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 March 31, 1996 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 No X
------ ------
1,594,344 shares of Common Stock, $.10 par value per share, were
outstanding at April 30, 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 (Unaudited):
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . 5-6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 8-14
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 15-19
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 20-28
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
-------------- ----------
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,747 $ 9,406
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 399 455
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 58 59
------- -------
9,204 9,920
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 9,344 9,839
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,560 2,236
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,456 1,407
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,393 1,122
------- -------
14,753 14,604
------- -------
Total asset management assets . . . . . . . . . . . . . . . . . . . 23,957 24,524
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,463 13,735
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,640 10,938
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,657 8,709
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986 1,092
------- -------
38,746 34,474
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,324 10,498
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 2,554 2,195
------- -------
12,878 12,693
------- -------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 51,624 47,167
ASSOCIATED COMPANY
Investment in ShowBiz. . . . . . . . . . . . . . . . . . . . . . . . . 17,350 16,490
OTHER
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5,866 5,929
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 1,714 3,339
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830 688
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 96
------- -------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 8,531 10,052
------- -------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,462 $ 98,233
======= =======
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)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1996 1995
-------------- ----------
ASSET MANAGEMENT
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 850 $ 1,037
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 115 240
------- -------
965 1,277
ENERGY
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 6,156 5,366
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3,408 3,293
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 1,883 2,857
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050 1,125
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 161 106
------- -------
12,658 12,747
------- -------
Total asset management liabilities . . . . . . . . . . . . . . . . 13,623 14,024
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 11,222 6,586
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,597 8,300
------- -------
18,819 14,886
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,241 5,432
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 1,776 2,238
------- -------
7,017 7,670
------- -------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 25,836 22,556
ASSOCIATED COMPANY
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 9,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 59 63
------- -------
Total associated company liabilities . . . . . . . . . . . . . . . 9,059 9,063
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 25,327 25,469
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 22,855 22,855
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 3.794 3,657
------- -------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 51,976 51,981
------- -------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 100,494 97,624
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 shares at both dates . . . . . . . . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 57,261 57,210
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (50,655) (50,963)
Treasury stock, 270,569 shares in both periods, at cost . . . . . . . (6,798) (6,798)
------- -------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) . . . . . . . . . . . . . . . (32) (391)
------- -------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,462 $ 98,233
======= =======
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)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------------ ---------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,008 $ 857
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 1 44
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (494) (24)
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 180
--------- --------
515 1,057
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 327 313
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 168 243
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 146
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1
Provision for losses (recovery) . . . . . . . . . . . . . . . . . . . -- (7)
--------- --------
515 696
--------- --------
Income from real estate operations . . . . . . . . . . . . . . . . -- 361
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 1,854 1,298
Other income (including intercompany amount of $57 in 1995) . . . . . 28 66
--------- --------
1,882 1,364
Depreciation, depletion, amortization and impairment . . . . . . . . . 469 881
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 382 339
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 247 252
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 71
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 115 (37)
--------- --------
1,354 1,506
--------- --------
Income (loss) from energy operations . . . . . . . . . . . . . . . 528 (142)
--------- --------
Income from asset management operations . . . . . . . . . . . . . . 528 219
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,170 20,778
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,602 18,406
Administrative and selling expenses . . . . . . . . . . . . . . . . . 2,110 1,949
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 206
--------- --------
17,868 20,561
--------- --------
Income from textile products operations . . . . . . . . . . . . . . 302 217
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)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------------ ----------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,570 $ 5,794
Gain from sale of hotel . . . . . . . . . . . . . . . . . . . . . . . -- 2,164
Management fee income . . . . . . . . . . . . . . . . . . . . . . . . -- 51
------- -------
5,570 8,009
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 4,551 4,835
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 563 628
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 188
------- -------
5,252 5,651
------- -------
Income from hotel operations . . . . . . . . . . . . . . . . . . . 318 2,358
------- -------
Income from operating subsidiaries . . . . . . . . . . . . . . . . 620 2,575
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . 808 425
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 167
------- -------
Income from associated company . . . . . . . . . . . . . . . . . . 642 258
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 106
Interest on short-term investments and other income . . . . . . . . . 74 74
------- -------
180 180
Interest (net of intercompany amount of $57 in 1995) . . . . . . . . . 1,026 1,065
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 494 551
------- -------
1,520 1,616
------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,340) (1,436)
------- -------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . 450 1,616
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 183
------- -------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308 $ 1,433
======= =======
PER COMMON SHARE (PRIMARY)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.23 $ 1.04
======= =======
See accompanying notes to consolidated financial statements.
Page 6
7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 308 $ 1,433
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation, depletion, amortization and impairment . . . . . . . . . 1,485 2,002
Undistributed income from energy affiliate . . . . . . . . . . . . . . (1,222) (706)
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . 769 762
Distributions from energy affiliate . . . . . . . . . . . . . . . . . 748 788
Equity in net loss of real estate affiliate and associated company . (314) (402)
Amortization of deferred gain from debenture exchange . . . . . . . . (142) (180)
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . 63 37
Proceeds from collections of mortgage loans . . . . . . . . . . . . . 1 272
Gain from sale of hotel . . . . . . . . . . . . . . . . . . . . . . . -- (2,164)
Mortgage loans assigned to plaintiff in litigation settlement . . . . -- 592
Provision for (recovery of) losses . . . . . . . . . . . . . . . . . . -- (7)
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . -- (7)
Net change in other assets and liabilities . . . . . . . . . . . . . . (1,670) (2,087)
Net change in textile products assets and liabilities . . . . . . . . 299 (2,000)
Net change in energy assets and liabilities . . . . . . . . . . . . . (140) (1,586)
------ -------
Net cash provided by (used in) operating activities . . . . . . . . 185 (3,253)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate and hotel assets . . . . . . . . . . . -- 12,888
Capital expenditures for hotels and real estate . . . . . . . . . . . . . (387) (91)
Investments in textile products property and equipment . . . . . . . . . (222) (375)
Net change in restricted cash for investing activities . . . . . . . . . (25) (3)
Investments in energy property and equipment . . . . . . . . . . . . . . (17) (17)
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . (3) (357)
------ -------
Net cash provided by (used in) investing activities . . . . . . . . (654) 12,045
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . -- 1,960
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . (1,156) (6,623)
Net change in restricted cash for financing activities . . . . . . . . . -- 693
Payment of dividends to minority stockholders of energy subsidiary . . . -- (268)
Purchase of capital stock by energy subsidiary for treasury . . . . . . . -- (136)
------ -------
Net cash (used in) financing activities . . . . . . . . . . . . . . (1,156) (4,374)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . -- (15)
------ -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (1,625) 4,403
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 3,339 3,295
------ -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 1,714 $ 7,698
====== =======
See accompanying notes to consolidated financial statements.
Page 7
8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(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 and the unaudited
consolidated financial statements and related disclosures in the transition
Form 10-Q for the two and five month periods ended December 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 contains comparative information for the quarter ended March
31, 1995 to conform with the Company's new reporting requirements. The
Company was not required to file a Form 10-K for the period ended December
31, 1995, but will report audited accounts for the five month period then
ended in the next required Form 10-K, which will be for the period ended
December 31, 1996.
Share and per share amounts have been adjusted for the one-for-four
reverse stock split effected on June 28, 1995.
Accounting Policies. The preparation of the financial statements for
the Company in conformity with generally accepted principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 121-Accounting for the Impairment of Long Lived Assets and
for Long Lived Assets to be Disposed Of ("SFAS No. 121"). Accordingly, the
Company's management routinely reviews its investments for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of SFAS No. 121
did not have an impact on the consolidated financial statements of the
Company.
Management has elected, as is allowable under Statement of Financial
Accounting Standards No. 123- Account for Stock Based Compensation ("SFAS
No. 123"), to continue to account for its stock based compensation under
its current method. Accordingly, the adoption of SFAS No. 123 did not have
a material impact on the Company's financial statements.
2. INVESTMENTS IN AFFILIATE AND ASSOCIATED COMPANY (DOLLAR AMOUNTS IN
THOUSANDS):
AS OF MARCH 31, 1996
----------------------------- AMOUNT AT WHICH CARRIED AT INCOME (LOSS) FROM INVESTMENTS
COST OR -------------------------- FOR THE THREE MONTHS ENDED
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED MARCH 31, DECEMBER 31, --------------------------
DESCRIPTION OF INVESTMENT UNITS OR SHARES VALUE 1996 1995 1996 1995
------------------------- --------------- ----------- ------------ ------------ ------------ ------------
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (A)
- General partner interest . . -- $ 8,650 $ 5,645 $ 5,841 $ (28) $(24)
- Limited partner units . . . . 413,040 5,381 3,102 3,565 (466) --
------ ------ ------ ---- ---
Totals . . . . . . . . . . $14,031 $ 8,747 $ 9,406 $(494) $(24)
====== ====== ====== ==== ===
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock . . . . . . . . 1,784,193 $ 5,438 $17,350 $16,490 $ 808 $425
====== ====== ====== ==== ===
Page 8
9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(A) At March 31, 1996, 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.
Beginning November 1, 1993, the Company commenced amortization of
that portion of the general partner interest ascribed to the
management rights, and for the three months ended March 31, 1996
and 1995 such amortization was $168,000, 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 limited partner units to collateralize the promissory
note, due March 1998, in the original principal amount of
$500,000.
Subsequent to March 1995, the Company has acquired 323,771
additional HRP limited partner units for $4,476,000. The Company
recorded its pro rata share of HRP's losses relating to such units
in the amount of $466,000 for the three months ended March 31,
1996.
(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 $51,000 for the three months ended March 31, 1996.
In April 1996, Showbiz announced that its Board of Directors
declared a three for two stock split in the form of a 50% dividend
effective and distributable May 22, 1996 to holders of record as
of May 1, 1996.
At March 31, 1996, 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 (prior to 3 for 2 stock split) at March 31, 1996 were:
AMOUNT PER SHARE
----------------------
SECURITY DESCRIPTION MARKET CARRYING
AND (QUOTRON SYMBOL) PRICE VALUE
---------------------------- --------- ---------
HRP limited partner units (HRY) . . . . . . . . . . . . $19.12 $7.51
ShowBiz common shares (SHBZ) . . . . . . . . . . . . . . 19.25 9.72
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 and the transition Form 10-Q for the two and five month periods
ended December 31, 1995.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
MARCH 31, DECEMBER 31,
1996 1995
------------- -------------
Real Estate
Promissory note, 8%, due March 1998 . . . . . . . . . . . $ 600 $ 600
Promissory note, 7.5%, due August 1996 . . . . . . . . . . 250 437
------ ------
850 1,037
Energy
Line of credit, prime + 2%, due September 1999 . . . . . . 1,050 1,125
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . 7,450 8,100
Equipment loan, 10%, due December 1996 . . . . . . . . . . 147 200
------ ------
7,597 8,300
Hotels
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . 5,075 5,099
Non-interest bearing obligation, due March 1997 . . . . . 166 333
------ ------
5,241 5,432
Associated Company
Line of credit, prime + .75%, due April 1997 . . . . . . . 5,000 5,000
Promissory note, 5%, due March 1997 . . . . . . . . . . . 4,000 4,000
------ ------
9,000 9,000
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $23,738 $24,894
====== ======
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 $19.12 at March 31, 1996, the Company has increased the term
note by $100,000 for this contingent obligation by a charge to interest
expense in a prior period.
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 March 31, 1996 was
$250,000. The note is collateralized by 187,500 shares of common stock of
HEC.
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 10.25% at March 31, 1996. The facility limits dividends to
$3.50 per share per annum. Availability is limited to 50% of the
market value of HEC's 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 March 31, 1996 was $1,050,000.
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
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 $6,156,000.
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 March
31, 1996 was 7.8% and $7,450,000, respectively. Brookwood had $3,352,000
of additional borrowing capacity at March 31, 1996.
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 March 31, 1996 was $147,000.
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 March
31, 1996 was $5,075,000.
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 two installments
were paid on March 8, 1996 and 1995, respectively, with the remaining
installment due on March 8, 1997. The outstanding balance at March 31,
1996 was $166,666.
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
30, 1996, the maximum commitment amount was reduced to $5,000,000. The
line of credit has been further extended until April 30, 1997. All other
terms remain unchanged. The interest rate and outstanding balance at March
31, 1996 was 9.00% 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) maturity
date - March 8, 1997; (ii) interest rate - 5% fixed; (iii) collateral -
344,828 shares of ShowBiz common stock; and (iv) the Trust is entitled to
an additional payment in an amount equal to 100% of the increase in the
value of the ShowBiz shares over the base amount of $25.00 per share. As
the per share price was only $19.25 at March 31, 1996, the Company has
recorded no charge for this contingent obligation.
Page 11
12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
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.
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
MARCH 31, DECEMBER 31,
DESCRIPTION 1996 1995
------------------------------------------ ----------- ------------
7% Debentures (face value) . . . . . . . . . . . . . . . . . $22,808 $22,808
Unrecognized gain from purchase and exchange, net of
$1,701 and $1,559 accumulated amortization, respectively 2,519 2,661
------ ------
Totals . . . . . . . . . . . . . . . . . . . . . . . $25,327 $25,469
====== ======
13.5% Debentures (face value)
1989 Series . . . . . . . . . . . . . . . . . . . . . . . $18,203 $18,203
1991 Series . . . . . . . . . . . . . . . . . . . . . . . 2,292 2,292
1992 Series . . . . . . . . . . . . . . . . . . . . . . . 2,360 2,360
------ ------
Totals . . . . . . . . . . . . . . . . . . . . . . . $22,855 $22,855
====== ======
6. INCOME TAXES
The following is a summary of the income tax expense (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
------- ------
Federal
Deferred . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 37
Current . . . . . . . . . . . . . . . . . . . . . . . . . -- --
--- ---
Sub-total . . . . . . . . . . . . . . . . . . . . . . 63 37
State . . . . . . . . . . . . . . . . . . . . . . . . . . 79 146
--- ---
Total . . . . . . . . . . . . . . . . . . . . . . . . $142 $183
=== ===
The federal deferred tax expense of $63,000 in 1996 was recorded by
the Company's HEC subsidiary, compared to $37,000 in 1995 that was recorded
by the Company.
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 $5,866,000 at March 31, 1996. The deferred tax asset arises
principally from the anticipated utilization of the Company's NOLs and tax
credits from the implementation of various tax planning strategies.
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(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:
THREE MONTHS ENDED
MARCH 31,
-------------------
DESCRIPTION 1996 1995
----------------------------------------- ------- -------
Supplemental schedule of noncash investing
and financing activities:
Recording of proportionate share of stockholders'
equity transaction by ShowBiz . . . . . . . . . . . . . . $ 51 $ 115
Mortgage loans assigned to plaintiff in connection
with litigation settlement . . . . . . . . . . . . . . . . -- 592
Supplemental disclosures of cash payments:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 913 $ 1,212
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 72 35
8. SUBSEQUENT EVENT
On May 2, 1996, a newly-formed wholly-owned special purpose
subsidiary, Brock Suite Greenville, Inc., acquired the fee interest in
the Residence Inn by Marriott hotel in Greenville, South Carolina for
$6,550,000. The acquisition was financed by a $6,800,000 loan from
Allied Capital Commercial Corporation and Business Mortgage Investors,
Inc. The loan is secured by the hotel and includes the following
significant terms: (i) interest rate of prime plus 3.50% (minimum rate
12%, maximum rate 17%); (ii) loan payments based upon a 19-year
amortization schedule with a maturity date of May 2001; (iii) loan may
be prepaid, subject to a prepayment premium which declines from 4% to
1% of loan balance, depending on the prepayment date; and (iv) various
financial and non-financial covenants, including a minimum debt
service coverage ratio, as defined, of 1.25.
Between April 24 and May 13, 1996, the Company sold 100,000
shares of ShowBiz at an average price of $22.95 per share, pursuant to
Rule 144 of the Securities Act of 1933.
Page 14
15
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 net income of $308,000 for the quarter ended
March 31, 1996, compared to net income of $1,433,000 in the 1995 period.
Total revenue was $27,125,000, compared to $31,813,000 in the prior-year
period. The prior year quarter was restated as a result of a change in the
Company's fiscal year end from July 31 to December 31 beginning December
31, 1995, and included a $2,164,000 gain on the January 1995 sale of the
Lido Beach Holiday Inn hotel.
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 $1,008,000 for the quarter ended March 31,
1996 increased by $151,000, or 18%, from $857,000 in the prior-year period,
primarily due to an increase in leasing fees. 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").
As a result of the December 1995 sale of the United Kingdom
office-retail property, the Company reported no rental income in the 1996
quarter, compared to $180,000 in the 1995 quarter.
Interest and discounts from mortgage loans for the quarter ended March
31, 1996 declined to $1,000 from the 1995 amount of $44,000. The decline
was a result of the sale or assignment of substantially all of the mortgage
loan portfolio in the prior fiscal year.
The equity loss from investments in HRP represents the Company's
recognition of its pro-rata share of the loss as reported by HRP. For the
quarter ended March 31, 1996, the Company reported a $494,000 loss compared
to a $24,000 loss in the period a year ago. The increased loss results
from the Company's additional investment in HRP limited partner units.
Since March 1995, the Company has acquired 323,771 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.
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 slightly to $327,000 in
the quarter ended March 31, 1996, compared to $313,000 in the year-ago
period.
Depreciation and amortization expense of $168,000 for the quarter
ended March 31, 1996 decreased from $243,000 in the 1995 period. There was
no depreciation expense in the 1996 quarter, compared to $75,000 in the
1995 quarter relating to the office-retail property. Amortization expense
of $168,000 in both periods relates to HRC's general partner investment in
HRP to the extent allocated to management rights.
Interest expense decreased to $17,000 from $146,000 in the quarter
ended March 31, 1995. The decrease is due to the aforementioned sale of
the office-retail property and repayment of the associated loan payable.
Operating expenses and provision for losses (recovery) were immaterial
in the periods.
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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. HEP owns approximately 44% of its affiliate, Hallwood Consolidated
Resources Corporation, which HEP accounts for under the equity method.
For the quarter ended March 31, 1996, oil and gas revenues of
$1,854,000 increased 43%, compared to $1,298,000 in the year-ago period.
Oil revenue for the quarter increased $154,000 to $672,000, due to an
increase in production to 38,000 barrels from 30,000 barrels, combined with
an increase in the average price per barrel to $17.68 from $17.27. Gas
revenue for the quarter increased $402,000 to $1,182,000, primarily as a
result of an increase in the average gas price to $2.54 from $1.76 per
mcf, and an increase in production to 465,000 mcf from 443,000 mcf. The
increase in oil and gas production is primarily due to increased production
from developmental drilling and exploratory projects in Montana, Wyoming
and West Texas, partially offset by normal production declines.
Other income decreased to $28,000 for the quarter ended March 31, 1996
from the $66,000 in the prior-year period. The decrease is due to various
items, including lower interest income from HEC's cash investments.
Expenses. Depreciation, depletion, amortization and impairment
expenses were $469,000 for the quarter ended March 31, 1996 compared to
$881,000 in the year-ago period. The decrease is primarily the result of
an asset impairment reported in the March 1995 period of $464,000, which
represented HEC's pro rata share of the write-off of HEP's Indonesian
operations, offset by a higher depletion rate in 1996 as a result of a 12%
increase in production.
Operating expenses increased by $43,000 to $382,000 for the quarter
ended March 31, 1996 from $339,000 in the prior-year period as a result of
increased production taxes in 1996 due to the 43% increase in oil and gas
revenue.
Administrative expenses decreased by $5,000 for the quarter ended
March 31, 1996 to $247,000 from $252,000 in 1995 quarter due to a decline
in allocated internal overhead.
Interest expense increased by $70,000 to $141,000 for the quarter
ended March 31, 1996 compared to $71,000 for the year-ago period, primarily
from HEC's borrowings under 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. The business segments of the Company's
operating subsidiaries consist of textile products and hotels.
TEXTILE PRODUCTS.
Revenue. Sales decreased $2,608,000 in the quarter ended March 31,
1996 to $18,170,000, compared to $20,778,000 in the same quarter a year
ago. The decrease in sales is due to weak market conditions experienced by
many of Brookwood's customers. Due to the uncertain market conditions,
these customers have reduced current purchases and are delaying making some
future commitments.
Page 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Expenses. Cost of sales decreased $2,804,000 or 15.2%, compared to
the 12.6% decrease in sales for the quarter ended March 31, 1996 from the
comparable prior year period. The higher gross profit margin for the
quarter (14.1% versus 11.4% for the quarter ended March 31, 1996) was
principally the result of more efficient operations at the Kenyon dyeing
and finishing plant.
Administrative and selling expenses increased $161,000 in the quarter
ended March 31, 1996 to $2,110,000 from $1,949,000 the comparable 1995
period, as a result of a $95,000 provision for costs related to management
changes at the Kenyon plant and increased operating expenses of the
distribution businesses.
The $50,000 decrease in interest expense for the quarter ended
March 31, 1996 to $156,000 was the result of lower average borrowings and
interest rates.
HOTELS
Revenue. Sales of $5,570,000 in the quarter ended March 31, 1996
decreased by $224,000 from the year-ago amount of $5,794,000. The decrease
is primarily attributable to the January 1995 sale of the Lido Beach
Holiday Inn hotel. Considering only the five hotels owned during both the
1996 and 1995 periods, revenues increased by $138,000 for the quarter.
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. In
January 1995 the Company sold its fee interest in the Lido Beach Holiday
Inn hotel resulting in a gain of $2,164,000. Management fee income of
$51,000, for the quarter ended March 31, 1995, relates to managed
properties, both of which were sold.
Expenses. Operating expenses of $4,551,000 for the quarter ended
March 31, 1996 decreased by $284,000 from the year-ago amount of
$4,835,000. The decrease is 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 1996 and 1995, operating expenses increased
$5,000 for the quarter. Depreciation and amortization expense decreased by
$65,000 for the quarter, 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
$50,000 to $138,000 for the quarter from $188,000 in the 1995 period, due
to the payoff of the term loan secured by The Lido Beach Holiday Inn hotel.
ASSOCIATED COMPANY
Revenue. The Company records its pro-rata share of ShowBiz results
using the equity accounting method. The Company recorded income of $808,000
from its investment in ShowBiz for the quarter ended March 31, 1996,
compared to income of $425,000 in the prior-year period. The improvement
in ShowBiz results for 1996 is attributable to a 7.7% increase in
comparable same store sales and in improved operating margins in the 1996
quarter.
Expenses. Interest expense of $166,000 for the quarter ended March
31, 1996 decreased $1,000 from the year-ago amount of $167,000.
OTHER
Revenue. Fee income in the 1996 quarter of $106,000, was the same
as the prior-year amount. Interest on short-term investments and
other income of $74,000 for the 1996 quarter was also the same as the
prior year amount.
Expenses. Interest expense in the amount of $1,026,000 for the
quarter ended March 31, 1996 decreased by $39,000 from the prior-year
amount of $1,065,000. The decrease is due to the repurchase of
approximately $2,500,000 principal amount of 7% Debentures.
Administrative expenses of $494,000 for the quarter ended March 31,
1996 decreased from the comparable 1995 amount of $551,000. The decrease
is primarily attributable to lower legal fees and related litigation costs.
Page 17
18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Income taxes. A federal deferred tax expense of $63,000 in 1996 was
recorded by the Company's HEC subsidiary, compared to $37,000 in 1995 that
was recorded by the Company. There was no federal current tax expense
recorded in either period.
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 March 31, 1996, 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 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 March 31, 1996, 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.
Page 18
19
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 March 31, 1996
totaled $1,714,000.
Although the Company's ShowBiz shares, having a market value of
approximately $38,806,000 at April 30, 1996 (based upon the closing price
on such date of $21.75 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 $6,156,000 at March 31, 1996. 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
$1,050,000 at March 31, 1996. 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 March 31, 1996. 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 March 31, 1996, Brookwood had $3,352,000 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 currently has no availability under its line of credit
secured by ShowBiz common stock, the maturity of which is April 1997.
Management believes that the line of credit can be increased.
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 19
20
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 None
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits
(i) 10.23 First Amended and Restated Employment Agreement for
Anthony J. Gumbiner with Hallwood Investment Company (formerly with
Hallwood Monaco SAM) Pages 22-26
(ii) 11 - Statement Regarding Computation of Per Share Earnings Page 27
(iii) 27 - Financial Data Schedule Page 28
(b) Reports on Form 8-K None
Page 20
21
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: May 14, 1996 By: /s/ Melvin J. Melle
-----------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 21
22
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
(i) 10.23 First Amended and Restated Employment Agreement for
Anthony J. Gumbiner with Hallwood Investment Company (formerly with
Hallwood Monaco SAM)
(ii) 11 - Statement Regarding Computation of Per Share Earnings
(iii) 27 - Financial Data Schedule