1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
MARK ONE
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD from August 1, 1995 TO December 31, 1995
For the Period Ended December 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
--- ---
1,594,344 shares of Common Stock, $.10 par value per share,
were outstanding at January 31, 1996, including 267,709 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 December 31, 1995
and July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Five Months Ended December 31, 1995 and 1994 . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Two Months Ended December 31, 1995 and 1994 . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the Five Months
Ended December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 10-16
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 17-22
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 23-53
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
DECEMBER 31, JULY 31,
1995 1995
-------------- ----------
(UNAUDITED) (AUDITED)
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,406 $ 10,517
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 455 353
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 59 86
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7,931
--------- ---------
9,920 18,887
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 9,839 9,856
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,236 1,859
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,407 1,415
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,122 1,298
--------- ---------
14,604 14,428
--------- ---------
Total asset management assets . . . . . . . . . . . . . . . . . . . 24,524 33,315
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,735 15,456
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,938 12,126
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,709 8,782
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092 976
--------- ---------
34,474 37,340
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,498 11,055
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 2,195 2,198
--------- ---------
12,693 13,253
--------- ---------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 47,167 50,593
ASSOCIATED COMPANY
Investment in ShowBiz. . . . . . . . . . . . . . . . . . . . . . . . . 16,490 16,511
OTHER
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5,929 5,429
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 3,339 5,824
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688 570
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 133
--------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 10,052 11,956
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,233 $ 112,375
========= =========
See accompanying notes to consolidated financial statements.
Page 3
4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, JULY 31,
1995 1995
-------------- ----------
ASSET MANAGEMENT (UNAUDITED) (AUDITED)
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,037 $ 5,997
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 240 334
--------- ---------
1,277 6,331
ENERGY
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 5,366 5,056
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3,293 5,336
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,857 2,357
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125 950
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 106 102
--------- ---------
12,747 13,801
--------- ---------
Total asset management liabilities . . . . . . . . . . . . . . . . 14,024 20,132
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,300 11,315
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 6,586 6,534
--------- ---------
14,886 17,849
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,432 5,469
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 2,238 1,977
--------- ---------
7,670 7,446
--------- ---------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 22,556 25,295
ASSOCIATED COMPANY
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 9,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 63 55
--------- ---------
Total associated company liabilities . . . . . . . . . . . . . . . 9,063 9,055
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 25,469 25,703
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 22,855 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 3,657 4,965
--------- ---------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 51,981 53,570
--------- ---------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 97,624 108,052
REDEEMABLE PREFERRED STOCK
Series B, $.10 par value; 250,000 shares issued and outstanding;
stated at redemption value . . . . . . . . . . . . . . . . . . . . 1,000 1,000
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.10 par value; 250,000 shares issued and outstanding -- --
Common stock, $.10 par value; issued 1,597,204 shares at both dates;
outstanding 1,326,635 and 1,344,910 shares, respectively . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 57,210 57,142
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (50,963) (47,698)
Equity adjustment from foreign currency translation . . . . . . . . . -- 329
Treasury stock, 270,569 and 252,294 shares, respectively, at cost . . (6,798) (6,610)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) . . . . . . . . . . . . . . . (391) 3,323
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,233 $ 112,375
========= =========
See accompanying notes to consolidated financial statements.
Page 4
5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FIVE MONTHS ENDED
DECEMBER 31,
----------------------------
1995 1994
------------ -----------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,744 $ 1,409
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 292
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 2 122
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (833) (30)
--------- --------
1,211 1,793
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 517 384
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 405 405
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 301
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . 101 11
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9
--------- --------
1,343 1,110
--------- --------
Income (loss) from real estate operations . . . . . . . . . . . . . (132) 683
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 2,980 2,816
Other income (including intercompany amount of $115 in 1994) . . . . . 169 97
--------- --------
3,149 2,913
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 887 1,058
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 801 694
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 704 1,025
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 171
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 192 (13)
--------- --------
2,873 2,935
--------- --------
Income (loss) from energy operations . . . . . . . . . . . . . . . 276 (22)
--------- --------
Income from asset management operations . . . . . . . . . . . . . . 144 661
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,229 28,721
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,824 25,222
Administrative and selling expenses . . . . . . . . . . . . . . . . . 3,091 3,254
Interest (including intercompany amount of $16 in 1994) . . . . . . . 307 270
--------- --------
28,222 28,746
========= ========
Income (loss) from textile products operations . . . . . . . . . . 7 (25)
See accompanying notes to consolidated financial statements.
Page 5
6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FIVE MONTHS ENDED
DECEMBER 31,
----------------------------
1995 1994
----------- -----------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,073 $ 9,391
Management fee income . . . . . . . . . . . . . . . . . . . . . . . . -- 101
--------- -------
8,073 9,492
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 7,163 8,057
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 943 1,089
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 527
--------- -------
8,326 9,673
--------- -------
Loss from hotel operations . . . . . . . . . . . . . . . . . . . . (253) (181)
--------- -------
Loss from operating subsidiaries . . . . . . . . . . . . . . . . . (246) (206)
ASSOCIATED COMPANY
Loss from investment in ShowBiz . . . . . . . . . . . . . . . . . . . (88) (477)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 284
--------- -------
Loss from associated company . . . . . . . . . . . . . . . . . . . (398) (761)
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 177
Interest on short-term investments and other income . . . . . . . . . 56 84
--------- -------
233 261
Interest (net of intercompany amount of $131 in 1994) . . . . . . . . 1,728 1,851
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 1,594 2,516
--------- -------
3,322 4,367
--------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (3,089) (4,106)
--------- -------
Loss before income taxes and extraordinary gain . . . . . . . . . . . (3,589) (4,412)
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . (299) 617
--------- -------
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . (3,290) (5,029)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 25 --
--------- -------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,265) $(5,029)
========= =======
PER COMMON SHARE (PRIMARY)
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . $ (2.47) $ (3.67)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 0.02 --
--------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.45) $ (3.67)
========= =======
See accompanying notes to consolidated financial statements.
Page 6
7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
TWO MONTHS ENDED
DECEMBER 31,
--------------------------
1995 1994
----------- ----------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 678 $ 551
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 121
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 1 51
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (222) (22)
------- -------
564 701
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 206 140
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 119
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 162 162
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . 101 --
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 2
------- -------
638 423
------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . (74) 278
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 1,515 1,353
Other income (loss) (including intercompany amount of $57 in 1994) . . 36 (60)
------- -------
1,551 1,293
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 411 558
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 384 311
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 320 839
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 85
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 142 (147)
------- -------
1,406 1,646
------- -------
Income (loss) from energy operations . . . . . . . . . . . . . . . 145 (353)
------- -------
Income (loss) from asset management operations . . . . . . . . . . 71 (75)
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,311 11,735
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,992 10,334
Administrative and selling expenses . . . . . . . . . . . . . . . . . 1,205 1,318
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 110
------- -------
10,315 11,762
------- -------
Loss from textile products operations . . . . . . . . . . . . . . . (4) (27)
See accompanying notes to consolidated financial statements.
Page 7
8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
TWO MONTHS ENDED
DECEMBER 31,
----------------------------
1995 1994
------------ -----------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,126 $ 3,768
Management fee income . . . . . . . . . . . . . . . . . . . . . . . . -- 31
---------- -------
3,126 3,799
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,892 3,244
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 392 441
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 219
---------- -------
3,373 3,904
---------- -------
Loss from hotel operations . . . . . . . . . . . . . . . . . . . . (247) (105)
---------- -------
Loss from operating subsidiaries . . . . . . . . . . . . . . . . . (251) (132)
ASSOCIATED COMPANY
Loss from investment in ShowBiz . . . . . . . . . . . . . . . . . . . (149) (678)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 102
---------- -------
Loss from associated company . . . . . . . . . . . . . . . . . . . (261) (780)
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 71
Interest on short-term investments and other income . . . . . . . . . 31 37
---------- -------
102 108
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 925 2,047
Interest (net of intercompany amount of $57 in 1994) . . . . . . . . . 689 781
---------- -------
1,614 2,828
---------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,512) (2,720)
---------- -------
Loss before income taxes and extraordinary gain . . . . . . . . . . . (1,953) (3,707)
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . (362) 60
---------- -------
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . (1,591) (3,767)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 25 --
---------- -------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,566) $(3,767)
========== =======
PER COMMON SHARE (PRIMARY)
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . $ (1.20) $ (2.75)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 0.02 --
---------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.18) $ (2.75)
========== =======
See accompanying notes to consolidated financial statements.
Page 8
9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FIVE MONTHS ENDED
DECEMBER 31,
-----------------------------
1995 1994
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,265) $(5,029)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 2,705 3,014
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . (1,789) (1,787)
Undistributed income from energy affiliate . . . . . . . . . . . . . . (1,592) (1,242)
Distributions from energy affiliate . . . . . . . . . . . . . . . . . 1,332 1,338
Equity in net loss of real estate affiliate and associated company . 921 507
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . (500) 450
Amortization of deferred gain from debenture exchange . . . . . . . . (234) (227)
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . 101 11
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . (25) --
Proceeds from collections of mortgage loans . . . . . . . . . . . . . 2 176
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . -- (20)
Net change in textile products assets and liabilities . . . . . . . . 2,817 883
Net change in energy assets and liabilities . . . . . . . . . . . . . (287) (222)
Net change in other assets and liabilities . . . . . . . . . . . . . . 226 397
------- -------
Net cash provided by (used in) operating activities . . . . . . . . 412 (1,751)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate and hotel assets . . . . . . . . . . . 7,610 1,464
Capital expenditures for hotels and real estate . . . . . . . . . . . . . (402) (819)
Investments in textile products property and equipment . . . . . . . . . (371) (590)
Investments in energy property and equipment . . . . . . . . . . . . . . (126) (17)
Net change in restricted cash for investing activities . . . . . . . . . 37 28
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . (1) --
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . -- 610
Proceeds from sale of insurance contracts . . . . . . . . . . . . . . . . -- 229
------- -------
Net cash provided by investing activities . . . . . . . . . . . . . 6,747 905
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . 250 245
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . (8,066) (2,477)
Purchase of capital stock by energy subsidiary for treasury . . . . . . . (1,189) --
Payment of dividends to minority stockholders of energy subsidiary . . . (429) --
Purchase of common stock for treasury . . . . . . . . . . . . . . . . . . (188) --
Repurchase of 13.5% Debentures . . . . . . . . . . . . . . . . . . . . . (22) --
Net change in restricted cash for financing activities . . . . . . . . . -- 693
------- -------
Net cash (used in) financing activities . . . . . . . . . . . . . . (9,644) (1,539)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . -- (48)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (2,485) (2,433)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 5,824 5,728
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 3,339 $ 3,295
======= =======
See accompanying notes to consolidated financial statements.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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, 1995.
In October 1995 the Company announced its intention to change its
fiscal year end from July 31 to December 31, effective December 31,1995.
This Form 10-Q is a transition report and covers the transition period for
the Company's five month period from August 1, 1995 through December 31,
1995, and the six month period from July 1, 1995 through December 31, 1995
for its HEC subsidiary and ShowBiz affiliate. The Company's next filing
with the Securities and Exchange Commission will be on Form 10-Q for the
quarter ended March 31, 1996.
Share and per share amounts have been adjusted for the one-for-four
reverse stock split effected on June 28, 1995.
2. INVESTMENTS IN AFFILIATE AND ASSOCIATED COMPANY (DOLLAR AMOUNTS IN
THOUSANDS):
AS OF DECEMBER 31, 1995 LOSS FROM INVESTMENTS
---------------------------- AMOUNT AT WHICH CARRIED AT FOR THE FIVE MONTHS ENDED
COST OR -------------------------- DECEMBER 31,
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED DECEMBER 31, JULY 31, -------------------------
DESCRIPTION OF INVESTMENT UNITS OR SHARES VALUE 1995 1995 1995 1994
------------------------- --------------- ----------- ------------ ------------ ----------- ------------
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (A)
- General partner interest . . -- $ 8,650 $ 5,841 $ 6,166 $ (47) $ (30)
- Limited partner units . . . 412,844 5,377 3,565 4,351 (786) --
-------- -------- -------- ------ -----
Totals . . . . . . . . . . $ 14,027 $ 9,406 $ 10,517 $ (833) $ (30)
======== ======== ======== ====== =====
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock . . . . . . . . 1,784,193 $ 5,438 $ 16,490 $ 16,511 $ (88) $(477)
======== ======== ======== ====== =====
(A) At December 31, 1995, Hallwood Realty Corporation ("HRC"), a
wholly owned subsidiary of the Company, owned a 1% general partner
interest and the Company owned a 24% 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 Company's acquisition of the
general partner interest on November 1, 1990. 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 has
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
five months ended December 31, 1995 and 1994 such amortization was
$280,000, respectively.
Due to recording the pro rata share of losses reported by HRP as
prescribed by equity accounting, the Company's carrying value of
the 89,269 limited partner units acquired prior to March 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.
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. As further discussed in Note 4, the Company has pledged
these 89,269
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
limited partner units to collateralize the promissory note, due
March 1998, in the original principal amount of $500,000.
During the period March through July 1995, the Company acquired
323,575 additional HRP limited partner units for $4,472,000. The
Company recorded its pro rata share of HRP's losses relating to
these limited partner units in the amount of $786,000 for the five
months ended December 31, 1995.
(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 $67,000 for the five months ended December 31, 1995.
At December 31, 1995, the Company owned approximately 15% of
ShowBiz, all of which is pledged to secure certain loans payable
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 December 31, 1995 were:
AMOUNT PER SHARE
----------------------
SECURITY DESCRIPTION MARKET CARRYING
AND (QUOTRON SYMBOL) PRICE VALUE
---------------------------- ---------- ----------
HRP limited partner units (HRY) . . . . . . . . . . . . $16.50 $8.64
ShowBiz common shares (SHBZ) . . . . . . . . . . . . . . 12.12 9.24
The general partner interest in HRP is not publicly traded.
3. LITIGATION, CONTINGENCIES AND COMMITMENTS
Reference is made to Note 19 to the consolidated financial statements
contained in Form 10-K for the fiscal year ended July 31, 1995.
Page 11
12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
DECEMBER 31, JULY 31,
1995 1995
------------- -------------
Real Estate
Promissory note, 8%, due March 1998 . . . . . . . . . . . $ 600 $ 500
Promissory note, 7.5%, due August 1996 . . . . . . . . . . 437 750
Term loan, libor + 2.5%, due January 1996 . . . . . . . . -- 4,747
-------- --------
1,037 5,997
Energy
Line of credit, prime + 2%, due September 1999 . . . . . . 1,125 950
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . 8,100 11,030
Equipment loan, 10%, due December 1996 . . . . . . . . . . 200 285
-------- --------
8,300 11,315
Hotels
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . 5,099 5,136
Non-interest bearing obligation, due March 1997 . . . . . 333 333
-------- --------
5,432 5,469
Associated Company
Line of credit, prime + .75%, due April 1996 . . . . . . . 5,000 5,000
Promissory note, 5%, due March 1997 . . . . . . . . . . . 4,000 4,000
-------- --------
9,000 9,000
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,894 $ 32,731
======== ========
Further information regarding loans payable is provided below:
Real Estate
Promissory note. In connection with the settlement of an obligation
related to the Company's Integra Hotels, Inc. subsidiary, the Company
issued a four-year, $500,000, promissory note in March 1994. The note is
secured by a pledge of 89,269 HRP limited partner units. The settlement
agreement also provided that the pledgee has the right to receive an
additional payment in an amount equal to 25% of the increase in the value
of the HRP units over the base amount of $11.25 per unit, but in no event
more than an additional $500,000 (the "Participation Amount"). As the per
unit price was $16.50 at December 31, 1995, the Company has increased the
term note by $100,000 for this contingent obligation by a corresponding
charge to interest expense.
Promissory Note. The Company issued a promissory note in the amount
of $1,500,000 to the agent for plaintiffs in the litigation styled Equitec
Roll-up Litigation, discussed in Note 19 to the Company's Form 10-K for
the fiscal year ended July 31, 1995. Monthly payments include $62,500 of
principal amortization. The outstanding balance at December 31, 1995 was
$437,000. The note is collateralized by 187,500 shares of common stock of
HEC.
Term Loan. The term loan was paid off upon sale of the office-retail
property in December 1995.
Energy
Line of credit. In May 1995, Hallwood Energy Corporation ("HEC")
entered into a line of credit facility with a bank in the maximum
commitment amount of $1,500,000. Interest is paid monthly and principal
amortization of $75,000 is paid quarterly. The interest rate was 10.5% at
December 31, 1995. The facility limits dividends to $3.50 per share per
annum. Availability is limited to 50% of the market value of HEC's
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
pledged HEP units at the date additional borrowings are made, subject to
the maximum of $1,500,000. HEC presently has no additional borrowing
capacity under this facility. The outstanding balance at December 31, 1995
was $1,125,000.
Included in the consolidated balance sheets are HEC's share of the
long-term obligations of its affiliated entity, Hallwood Energy Partners,
L.P. ("HEP") in the amount of $5,366,000.
Textile Products
Revolving credit facility. In December 1992, the Company's textile
products subsidiary, Brookwood Companies Incorporated ("Brookwood")
established a revolving line of credit facility with The Chase Manhattan
Bank, N.A. ("Chase") in an amount up to $13,500,000 (the "Brookwood
Revolver"). The Brookwood Revolver is collateralized by accounts
receivable and the industrial machinery and equipment located in Kenyon,
Rhode Island. In September 1994, the Brookwood Revolver was amended to
extend the expiration date to August 1997, reduce the interest to one-half
percent over prime or libor plus 2.25%, permit the repayment of the
Company's $1,000,000 balance of bridge financing and change certain of the
financial covenants. The interest rate and outstanding balance at December
31, 1995 were 8.20% and $8,100,000, respectively. Brookwood had $1,440,000
of additional borrowing capacity at December 31, 1995.
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 December 31, 1995 was $200,000.
Hotels
Term loan. 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 capital expenditures and
debt service and 15% of residual value at maturity or upon sale or
refinancing; (iv) maintenance of a 4% capital reserve; and (v) repayment
prohibition until after June 30, 1996. The outstanding balance at December
31, 1995 was $5,099,000.
Non-interest bearing obligation. A $500,000 non-interest bearing
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 1995 Form 10-K, and is payable in three equal
annual installments in the amount of $166,667. The first installment was
paid on March 8, 1995, with the remaining two installments due on March 8,
1996 and 1997. The outstanding balance at December 31, 1995 was $333,000.
Associated Company
Line of credit. In April 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 of which were used to
repay a former margin loan. Significant terms were (i) initial maturity
date - April 25, 1995; (ii) interest rate - prime plus 0.75%; (iii)
collateral - 1,439,365 shares of ShowBiz common stock; and (iv)
availability limited to 50% of the market value of the pledged shares of
ShowBiz. 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. Management believes that the line of credit
will be extended prior to maturity on comparable financial terms. The
interest rate and outstanding balance at December 31, 1995 were 9.25% and
$5,000,000, respectively.
Promissory note. 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)
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
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 $27,481,000 of its 13.5%
Debentures were exchanged for a new issue of 7% Collateralized Senior
Subordinated Debentures due July 31, 2000 (the" 7% Debentures"), and
purchased for cash $14,538,000 of its 13.5% Debentures at 80% of face
value. Interest is payable quarterly in arrears, in cash, and the 7%
Debentures are secured by a pledge of the capital stock of the Brookwood
and Hallwood Hotels, Inc. subsidiaries. The common and preferred stock of
Brookwood are subject to a prior pledge in favor of Chase.
Since 1994, the Company has repurchased 7% Debentures having a
principal value of $4,673,000. 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
an original issue (the "1989 Series") 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).
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 (the "1991 Series") 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 (the
"1992 Series") and $172,500 of cash in lieu of fractional debentures.
Interest due on August 15, 1993, 1994 and 1995 was also paid in cash.
Under the terms of its Trust Indenture, the Company is not obligated to pay
future cash interest until August 15, 1998, and has no present intention of
paying interest in cash until that time.
In December 1995, the Company repurchased 13.5% Debentures having a
principal value of $46,700 for $21,100, resulting in an extraordinary gain
from debt extinguishment of $25,600.
Page 14
15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
DECEMBER 31, JULY 31,
DESCRIPTION 1995 1995
------------------------------------------ ------------ ------------
7% Debentures (face value) . . . . . . . . . . . . . . . . . $22,808 $22,808
Unrecognized gain from purchase and exchange, net of
$1,559 and $1,325 accumulated amortization, respectively 2,661 2,895
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $25,469 $25,703
======= =======
13.5% Debentures (face value)
1989 Series . . . . . . . . . . . . . . . . . . . . . . . $18,203 $18,203
1991 Series . . . . . . . . . . . . . . . . . . . . . . . 2,292 2,310
1992 Series . . . . . . . . . . . . . . . . . . . . . . . 2,360 2,389
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $22,855 $22,902
======= =======
6. INCOME TAXES
The following is a summary of the income tax expense (benefit) (in
thousands):
FIVE MONTHS ENDED
DECEMBER 31,
-----------------------
1995 1994
-------- --------
Federal
Deferred (benefit) . . . . . . . . . . . . . . . . . . . $ (500) $ 450
Current . . . . . . . . . . . . . . . . . . . . . . . . . 6 33
------- ------
Sub-total . . . . . . . . . . . . . . . . . . . . . . (494) 483
State . . . . . . . . . . . . . . . . . . . . . . . . . . 195 134
------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ (299) $ 617
======= ======
The federal deferred tax (benefit) of $500,000 in 1995 was recorded by
the Company's HEC subsidiary, primarily as a result of a reduction in the
valuation allowance. T he federal deferred tax charge of $450,000 in 1994
was recorded by the Company, and was the result of a fluctuation in the
valuation allowance arising from changes in the Company's tax planning
strategies, primarily relating to a reduction in the market price of
ShowBiz common stock. The federal current charge in the 1995 and 1994
periods relate to the alternative minimum tax payable by HEC which was
required to file a separate federal tax return.
As a result of the Company's purchase of approximately 37,000
additional HEC common shares in the October through December 1995 period,
and the December 31, 1995 conversion of 356,000 shares of HEC preferred
stock into 356,000 shares of common stock, the Company owns 80% of the
common stock of HEC. Beginning January 1, 1996 HEC will be included in the
consolidated income tax returns of the Company. Prior to January 1, 1996,
HEC was an independent entity for tax reporting purposes, although it has
been a consolidated subsidiary for financial reporting purposes since May
1990. As of December 31, 1995, HEC had estimated net operating loss
carryforwards ("NOLs") of $108,000,000, in addition to various other tax
credits and carryforwards. A related valuation allowance was recorded,
based upon HEC's expectations regarding the utilization of such NOLs, to
reduce the value of the reported tax benefit to $500,000. In accordance
with federal tax laws and regulations governing consolidated groups, these
NOLs and tax carryforwards must remain at the subsidiary level.
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
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.
The amount of the consolidated deferred tax asset (net of valuation
allowance) was $5,929,000 at December 31, 1995. The deferred tax asset
arises principally from the anticipated utilization of NOLs and tax credits
from the implementation of various tax planning strategies.
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:
FIVE MONTHS ENDED
DECEMBER 31,
---------------------
DESCRIPTION 1995 1994
----------------------------------------- -------- --------
Supplemental schedule of noncash investing
and financing activities:
Recording of proportionate share of stockholders'
equity transaction by ShowBiz . . . . . . . . . . . . . . $ 67 $ 96
Real estate acquired through foreclosure . . . . . . . . . . 25 --
Supplemental disclosures of cash payments:
Interest paid (including capitalized interest) . . . . . . . $ 4,645 $ 5,143
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 95 185
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 $1,566,000 for the two months ended
December 31, 1995, compared to a net loss of $3,767,000 in the 1994 period.
Total revenue was $15,505,000, compared to $16,958,000 in the prior-year
period. The net loss of $3,265,000 for the five months in 1995, compares
to a net loss of $5,029,000 in the prior- year period.
Following is an analysis of the results of operations by asset
management, operating subsidiaries and associated company divisions; and by
the real estate, energy, textile products, hotels and restaurant business
segments within those divisions.
Asset Management. The business segments of the Company's asset
management division consist of real estate and energy.
REAL ESTATE.
Revenue. Fee income of $678,000 for the two months ended December 31,
1995 increased by $127,000, or 23%, from the $551,000 in the prior-year
period. Fee income of $1,744,000 for the five months increased by $335,000
from the prior-year period. 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"). The increases were primarily
due to an increase in leasing fees.
Rental income from the United Kingdom office-retail property in the
1995 two-month period decreased to $107,000 or 12% from $121,000 in the
1994 period, due to a tenant receivable write-off in fiscal 1995. Rental
income for the five month period increased slightly to $298,000 from
$292,000 in the comparable 1994 period. The office-retail property was
sold on December 28, 1995.
Interest and discounts from mortgage loans for the two months ended
December 31, 1995 declined to $1,000, from the 1994 amount of $51,000. The
comparative five month amounts were $2,000 and $122,000, respectively. The
declines were a result of the sale or assignment of substantially all of
the mortgage loan portfolio in the prior fiscal year.
The loss from investments in HRP represents the Company's recognition
of its pro-rata share of the loss as reported by HRP. For the two months
ended December 31, 1995, the Company reported a $222,000 loss compared to a
$22,000 loss in the period a year ago. The comparative five month loss was
$833,000 and $30,000, respectively. The increased losses result from the
Company's additional investment in HRP limited partner units acquired in
the prior fiscal year. Between March and July 1995, the Company acquired
323,575 additional limited partner units, pursuant to HRP's reverse unit
split and commission-free, odd-lot buyback programs. The Company will
continue to recognize significant non-cash, equity losses from its HRP
investment, until the book value of the limited partner units is reduced to
zero.
Similarly, the Company's carrying value of the 89,269 HRP limited
partner units acquired prior to March 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. 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. See Note 2 to the Company's consolidated financial
statements.
Expenses. Administrative expenses increased 47% to $206,000 in the
two months ended December 31, 1995, compared to $140,000 in the year-ago
period. Administrative expenses for the fiscal 1995 five month period
increased to $517,000 from $384,000 in the comparable prior-year period.
The increases were primarily attributable to additional leasing commission
expense.
Page 17
18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Interest expense increased to $170,000 from $119,000 in the two months
ended December 31, 1995. The comparative five month amounts were $303,000
and $301,000 for the 1995 and 1994 periods, respectively. The increase is
due to recording $100,000 of contingent interest on the $500,000 promissory
note due March 1998 (see also Note 4), partially offset by lower costs for
the office-retail property.
Depreciation and amortization expense of $162,000 for the two months
ended December 31, 1995 and $405,000 for the five month period were the
same as the corresponding fiscal 1994 periods. Depreciation expense
relates to the office-retail property. Amortization expense relates to the
cost of HRC's general partner interest in HRP to the extent allocated to
management rights.
On December 28, 1995, the Company completed the sale of the
office-retail property located in the United Kingdom for $7,543,000
(L.4,850,000). A provision for loss of $101,000 was recorded in connection
with the sale. The provision for loss of $11,000 in the 1994 period is a
result of the August 1994 sale of a land parcel in Flint, Michigan.
Operating expenses were immaterial in both the two and five month
periods ended December 31, 1995 and 1994.
ENERGY.
Revenue. Following the December 1995 conversion of its HEC preferred
stock investment into common stock, the Company owns 80% of the common
stock of HEC. HEC's general partner interest in Hallwood Energy Partners,
L.P. ("HEP") entitles it to a share of net revenues derived from HEP's
properties ranging from 2% to 25%, and it also holds approximately 6.5% of
HEP's limited partner units. HEC accounts for its ownership of HEP using
the proportionate consolidation method of accounting, whereby HEC records
its proportionate share of HEP's revenue and expenses, current assets,
current liabilities, noncurrent assets, long-term obligations and fixed
assets.
For the two months ended December 31, 1995, oil and gas revenues of
$1,515,000 increased 12%, compared to $1,353,000 in the year-ago period.
For the five months, the comparison of oil and gas revenues was $2,980,000
in the current year and $2,816,000 in the year-ago period. Oil revenue for
the five months increased $106,000 to $1,191,000, due to an increase in
production to 68,000 barrels from 63,000 barrels, combined with an increase
in the average price per barrel to $17.51 from $16.19. Gas revenue for the
five months increased $58,000 to $1,789,000, primarily as a result of an
increase in the average gas price to $1.93 from $1.71 per mcf, partially
offset by a decrease in production to 928,000 mcf from 1,010,000 mcf. The
changes in oil and gas production are due to increased production from
developmental drilling projects in West Texas, partially offset by normal
production declines.
Other income increased to $36,000 for the two months ended December
31, 1995 from the $60,000 loss in the prior-year period, and for the five
months increased to $169,000, from $97,000. The increase in both periods
is due to HEC's share of HEP's monetization of its Section 29 tax credits.
Expenses. Depreciation, depletion and amortization expenses were
$411,000 for the two months ended December 31, 1995 compared to $558,000 in
the year-ago period. For the five-month periods they were $887,000 and
$1,058,000, respectively. The decreases are the result of lower
capitalized costs in 1995.
Operating expenses increased to $384,000 for the two months ended
December 31, 1995 from $311,000 in the prior- year period and increased to
$801,000 for the five months from $694,000 in the prior-year period, as a
result of increased maintenance activity during the current-year periods.
Administrative expenses decreased by $519,000 to $320,000 for the two
months ended December 31, 1995 and decreased $321,000 to $704,000 for the
five month period, primarily due to the litigation settlement of an
affiliate in the amount of $308,000 recorded in 1994.
Page 18
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Interest expense increased by $64,000 to $149,000 for the two months
ended December 31, 1995 compared to $85,000 for the year-ago period, and
increased $118,000 to $289,000 for the five month period, primarily from
HEC's utilization of its line of credit.
Minority interest, which represents the interest of other common
shareholders in the net income (loss) of HEC, increased in the current-year
periods, due to higher net income from energy operations, partially offset
by a lower minority interest ownership percentage, resulting from HEC's
repurchase of its own shares from minority shareholders for treasury and
the Company's purchase of additional HEC shares in the October through
December 1995 period.
OPERATING SUBSIDIARIES.
Textile products.
Revenue. Sales decreased $1,424,000 in the two months ended December
31, 1995 to $10,311,000, compared to $11,735,000 in the year-ago period.
The comparative five month sales decreased to $28,229,000, from
$28,721,000. The decreases in sales were due to weak market conditions in
both the textile distribution businesses and the Kenyon finishing plant.
Expenses. Cost of sales decreased by $1,342,000 or 13.0%, compared to
the 12.1% decrease in sales for the two month period ended December 31,
1995 from the comparable prior year period. The higher gross profit margin
for the two-month period (12.8% versus 11.9% for the two-month periods
ended December 31, 1995 and 1994, respectively) was principally the result
of a change in product mix with higher gross profits in the distribution
business. The comparable gross profit margins for the five-month periods
were 12.1% in 1995 and 12.2% in 1994.
Administrative and selling expenses decreased $113,000 in the two
months ended December 31, 1995 to $1,205,000 and decreased $163,000 for the
five-month period to $3,091,000 from the comparable 1994 periods, as a
result of cost control efforts. The $8,000 increase in interest expense
for the two months ended December 31, 1995 to $118,000 and $37,000 increase
for the five months to $307,000 was the result of higher average borrowings
outstanding.
Hotels
Revenue. Sales of $3,126,000 in the two month period ended December
31, 1995 decreased by $642,000 from the year-ago amount of $3,768,000. The
1995 five month period hotel revenues of $8,073,000 decreased by $1,318,000
from the 1994 amount of $9,371,000. The decreases are primarily
attributable to the January 1995 sale of the Lido Beach Holiday Inn hotel.
Considering only the five hotels owned during both the 1995 and 1994
periods, revenues increased by $75,000 for the two month period and
$317,000 for the five months. This increase reflects the Company's
decision 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. Management fee income of $31,000
and $101,000, for the two month and five month periods in 1994,
respectively, relates to managed properties, both of which were sold in the
prior fiscal year.
Expenses. Operating expenses of $2,892,000 for the two month period
ended December 31, 1995 decreased by $352,000 from the year-ago amount of
$3,244,000. For the five month period, operating expenses of $7,163,000 in
1995 decreased by $894,000 from the year-ago amount of $8,057,000. The
decreases were also due to the aforementioned sale of the Lido Beach
Holiday Inn hotel. On a comparable basis, considering only the five hotels
owned during both 1995 and 1994, operating expenses increased $161,000 for
the two-month period and $310,000 for the five-month period. Depreciation
and amortization expense decreased by $49,000 for the two month period and
$146,000 for the five months, reflecting the sale of the Lido Beach Holiday
Inn hotel, partially offset by additional depreciation from recent capital
expenditures at the remaining properties. Interest expense decreased by
$130,000 to $89,000 for the two months from $219,000 in the 1994 period,
and decreased by $307,000 to $220,000 for the five months, from $527,000 in
1994 to, due to the payoff of the term loan upon sale of The Lido Beach
Holiday Inn hotel.
Page 19
20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
ASSOCIATED COMPANY
Revenue. The Company records its pro-rata share of ShowBiz results
using the equity accounting method. The Company recorded a loss of $149,000
from its investment in ShowBiz for the two months ended December 31, 1995,
compared to a loss of $678,000 in the prior-year period. The comparable
five-month amounts were losses of $88,000 and $477,000, respectively. The
improvement in ShowBiz results for 1995 is attributable to (i) an increase
in comparable same store sales and in operating margins in the 1995 periods
and (ii) a $2.0 million loss associated with the valuation of fixed assets
recorded in December 1994.
Expenses. Interest expense of $112,000 for the two months ended
December 31, 1995 increased from the year-ago amount of $102,000, due to an
increase in rate on the line of credit, offset by a decline in the average
outstanding balance. Interest expense for the five months ended December
31, 1995 increased to $310,000 from the year-ago amount of $284,000 for the
same reasons.
OTHER
Revenue. Fee income in the 1995 two month period and five month
period of $71,000 and $177,000, respectively, was the same as the
prior-year amounts. Interest on short-term investments and other income of
$31,000 for the 1995 two month period and $56,000 for the five month
period, compares to the prior year amounts of $37,000 and $84,000,
respectively. The level of interest income varies dependent on the average
level of invested cash balances and the average interest rate.
Expenses. Interest expense in the amount of $689,000 for the two
months ended December 31, 1995 decreased by $92,000 from the prior-year
amount of $781,000. Interest expense for the five month period of
$1,728,000 decreased $123,000 from the prior-year amount of $1,851,000.
The decreases are due to the repurchase of approximately $2,500,000
principal amount of 7% Debentures, and additional interest costs from the
settlement of a state tax audit in the prior-year period.
Administrative expenses of $925,000 for the two months ended December
31, 1995, and $1,594,000 for the five months, were significantly decreased
from the comparable 1994 amounts of $2,047,000 and $2,516,000,
respectively. The decreases are primarily attributable to a reduction of
$1,450,000 in litigation charges, partially offset by increased
professional fees.
Income taxes. The federal deferred tax (benefit) of $500,000 in 1995
was recorded by the Company's HEC subsidiary, primarily as a result of a
reduction in the valuation allowance. T he federal deferred tax charge of
$450,000 in 1994 was recorded by the Company, and was the result of a
fluctuation in the valuation allowance arising from changes in the
Company's tax planning strategies, primarily relating to a reduction in the
market price of ShowBiz common stock. The federal current charge in the
1995 and 1994 periods relate to the alternative minimum tax payable by HEC
which was required to file a separate federal tax return.
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 December 31, 1995, the Company had approximately $67,000,000 of
tax net operating loss carryforwards ("NOLs") and temporary differences
(excluding separate return losses of HEC) to reduce future 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 $16,000,000 of
the NOLs prior to their ultimate expiration in the year 2010.
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, 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
Page 20
21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 limitations.
As a result of the Company's purchase of approximately 37,000
additional HEC common shares in the October through December 1995 period,
and the December 31, 1995 conversion of 356,000 shares of HEC preferred
stock into 356,000 shares of common stock, the Company owns 80% of the
common stock of HEC. Beginning January 1, 1996 HEC will be included in the
consolidated income tax returns of the Company. Prior to January 1, 1996,
HEC was an independent entity for tax reporting purposes, although it has
been a consolidated subsidiary for financial reporting purposes since May
1990. As of December 31, 1995, HEC had estimated net operating loss
carryforwards ("NOLs") of $108,000,000, in addition to various other tax
credits and carryforwards. A related valuation allowance was recorded,
based upon HEC's expectations regarding the utilization of such NOL's, to
reduce the value of the reported tax benefit to $500,000. In accordance
with federal tax laws and regulations governing consolidated groups, these
NOLs and tax carryforwards must remain at the subsidiary level.
Extraordinary gain from extinguishment of debt. In December 1995, the
Company retired 13.5% Debentures having a principal value of $46,700 for
$21,100, resulting in an extraordinary gain from debt extinguishment of
$25,600.
Page 21
22
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 December 31,
1995 totaled $3,339,000.
Although the Company's ShowBiz shares, having a market value of
approximately $29,207,000 at February 29, 1996 (based upon the closing
price on such date of $16.37 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 line of credit and the $4,000,000 promissory note.
The Company's real estate segment generates funds principally from
its property management activities, without significant additional capital
costs.
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 $5,350,000 at December 31, 1995. HEP's
borrowings are secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. In May 1995, HEC obtained a $1,500,000 line
of credit from a bank and subsequently borrowed $1,200,000, which has been
reduced to $1,125,000 at December 31, 1995. The line of credit is secured
by the publicly-traded limited partner units it holds in HEP. HEC has no
unused borrowing capacity under its line of credit at December 31, 1995.
The line of credit limits HEC's dividends to $3.50 in each calendar year.
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 December 31, 1995, Brookwood had $1,440,000
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 sale of hotel properties may also provide a source of liquidity;
however, sales transactions may be impacted by the inability of prospective
purchasers to obtain equity capital or suitable financing.
The Company has no availability under its line of credit secured by
ShowBiz common stock, the maturity of which is April 1996. Management
believes that the line of credit can be extended 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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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 of this Form 10-Q
for discussion of pending litigation matters.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on January 26, 1996, stockholders of the
Company voted on one issue:
(a) To elect one director to hold office for three years and until his successor
is elected and qualified:
Nominee Director Votes For Votes Withheld
---------------- --------- --------------
Brian M. Troup 1,206,185 52,916
As a result of the above, the nominee director was re-elected for an additional
three-year term. The continuing directors are Messrs. Charles A. Crocco, Jr.,
Anthony J. Gumbiner, Robert L. Lynch and J. Thomas Talbot.
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits:
(i) 10.16 - Fourth Amendment and Waiver of Credit Agreement and Guaranty,
dated as of December 11, 1995, among Brookwood Companies Incorporated,
the Borrower, Kenyon Industries, Inc., Brookwood Laminating, Inc., as
Guarantors and The Chase Manhattan Bank, N.A., as Bank and Agent for
the Banks; and related First Amendment to Stock Pledge Agreement and
Security Agreement, both dated as of December 11, 1995, filed herewith. Pages 25-52
(ii) 11 - Statement Regarding Computation of Per Share Earnings Pages 53
(b) Reports on Form 8-K None
Page 23
24
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 4, 1996 By: /s/ Melvin J. Melle
--------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 24
25
INDEX TO EXHIBITS
Exhibit Description
Exhibit 10.16 Fourth Amendment and Waiver of Credit Agreement and Guaranty, dated as of December 11, 1995,
among Brookwood Companies Incorporated, the Borrower, Kenyon Industries, Inc., Brookwood
Laminating, Inc., as Guarantors and The Chase Manhattan Bank, N.A., as Bank and Agent for the
Banks; and related First Amendment to Stock Pledge Agreement and Security Agreement, both dated
as of December 11, 1995, filed herewith.
Exhibit 11 Statement Regarding Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule