1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
MARK ONE
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO __________________
FOR THE PERIOD ENDED MARCH 31, 1997 COMMISSION FILE NUMBER: 1-8303
----------------------
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
----------------------
DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No _____
1,566,294 shares of Common Stock, $.10 par value per share,
were outstanding at April 30, 1997.
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2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM NO. PART I - FINANCIAL INFORMATION PAGE
-------- ------------------------------ ----
1 Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . 5-6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 8-15
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 16-20
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 21-30
Page 2
3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,929 $ 7,007
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 997 1,220
-------- --------
7,926 8,227
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 8,783 8,928
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,864 2,426
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,779 1,664
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 560 548
-------- --------
13,986 13,566
-------- --------
Total asset management assets . . . . . . . . . . . . . . . . . . . 21,912 21,793
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,192 13,094
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,956 17,188
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,813 8,791
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,009 1,037
-------- --------
45,970 40,110
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,120 15,568
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 2,100 2,076
-------- --------
17,220 17,644
-------- --------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 63,190 57,754
ASSOCIATED COMPANY
Investment in ShowBiz Pizza Time, Inc.. . . . . . . . . . . . . . . . -- 16,945
OTHER
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 34,353 7,495
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,871 573
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 2,040 11,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,160 1,236
-------- --------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 40,424 20,304
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,526 $116,796
======== ========
See accompanying notes to consolidated financial statements.
Page 3
4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
ASSET MANAGEMENT
REAL ESTATE
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . $ 605 $ 490
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 500
-------- --------
1,105 990
ENERGY
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 3,527 2,531
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 3,510 4,432
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,444 2,361
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 510 1,223
-------- --------
8,991 10,547
-------- --------
Total asset management liabilities . . . . . . . . . . . . . . . . 10,096 11,537
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,450 11,200
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 12,707 8,678
-------- --------
26,157 19,878
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,683 12,281
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 1,576 1,976
-------- --------
13,259 14,257
-------- --------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 39,416 34,135
ASSOCIATED COMPANY
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 2,355 870
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 11,000
-------- --------
Total associated company liabilities . . . . . . . . . . . . . . . 2,355 11,870
OTHER
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 25,672 25,672
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 24,745 24,892
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 4,114 1,906
-------- --------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 54,531 52,470
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 106,398 110,012
REDEEMABLE PREFERRED STOCK
Series B, 250,000 shares issued and outstanding;
stated at redemption value . . . . . . . . . . . . . . . . . . . . 1,000 1,000
STOCKHOLDERS' EQUITY
Preferred stock, 250,000 shares issued and outstanding as Series B . . -- --
Common stock, issued 1,597,204 shares at both dates;
outstanding 1,566,294 and 1,298,509 shares, respectively . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 54,823 57,306
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (36,109) (44,490)
Treasury stock, 30,910 and 298,695 shares, respectively, at cost . . . (746) (7,192)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . 18,128 5,784
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,526 $116,796
======== ========
See accompanying notes to consolidated financial statements.
Page 4
5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
-------- -------
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 973 $ 1,009
Equity income (loss) from investments in HRP . . . . . . . . . . . . . 90 (494)
-------- -------
1,063 515
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 535 330
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 168 168
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 17
-------- -------
743 515
-------- -------
Income from real estate operations . . . . . . . . . . . . . . . . 320 --
ENERGY
Gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,062 1,182
Oil revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625 672
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 28
-------- -------
1,765 1,882
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 328 382
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 309 469
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 275 247
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 141
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . -- 115
-------- -------
1,032 1,354
-------- -------
Income from energy operations . . . . . . . . . . . . . . . . . . . 733 528
-------- -------
Income from asset management operations . . . . . . . . . . . . . . 1,053 528
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,505 18,170
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,370 15,602
Administrative and selling expenses . . . . . . . . . . . . . . . . . 2,261 2,110
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 156
-------- -------
22,873 17,868
-------- -------
Income from textile products operations . . . . . . . . . . . . . . 632 302
See accompanying notes to consolidated financial statements.
Page 5
6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
-------- -------
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,857 $ 5,570
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 4,528 4,551
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 689 563
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 138
-------- -------
5,582 5,252
-------- -------
Income from hotel operations . . . . . . . . . . . . . . . . . . . 275 318
-------- -------
Income from operating subsidiaries . . . . . . . . . . . . . . . . 907 620
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . 19,327 808
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,863 166
-------- -------
Income from associated company . . . . . . . . . . . . . . . . . . 17,464 642
OTHER
Interest on short-term investments and other income . . . . . . . . . 192 74
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 106
-------- -------
298 180
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,106 1,026
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 640 494
-------- -------
1,746 1,520
-------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,448) (1,340)
-------- -------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . 17,976 450
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,595 142
-------- -------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,381 $ 308
======== =======
PER COMMON SHARE (PRIMARY)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.25 $ 0.23
======== =======
See accompanying notes to consolidated financial statements.
Page 6
7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,381 $ 308
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain from sale of investment in ShowBiz . . . . . . . . . . . . . . . (18,188) --
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . 8,960 63
Accrual of ShowBiz Participation Amount . . . . . . . . . . . . . . . 1,675 --
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 1,467 1,485
Undistributed income from HEP . . . . . . . . . . . . . . . . . . . . . (1,139) (1,222)
Equity in net (income) of ShowBiz . . . . . . . . . . . . . . . . . . (1,095) (808)
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . 855 769
Distributions from HEP . . . . . . . . . . . . . . . . . . . . . . . . 529 748
Equity in net (income) loss of HRP . . . . . . . . . . . . . . . . . . (90) 494
Amortization of deferred gain from debenture exchange . . . . . . . . (147) (142)
Net change in textile products assets and liabilities . . . . . . . . (1,826) 299
Net change in other assets and liabilities . . . . . . . . . . . . . . 1,100 (1,669)
Net change in energy assets and liabilities . . . . . . . . . . . . . (76) (140)
--------- --------
Net cash provided by operating activities . . . . . . . . . . . . . 406 185
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of investment in ShowBiz . . . . . . . . . . . . . 40,235 --
Purchase of minority shares of HEC . . . . . . . . . . . . . . . . . . . (648) --
Investments in textile products property and equipment . . . . . . . . . (306) (222)
Capital expenditures for hotels and real estate . . . . . . . . . . . . . (240) (387)
Net change in restricted cash for investing activities . . . . . . . . . (160) (25)
Investments in energy property and equipment . . . . . . . . . . . . . . (26) (17)
Investment in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (3)
--------- --------
Net cash provided by (used in) investing activities . . . . . . . . 38,855 (654)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . 2,250 --
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . (12,140) (1,156)
Escrow of ShowBiz Participation Amount . . . . . . . . . . . . . . . . . (2,513) --
--------- --------
Net cash (used in) financing activities . . . . . . . . . . . . . . (12,403) (1,156)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . 26,858 (1,625)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 7,495 3,339
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 34,353 $ 1,714
========= ========
See accompanying notes to consolidated financial statements.
Page 7
8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING POLICIES
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 year ended December 31,
1996.
Accounting Policies. Statement of Financial Standards No. 128,
"Earnings Per Share," specifies new computation, presentation and
disclosure requirements. The statement will be effective for both interim
and annual periods ending after December 15, 1997. Management believes
that the adoption of this statement will not have a material impact on the
earnings per share presented herein.
2. INVESTMENTS IN REAL ESTATE AFFILIATE AND ASSOCIATED COMPANY (DOLLAR AMOUNTS
IN THOUSANDS):
AS OF MARCH 31, 1997 AMOUNT AT INCOME (LOSS) FROM
-------------------- WHICH CARRIED AT INVESTMENTS FOR THE
COST OR ---------------------- THREE MONTHS ENDED MARCH 31,
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED MARCH 31, DECEMBER 31, ----------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 1997 1996 1997 1996
------------------------- --------- -------- --------- ------------ --------- ------
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P.(A)
- General partner interest . . . . -- $ 8,650 $ 4,949 $ 5,117 $ -- $ (78)
- Limited partner interest . . . . 413,040 5,381 1,980 1,890 90 (416)
------- ------- ------- -------- -----
Totals . . . . . . . . . . . . . $14,031 $ 6,929 $ 7,007 $ 90 $(494)
======= ======= ======= ======== =====
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC.(B)
- Common stock . . . . . . . . . . $16,945 $ -- $ --
Equity in earnings . . . . . . . . -- 1,139 808
Gain on sale of shares . . . . . . -- 18,188 --
------- -------- -----
Totals . . . . . . . . . . . . . $16,945 $ 19,327 $ 808
======= ======== =====
(A) At March 31, 1997, Hallwood Realty Corporation ("HRC"), a wholly
owned subsidiary of the Company, owned a 1% general partner
interest and the Company owned a 24% limited partner interest in
its Hallwood Realty Partners, L.P. ("HRP") affiliate. The Company
accounts for its investment in HRP by the equity method of
accounting. In addition to recording its share of net income
(loss), the Company also records its pro rata share of partner
capital transactions. On a cumulative basis, the Company's
carrying value of its investment in HRP has been decreased by
$49,000 for its share of such capital transactions through March
31, 1997, with corresponding adjustments to paid-in capital.
The carrying value of the Company's general partner interest
includes the value of intangible rights to provide asset
management and property management services. The Company
amortizes that portion of the general partner interest ascribed to
the management rights. For the three months ended March 31, 1997
and 1996 such amortization was $168,000 in each period.
As discussed in Note 4, the Company pledged 89,269 limited partner
units to collateralize a promissory note, due March 1998, in the
principal amount of $500,000.
The quoted market price and the Company's carrying value per
limited partner unit (Quotron symbol HRY) at March 31, 1997 were
$27.37 and $4.79, respectively.
The general partner interest is not publicly traded.
Page 8
9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(B) The Company accounted for its investment in ShowBiz Pizza Time,
Inc. ("ShowBiz") by the equity method of accounting. The Company also
recorded its pro rata share of stockholders' equity transactions with
corresponding adjustments to paid-in capital.
On January 3, 1997, the Company's Board of Directors authorized the
issuance of 267,709 treasury shares in exchange for 219,194 common
shares of ShowBiz from the Alpha and Epsilon Trusts, which are
associated with Messrs. Anthony J. Gumbiner and Brian M. Troup,
chairman and president of the Company, respectively. For purposes of
the exchange, the shares of both companies were valued at their
average closing price for the month of December 1996.
On February 24, 1997, ShowBiz filed a registration statement with the
Securities and Exchange Commission covering a proposed public offering
of 3,200,000 shares of common stock (2,305,371 shares of which were
sold by the Company and 894,629 shares of which were sold by the Alpha
and Epsilon Trusts). The underwriters were also granted, and did
exercise their option to purchase an additional 454,746 shares of
common stock from the Company and the Trusts to cover over-allotments.
The Company had determined to sell its shares to repay debt, utilize
expiring federal income tax loss carryforwards and focus on core
investments. On March 26, 1997, the Company completed the sale of its
entire 2,632,983 ShowBiz shares at $15.68 per share, net of
underwriting commissions. A portion of the proceeds from the sale
were used to repay the $7,000,000 MLBFS line of credit and the
$4,000,000 promissory note as discussed in Note 4. The Company
reported a gain of $18,188,000 from the transaction. Concurrent with
the sale, all five directors of the Company who were also directors of
ShowBiz resigned from the ShowBiz board.
3. LITIGATION, CONTINGENCIES AND COMMITMENTS
Reference is made to Note 17 to the consolidated financial statements
contained in Form 10-K for the year ended December 31, 1996. There has
been no significant change since that time.
Page 9
10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
MARCH 31, DECEMBER 31,
1997 1996
------- -------
Real Estate
Promissory note, 8%, due March 1998 . . . . . . . . . . . . . . . . $ 500 $ 500
Energy
Term loan, prime + 1%, due May 1998 . . . . . . . . . . . . . . . . 1,444 2,361
Textile Products
Revolving credit facility, prime + .25%, due January 2000 . . . . . 13,450 --
Revolving credit facility, prime + .5%, repaid January 1997 . . . . -- 11,200
------- -------
13,450 11,200
Hotels
Term loan, prime + 3.5%, due May 2001 . . . . . . . . . . . . . . . 6,708 6,739
Term loan, 10%, due October 2001 . . . . . . . . . . . . . . . . . . 4,975 5,001
Promissory note, certificate of deposit rate,
repaid January 1997 . . . . . . . . . . . . . . . . . . . . . . . -- 375
Non-interest bearing obligation, repaid March 1997 . . . . . . . . . -- 166
------- -------
11,683 12,281
Associated Company
Line of credit, prime + .75%, repaid March 1997 . . . . . . . . . . -- 7,000
Promissory note, 5%, repaid March 1997 . . . . . . . . . . . . . . . -- 4,000
------- -------
-- 11,000
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,077 $37,342
======= =======
Further information by business segment 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 due March 1998. 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 $8.44 per unit, but in no event
more than an additional $500,000 (the "HRP Participation Amount"). As the
HRP per unit price was $27.37 at March 31, 1997, the Company has accrued
the cumulative amount of $360,000 for this HRP Participation Amount as a
charge to interest expense, of which $30,000 and $-0- were recorded in the
quarters ended March 31, 1997 and 1996, respectively.
Energy
Term Loan. In December 1996, the Company's HEPGP Ltd. partnership
("HEPGP") entered into a $2,500,000 term loan agreement. The loan is
collateralized by the Company's HEP limited partner units and its
investment in HEPGP and Hallwood GP, Inc. HEPGP has also pledged its
direct interests in certain oil and gas properties. Other significant
terms include: (i) maturity date of May 31, 1998; (ii) monthly principal
payments of $139,000, plus interest; (iii) interest rate of prime plus 1%
(9.50% at March 31, 1997); (iv) a negative pledge relating to a portion of
the Company's ShowBiz common shares, which was released in March 1997 as a
result of a $500,000 principal payment from proceeds of sale of the ShowBiz
shares; and (v) restrictions on the declaration of distributions or
redemptions of partnership interests.
Page 10
11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Included in the consolidated balance sheets are the Company's share of
the long-term obligations of its affiliated entity, Hallwood Energy
Partners, L.P. ("HEP") in the amount of $3,510,000 and $4,432,000 at March
31, 1997 and December 31, 1996, respectively.
Textile Products
Revolving credit facility (old). 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 facility was
collateralized by accounts receivable and the industrial machinery and
equipment located in Kenyon, Rhode Island.
Revolving credit facility (new). The Chase facility was replaced by a
new revolving credit facility in an amount of up to $14,000,000
($17,500,000 between April 1, 1997 and June 30, 1997 and $15,000,000 April
through June of any other year) on January 7, 1997 with The Bank of New
York ("BNY"). Borrowings under the BNY facility are collateralized by
accounts receivable, inventory imported under trade letters of credit,
certain finished goods inventory and the machinery and equipment of
Brookwood's subsidiaries. The BNY facility expires on January 7, 2000 and
bears interest, at Brookwood's option, of one-quarter percent over prime
(8.75% at March 31, 1997) or LIBOR plus 2.25%. The facility contains
covenants, which include maintenance of certain financial ratios,
restrictions on dividends and repayment of debt or cash transfers to the
Company. Brookwood is in substantial compliance with the BNY loan
covenants, and is currently discussing modifications to the covenants to
accommodate its long range financial plans. BNY has indicated its
willingness to modify the covenants, although such modifications have not
yet been completed. The outstanding balance at March 31, 1997 was
$13,450,000.
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 term
loan. 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 the 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 March 31, 1997 was
$6,708,000.
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 March 31,
1997 was $4,975,000.
Promissory note. In connection with the acquisition of the fee
interest of the Greenville Residence Inn, the Company issued a promissory
note to the former owner in the amount of $375,000. The promissory note
bore interest at the same rate as the related $375,000 certificate of
deposit, which secured the repayment of the note. The certificate of
deposit was included in restricted cash at December 31, 1996. The
promissory note was repaid in full from proceeds of the certificate of
deposit, which matured in January 1997.
Non-interest bearing obligation. The $500,000 non-interest bearing
obligation to the former preferred shareholders of Integra was issued in
connection with a Settlement and Supplemental Settlement and was payable in
three equal annual installments in the amount of $166,667. The third and
final payment was made on March 8, 1997.
Page 11
12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Associated Company
Line of credit. In April 1994, the Company obtained a line of credit
from Merrill Lynch Business Financial Services Inc. ("MLBFS") which
replaced a former margin loan. Significant terms of the line of credit
were (i) interest rate - prime plus 0.75%; (ii) collateral - 2,159,047
shares of ShowBiz common stock; and (iii) availability limited to 50% of
the market value of the pledged shares of ShowBiz. The maturity date of
the line of credit was extended to April 30, 1997, and the maximum
commitment amount was increased to $7,000,000. The Company drew down the
additional funds under this line of credit in June 1996. In May 1996,
MLBFS consented to the release and sale of 262,500 shares, which were sold.
The line of credit was repaid in March 1997 from proceeds of sale of the
Company's ShowBiz investment as discussed in Note 2.
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 were (i) maturity
date - March 8, 1997; (ii) interest rate - 5% fixed; (iii) collateral -
517,242 shares of ShowBiz common stock; and (iv) the Trust was entitled to
an additional payment at the "Payment Date", as defined, 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 (the " ShowBiz
Participation Amount"). As the ShowBiz per share price was $18.12 at
December 31, 1996, the Company accrued $755,000 for the ShowBiz
Participation Amount as a charge to interest expense in the year ended
December 31, 1996. Although the Company has accrued and escrowed the
ShowBiz Participation Amount, it contends that a proper tender of payment
and accrued interest was made on October 11, 1996, and therefore no ShowBiz
Participation Amount is owed. As the Trust contends that the promissory
note does not provide for prepayment, and that both the promissory note and
ShowBiz Participation Amount were owing, the Company filed suit to resolve
the matter.
In connection with the disposition of the Company's entire ShowBiz
investment in March 1997, the Company and the Trust entered into a Partial
Compromise and Settlement Agreement, whereby the Trust consented to the
sale of the 517,242 shares of ShowBiz in exchange for (i) the repayment of
the $4,000,000 principal amount of the note and accrued interest through
October 11, 1996 and (ii) the deposit of $2,513,000 into an escrow, which
is a combination of the $2,431,000 disputed ShowBiz Participation Amount,
including an additional accrual of $1,675,000 as a charge to interest
expense in the quarter ended March 31, 1997, and the $82,000 balance of
accrued interest to the maturity date.
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.
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).
Page 12
13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
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 did not meet the $5,000,000
minimum listing requirement on a recognized exchange and therefore was not
listed. On May 12, 1997, the Company announced its intention to pay annual
interest in-kind on August 15, 1997.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
MARCH 31, DECEMBER 31,
DESCRIPTION 1997 1996
----------- ------- -------
7% Debentures (face amount) . . . . . . . . . . . . . . . . $22,808 $22,808
Unrecognized gain from purchase and exchange, net of
$2,284 and $2,136 accumulated amortization,
respectively . . . . . . . . . . . . . . . . . . . . 1,937 2,084
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $24,745 $24,892
======= =======
13.5% Debentures (face amount)
1989 Original Series . . . . . . . . . . . . . . . . . . $18,203 $18,203
1991 Series . . . . . . . . . . . . . . . . . . . . . . . 2,292 2,292
1992 Series . . . . . . . . . . . . . . . . . . . . . . . 2,360 2,360
1996 Series . . . . . . . . . . . . . . . . . . . . . . . 2,817 2,817
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $25,672 $25,672
======= =======
See Note 8 for information regarding the April 30, 1997 announcement of a
commission-free, self-tender offer to holders of 13.5% Debentures.
Page 13
14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
6. INCOME TAXES
The following is a summary of the income tax expense (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
------ -----
Federal
Deferred . . . . . . . . . . . . . . . . . . $8,960 $ 63
Current . . . . . . . . . . . . . . . . . . . 500 --
------ -----
Sub-total . . . . . . . . . . . . . . . . 9,460 63
State . . . . . . . . . . . . . . . . . . . . 135 79
------ -----
Total . . . . . . . . . . . . . . . . . . $9,595 $ 142
====== =====
As a result of the substantial tax gain from the of ShowBiz, the
Company recorded a related non-cash deferred federal tax charge of
$8,960,000 in the 1997 first quarter, which reflects the realization of tax
benefits from the utilization of the Company's tax net operating loss
carryforwards ("NOLs"). Additionally, the Company recorded a current federal
tax charge of $500,000 for alternative minimum tax.
State tax expense is an estimate based upon taxable income allocated
to those states in which the Company does business, at their respective tax
rates.
The amount of the deferred tax asset (net of valuation allowance) was
$2,040,000 at March 31, 1997. 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
The following transactions affected recognized assets or liabilities
but did not result in cash receipts or cash payments (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------
DESCRIPTION 1997 1996
----------- ------ ------
Supplemental schedule of noncash investing
and financing activities:
Issuance of treasury stock in exchange for
common shares of ShowBiz:
Investment in ShowBiz . . . . . . . . . . . . . . . . . . $3,820 $ --
Reduction of additional paid-in capital . . . . . . . . . 2,626 --
------ ------
Reduction in treasury stock . . . . . . . . . . . . . . . 6,446 --
Repayment of note payable from funds held in
restricted cash . . . . . . . . . . . . . . . . . . . . . 375 --
Recording of proportionate share of stockholders'
equity transaction of equity investments . . . . . . . . . 143 51
Supplemental disclosures of cash payments:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $1,287 $ 913
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 90 72
Page 14
15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
8. SUBSEQUENT EVENT
On April 30, 1997, the Company announced commission-free, self-tender
offers for portions of its common stock and 13.5% Debentures.
Common stock. The Company is offering to purchase for cash up to 300,000
shares of common stock (or approximately 19.1% of its outstanding shares) from
stockholders at $27.50 per share. If more than 300,000 shares of common stock
are tendered, the Company will prorate the purchases of properly tendered
shares. The complete terms and conditions of the self-tender offer are
described in the offering documents, dated May 12, 1997. The expiration date
of the offer is June 16, 1997, unless extended.
13.5% Debentures. The Company is offering to purchase for cash all of the
1991 and 1992 Series for $80 per $100 in principal amount, all of the 1996
Series for $70 per $100 in principal amount and so much of the Original 1989
Series as possible, at a price of $95 per $100 in principal amount, from the
total available purchase funds of $20,000,000 remaining, after the purchase of
all 1991 Series, 1992 Series and 1996 Series 13.5% Debentures properly
tendered. No payment will be made for accrued interest on any of the tendered
bonds pursuant to the offer. If necessary, the Company will prorate its
purchases of properly tendered Original 1989 Series 13.5% Debentures. The
complete terms and conditions of the self-tender offer are described in the
offering documents, dated May 8, 1997. The expiration date of the Offer is
June 16, 1997, unless extended.
Page 15
16
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 $8,381,000 for the first quarter
ended March 31, 1997, compared to net income of $308,000 in the 1996
period. Total revenue for the 1997 first quarter was $51,815,000, compared
to $27,125,000 in the prior-year period. The 1997 first quarter included a
gain of $18.2 million from the sale of the Company's investment in ShowBiz,
partially offset by a related non-cash deferred tax charge of $8,960,000.
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 $973,000 for the quarter ended March 31, 1997
decreased by $36,000, or 4%, from $1,009,000 in the prior-year period.
Fees are derived from the Company's asset management, property management,
leasing and construction supervision services provided to its Hallwood
Realty Partners, L.P. affiliate, a real estate master limited partnership
("HRP"). The decrease was due primarily to reduced leasing fees in the
1997 quarter.
The equity income (loss) from investments in HRP represents the
Company's recognition of its pro rata share of the earnings (loss) reported
by HRP and amortization of negative goodwill. For the 1997 first quarter,
the Company reported income of $90,000 compared to a $494,000 loss in the
period a year ago. The improvement resulted principally from HRP's
substantially lower depreciation expense, as a result of an extension of
the useful economic lives of certain building costs, effective January 1,
1997.
Expenses. Administrative expenses increased to $535,000 in the 1997
first quarter, compared to $330,000 in the 1996 first quarter, due to
increased payments under the HCRE incentive plan.
Amortization expense of $168,000 for the quarter in both the 1997 and
1996 periods relates to HRC's general partner investment in HRP to the
extent allocated to management rights.
Interest expense increased to $40,000 from $17,000 in the 1996 first
quarter, due to the recording of a $30,000 charge in the 1997 first quarter
for the HRP Participation Amount discussed in Note 4.
ENERGY.
Revenue. After the Company's successful completion of the tender
offer for the minority shares of Hallwood Energy Corporation ("HEC") and
the subsequent merger of HEC, it effectively acquired ownership of the
assets formerly held by HEC. Following the merger, certain HEC assets were
transferred to two wholly owned entities. These two entities, in addition
to the three classes of limited partner units (or 6.5%) of HEP which remain
with the Company, constitute the Company's investment in the energy
industry. The Company's general partner interest in HEP entitles it to
interests in HEP's properties ranging from 2% to 25%. The Company and its
energy subsidiaries account for their ownership of HEP using the
proportionate consolidation method of accounting, whereby they record their
proportionate share of HEP's revenues 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 ("HCRC"), which HEP accounts for under the equity
method.
Gas revenue for the 1997 first quarter decreased $120,000 to
$1,062,000, primarily as a result of a decrease in production to 379,000
mcf from 465,000 mcf, partially offset by an increase in the average gas
price to $2.80 from $2.54 per mcf. Oil revenue for the 1997 first quarter
decreased $47,000 to $625,000, due to a decrease in
Page 16
17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
production to 28,000 barrels from 38,000 barrels, partially offset by an
increase in the average price per barrel to $22.32 from $17.68. The
decrease in oil and gas production is primarily due to a temporary decline
on a Louisiana well and steep production declines on wells located in the
West Texas area.
Other income consists primarily of acquisition fee and interest
income, as well as a share of HEP's interest income, facilities income from
two gathering systems in New Mexico, pipeline revenue, equity in income of
affiliates and miscellaneous income or expense. The increase in other
income to $78,000 for the 1997 first quarter from $28,000 in the 1996
period is primarily due to an increase in HEP's equity in earnings of HCRC.
Expenses. Operating expenses decreased by $54,000 to $328,000 for the
1997 first quarter from $382,000 in the prior-year quarter as a result of
decreased production taxes resulting from the lower production described
above.
Depreciation, depletion and amortization decreased to $309,000 for the
1997 first quarter compared to $469,000 in the 1996 quarter. The decrease
is attributable to lower capitalized costs in 1997 as well as a lower
depletion rate in 1997 due to the decline in production.
Administrative expenses increased by $28,000 for the 1997 first
quarter to $275,000 from $247,000 in the 1996 quarter due to an increase in
allocated internal overhead.
Interest expense decreased by $21,000 to $120,000 for the 1997 first
quarter compared to $141,000 in 1996, primarily due to a decrease in the
Company's pro rata share of HEP's interest expense resulting from a lower
debt balance during 1997.
Minority interest, which represents the interest of other common
shareholders in the net income of HEC, was $115,000 in the 1996 first
quarter. The minority interest was eliminated in November 1996 as a result
of the merger of HEC into the Company.
Operating Subsidiaries. The business segments of the Company's
operating subsidiaries consist of textile products and hotels.
TEXTILE PRODUCTS.
Revenue. Sales increased $5,335,000, or 29%, in the 1997 first
quarter to $23,505,000, compared to $18,170,000 in the same quarter a year
ago. The sales increase occurred in all divisions, but principally in the
distribution businesses. Demand for Brookwood's products is much higher
in 1997, compared to the weak market conditions experienced in 1996.
Expenses. Cost of sales increased $4,768,000, or 31%, to $20,370,000
from $15,602,000 in the first quarter last year. The increase in cost of
sales was principally the result of the increase of sales revenue. The
lower gross profit margin for the 1997 first quarter (13.3% versus 14.1%)
resulted from competitive market pressures in the distribution businesses.
Administrative and selling expenses increased $151,000 in the 1997
first quarter to $2,261,000 from $2,110,000 for the comparable 1996 period,
due to increased operating expenses associated with the 29% increase in
sales revenue.
The $86,000 increase in interest expense to $242,000 for the 1997
first quarter from $156,000 in the prior-year period was the result of
higher average borrowings than in the prior-year period.
Page 17
18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HOTELS
Revenue. Sales of $5,857,000 in the 1997 first quarter increased by
$287,000, or 5.1% from the year-ago amount of $5,570,000. Improved sales
were reported at all five of the Company's hotel properties and were
attributable to higher average daily rates, which averaged a 5.24%
increase, and higher occupancy levels, which averaged a 1.34% increase.
Expenses. Operating expenses of $4,528,000 for the 1997 first quarter
were down slightly from $4,551,000 in 1996. The reduction is attributable
to the lack of lease rent expense for the Greenville, South Carolina
Residence Inn; although on a comparable basis, operating expenses were up
approximately 3.6% for the properties.
Depreciation and amortization expense increased by $126,000 to
$689,000 for the 1997 first quarter from $563,000 in the prior-year period,
reflecting the May 1996 purchase of the fee interest in the Greenville
Residence Inn hotel and recent capital expenditures at the remaining
properties.
Interest expense increased by $227,000 to $365,000 for the quarter
from $138,000 in the 1996 period due to the procurement of the $6,800,000
term loan on the Greenville Residence Inn hotel.
ASSOCIATED COMPANY
Revenue. Results for the 1997 first quarter include the Company's
pro-rata share of ShowBiz results using the equity method of accounting and
a substantial gain on the sale of the Company's entire ShowBiz investment
on March 26, 1997. The Company recorded equity income of $1,139,000 from
its investment in ShowBiz for the 1997 first quarter, compared to income of
$808,000 in the prior-year period. The improvement in ShowBiz results for
the 1997 quarter is attributable to a 10.1% increase in comparable same
store sales and in improved operating margins. On March 26, 1997 the
Company completed the sale of its entire 2,632,983 ShowBiz shares at $15.68
per share, net of underwriting commissions. The Company had determined to
sell its shares to repay debt, utilize expiring federal income tax loss
carryforwards and focus on core investments. The Company reported a gain
of $18,188,000 from the transaction. See Note 2.
Expenses. Interest expense of $1,863,000 for the 1997 first quarter
increased by $1,697,000 from the year-ago amount of $166,000. The
increase is primarily attributable to the recording of $1,675,000 for the
ShowBiz Participation Amount in the 1997 first quarter. See Note 4.
OTHER
Revenue. Interest on short-term investments and other income
increased by $118,000 to $192,000 for the 1997 first quarter. The
increase was primarily attributable to higher interest income earned on the
Company's short-term investments, and higher rental income from the
subleasing of executive office space formerly occupied by the Company's
affiliated entity - Integra-A Hotel and Restaurant Company. Fee income in
the 1997 first quarter of $106,000 was the same as the prior-year amount.
Expenses. Interest expense in the amount of $1,106,000 for the 1997
first quarter increased from the prior year amount of $1,026,000. The
increase was primarily due to the August 1996 issuance of additional 13.5%
Debentures in the amount of $2,817,000 in connection with the payment of
annual interest in-kind. See Note 5.
Administrative expenses of $640,000 for the 1997 first quarter
increased by $146,000 from the prior-year amount of $494,000 due to higher
consulting, legal and accounting fees.
Income taxes. Income taxes were $9,595,000 for the 1997 first quarter
and $142,000 in the 1996 quarter. The 1997 quarter included an $8,960,000
non-cash federal deferred tax charge and a federal current charge of
$500,000 for alternative minimum tax (both charges relating to the ShowBiz
sale). The 1996 first quarter included a non-cash federal deferred tax
charge of $63,000 and no federal current charge. The balance of the
expense in both
Page 18
19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
quarters was for state taxes, which 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 March 31, 1997, following the sale of the ShowBiz investment,
the Company had approximately $115,000,000 of tax net operating loss
carryforwards ("NOLs") and temporary differences to reduce future federal
income tax liability. The estimated tax gain from the sale of the
Company's ShowBiz investment will be offset by utilization of the Company's
NOL's. 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 $6,000,000 of the NOLs
prior to their ultimate expiration in the year 2011.
Management believes that the Company has certain tax planning
strategies available, which include the potential sale of 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 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.
Page 19
20
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 March 31, 1997
totaled $34,353,000. The substantial increase from the December 31, 1996
amount of $7,495,000 is attributable to the sale of the Company's entire
ShowBiz investment, after the payment of certain related liabilities.
On April 30, 1997, the Company announced commission-free, self-tender
offers for portions of its common stock and 13.5% Debentures. If
stockholders and bondholders were to participate to the full level
permitted by the offers, the Company would expend $20,000,000 for the
purchase of 13.5% Debentures and $8,250,000 for common stock. See Note 8.
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, the Company reports its share of the long-term
obligations of its HEP affiliate totaling $3,510,000 at March 31, 1997.
HEP's borrowings are secured by a first lien on approximately 80% in value
of HEP's oil and gas properties. In December 1996, the Company's HEPGP
entity obtained a $2,500,000 term loan, which has been reduced to
$1,444,000 at March 31, 1997. The loan contains a provision which
prohibits HEPGP from making any distribution, directly or indirectly, to
the Company during the term of the loan.
Brookwood maintains a revolving line of credit facility with The Bank
of New York, which is collateralized by accounts receivable, certain
inventory and equipment. At April 1, 1997, Brookwood had $3,483,000 of
unused borrowing capacity on its line of credit. In January 1997, the
Company received a $1,000,000 cash dividend from Brookwood on its preferred
stock. Future dividends will be paid as permitted by the new revolver,
which allows for dividends to be paid to the extent of 80% of cash flow
after capital expenditures.
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 hotel properties or other assets to
satisfy its obligations.
Page 20
21
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.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 7, 1997,
stockholders of the Company voted on two proposals:
(i) To elect two directors to hold office for three years
and until their successors are elected and qualified:
Nominee Directors Votes For Votes Withheld
----------------- --------- --------------
Anthony J. Gumbiner 1,453,893 34,727
Robert L. Lynch 1,453,393 35,227
As a result of the above, the nominee directors were elected for
an additional three-year term. The continuing directors are
Messrs. Charles A. Crocco, Jr., J. Thomas Talbot and Brian M.
Troup.
(ii) To approve the Company's amended 1995 Stock Option Plan,
including an increase in the number of shares authorized
under the Option Plan.
Votes For Votes Against
--------- -------------
1,382,878 76,639
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits
(i) 10.24 - Amendment No. 1, dated as of April 1,
1997 to Credit Agreement dated as of
January 7, 1997, among Brookwood
Companies Incorporated, Kenyon
Industries, Inc., Brookwood Laminating,
Inc. as Borrowers and The Bank of
New York, filed herewith. Page 23-28
(ii) 11 - Statement Regarding Computation of
Per Share Earnings Page 29
(iii) 27 - Financial Data Schedule Page 30
(b) Reports on Form 8-K None
Page 21
22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
Dated: May 14, 1997 By: /s/ Melvin J. Melle
------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 22
23
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.24 Amendment No. 1 dated as of April 1, 1997 to Credit
Agreement dated as of January 7, 1997
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule