<PAGE> 1
================================================================================
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 APRIL 30, 1994 COMMISSION FILE NUMBER: 1-8303
_____________________
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
_____________________
<TABLE>
<S> <C>
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)
</TABLE>
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
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES NO NOT APPLICABLE X
--- --- ---
5,487,267 SHARES OF COMMON STOCK WERE OUTSTANDING AT MAY 31, 1994.
================================================================================
PAGE 1 OF 23
<PAGE> 2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PART I - FINANCIAL INFORMATION PAGE
- - -------- ------------------------------ ----
<S> <C> <C>
1 Financial Statements:
Consolidated Balance Sheets as of April 30, 1994
and July 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Nine Months Ended April 30, 1994 and 1993 . . . . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Three Months Ended April 30, 1994 and 1993 . . . . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the
Nine Months Ended April 30, 1994 and 1993 . . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 10-16
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . 17-20
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . . . 21-23
</TABLE>
PAGE 2 OF 23
<PAGE> 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
April 30, July 31,
1994 1993
---------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,016 $ 7,998
Investments in real estate affiliate . . . . . . . . . . . . . . . . 7,120 7,869
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 2,145 2,601
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 275 636
-------- --------
17,556 19,104
ENERGY
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 11,412 12,385
Current assets of affiliate . . . . . . . . . . . . . . . . . . . . . 3,470 6,157
Noncurrent assets of affiliate . . . . . . . . . . . . . . . . . . . 1,889 2,133
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 1,649 1,035
-------- --------
18,420 21,710
-------- --------
TOTAL ASSET MANAGEMENT ASSETS . . . . . . . . . . . . . . . . . . 35,976 40,814
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,962 14,389
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,626 12,501
Property, plant and equipment, net . . . . . . . . . . . . . . . . . 7,803 8,058
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,048 1,107
-------- --------
38,439 36,055
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,645 16,940
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 3,636 1,519
-------- --------
27,281 18,459
-------- --------
TOTAL OPERATING SUBSIDIARIES ASSETS . . . . . . . . . . . . . . . 65,720 54,514
ASSOCIATED COMPANIES
Investments in associated companies . . . . . . . . . . . . . . . . . 16,190 17,983
-------- --------
TOTAL ASSOCIATED COMPANIES ASSETS . . . . . . . . . . . . . . . . 16,190 17,983
OTHER
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 7,450 8,533
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 3,739 11,837
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,541 2,048
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,317 1,602
Investment in insurance contracts . . . . . . . . . . . . . . . . . . 590 1,047
-------- --------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 14,637 25,067
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,523 $138,378
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 3 OF 23
<PAGE> 4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
April 30, July 31,
1994 1993
-------- --------
(Unaudited) (Audited)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,322 $ 5,205
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 356 550
-------- --------
7,678 5,755
ENERGY
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,080 8,751
Long-term obligations of affiliate . . . . . . . . . . . . . . . . . . 5,396 6,963
Current liabilities of affiliate . . . . . . . . . . . . . . . . . . . 2,588 3,938
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 215 165
-------- --------
15,279 19,817
-------- --------
TOTAL ASSET MANAGEMENT LIABILITIES . . . . . . . . . . . . . . . . . 22,957 25,572
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 11,313 6,990
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,545 9,198
-------- --------
17,858 16,188
HOTELS
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,848 7,429
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 3,850 1,479
-------- --------
16,698 8,908
-------- --------
TOTAL OPERATING SUBSIDIARIES LIABILITIES . . . . . . . . . . . . . . 34,556 25,096
ASSOCIATED COMPANIES
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 7,491
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 1,285 1,835
Anticipatory loss . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 8,300
-------- --------
TOTAL ASSOCIATED COMPANIES LIABILITIES . . . . . . . . . . . . . . . 11,285 17,626
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 26,998 29,611
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . 22,902 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . . 2,820 3,811
-------- --------
TOTAL OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 52,720 56,324
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 121,518 124,618
CONTINGENCIES AND COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value; authorized 500,000 shares; unissued . -- --
Common stock, $0.10 par value; authorized 10,000,000 shares;
issued 6,394,709 shares at both dates;
outstanding 5,487,267 shares at both dates . . . . . . . . . . . . . 639 639
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 56,420 58,088
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (39,751) (38,504)
Equity adjustment from foreign currency translation . . . . . . . . . . (7) (167)
Treasury stock, 907,442 shares at both dates; at cost . . . . . . . . . (6,296) (6,296)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 11,005 13,760
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . $132,523 $138,378
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 4 OF 23
<PAGE> 5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,835 $ 3,734
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 523
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 272 361
Loss from investments in affiliate . . . . . . . . . . . . . . . . . . . (422) (131)
------- -------
3,127 4,487
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 --
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 832 1,179
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 817 993
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499 542
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 26
(Recovery of) provision for losses . . . . . . . . . . . . . . . . . . . (6) 200
------- -------
3,663 2,940
------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . . (536) 1,547
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 4,548 5,287
Interest and other income (including intercompany
amounts of $187 and $66, respectively) . . . . . . . . . . . . . . . 128 451
------- -------
4,676 5,738
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . 1,538 1,650
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,076 1,361
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 871 844
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 686
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284 441
------- -------
4,064 4,982
------- -------
Income from energy operations . . . . . . . . . . . . . . . . . . . . 612 756
------- -------
INCOME FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . . . . 76 2,303
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,338 51,019
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,823 43,705
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 3,987 4,083
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,575 1,605
Interest (including intercompany amounts of $60 and $140, respectively) . 415 488
------- -------
51,800 49,881
------- -------
Income from textile products operations . . . . . . . . . . . . . . . 538 1,138
</TABLE>
See accompanying notes to consolidated financial statements
PAGE 5 OF 23
<PAGE> 6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
----------------------
1994 1993
---------- -----------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,721 $13,626
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,076 11,576
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 1,441 1,156
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 541 515
------- -------
14,058 13,247
------- -------
Income from hotel operations . . . . . . . . . . . . . . . . . . . . . 663 379
------- -------
INCOME FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . . . . . 1,201 1,517
ASSOCIATED COMPANIES
Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,124 8,700
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 690
Loss from asset held for sale . . . . . . . . . . . . . . . . . . . . . . -- 414
------- -------
324 1,104
------- -------
INCOME FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . . . . . 800 7,596
OTHER
Recovery from investment in Alliance Bancorporation . . . . . . . . . . . 1,703 --
Interest on short-term investments and other income . . . . . . . . . . . 267 304
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 399
------- -------
2,064 703
Interest (including intercompany amounts of $127 and $74, respectively). . 3,253 5,276
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,559 3,064
------- -------
4,812 8,340
------- -------
OTHER (LOSS), NET . . . . . . . . . . . . . . . . . . . . . . . . . . (2,748) (7,637)
------- -------
Income (loss) before income taxes and extraordinary gain . . . . . . . . (671) 3,779
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . 1,224 (419)
------- -------
Income (loss) before extraordinary gain . . . . . . . . . . . . . . . . . (1,895) 4,198
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . . 648 --
------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,247) $ 4,198
======= =======
PER COMMON SHARE (PRIMARY)
Net income (loss) per common share . . . . . . . . . . . . . . . . . . $ (0.23) $ 0.77
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 6 OF 23
<PAGE> 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 835 $ 1,181
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 154
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 84 115
Loss from investments in affiliate . . . . . . . . . . . . . . . . . . . (133) (118)
------- -------
957 1,332
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 --
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 234 323
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 243 331
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 166
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3
(Recovery of) provision for losses . . . . . . . . . . . . . . . . . . . (6) --
------- -------
2,148 823
------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . . (1,191) 509
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 1,627 1,574
Interest and other income (including intercompany
amounts of $57 and $22, respectively) . . . . . . . . . . . . . . . . 55 347
------- -------
1,682 1,921
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . 499 518
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 434
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 203 201
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 133
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 258
------- -------
1,350 1,544
------- -------
Income from energy operations . . . . . . . . . . . . . . . . . . . . 332 377
------- -------
INCOME (LOSS) FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . (859) 886
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,430 18,145
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,876 15,271
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,331 1,428
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 581
Interest (including intercompany amounts of $20 and $51, respectively) . 122 152
------- -------
18,894 17,432
------- -------
Income from textile products operations . . . . . . . . . . . . . . . 536 713
</TABLE>
See accompanying notes to consolidated financial statements
PAGE 7 OF 23
<PAGE> 8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
----------------------
1994 1993
---------- -----------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,921 $ 5,580
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,926 4,184
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 572 376
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 182
------- -------
5,704 4,742
------- -------
Income from hotel operations . . . . . . . . . . . . . . . . . . . . . 1,217 838
------- -------
INCOME FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . . . . . 1,753 1,551
ASSOCIATED COMPANIES
Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544 1,115
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 264
Loss from asset held for sale . . . . . . . . . . . . . . . . . . . . . . -- 414
------- -------
110 678
------- -------
INCOME FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . . . . . 434 437
OTHER
Interest on short-term investments and other income . . . . . . . . . . . 80 122
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 93
------- -------
112 215
Interest (including intercompany amounts of $37 and $29, respectively) . . 1,069 1,350
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 444 1,082
------- -------
1,513 2,532
------- -------
OTHER (LOSS), NET . . . . . . . . . . . . . . . . . . . . . . . . . . (1,401) (2,217)
------- -------
Income (loss) before income taxes and extraordinary gain . . . . . . . . (73) 657
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 2,564
------- -------
(Loss) before extraordinary gain . . . . . . . . . . . . . . . . . . . . (107) (1,907)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . . 648 --
------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 541 $ (1,907)
======= ========
PER COMMON SHARE (PRIMARY)
Net income (loss) per common share . . . . . . . . . . . . . . . . . . $ 0.10 $ (0.35)
======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 8 OF 23
<PAGE> 9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
------------------
1994 1993
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,247) $ 4,198
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . 4,613 4,678
Undistributed income from energy affiliate . . . . . . . . . . . . . . . . . . (2,721) (3,332)
Distributions from energy affiliate . . . . . . . . . . . . . . . . . . . . . . 1,948 2,001
(Recovery of) provision for losses . . . . . . . . . . . . . . . . . . . . . . (1,709) 200
Issuance of note payable for litigation settlement . . . . . . . . . . . . . . 1,500 --
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 1,083 (886)
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . . . . . (775) 5,076
Equity in net income of associated company/affiliate . . . . . . . . . . . . . (672) (2,361)
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . (648) --
Proceeds from collections of mortgage loans . . . . . . . . . . . . . . . . . . 500 910
Amortization of deferred gain from debenture exchange . . . . . . . . . . . . . (439) (75)
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . . . . . . (38) (60)
Loss (gain) on sale of investment in associated company . . . . . . . . . . . . (30) (6,125)
Loss from asset held for sale . . . . . . . . . . . . . . . . . . . . . . . . . -- 414
Increase in mortgage loans from sale of real estate . . . . . . . . . . . . . . -- (76)
Net change in textile products assets and liabilities . . . . . . . . . . . . . 1,596 890
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . (1,035) 257
Net change in energy assets and liabilities . . . . . . . . . . . . . . . . . . (436) 157
------- -------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 1,490 5,866
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements related to Integra - asset held for sale . . . . . . . . . . . . . (7,422) (34)
Less: Integra cash balance at emergence from bankruptcy . . . . . . . . . . . . 2,077 --
Proceeds from liquidation of Alliance Bancorporation . . . . . . . . . . . . . . 1,703 --
Proceeds from sale of investment in associated company . . . . . . . . . . . . . 1,250 8,289
Capital expenditures to real estate and hotel properties . . . . . . . . . . . . (1,098) (643)
Proceeds from sale (investment in) insurance contracts, net . . . . . . . . . . . 481 (1,015)
Investments in textile products property and equipment . . . . . . . . . . . . . (474) (309)
Net change in restricted cash for investing activities . . . . . . . . . . . . . 381 (145)
Investments in energy property and equipment . . . . . . . . . . . . . . . . . . (123) 13
Investments in associated companies/affiliates . . . . . . . . . . . . . . . . . (9) (266)
Proceeds from repayment of investment in associated company . . . . . . . . . . . -- 4,768
Investments in marketable securities . . . . . . . . . . . . . . . . . . . . . . -- (776)
Proceeds from sales of real estate . . . . . . . . . . . . . . . . . . . . . . . -- 89
------- -------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . (3,234) 9,971
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . . . . . (3,519) (8,643)
Repurchase of 7% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,526) --
Purchase of capital stock by energy subsidiary for treasury . . . . . . . . . . . (1,454) (1,880)
Net change in restricted cash for financing activities . . . . . . . . . . . . . 143 1,940
Payment of loan fees and financing costs . . . . . . . . . . . . . . . . . . . . (2) (461)
Repurchase of 13.5% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . -- (6,461)
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . -- 94
------- -------
Net cash (used in) financing activities . . . . . . . . . . . . . . . . . . . (6,358) (15,411)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . . . . . 4 (136)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . (8,098) 290
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . 11,837 9,959
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . $ 3,739 $ 10,249
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
PAGE 9 OF 23
<PAGE> 10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1994
(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, 1993.
2. INVESTMENTS IN ASSOCIATED COMPANIES AND AFFILIATE (DOLLAR AMOUNTS IN
THOUSANDS)
<TABLE>
<CAPTION>
Income (loss) from
As of April 30, 1994 Amount at which investments for the
------------------------- carried at, nine months ended
Cost or ---------------------- April 30,
Business segments and Number of ascribed April 30, July 31, ---------------------
description of investment shares or units value 1994 1993 1994 1993
- - ----------------------------------- --------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSOCIATED COMPANIES
SHOWBIZ PIZZA TIME, INC.(A)
--Common stock . . . . . . . . . . 1,784,193 $5,438 $16,190 $16,763 -- --
Equity in earnings . . . . . . . -- -- -- $ 1,094 $ 2,492
Gain on sale of shares . . . . . -- 6,125
--Floating rate
subordinated bond interest -- -- -- -- 83
------ ------- ------- ------- --------
5,438 16,190 16,763 1,094 8,700
------ ------- ------- ------- --------
OAKHURST CAPITAL, INC. (B)
--Common stock . . . . . . . . . . -- -- -- 1,000 30 --
--Warrants to purchase
common stock . . . . . . . . . . -- -- -- 220 -- --
------ ------- ------- ------- --------
-- -- 1,220 30 --
------ ------- ------- ------- --------
Totals . . . . . . . . . . . . . $5,438 $16,190 $17,983 $ 1,124 $ 8,700
====== ======= ======= ======= ========
AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (C)
-- General partnership interest -- $8,650 $ 7,120 $ 7,718 $ (263) $ (67)
-- Limited partnership units 446,345 906 -- 151 (159) (64)
------ ------- ------- ------- --------
Totals . . . . . . . . . . . . $9,556 $ 7,120 $ 7,869 $ (422) $ (131)
====== ======= ======= ======= ========
</TABLE>
(A) The Company accounts for its investment in ShowBiz Pizza Time, Inc.
("ShowBiz"), on the equity method of accounting. The Company also
records its pro-rata share of various stockholders' equity
transactions. The financial impact of ShowBiz's shareholders' equity
transactions, principally the purchase of treasury stock at prices in
excess of book value and the exercise of warrants and options at prices
below book value, resulted in a non-cash reduction in the carrying
value of the Company's investment in ShowBiz and a corresponding
reduction in additional paid-in capital in the amount of $1,667,000 for
the nine months ended April 30, 1994.
As of April 30, 1994, the Company owned approximately 14% of ShowBiz,
and all of its ShowBiz shares are pledged to secure certain loans
payable as discussed in Note 5.
(B) On February 14, 1994 the Company completed the all cash sale of its
entire investment in Oakhurst Capital, Inc. for $1,250,000, resulting in
a gain of $30,000.
(C) As of April 30, 1994, Hallwood Realty Corporation ("HRC"), a wholly
owned subsidiary of the Company, owned a 1% general partnership
interest, and the Company owned a 5% limited partnership interest in
its Hallwood Realty Partners, L.P. ("HRP") affiliate.
Due to recording the Company's pro rata share of equity losses recorded
by HRP, the carrying value of the Company's investment in HRP's limited
partnership units had been reduced to zero; therefore, the Company no
longer records its pro rata share of losses, as the Company is not
liable for any additional
PAGE 10 OF 23
<PAGE> 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
amounts. The Company would have to recover such unrecognized losses,
however, before any equity income could be recognized.
The carrying value of the Company's investment in the general partner
interest of HRP includes the value of intangible rights to provide
asset management and property management services. The former owner
initially retained the property management rights for a three-year
period following the November 1, 1990 sale. On June 1, 1991 the
Company purchased the retained property management rights from the
former owner for the balance of the three-year period, and, as of
October 31, 1993, had fully amortized the $2,475,000 cost. Beginning
November 1, 1993 the Company commenced amortization of that portion of
the general partnership interest ascribed to the management rights, and
for the quarter and year-to-date periods ended April 30, 1994 such
amortization was $168,000 and $336,000, respectively.
As further discussed in Note 5, the Company has pledged its 446,345 HRP
limited partnership units to collateralize a $500,000 note payable.
The quoted market price per share and the Company's carrying value per share
of the common shares of ShowBiz and the limited partnership units of HRP at
April 30, 1994 were:
<TABLE>
<CAPTION>
AMOUNT PER SHARE
------------------
MARKET CARRYING
PRICE VALUE
------- -------
<S> <C> <C>
ShowBiz common shares . . . . . . . . . . . . . . . . . . . . . . . . . $10.00 $9.07
HRP limited partnership units . . . . . . . . . . . . . . . . . . . . . 3.37 --
</TABLE>
The general partnership interest of HRP is not publicly traded.
3. CONTINGENCIES
As discussed in Note 18 of the Company's consolidated financial
statements contained in its annual report on Form 10-K for the year ended
July 31, 1993, all contingencies described therein remain in effect at April
30, 1994, except as discussed below.
The Company is also a named defendant in Nitti v. Frank, et al, in the
68th District Court of Dallas County, Texas (No. 93- 06753-C), in which the
plaintiff, purporting to act derivatively on behalf of ShowBiz Pizza Time,
Inc., contends among other things that the defendants (most of whom are
directors of ShowBiz and some of whom are directors of the Company) made
misleading statements on behalf of ShowBiz to the securities market,
breached fiduciary duties to stockholders of ShowBiz, committed constructive
fraud and unjustly enriched themselves by selling ShowBiz stock prior to
ShowBiz's report of a reduced earnings estimate in June 1993. Plaintiffs
demand restitution and/or unspecified damages and punitive and exemplary
damages. The Company intends to vigorously defend this action and does not
believe the ultimate outcome will materially affect the Company. Counsel
for the Company presently believes that an agreement in principle to settle
the Nitti litigation has been reached with plaintiff's counsel. As
proposed, the plaintiff's settlement with ShowBiz would be at no cost to the
Company or its directors and officers. A written settlement agreement draft
is being circulated among all counsel of record for comment at the date of
this filing. In addition, and in response to a formal investigative order
of the Securities and Exchange Commission ("SEC"), the Company and certain
of its officers have provided testimony and produced the documents regarding
the Company's sale of shares of ShowBiz Pizza Time, Inc. in June 1993.
Hallwood entered into a settlement agreement dated April 14, 1994 with
HRP and Smith Barney Shearson Holding Inc. requiring the Company to issue a
note in the principal amount of $1,500,000 to the agent for the plaintiffs
in the litigation styled Equitec Roll-up Litigation, No. C-90-2064 CAL, in
the United States District Court, Northern District of California. The note
is being issued in connection with the settlement of this litigation, and is
being guaranteed as to payment by Smith Barney. Hallwood has agreed to
reimburse Smith Barney for any payments Smith Barney is required to make
pursuant to the guaranty and has granted Smith Barney a security interest in
187,500 shares of common stock of Hallwood Energy Corporation to secure this
reimbursement agreement. Hallwood has agreed to maintain a 150%
value-to-loan ratio throughout the term of the note, and has agreed to grant
a security interest in additional shares of common
PAGE 11 OF 23
<PAGE> 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
stock of Hallwood Energy Corporation held or acquired by Hallwood if
necessary to maintain this ratio. The settlement agreement is subject to
court approval after notice to class members and a hearing regarding the
terms of the settlement.
4. ANTICIPATORY LOSS
The Company acquired its investment in Integra-A Hotel and Restaurant
Company ("Integra") as a restructuring fee for its assistance in
implementing a plan of financial restructuring in 1986 and through
subsequent stock purchases. On December 30, 1988, Integra completed a
spin-off of its ShowBiz subsidiary, which resulted in an allocation of the
Company's Integra investment between the two entities and a reduction of the
Company's investment in Integra.
The Company resolved to dispose of its remaining Integra investment in
July 1990, therefore reclassifying it as an asset held for sale for
financial reporting purposes. In connection with the planned disposition
the Company provided additional financing to Integra; however, the
continuation of the recession resulted in a deterioration of Integra's
financial position, and eventually its July 14, 1992 chapter 11 bankruptcy
protection filing. During fiscal 1992 and 1993, the Company recognized a
loss on its asset held for sale in the amounts of $24,178,000 and
$4,118,000, respectively. Integra closed and consummated the transactions
under the first amended plan of reorganization (the "Plan"). The Plan,
which was confirmed by the Bankruptcy Court on February 11, 1994,
incorporated a settlement agreement by and between Integra, the Company, the
unsecured creditors' committee and others (the "Settlement") and a
supplemental settlement agreement by and between Integra, the unsecured
creditors' committee, and the plaintiffs in the Reese lawsuit (the
"Supplemental Settlement"). The Plan and Settlement provided for the
reorganized Integra to continue in business as a wholly-owned subsidiary of
the Company under its new name, Integra Hotels, Inc.
On March 8, 1994, all of Integra's common and preferred stock was
cancelled and new common stock of Integra Hotels, Inc. was issued to
Hallwood-Integra Holding Company Incorporated, a newly-incorporated, wholly
owned subsidiary of the Company, for $1,000,000. Integra Hotels, Inc. is
obligated to pay the administrative and priority tax claims of the
bankruptcy case in full which has been fully accrued. Pursuant to the Plan,
as impacted by the Supplemental Settlement, Integra funded a trust for the
unsecured creditors by transferring to the trust $1,000,000 and all
potential litigation claims which Integra has against the Company and
certain others. The cash and claims were transferred to the trust in full
satisfaction of the claims of all of Integra's unsecured creditors.
Pursuant to the Settlement and Supplemental Settlement, the trust
released all of the transferred claims which relate to the Company and
certain related parties, for an immediate payment from the Company to the
trust of $9,000,000, consisting of $5,000,000 in cash and a $4,000,000 note
secured by 344,828 shares of ShowBiz stock. The Supplemental Settlement
resolved a dispute and allowed the Bankruptcy Court to enter an order that
determined that Integra is the owner and holder of certain claims described
in the Settlement as "Core Claims", (which Core Claims have been asserted in
certain state court proceedings identified as the Reese, European American
and Hermitage Hotel lawsuits). As a consequence, all Core Claims pending
against the Company in existing or future litigation, or asserted against
the Company in the future, are released and permanently enjoined by the Plan
and the order confirming the Plan.
The Company believes that any pending or remaining non-released claims
are without merit and, if such non-released claims are pursued, the Company
intends to continue to vigorously contest such claims.
5. LOANS PAYABLE
Real Estate
The outstanding balance of the combined loans payable for the real estate
division at April 30, 1994 was $7,322,000.
Office-retail property. The Company's United Kingdom office-retail
property is collateral for a L.3,500,000 term loan with the London Branch of
The First National Bank of Boston ("FNBB"). The increase in the amount
payable at April 30, 1994 to $5,322,000 from $5,205,000 is due solely to
fluctuation in the foreign currency exchange rate.
PAGE 12 OF 23
<PAGE> 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
HRP litigation settlement. The Company has agreed to issue a note in the
amount of $1,500,000 to the agent for the plaintiffs in the litigation
styled Equitec Roll-up Litigation, previously referred to in Note 3.
Term note. In January 1992, the Company issued a $1,613,350 note payable
to Integra bearing interest at the FNBB Base Rate. On March 8, 1994
pursuant to a settlement agreement, the note, which had a remaining balance
of $1,491,000 plus $60,000 of accrued interest, was satisfied by a cash
payment of $150,000 and the issuance of a new five-year, eight percent,
interest only $500,000 note, secured by a pledge of all of the Company's
446,345 HRP limited partnership units.
The settlement agreement also provides that the pledgee will have the
right to receive from the Company a payment in immediately available funds
on the Payment Date (as hereinafter defined) in an amount (the
"Participation Amount") equal to 25% of the increase in the value of the
units, but in no event more than $500,000, from February 25, 1994 (the
"Closing Date") to the Value Date (as hereinafter defined). The value of
the units on the Closing Date was $1.69, the "high" price as quoted on the
Closing Date for the units in The Wall Street Journal. The value of the
units on the Value Date will be (i) the "high" price for the units on the
Value Date as quoted in The Wall Street Journal, or (ii) if the units are no
longer traded on the American Stock Exchange or another public exchange, as
determined by an appraiser. The Value Date is defined as five (5) days
prior to the Payment Date. The Payment Date is the earlier to occur of (a)
the maturity date of the note and (b) one hundred twenty (120) days after
pledgee requests payment in writing, provided that the Units are trading at
a "high" price of not less than $9.00 per unit as quoted in The Wall Street
Journal on the date of such request.
Energy
The Company's 70%-owned Hallwood Energy Corporation subsidiary ("HEC")
has no direct indebtedness. Reflected in the consolidated balance sheets are
HEC's share of the long term obligations of its affiliated entity, Hallwood
Energy Partners, L.P. ("HEP").
Textile Products
The outstanding balance of the combined loans payable for textile
products at April 30, 1994 was $6,545,000.
Brookwood revolver. In December 1992, the Company's textile products
subsidiary, Brookwood Companies Incorporated ("Brookwood") entered into a
two-year revolving credit facility with The Chase Manhattan Bank, N.A.
("Chase") in the amount of $13,500,000 (the "Brookwood Revolver"). At that
time the Company agreed to subordinate its $1,000,000 remaining intercompany
bridge loan receivable from this subsidiary to the Brookwood Revolver. The
Brookwood Revolver is collateralized by accounts receivable and the
industrial equipment located in Kenyon, Rhode Island. The outstanding
balance at April 30, 1994 was $6,025,000.
Equipment loan. In December 1991, Brookwood entered into a $900,000
equipment financing arrangement with CIT Group/Equipment Financing, Inc.
The loan matures in December 1996, bears a 10% fixed interest rate and is
secured by various existing dyeing and finishing equipment. The outstanding
balance at April 30, 1994 was $520,000.
Hotels
The outstanding balance of the combined loans payable for the hotels at
April 30, 1994 division was $12,848,000.
In December, 1992, the Company entered into a term loan with FNBB to
provide senior debt financing on the Lido Beach Holiday Inn Hotel in the
amount of $8,000,000, for three years with an additional two-year option
(the "Term Loan"). The Term Loan is secured by the pledge of all the
capital stock of a special-purpose subsidiary, The Lido Beach Hotel, Inc.
The principal assets of this subsidiary are the aforementioned hotel and
three residential mortgage loan portfolios. The outstanding balance of the
Term Loan at April 30, 1994 was $6,710,000.
PAGE 13 OF 23
<PAGE> 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
The Company also assumed various note payable obligations as part of
Integra's emergence from bankruptcy as follows: (i) first mortgage on a
Residence Inn hotel located in Tulsa, Oklahoma - $5,200,000 (based upon
commitment letter from lender); (ii) first mortgage on certain parking lots
- $438,000; and (iii) note payable to former preferred shareholders of
Integra - $500,000.
Associated Companies
The outstanding balance of the combined loans payable for the associated
companies division at April 30, 1994 was $10,000,000.
Margin loan. In July 1993, the Company obtained a margin loan from
Prudential Securities Incorporated in the amount of $6,000,000 (the
"Prudential Margin Loan"). Proceeds from the Prudential Margin Loan were
used to satisfy a former margin loan facility with Interallianz Bank Zurich
("IBZ"). The Company had formerly pledged all of its ShowBiz common shares
as collateral for the Prudential Margin Loan. On March 8, 1994, 344,828
shares were released and repledged to secure the $4,000,000 note given to
the Integra Unsecured Creditors' Trust discussed in Note 4. The Prudential
Margin Loan was paid in full from proceeds of the LOC, and the balance of
the ShowBiz shares were pledged to secure its repayment.
Line of credit. On April 19, 1994, the Company obtained a line of credit
from Merrill Lynch Business Financial Services (the "LOC") in the maximum
commitment amount of $6,000,000. Significant terms are (i) initial maturity
date - April 25, 1995; (ii) interest rate - prime plus 0.75%; and (iii)
collateral - 1,439,365 shares of ShowBiz common stock. The outstanding
balance at April 30, 1994 was $6,000,000.
Integra Unsecured Creditors' Trust. As discussed in Note 4 the Company
issued a $4,000,000 note payable to the Integra Unsecured Creditors' Trust
in connection with the consummation of the Integra Plan of Reorganization.
Significant terms are (i) maturity date - March 8, 1997; (ii) interest rate
- 5% fixed; and (iii) collateral - 344,828 shares of ShowBiz common stock.
6. 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 13.5% Debentures, as defined
below, in the aggregate principal amount of $27,481,000 were exchanged for a
new issue of 7% Collateralized Senior Subordinated Debentures due July 31,
2000 (the "7% Debentures"), and purchased $14,538,000 of certain of its
13.5% Debentures at 80% of face value. Interest on the $27,481,000
principal amount of the 7% Debentures accrued from March 2, 1993, and is
payable quarterly in arrears in cash. The 7% Debentures are secured by a
pledge of the capital stock of certain wholly-owned subsidiaries of the
Company having an aggregate net carrying value at March 1, 1993 (the issue
date) of $27,607,000. The pledged stocks consist of 100% of the outstanding
shares of common and preferred stock of Brookwood, 100% of the outstanding
shares of common stock of Hallwood Hotels, Inc. and 35% of the outstanding
shares of common stock of The Lido Beach Hotel, Inc. The common and
preferred stock of Brookwood are also subject to a prior pledge in favor of
Chase and the common stock of The Lido Beach Hotel, Inc. is also subject to
a prior pledge in favor of FNBB.
In April 1994 the Company repurchased 7% Debentures having a principal
value of $2,174,000 for $1,526,000, resulting in a gain from debt
extinguishment of $648,000. The repurchase partially satisfies the
Company's obligation to retire 10% of the original issue ($2,765,000) by
March 1996 and 25% of the original issue ($6,914,000) by March 1998.
13.5% subordinated debentures. On May 15, 1989, the Company distributed
to its stockholders $46,318,600 aggregate principal amount of a new issue 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). Ten dollars principal amount of the 13.5% Debentures was
distributed for each share of common stock of the Company outstanding at the
close of business on March 31, 1989. The 13.5% Debentures were issued in
denominations of $100 and integral multiples thereof. The Company
distributed $228,770 in cash, in lieu of the issuance of fractional
denominations of such debentures.
PAGE 14 OF 23
<PAGE> 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1994
(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 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 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 and $172,500 of cash in
lieu of fractional debentures. Interest due on August 15, 1993 was also
paid in cash. The Company is prohibited from issuing additional 13.5%
Debentures as payment of interest in-kind until August 15, 1996.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
April 30, July 31,
Description 1994 1993
----------- ---------- ----------
<S> <C> <C>
7% Debentures (face value) . . . . . . . . . . . . $25,306 $27,481
Unrecognized gain from purchases and exchange,
net of $634 and $196 accumulated amortization,
respectively . . . . . . . . . . . . . . . . . . 3,586 4,024
Elimination of debentures owned by HEC . . . . . . (1,894) (1,894)
------- -------
Totals . . . . . . . . . . . . . . . . . . . . $26,998 $29,611
======= =======
13.5% Debentures (face value)
1989 Series . . . . . . . . . . . . . . . . . . $18,203 $18,203
1991 Series . . . . . . . . . . . . . . . . . . 2,310 2,310
1992 Series . . . . . . . . . . . . . . . . . . 2,389 2,389
------- -------
Totals . . . . . . . . . . . . . . . . . . . . $22,902 $22,902
======= =======
</TABLE>
7. INCOME TAXES
Effective August 1, 1991, the Company accounts for income taxes in
accordance with SFAS No. 109. The related deferred tax asset arises
principally from the anticipated utilization of net operating loss
carryforwards and tax credits at the statutory tax rate and other tax
planning strategies.
The following is a summary (in thousands) of the income tax
provision (benefit):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
April 30, April 30,
----------------------- -----------------------
1994 1993 1994 1993
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Federal
Deferred tax . . . . . . . . . $1,083 $(886) $-- $2,429
Current . . . . . . . . . . . . -- 75 -- --
State . . . . . . . . . . . . . . 141 392 34 135
------ ----- --- ------
Total . . . . . . . . . . . . $1,224 $(419) $34 $2,564
====== ===== === ======
</TABLE>
The federal deferred tax charge and (benefit) for the nine and
three-month periods ended April 30, 1994 and 1993 are a result of a
fluctuation in the valuation allowance, which is attributed to the
recognition of additional (or reduction of) taxable income that would
result from the implementation of certain tax planning strategies, which
include the potential sale of its ShowBiz shares and certain other assets
that would supplement income from operations.
The amount of the deferred tax asset (net of the valuation allowance
of $14,186,000) was $7,450,000 at April 30, 1994.
PAGE 15 OF 23
<PAGE> 16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
8. RECOVERY FROM INVESTMENT IN ALLIANCE BANCORPORATION
On February 4, 1994 the Company received $1,703,000 in cash as its
share of a final liquidation distribution of Alliance Bancorporation. Due
to previous uncertainties involving the recoverability on this investment,
the Company had previously written off the asset; therefore, the entire
amount was recognized as a recovery in the second quarter.
9. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of noncash investing and financing activities
The following transactions affected recognized assets or liabilities
but did not result in cash receipts or cash payments (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
April 30,
--------------------
Description 1994 1993
------------------------------------------------- -------- -------
<S> <C> <C>
Issuance of promissory note payable in connection
with Integra bankruptcy . . . . . . . . . . . . . . . . . $4,000 --
Assets (liabilities) acquired in connection with the
emergence of Integra from bankruptcy (1)
Hotel properties . . . . . . . . . . . . . . . . . . . 7,048 --
Receivables and other assets . . . . . . . . . . . . . 2,296 --
Loans payable . . . . . . . . . . . . . . . . . . . . . (6,135) --
Accounts payable and accrued expenses . . . . . . . . . (3,586) --
Less: investment in net assets received . . . . . . . . (1,700) --
------- ------
Integra cash balance at emergence from bankruptcy . 2,077 --
======= ======
Recording of proportionate share of stockholders'
equity transaction by ShowBiz affiliate . . . . . . . . . 1,667 --
Issuance of note payable in connection with
litigation settlement . . . . . . . . . . . . . . . . . . 1,500 --
Exchange of Subordinated Debentures for
new debentures . . . . . . . . . . . . . . . . . . . . . -- $25,587
Payment in-kind of annual interest on
Subordinated Debentures . . . . . . . . . . . . . . . . . -- 6,792
Unrecognized gain from completion of Bond Exchange
and Offer to Purchase for Cash . . . . . . . . . . . . . -- 4,220
Supplemental disclosures of cash payments
-----------------------------------------
Interest paid (including capitalized interest) . . . . . . . 6,192 2,660
Income taxes paid . . . . . . . . . . . . . . . . . . . . . 82 20
</TABLE>
(1) The Company has made a preliminary estimate of the net assets distributed
upon Integra's emergence from bankruptcy.
PAGE 16 OF 23
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company reported net income of $541,000 for the quarter ended April 30,
1994, compared to a net loss of $1,907,000 in the year-ago quarter. The
nine-month net loss of $1,247,000, compares to net income of $4,198,000 for the
prior-year period.
Following is an analysis of the results of operations by asset management,
operating subsidiaries and associated companies divisions and by the real
estate, energy, textile products, hotels, and associated companies business
segments within those divisions.
ASSET MANAGEMENT.
Real estate.
Revenues. Fee income of $835,000 for the fiscal 1994 third quarter
decreased by $346,000 from the $1,181,000 reported in the year-ago quarter.
Fee income of $2,835,000 for the nine months decreased by $899,000 from the
similar period a year ago. The decreases were due to the significant level of
leasing and construction activities in the prior-year periods and the
disposition of properties by HRP. Fee income is derived from the Company's
asset management and property management services provided to its Hallwood
Realty Partners, L.P. affiliate, a real estate master limited partnership
("HRP").
Rental income from the United Kingdom office-retail property in the amount
of $171,000 in the current-year quarter increased slightly from $154,000 in the
prior year while rental income for the nine-month period decreased to $442,000
from $523,000 due to retail tenant turnover.
Interest and discounts from mortgage loans for the fiscal 1994 third quarter
declined 27% to $84,000, from $115,000, as a result of early repayments of
loans in the Company's mortgage loan portfolio. The comparative nine-month
amounts were $272,000 and $361,000 for the 1994 and 1993 periods, respectively.
The loss from investments in affiliate represents the Company's recognition
of its pro-rata share of the loss recorded by HRP. For the current quarter the
Company reported a $133,000 loss compared to a $118,000 loss in the quarter a
year ago. The fiscal 1994 nine-month loss of $422,000 compares to a fiscal
1993 loss of $131,000. The increased loss is due to the effects of HRP's debt
forgiveness gains in fiscal 1993 and the Company's increased investment in HRP
limited partnership units. The carrying value of the Company's investment in
HRP's limited partnership units had been reduced to zero; therefore, the
Company no longer records its pro- rata share of losses from its limited
partnership investment as the Company is not liable for any additional amounts.
The Company would have to recover such unrecognized losses, however, before any
equity income could be recognized.
Expenses. On April 14, 1994 the Company entered into a litigation
settlement agreement to resolve the Equitec Roll-up Litigation. The settlement
involved no immediate cash payment, but did require the Company to issue a
$1,500,000 promissory note. See Note 3.
Administrative expenses declined 28% to $234,000 in the fiscal 1994 third
quarter, compared to $323,000 in the year-ago quarter. Administrative expenses
for the nine-month period decreased to $832,000 from $1,179,000. The decline
for the three and nine-month periods is primarily attributable to the October
31, 1992 expiration of the Hallwood Realty Corporation subsidiary's guarantee
to absorb general and administrative expenses of HRP in excess of a $2,500,000
required cap.
Depreciation and amortization expense of $243,000 for the fiscal 1994 third
quarter and $817,000 for the nine-month period decreased from $331,000 and
$993,000 in the corresponding fiscal 1993 periods. Depreciation expense
relates to the office-retail property. Amortization expense relates to the
cost of former property management contracts acquired by Hallwood Management
Company and amortization of Hallwood Realty Corporation's, general partnership
interest in HRP to the extent allocated to management rights. The decline is
attributable to the expiration of amortization of acquired property management
contracts.
Interest expense declined in the fiscal 1994 third quarter to $163,000 from
$166,000 and for the nine-month period declined to $499,000 from $542,000, due
to a decline in the foreign currency exchange rate with respect to the loan on
the office-retail property.
Operating expenses were immaterial for the fiscal 1994 and 1993 periods.
PAGE 17 OF 23
<PAGE> 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
An additional provision for loss in the amount of $200,000 on a commercial
mortgage loan in default to its net realizable value was recorded in the fiscal
1993 first quarter. Recoveries of $6,000 on fully reserved residential loans
were recorded in the fiscal 1994 third quarter.
Energy.
Revenues. The Company owns 70% of the common stock of Hallwood Energy
Corporation ("HEC"). HEC accounts for its investment in its Hallwood Energy
Partners, L.P. ("HEP") affiliate using the proportionate consolidation method
of accounting. HEC's general partner interest in HEP entitles it to interests
in HEP's properties ranging from 2% to 25%, and HEC also holds approximately
7.3% of HEP's limited partnership units. Third quarter fiscal 1994 oil and gas
revenues of $1,627,000 increased 3%, compared to $1,574,000 in the year-ago
quarter. For the nine-months, the comparison of oil and gas revenues was
$4,548,000 in the current year and $5,287,000 in the year-ago period. Oil
revenue for the nine months decreased $615,000 to $1,333,000 due to a decline
in the average price per barrel to $16.06 from $19.48 and a decrease in
production to 83,000 barrels from 100,000 barrels. Gas revenue for the nine
months decreased $124,000 to $3,215,000 as a result of a decrease in production
to 1,470,000 mcf from 1,716,000 mcf offset by a slight increase in the average
gas price to $2.19 from $1.95 per mcf. The decrease in oil and gas production
is due primarily to normal production declines.
Interest and other income decreased for the quarter to $55,000 from
$347,000, principally due to a decrease in HEC's share of HEP's pipeline and
gas marketing revenue, resulting from the sale of HEP's gas pipeline and other
West Virginia properties which was effective March 31, 1993. For the nine
months interest and other income decreased $323,000 for principally the same
reasons.
Expenses. Depreciation, depletion and amortization expenses were $499,000
for the quarter and $1,538,000 for the nine months. A year ago the comparable
expenses were $518,000 and $1,650,000, respectively. The decrease is primarily
the result of a lower depletion rate caused by the decrease in production due
to property sales. Operating expenses decreased $53,000 to $381,000 for the
three months and decreased $285,000 to $1,076,000 for the nine months compared
to the fiscal 1993 periods, primarily due to the sale of HEP properties.
Administrative expenses increased by $2,000 for the quarter and $27,000 for
the nine-month period. The changes for both periods were immaterial.
Interest expense decreased $35,000 to $98,000 during the fiscal 1994 third
quarter and decreased $157,000 to $284,000 for the nine-month period as a
result of HEP's lower average debt balance.
Minority interest, which represents the interest of other stockholders in
HEC's operations, decreased in both the fiscal 1994 third quarter and the
nine-month period, due to HEC's repurchase of its own shares from minority
shareholders for treasury and slightly lower net income from energy operations.
OPERATING SUBSIDIARIES.
Textile products.
Revenues. Sales increased $1,285,000 in the fiscal 1994 third quarter to
$19,430,000 compared to $18,145,000 in fiscal 1993. The comparative nine month
sales were $52,338,000 in fiscal 1994 and $51,019,000 in fiscal 1993. The 7%
increase in sales for the fiscal 1994 quarter was the result of continued
growth in the Broowood Consumer and Brookwood Roll Goods divisions. The lower
level of growth, 3%, in the nine month sales reflect the weak market conditions
in the second fiscal quarter affecting the Kenyon finishing plant and the
adverse impact of a strike at a principal supplier.
Expenses. Cost of sales increased by 10%, compared to the 7% increase in
sales, in the fiscal 1994 third quarter from the comparable prior year quarter,
resulting in a lower gross profit. The lower gross profit margin for the
quarter (13.1% in fiscal 1994 compared to 15.8% in fiscal 1993) and for the
nine-month period (12.4% in fiscal 1994 compared to 14.3% in fiscal 1993) was
due to weak market conditions experienced by the Kenyon finishing plant.
Administrative and selling expenses decreased slightly in the quarter and
nine months from the comparable 1993 periods.
The reduction of interest expense of $30,000 for the third fiscal quarter
and $73,000 for the nine months was the result of lower average borrowings in
fiscal 1994 than in the comparable 1993 periods.
PAGE 18 OF 23
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
Hotels.
Revenues. Hotel revenues for the period beginning March 9, 1994 include the
result of Integra's Residence Inn hotel investments, consisting of one
fee-owned and two leasehold properties and management fees from two Residence
Inns managed for third-party owners. Such revenues were $1,066,000 and
included in both the three month and nine month results. Considering only the
three hotels owned by the Company for the three and nine-months periods in each
of the comparable periods in fiscal 1994 and 1993, revenues increased by
$275,000 and $29,000, respectively. The current quarter increase reflects the
Company's election to aggressively pursue higher average daily rates, resulting
in higher revenue and lower operating costs. The higher rates were made
possible by the Company's intensive capital expenditure program begun in early
fiscal 1993.
Expenses. On a comparable basis for the three-month and nine-month periods
operating expenses decreased $112,000 and $354,000, respectively, reflecting
the marketing strategy. Depreciation and amortization increased by $131,000
and $220,000, respectively, reflecting the capital expenditure program.
Interest expenses decreased by $19,000 and $17,000, respectively, due to
scheduled amortization of the FNBB Term Loan and additional amortization
resulting from proceeds of early payoffs of pledged mortgage loans.
ASSOCIATED COMPANIES
Revenues. Associated companies' income for the fiscal 1994 third quarter in
the amount of $544,000 compares to income of $1,115,000 in fiscal 1993. The
comparable nine month amounts were $1,124,000 in fiscal 1994 and $8,700,000 in
fiscal 1993. The decline is attributable to (i) the Company's sale of 250,000
shares of ShowBiz common stock in the fiscal 1993 second quarter for
$8,300,000, which resulted in a gain of $6,125,000; (ii) a 3% decline in the
Company's ownership percentage of ShowBiz (17% to 14%); and (iii) a substantial
decline in ShowBiz earnings.
Expenses. Interest expense of $110,000 for the fiscal 1994 third quarter
and $324,000 for the nine months decreased from the year-ago expense of
$264,000 and $690,000, respectively, due to a $6,000,000 reduction of the
Company's margin loan in December 1992.
In the fiscal 1993 third quarter the Company recorded a provision for loss
of $414,000 with respect to its investment in Integra. No comparable amount
was recorded in fiscal 1994.
OTHER
Revenues. On February 4, 1994 the Company received $1,703,000 in cash as
its share of a final liquidation distribution of Alliance Bancorporation. Due
to previous uncertainties involving the recoverability on this investment, the
Company had previously written off the asset; therefore, the entire amount was
recognized as a recovery in the second quarter. Interest on short-term
investments of $80,000 for the fiscal 1994 third quarter and $267,000 for the
nine months declined in comparison with the prior year amounts due to lower
average invested cash balances. Fee income in the current year quarter of
$32,000 declined from $93,000 in the fiscal 1993 quarter and declined to
$94,000 from $399,000 for the nine months, due to the sale of the Company's
Hallwood Services subsidiary in October 1992 and the expiration of a financial
consulting contract with Oakhurst.
Expenses. The Company's net interest expense for the fiscal 1994 third
quarter of $1,069,000 and for the nine-month period of $3,253,000 were
significantly reduced from the prior year amounts of $1,350,000 and $5,276,000,
respectively. The decease was attributed to the completion of the Bond
Exchange Offer referred to in Note 6 and the repayment of certain loan
obligations.
Administrative expenses, at $444,000 for the quarter and $1,559,000 for the
nine months, were down from $1,082,000 and $3,064,000 in the comparable periods
last year, due to the sale of Hallwood Services, costs associated with the
Bond Exchange Offer expensed in fiscal 1993, lower office costs, and lower
professional fees.
Income taxes. Third quarter fiscal 1994 income tax expense includes a
current provision for state income and franchise taxes of $34,000, and no
deferred federal tax expense or benefit, compared to a fiscal 1993 income tax
expense of $2,564,000, which includes a current provision for state income and
franchise taxes of $135,000 and a deferred federal tax expense of $2,429,000.
The nine- month fiscal 1994 income tax expense of $1,224,000 includes a current
provision for state income and franchise taxes of $141,000 and a deferred
federal tax expense of $1,083,000, compared to a fiscal 1993 nine-month income
tax benefit of $419,000,
PAGE 19 OF 23
<PAGE> 20
which included a current provision for federal taxes of $75,000, a provision
for state income and franchise taxes $392,000 and a deferred federal tax
benefit of $886,000.
The Company believes it will realize substantial benefits from utilization
of approximately $62,000,000 of its net operating loss carryforwards and
existing temporary differences to reduce federal income tax liability.
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 limitation.
Extraordinary gain. In April 1994 the Company repurchased 7% Debentures
with a principal value of $2,174,000 for a discounted amount of $1,526,000,
which resulted in an extraordinary gain from debt extinguishment in the amount
of $648,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at April 30, 1994
totaled $3,739,000. Additionally, $1,541,000 of cash is restricted as to
withdrawal by the Company, pursuant to terms of various loan agreements and
hotel lease agreements.
Although the Company's ShowBiz shares, having a market value of
approximately $17,842,000 at April 30, 1994 (based upon the closing price on
such date of $10.00 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. At April 30, 1994,
1,439,365 of the Company's ShowBiz shares were pledged to secure the $6,000,000
line of credit and the balance of 344,828 shares to secure the $4.0 million
promissory note issued to the Integra Unsecured Creditors' Trust discussed in
Note 4. A limited number of the Company's ShowBiz shares (dependent upon the
ShowBiz share market price at the time) may be released under the line of
credit's 130% collateral coverage requirement.
The Company's real estate segment generates funds principally from its
various real estate-related management activities without significant
additional capital costs. The mortgage loan portfolio is a source of liquidity;
however the principal has been pledged to secure the unpaid balance of The Lido
Beach Holiday Inn hotel Term Loan. At April 30, 1994, substantially all of the
Company's real estate and mortgage loans were pledged to secure loan
obligations.
Reflected in the energy segment of the accompanying balance sheet at April
30, 1994 are long-term obligations of affiliate of $5,396,000. This amount
represents HEC's share of HEP's outstanding long-term obligations. HEP's debt
consists primarily of $37,829,000 of borrowings under a line of credit and note
purchase agreement. HEP's borrowings are secured by a first lien on
approximately 80% in value of HEP's oil and gas properties.
At April 30, 1994 Brookwood maintained a $13,500,000 revolving credit
facility with The Chase Manhattan Bank, N.A., which is collateralized by
accounts receivable and equipment. Brookwood had additional availability under
its Revolver in the amount of $6,155,000 at April 30, 1994. At present, it is
presently restricted from repaying its $1,000,000 bridge financing to the
parent company.
The Company's hotel segment generates cash flow from operating six hotels
(two Holiday Inns in Florida. One Embassy Suites and one Residence Inn
Oklahoma, and one Residence Inn each in Alabama and South Carolina.)
Additional cash revenues are derived from two management contracts for managing
Residence Inns located in Arizona and Texas.
PAGE 20 OF 23
<PAGE> 21
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item
- - ----
<S> <C> <C>
1 Legal Proceedings.
------------------
Reference is made to Notes 3 and 4 to the Company's consolidated
financial statements for discussion of pending litigation matters.
2 Changes in Securities. None.
----------------------
3 Defaults upon Senior Securities. None.
--------------------------------
4 Submission of Matter 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 23
(b) Reports on Form 8-K None.
</TABLE>
PAGE 21 OF 23
<PAGE> 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: June 13, 1994 By: /s/ MELVIN J. MELLE
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
PAGE 22 OF 23
<PAGE> 1
EXHIBIT 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
April 30, April 30,
------------------ ------------------
1994 1993 1994 1993
------- ------ ------ -------
<S> <C> <C> <C> <C>
PRIMARY:
Average common shares outstanding . . . . . . . . . . . . . 5,487 5,470 5,487 5,486
Dilutive stock options based on the treasury stock method
using the period end market price . . . . . . . . . . . . . -- 11 -- 11
------- ------ ------ -------
Average common and common share equivalents outstanding . . 5,487 5,481 5,487 5,497
======= ====== ====== =======
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(1,247) $4,198 $ 541 $(1,907)
======= ====== ====== =======
Per share amount . . . . . . . . . . . . . . . . . . . . . $ (0.23) $ 0.77 $ 0.10 $ (0.35)
======= ====== ====== =======
FULLY DILUTED:
Average common and common share equivalents
outstanding - primary . . . . . . . . . . . . . . . . . . . 5,487 5,481 5,487 5,497
======= ====== ====== =======
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(1,247) $4,198 $ 541 $(1,907)
======= ====== ====== =======
Per share amount . . . . . . . . . . . . . . . . . . . . . $ (0.23) $ 0.77 $ 0.10 $ (0.35)
======= ====== ====== =======
</TABLE>
NOTE: Since dilution under fully diluted method is less than 3%, dual
presentation on consolidated statements of operations is not required.
PAGE 23 OF 23
