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
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FOR THE PERIOD ENDED JUNE 30, 1996 COMMISSION FILE NUMBER: 1-8303
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THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
-------------------------
DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
1,566,218 shares of Common Stock, $.10 par value per share,
were outstanding at July 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 (Unaudited):
Consolidated Balance Sheets as of June 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Three Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 10-17
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 18-23
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 24-93
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1996 1995
--------- -----------
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,176 $ 9,406
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 289 430
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 67 59
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 25
--------- ---------
8,597 9,920
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 8,757 9,839
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,816 2,236
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,549 1,407
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,210 1,122
--------- ---------
14,332 14,604
--------- ---------
Total asset management assets . . . . . . . . . . . . . . . . . . . 22,929 24,524
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,526 13,735
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,999 10,938
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,611 8,709
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,009 1,092
--------- ---------
40,145 34,474
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,629 10,498
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 2,303 2,195
--------- ---------
18,932 12,693
--------- ---------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 59,077 47,167
ASSOCIATED COMPANY
Investment in ShowBiz. . . . . . . . . . . . . . . . . . . . . . . . . 16,248 16,490
OTHER
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 7,609 3,339
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5,771 5,929
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,152 688
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 96
--------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 14,636 10,052
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,890 $ 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
JUNE 30, DECEMBER 31,
1996 1995
---------- -----------
ASSET MANAGEMENT
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 662 $ 1,037
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 123 240
---------- --------
785 1,277
ENERGY
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 5,312 5,366
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3,362 3,293
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,013 2,857
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 975 1,125
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 150 106
---------- --------
11,812 12,747
---------- --------
Total asset management liabilities . . . . . . . . . . . . . . . . 12,597 14,024
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,093 8,300
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 9,411 6,586
---------- --------
19,504 14,886
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,009 5,432
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 1,778 2,238
---------- --------
13,787 7,670
---------- --------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 33,291 22,556
ASSOCIATED COMPANY
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 9,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 17 63
---------- --------
Total associated company liabilities . . . . . . . . . . . . . . . 11,017 9,063
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 25,184 25,469
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 22,855 22,855
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 4.635 3,657
---------- --------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 52,674 51,981
---------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 109,579 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 1,322,668 and 1,326,635 shares, respectively . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 57,263 57,210
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (48,259) (50,963)
Treasury stock, 274,536 and 270,569 shares, respectively, at cost . . (6,853) (6,798)
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TOTAL STOCKHOLDERS' EQUITY (DEFICIT) . . . . . . . . . . . . . . . 2,311 (391)
---------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,890 $ 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)
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
--------- ---------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,092 $ 2,093
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . . (949) (75)
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 3 74
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 355
--------- ---------
1,146 2,447
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 651 649
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 336 486
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 314
Provision for losses (recovery) . . . . . . . . . . . . . . . . . . . . (22) (6)
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8
--------- ---------
1,001 1,451
--------- ---------
Income from real estate operations . . . . . . . . . . . . . . . . . 145 996
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 3,584 2,527
Other income (expense) (including intercompany income of $57 in 1995) . 64 (81)
--------- ---------
3,648 2,446
Depreciation, depletion, amortization and impairment . . . . . . . . . . 855 1,345
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 732 642
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 434 500
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 204
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 (51)
--------- ---------
2,503 2,640
--------- ---------
Income (loss) from energy operations . . . . . . . . . . . . . . . . 1,145 (194)
--------- ---------
Income from asset management operations . . . . . . . . . . . . . . . 1,290 802
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,087 45,128
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,354 39,936
Administrative and selling expenses . . . . . . . . . . . . . . . . . . 4,279 4,040
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322 459
--------- ---------
38,955 44,435
--------- ---------
Income from textile products operations . . . . . . . . . . . . . . . 1,132 693
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)
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1995
--------- ---------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,061 $ 11,256
Gain from sale of hotel and management contracts . . . . . . . . . . . . -- 2,396
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 125
--------- ---------
11,061 13,777
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,949 9,393
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 1,175 1,165
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 335
--------- ---------
10,547 10,893
--------- ---------
Income from hotel operations . . . . . . . . . . . . . . . . . . . . 514 2,884
--------- ---------
Income from operating subsidiaries . . . . . . . . . . . . . . . . . 1,646 3,577
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . . 3,203 305
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 341
--------- ---------
Income (loss) from associated company . . . . . . . . . . . . . . . . 2,863 (36)
OTHER
Interest on short-term investments and other income . . . . . . . . . . 231 190
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 212
--------- ---------
443 402
Interest (including intercompany expense of $57 in 1995) . . . . . . . . 2,051 2,132
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,066 980
--------- ---------
3,117 3,112
--------- ---------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,674) (2,710)
--------- ---------
Income before income taxes and extraordinary gain . . . . . . . . . . . 3,125 1,633
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 258
--------- ---------
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . . 2,704 1,375
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . . -- 144
--------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,704 $ 1,519
========= =========
PER COMMON SHARE (PRIMARY)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.04 $ 1.11
========= =========
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)
THREE MONTHS ENDED
JUNE 30,
------------------------
1996 1995
--------- ---------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,084 $ 1,236
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (455) (51)
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 2 31
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 174
--------- ---------
631 1,390
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 324 336
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 168 243
Provision for losses (recovery) . . . . . . . . . . . . . . . . . . . (22) 1
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 168
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7
--------- ---------
486 755
--------- ---------
Income from real estate operations . . . . . . . . . . . . . . . . 145 635
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 1,730 1,229
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . 36 (147)
--------- ---------
1,766 1,082
Depreciation, depletion, amortization and impairment . . . . . . . . . 386 463
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 350 303
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 187 248
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 113 (14)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 133
--------- ---------
1,149 1,133
--------- ---------
Income (loss) from energy operations . . . . . . . . . . . . . . . 617 (51)
--------- ---------
Income from asset management operations . . . . . . . . . . . . . . 762 584
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,917 24,350
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,752 21,530
Administrative and selling expenses . . . . . . . . . . . . . . . . . 2,169 2,091
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 254
--------- ---------
21,087 23,875
--------- ---------
Income from textile products operations . . . . . . . . . . . . . . 830 475
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)
THREE MONTHS ENDED
JUNE 30,
------------------------
1996 1995
--------- ---------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,491 $ 5,462
Gain from sale of management contracts . . . . . . . . . . . . . . . . -- 232
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 73
--------- ---------
5,491 5,767
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 4,398 4,558
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 612 536
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 147
--------- ---------
5,295 5,241
--------- ---------
Income from hotel operations . . . . . . . . . . . . . . . . . . . 196 526
Income from operating subsidiaries . . . . . . . . . . . . . . . . 1,026 1,001
ASSOCIATED COMPANY
Income (loss) from investment in ShowBiz . . . . . . . . . . . . . . . 2,395 (120)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 174
--------- ---------
Income (loss) from associated company . . . . . . . . . . . . . . . 2,221 (294)
OTHER
Interest on short-term investments and other income . . . . . . . . . 157 116
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 106
--------- ---------
263 222
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 1,066
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 572 429
--------- ---------
1,597 1,495
--------- ---------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,334) (1,273)
--------- ---------
Income before income taxes and extraordinary gain . . . . . . . . . . 2,675 18
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 76
--------- ---------
Income (loss) before extraordinary gain . . . . . . . . . . . . . . . 2,396 (58)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . -- 144
--------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,396 $ 86
========= =========
PER COMMON SHARE (PRIMARY)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.81 $ 0.06
========= =========
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)
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1995
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,704 $ 1,519
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation, depletion, amortization and impairment . . . . . . . . . . . . . . . . 2,945 3,526
Undistributed income from energy affiliate . . . . . . . . . . . . . . . . . . . . . (2,397) (1,325)
Gain from sale of investment in ShowBiz . . . . . . . . . . . . . . . . . . . . . . (2,040) --
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . . . . . . . . 1,538 1,533
Distributions from energy affiliate . . . . . . . . . . . . . . . . . . . . . . . . 1,355 1,554
Amortization of deferred gain from debenture exchange . . . . . . . . . . . . . . . (285) (249)
Equity in net (income) of associated company . . . . . . . . . . . . . . . . . . . . (1,163) (305)
Equity in net loss of real estate affiliate . . . . . . . . . . . . . . . . . . . . . 949 75
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . 158 37
Increase in mortgage loans from sale of real estate . . . . . . . . . . . . . . . . (10) (18)
Proceeds from collections of mortgage loans . . . . . . . . . . . . . . . . . . . . 2 273
Gain from sale of hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (2,164)
Mortgage loans assigned to plaintiff in litigation settlement . . . . . . . . . . . -- 592
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . -- (144)
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . . . . . . . . -- (10)
Net change in textile products assets and liabilities . . . . . . . . . . . . . . . (2,971) (4,417)
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . (1,618) (2,538)
Net change in energy assets and liabilities . . . . . . . . . . . . . . . . . . . . (65) 831
--------- --------
Net cash (used in) operating activities . . . . . . . . . . . . . . . . . . . . . (898) (1,230)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fee interest in hotel . . . . . . . . . . . . . . . . . . . . . . . . . (6,550) --
Proceeds from sale of investment in ShowBiz . . . . . . . . . . . . . . . . . . . . . . 3,498 --
Capital expenditures for hotels and real estate . . . . . . . . . . . . . . . . . . . . (793) (213)
Investments in textile products property and equipment . . . . . . . . . . . . . . . . (455) (701)
Investments in energy property and equipment . . . . . . . . . . . . . . . . . . . . . (101) (19)
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55) (2,108)
Net change in restricted cash for investing activities . . . . . . . . . . . . . . . . (8) (5)
Proceeds from sale of hotel assets . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,888
--------- --------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . (4,464) 9,842
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . . . . . . . . 10,700 4,030
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . . . . . . . . (855) (6,881)
Purchase of capital stock by energy subsidiary for treasury . . . . . . . . . . . . . . (158) (1,042)
Purchase of common stock for treasury . . . . . . . . . . . . . . . . . . . . . . . . . (55) (314)
Net change in restricted cash for financing activities . . . . . . . . . . . . . . . . -- 724
Repurchase of 7% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (460)
Payment of dividends to minority stockholders of energy subsidiary . . . . . . . . . . -- (268)
--------- --------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . 9,632 (4,211)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . 4,270 4,401
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . 3,339 3,295
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,609 $ 7,696
========= ========
See accompanying notes to consolidated financial statements.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 five month period 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 and six
months ended June 30, 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
include the period beginning August 1, 1995 and ending 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 had no
impact on the Company's financial statements.
2. INVESTMENTS IN AFFILIATE AND ASSOCIATED COMPANY (DOLLAR AMOUNTS IN
THOUSANDS):
AS OF JUNE 30, 1996 AMOUNT AT INCOME (LOSS) FROM INVESTMENTS
-------------------------- WHICH CARRIED AT FOR THE SIX MONTHS ENDED
COST OR ---------------------- JUNE 30,
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED JUNE 30, 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 $ 5,504 $ 5,841 $ (52) $ (55)
- Limited partner units . . . . . . . . 413,040 5,381 2,672 3,565 (897) (20)
-------- -------- --------- -------- -----
Totals . . . . . . . . . . . . . . . $ 14,031 $ 8,176 $ 9,406 $ (949) $ (75)
======== ======== ========= ======== =====
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock . . . . . . . . . . . . . 2,451,289 $ 4,981 $ 16,248 $ 16,490 $ 1,163 $ 305
- Gain on sale of shares . . . . . . . . -- -- -- 2,040 --
-------- -------- --------- -------- -----
Totals . . . . . . . . . . . . . . . $ 4,981 $ 16,248 $ 16,490 $ 3,203 $ 305
======== ======== ========= ======== =====
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(A) At June 30, 1996, Hallwood Realty Corporation ("HRC"), a wholly
owned subsidiary of the Company, owned a 1% general partner
interest and the Company owned a 25% 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 six months ended June 30, 1996 and
1995 such amortization was $336,000, 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 a 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, which amounted to $897,000 and $20,000 for the six months
ended June 30, 1996 and 1995, respectively.
(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 $53,000 for the six months ended June 30, 1996.
On May 22, 1996, ShowBiz completed a three for two stock split in
the form of a 50% dividend to holders of record as of May 1, 1996.
The Company received 842,096 additional shares of ShowBiz in
connection with the stock split. All references to the number of
ShowBiz shares have been restated for the effect of this stock
split.
During the quarter ended June 30, 1996, the Company sold 225,000
shares of ShowBiz for aggregate proceeds of $3,498,000 (average
price of $15.55 per share). The net gain from the various sales
was $2,040,000. On July 1, 1996, the Company sold an additional
37,500 shares of ShowBiz for aggregate proceeds of $640,000
(average price of $17.07 per share).
At June 30, 1996, the Company owned 13% of ShowBiz, all of which
is pledged to secure certain loans payable discussed in Note 4.
Page 11
12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
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 June 30, 1996 were:
AMOUNT PER SHARE
---------------------
SECURITY DESCRIPTION MARKET CARRYING
AND (QUOTRON SYMBOL) PRICE VALUE
-------------------- ------ --------
HRP limited partner units (HRY) . . . . . . . . . . . . $21.75 $6.47
ShowBiz common shares (SHBZ) . . . . . . . . . . . . . . 15.75 6.63
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 five month period ended December 31, 1995.
Settlement of Claim by the Securities and Exchange Commission. On
July 22, 1996, the Company announced that it agreed to a settlement of a
claim by the Securities and Exchange Commission ("SEC") arising from the
sale of a small portion of its holdings in the stock of ShowBiz during a
four-day period in June 1993. These and other similar sales were made by
the Company pursuant to a pre-planned, long-term selling program begun in
December 1992. The SEC asserted that some, but not all, of the Company's
June 1993 sales were improper because, before the sales program was
completed, the Company is alleged to have received non-public information
about ShowBiz. In connection with the settlement, the Company agreed to
contribute approximately $953,000, representing the loss that the SEC
alleged the Company avoided by selling during the four-day period, plus
interest of $240,000. This money will go into a fund for the benefit of
those who bought ShowBiz stock from the Company during the four-day period.
The Company has also agreed to be subject to an injunction against any
future violations of certain federal securities laws. In addition, the SEC
alleged that Anthony J. Gumbiner, Chairman of the Board and Chief Executive
Officer of the Company, failed to take appropriate action to discontinue
the Company's sales of the ShowBiz shares during the four days in question.
Mr. Gumbiner did not directly conduct the sales, nor did he sell any shares
for his own account or for the account of any trust for which he has the
power to designate the trustee. Although the sales were made solely by the
Company, the SEC assessed a civil penalty of $477,000, against Mr.
Gumbiner, as a "control person" for the Company. Mr. Gumbiner, however, is
not subject to any separate injunction concerning his future personal
activities.
As provided in the settlement, neither the Company nor Mr. Gumbiner
admitted or denied the allegations made by the SEC, and both entered into
the settlement to avoid the extraordinary time and expense that would be
involved in protracted litigation with the government. The Company
believes that the SEC's legal theories in any such litigation would have
been novel, but feels that this settlement is in its best interests and
fair to the shareholders who were affected by the Company's sales.
As the settlement had been anticipated and estimated amounts
previously accrued, the Company's contribution, including interest, did not
result in an additional charge against operations in any period included
herein. In approving the terms of the settlement, the Board of Directors
of the Company also authorized the Company to loan Mr. Gumbiner the amount
needed to satisfy his personal assessment. Significant terms of the
promissory note from Mr. Gumbiner include: (i) principal amount of
$477,000; (ii) interest rate of prime plus 0.75%; and (iii) quarterly
principal and interest payments of $31,250.
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
Real Estate
Promissory note, 8%, due March 1998 . . . . . . . . . . . $ 600 $ 600
Promissory note, 7.5%, repaid in July 1996 . . . . . . . . 62 437
-------- --------
662 1,037
Energy
Line of credit, prime + 2%, due September 1999 . . . . . . 975 1,125
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . 10,000 8,100
Equipment loan, 10%, due December 1996 . . . . . . . . . . 93 200
-------- --------
10,093 8,300
Hotels
Term loan, prime + 3.5%, due May 2001 . . . . . . . . . . 6,792 --
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . 5,051 5,099
Non-interest bearing obligation, due March 1997 . . . . . 166 333
-------- --------
12,009 5,432
Associated Company
Line of credit, prime + .75%, due April 1997 . . . . . . . 7,000 5,000
Promissory note, 5%, due March 1997 . . . . . . . . . . . 4,000 4,000
-------- --------
11,000 9,000
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,739 $ 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 HRP
per unit price was $21.75 at June 30, 1996, the Company has increased the
promissory note to $600,000 for this Participation Amount by a $100,000
charge to interest expense in December 1995.
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 note is collateralized by 187,500 shares of
common stock of Hallwood Energy Corporation ("HEC"). The outstanding
balance at June 30, 1996 was $63,000 and was repaid in July 1996.
Energy
Line of credit. In May 1995, 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
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
quarterly. The interest rate was 10.25% at June 30, 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 June 30, 1996 was $975,000.
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 $5,312,000.
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 June 30,
1996 was 7.9% and $10,000,000, respectively. Brookwood had $2,092,000 of
additional borrowing capacity at June 30, 1996.
Equipment loan. In December 1991, Brookwood entered into an 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 June
30, 1996 was $93,000.
Hotels
Term loan. In May 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. Prior to the acquisition, the Company held a leasehold
interest in the hotel. 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. The outstanding balance at June 30, 1996 was
$6,792,000.
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 by Marriott 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; and (iv) maintenance of a 4% capital reserve. The
outstanding balance at June 30, 1996 was $5,051,000.
Non-interest bearing obligation. A $500,000 non-interest bearing
obligation was issued to the former preferred shareholders of Integra 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, 1995 and 1996, respectively, with the remaining
installment due on March 8, 1997. The outstanding balance at June 30, 1996
was $166,666.
Page 14
15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
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 - 2,159,047 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
maturity date of the line of credit was further extended to April 30, 1997,
and the maximum commitment amount was increased by $2,000,000 to
$7,000,000. The Company drew down the additional $2,000,000 on June 10,
1996. The interest rate and outstanding balance at June 30, 1996 were
9.00% and $7,000,000, respectively.
Promissory note. The Company issued a $4,000,000 promissory note 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 -
517,242 shares of ShowBiz common stock; and (iv) the Trust is entitled to
contingent interest in an amount equal to 100% of the increase in the value
of the ShowBiz shares over the base amount of $16.67 per share. As the
ShowBiz share price was $15.75 at June 30, 1996, the Company did not record
an additional charge for this contingent interest.
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 in-kind 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 paid in
cash.
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Interest due on August 15, 1996 will be paid in-kind by the issuance
of $2,979,000 additional 13.5% Debentures (the "1996 Series") and $99,000
of cash in lieu of fractional debentures. The 1996 Series does not meet
the $5,000,000 minimum listing requirement on a recognized exchange and
therefore will not be listed.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
JUNE 30, DECEMBER 31,
DESCRIPTION 1996 1995
------------------------------------------ -------- -----------
7% Debentures (face value) . . . . . . . . . . . . . . . . . $22,808 $22,808
Unrecognized gain from purchase and exchange, net of
$1,844 and $1,559 accumulated amortization, respectively 2,376 2,661
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $25,184 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1996 1995 1996 1995
------- ------- ------- ------
Federal
Deferred . . . . . . . . . . $ 95 $ -- $158 $ 37
Current . . . . . . . . . . . -- -- 54 --
----- ------ ---- ----
Sub-total . . . . . . . . 95 -- 212 37
State . . . . . . . . . . . . 184 76 209 221
----- ------ ---- ----
Total . . . . . . . . . . $ 279 $ 76 $421 $258
===== ====== ==== ====
The federal deferred tax expense in 1996 was recorded by the Company's
HEC subsidiary, and the 1995 amount was recorded by the Company. The
federal current tax expense in 1996 is an estimate for alternative minimum
tax payable 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 $5,771,000 at June 30, 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 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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:
SIX MONTHS ENDED
JUNE 30,
--------------------
DESCRIPTION 1996 1995
----------------------------------------- -------- -------
Supplemental schedule of noncash investing
and financing activities:
Recording of proportionate share of stockholders'
equity transaction by ShowBiz . . . . . . . . . . . . . . $ 53 $ 142
Mortgage loans assigned to plaintiff in connection
with litigation settlement . . . . . . . . . . . . . . . . -- 592
Supplemental disclosures of cash payments:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 1,998 $ 2,351
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 151 153
8. COMMISSION-FREE OFFER TO PURCHASE COMMON STOCK
On June 10, 1996, the Company announced a commission-free offer
(the "Offer") program for stockholders holding 99 or fewer shares of
the Company's common stock as of the record date of June 7, 1996 to
sell their shares to the Company. The Offer allowed eligible
stockholders to sell all, but not less than all, of their shares to
the Company without incurring any brokerage commission. The price
paid by the Company was $14.00 per share, which was higher than the
average of the closing market prices of the shares for the five
trading days immediately preceding the Record Date, as reported by the
Wall Street Journal.
On July 10, 1996 the Offer was extended from its original
termination date of July 12, 1996 to July 23, 1996. As a result the
Company purchased 28,126 shares, or 1.76% of the total outstanding
shares, from 1,590 stockholders at a total cost of $394,000. Such
shares have been added to treasury shares, 3,967 of which, at a cost
of $55,000, are included in the quarter ended June 30, 1996.
Page 17
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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 $2,396,000 for the second quarter
ended June 30, 1996, compared to net income of $86,000 in the 1995 period.
The six-month net income of $2,704,000, compares to net income of
$1,519,000 in the 1995 period. Total revenue for the 1996 second quarter
was $32,463,000, compared to $32,691,000 in the prior-year period. For the
six months revenue was $59,588,000 compared to $64,505,000 in the
prior-year period.
The prior year quarter and six month results have been restated as a
result of a change in the Company's fiscal year end from July 31 to
December 31, beginning December 31, 1995.
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 $1,084,000 for the quarter ended June 30, 1996
decreased by $152,000, or 12%, from $1,236,000 in the prior-year period.
Fee income of $2,092,000 for the six months decreased by $1,000 from the
similar period a year ago. The decreases were due to lower 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").
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
1996 second quarter, the Company reported a $455,000 loss compared to a
$51,000 loss in the period a year ago. The comparative six month amounts
were losses of $949,000 and $75,000 for the 1996 and 1995 periods,
respectively. The increased losses result 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.
Interest and discounts from mortgage loans for the 1996 second quarter
declined to $2,000 from the 1995 amount of $31,000 and for the six months
declined to $3,000 from the 1995 amount of $74,000. The declines were the
result of the sale or assignment of substantially all of the mortgage loan
portfolio in the prior year.
As a result of the December 1995 sale of the United Kingdom
office-retail property, the Company reported no rental income in 1996,
compared to $174,000 in the 1995 second quarter and $355,000 for the six
months in 1995.
Expenses. Administrative expenses changed slightly to $324,000 and
$651,000 in the 1996 second quarter the six month periods, compared to
$336,000 and $649,000 in the comparable year-ago periods.
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
Depreciation and amortization expense of $168,000 for the 1996 second
quarter and $336,000 for the six month period decreased from $243,000 and
$486,000 in the 1995 periods. The 1995 periods included depreciation
expense of $75,000 and $150,000 for the 1995 three and six month periods,
respectively. Amortization expense of $168,000 for the quarter and
$336,000 for the six months in both the 1996 and 1995 periods relates to
HRC's general partner investment in HRP to the extent allocated to
management rights.
Interest expense decreased to $13,000 from $168,000 in the 1996 second
quarter and decreased to $30,000 from $314,000 in the six month period, 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
for the 1996 and 1995 periods.
ENERGY.
Revenue. Following the December 1995 conversion of its HEC preferred
stock investment into common stock and various purchases of its own stock
for treasury, the Company owns 82% 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 46% of its affiliate, Hallwood Consolidated Resources
Corporation, which HEP accounts for under the equity method.
Second quarter 1996 oil and gas revenues of $1,730,000 increased
$501,000, or 41%, compared to $1,229,000 in the year-ago period. For the
six months, the comparison of oil and gas revenues was $3,584,000 in the
current year and $2,527,000 in the year ago period. Oil revenue for the
six months increased $308,000 to $1,345,000, due to an increase in
production to 71,000 barrels from 62,000 barrels, combined with an increase
in the average price per barrel to $18.94 from $16.73. Gas revenue for
the six months increased $749,000 to $2,239,000, primarily as a result of
an increase in the average gas price to $2.41 from $1.69 per mcf, and an
increase in production to 928,000 mcf from 880,000 mcf. The increase in
oil and gas production is primarily due to increased production from
developmental and exploratory drilling projects in Montana, Wyoming and
West Texas, partially offset by normal production declines.
Other income consists primarily of HEC's direct interest income, as
well as HEC's share of HEP's interest income, facilities income from two
gathering systems in New Mexico, pipeline revenue, equity in income (loss)
of affiliates and miscellaneous income or expense. The increases in other
income to $36,000 for the 1996 second quarter from the $147,000 loss in the
1995 period and to $64,000 for the 1996 six month period from the ($81,000)
loss in the 1995 period are due to an increase in HEP's equity in earnings
of affiliate which resulted from higher oil and gas revenues.
Expenses. Depreciation, depletion, amortization and impairment
expenses were $386,000 for the 1996 second quarter and $855,000 for the six
months compared to $463,000 and $1,345,000 in the year-ago periods. The
decreases are 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, combined with lower
capitalized costs in 1996.
Operating expenses increased by $47,000 to $350,000 for the 1996
second quarter from $303,000 in the prior-year quarter and increased
$90,000 to $732,000 for the six months from $642,000 as a result of
increased production taxes and operating expenses in 1996 due to the
production increase described above.
Page 19
20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Administrative expenses decreased by $61,000 for the 1996 second
quarter to $187,000 from $248,000 in the 1995 quarter and decreased by
$66,000 to $434,000 for the 1996 six month period from $500,000 due to a
decline in allocated internal overhead.
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.
Interest expense decreased by $20,000 to $113,000 for the 1996 second
quarter compared to $133,000 in 1995 and increased by $50,000 to $254,000
for the 1996 six months compared to $204,000 for the year-ago period,
primarily from HEC's net borrowings under its line of credit.
Operating Subsidiaries. The business segments of the Company's
operating subsidiaries consist of textile products and hotels.
TEXTILE PRODUCTS.
Revenue. Sales decreased $2,433,000 in the 1996 second quarter to
$21,917,000, compared to $24,350,000 in the same quarter a year ago. The
comparative six month sales decreased to $40,087,000 in 1996 from
$45,128,000 in 1995. The decreases in sales are 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. However, these decreases
are partially offset by continued growth of distribution businesses.
Expenses. Cost of sales decreased $2,778,000 or 12.9% to $18,752,00
from $21,530,000, compared to the 10.0% decrease in sales for the 1996
second quarter from the comparable prior year quarter. The higher gross
profit margin for the 1996 second quarter (14.4% versus 11.6%) was
principally the result of more efficient operations at the Kenyon dyeing
and finishing plant. The comparable gross profit margins for the six month
periods were 14.3% in 1996 and 11.5% in 1995.
Administrative and selling expenses increased $78,000 in the 1996
second quarter to $2,169,000 from $2,091,000 for the comparable 1995 period
and increased $239,000 for the six month period to $4,279,000 from
$4,040,000 for the comparable 1995 period, due primarily to a $95,000
provision for costs related to management changes at the Kenyon plant in
the first quarter and increased operating expenses associated with growth of
the distribution businesses.
The $88,000 decrease in interest expense to $166,000 for the 1996
second quarter and $137,000 decrease to $322,000 for the six months were
the result of lower average borrowings and interest rates than in the
prior-year periods.
HOTELS
Revenue. Sales of $5,491,000 in the 1996 second quarter increased by
$29,000 from the year-ago amount of $5,462,000. The 1996 six month hotel
revenues of $11,061,000 decreased by $195,000, compared to $11,256,000 for
the 1995 period. The decrease for the six months is attributable to the
January 1995 sale of the Lido Beach Holiday Inn hotel, which had
contributed $362,000 to sales in the 1995 first quarter, partially offset
by increased revenues at the remaining hotels. In January 1995 the Company
sold its fee interest in the Lido Beach Holiday Inn hotel resulting in a
gain of $2,164,000 and in the 1995 second quarter the Company sold two
management contracts which resulted in a gain of $232,000. Management fee
income of $73,000 for the 1995 second quarter and $125,000 for the 1995 six
month period related to managed properties prior to the sale of the
management contracts.
Page 20
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Expenses. Operating expenses of $4,398,000 for the 1996 quarter
decreased by $160,000 from the year-ago amount of $4,558,000. The 1996 six
month hotel operating expenses decreased by $444,000 to $8,949,000,
compared to $9,393,000 for the 1995 period. The decrease for the six
months is primarily attributable to the aforementioned sale of the Lido
Beach Holiday Inn hotel.
Depreciation and amortization expense increased by $76,000 to $612,000
for the 1996 second quarter, reflecting the purchase of the fee interest in
the Residence Inn by Marriott hotel in Greenville, South Carolina and
recent capital expenditures at the remaining properties, partially offset
by the sale of the Lido Beach Holiday Inn hotel. Depreciation and
amortization for the 1996 and 1995 six month periods were $1,175,000 and
$1,165,000, respectively.
Interest expense increased by $138,000 to $285,000 for the quarter
from $188,000 in the 1995 period from $147,000 and increased by $88,000 to
$423,000 for the six month period from $335,000 in 1995, due to the
procurement of the $6,800,000 term loan on the Greenville, South Carolina
hotel, partially offset by 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 $355,000
from its investment in ShowBiz for the quarter ended June 30, 1996,
compared to a loss of $120,000 in the prior-year period. For the six
months the Company recorded equity income of $1,163,000, compared to income
of $305,000 in 1995. The improvement in ShowBiz results for the 1996
periods are attributable to a 9.4% increase in comparable same store sales
and in improved operating margins. During the quarter ended June 30, 1996
the Company also sold 225,000 shares of ShowBiz for aggregate proceeds of
$3,498,000 (average price of $15.55 per share). The net gain from the
various sales was $2,040,000.
Expenses. Interest expense of $174,000 for the 1996 second quarter
was unchanged from the year-ago quarter. Interest expense of $340,000 for
the 1996 six month period decreased by $1,000 from the 1995 amount of
$341,000.
OTHER
Revenue. Interest on short-term investments and other income
increased by $41,000 to $157,000 for the 1996 second quarter and increased
by $41,000 to $231,000 for the 1996 six month period from the comparable
prior year amounts. Fee income in the 1996 second quarter and six month
periods of $106,000 and $212,000, respectively, were the same as the
prior-year amounts.
Expenses. Interest expense in the amount of $1,025,000 for the 1996
second quarter and $2,051,000 for the six months decreased from the prior
year amounts of $1,066,000 and $2,132,000, respectively. The decreases are
due to the repurchase of 7% Debentures in 1995.
Administrative expenses of $572,000 for the 1996 second quarter and
$1,066,000 for the six months, were increased from the comparable 1995
amount of $429,000 and $980,000, respectively. The increases are primarily
attributable to an increase in legal, accounting and consulting fees.
Income taxes. Income taxes were $279,000 for the 1996 quarter and
$76,000 in the 1995 quarter. The 1996 quarter included a $95,000 deferred
tax charge and $158,000 for the six months. The balance of the expense in
all periods was for state taxes, apart from a provision for estimated
federal alternative minimum tax of $54,000 in the 1996 quarter.
Page 21
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 June 30, 1996, the Company had approximately $60,000,000 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, as well as various purchases by
HEC of its own stock for treasury, the Company owns 82% 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 June 30, 1996, HEC had estimated net operating loss carryforwards
("NOLs") of $109,000,000, 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 $342,000. 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. The extraordinary
gain in the second quarter of 1995 resulted from the early extinguishment
of 7% Debentures at a discount, having a face value of $604,000.
Page 22
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THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at June 30, 1996
totaled $7,609,000.
Although the Company's ShowBiz shares, having a market value of
approximately $35,838,000 at July 31, 1996 (based upon the closing price on
such date of $14.62 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 2,451,289 ShowBiz shares are pledged as collateral for
the $7,000,000 line of credit and the $4,000,000 promissory note. The
Company currently has no availability under its line of credit which
matures in April 1997, and the promissory note is due March 1997.
The Company's real estate segment generates funds principally from
its property management activities, without significant additional capital
costs. The majority of its investment in HRP is presently unencumbered.
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 $5,312,000 at June 30, 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
$975,000 at June 30, 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 June 30, 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 June 30, 1996, Brookwood had $2,092,000 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 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 23
24
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) 10.24 - Loan agreement and related promissory
note, dated May 2, 1996, between Brock
Suite Greenville, Inc. and Allied
Capital Commercial Corporation and
Business Mortgage Investors, Inc. Pages 26-86
10.25 - Promissory note from Anthony J.
Gumbiner, as Maker, in favor of the
Company, dated July 25, 1996. Pages 87-89
10.26 - Letter agreement, dated June 4, 1996,
between the Company and Merrill Lynch
Business Financial Services, Inc.
amending certain terms of the WCMA Note
and Loan Agreement, dated April 19, 1994. Pages 90-91
(ii) 11 - Statement Regarding Computation of Per
Share Earnings Page 92
(iii) 27 - Financial Data Schedule Page 93
(b) Reports on Form 8-K None
Page 24
25
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: August 14, 1996 By: /s/ Melvin J. Melle
-------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 25
26
EXHIBIT INDEX
EXHIBIT
- -------
10.24 Loan Agreement
10.25 Promissory Note
10.26 Letter of Terms
11 Statement Regarding Computation
27 Financial Data Schedule