
carrier performs promptly. The Company is awaiting performance by the carrier and will continue to
forbear from initiating a coverage lawsuit if the carrier performs promptly.
Other Income (Loss)
Interest expense was $89,000 and $207,000 in the 2010 third quarter and nine month periods,
respectively, compared to $44,000 and $171,000 in the 2009 periods. Interest expense principally
relates to Brookwoods Key Bank revolving credit facility and also includes $33,000 in the 2010
third quarter paid to tax agencies.
Interest and other income was $2,000 and $8,000 in the 2010 third quarter and nine month
periods, respectively, compared to $16,000 and $33,000 in 2009. The 2010 decreases were principally
due to reduced interest income earned on lower balances of cash and cash equivalents and lower
interest rates.
Income Taxes
Following is a schedule of income tax expense (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
152 |
|
|
$ |
1,198 |
|
|
$ |
5,157 |
|
|
$ |
1,260 |
|
Deferred |
|
|
174 |
|
|
|
899 |
|
|
|
174 |
|
|
|
4,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
326 |
|
|
|
2,097 |
|
|
|
5,331 |
|
|
|
5,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
136 |
|
|
|
332 |
|
|
|
731 |
|
|
|
950 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
136 |
|
|
|
332 |
|
|
|
731 |
|
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
(280 |
) |
|
|
|
|
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
462 |
|
|
$ |
2,149 |
|
|
$ |
6,062 |
|
|
$ |
6,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010, the net deferred tax asset was attributable to temporary
differences that upon reversal, could be utilized to offset income from operations, and state tax
credits. The statutory federal tax rate in both periods was 35%, while state taxes were determined
based upon taxable income apportioned to those states in which the Company does business at their
respective tax rates.
Investments in Hallwood Energy
Prior to the bankruptcy reorganization by Hallwood Energy (discussed below) in October 2009,
the Company had invested $61,481,000 in Hallwood Energys general partner interest and Class A and
Class C limited partner interests. In addition, the
Company loaned Hallwood Energy $13,920,000 in the form of convertible notes issued by Hallwood
Energy. Prior to the confirmation of Hallwood Energys plan of reorganization, the Company
accounted for the investment in Hallwood Energy using
Page 25
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
the equity method of accounting and recorded its pro rata share of Hallwood Energys net
income (loss), partners capital transactions, and comprehensive income (loss), as appropriate. In
connection with Hallwood Energys bankruptcy reorganization, the Companys ownership interests in
Hallwood Energy were extinguished and the Company no longer accounts for the investment in Hallwood
Energy using the equity method of accounting.
Hallwood Energy was a privately held independent oil and gas limited partnership and operated
as an upstream energy company engaged in the acquisition, development, exploration, production, and
sale of hydrocarbons, with a primary focus on natural gas assets. Certain of the Companys officers
and directors were investors in Hallwood Energy. In addition, as a former member of management of
Hallwood Energy, one officer of the Company held a profit interest in Hallwood Energy that was also
extinguished in the bankruptcy.
Bankruptcy Reorganization by Hallwood Energy. On March 1, 2009, Hallwood Energy, HEM (the
general partner of Hallwood Energy) and Hallwood Energys subsidiaries, filed petitions for relief
under Chapter 11 of the United States Bankruptcy Code. The cases were adjudicated in the United
States Bankruptcy Court for the Northern District of Texas, Dallas Division, in In re Hallwood
Energy, L.P., et al Case No. 09-31253. The Company was only an investor in and creditor of Hallwood
Energy. The bankruptcy filing did not include the Company or any other of its assets.
On June 29, 2009, the Bankruptcy Court granted a motion by Hall Phoenix/Inwood, Ltd. (HPI),
the secured lender to Hallwood Energy, to partially lift the automatic stay applicable in
bankruptcy proceedings, permitting HPI, among other things, to enter upon and take possession of
substantially all of Hallwood Energys assets and operations.
On October 16, 2009, the Bankruptcy Court confirmed a plan of reorganization of the debtors
that, among other things, extinguished Hallwood Energys general partnership and limited
partnership interests, including those held by the Company. In addition, Hallwood Energys
convertible notes including those held by the Company, are subordinated to recovery in favor of
HPI. As a result of these developments, the Company does not anticipate that it will recover any of
its investments in Hallwood Energy. The carrying value of the Companys investment in Hallwood
Energy has been reflected as zero since December 31, 2007.
Litigation. In connection with Hallwood Energys bankruptcy proceeding, Hallwood Energy and
other parties have filed lawsuits and threatened to assert additional claims against the Company
and certain related parties alleging actual, compensatory and exemplary damages in excess of
$200,000,000, based on purported breach of contract, fraud, breach of fiduciary duties, neglect,
negligence and various misleading statements, omissions and misrepresentations. See Note 12 to the
condensed consolidated financial statements of this report. The Company believes that the
allegations and claims are without merit and intends to defend the lawsuits and any future claims
vigorously.
Critical Accounting Policies
There have been no changes to the critical accounting policies identified and set forth in the
Companys Form 10-K for the year ended December 31, 2009.
Related Party Transactions
Hallwood Investments Limited. The Company has entered into a financial consulting contract
with Hallwood Investments Limited (HIL), a corporation associated with Mr. Anthony J.
Gumbiner, the Companys chairman and principal stockholder. 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. The annual amount is payable in monthly installments. The contract automatically renews
for one-year periods if not terminated by the parties beforehand. Additionally, HIL and Mr.
Gumbiner are also eligible for bonuses from the Company or its subsidiaries, subject to approval by
the Companys or its subsidiaries board of directors. The Company also reimburses HIL
for reasonable expenses in providing office space and administrative services and for travel and
related expenses to and from the Companys corporate office and Brookwoods facilities and health
insurance premiums.
Page 26
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
A summary of the fees and expenses related to HIL and Mr. Gumbiner are detailed below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees |
|
$ |
249 |
|
|
$ |
249 |
|
|
$ |
747 |
|
|
$ |
747 |
|
Office space and administrative services |
|
|
62 |
|
|
|
24 |
|
|
|
192 |
|
|
|
160 |
|
Travel and other expenses |
|
|
20 |
|
|
|
85 |
|
|
|
110 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
331 |
|
|
$ |
358 |
|
|
$ |
1,049 |
|
|
$ |
1,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, from time to time, HIL and Mr. Gumbiner have performed services for certain
affiliated entities that are not subsidiaries of the Company, for which they receive consulting
fees, bonuses, stock options, profit interests 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. HIL or Mr. Gumbiner received no compensation from these affiliated entities in 2010 or
2009.
HIL and certain of its affiliates in which Mr. Gumbiner has an indirect financial interest
share common offices, facilities and certain staff in the Companys Dallas office for which these
companies reimburse the Company. The Company pays certain common general and administrative
expenses and charges the companies an overhead reimbursement fee for the share of the expenses
allocable to these companies. For the three months ended September 30, 2010 and 2009, these
companies reimbursed the Company $28,000 and $19,000, respectively, for such expenses. For the
nine months ended September 30, 2010 and 2009, these companies reimbursed the Company $82,000 and
$55,000, respectively.
Hallwood Financial Limited. Hallwood Financial Limited (Hallwood Financial), a corporation
associated with Mr. Gumbiner, announced on April 20, 2009 that it had advised the Companys Board
of Directors that it intended to make an offer to acquire all of the outstanding common stock of
the Company not already beneficially owned by Hallwood Financial. On June 17, 2009, Hallwood
Financial announced that it had determined that it would not proceed with the offer.
Hallwood Energy. Prior to July 31, 2009, Hallwood Energy shared common offices, facilities and
certain staff in the Companys Dallas office with the Company and Hallwood Energy was obligated to
reimburse the Company for its allocable share of the expenses and certain direct expenses. For the
three months and nine months ended September 30, 2009, Hallwood Energy reimbursed the Company
$9,000 and $124,000 for such expenses, respectively. Hallwood Energy completed its move from the
office space by July 31, 2009 and no longer shares such expenses.
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 September 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due During the Year Ending December 31, |
|
|
|
2010* |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,000 |
|
|
$ |
|
|
|
$ |
3,000 |
|
Operating leases |
|
|
155 |
|
|
|
602 |
|
|
|
519 |
|
|
|
364 |
|
|
|
364 |
|
|
|
576 |
|
|
|
2,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
155 |
|
|
$ |
602 |
|
|
$ |
519 |
|
|
$ |
364 |
|
|
$ |
3,364 |
|
|
$ |
576 |
|
|
$ |
5,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
For the three months ending December 31, 2010. |
Interest costs associated with the Companys debt, which bears interest at variable rates, are
not a material component of the Companys expenses. Estimated interest payments, based on the
current principal balances and weighted average interest rates, assuming the renewal of the
revolving credit facility at its loan balance as of September 30, 2010, are $23,000 for the three
months ending December 31, 2010 and $91,000 for each the years ending December 31, 2011 through
December 31, 2014, respectively.
Page 27
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
|
|
|
Item 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Employment Contracts. The Company and its Brookwood subsidiary have compensation agreements
with various personnel and consultants. Generally, the agreements extend for one-year terms and are
renewable annually.
2005 Long-Term Incentive Plan for Brookwood. In December 2005, the Company adopted The
Hallwood Group Incorporated 2005 Long-Term Incentive Plan for Brookwood Companies Incorporated
(2005 Long-Term Incentive Plan for Brookwood) to encourage employees of Brookwood to increase the
value of Brookwood and to continue to be employed by Brookwood. The terms of the incentive plan
provide for a total award amount to participants equal to 15% of the fair market value of
consideration received by the Company in a change of control transaction, as defined, in excess of
the sum of the liquidation preference plus accrued unpaid dividends on the Brookwood preferred
stock (approximately $13,956,000 at September 30, 2010). The base amount will fluctuate in
accordance with a formula that increases by the annual amount of the dividend on the preferred
stock accrued, currently $1,823,000, and decreases by the amount of the cash dividends actually
paid. However, if the Companys board of directors determines that certain specified Brookwood
officers, or other persons performing similar functions do not have, prior to the change of control
transaction, in the aggregate an equity or debt interest of at least two percent in the entity with
whom the change of control transaction is completed, then the minimum amount to be awarded under
the plan shall be $2,000,000. In addition, the Company agreed that, if members of Brookwoods
senior management do not have, prior to a change of control transaction, in the aggregate an equity
or debt interest of at least two percent in the entity with whom the change of control transaction
is completed (exclusive of any such interest any such individual receives with respect to his or
her employment following the change of control transaction), then the Company will be obligated to
pay an additional $2,600,000.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Financial Covenants
The principal ratios, required to be maintained under Brookwoods Working Capital Revolving
Credit Facility for the last four quarters are provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
|
September 30, |
|
June 30, |
|
March 31, |
|
December 31, |
Description |
|
Requirement |
|
2010 |
|
2010 |
|
2010 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt to tangible net worth
|
|
must be less than ratio of 1.50
|
|
|
0.37 |
|
|
|
0.46 |
|
|
|
0.55 |
|
|
|
0.66 |
|
Total funded debt to EBITDA
|
|
must be less than ratio of 2.00
|
|
|
0.08 |
|
|
|
0.07 |
|
|
|
0.14 |
|
|
|
0.19 |
|
Net income
|
|
must exceed $1
|
|
Yes
|
|
Yes
|
|
Yes
|
|
Yes
|
Brookwood was in compliance with its loan covenants under the Working Capital Revolving
Credit Facility as of the end of all interim periods in 2010 and 2009 and as of December 31, 2009.
In October 2009, an additional covenant was added that provides for a total funded debt to
EBITDA (earnings before interest, taxes, depreciation and amortization), for the trailing four
quarters, ratio of not greater than 2.00 to be calculated on a quarterly basis, commencing December
31, 2009.
Cash dividends and tax sharing payments by Brookwood to the Company are contingent upon
Brookwoods compliance with the loan covenants contained in the Working Capital Revolving Credit
Facility. This limitation on the transferability of assets constitutes a restriction of Brookwoods
net assets, which were $60,470,000 and $48,821,000 as of September 30, 2010 and December 31, 2009,
respectively.
Page 28
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
General. The Company, through its Brookwood subsidiary, principally operates in the textile
products and segment and, until Hallwood Energys bankruptcy reorganization in 2009, the energy
business segment. The Company's cash position increased by $8,479,000 during the 2010 nine
month period to $16,317,000 as of September 30, 2010. The principal source of cash in the 2010 nine
month period was $19,045,000 provided by operations. The primary uses of cash were $6,116,000 for
property, plant and equipment, principally at Brookwood (including $3,200,000 for the purchase of
the Connecticut production facility), $3,450,000 for net repayment of bank borrowings and
$1,000,000 for the redemption of the Companys preferred stock.
Textiles.
The Company's textile products segment generates funds from the dyeing,
laminating and finishing of fabrics and their sales to customers in the military, consumer,
industrial and medical markets. Brookwood maintains a $25,000,000 Working Capital Revolving Credit
Facility with Key Bank. The facility had a maturity date of January 31, 2011. At September 30,
2010, Brookwood had approximately $21,879,000 of unused borrowing capacity on its Working Capital
Revolving Credit Facility. On September 30, 2010, Brookwood entered into an amendment to extend the
term of the facility to January 31, 2014.
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, subject to a
commission and the factors prior approval. Brookwood continues to monitor its factors and the
effect the current economic conditions may have upon Brookwoods factors that cannot be determined
at this time. As of November 12, 2010, all of Brookwoods factors were complying with payment terms
in accordance with factor agreements. In March 2010, GMAC Commercial Finance, one of Brookwoods
factors, entered into an agreement to sell substantially all of its factoring portfolio to Wells
Fargo Bank, N.A., also one of Brookwood factors. Brookwood was notified of the sale by both factors
in April and has been in communication with the factors. Brookwood is closely monitoring the effect
of the transaction.
Brookwood paid cash dividends to the Company of $3,000,000 and $3,500,000 in the 2010 and 2009
nine month periods, respectively and $4,500,000 for all of 2009. In addition, Brookwood made tax
sharing payments to the Company of $8,236,000 and $4,264,000 in the 2010 and 2009 nine month
periods, respectively, and $7,751,000 for all of 2009 under its tax sharing agreement. Future cash
dividends and tax sharing payments are contingent upon Brookwood's continued profitability
and compliance with its loan covenants contained in the Working Capital Revolving Credit Facility.
Brookwoods total debt to total tangible net worth ratio of 0.37 at September 30, 2010 was reduced
from 0.66 at December 31, 2009, principally due to its profitable operations during the 2010 nine
month period, and was substantially below the maximum allowable ratio of 1.50. In October 2009, an
additional covenant was added that provides for a total funded debt to EBITDA (earnings before
interest, taxes, depreciation and amortization), for the trailing four quarters, ratio of not
greater than 2.00 to be calculated on a quarterly basis, commencing December 31, 2009. The total
funded debt to EBITDA ratio was 0.08 and 0.19 at September 30, 2010 and December 31, 2009,
respectively, which was substantially below the maximum allowable ratio.
Brookwood continuously evaluates opportunities to reduce production costs and expand its
manufacturing capacity and portfolio of products. Accordingly, Brookwood incurs capital
expenditures to pursue such opportunities, as well as for environmental and safety compliance,
building upgrades, energy efficiencies, and various strategic objectives. In the 2010 nine month
period and for all of 2009, Brookwood met its capital expenditure and equipment maintenance
requirements from its operating cash flows and availability under its Working Capital Revolving
Credit Facility. There were no material capital commitments as of September 30, 2010. It is
anticipated that Brookwoods future capital expenditure projects will be funded from operations
and, if necessary, availability under its Working Capital Revolving Credit Facility. Brookwood
estimates its 2010 capital expenditures will be within a range of $3,500,000 to $4,500,000,
excluding the purchase of the Brookwood Laminating production facility. In May 2010, Brookwood
Laminating completed the purchase of its Connecticut production facility pursuant to the exercise
of an option contained in its lease agreement. The purchase price of $3,200,000 was funded with
operating cash flows.
Companys Future Liquidity. The Companys ability to generate cash flow from operations will
depend on its future performance and its ability to successfully implement business and growth
strategies. The Companys performance will also be
affected by the outcome of its litigation matters and prevailing economic conditions. Many of
these factors are beyond the Companys control. Considering its current cash position, anticipated
cash flow from operations and availability under the Brookwood Working Capital Revolving Credit
Facility, the Company believes it has sufficient funds to meet its liquidity needs for the next
twelve months.
Page 29
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company and its subsidiaries are involved in a number of litigation matters. Although the
Company does not believe that the results of any of these matters are likely to have a material
adverse effect on its financial position, results of operations or cash flows, it is possible that
any of these matters could result in material liability to the Company. In addition, the Company
has spent and will continue to spend significant amounts in professional fees and associated costs
in connection with these matters.
Page 30
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
In the interest of providing stockholders with certain information regarding the
Companys future plans and operations, certain statements set forth in this Form 10-Q relate
to managements 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
Companys 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 the Companys Form 10-K for the year ended December 31, 2009 in Item 1A
Risk 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 Companys periodic reports and filings with the Securities and
Exchange Commission.
Page 31
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. It is the conclusion of the Companys
principal executive officer and principal financial officer that the Companys 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 Form 10-Q,
are effective at the reasonable assurance level in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms, and that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Companys management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure. 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 managements 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.
Changes in Internal Controls over Financial Reporting. There were no changes in the
Companys internal controls over financial reporting that occurred during the last fiscal
quarter that have materially affected, or are reasonably likely to materially affect, these
controls.
Page 32
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
PART II OTHER INFORMATION
Item
|
|
|
|
|
1
|
|
Legal Proceedings |
|
|
|
|
|
|
|
|
|
Reference is made to
Note 12 to the Companys condensed consolidated financial statements included
within this Form 10-Q. |
|
|
|
|
|
1A
|
|
Risk Factors
|
|
N/A |
|
|
|
|
|
2
|
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
None |
|
|
|
|
|
3
|
|
Defaults upon Senior Securities
|
|
None |
|
|
|
|
|
4
|
|
(Removed and Reserved) |
|
|
|
|
|
|
|
5
|
|
Other Information
|
|
None |
|
|
|
|
|
6
|
|
Exhibits |
|
|
|
|
|
10.20
|
|
Sixth Amendment to Second Amended and Restated Revolving Credit Loan and
Security Agreement, dated as of September 30, 2010, by and among Key Bank National
Association, Brookwood Companies Incorporated and certain subsidiaries. |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Page 33
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements 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
|
|
Dated: November 12, 2010 |
By: |
/s/ Richard Kelley
|
|
|
|
Richard Kelley, Vice President |
|
|
|
(Duly Authorized Officer and
Principal Financial and
Accounting Officer) |
|
|
Page 34
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.20
|
|
Sixth Amendment to Second Amended and Restated Revolving Credit Loan and Security
Agreement, dated as of September 30, 2010, by and among Key Bank National
Association, Brookwood Companies Incorporated
and certain subsidiaries. |
|
|
|
31.1
|
|
Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
Page 35