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 September 30, 1996 Commission File Number: 1-8303
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The Hallwood Group Incorporated
(Exact name of registrant as specified in its charter)
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DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
1,566,218 shares of Common Stock, $.10 par value per share, were
outstanding at October 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 September 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Three Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 10-18
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 19-24
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 25-28
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- ----------
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,650 $ 9,406
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,459 430
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 65 59
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 25
-------- ---------
9,239 9,920
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 9,607 10,563
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,388 2,236
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,604 1,407
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 675 398
-------- ---------
14,274 14,604
-------- ---------
Total asset management assets . . . . . . . . . . . . . . . . . . . 23,513 24,524
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,521 13,735
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,905 10,938
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,559 8,709
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995 1,092
-------- ---------
39,980 34,474
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,068 10,498
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 2,133 2,195
-------- ---------
18,201 12,693
-------- ---------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 58,181 47,167
ASSOCIATED COMPANY
Investment in ShowBiz. . . . . . . . . . . . . . . . . . . . . . . . . 16,527 16,490
OTHER
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 6,504 3,339
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5,740 5,929
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,679 688
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 587 96
-------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 14,510 10,052
-------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,731 $ 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
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- ------------
ASSET MANAGEMENT
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500 $ 937
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 385 340
---------- ----------
885 1,277
ENERGY
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 4,649 5,366
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3,487 3,293
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,394 2,857
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 1,125
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 189 106
---------- ----------
11,619 12,747
---------- ----------
Total asset management liabilities . . . . . . . . . . . . . . . . 12,504 14,024
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,538 8,300
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 10,931 6,586
---------- ----------
19,469 14,886
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,347 5,432
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 1,888 2,238
---------- ----------
14,235 7,670
---------- ----------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 33,704 22,556
ASSOCIATED COMPANY
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000 9,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 37 63
---------- ----------
Total associated company liabilities . . . . . . . . . . . . . . . 11,037 9,063
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 25,039 25,469
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 25,672 22,855
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 1,384 3,657
---------- ----------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 52,095 51,981
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 109,340 97,624
REDEEMABLE PREFERRED STOCK
Series B, 250,000 shares issued and outstanding;
stated at redemption value . . . . . . . . . . . . . . . . . . . . 1,000 1,000
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, 250,000 shares issued and outstanding as Series B . . -- --
Common stock, issued 1,597,204 shares at both dates;
outstanding 1,298,509 and 1,326,635 shares, respectively . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 57,232 57,210
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (47,809) (50,963)
Treasury stock, 298,695 and 270,569 shares, respectively, at cost . . (7,192) (6,798)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) . . . . . . . . . . . . . . . 2,391 (391)
---------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,731 $ 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)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1995
---------- ----------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,208 $ 3,238
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . . (1,259) (495)
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 4 77
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 538
--------- ---------
2,953 3,358
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 898 974
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 504 729
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 427
Provision for losses (recovery) . . . . . . . . . . . . . . . . . . . . (22) 421
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 31
--------- ---------
1,628 2,582
--------- ---------
Income from real estate operations . . . . . . . . . . . . . . . . . 1,325 776
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 5,242 3,992
Other income (including intercompany income of $57 in 1995) . . . . . . 405 52
--------- ---------
5,647 4,044
Depreciation, depletion, amortization and impairment . . . . . . . . . . 1,210 1,820
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,088 1,059
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 890 884
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 344
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 (1)
--------- ---------
3,898 4,106
--------- ---------
Income (loss) from energy operations . . . . . . . . . . . . . . . . 1,749 (62)
--------- ---------
Income from asset management operations . . . . . . . . . . . . . . . 3,074 714
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,940 60,759
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,980 53,848
Administrative and selling expenses . . . . . . . . . . . . . . . . . . 6,417 6,034
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498 703
--------- ---------
56,895 60,585
--------- ---------
Income from textile products operations . . . . . . . . . . . . . . . 1,045 174
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)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
---------- ---------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,107 $16,248
Gain from sale of hotel and management contracts . . . . . . . . . . . . -- 2,396
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 125
------- -------
16,107 18,769
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,188 13,632
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 1,905 1,721
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 804 466
------- -------
15,897 15,819
------- -------
Income from hotel operations . . . . . . . . . . . . . . . . . . . . 210 2,950
------- -------
Income from operating subsidiaries . . . . . . . . . . . . . . . . . 1,255 3,124
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . . 4,107 367
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566 542
------- -------
Income (loss) from associated company . . . . . . . . . . . . . . . . 3,541 (175)
OTHER
Interest on short-term investments and other income . . . . . . . . . . 358 244
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 319
------- -------
677 563
Interest (including intercompany expense of $57 in 1995) . . . . . . . . 3,131 3,143
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,656 1,657
------- -------
4,787 4,800
-------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,110) (4,237)
------- -------
Income (loss) before income taxes and extraordinary gain . . . . . . . . 3,760 (574)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555 223
------- -------
Income (loss) before extraordinary gain . . . . . . . . . . . . . . . . 3,205 (797)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . . -- 144
------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,205 $ (653)
======== =======
PER COMMON SHARE (PRIMARY)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.41 $ (0.48)
======== =======
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
SEPTEMBER 30,
-----------------------
1996 1995
-------- -------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,116 $ 1,145
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (310) (420)
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 1 3
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 183
--------- -------
1,807 911
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 247 325
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 113
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 168 243
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 1 23
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . -- 427
--------- -------
627 1,131
--------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . 1,180 (220)
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 1,658 1,465
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 133
--------- -------
1,999 1,598
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 456 384
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 356 417
Depreciation, depletion, amortization and impairment . . . . . . . . . 355 475
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 124 50
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 140
--------- -------
1,395 1,466
--------- -------
Income from energy operations . . . . . . . . . . . . . . . . . . . 604 132
--------- -------
Income (loss) from asset management operations . . . . . . . . . . 1,784 (88)
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,853 15,631
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,626 13,912
Administrative and selling expenses . . . . . . . . . . . . . . . . . 2,138 1,994
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 244
--------- -------
17,940 16,150
--------- -------
Loss from textile products operations . . . . . . . . . . . . . . . (87) (519)
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
SEPTEMBER 30,
---------------------------
1996 1995
------------ ----------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,045 $ 4,992
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 4,238 4,239
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 730 556
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 131
-------- --------
5,349 4,926
-------- --------
Income (loss) from hotel operations . . . . . . . . . . . . . . . . (304) 66
Loss from operating subsidiaries . . . . . . . . . . . . . . . . . (391) (453)
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . 904 62
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 201
-------- --------
Income (loss) from associated company . . . . . . . . . . . . . . . 678 (139)
OTHER
Interest on short-term investments and other income . . . . . . . . . 128 54
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 107
-------- --------
234 161
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080 1,012
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 590 677
-------- --------
1,670 1,689
-------- --------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,436) (1,528)
-------- --------
Income (loss) before income taxes and extraordinary gain . . . . . . . 635 (2,208)
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . 135 (36)
-------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500 $ (2,172)
======== ========
PER COMMON SHARE (PRIMARY)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.38 $ (1.61)
======== ========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,205 $ (653)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, depletion, amortization and impairment . . . . . . . . . . . . . . . . . 4,427 5,047
Undistributed income from energy affiliate . . . . . . . . . . . . . . . . . . . . . . (3,438) (2,208)
Gain from sale of investment in ShowBiz . . . . . . . . . . . . . . . . . . . . . . . (2,431) --
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . . . . . . . . . 2,103 (952)
Distributions from energy affiliate . . . . . . . . . . . . . . . . . . . . . . . . . 1,943 2,301
Equity in net (income) of associated company . . . . . . . . . . . . . . . . . . . . (1,676) (367)
Equity in net loss of real estate affiliate . . . . . . . . . . . . . . . . . . . . . 1,259 495
Amortization of deferred gain from debenture exchange . . . . . . . . . . . . . . . . (430) (383)
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 21
Increase in mortgage loans from sale of real estate . . . . . . . . . . . . . . . . . (10) (18)
Proceeds from collections of mortgage loans . . . . . . . . . . . . . . . . . . . . . 4 972
Gain from sale of hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (2,164)
Mortgage loans assigned to plaintiff in litigation settlement . . . . . . . . . . . . -- 592
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 421
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (144)
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . . . . . . . . . -- (10)
Net change in textile products assets and liabilities . . . . . . . . . . . . . . . . (1,351) 148
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . (3,853) (2,418)
Net change in energy assets and liabilities . . . . . . . . . . . . . . . . . . . . . 158 (205)
--------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . 99 475
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fee interest in hotel . . . . . . . . . . . . . . . . . . . . . . . . . . (6,550) --
Proceeds from sale of investment in ShowBiz . . . . . . . . . . . . . . . . . . . . . . . 4,139 --
Capital expenditures for hotels and real estate . . . . . . . . . . . . . . . . . . . . . (961) (547)
Investments in textile products property and equipment . . . . . . . . . . . . . . . . . (618) (1,004)
Investments in energy property and equipment . . . . . . . . . . . . . . . . . . . . . . (288) (51)
Net change in restricted cash for investing activities . . . . . . . . . . . . . . . . . (116) (67)
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (4,474)
Proceeds from sale of hotel assets . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 12,888
--------- --------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . (4,448) 6,745
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . . . . . . . . . 9,200 1,280
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . . . . . . . . . (1,084) (7,141)
Purchase of common stock for treasury . . . . . . . . . . . . . . . . . . . . . . . . . . (394) (458)
Purchase of capital stock by energy subsidiary for treasury . . . . . . . . . . . . . . . (158) (2,231)
Payment of dividend to Series B preferred stockholders . . . . . . . . . . . . . . . . . (50) --
Net change in restricted cash for financing activities . . . . . . . . . . . . . . . . . -- 739
Repurchase of 7% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (460)
Payment of dividends to minority stockholders of energy subsidiary . . . . . . . . . . . -- (546)
Purchase of fractional shares - reverse split . . . . . . . . . . . . . . . . . . . . . . -- (17)
--------- --------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . 7,514 (8,834)
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 17
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . 3,165 (1,597)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . 3,339 3,295
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,504 $ 1,698
========= ========
See accompanying notes to consolidated financial statements.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine
months ended September 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 REAL ESTATE AFFILIATE AND ASSOCIATED COMPANY (DOLLAR AMOUNTS
IN THOUSANDS):
INCOME (LOSS) FROM INVESTMENTS
AS OF SEPTEMBER 30, 1996 AMOUNT AT FOR THE NINE MONTHS ENDED
------------------------ WHICH CARRIED AT -------------------------
COST OR -------------------------- SEPTEMBER 30,
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED SEPTEMBER 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 . . . . -- $ 8,718 $ 5,313 $ 5,841 $ (75) $ (78)
- Limited partner units . . . . . . 413,040 5,381 2,337 3,565 (1,184) (417)
-------- -------- -------- -------- ------
Totals . . . . . . . . . . . . . $ 14,099 $ 7,650 $ 9,406 $ (1,259) $ (495)
======== ======== ======== ======== ======
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock . . . . . . . . . . 2,413,789 $ 4,904 $ 16,527 $ 16,490 $ 1,676 $ 367
- Gain on sale of shares . . . . . -- -- -- 2,431 --
-------- -------- -------- -------- ------
Totals . . . . . . . . . . . . . $ 4,904 $ 16,527 $ 16,490 $ 4,107 $ 367
======== ======== ======== ======== ======
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
(A) At September 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 Company accounts for its investment in HRP on the equity
method of accounting. In addition to recording its share of net
income (loss), the Company also records its pro rata share of
various partner capital transactions reported by HRP.
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 nine months ended September 30,
1996 and 1995 such amortization was $504,000, respectively.
As the Company continues to record its share of HRP's net loss,
primarily the result of non-cash depreciation expense, it is
anticipated that the carrying value of the limited partner
interest will be reduced to zero. At such time, no further
recording of equity losses will be required; however,
unrecognized losses which may occur after the carrying value has
been reduced to zero must be recovered before the Company would
be able to recognize income on such units in the future.
The carrying value of the Company's investment in HRP's limited
partner interest also includes non-cash adjustments for its pro
rata share of HRP's partner capital transactions with
corresponding adjustments to additional paid-in capital. For the
nine months ended September 30, 1996 the carrying value was
decreased by $47,000 for such adjustments.
As further discussed in Note 4, the Company has pledged 89,269
limited partner units to collateralize a promissory note, due
March 1998, in the principal amount of $500,000.
(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 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 $69,000 for the nine months ended September 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 nine months ended September 30, 1996, the Company sold
262,500 shares of ShowBiz for aggregate proceeds of $4,139,000
(average price of $15.77 per share). The net gain from the
various sales was $2,431,000, of which $391,000 was recorded in
the quarter ended September 30, 1996.
At September 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
SEPTEMBER 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 September 30, 1996 were:
AMOUNT PER SHARE
----------------------
SECURITY DESCRIPTION MARKET CARRYING
AND (QUOTRON SYMBOL) PRICE VALUE
---------------------------- ---------- ----------
HRP limited partner units (HRY) . . . . . . . . . . . . $28.50 $5.66
ShowBiz common shares (SHBZ) . . . . . . . . . . . . . . 18.12 6.85
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.
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 was deposited 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 totaling $31,250.
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
Real Estate
Promissory note, 8%, due March 1998 . . . . . . . . . . . $ 500 $ 500
Promissory note, 7.5%, repaid in July 1996 . . . . . . . . -- 437
-------- --------
500 937
Energy
Line of credit, prime + 2%, due September 1999 . . . . . . 900 1,125
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . 8,500 8,100
Equipment loan, 10%, due December 1996 . . . . . . . . . . 38 200
-------- --------
8,538 8,300
Hotels
Term loan, prime + 3.5%, due May 2001 . . . . . . . . . . 6,779 --
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . 5,027 5,099
Term loan, certificate of deposit rate, due January 1997 . 375 --
Non-interest bearing obligation, due March 1997 . . . . . 166 333
-------- --------
12,347 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 . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,285 $ 24,794
======== ========
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 $28.50 at September 30, 1996, the Company has accrued an
additional $200,000 for this Participation Amount as a charge to interest
expense in the quarter ended September 30, 1996, which is in addition to
the $100,000 charge which had been recorded in the two month period ended
December 31, 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 included $62,500 of
principal amortization. The note was collateralized by 187,500 shares of
common stock of Hallwood Energy Corporation ("HEC"). The final payment was
made in July 1996.
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
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
quarterly. The interest rate was 10.25% at September 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 September 30, 1996 was $900,000.
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 $4,649,000.
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
September 30, 1996 were 7.93% and $8,500,000, respectively. Brookwood had
$1,624,000 of additional borrowing capacity at September 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
September 30, 1996 was $38,000.
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 September 30, 1996 was
$6,779,000.
Term loan. In October 1994, the Company's Integra Hotels, Inc.
subsidiary entered into a mortgage loan in the amount of $5,200,000. The
loan is secured by the Residence Inn By Marriott hotel in Tulsa, Oklahoma
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 September
30, 1996 was $5,027,000.
Page 14
15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Promissory note. In connection with the acquisition of the fee
interest of the Greenville Residence Inn By Marriott, the Company issued a
promissory note in the amount of $375,000. The promissory note bears
interest at the same rate as the related $375,000 certificate of deposit,
which secures the repayment of the note. The certificate of deposit is
included in restricted cash, and it is anticipated that, at maturity, the
promissory note will be repaid in full from proceeds of the certificate of
deposit. The outstanding balance at September 30, 1996 was $375,000.
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 September
30, 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 - 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 in June 1996.
Due to the increased value of the pledged ShowBiz shares and resulting
excess collateral value, MLBFS consented to the release of 262,500 shares,
which were sold as discussed in Note 3. At September 30, 1996, 1,896,547
shares of ShowBiz were pledged to MLBFS. The interest rate and outstanding
balance at September 30, 1996 were 9% 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 market
value of the ShowBiz shares, as defined, over the base amount of $16.67 per
share. As the ShowBiz share price, as defined, was less than the base
amount at September 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.
Accordingly, the Company must retire an additional $2,197,000 prior to
March 1998.
Page 15
16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
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.
Interest due on August 15, 1996 was paid in-kind by the issuance of
$2,817,000 additional 13.5% Debentures (the "1996 Series") and $260,000 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 is not listed. 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.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 1996 1995
------------------------------------------ ------------- ------------
7% Debentures (face value) . . . . . . . . . . . . . . . . . $22,808 $22,808
Unrecognized gain from purchase and exchange, net of
$1,989 and $1,559 accumulated amortization, respectively . 2,231 2,661
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . . $25,039 $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
1996 Series . . . . . . . . . . . . . . . . . . . . . . . 2,817 --
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . . $25,672 $22,855
======= =======
Page 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
6. INCOME TAXES
The following is a summary of the income tax expense (benefit) (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
Federal
Deferred . . . . . . . . . . $ 31 $ (16) $189 $ 21
Current . . . . . . . . . . . 128 -- 182 --
----- ----- ---- -----
Sub-total . . . . . . . . 159 (16) 371 21
State . . . . . . . . . . . . (24) (20) 184 202
----- ----- ---- -----
Total . . . . . . . . . . $ 135 $ (36) $555 $ 223
===== ===== ==== =====
The 1996 federal deferred tax expense amounts were recorded by the
Company's HEC subsidiary, and the 1995 amounts were 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 $5,740,000 at September 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.
7. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS (IN
THOUSANDS)
The following transactions affected recognized assets or liabilities
but did not result in cash receipts or cash payments:
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
DESCRIPTION 1996 1995
----------------------------------------- -------- --------
Supplemental schedule of noncash investing
and financing activities:
Payment in-kind of annual interest on 13.5% Debentures . . . $2,817 $ --
Recording of proportionate share of stockholders'
equity transaction by ShowBiz . . . . . . . . . . . . . . 69 161
Recording of proportionate share of partners' capital
transactions by HRP . . . . . . . . . . . . . . . . . . . 47 --
Issuance of redeemable preferred stock . . . . . . . . . . . -- 1,000
Mortgage loans assigned to plaintiff in connection
with litigation settlement . . . . . . . . . . . . . . . . -- 592
Effect of reverse split on common stock/additional
paid in capital . . . . . . . . . . . . . . . . . . . . . -- 479
Real estate acquired through foreclosure . . . . . . . . . . -- 23
Supplemental disclosures of cash payments:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $3,446 $6,489
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 328 279
Page 17
18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
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.
9. TENDER OFFER FOR SHARES OF HEC AND MERGER INTO THE COMPANY
On October 10, 1996, the Company and HEC, an 82% owned subsidiary,
announced that the two companies had entered into a definitive merger
agreement providing for the merger of HEC into the Company. Prior to
the merger, the Company agreed to commence a tender offer for all of
the outstanding shares of HEC not currently owned by the Company, at a
price of $19.50 per share, subject to the terms and conditions of the
tender offer documents.
The board of directors of HEC and a special committee of the board
of directors of HEC unanimously approved the tender offer and merger
and determined that the terms of the tender offer and the merger were
fair to and in the best interest of the stockholders of HEC. The
board of directors of HEC have recommended that all stockholders of
HEC accept the tender offer and tender their shares. The completion
of the transaction is conditioned upon, among other things, the valid
tender of a majority of the HEC shares not currently held by the
Company, which together with the shares currently held by the Company,
will constitute at least 90% of the issued and outstanding shares of
HEC.
The tender offer will expire on November 22, 1996, unless extended.
The merger agreement provides that promptly after the completion of
the tender offer, receipt of any required approvals for the merger and
the waiver or satisfaction of any other condition, HEC will be merged
into the Company.
Page 18
19
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 $500,000 for the third quarter
ended September 30, 1996, compared to a net loss of $2,172,000 in the 1995
period. The nine-month net income of $3,205,000, compares to a net loss of
$653,000 in the 1995 period. Total revenue for the 1996 third quarter was
$27,842,000, compared to $23,355,000 in the prior-year period. For the
nine months revenue was $87,431,000 compared to $87,860,000 in the
prior-year period.
The prior year quarter and nine 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 $2,116,000 for the quarter ended September 30,
1996 increased by $971,000, or 85%, from $1,145,000 in the prior-year
period. Fee income of $4,208,000 for the nine months increased by $970,000
from the similar period a year ago. Fees are 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 increase was due primarily to
leasing fees earned in the quarter ended September 30, 1996, in connection
with the long-term renewal of a lease for a major tenant.
The equity loss from investments in HRP represents the Company's
recognition of its pro rata share of the loss reported by HRP. For the
1996 third quarter, the Company reported a $310,000 loss compared to a
$420,000 loss in the period a year ago. The comparative nine month amounts
were losses of $1,259,000 and $495,000 for the 1996 and 1995 periods,
respectively. The increased loss for the nine months resulted 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 carrying value of the
limited partner units is reduced to zero. See Note 2 to the Company's
consolidated financial statements.
Interest and discounts from mortgage loans for the 1996 third quarter
declined to $1,000 from the 1995 amount of $3,000, and for the nine months
declined to $4,000 from the 1995 amount of $77,000. 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 $183,000 in the 1995 third quarter and $538,000 for the nine
months in 1995.
Expenses. Administrative expenses declined to $247,000 and $898,000
in the 1996 third quarter and nine month periods, compared to $325,000 and
$974,000 in the comparable year-ago periods. The decreases were primarily
attributable to lower leasing commission expense.
Amortization expense of $168,000 for the quarter and $504,000 for the
nine months in both the 1996 and 1995 periods relates to HRC's general
partner investment in HRP to the extent allocated to management rights.
Page 19
20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The 1995 periods also include depreciation expense of $75,000 and $225,000,
respectively, for the office-retail property which was sold in December
1995.
Interest expense increased to $211,000 from $113,000 in the 1996 third
quarter and decreased to $241,000 from $427,000 in the nine month period,
due to the recording of a $200,000 charge in the 1996 third quarter for the
Participation Amount discussed in Note 4, offset by lower interest costs
from the aforementioned sale of the office-retail property and repayment
of the associated loan payable.
The provision for losses of $427,000 in the 1995 third quarter and
$421,000 for the 1995 nine month period were primarily comprised of a
$221,000 loss on the disposition of a portion of the Company's mortgage
loan portfolio and a $200,000 write-down on the carrying value of the
office-retail property. In 1996, the Company recorded a recovery of
$22,000 in the second fiscal quarter in connection with the resolution of
litigation over a defaulted mortgage.
Operating expenses 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 HEC's various purchases of its own
stock for treasury, the Company presently 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.
Third quarter 1996 oil and gas revenues of $1,658,000 increased
$193,000, or 13%, compared to $1,465,000 in the year-ago period. For the
nine months, the comparison of oil and gas revenues was $5,242,000 in the
current year and $3,992,000 in the year ago period. Oil revenue for the
nine months increased $322,000 to $1,982,000, due to an increase in
production to 101,000 barrels from 97,000 barrels, combined with an
increase in the average price per barrel to $19.62 from $17.11. Gas
revenue for the nine months increased $928,000 to $3,260,000, primarily as
a result of an increase in the average gas price to $2.39 from $1.75 per
mcf, and an increase in production to 1,364,000 mcf from 1,329,000 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 acquisition fee and 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 $341,000 for the 1996 third quarter from
$133,000 in the 1995 period and to $405,000 for the 1996 nine month period
from $52,000 in the 1995 period are primarily due to fees earned from HEP
property acquisitions and an increase in HEP's equity in earnings of
affiliate which resulted from higher oil and gas revenues.
Expenses. Administrative expenses increased by $72,000 for the 1996
third quarter to $456,000 from $384,000 in the 1995 quarter and increased
by $6,000 to $890,000 for the 1996 nine month period from $884,000 due to
an increase in allocated internal overhead.
Operating expenses decreased by $61,000 to $356,000 for the 1996 third
quarter from $417,000 in the prior-year quarter as a result of production
decreases during the quarter; however, the operating expenses
Page 20
21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
increased $29,000 to $1,088,000 for the nine months from $1,059,000 as a
result of increased production taxes and operating expenses in 1996 due to
the production increase described above.
Depreciation, depletion, amortization and impairment expenses were
$355,000 for the 1996 third quarter and $1,210,000 for the nine months
compared to $475,000 and $1,820,000 in the year-ago periods. The quarterly
decrease is attributable to lower capitalized costs in 1996 and the nine
months 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, combined with lower
capitalized costs in 1996.
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 $36,000 to $104,000 for the 1996 third
quarter compared to $140,000 in 1995 and increased by $14,000 to $358,000
for the 1996 nine months compared to $344,000 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 increased $2,222,000 in the 1996 third quarter to
$17,853,000, compared to $15,631,000 in the same quarter a year ago. The
comparative nine month sales decreased to $57,940,000 in 1996 from
$60,759,000 in 1995. The increase of sales in the third quarter was
principally in the distribution business. During the first six months many
of Brookwood's customers reduced their purchases due to weak market
conditions that they were experiencing; however, in the third quarter these
customers increased their purchases from Brookwood.
Expenses. Cost of sales increased $1,714,000 or 12.3% to $15,626,00
from $13,912,000, compared to the 14.2% increase in sales for the 1996
third quarter from the comparable prior year quarter. The higher gross
profit margin for the 1996 third quarter (12.5% versus 11.0%) was
principally the result of the increased level of distribution sales with
their higher profit margins and the more efficient operations at the Kenyon
dyeing and finishing plant. The comparable gross profit margins for the
nine month periods were 13.7% in 1996 and 11.4% in 1995.
Administrative and selling expenses increased $144,000 in the 1996
third quarter to $2,138,000 from $1,994,000 for the comparable 1995 period
and increased $383,000 for the nine month period to $6,417,000 from
$6,034,000 for the comparable 1995 period, due primarily to increased
operating expenses associated with growth of the distribution businesses
and a $95,000 provision for costs related to management changes at the
Kenyon plant in the 1996 first quarter.
The $68,000 decrease in interest expense to $176,000 for the 1996
third quarter and $205,000 decrease to $498,000 for the nine months were
the result of lower average borrowings and interest rates than in the
prior-year periods.
Page 21
22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HOTELS
Revenue. Sales of $5,045,000 in the 1996 third quarter increased by
$53,000 from the year-ago amount of $4,992,000. The 1996 nine month sales
of $16,107,000 decreased by $141,000, compared to $16,248,000 for the 1995
period. The modest increase for the three months is attributable to higher
average daily rates, partially offset by reduced occupancy levels. The
decrease for the nine months is primarily 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. This decrease was offset by increased
revenues at the remaining hotels which reported higher average daily rates
but lower occupancy levels during the 1996 nine month period. 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 $125,000 for the 1995 nine month period related to
managed properties prior to the sale of the management contracts.
Expenses. Operating expenses of $4,238,000 for the 1996 third quarter
were virtually unchanged from the prior year. The 1996 nine month hotel
operating expenses decreased by $444,000 to $13,188,000, compared to
$13,632,000 for the 1995 period. The decrease for the nine months is
primarily attributable to the aforementioned sale of the Lido Beach Holiday
Inn hotel.
Depreciation and amortization expense increased by $174,000 to
$730,000 for the 1996 third 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.
Depreciation and amortization for the 1996 and 1995 nine month periods were
$1,905,000 and $1,721,000, respectively.
Interest expense increased by $250,000 to $381,000 for the quarter
from $131,000 in the 1995 period and increased by $338,000 to $804,000 for
the nine month period from $466,000 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 $513,000
from its investment in ShowBiz for the quarter ended September 30, 1996,
compared to income of $62,000 in the prior-year period. For the nine
months the Company recorded equity income of $1,676,000, compared to income
of $367,000 in 1995. The improvement in ShowBiz results for the 1996
periods are attributable to a 9.7% increase in comparable same store sales
and in improved operating margins. During the nine months ended September
30, 1996 the Company also sold 262,500 shares of ShowBiz for aggregate
proceeds of $4,139,000 (average price of $15.77 per share). The net gain
from the various sales was $2,431,000. Of the 262,500 shares sold, 37,500
shares were sold in the 1996 third quarter for $640,000 with a net gain of
$391,000.
Expenses. Interest expense of $226,000 for the 1996 third quarter
increased by $25,000 from the year-ago amount of $201,000. Interest
expense of $566,000 for the 1996 nine month period increased by $24,000
from the 1995 amount of $542,000. The increases were attributable to
additional borrowings under the MLBFS line of credit.
OTHER
Revenue. Interest on short-term investments and other income
increased by $74,000 to $128,000 for the 1996 third quarter and increased
by $114,000 to $358,000 for the 1996 nine month period from the comparable
prior year amounts. The increases were primarily attributable to rental
income earned from the subleasing of executive office space formerly
occupied by the Company's affiliated entity - Integra-A Hotel and
Restaurant
Page 22
23
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Company. Fee income in the 1996 third quarter and nine month periods of
$106,000 and $319,000, respectively, were comparable with the prior-year
amounts.
Expenses. Interest expense in the amount of $1,080,000 for the 1996
third quarter and $3,131,000 for the nine months fluctuated from the prior
year amounts of $1,012,000 and $3,144,000, respectively. The fluctuations
were due to the August 1996 issuance of additional 13.5% Debentures in the
amount of $2,817,000 in connection with the payment of interest in-kind as
discussed in Note 5, offset by the repurchase of 7% Debentures in 1995.
Administrative expenses of $590,000 for the 1996 third quarter and
$1,656,000 for the nine months were slightly below the comparable 1995
amounts of $677,000 and $1,657,000, respectively.
Income taxes. Income taxes (benefit) were $135,000 for the 1996
quarter and $(36,000) in the 1995 quarter. The 1996 quarter included a
$31,000 federal deferred tax charge and the nine months included a $189,000
federal deferred tax charge. The federal current charge of $128,000 and
$182,000 for the three and nine months of 1996 relate to estimated
alternative minimum tax. The balance of the expense in all periods was for
state taxes. 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. See Note 6.
As of September 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 September 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 $311,000. 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 in the amount of $144,000 resulted from
the early extinguishment of 7% Debentures at a discount, having a face
value of $604,000.
Page 23
24
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 September 30,
1996 totaled $6,504,000.
Although the Company's ShowBiz shares, having a market value of
approximately $44,655,000 at October 31, 1996 (based upon the closing price
on such date of $18.50 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 2,413,789 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. The promissory note matures March 1997.
The Company's real estate segment generates funds principally from
its property management and leasing 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 $4,649,000 at September 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 September 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 September 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 September 30, 1996, Brookwood had $1,624,000
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.
Management believes that it will have sufficient funds derived from
operations and the potential sale of ShowBiz shares, hotel properties or
other assets to satisfy its obligations and, additionally, the Company
hopes to be able to retire debentures and /or equity from time to time
through open market purchases or negotiated transactions.
Page 24
25
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) 11 - Statement Regarding Computation of Per Share Earnings Page 27
(ii) 27 - Financial Data Schedule Page 28
(b) Reports on Form 8-K None
Page 25
26
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: November 13, 1996 By: /s/ Melvin J. Melle
-------------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 26
27
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
11 - Statement Regarding Computation of Per Share Earnings
27 - Financial Data Schedule