1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
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 APRIL 30, 1995 COMMISSION FILE NUMBER: 1-8303
_____________________
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
_____________________
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 MAY 31, 1995,
INCLUDING 907,739 SHARES OWNED BY THE COMPANY'S HALLWOOD ENERGY CORPORATION
SUBSIDIARY.
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Page 1
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 April 30, 1995
and July 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Nine Months Ended April 30, 1995 and 1994 . . . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Three Months Ended April 30, 1995 and 1994 . . . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 1995 and 1994 . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 10-16
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . 17-21
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . . 22-24
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
April 30, July 31,
1995 1994
------------- ----------
(Unaudited) (Audited)
ASSET MANAGEMENT
REAL ESTATE
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,322 $ 8,119
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . 6,697 6,927
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 1,013 2,021
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 407 406
-------- --------
16,439 17,473
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 10,066 11,005
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 2,869 1,437
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,421 2,976
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . 1,596 1,868
-------- --------
16,952 17,286
-------- --------
TOTAL ASSET MANAGEMENT ASSETS . . . . . . . . . . . . . . . . . . 33,391 34,759
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,353 12,910
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,221 12,723
Property, plant and equipment, net . . . . . . . . . . . . . . . . . 8,613 8,301
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,048 982
-------- --------
44,235 34,916
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,456 22,784
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 2,060 3,671
-------- --------
13,516 26,455
-------- --------
TOTAL OPERATING SUBSIDIARIES ASSETS . . . . . . . . . . . . . . . 57,751 61,371
ASSOCIATED COMPANIES
Investment in ShowBiz Pizza Time, Inc. . . . . . . . . . . . . . . . 16,604 16,444
-------- --------
TOTAL ASSOCIATED COMPANIES ASSETS . . . . . . . . . . . . . . . . 16,604 16,444
OTHER
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 7,785 5,728
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5,413 5,900
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 1,641
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1,482
-------- --------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 13,599 14,751
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,345 $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
April 30, July 31,
1995 1994
------------ --------
(Unaudited) (Audited)
ASSET MANAGEMENT
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,245 $ 7,399
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 279 492
-------- --------
6,524 7,891
ENERGY
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,243 7,153
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 5,371 4,858
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,422 2,470
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 129 148
-------- --------
14,165 14,629
-------- --------
TOTAL ASSET MANAGEMENT LIABILITIES . . . . . . . . . . . . . . . . . 20,689 22,520
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,005 8,451
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 11,559 6,079
-------- --------
24,564 14,530
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,491 12,204
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 1,746 4,460
-------- --------
7,237 16,664
-------- --------
TOTAL OPERATING SUBSIDIARIES LIABILITIES . . . . . . . . . . . . . 31,801 31,194
ASSOCIATED COMPANIES
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 10,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 94 26
-------- --------
TOTAL ASSOCIATED COMPANIES LIABILITIES . . . . . . . . . . . . . . 9,094 10,026
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . 26,412 26,866
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 22,902 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 5,713 5,840
-------- --------
TOTAL OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . 55,027 55,608
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 116,611 119,348
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 . . . . . . . . . . . . . . . . . . . . . 56,653 56,442
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (46,648) (42,894)
Equity adjustment from foreign currency translation . . . . . . . . . 386 86
Treasury stock, 907,442 shares at both dates; at cost . . . . . . . . (6,296) (6,296)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . 4,734 7,977
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . $121,345 $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)
Nine Months Ended
April 30,
-----------------------
1995 1994
---------- ----------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,721 $ 2,835
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532 442
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 176 272
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . . (85) (422)
------- -------
3,344 3,127
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 792 832
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 729 817
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 499
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 21
Provision for (recovery of) losses . . . . . . . . . . . . . . . . . . . 5 (6)
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,500
------- -------
2,030 3,663
------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . . 1,314 (536)
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 4,114 4,548
Other income (including intercompany
amounts of $180 and $144, respectively) . . . . . . . . . . . . . . . 163 128
------- -------
4,277 4,676
Depreciation, depletion, amortization and impairment . . . . . . . . . . 1,939 1,538
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,277 952
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,033 995
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 284
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50) 295
------- -------
4,441 4,064
------- -------
Income (loss) from energy operations . . . . . . . . . . . . . . . . . (164) 612
------- -------
INCOME FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . . . . 1,150 76
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,115 52,338
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,503 45,823
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 4,246 3,987
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,606 1,575
Interest (including intercompany amounts of $16 and $60, respectively) . 561 415
------- -------
56,916 51,800
------- -------
Income from textile products operations . . . . . . . . . . . . . . . 199 538
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)
Nine Months Ended
April 30,
---------------------
1995 1994
--------- ---------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,158 $14,721
Gain on sale of hotel . . . . . . . . . . . . . . . . . . . . . . . . . . 2,164 --
------- -------
19,322 14,721
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,429 12,076
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 1,884 1,441
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 756 541
------- -------
17,069 14,058
------- -------
Income from hotel operations . . . . . . . . . . . . . . . . . . . . . 2,253 663
------- -------
INCOME FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . . . . . 2,452 1,201
ASSOCIATED COMPANIES
Income (loss) from investment in ShowBiz . . . . . . . . . . . . . . . . (51) 1,124
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506 324
------- -------
INCOME (LOSS) FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . (557) 800
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 94
Interest on short-term investments and other income . . . . . . . . . . . 194 267
Recovery from investment in Alliance Bancorporation . . . . . . . . . . . -- 1,703
------- -------
513 2,064
Interest (net of intercompany amounts of $196 and $204, respectively) . . 3,261 3,253
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 3,211 1,559
------- -------
6,472 4,812
------- -------
OTHER LOSS, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,959) (2,748)
------- -------
Loss before income taxes and extraordinary gain . . . . . . . . . . . . . (2,914) (671)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840 1,224
------- -------
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . . (3,754) (1,895)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . . -- 648
------- -------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,754) $(1,247)
======= =======
PER COMMON SHARE (PRIMARY)
Net loss per common share . . . . . . . . . . . . . . . . . . . . . . $ (0.68) $( 0.23)
======= =======
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
April 30,
-----------------------
1995 1994
---------- ----------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,141 $ 835
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 171
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . . (45) (133)
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 38 84
------- -------
1,314 957
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 289 234
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 243 243
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 163
(Recovery of) provision for losses . . . . . . . . . . . . . . . . . . . (6) (6)
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 14
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,500
------- -------
665 2,148
------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . . 649 (1,191)
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 1,298 1,627
Other income (including intercompany
amounts of $66 and $57, respectively) . . . . . . . . . . . . . . . . 66 55
------- -------
1,364 1,682
Depreciation, depletion, amortization and impairment . . . . . . . . . . 881 499
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 344
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 252 240
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 98
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) 169
------- -------
1,506 1,350
------- -------
Income (loss) from energy operations . . . . . . . . . . . . . . . . . (142) 332
------- -------
INCOME (LOSS) FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . 507 (859)
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,947 19,430
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,501 16,876
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,460 1,331
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573 565
Interest (including intercompany amounts of $-0- and $20 respectively) . 223 122
------- -------
21,757 18,894
------- -------
Income from textile products operations . . . . . . . . . . . . . . . 190 536
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
April 30,
-----------------------
1995 1994
---------- ----------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,857 $ 6,921
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,812 4,926
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 540 572
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 206
------- -------
5,487 5,704
------- -------
Income from hotel operations . . . . . . . . . . . . . . . . . . . . . 370 1,217
------- -------
INCOME FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . . . . . 560 1,753
ASSOCIATED COMPANIES
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . . . 426 544
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 110
------- -------
INCOME FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . . . . . 262 434
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 32
Interest on short-term investments and other income . . . . . . . . . . . 102 80
------- -------
209 112
Interest (net of intercompany amounts of $66 and $77, respectively) . . . 1,045 1,069
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 510 444
------- -------
1,555 1,513
------- -------
OTHER LOSS, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,346) (1,401)
------- -------
Loss before income taxes and extraordinary gain . . . . . . . . . . . . . (17) (73)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 34
------- -------
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . . (73) (107)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . . -- 648
------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (73) $ 541
======= =======
PER COMMON SHARE (PRIMARY)
Net income (loss) per common share . . . . . . . . . . . . . . . . . . $ (0.01) $ 0.10
======= =======
See accompanying notes to consolidated financial statements.
Page 8
9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
April 30,
----------------------
1995 1994
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,754) $(1,247)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation, depletion, amortization and impairment . . . . . . . . . . . . . 5,353 4,613
Gain from sale of real estate and hotels . . . . . . . . . . . . . . . . . . . (2,153) --
Distributions from energy affiliate . . . . . . . . . . . . . . . . . . . . . . 2,126 1,948
Undistributed income from energy affiliate . . . . . . . . . . . . . . . . . . (1,948) (2,721)
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . . . . . (771) (775)
Mortgage loans assigned to plaintiff in litigation settlement . . . . . . . . . 592 --
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 487 1,083
Proceeds from collections of mortgage loans . . . . . . . . . . . . . . . . . . 443 500
Amortization of deferred gain from debenture exchange . . . . . . . . . . . . . (412) (439)
Equity in net income of associated company/affiliate . . . . . . . . . . . . . 136 (672)
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . . . . . . (27) (38)
(Recovery of) provision for losses . . . . . . . . . . . . . . . . . . . . . . -- (1,709)
Issuance of note payable for litigation settlement . . . . . . . . . . . . . . -- 1,500
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . -- (648)
Loss on sale of investment in associated company . . . . . . . . . . . . . . . -- (30)
Net change in textile products assets and liabilities . . . . . . . . . . . . . (3,563) 1,596
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . (1,618) (1,035)
Net change in energy assets and liabilities . . . . . . . . . . . . . . . . . . (2,255) (436)
------- -------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . (7,364) 1,490
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate and hotel assets . . . . . . . . . . . . . . . 14,067 --
Investments in textile products property and equipment . . . . . . . . . . . . . (1,080) (474)
Capital expenditures and acquisition of real estate and hotels . . . . . . . . . (965) (1,098)
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . . . . . 610 --
Investments in associated company/affiliate . . . . . . . . . . . . . . . . . . . (356) (9)
Proceeds from sale of insurance contracts . . . . . . . . . . . . . . . . . . . . 229 481
Investments in energy property and equipment . . . . . . . . . . . . . . . . . . (34) (123)
Net change in restricted cash for investing activities . . . . . . . . . . . . . 24 381
Disbursements related to Integra - asset held for sale . . . . . . . . . . . . . -- (7,422)
Less: Integra cash balance at emergence from bankruptcy . . . . . . . . . . . . -- 2,077
Proceeds from liquidation of Alliance Bancorporation . . . . . . . . . . . . . . -- 1,703
Proceeds from sale of investment in associated company . . . . . . . . . . . . . -- 1,250
------- -------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . 12,495 (3,234)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . . . . . 4,695 --
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . . . . . (9,188) (3,519)
Net change in restricted cash for financing activities . . . . . . . . . . . . . 1,432 143
Repurchase of 7% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (1,526)
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 . . . . . . . . . . . . . . . . . . . (3,061) (6,358)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . . . . . (13) 4
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . 2,057 (8,098)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . 5,728 11,837
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . $ 7,785 $ 3,739
======= =======
See accompanying notes to consolidated financial statements.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 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)
As of April 30, 1995 Income (loss) from investments
-------------------------- Amount at which carried at, for the nine months ended
Cost or --------------------------- April 30,
Business segments and Number of ascribed April 30, July 31, ------------------------------
description of investment units or shares value 1995 1994 1995 1994
- - ----------------------------------- --------------- ---------- -------- -------- ---------- ----------
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (A)
-- General partner interest -- $8,650 $ 6,361 $ 6,927 $ (64) $ (263)
-- Limited partner units . . . . . 119,269 1,262 336 -- (21) (159)
------ ------- ------- ----- -------
Totals . . . . . . . . . . . . . $9,912 $ 6,697 $ 6,927 $ (85) $ (422)
====== ======= ======= ===== =======
ASSOCIATED COMPANIES
SHOWBIZ PIZZA TIME, INC. (B)
-- Common stock . . . . . . . . . 1,784,193 $5,438 $16,604 $16,444 $ (51) $ 1,124
====== ======= ======= ===== ========
(A) As of April 30, 1995, Hallwood Realty Corporation ("HRC"), a wholly
owned subsidiary of the Company, owned a 1% general partner interest,
and the Company owned a 7% 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
($168,000 per quarter), and for the nine months ended April 30, 1995
and six months ended April 30, 1994, such amortization was $504,000,
and $336,000, respectively.
Due to recording the Company's pro rata share of losses recorded by HRP
as prescribed by equity accounting, the carrying value of the Company's
post one-for-five reverse split investment of 89,269 limited partner
units of HRP acquired prior to the March 3, 1995 had been reduced to
zero; therefore, the Company no longer records its pro rata share of
HRP's losses with respect to such units, as the Company is not liable
for any additional amounts. Unrecognized losses which have occurred
since the carrying value of the 89,269 units was reduced to zero must
be recovered before the Company would be able to recognize a pro rata
share of income in the future. As further discussed in Note 4, the
Company has pledged these 89,269 units to collateralize a $500,000 note
payable.
On March 3, 1995, HRP completed a one-for-five reverse split of its
limited partner units and, as previously announced, the Company
acquired 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
and the acquisition of the fractional units by the Company. The
Company commenced recording its pro rata share of losses recorded by
HRP relating to the additional 30,000 limited partner units which
amounted to $21,000 for the period ended April 30, 1995.
In June 1995, HRP announced a commission-free program for its limited
partner unitholders to sell their less than round lot holdings of 99 or
fewer units as of the record date of May 31, 1995. HRP intends to
resell any units it acquires to the Company or other institutional
investors, including
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1995
(UNAUDITED)
affiliates of the Company, at the price that HRP pays for such units.
The program will remain open until July 10, 1995 unless extended.
(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 $211,000 for the nine
months ended April 30, 1995.
As of April 30, 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 April 30, 1995 were:
AMOUNT PER SHARE
------------------
MARKET CARRYING
PRICE VALUE
------- -------
HRP limited partner units . . . . . . . . . . . . . . . . . . $10.12 $2.82
ShowBiz common shares . . . . . . . . . . . . . . . . . . . . 8.87 9.31
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. For the first five years,
dividends will be cumulative and the payment of cash dividends on any common
stock will be prohibited before the full payment of any accrued dividends.
Thereafter, dividends will accrue and be payable only if and when declared
by the Board of Directors. The Series B Preferred Stock 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.
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
APRIL 30, 1995
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates (in thousands):
April 30, July 31,
1995 1994
-------- --------
Real Estate
Term loan, libor plus 2.5%, due August 1995 . . . . . . . . . $ 4,808 $ 5,399
Promissory note, 7.50%, due August 1996 . . . . . . . . . . . 937 1,500
Promissory note, 8%, due March 1998 . . . . . . . . . . . . . 500 500
------- -------
6,245 7,399
Energy
No direct indebtedness . . . . . . . . . . . . . . . . . . . . -- --
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . . . 12,670 7,975
Equipment financing, 10%, due December 1996 . . . . . . . . . 335 476
------- -------
13,005 8,451
Hotels
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . . . 5,158 5,200
Non-interest bearing obligation, due March 1997 . . . . . . . 333 500
Term loan, base + 2%, repaid January 1995 . . . . . . . . . . -- 6,504
------- -------
5,491 12,204
Associated Companies
Line of credit, prime + .75%, due April 1996 . . . . . . . . . 5,000 6,000
Promissory note, 5%, due March 1997 . . . . . . . . . . . . . 4,000 4,000
------- -------
9,000 10,000
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33,741 $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 April 30, 1995 was $937,000.
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 89,269 HRP limited partner
units.
Energy
The Company's 70%-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
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1995
(UNAUDITED)
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 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
April 30, 1995 was $12,670,000.
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 April
30, 1995 was $335,000.
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 in the amount of $5,200,000. The loan is
secured by the Tulsa, Oklahoma Residence Inn 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
April 30, 1995 was $5,158,000.
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. The outstanding balance at April 30, 1995 was
$333,000.
Associated Companies
Line of credit. On April 19, 1994, the Company obtained a line of credit
from Merrill Lynch Business Financial Services Inc. ("MLBFS") 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.
Other significant terms were (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 is limited to 50% of the market value of
the pledged shares of ShowBiz stock, or the maximum of $6,000,000 (based upon
the closing price of $8.875 per share at April 30, 1995). In connection with
an extension of the line of credit to April 25, 1996 the maximum commitment
amount was reduced to $5,000,000. All other terms remain unchanged. The
outstanding balance at April 30, 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 its 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 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
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1995
(UNAUDITED)
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. In April 1995, the Company repurchased
7% Debentures from its HEC subsidiary having a principal value of $1,894,000
for $1,385,000 and in May 1995 the Company repurchased 7% Debentures having a
principal value of $604,000 for $460,000. These repurchases satisfied the
Company's obligation to retire 10% of the original issue ($2,748,000) prior
to March 1996 and partially satisfied the Company's obligation to retire 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.
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):
April 30, July 31,
Description 1995 1994
----------- ---------- ----------
7% Debentures (face value) . . . . . . . . . . . . . . . $23,412 $25,306
Unrecognized gain from purchases and exchange,
net of $1,220 and $766 accumulated amortization,
respectively . . . . . . . . . . . . . . . . . . . . . 3,000 3,454
Elimination of debentures owned by HEC . . . . . . . . . -- (1,894)
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $26,412 $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
APRIL 30, 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:
Nine Months Ended Three Months Ended
April 30, April 30,
---------------------- ----------------------
1995 1994 1995 1994
-------- -------- -------- --------
Federal
Deferred . . . . . . . . . . . . . $487 $1,083 $ -- $ --
Current . . . . . . . . . . . . . . 133 -- -- --
State . . . . . . . . . . . . . . . . 220 141 56 34
---- ------ ----- -----
Total . . . . . . . . . . . . . $840 $1,224 $ 56 $ 34
==== ====== ===== =====
The federal deferred tax charges are the result of fluctuations in
the valuation allowance arising from changes in the Company's tax planning
strategies. Deferred tax charges relating to reductions in the market
price of ShowBiz common stock and the realized gain on sale of The Lido
Beach Holiday Inn hotel, offset by a benefit relating to increased
valuations of the remaining hotel assets were the principal changes
considered for the nine month periods in fiscal 1995 and 1994, resulting
in charges of $487,000 and $1,083,000, respectively. No federal deferred
tax charges were recorded for the three month periods in fiscal 1995 and
1994. The federal current charge relates to amounts payable by HEC for
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 April 30, 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.
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1995
(UNAUDITED)
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:
Nine Months Ended
April 30,
--------------------
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 . . . . . . . . . . . . . . . . 211 1,667
Issuance of promissory note payable in connection
with Integra bankruptcy . . . . . . . . . . . . . . . . . . . -- 4,000
Assets (liabilities) acquired in connection with the
emergence of Integra from bankruptcy . . . . . . . . . . . .
Hotel properties . . . . . . . . . . . . . . . . . . . . . -- 7,048
Receivables and other assets . . . . . . . . . . . . . . . -- 2,296
Loans payable . . . . . . . . . . . . . . . . . . . . . . . -- (6,135)
Accounts payable and accrued expenses . . . . . . . . . . . -- (3,586)
Less: investment in net assets received . . . . . . . . . . -- (1,700)
Issuance of note payable in connection with
litigation settlement . . . . . . . . . . . . . . . . . . . . -- 1,500
Description
---------------------
Supplemental disclosures of cash payments:
Interest paid (including capitalized interest) . . . . . . . . . $5,458 $ 6,192
Income taxes paid. . . . . . . . . . . . . . . . . . . . . . . . 348 82
Page 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company reported a net loss of $73,000 for the third fiscal 1995 quarter
ended April 30, 1995, compared to net income of $541,000 in the prior-year
quarter. The nine-month net loss of $3,754,000, compares to a net loss of
$1,247,000 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 $1,141,000 for the fiscal 1995 third quarter
increased by $306,000 from the $835,000 reported in the year-ago quarter. Fee
income of $2,721,000 for the nine months decreased by $114,000 from the similar
period a year ago. The changes were due to varying levels of leasing and
construction activities in the prior-year periods. Fee income is principally
derived from the Company's asset management, property management, leasing and
construction 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 $180,000 in the current-year quarter increased from $171,000 in the
prior-year quarter due to slightly higher occupancy of the retail space.
Rental income for the nine-month period increased to $532,000 from $442,000 due
to higher occupancy levels, a $51,000 tenant receivable writeoff recorded in
the fiscal 1994 quarter and a favorable foreign currency exchange rate
fluctuation.
Interest and discounts from mortgage loans for the fiscal 1995 third quarter
declined to $38,000, from the 1994 amount of $84,000. The comparative
nine-month amounts were $176,000 and $272,000 for the 1995 and 1994 periods.
The declines were primarily a result of the January 1995 settlement of the
lawsuit styled Third National Bank in Nashville, Trustee, v. The Hallwood Group
Incorporated, whereby the Company directly assigned a portion of the mortgage
loan portfolio (approximately 34%) to the plaintiff as part of the negotiated
settlement and the March 1995 cash sale of an additional portion of the
mortgage loan portfolio (approximately 11%).
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-year quarter the
Company reported a $45,000 loss compared to a $133,000 loss in the quarter a
year ago. The comparative nine-month amounts were losses of $85,000 and
$422,000 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 nine-month period and $21,000 in the current year period. Due to recording
the Company's pro rata share of losses recorded by HRP as prescribed by equity
accounting, the carrying value of the Company's investment in HRP's limited
partner units acquired prior to the March 3, 1995 acquisition discussed above
(89,269 units) had been reduced to zero; therefore, the Company no longer
records its pro rata share of HRP's losses with respect to such units, as the
Company is not liable for any additional amounts. In March 1995 the Company
commenced recording its pro rata share of losses relating to the newly-acquired
30,000 HRP limited partner units. Unrecognized losses which have occurred
since the carrying value of the 89,269 units was reduced to zero must be
recovered before the Company would be able to recognize income on such units in
the future.
Expenses. Administrative expenses increased 24% to $289,000 in the fiscal
1995 third quarter, compared to $234,000 in the year-ago quarter.
Administrative expenses for the nine-month period decreased to $792,000 from
$832,000. The changes are primarily attributable to changes in leasing
commissions resulting from the varying levels of leasing activity.
Depreciation and amortization expense of $243,000 for the fiscal 1995 third
quarter and $729,000 for the nine-month period is compared to $243,000 and
$817,000 in the corresponding fiscal 1994 periods. Depreciation expense
relates to the office-retail property. Amortization expense relates to the
cost of former
Page 17
18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
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.
Interest expense decreased in the fiscal 1995 third quarter to $138,000 from
$163,000 and for the nine-month period decreased to $493,000 from $499,000, due
to lower interest costs from the August 1994 extension of the office-retail
property loan with FNBB, offset by the interest on the $1,500,000 promissory
note issued in August 1994 as the Company's contribution to settle the Equitec
Rollup Litigation.
The provision for (recovery of) losses and operating expenses were
immaterial for the fiscal 1995 and 1994 periods.
In April 1994, the Company participated in the agreement to settle the
Equitec Rollup Litigation and recorded the expense relating to the issuance of
a $1,500,000 promissory note.
Energy.
Revenue. The Company owns 70% 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. Third quarter fiscal 1995 oil and gas revenues of $1,298,000 decreased
20%, compared to $1,627,000 in the year- ago quarter. For the nine-months, the
comparison of oil and gas revenues was $4,114,000 in the current year and
$4,548,000 in the year-ago period. Oil revenue for the nine months increased
$270,000 to $1,603,000, due to an increase in production to 97,000 barrels from
83,000 barrels, combined with an increase in the average price per barrel to
$16.53 from $16.06. Gas revenue for the nine months decreased $704,000 to
$2,511,000, as a result of a decrease in production to 1,458,000 mcf from
1,470,000 mcf combined with a decrease in the average gas price to $1.72 from
$2.19 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.
The increase in other income to $66,000 for the quarter from $55,000, is
comprised of numerous items, none of which are individually significant. For
the nine-months, other income increased by $35,000 to $163,000 due to an
increase in HEP's facilities income arising from the connection of several
wells in New Mexico.
Expenses. Depreciation, depletion, amortization and impairment expenses
were $881,000 for the fiscal 1995 third quarter and $1,939,000 for the nine
months. A year ago the comparable expenses were $499,000 and $1,538,000,
respectively. The increase is primarily the result of recording in March 1995
a $464,000 impairment cost which represents HEC's pro rata share of the
write-off of HEP's Indonesian operations. Operating expenses decreased $5,000
to $339,000 for the three months and increased $38,000 to $1,033,000 for the
nine 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 $12,000 to $252,000 for the three months
primarily due to HEC's pro rata share of bank fees paid by HEP, and increased
$325,000 to $1,277,000 for the nine months compared to the fiscal 1994 period,
primarily due to the litigation settlement of an affiliate in the amount of
$308,000 recorded in the second fiscal 1995 quarter.
Interest expense decreased by $27,000 to $71,000 during the fiscal 1995
third quarter and decreased by $42,000 to $242,000 for the nine-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 (loss) of HEC, decreased in the fiscal
1995 third quarter, due to HEC's repurchase of its own shares from minority
shareholders for treasury since the 1994 third quarter and the net losses from
energy operations.
Page 18
19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OPERATING SUBSIDIARIES.
Textile products.
Revenue. Sales increased $2,517,000 in the fiscal 1995 third quarter to
$21,947,000, compared to $19,430,000 in fiscal 1994. The comparative nine
month sales increased to $57,115,000 in fiscal 1995 from $52,338,000 in fiscal
1994. The increases in sales for the fiscal 1995 periods were due to improved
market conditions in 1995 experienced by the distribution operations. Sales in
the fiscal 1994 nine month period were depressed due to the adverse impact of
a strike at a principal supplier.
Expenses. Cost of sales increased by $2,625,000, or 16%, compared to the
13% increase in sales for the fiscal 1995 third quarter from the comparable
prior year quarter. The lower gross profit margin for the quarter (11.1% in
fiscal 1995 compared to 13.1% in fiscal 1994) was principally the result of
manufacturing inefficiencies at the Kenyon finishing plant. The comparable
gross profit margins for the nine-month periods were 11.6% in fiscal 1995 and
12.4% in fiscal 1994. Administrative and selling expenses increased $137,000
in the quarter to $1,896,000 and increased $290,000 for the nine-month period
to $5,852,000 from the comparable 1994 periods, due primarily to the
aforementioned increased sales from the distribution operations and the
increased use of consultants on special projects in 1995. The $101,000
increase in interest expense for the third quarter and $146,000 increase for
the nine months were the result of higher average borrowings and higher
interest rates in 1995 than in the prior-year periods.
Hotels
Revenue. Third quarter fiscal 1995 hotel revenues of $5,857,000 decreased by
$1,064,000, from the fiscal 1994 amount of $6,921,000. The fiscal 1995
nine-month hotel revenues of $17,158,000 increased by $2,437,000, compared to
$14,721,000 for the fiscal 1994 period. The decrease for the third quarter is
primarily attributable to the January 1995 sale of the Lido Beach Holiday Inn
hotel, offset by the inclusion of revenue from Integra's Residence Inn by
Marriott hotel investments, discussed below. The increase for the nine-month
period 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 two Residence Inn managed
properties (the "Integra Hotel Properties"), offset by the decline from the
Lido Beach hotel sale. The Company acquired the Integra Hotel Properties in
connection with Integra's emergence from bankruptcy in March 1994. Revenues
from the acquired assets were $1,748,000 for the quarter and $4,985,000 for the
nine months. Considering only the two leased hotels operated by the Company
for the comparable nine- month periods in fiscal 1995 and 1994, revenues
increased by $256,000. This 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 of 1995 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 $4,812,000 for the fiscal 1995 third
quarter decreased by $114,000 from the fiscal 1994 expenses of $4,926,000. The
decrease was primarily due to the sale of the Lido Beach Holiday Inn hotel,
offset by the inclusion of the Integra Hotel Properties. On a comparable basis
for the third fiscal quarter, operating expenses increased $145,000 as a result
of the higher revenues for the quarter. Depreciation and amortization expense
decreased $32,000 during the third quarter reflecting the capital expenditure
program, the acquisition of the Integra Hotel Properties and the sale of the
Lido Beach Holiday Inn hotel. Depreciation and amortization expense for the
fiscal 1995 and 1994 nine-month periods were $1,884,000 and $1,441,000,
respectively. Interest expense during the fiscal 1995 third quarter decreased
by $71,000 compared to the year-ago quarter, due to a decrease of $163,000
resulting from the January 1995 payoff of the Lido Beach FNBB term loan,
partially offset by an increase of interest of $92,000 on one of the Integra
Hotels' properties. Interest expense for the nine months increased by $215,000
to $756,000 due to an increase in interest of $353,000 on the Integra Hotels'
property offset by a decrease of $138,000 on the Lido Beach FNBB term loan.
Page 19
20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
ASSOCIATED COMPANIES
Revenue. Associated companies' income for the fiscal 1995 third quarter in
the amount of $262,000 compares to income of $434,000 in fiscal 1994. The
comparable nine-month amounts were a loss of $(557,000) in fiscal 1995 and
income of $800,000 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 $164,000 for the fiscal 1995 third quarter
and $506,000 for the nine months increased from the year-ago amounts of
$110,000 and $324,000, respectively, due to an increase in rate on the line of
credit, offset by a decline in the average outstanding balance and the issuance
of a 5% fixed interest rate $4,000,000 note to the Integra Unsecured Creditors'
Trust in March 1994.
OTHER
Revenue. Fee income in the current year quarter of $107,000 increased from
$32,000 in the fiscal 1994 quarter and increased to $319,000 from $94,000 for
the nine-month period, due to the commencement of a new $300,000 annual
consulting contract with a subsidiary of HEP. Interest on short-term
investments of $102,000 for the fiscal 1995 third quarter and $194,000 for the
nine months compare to the prior year amounts of $80,000 and $267,000,
respectively. The level of interest income varies dependent on the average
level of invested cash balances and the average interest rate. 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 $1,045,000
for the fiscal 1995 third quarter and $3,261,000 for the nine months changed
slightly from the prior year amounts of $1,069,000 and $3,253,000,
respectively. The nine-month period 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 7%
Debentures of $2,174,000 principal amount in April 1994 and $1,894,000 in March
1995.
Administrative expenses, at $510,000 for the fiscal 1995 third quarter and
$3,211,000 for the nine months, were significantly increased from the
comparable fiscal 1994 amounts of $444,000 and $1,559,000, respectively. The
$66,000 increase for the quarter is primarily attributable to increased
professional fees and litigation related costs, while the nine-month period
increase of $1,652,000 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. Deferred tax charges relating to reductions in the
market price of ShowBiz common stock and the realized gain on sale of The Lido
Beach Holiday Inn hotel, offset by a benefit relating to increased valuations
of the remaining hotel assets were the principal changes considered for the
nine month periods in fiscal 1995 and 1994, resulting in charges of $487,000
and $1,083,000, respectively. No federal deferred tax charges were recorded
for the three-month periods in fiscal 1995 and 1994. The federal current
charge relates to amounts payable by HEC for 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.
Page 20
21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at April 30, 1995
totaled $7,785,000.
Although the Company's ShowBiz shares, having a market value of
approximately $15,835,000 at April 30, 1995 (based upon the closing price on
such date of $8.875 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 April 30, 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 $5,371,000 at April 30, 1995. HEP's debt consists primarily
of $36,843,000 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. During May 1995, HEC obtained a
$1,500,000 line of credit from a bank and subsequently borrowed $950,000. The
line of credit is secured by the publicly traded limited partner units it holds
in HEP.
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 April 30, 1995, Brookwood had $1,174,000 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).
The Merrill Lynch Business Financial Services Inc. line of credit was
extended until April 1996 and the term loan on the Company's office-retail
property matures in August 1995. Management believes that the term loan 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.
Page 21
22
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.
5 Other Information None.
6 Exhibits and Reports on Form 8-K
(a) Exhibits:
(i) 11 Statement Regarding Computation of Per Share Earnings. Page 24
(b) Reports on Form 8-K None.
Page 22
23
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: June 14, 1995 By: /s/ Melvin J. Melle
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 23
24
EXHIBIT INDEX
Exhibit 11 - Statement Regarding Computation of Per Share Earnings
Exhibit 27 - Financial Data Schedule