The implosion of MGT Construction – the local builder that last month filed for Chapter 7 bankruptcy liquidation – has dealt a blow to parent company Thalhimer’s employee stock ownership plan.
Letters and account statements sent last month to shareholders and obtained by BizSense, show that the fallout from MGT’s financial issues forced Thalhimer to restate its financials for 2014 and 2015 – a revision that trickled down to the shares of its ESOP, a type of plan some privately held companies offer as a benefit to employees to give them an option for an ownership stake.
The revised 2015 statements, for example, peg the ESOP shares at $3.20 apiece – a 91 percent decline from original 2015 statements that showed a value of $34.42 per share, according to the letters.
Long-delayed year-end 2016 account statements were also sent last month, showing that the per-share price bounced back that year to a valuation of $12. But that was still 67 percent less than the $37 per share value from June 2016, when the ESOP paid that price to purchase the remaining original stock from a dozen longtime employees and executives who still had shares they obtained prior to the creation of the ESOP in 2003.
That deal, aimed at getting the company closer to being 100 percent employee-owned, ultimately had to be unwound in early 2017 because of the company’s realization that the share price was overpriced due to MGT’s negative effect on Thalhimer’s bottom line.
In the letters, dated Feb. 5, Thalhimer CEO Warfield told shareholders: “As you may know, the company restated its audited financial statements for 2014 and 2015 tax years due to circumstances involving the company’s subsidiary, MGT Construction.
“The company was unaware of the issues related to MGT Construction when the original statements were issued and the company’s auditor did not discover the errors during the annual audit process.”
The circumstances Warfield referred to included losses fueled in part by an accounting scheme perpetrated by an undisclosed number of MGT’s employees. Thalhimer, as disclosed in court records in an ongoing lawsuit against its top executives, has said it discovered the scheme in fall 2016.
Emphasizing the share price uptick in 2016 and MGT’s bankruptcy, Warfield said the share value reached “the bottom” in 2015 and rebounded due to the performance of the company’s other divisions – its Cushman & Wakefield | Thalhimer brokerage and Thalhimer Realty Partners development arm.
“We expect the company’s stock value to continue on an upward trend based on the projected performance of our core businesses and shut down of MGT Construction,” Warfield said in the letter.
In a separate round of letters last month, some former Thalhimer employees who are still participants in the ESOP were told cash distributions they received in 2016 for yearend 2015 were based on the original, higher share price and therefore they were overpaid.
The letters asked those shareholders to pay the excess back into the ESOP, and they were given until Feb. 28 to make those payments. Thalhimer last week instead decided to make the repayments to the ESOP on behalf of those participants.
In an email to BizSense last week, Warfield said the company believes the “negative impact of MGT’s financial struggles is substantially behind us now.”
“Unfortunately, the financial problems at MGT, while a subsidiary, did have a significant impact on the ESOP’s value for the years involved,” Warfield said in the email. “The recent (MGT) bankruptcy is the final step in closing down that operation. No one is pleased with a loss in value.”
Warfield stressed that the ESOP is in a “very strong financial position.”
“It has no debt and holds Thalhimer stock and substantial cash that the company has contributed over a number of years,” Warfield said. “The stock price fluctuates over time. There are no guarantees for any of us.”
Warfield said the delays in getting 2016 account statements out to shareholders were caused by the extra time it took outside auditors to review and rework the annual financials, which were needed to calculate the share price.
“We understand the frustration with the delay we all experienced in getting information this past year,” he said. “The process of restating our financials took much longer than we had hoped or expected.”
Warfield said the company has held multiple meetings with its more than 400 employees to keep them abreast of all that has happened.
Reiterating comments he’s made in recent months, Warfield maintained that Thalhimer overall is “thriving.”
“We are hopeful that our 2017 financial performance will lead to increased stock value, which will benefit all ESOP participants and shareholders alike,” he said.
On Wednesday, attorneys for Warfield and other Thalhimer executives will appear in Richmond federal court for the latest hearing in a lawsuit filed against them in October by Steve Brincefield, the company’s former property management head.
The defendants in the suit are Warfield; former Thalhimer chairman and former longtime head Paul Silver; executive vice president Evan Magrill; CFO David Dustin; Jeff Bisger, former head of what’s now Thalhimer Realty Partners; and Lance Studdard, an employee stock plan consultant hired by the company to act as trustee of the ESOP.
Brincefield, who retired from Thalhimer in 2012 after three decades, claims the executives had a hand in wrongfully depleting the value of the ESOP by millions of dollars in part to allegedly cover up troubles at MGT.
Brincefield is also the lone holdout of the original shareholders who has refused to sell his shares to the ESOP.
Thalhimer has not commented broadly on the lawsuit, but Warfield did say last week that Brincefield’s allegation that former longtime MGT president Michael Logan had “admitted to participating in an accounting scheme” is false.
Logan left the company in January.
Warfield would not comment on how big of a hole Thalhimer has had to fill to make up for the financial mismanagement attributed to MGT. He pointed to the construction company’s initial bankruptcy filing, which shows it has liabilities of between $10 million and $50 million, but assets of only $100,000 to $500,000.
Asked how irregularities at MGT could have gone unnoticed until 2016, Warfield said he could not comment in detail.
“We expect that the answer to this question will become clear through the relevant court proceedings over the coming months,” he said.