1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
MARK ONE
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
FOR THE PERIOD ENDED JANUARY 31, 1995 COMMISSION FILE NUMBER: 1-8303
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THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
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DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS
SUITE 1500
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
6,383,267 SHARES OF COMMON STOCK WERE OUTSTANDING AT FEBRUARY 28, 1995,
INCLUDING 896,000 SHARES OWNED BY THE COMPANY'S HALLWOOD ENERGY CORPORATION
SUBSIDIARY.
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2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM NO. PART I - FINANCIAL INFORMATION PAGE
-------- ------------------------------ ----
1 Financial Statements:
Consolidated Balance Sheets as of January 31, 1995
and July 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Six Months Ended January 31, 1995 and 1994 . . . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Three Months Ended January 31, 1995 and 1994 . . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the
Six Months Ended January 31, 1995 and 1994 . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 10-15
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . 16-20
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
January 31, July 31,
1995 1994
---------- ----------
(Unaudited) (Audited)
ASSET MANAGEMENT
REAL ESTATE
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,160 $ 8,119
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . 6,552 6,927
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 1,256 2,021
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 335 406
-------- --------
16,303 17,473
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 10,569 11,005
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 1,760 2,976
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . 1,704 1,868
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 1,335 1,437
-------- --------
15,368 17,286
-------- --------
TOTAL ASSET MANAGEMENT ASSETS . . . . . . . . . . . . . . . . . . 31,671 34,759
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,558 12,910
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,863 12,723
Property, plant and equipment, net . . . . . . . . . . . . . . . . . 8,530 8,301
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,063 982
-------- --------
39,014 34,916
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,878 22,784
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 2,266 3,671
-------- --------
14,144 26,455
-------- --------
TOTAL OPERATING SUBSIDIARIES ASSETS . . . . . . . . . . . . . . . 53,158 61,371
ASSOCIATED COMPANIES
Investment in ShowBiz Pizza Time, Inc. . . . . . . . . . . . . . . . 16,063 16,444
-------- --------
TOTAL ASSOCIATED COMPANIES ASSETS . . . . . . . . . . . . . . . . 16,063 16,444
OTHER
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 9,073 5,728
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5,413 5,900
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 1,641
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1,482
-------- --------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 14,917 14,751
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $115,809 $127,325
======== ========
See accompanying notes to consolidated financial statements.
Page 3
4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
January 31, July 31,
1995 1994
-------- --------
(Unaudited) (Audited)
ASSET MANAGEMENT
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,348 $ 7,399
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 280 492
-------- --------
6,628 7,891
ENERGY
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,675 7,153
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 3,917 4,858
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,879 2,470
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 154 148
-------- --------
13,625 14,629
-------- --------
TOTAL ASSET MANAGEMENT LIABILITIES . . . . . . . . . . . . . . . . . 20,253 22,520
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 10,210 6,079
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,303 8,451
-------- --------
19,513 14,530
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,680 12,204
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 1,817 4,460
-------- --------
7,497 16,664
-------- --------
TOTAL OPERATING SUBSIDIARIES LIABILITIES . . . . . . . . . . . . . 27,010 31,194
ASSOCIATED COMPANIES
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 10,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 98 26
-------- --------
TOTAL ASSOCIATED COMPANIES LIABILITIES . . . . . . . . . . . . . . 9,098 10,026
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . 26,593 26,866
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 22,902 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 5,402 5,840
-------- --------
TOTAL OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . 54,897 55,608
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 111,258 119,348
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value; authorized 500,000 shares; unissued -- --
Common stock, $0.10 par value; authorized 10,000,000 shares;
issued 6,394,709 shares at both dates;
outstanding 5,487,267 shares at both dates . . . . . . . . . . . . 639 639
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 56,538 56,442
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (46,575) (42,894)
Equity adjustment from foreign currency translation . . . . . . . . . 245 86
Treasury stock, 907,442 shares at both dates; at cost . . . . . . . . (6,296) (6,296)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . 4,551 7,977
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . $115,809 $127,325
======== ========
See accompanying notes to consolidated financial statements.
Page 4
5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six Months Ended
January 31,
------------------
1995 1994
------- -------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,580 $ 2,000
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 271
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 138 188
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . . (40) (289)
------- --------
2,030 2,170
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 503 598
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 486 574
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 336
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . 11 --
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7
------- --------
1,365 1,515
------- --------
Income from real estate operations . . . . . . . . . . . . . . . . . . 665 655
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 2,816 2,921
Other income (including intercompany
amounts of $115 and $87, respectively) . . . . . . . . . . . . . . . 97 73
------- --------
2,913 2,994
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . 1,058 1,039
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 668
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 694 695
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 186
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) 126
------- --------
2,935 2,714
------- --------
Income (loss) from energy operations . . . . . . . . . . . . . . . . . (22) 280
------- --------
INCOME FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . . . . 643 935
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,168 32,908
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,002 28,947
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2,786 2,656
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,033 1,010
Interest (including intercompany amounts of $16 and $40, respectively) . 338 293
------- --------
35,159 32,906
------- --------
Income from textile products operations . . . . . . . . . . . . . . . 9 2
See accompanying notes to consolidated financial statements.
Page 5
6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six Months Ended
January 31,
--------------------
1995 1994
-------- --------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,301 $ 7,800
Gain on sale of hotel . . . . . . . . . . . . . . . . . . . . . . . . . . 2,164 --
-------- --------
13,465 7,800
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,617 7,150
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 1,344 869
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621 335
-------- --------
11,582 8,354
-------- --------
Income (loss) from hotel operations . . . . . . . . . . . . . . . . . 1,883 (554)
-------- --------
INCOME (LOSS) FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . 1,892 (552)
ASSOCIATED COMPANIES
Income (loss) from investments in ShowBiz . . . . . . . . . . . . . . . . (477) 580
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 214
-------- --------
INCOME (LOSS) FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . (819) 366
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 62
Interest on short-term investments and other income . . . . . . . . . . . 92 187
Recovery from investment in Alliance Bancorporation . . . . . . . . . . . -- 1,703
-------- --------
304 1,952
Interest (net of intercompany amounts of $131 and $127, respectively) . . 2,216 2,184
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2,701 1,115
-------- --------
4,917 3,299
-------- --------
OTHER LOSS, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,613) (1,347)
-------- --------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . (2,897) (598)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784 1,190
-------- --------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,681) $ (1,788)
======== ========
PER COMMON SHARE (PRIMARY)
Net loss per common share . . . . . . . . . . . . . . . . . . . . . . $ (0.67) $ (0.33)
======== ========
See accompanying notes to consolidated financial statements.
Page 6
7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
January 31,
------------------
1995 1994
------- -------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 722 $801
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 118
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 67 94
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . . (32) (79)
------- --------
938 934
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 259 308
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 243 243
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 168
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4
------- --------
678 723
------- --------
Income from real estate operations . . . . . . . . . . . . . . . . . . 260 211
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353 1,402
Other income (loss) (including intercompany
amounts of $57 and $43, respectively) . . . . . . . . . . . . . . . . (60) (138)
------- --------
1,293 1,264
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 839 423
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . 558 552
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 277
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . (147) (26)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 72
------- --------
1,646 1,298
------- --------
Loss from energy operations . . . . . . . . . . . . . . . . . . . . . (353) (34)
------- --------
INCOME (LOSS) FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . (93) 177
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,182 14,924
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,114 13,339
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,354 1,303
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529 501
Interest (including intercompany amounts of $-0- and $20 respectively) . 178 123
------- --------
18,175 15,266
------- --------
Income (loss) from textile products operations . . . . . . . . . . . . 7 (342)
See accompanying notes to consolidated financial statements.
Page 7
8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
January 31,
-----------------------
1995 1994
---------- ---------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,608 $3,913
Gain on sale of hotel . . . . . . . . . . . . . . . . . . . . . . . . . . 2,164 --
-------- --------
7,772 3,913
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,804 3,554
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 696 493
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313 164
-------- --------
5,813 4,211
-------- --------
Income (loss) from hotel operations . . . . . . . . . . . . . . . . . 1,959 (298)
-------- --------
INCOME (LOSS) FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . 1,966 (640)
ASSOCIATED COMPANIES
Income (loss) from investments in ShowBiz . . . . . . . . . . . . . . . . (678) 2
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 105
-------- --------
LOSS FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . . . . . . (839) (103)
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 31
Interest on short-term investments and other income . . . . . . . . . . . 46 93
Recovery from investment in Alliance Bancorporation . . . . . . . . . . . -- 1,703
-------- --------
152 1,827
Interest (net of intercompany amounts of $57 and $63, respectively) . . . 1,146 1,095
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2,233 553
-------- --------
3,379 1,648
-------- --------
OTHER INCOME (LOSS), NET . . . . . . . . . . . . . . . . . . . . . . . (3,227) 179
-------- --------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . (2,193) (387)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 60
-------- --------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,419) $ (447)
======== ========
PER COMMON SHARE (PRIMARY)
Net loss per common share . . . . . . . . . . . . . . . . . . . . . . $ (0.44) $ (0.09)
======== ========
See accompanying notes to consolidated financial statements.
Page 8
9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
January 31,
---------------------
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,681) $(1,788)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . 3,420 3,037
Gain from sale of real estate and hotels . . . . . . . . . . . . . . . . . . . (2,153) (1,703)
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . . . . . (1,525) (1,530)
Distributions from energy affiliate . . . . . . . . . . . . . . . . . . . . . . 1,338 1,177
Undistributed income from energy affiliate . . . . . . . . . . . . . . . . . . (1,242) (1,679)
Mortgage loans assigned to plaintiff in litigation settlement . . . . . . . . . 592 --
Equity in net income/(loss) of associated company/affiliate . . . . . . . . . . 517 (291)
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 487 1,083
Amortization of deferred gain from debenture exchange . . . . . . . . . . . . . (273) (290)
Proceeds from collections of mortgage loans . . . . . . . . . . . . . . . . . . 195 355
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . . . . . . (22) (25)
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . (1,256) (506)
Net change in textile products assets and liabilities . . . . . . . . . . . . . 230 3,301
Net change in energy assets and liabilities . . . . . . . . . . . . . . . . . . (222) 70
------- -------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . (3,595) 1,211
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate and hotel assets . . . . . . . . . . . . . . . 14,067 --
Capital expenditures and acquisition of real estate and hotels . . . . . . . . . (856) (716)
Investments in textile products property and equipment . . . . . . . . . . . . . (731) (326)
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . . . . . 610 --
Proceeds from sale of insurance contracts . . . . . . . . . . . . . . . . . . . . 229 522
Net change in restricted cash for investing activities . . . . . . . . . . . . . 32 465
Investments in energy property and equipment . . . . . . . . . . . . . . . . . . (17) (64)
Disbursements related to Integra - asset held for sale . . . . . . . . . . . . . -- (1,062)
Investments in associated company/affiliate . . . . . . . . . . . . . . . . . . . -- (9)
------- -------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . 13,334 (1,190)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . . . . . 945 --
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . . . . . (8,763) (4,006)
Net change in restricted cash for financing activities . . . . . . . . . . . . . 1,432 165
Purchase of capital stock by energy subsidiary for treasury . . . . . . . . . . . -- (1,454)
Payment of loan fees and financing costs . . . . . . . . . . . . . . . . . . . . -- (2)
------- -------
Net cash (used in) financing activities . . . . . . . . . . . . . . . . . . . (6,386) (5,297)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . . . . . (8) 3
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . 3,345 (5,273)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . 5,728 11,837
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . $ 9,073 $ 6,564
======= =======
See accompanying notes to consolidated financial statements.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(UNAUDITED)
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information
and disclosures required by generally accepted accounting principles,
although, in the opinion of management, all adjustments considered necessary
for a fair presentation have been included. These financial statements
should be read in conjunction with the audited consolidated financial
statements and related disclosures thereto included in Form 10-K for the
fiscal year ended July 31, 1994.
2. INVESTMENTS IN ASSOCIATED COMPANIES AND AFFILIATE (DOLLAR AMOUNTS IN
THOUSANDS)
Income (loss) from
As of January 31, 1995 Amount at investments for the
-------------------------- which carried at, six months ended
Cost or ----------------------- January 31,
Business segments and Number of ascribed January 31, July 31, -----------------------
description of investment shares or units value 1995 1994 1995 1994
- ----------------------------------- --------------- -------- ------- ------- -------- ---------
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (A)
-- General partner interest -- $8,650 $ 6,552 $ 6,927 $ (40) $ (130)
-- Limited partner units . . 89,269 906 -- -- -- (159)
------ ------- ------- ------- -------
Totals . . . . . . . . . . $9,556 $ 6,552 $ 6,927 $ (40) $ (289)
====== ======= ======= ======= =======
ASSOCIATED COMPANIES
SHOWBIZ PIZZA TIME, INC. (B)
-- Common stock . . . . . . 1,784,193 $5,438 $16,063 $16,444 $ (477) $ 580
====== ======= ======= ====== ======
(A) As of January 31, 1995, Hallwood Realty Corporation ("HRC"), a wholly
owned subsidiary of the Company, owned a 1% general partner interest,
and the Company owned a 5% limited partner interest in its Hallwood
Realty Partners, L.P. ("HRP") affiliate.
The carrying value of the Company's investment in the general partner
interest of HRP includes the value of intangible rights to provide
asset management and property management services. The former owner
initially retained the property management rights for a three-year
period following the November 1, 1990 sale. On June 1, 1991 the
Company purchased the retained property management rights from the
former owner for the balance of the three-year period, and, as of
October 31, 1993, had fully amortized the $2,475,000 cost. Beginning
November 1, 1993 the Company commenced amortization of that portion of
the general partner interest ascribed to the management rights, and for
the six months ended January 31, 1995 such amortization was $336,000.
Due to recording the Company's pro rata share of losses recorded by HRP
as prescribed by equity accounting, the carrying value of the
investment in HRP's limited partner units has been reduced to zero;
therefore, the Company no longer records its pro rata share of HRP's
losses, as the Company is not liable for any additional amounts. The
Company would have to recover such unrecognized losses, however, before
any equity income could be recognized in the future.
As further discussed in Note 4, the Company has pledged its 89,269 HRP
limited partner units to collateralize a $500,000 note payable.
On the effective date of March 3, 1995 HRP completed a one-for-five
reverse split of its limited partner units. Concurrent with the
reverse split, the Company purchased 30,000 limited partner units
(estimated to be the number of fractional units to be purchased by HRP
as a result of such reverse split) for a price of $356,000. The number
of units and value per unit listed herein have been adjusted for the
effect of the reverse split.
(B) The Company accounts for its investment in ShowBiz Pizza Time, Inc.
("ShowBiz"), on the equity method of accounting. The Company also
records its pro-rata share of various stockholders' equity
transactions. The financial impact of ShowBiz's shareholders' equity
transactions resulted in a non-cash increase in the carrying value of
the Company's investment in ShowBiz and a corresponding increase in
additional paid-in capital in the amount of $96,000 for the six months
ended January 31, 1995.
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(UNAUDITED)
As of January 31, 1995, the Company owned approximately 15% of
ShowBiz, and all of its ShowBiz shares are pledged to secure certain
loans payable as discussed in Note 4.
The quoted market price per unit/share and the Company's carrying value per
unit/share of the limited partner units of HRP and the common shares of ShowBiz
at January 31, 1995 were:
AMOUNT PER SHARE
--------------------
MARKET CARRYING
PRICE VALUE
------- --------
HRP limited partner units . . . . . . . . . . . . . . . . . . $10.62 --
ShowBiz common shares . . . . . . . . . . . . . . . . . . . . 9.87 $9.00
The general partner interest in HRP is not publicly traded.
3. LITIGATION, CONTINGENCIES AND COMMITMENTS
Reference is made to Note 18 to the consolidated financial statements
contained in Form 10-K for the fiscal year ended July 31, 1994.
In February 1995, the Company entered into agreements to settle the
following three lawsuits styled: (1) Louis G. Reese, Inc. et al. v. The
Hallwood Group Incorporated et al, which was filed in the Fourteenth
District Court of Dallas County, Texas; (2) European American Reinsurance
Corporation v. The Hallwood Group Incorporated et al, which was also filed
in the Fourteenth District Court of Dallas County, Texas; and (3) Hermitage
Hotel, Ltd., L.P. v. The Hallwood Group Incorporated et al, which was filed
in the 101st District Court of Dallas County, Texas. Pursuant to these
settlement agreements, the Company has agreed to pay an aggregate of
$425,000 in cash and to issue 250,000 shares of a newly designated series of
preferred stock (the "Series B Preferred Stock") to the plaintiffs in these
lawsuits in exchange for the dismissal of all of these actions with
prejudice. The holders of Series B Preferred Stock will be entitled to
dividends in an annual amount of $0.20 per share. Dividends will be
cumulative for the first five years, and restricts the payment of cash
dividends on any common stock before the full payment of any accrued
dividends. Thereafter, dividends will accrue and be payable only if and
when declared by the Board of Directors. The Series B Preferred Stock will
also have dividend and liquidation preferences to the Company's common
stock. The shares are subject to mandatory redemption 15 years from the
date of issuance, at 100% of the liquidation preference of $4.00 per share
plus all accrued and unpaid dividends, and may be redeemed at any time on
the same terms at the option of the Company. The holders of the shares of
Series B Preferred Stock will not be entitled to vote on matters brought
before the Company's stockholders, except as otherwise provided by law.
The Reese settlement is subject to final approval by the court in which
it was filed. The Company will place the consideration to be paid to the
plaintiffs in escrow pending court approval.
In January 1995, the Company settled the lawsuit styled Third National
Bank in Nashville, Trustee v. The Hallwood Group Incorporated filed in the
United States District Court for the Middle District of Tennessee. Pursuant
to the settlement, the court has dismissed this action with prejudice.
Terms of the settlement are confidential. The Company did not incur any
additional charge in excess of the amount previously reserved for this
matter.
Page 11
12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates (in thousands):
January 31, July 31,
1995 1994
---------- ----------
Real Estate
Term loan, libor plus 2.5%, due August 1995 . . . . . . . . . $ 4,723 $ 5,399
Promissory note, 7.50%, due August 1996 . . . . . . . . . . . 1,125 1,500
Promissory note, 8%, due March 1998 . . . . . . . . . . . . . 500 500
------- -------
6,348 7,399
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . . . 8,920 7,975
Equipment financing, 10%, due December 1996 . . . . . . . . . 383 476
------- -------
9,303 8,451
Hotels
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . . . 5,180 5,200
Non-interest bearing obligation, due March 1997 . . . . . . . 500 500
Term loan, base + 2%, repaid January 1995 . . . . . . . . . . -- 6,504
------- -------
5,680 12,204
Associated Companies
Line of credit, prime + .75%, due April 1995 . . . . . . . . . 5,000 6,000
Promissory note, 5%, due March 1997 . . . . . . . . . . . . . 4,000 4,000
------- -------
9,000 10,000
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,331 $38,054
======= =======
Further information regarding loans payable is provided below:
Real Estate
Office-retail property. The Company's United Kingdom office-retail
property is collateral for a L.3,000,000 term loan with the London Branch of
The First National Bank of Boston ("FNBB"). At July 31, 1994 the principal
balance was L.3,500,000. An extension of the term loan was completed in
August 1994, with significant terms as follows: (i) interest rate equal to
libor plus 2.5%, (ii) maturity date of August 1995, and (iii) reduction of
the loan principal to L.3,000,000 by application of a L.500,000 restricted
cash deposit.
HRP litigation settlement. The Company issued a note in the amount of
$1,500,000 to the agent for the plaintiffs in the litigation styled Equitec
Roll-up Litigation, which is discussed in Note 18 to the Company's 1994 Form
10-K. Monthly principal payments of $62,500 are required from September
1994. The outstanding balance at January 31, 1995 was $1,125,000.
Term note. In connection with the resolution of an obligation related to
the Company's Integra Hotels, Inc. subsidiary, the Company issued a $500,000
term note. The note is secured by a pledge of all of the Company's 89,269
HRP limited partner units.
Energy
The Company's 63%-owned (on a fully-diluted basis) Hallwood Energy
Corporation subsidiary ("HEC") has no direct indebtedness. Reflected in the
consolidated balance sheets are HEC's share of the long term obligations of
its affiliated entity, Hallwood Energy Partners, L.P. ("HEP").
Textile Products
Brookwood revolver. In December 1992, the Company's textile products
subsidiary, Brookwood Companies Incorporated ("Brookwood") entered into a
two-year revolving credit facility with The Chase Manhattan Bank, N.A.
("Chase") in the amount of $13,500,000 (the "Brookwood Revolver"). At that
time the Company agreed to subordinate its $1,000,000 remaining
intercompany bridge loan receivable from this subsidiary to the Brookwood
Revolver. The Brookwood Revolver is collateralized by accounts receivable
and the industrial equipment located in Kenyon, Rhode Island. In September
1994, the Brookwood Revolver was amended which extended the expiration date
to August 1997, reduced the interest to one-half
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(UNAUDITED)
percent over prime or libor plus 2.25%, permitted the repayment of the
Company's $1,000,000 balance of bridge financing and changed certain of the
financial covenants. The outstanding balance at January 31, 1995 was
$8,920,000.
Equipment loan. In December 1991, Brookwood entered into a $900,000
equipment financing arrangement with CIT Group/Equipment Financing, Inc. The
loan matures in December 1996, bears a 10% fixed interest rate and is secured
by certain dyeing and finishing equipment. The outstanding balance at
January 31, 1995 was $383,000.
Hotels
Lido Beach Holiday Inn Hotel. In December, 1992, the Company entered into
a term loan with FNBB to provide senior debt financing on the Lido Beach
Holiday Inn hotel in the amount of $8,000,000, for three years with an
additional two-year option (the "Term Loan"). The Term Loan was secured by
the pledge of all the capital stock of a special-purpose subsidiary, The Lido
Beach Hotel, Inc. The principal assets of the subsidiary were the
aforementioned hotel and three residential mortgage loan portfolios.
Concurrent with the sale of the hotel in January 1995 the loan was repaid in
full and the pledge was released.
Tulsa, Oklahoma Residence Inn by Marriott. In October 1994 the Company
entered into a mortgage loan with MBO Properties, Inc. in the amount of
$5,200,000. The loan is secured by the Tulsa, Oklahoma hotel and includes
the following significant terms: (i) fixed interest rate of 10%; (ii) loan
payments based upon a 20-year amortization schedule with a call after seven
years; (iii) participation by lender of 15% of net cash flow (as defined)
after debt service and 15% of residual value at maturity or upon sale or
refinancing; and (iv) maintenance of a 4% capital reserve. The outstanding
balance at January 31, 1995 was $5,180,000.
Other. The $500,000 obligation to the former preferred shareholders of
Integra was issued in connection with the Settlement and Supplemental
Settlement described in Note 8 of the Company's 1994 Form 10-K. It is
payable in three equal annual installments in the amount of $166,667 on March
8, 1995, 1996 and 1997.
Associated Companies
Line of credit. On April 19, 1994, the Company obtained a line of credit
from Merrill Lynch Business Financial Services Inc. in the maximum commitment
amount of $6,000,000. The proceeds from the line of credit were used to repay
a former margin loan with Prudential Securities Incorporated. Significant
terms are (i) initial maturity date - April 25, 1995; (ii) interest rate -
prime plus 0.75%; and (iii) collateral - 1,439,365 shares of ShowBiz common
stock. Since July 31, 1994, the Company reduced the line of credit by
$1,000,000. Availability from the line of credit is limited to 50% of the
market value of the pledged shares of ShowBiz stock, or $6,000,000 (based
upon the closing price of $9.875 per share at January 31, 1995). The
outstanding balance at January 31, 1995 was $5,000,000.
Integra Unsecured Creditors' Trust. The Company issued a $4,000,000 note
payable to the Integra Unsecured Creditors' Trust in connection with the
consummation of the Integra Plan of Reorganization. Significant terms are
(i) maturity date - March 8, 1997; (ii) interest rate - 5% fixed; and (iii)
collateral - 344,828 shares of ShowBiz common stock.
5. 7% COLLATERALIZED SENIOR SUBORDINATED DEBENTURES AND 13.5% SUBORDINATED
DEBENTURES
7% collateralized senior subordinated debentures. On March 1, 1993, the
Company completed an exchange offer whereby 13.5% Debentures, as defined
below, in the aggregate principal amount of $27,481,000 were exchanged for a
new issue of 7% Collateralized Senior Subordinated Debentures due July 31,
2000 (the "7% Debentures"), and purchased $14,538,000 of certain of its 13.5%
Debentures at 80% of face value. Interest on the $27,481,000 principal
amount of the 7% Debentures accrued from March 2, 1993, and is payable
quarterly in arrears in cash. The 7% Debentures are secured by a pledge of
the capital stock of certain wholly- owned subsidiaries of the Company having
an aggregate net carrying value at March 1, 1993 (the issue date) of
$27,607,000. The pledged stocks consist of 100% of the outstanding shares of
common and preferred stock of Brookwood, 100% of the outstanding shares of
common stock of Hallwood Hotels, Inc. and 35% of the outstanding shares of
common stock of The Lido Beach Hotel, Inc. The common and preferred stock of
Brookwood are also subject to a prior pledge in favor of Chase.
In April 1994 the Company repurchased 7% Debentures having a principal
value of $2,174,000 for $1,526,000. The repurchase partially satisfied the
Company's obligation to retire 10% of the original issue
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(UNAUDITED)
($2,748,000) prior to March 1996 and an additional 15% of the original issue
($4,122,000) prior to March 1998.
13.5% subordinated debentures. On May 15, 1989, the Company distributed to
its stockholders $46,318,600 aggregate principal amount of a new issue of its
13.5% Subordinated Debentures Due July 31, 2009 (the "13.5% Debentures").
The Company had authorized the issuance of up to $100,000,000 aggregate
principal amount of 13.5% Debentures. The 13.5% Debentures are subordinate
to bank borrowings, guarantees of the Company and other "Senior Indebtedness"
(as defined in the indenture relating to the 13.5% Debentures). Ten dollars
principal amount of the 13.5% Debentures was distributed for each share of
common stock of the Company outstanding at the close of business on March 31,
1989. The 13.5% Debentures were issued in denominations of $100 and integral
multiples thereof. The Company distributed $228,770 in cash, in lieu of the
issuance of fractional denominations of such debentures.
Interest on the 13.5% Debentures is payable annually on August 15, and, at
the Company's option, up to two annual interest payments in any five-year
period may be paid by the issuance of additional 13.5% Debentures in lieu of
cash. Interest due on August 15, 1989 and 1990 was paid in cash. Interest
due on August 15, 1991 was paid in-kind by the issuance of $6,019,500
additional 13.5% Debentures and $139,200 of cash in lieu of fractional
debentures. Interest due on August 15, 1992 was paid in-kind by the
issuance of $6,792,900 additional 13.5% Debentures and $172,500 of cash in
lieu of fractional debentures. Interest due on August 15, 1993 and 1994 was
also paid in cash. The Company is prohibited from issuing additional 13.5%
Debentures as payment of interest in-kind until August 15, 1996.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
January 31, July 31,
Description 1995 1994
----------- ---------- ----------
7% Debentures (face value) . . . . . . . . . . . . $25,306 $25,306
Unrecognized gain from purchases and exchange,
net of $903 and $766 accumulated amortization,
respectively . . . . . . . . . . . . . . . . . . 3,181 3,454
Elimination of debentures owned by HEC . . . . . . (1,894) (1,894)
------- -------
Totals . . . . . . . . . . . . . . . . . . . . $26,593 $26,866
======= -------
13.5% Debentures (face value)
1989 Series . . . . . . . . . . . . . . . . . . $18,203 $18,203
1991 Series . . . . . . . . . . . . . . . . . . 2,310 2,310
1992 Series . . . . . . . . . . . . . . . . . . 2,389 2,389
------- -------
Totals . . . . . . . . . . . . . . . . . . . . $22,902 $22,902
======= =======
Page 14
15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1995
(UNAUDITED)
6. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No.
109. The related deferred tax asset arises principally from the
anticipated utilization of net operating loss carryforwards and tax
credits at the statutory tax rate and other tax planning strategies.
The following is a summary (in thousands) of the income tax
provision:
Six Months Ended Three Months Ended
January 31, January 31,
--------------------- -----------------------
1995 1994 1995 1994
--------- ----------- ---------- ----------
Federal
Deferred . . . . . . . . . . . . . . . $487 $1,083 $ 37 $ --
Current . . . . . . . . . . . . . . . 133 -- 54 --
State . . . . . . . . . . . . . . . 164 107 135 60
---- ------ ----- ---
Total . . . . . . . . . . . . . . . $784 $1,190 $ 226 $60
==== ====== ===== ===
The federal deferred tax charges are the result of fluctuations in
the valuation allowance arising from changes in the Company's tax planning
strategies. Reductions in the market price of ShowBiz common stock were
the principal changes considered for the six month periods in fiscal 1995
and 1994, resulting in charges of $487,000 and $1,083,000, respectively.
For the three-month period in fiscal 1995, the $37,000 net deferred tax
charge relates principally to a charge of approximately $741,000 relating
to the realized gain on sale of the Lido Beach Holiday Inn hotel,
substantially offset by a benefit of $(704,000) relating to increased
valuations of the remaining hotel assets. The federal current charge
relates to amounts payable under the alternative minimum tax. The amount
of the deferred tax asset (net of the valuation allowance of $17,000,000)
was $5,413,000 at January 31, 1995.
State tax expense is an estimate based upon taxable income allocated
to those states in which the Company does business at their respective tax
rates.
7. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS (IN
THOUSANDS)
The following transactions affected recognized assets or liabilities
but did not result in cash receipts or cash payments:
Six Months Ended
January 31,
----------------------
Description 1995 1994
--------------------- -------- -------
Supplemental schedule of noncash investing and
financing activities:
Mortgage loans assigned to plaintiff in connection
with litigation settlement . . . . . . . . . . . . . . . $592 $ --
Recording of proportionate share of stockholders'
equity transaction by ShowBiz . . . . . . . . . . . . . . 96 1,333
Supplemental disclosures of cash payments:
Description
---------------------
Interest paid (including capitalized interest) . . . . . . . $5,747 $4,922
Income taxes paid . . . . . . . . . . . . . . . . . . . . . 210 146
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
RESULTS OF OPERATIONS
The Company reported a net loss of $2,419,000 for the second fiscal 1995
quarter ended January 31, 1995, compared to a net loss of $447,000 in the
prior-year quarter. The six-month net loss of $3,681,000, compares to a net
loss of $1,788,000 of the prior-year period.
Following is an analysis of the results of operations by asset management,
operating subsidiaries and associated companies divisions and by the real
estate, energy, textile products, hotels, and restaurant business segments
within those divisions.
ASSET MANAGEMENT.
Real estate.
Revenue. Fee income of $722,000 for the fiscal 1995 second quarter
decreased by $79,000 from the $801,000 reported in the year- ago quarter. Fee
income of $1,580,000 for the six months decreased by $420,000 from the similar
period a year ago. The decreases were due to the higher level of leasing and
construction activities in the prior-year periods. Fee income is principally
derived from the Company's asset management and property management services
provided to its Hallwood Realty Partners, L.P. affiliate, a real estate master
limited partnership ("HRP").
Rental income from the United Kingdom office-retail property in the amount
of $181,000 in the current-year quarter increased 53% from $118,000 in the
prior-year quarter due to higher occupancy of the retail space, a $51,000
tenant receivable writeoff recorded in the fiscal 1994 quarter and a favorable
foreign currency exchange rate fluctuation. Rental income for the six-month
period increased to $352,000 from $271,000 for the same reasons.
Interest and discounts from mortgage loans for the fiscal 1995 second
quarter declined 29% to $67,000, from $94,000, as a result of early repayments
of loans in the Company's mortgage loan portfolio. The comparative six-month
amounts were $138,000 and $188,000 for the 1995 and 1994 periods. In
connection with the January 1995 settlement of the lawsuit styled Third
National Bank in Nashville, Trustee, v. The Hallwood Group Incorporated, the
Company directly assigned a portion of the mortgage loan portfolio
(approximately 34%) to the plaintiff as part of the negotiated settlement.
This assignment will result in reduced interest income in the future.
The loss from investments in HRP represents the Company's recognition of its
pro-rata share of the loss recorded by HRP. For the current quarter the
Company reported a $32,000 loss compared to a $79,000 loss in the quarter a
year ago. The comparative six-month amounts were losses of $40,000 and
$289,000 for the 1995 and 1994 periods, respectively. The reduced loss is
primarily due to the recording of a pro-rata share of losses with respect to
the Company's investment in HRP limited partner units of $159,000 in the year
ago six-month period and zero in the current year period. Due to the recording
of the Company's pro-rata share of losses recorded by HRP as prescribed by
equity accounting, the carrying value of the investment in HRP's limited
partner units has been reduced to zero; therefore, the Company no longer
records its pro-rata share of losses as the Company is not liable for any
additional amounts. The Company would have to recover such unrecognized
losses, however, before any equity income could be recognized in the future.
See Note 2.
Expenses. Administrative expenses declined 16% to $259,000 in the fiscal
1995 second quarter, compared to $308,000 in the year- ago quarter.
Administrative expenses for the six-month period decreased to $503,000 from
$598,000. The decline is primarily attributable to a reduction in leasing
commissions resulting from the aforementioned reduced level of leasing activity
and reduced professional fees.
Depreciation and amortization expense of $243,000 for the fiscal 1995 second
quarter and $486,000 for the six-month period compared to $243,000 and $574,000
in the corresponding fiscal 1994 periods. Depreciation expense relates to the
office-retail property. Amortization expense relates to the cost of former
property management contracts acquired by Hallwood Management Company and
amortization of Hallwood Realty Corporation's general partner interest in HRP
to the extent allocated to management rights. The decline is attributable to
the expiration of amortization of acquired property management contracts in
October 1993.
Page 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
Interest expense increased in the fiscal 1995 second quarter to $173,000
from $168,000 and for the six-month period increased to $355,000 from
$336,000, due to a $1,500,000 promissory note issued in August 1994 to
resolve the Equitec Rollup Litigation, offset by lower interest costs due to
the August 1994 extension of the office-retail property loan with FNBB.
The provision for loss of $11,000 in the current-year period is a result of
the August 1994 sale of a land parcel in Flint, Michigan.
Operating expenses were immaterial for the fiscal 1995 and 1994 periods.
Energy.
Revenue. The Company owns 63% of the common stock (on a fully diluted
basis) of Hallwood Energy Corporation ("HEC"). HEC accounts for its investment
in its Hallwood Energy Partners, L.P. ("HEP") affiliate using the proportionate
consolidation method of accounting. HEC's general partner interest in HEP
entitles it to a share of net revenues derived from HEP's properties ranging
from 2% to 25%, and HEC also holds approximately 7.3% of HEP's limited partner
units. Second quarter fiscal 1995 oil and gas revenues of $1,353,000 decreased
3%, compared to $1,402,000 in the year-ago quarter. For the six-months, the
comparison of oil and gas revenues was $2,816,000 in the current year and
$2,921,000 in the year-ago period. Oil revenue for the six months increased
$206,000 to $1,085,000, due to a decrease in the average price per barrel to
$16.19 from $16.90 offset by an increase in production to 67,000 barrels from
52,000 barrels. Gas revenue for the six months decreased $311,000 to
$1,731,000, as a result of a decrease in production to 1,010,000 mcf from
1,022,000 mcf combined with a decrease in the average gas price to $1.71 from
$1.98 per mcf. The increase in oil production is a result of property
acquisitions, partially offset by normal production declines. The decrease in
gas production is due to normal production declines, allowable production
limits and gas balancing situations during the fiscal 1995 period.
Other income (loss) decreased to $(60,000) for the quarter from $(138,000),
due to a decrease in HEC's share of HEP's gas marketing income, which resulted
from the elimination of HEP's gas marketing activities. For the six-months,
other income increased by $24,000 due to an increase in HEP's facilities income
arising from the connection of several wells in New Mexico.
Expenses. Depreciation, depletion and amortization expenses were $558,000
for the fiscal 1995 quarter and $1,058,000 for the six months. A year ago the
comparable expenses were $552,000 and $1,039,000, respectively. The increase
is primarily the result of higher capitalized costs in the fiscal 1995 period.
Operating expenses increased $34,000 to $311,000 for the three months and
decreased $1,000 to $694,000 for the six months compared to the fiscal 1994
periods, primarily due to property acquisitions and increased ad valorem taxes
and salt water disposal costs.
Administrative expenses increased $416,000 to $839,000 for the three months
and increased $357,000 to $1,025,000 for the six months compared to the fiscal
1994 periods, primarily due to the litigation settlement of an affiliate in the
amount of $308,000 recorded in the second fiscal 1995 quarter.
Interest expense increased by $13,000 to $85,000 during the fiscal 1995
second quarter and decreased by $15,000 to $171,000 for the six-month period as
a result of HEP's lower average debt balance, which was partially offset by
higher interest costs.
Minority interest, which represents the interest of other common and
preferred shareholders in the net income of HEC, decreased in the fiscal 1995
second quarter, due to HEC's repurchase of its own shares from minority
shareholders for treasury since the 1994 second quarter and reduced net income
from energy operations.
OPERATING SUBSIDIARIES.
Textile products.
Revenue. Sales increased $3,258,000 in the fiscal 1995 second quarter to
$18,182,000, compared to $14,924,000 in fiscal 1994. The comparative six month
sales increased to
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18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
$35,168,000 in fiscal 1995 from $32,908,000 in fiscal 1994. The increase in
sales for the fiscal 1995 periods was due to improved market conditions in
1995. Sales in the fiscal 1994 second quarter were depressed due to the
adverse impact of a strike at a principal supplier.
Expenses. Cost of sales increased by $2,775,000, or 21%, compared to the
22% increase in sales in the fiscal 1995 second quarter from the comparable
prior year quarter. The higher gross profit margin for the quarter (11.4% in
fiscal 1995 compared to 10.6% in fiscal 1994) was principally the result of
improved performance at the Kenyon finishing plant. The comparable gross
profit margins for the six-month periods were 11.8% in fiscal 1995 and 12.0% in
fiscal 1994. Administrative and selling expenses increased $79,000 in the
quarter to $1,883,000 and increased $153,000 for the six-month period to
$3,819,000 from the comparable 1994 periods, due primarily to the increased use
of consultants on special projects in 1995. The $55,000 increase in interest
expense for the second quarter and $45,000 for the six months was the result of
higher average borrowings and higher interest rates in 1995 than in the
prior-year periods.
Hotels
Revenue. Second quarter fiscal 1995 hotel revenues of $5,608,000 increased
by $1,695,000, from the fiscal 1994 amount of $3,913,000. The fiscal 1995
six-month hotel revenues of $11,301,000 increased by $3,501,000, compared to
$7,800,000 for the fiscal 1994 period. The increase is primarily due to the
inclusion of revenue from Integra's Residence Inn by Marriott hotel
investments, consisting of one fee-owned and two leasehold properties and
management fees from a Residence Inn managed for a third-party owner (the
"Integra Hotel Properties"). The Company acquired the Integra Hotel Properties
in connection with Integra's emergence from bankruptcy in March 1994. Revenues
from the acquired assets were $1,495,000 for the quarter. Considering only the
three hotels owned by the Company for the comparable periods in fiscal 1995 and
1994, revenues increased by $200,000. The current quarter increase reflects
the Company's election to aggressively pursue higher average daily rates,
resulting in higher revenue and lower operating costs as a percentage of
revenues. The higher rates were made possible by the Company's intensive
capital expenditure program begun in fiscal 1993.
During the second fiscal quarter the Company sold its fee interest in the
Lido Beach Holiday Inn hotel and recognized a gain of $2,164,000.
Expenses. Operating expenses of $4,804,000 for the fiscal 1995 second
quarter increased by $1,250,000, or 35%, from the fiscal 1994 expenses of
$3,554,000. The increase was primarily due to the inclusion of the Integra
Hotel Properties. On a comparable basis for the second fiscal quarter,
operating expenses increased $30,000 as a result of the higher revenues for the
quarter. Depreciation and amortization expense increased $203,000 during the
second quarter reflecting the capital expenditure program and the acquisition
of the Integra Hotel Properties. Depreciation and amortization expense for the
fiscal 1995 and 1994 six-month periods were $1,344,000 and $869,000,
respectively. Interest expense during the fiscal 1995 second quarter increased
by $149,000, due to interest of $132,000 on one of the Integra Hotels'
properties and an increase of $17,000 on the FNBB term loan, which was a result
of a higher average interest rate, partially offset by a declining principal
balance. Interest expense for the six-month increased by $286,000 to $621,000
due to interest of $261,000 on the Integra Hotels' property and an increase of
$25,000 on the FNBB term loan.
ASSOCIATED COMPANIES
Revenue. Associated companies' (loss) for the fiscal 1995 second quarter in
the amount of $(678,000) compares to income of $2,000 in fiscal 1994. The
comparable six-month amounts were a loss of $(477,000) in fiscal 1995 and
income of $580,000 in fiscal 1994. The decline is due to a substantial decline
in ShowBiz results, which was attributable to lower operating margins and
certain non-cash charges that negatively impacted results, including a
reduction in deferred tax credits, a charge for new store pre-opening expenses,
a reserve for asset impairment of two restaurants and a reserve for legal
settlements. The Company records its pro-rata share of ShowBiz results using
the equity accounting method.
Expenses. Interest expense of $161,000 for the fiscal 1995 second quarter
and $342,000 for the six months increased from the year-ago expense of $105,000
and $214,000, respectively, due to an increase in rate on the line of credit,
and the issuance of a 5% fixed interest rate $4,000,000 note to the Integra
Unsecured Creditors' Trust in March 1994.
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19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
OTHER
Revenue. Fee income in the current year quarter of $106,000 increased from
$31,000 in the fiscal 1994 quarter and increased to $212,000 from $62,000 for
the six-month period, due to the commencement of a new consulting contract with
a subsidiary of HEP. Interest on short-term investments of $46,000 for the
fiscal 1995 second quarter and $92,000 for the six months declined in
comparison with the prior year amounts of $93,000 and $187,000, respectively,
due to lower average invested cash balances. In February 1994 the Company
received $1,703,000 in cash as its share of a final liquidation distribution
regarding its former investment in Alliance Bancorporation. Due to previous
uncertainties involving the recoverability on this investment, the Company had
previously written off the asset; therefore, the entire amount was recognized
as a recovery in the fiscal 1994 second quarter.
Expenses. The Company's net interest expense in the amount of $1,146,000
for the fiscal 1995 second quarter and $2,216,000 for the six months increased
slightly from the prior year amounts of $1,095,000 and $2,184,000,
respectively. The increase is generally due to interest costs incurred from
settlement of a state tax audit during the fiscal 1995 second quarter,
partially offset by the repurchase and retirement of $2,174,000 principal
amount of 7% Debentures in April 1994.
Administrative expenses, at $2,233,000 for the fiscal 1995 second quarter
and $2,701,000 for the six months, were significantly increased from the
comparable fiscal 1994 amounts of $553,000 and $1,115,000, respectively. The
increase is primarily attributable to a $1,700,000 million charge for
litigation matters recorded in the fiscal 1995 second quarter.
Income taxes. The federal deferred tax charges are the result of
fluctuations in the valuation allowance arising from changes in the Company's
tax planning strategies. Reductions in the market price of ShowBiz common
stock were the principal changes considered for the six month periods in fiscal
1995 and 1994, resulting in charges of $487,000 and $1,083,000, respectively.
For the three- month period in fiscal 1995, the $37,000 net deferred tax charge
relates principally to a charge of approximately $741,000 relating to the
realized gain on sale of the Lido Beach Holiday Inn hotel, substantially offset
by a benefit of $(704,000) relating to increased valuations of the remaining
hotel assets. The federal current charge relates to amounts payable under the
alternative minimum tax.
State tax expense is an estimate based upon taxable income allocated to
those states in which the Company does business at their respective tax rates.
As of July 31, 1994 the Company had approximately $65,000,000 of tax net
operating loss carryforwards ("NOLs") and temporary differences to reduce
federal income tax liability. Based upon the Company's expectations and
available tax planning strategies, management has determined that taxable
income will more likely than not be sufficient to utilize approximately
$16,200,000 of the NOLs prior to their ultimate expiration in the year 2009.
Management believes that the Company has certain tax planning strategies
available, which include the potential sale of its ShowBiz shares, hotel
properties and certain other assets, that could be implemented, if necessary,
to supplement income from operations to fully realize the recorded tax benefits
before their expiration. Management has considered such strategies in reaching
its conclusion that it is more likely than not taxable income will be
sufficient to utilize a significant portion of the NOLs before expiration,
however, future levels of operating income and taxable gains are dependent upon
general economic conditions and other factors beyond the Company's control.
Accordingly, no assurance can be given that sufficient taxable income will be
generated for significant utilization of the NOLs. Although the use of such
carryforwards could, under certain circumstances, be limited, the Company is
presently unaware of the occurrence of any event which would result in the
imposition of such limitation.
Page 19
20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at January 31, 1995
totaled $9,073,000.
Although the Company's ShowBiz shares, having a market value of
approximately $17,619,000 at January 31, 1995 (based upon the closing price on
such date of $9.875 per share), are presently unregistered, and may be subject
to some limitations on sale, management believes there is a ready market to
sell such shares without adversely affecting market price. All of the
Company's 1,784,193 ShowBiz shares are pledged as collateral for the $5,000,000
Merrill Lynch Business Financial Services Inc. line of credit and the
$4,000,000 note payable to the Integra Unsecured Creditors' Trust.
The Company's real estate segment generates funds principally from its
property management activities, without significant additional capital costs,
and its mortgage loan portfolio. At January 31, 1995, the Company's remaining
real estate property was fully leveraged.
The Company's energy segment generates funds from operating and financing
activities. Cash flow is subject to fluctuating oil and gas production and
prices. In accordance with the proportionate consolidation method of
accounting, HEC reports its share of the long-term obligations of its HEP
affiliate totaling $3,917,000 at January 31, 1995. HEP's debt consists
primarily of $29,843,000 of borrowings under a line of credit and note purchase
agreement. HEP's borrowings are secured by a first lien on approximately 80%
in value of HEP's oil and gas properties.
Brookwood maintains a $13,500,000 revolving line of credit facility with The
Chase Manhattan Bank, N.A., which is collateralized by accounts receivable and
equipment. At January 31, 1995, Brookwood had $1,102,000 of unused borrowing
capacity on its line of credit.
The Company's hotel segment generates cash flow from operating five hotels
(one Holiday Inn in Florida, one Embassy Suites and one Residence Inn in
Oklahoma, and one Residence Inn each in Alabama and South Carolina). Additional
cash revenues are derived from a management contract for managing a Residence
Inn located in Arizona.
The Merrill Lynch Business Financial Services Inc. line of credit matures in
April 1995 and the FNBB term loan on the Company's office-retail property
matures in August 1995. Management believes that both loans will be extended
prior to maturity on comparable financial terms.
The Company hopes to be able to reinvest the proceeds of asset sales to
increase profits and cash flows, and also to retire debentures and/or equity
from time to time through open market purchases or negotiated transactions.
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21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item
1 Legal Proceedings
Reference is made to Note 3 to the Company's consolidated
financial statements for discussion of pending litigation matters.
2 Changes in Securities None.
3 Defaults upon Senior Securities None.
4 Submission of Matter to a Vote of Security Holders None.
At its Annual Meeting of Stockholders on January 19, 1995, the
stockholders of the Company voted on one issue:
(a) To elect two directors to hold office for three years and until
their successors are elected and qualified.
Votes Votes
Nominee Directors For Withheld
----------------- ----------- --------
Charles A. Crocco, Jr. 5,970,901 142,318
J. Thomas Talbot 5,967,176 146,043
As a result of the above, each of the two nominee directors were
re-elected for an additional three-year term.
The continuing directors are Messrs. Anthony J. Gumbiner, Robert
L. Lynch and Brian M. Troup.
5 Other Information None.
6 Exhibits and Reports on Form 8-K
(a) Exhibits:
(i) 11 Statement Regarding Computation of Per Share Earnings.
(ii) 27 Financial Data Schedule
(b) Reports on Form 8-K None.
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22
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: March 20, 1995 By: /s/ Melvin J. Melle
---------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 22
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EXHIBIT INDEX
EX-11 Statement Regarding Computation of Per Share Earnings
EX-27 Financial Data Schedule