<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 JANUARY 31, 1994 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
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 FEBRUARY 28, 1994.
================================================================================
<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 January 31, 1994
and July 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Six Months Ended January 31, 1994 and 1993 . . . . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Three Months Ended January 31, 1994 and 1993 . . . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the
Six Months Ended January 31, 1994 and 1993 . . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 10-15
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . 16-19
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . . . 20-22
</TABLE>
Page 2 of 22
<PAGE> 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
January 31, July 31,
1994 1993
---------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,999 $ 7,998
Investments in real estate affiliate . . . . . . . . . . . . . . . . 7,421 7,869
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 2,271 2,601
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 218 636
-------- --------
17,909 19,104
ENERGY
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 11,697 12,385
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 1,568 1,035
Net working capital in affiliate . . . . . . . . . . . . . . . . . . 934 2,219
-------- --------
14,199 15,639
-------- --------
TOTAL ASSET MANAGEMENT ASSETS . . . . . . . . . . . . . . . . . . 32,108 34,743
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,199 14,389
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,079 12,501
Property, plant and equipment, net . . . . . . . . . . . . . . . . . 7,886 8,058
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,134 1,107
-------- --------
32,298 36,055
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,887 17,038
Receivables and other assets . . . . . . . . . . . . . . . . . . . . 1,482 1,421
-------- --------
18,369 18,459
-------- --------
TOTAL OPERATING SUBSIDIARIES ASSETS . . . . . . . . . . . . . . . 50,667 54,514
ASSOCIATED COMPANIES
Investments in associated companies . . . . . . . . . . . . . . . . . 17,231 17,983
-------- --------
TOTAL ASSOCIATED COMPANIES ASSETS . . . . . . . . . . . . . . . . 17,231 17,983
OTHER
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 7,450 8,533
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 6,564 11,837
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,253 1,602
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,429 2,048
Investment in insurance contracts . . . . . . . . . . . . . . . . . . 540 1,047
-------- --------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 19,236 25,067
-------- --------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,242 $132,307
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 22
<PAGE> 4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 31, July 31,
1994 1993
-------- --------
(Unaudited) (Audited)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,280 $ 5,205
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 377 550
-------- --------
5,657 5,755
ENERGY
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,384 8,751
Net long-term obligations of affiliate . . . . . . . . . . . . . . . . 3,669 4,830
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 341 165
-------- --------
11,394 13,746
-------- --------
TOTAL ASSET MANAGEMENT LIABILITIES . . . . . . . . . . . . . . . . . 17,051 19,501
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 6,763 6,990
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,689 9,198
-------- --------
12,452 16,188
HOTELS
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,932 7,429
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 971 1,479
-------- --------
7,903 8,908
-------- --------
TOTAL OPERATING SUBSIDIARIES LIABILITIES . . . . . . . . . . . . . . 20,355 25,096
ASSOCIATED COMPANIES
Anticipatory loss - asset held for sale . . . . . . . . . . . . . . . . 8,988 10,050
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,491 7,491
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . 256 85
-------- --------
TOTAL ASSOCIATED COMPANIES LIABILITIES . . . . . . . . . . . . . . . 16,735 17,626
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 29,321 29,611
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . . 22,902 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . . 2,133 3,811
-------- --------
TOTAL OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 54,356 56,324
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 108,497 118,547
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 . . . . . . . . . . . . . . . . . . . . . . 56,755 58,088
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (40,292) (38,504)
Equity adjustment from foreign currency translation . . . . . . . . . . (61) (167)
Treasury stock, 907,442 shares at both dates; at cost . . . . . . . . . (6,296) (6,296)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 10,745 13,760
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . $119,242 $132,307
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4 of 22
<PAGE> 5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000 $ 2,553
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 369
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 188 246
Loss from investments in affiliate . . . . . . . . . . . . . . . . . . . (289) (13)
------- -------
2,170 3,155
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 598 856
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 574 662
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 376
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 23
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . -- 200
------- -------
1,515 2,117
------- -------
Income from real estate operations . . . . . . . . . . . . . . . . . . 655 1,038
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 2,921 3,713
Interest and other income . . . . . . . . . . . . . . . . . . . . . . . . 73 104
------- -------
2,994 3,817
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . 1,039 1,132
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 695 927
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 668 643
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 308
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 428
------- -------
2,714 3,438
------- -------
Income from energy operations . . . . . . . . . . . . . . . . . . . . 280 379
------- -------
INCOME FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . . . . 935 1,417
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,908 32,874
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,947 28,434
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 2,656 2,655
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010 1,024
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293 336
------- -------
32,906 32,449
------- -------
Income from textile products operations . . . . . . . . . . . . . . . 2 425
</TABLE>
See accompanying notes to consolidated financial statements
Page 5 of 22
<PAGE> 6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
-------------------------
1994 1993
---------- ---------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,800 $ 8,046
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,150 7,392
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 869 780
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 333
------- -------
8,354 8,505
------- -------
Loss from hotel operations . . . . . . . . . . . . . . . . . . . . . . (554) (459)
------- -------
LOSS FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . . . . . . (552) (34)
ASSOCIATED COMPANIES
Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580 7,585
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 426
------- -------
INCOME FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . . . . . 366 7,159
OTHER
Recovery from investment in Alliance Bancorporation . . . . . . . . . . . 1,703 --
Interest on short-term investments and other income . . . . . . . . . . . 187 182
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 306
------- -------
1,952 488
Interest, net of $109 and $89, respectively, from other segments . . . . 2,184 3,926
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,115 1,982
------- -------
3,299 5,908
------- -------
OTHER LOSS, NET . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,347) (5,420)
------- -------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . (598) 3,122
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . 1,190 (2,983)
------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,788) $ 6,105
======= =======
PER COMMON SHARE (PRIMARY)
Net income (loss) per common share . . . . . . . . . . . . . . . . . . $ (0.33) $ 1.10
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6 of 22
<PAGE> 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 801 $ 1,477
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 165
Interest and discounts from mortgage loans . . . . . . . . . . . . . . . 94 119
Income (loss) from investments in affiliate . . . . . . . . . . . . . . . (79) 41
------- -------
934 1,802
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 308 393
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 243 331
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 171
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 17
------- -------
723 912
------- -------
Income from real estate operations . . . . . . . . . . . . . . . . . . 211 890
ENERGY OPERATIONS
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 1,402 2,040
Interest and other income (loss) . . . . . . . . . . . . . . . . . . . . (138) (47)
------- -------
1,264 1,993
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . 552 572
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 481
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 423 430
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 154
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) 191
------- -------
1,298 1,828
------- -------
Income (loss) from energy operations . . . . . . . . . . . . . . . . . (34) 165
------- -------
INCOME FROM ASSET MANAGEMENT OPERATIONS . . . . . . . . . . . . . . . 177 1,055
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,924 15,869
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,339 13,815
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,303 1,345
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501 507
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 147
------- -------
15,266 15,814
------- -------
Income (loss) from textile products operations . . . . . . . . . . . . (342) 55
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7 of 22
<PAGE> 8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
-------------------------
1994 1993
---------- -----------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,913 $ 4,152
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,554 3,791
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 493 404
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 173
------- -------
4,211 4,368
------- -------
Loss from hotel operations . . . . . . . . . . . . . . . . . . . . . . (298) (216)
------- -------
LOSS FROM OPERATING SUBSIDIARIES . . . . . . . . . . . . . . . . . . . (640) (161)
ASSOCIATED COMPANIES
Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6,652
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 212
------- -------
INCOME (LOSS) FROM ASSOCIATED COMPANIES . . . . . . . . . . . . . . . (103) 6,440
OTHER
Recovery from investment in Alliance Bancorporation . . . . . . . . . . . 1,703 --
Interest on short-term investments and other income . . . . . . . . . . . 93 99
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 94
------- -------
1,827 193
Interest, net of $53 and $71, respectively, from other segments . . . . 1,095 1,955
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . 553 1,003
------- -------
1,648 2,958
------- -------
OTHER INCOME (LOSS), NET . . . . . . . . . . . . . . . . . . . . . . . 179 (2,765)
------- -------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . (387) 4,569
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . 60 (1,752)
------- -------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (447) $ 6,321
======= =======
PER COMMON SHARE (PRIMARY)
Net income (loss) per common share . . . . . . . . . . . . . . . . . . $ (0.09) $ 1.14
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 8 of 22
<PAGE> 9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,788) $ 6,105
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . . . . . 3,037 3,180
Provision for (recovery of) losses . . . . . . . . . . . . . . . . . . . . . . (1,703) 200
Undistributed income from energy affiliate . . . . . . . . . . . . . . . . . . (1,679) (2,207)
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . . . . . (1,530) 2,959
Distributions from energy affiliate . . . . . . . . . . . . . . . . . . . . . . 1,177 1,386
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . 1,083 (3,315)
Proceeds from collections of mortgage loans . . . . . . . . . . . . . . . . . . 355 802
Equity in net income of associated company/affiliate . . . . . . . . . . . . . (291) (1,364)
Amortization of deferred gain from debenture exchange . . . . . . . . . . . . . (290) --
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . . . . . . (25) (40)
Gain on sale of investment in associated company . . . . . . . . . . . . . . . -- (6,125)
Increase in mortgage loans from sale of real estate . . . . . . . . . . . . . . -- (76)
Net change in textile products assets and liabilities . . . . . . . . . . . . . 3,301 2,804
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . (506) 405
Net change in energy assets and liabilities . . . . . . . . . . . . . . . . . . 70 667
------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 1,211 5,381
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements related to asset held for sale . . . . . . . . . . . . . . . . . . (1,062) 2
Capital expenditures to real estate and hotel properties . . . . . . . . . . . . (716) (314)
Proceeds from sale (investment in) insurance contracts, net . . . . . . . . . . . 522 (235)
Net change in restricted cash for investing activities . . . . . . . . . . . . . 465 (189)
Investments in textile products property and equipment . . . . . . . . . . . . . (326) (230)
Investments in energy property and equipment . . . . . . . . . . . . . . . . . . (64) (3)
Investments in associated companies/affiliates . . . . . . . . . . . . . . . . . (9) (182)
Proceeds from sale of investment in associated company . . . . . . . . . . . . . -- 8,289
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 . . . . . . . . . . . . . (1,190) 11,219
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . . . . . (4,006) (8,520)
Purchase of capital stock by energy subsidiary for treasury . . . . . . . . . . . (1,454) (1,880)
Net change in restricted cash for financing activities . . . . . . . . . . . . . 165 1,992
Payment of loan fees and financing costs . . . . . . . . . . . . . . . . . . . . (2) (295)
------- --------
Net cash (used in) financing activities . . . . . . . . . . . . . . . . . . . (5,297) (8,703)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . . . . . 3 (193)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . (5,273) 7,704
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . 11,837 9,959
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . $ 6,564 $ 17,663
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 9 of 22
<PAGE> 10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 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>
As of January 31, 1994 Income (loss) from investments
-------------------------- Amount at which carried at, for the six months ended
Number of Cost or --------------------------- January 31,
Business segments and shares, ascribed January 31, July 31, ------------------------------
description of investment warrants 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 $16,011 $16,763 -- --
Equity in earnings . . . . -- -- -- $ 580 $1,377
Gain on sale of shares . . -- 6,125
--Floating rate
subordinated bond interest -- -- -- -- 83
------ ------- ------- ----- ------
5,438 16,011 16,763 580 7,585
------ ------- ------- ----- ------
OAKHURST CAPITAL, INC. (B)
--Common stock . . . . . . . 398,838 1,192 1,000 1,000 -- --
--Warrants to purchase
common stock . . . . . . . 146,621 953 220 220 -- --
------ ------- ------- ----- ------
2,145 1,220 1,220 -- --
------ ------- ------- ----- ------
Totals . . . . . . . . . . $7,583 $17,231 $17,983 $ 580 $7,585
====== ======= ======= ===== ======
AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (C)
-- General partnership interest -- $8,650 $ 7,421 $ 7,718 $(130) $ (9)
-- Limited partnership units 441,845 906 -- 151 (159) (4)
------ ------- ------- ----- ------
Totals . . . . . . . . . . $9,556 $ 7,421 $ 7,869 $(289) $ (13)
====== ======= ======= ===== ======
</TABLE>
(A) The Company accounts for its investment in ShowBiz Pizza Time, Inc.
("ShowBiz"), on the equity method of accounting. For the six-month period
ended January 31, 1994, the Company recorded its pro-rata share of
ShowBiz's earnings in the amount of $580,000. The Company also recorded
its pro-rata share of various stockholders' equity transactions. The
financial impact of those shareholders' equity transactions, principally
the purchase of treasury stock at prices in excess of book value and the
exercise of ShowBiz warrants and options at exercise 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 $1,333,000.
As of January 31, 1994, the Company owned approximately 13% of ShowBiz,
and all of the Company's shares are pledged to secure the Margin Loan
discussed in Note 5.
(B) On February 14, 1994 the Company completed the all cash sale of its
entire investment in Oakhurst Capital, Inc. ("Oakhurst") for $1,250,000.
The $30,000 gain will be recorded in the Company's third fiscal quarter
ending April 30, 1994.
(C) As of January 31, 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.
Page 10 of 22
<PAGE> 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1994
(UNAUDITED)
Due to recording the Company's pro rata share of equity losses from 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 amounts. The Company would have to recover
such unrecognized losses before any equity income could be recognized.
The cost of the general partner interest includes the value of rights
to provide asset management and property management services to HRP.
The value ascribed to the property management rights included in the
general partnership interest did not become effective until November 1,
1993, since the seller of the general partner interest retained those
property management rights for a three-year period following the sale.
As of November 1, 1993 the Company commenced amortization of the cost
attributed to these property management rights, and for the quarter
ended January 31, 1994 amortization was $168,000. During the
preceeding period from June 1, 1991 through October 31, 1993, the
Company had fully amortized the $2,475,000 cost of the property
management contracts acquired from the former general partner.
As further discussed in Note 5, the Company has pledged its 441,845 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 Oakhurst (assuming exercise of warrants) and
the limited partnership units of HRP at January 31, 1994 were:
<TABLE>
<CAPTION>
AMOUNT PER SHARE
------------------
MARKET CARRYING
PRICE VALUE
------ --------
<S> <C> <C>
ShowBiz common shares . . . . . . . . . . . . . . . . . . . . . . . . . $12.75 $9.10
Oakhurst common shares . . . . . . . . . . . . . . . . . . . . . . . . . 2.13 2.51
HRP limited partnership units . . . . . . . . . . . . . . . . . . . . . 2.00 --
</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
January 31, 1994. In addition to the matters discussed in Note 4 and the
expected completion of the jury trial in the Equitec Rollup litigation
before the end of the Company's next fiscal quarter, the Company is 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
vigorously to defend this action and does not believe the ultimate outcome
will materially affect the Company. In addition, in response to a formal
investigative order of the Securities and Exchange Commission, 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.
4. ANTICIPATORY LOSS - ASSET HELD FOR SALE
The Company acquired its investment in Integra-A Hotel and Restaurand
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.
Page 11 of 22
<PAGE> 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1994
(UNAUDITED)
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 million. Integra Hotels, Inc. will
pay the administrative and priority claims of the bankruptcy case in full.
Pursuant to the Plan, as impacted by the Supplemental Settlement, Integra
funded a trust for the unsecured creditors by transferring to the trust $1
million 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 million, consisting of $5 million in cash and a $4 million 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 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 January 31, 1994 to
$5,280,000 from $5,205,000 is due solely to fluctuation in the foreign
currency exchange rate.
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 net long term obligations of its affiliated entity,
Hallwood Energy Partners, L.P. ("HEP"), net of HEC's share of HEP's other
assets.
Textile Products
The outstanding balance of the combined loans payable for textile
products at January 31, 1994 was $5,689,000.
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 the $1,000,000 remaining balance of
bridge financing to the Brookwood Revolver. The Brookwood Revolver is
collateralized by accounts receivable and the industrial property,
Page 12 of 22
<PAGE> 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1994
(UNAUDITED)
plant and equipment located in Kenyon, Rhode Island. The outstanding
balance at January 31, 1994 was $5,125,000.
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 January 31, 1994 was $564,000.
Hotels
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 January 31, 1994 was $6,932,000.
Associated Companies
The balance of the combined outstanding loans for the associated
companies division was $7,491,000 at January 31, 1994.
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 has pledged all of its ShowBiz common shares with a market
value of $22,748,000 at January 31, 1994, as collateral for the Prudential
Margin Loan; however,approximately 600,000 shares may be released under the
250% margin requirement. On March 8, 1994, 344,828 shares were released and
repledged to secure the $4 million note given to the Integra Unsecured
Creditors' Trust discussed in Note 4.
The outstanding balance at January 31, 1994 was $6,000,000.
Term Note. In January 1992, the Company issued a $1,613,350 note payable
to Integra bearing interest at the FNBB Base Rate. Because the Company
believed it may have certain offsets and other defenses to repayment of this
note in the Integra bankruptcy proceedings, the note became technically in
default.
The outstanding balance at January 31, 1994 was $1,491,000.
On March 8, 1994 the note 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 all of the Company's HRP limited partnership units.
6. 13.5% SUBORDINATED DEBENTURES AND 7% COLLATERALIZED SENIOR SUBORDINATED
DEBENTURES
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.
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
Page 13 of 22
<PAGE> 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1994
(UNAUDITED)
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.
7% Collateralized Senior Subordinated Debentures. On March 1, 1993, the
Company completed an exchange offer whereby 13.5% Debentures 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.
Balance sheet amounts for the 13.5% Debentures and 7% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
January 31, July 31,
Description 1994 1993
----------- ---------- ----------
<S> <C> <C>
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
======= =======
7% Debentures (face value) . . . . . . . . . . . . $27,481 $27,481
Unrecognized gain from purchase and exchange,
net of $486 and $196 accumulated amortization,
respectively . . . . . . . . . . . . . . . . . . 3,734 4,024
Elimination of debentures owned by HEC . . . . . . (1,894) (1,894)
------- -------
Totals . . . . . . . . . . . . . . . . . . . . $29,321 $29,611
======= =======
</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 to 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>
Six Months Ended Three Months Ended
January 31, January 31,
-------------------- --------------------
1994 1993 1994 1993
-------- -------- ------ ------
<S> <C> <C> <C> <C>
Federal
Deferred tax . . . . . . . . . . . $1,083 $(3,315) -- $(2,034)
Current . . . . . . . . . . . . . -- 75 -- 75
State . . . . . . . . . . . . . . . 107 257 $60 207
------ ------- --- -------
Total . . . . . . . . . . . . . $1,190 $(2,983) $60 $(1,752)
====== ======= === =======
</TABLE>
Page 14 of 22
<PAGE> 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1994
(UNAUDITED)
The federal deferred tax charge and (benefit) for the six and
three-month periods ended January 31, 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 January 31, 1994.
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.
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>
Six Months Ended
January 31,
--------------------
Description 1994 1993
------------------------------------------------------- -------- -------
<S> <C> <C>
Payment in-kind payment of annual interest on
13.5% Debentures . . . . . . . . . . . . . . . . -- $6,792
Recording of proportionate share of stockholders'
equity transaction by ShowBiz affiliate . . . . $1,333 --
Supplemental disclosures of cash payments
-----------------------------------------
Interest paid (including capitalized interest) . . . . . 4,922 1,543
Income taxes paid (refunds received) . . . . . . . . . . 146 39
</TABLE>
Page 15 of 22
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company reported a net loss of $447,000 for the quarter ended January
31, 1994, compared to net income of $6,321,000 in the same quarter last year.
The six-month net loss of $1,788,000, compares to net income of $6,105,000 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 $801,000 for the fiscal 1994 second quarter
decreased by $676,000 from the $1,477,000 reported in the year-ago quarter.
Fee income of $2,000,000 for the six months decreased by $553,000 from the
similar period a year ago. The decreases were due to the significant level of
leasing activity in the prior year periods. 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 $118,000 in the current-year quarter declined from
$165,000 in the prior year, due to retail tenant turnover. Rental income for
the six-month period decreased to $271,000 from $369,000 for the same reason.
Interest and discounts from mortgage loans for the fiscal 1994 second
quarter declined 21% to $94,000, from $119,000, as a result of early repayments
of loans in the Company's mortgage loan portfolio. The comparative six-month
amounts were $188,000 and $246,000 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 $79,000 loss as compared to a $41,000 gain in the quarter a
year ago, primarily due to the recognition of debt forgiveness gains by HRP in
fiscal 1993. The fiscal 1994 six-month loss of $289,000 compares to a fiscal
1993 loss of $13,000. The increased loss is due to the effects of the fiscal
1993 debt forgiveness gains 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 before any equity
income could be recognized.
Expenses. Administrative expenses declined 22% to $308,000 in the fiscal
1994 second quarter, compared to $393,000 in the year-ago quarter.
Administrative expenses for the six-month period decreased to $598,000 from
$856,000. The decline for the three and six-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 second
quarter and $574,000 for the six-month period decreased from $331,000 and
$662,000 in the corresponding fiscal 1993 periods. Depreciation expense
relates to the office-retail property, and amortization expense relates to the
former property management contracts of Hallwood Management Company and
amortization of Hallwood Realty Corporation's, general partnership interest in
HRP to the extent of the cost allocated to property management rights. The
decline is attributable to the expiration of amortization of acquired property
management contracts.
Interest expense declined in the fiscal 1994 second quarter to $168,000 from
$171,000 and for the six-month period declined to $336,000 from $376,000, 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.
In the Company's fiscal 1993 first quarter, the Company recorded an
additional provision for loss of $200,000 on a commercial mortgage loan in
default to its net realizable value. No loss provision was recorded in the
fiscal 1994 quarter or six-month periods.
Page 16 of 22
<PAGE> 17
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED).
Energy.
Revenues. The Company owns 70% of the common stock of Hallwood Energy
Corporation ("HEC"), which accounts for its investment in its Hallwood Energy
Partners, L.P. ("HEP") affiliate using the proportional method of accounting.
HEC's general partner interest in HEP entitles it to interests in HEP's
properties ranging from 2% to 25%, averaging approximately 4%, and HEC also
holds approximately 7.3% of HEP's limited partnership units. Second quarter
fiscal 1994 oil and gas revenues of $1,402,000 decreased 31%, compared to
$2,040,000 in the year-ago quarter. For the six-months, the comparison of oil
and gas revenues was $2,921,000 in the current year and $3,713,000 in the
year-ago period. Oil revenue for the six months decreased $489,000 to $879,000
due to a decline in the average price per barrel to $16.90 from $19.96 and a
decrease in production to 52,000 barrels from 69,000 barrels. Gas revenue for
the six months decreased $303,000 to $2,042,000 as a result of a decrease in
production to 1,022,000 mcf from 1,186,000 mcf offset by a slight increase in
the average gas price to $2.00 from $1.98 per mcf. The decrease in oil and gas
production is due primarily to normal production declines and the sale of
certain HEP properties in fiscal 1993.
Interest and other income (loss) decreased for the quarter to $(138,000)
from $(47,000), principally due to expenses incurred by HEP to settle certain
lawsuits. For the six months interest and other income decreased $31,000 for
principally the same reasons.
Expenses. Depreciation, depletion and amortization expenses were $552,000
for the quarter and $1,039,000 for the six months. A year ago the comparable
expenses were $572,000 and $1,132,000, 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 $204,000 to $277,000 for the
three months and decreased $232,000 to $695,000 for the six months compared to
the fiscal 1993 periods, primarily due to the sale of HEP properties and
decreased general maintenance activity.
Administrative expenses decreased $7,000 for the quarter, while the
six-month expense increased $25,000 from the year-ago periods. The changes for
both periods were immaterial.
Interest expense decreased $82,000 to $72,000 during the fiscal 1994 second
quarter and decreased $122,000 to $186,000 for the six-month period as a result
of HEP's lower average debt balance, as well as lower average interest rates.
Minority interest, which represents the interest of other stockholders in
HEC's operations, decreased in the second fiscal 1994 quarter and the six-month
period, due to HEC's repurchase of its own shares from minority shareholders
for treasury and reduced net income from energy operations.
OPERATING SUBSIDIARIES.
Textile Products.
Revenues. Sales decreased $945,000 in the second 1994 fiscal quarter to
$14,924,000 compared with $15,869,000 in fiscal 1993. The comparative six
month sales were $32,908,000 in fiscal 1994 and $32,874,000 in fiscal 1993.
The 6% decrease in sales for the fiscal 1994 quarter was the result of weak
market conditions primarily affecting the Kenyon finishing plant and the
adverse impact of a strike at a pricipal supplier.
Expenses. Cost of sales decreased 3%, at a lower rate than the 6% decrease
in sales, in the second 1994 fiscal quarter from the comparable prior year
quarter, resulting in a lower gross profit. The lower gross profit margin for
the quarter (10.6% in fiscal 1994 compared to 12.9% in 1993) and for the
six-month period (12.0% in fiscal 1994 compared to 13.5% in 1993) was due to
competitive pressures in a weak market. Administrative and selling expenses
decreased slightly in the quarter and six months from the comparable 1993
periods. The reduction of interest expense of $24,000 for the second fiscal
quarter and $43,000 for the six months was the result of lower average
borrowings in fiscal 1994 than in the comparable 1993 periods.
Hotels.
Revenues. Second quarter fiscal 1994 hotel revenues of $3,913,000 decreased
by $239,000 from the fiscal 1993 amount of $4,152,000. The fiscal 1994
six-month hotel revenues of $7,800,000 decreased by $246,000, compared to
$8,046,000 for the fiscal 1993 period. The decline is attributable to reduced
occupancy rates partially offset by higher average daily rates.
Page 17 of 22
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED).
Expenses. Fiscal 1994 operating expenses of $3,554,000 for the quarter and
$7,150,000 for the six months compare to the fiscal 1993 amounts of $3,791,000
and $7,392,000, respectively. The declines were primarily attributable to
reduced occupancy, more effective cost controls and reduced management fees at
the Lido Beach Holiday Inn.
Depreciation and amortization expense in the current-year quarter of
$493,000 and six months of $869,000 increased from the comparable fiscal 1993
amounts of $404,000 and $780,000, respectively. The increases were due to
recent capital improvements.
Interest expense of $164,000 in the fiscal 1994 quarter and $335,000 for the
six months were comparable to the respective fiscal 1993 amounts.
ASSOCIATED COMPANIES
Revenues. Associated companies' income for the fiscal 1994 second quarter
in the amount of $2,000 compares to income of $6,652,000 in fiscal 1993. The
comparable six month amounts were $580,000 in fiscal 1994 and $7,585,000 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 4% decline in the
Company's ownership percentage of ShowBiz (17% to 13%); and (iii) a substantial
decline in ShowBiz earnings.
Expenses.
Interest expense of $105,000 for the fiscal 1994 second quarter and $214,000
for the six months decreased from the year-ago expense of $212,000 and
$426,000, respectively, due to a $6,000,000 reduction of the Company's margin
loan in December 1992.
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. Interest on short-term investments of $93,000 for
the fiscal 1994 second quarter and $187,000 for the six months were comparable
with the prior year amounts. Fee income in the current year quarter of $31,000
declined from $94,000 in the fiscal 1993 quarter and declined to $62,000 from
$306,000 for the six 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 second
quarter of $1,095,000 and for the six-month period of $2,184,000 were
significantly reduced from the prior year amounts of $1,955,000 and $3,926,000,
respectively. The decline is attributed to the completion of the Bond Exchange
Offer referred to in Note 6 and the repayment of certain loan obligations.
Administrative expenses, at $553,000 for the quarter and $1,115,000 for the
six months, were down from $1,003,000 and $1,982,000 in the comparable periods
last year, primarily due to the sale of Hallwood Services, lower office costs,
and lower professional fees.
Income Taxes.
Second quarter fiscal 1994 income tax expense includes a current provision
for state income and franchise taxes of $60,000, and no deferred federal tax
expense or benefit, compared to a fiscal 1993 income tax benefit of $1,752,000,
which includes a current provision for federal taxes of $75,000, a provision
for state income and franchise taxes of $207,000 and a deferred federal tax
benefit of $2,034,000. The six-month fiscal 1994 income tax expense of
$1,190,000 includes a current provision for state income and franchise taxes of
$107,000 and a deferred tax expense of $1,083,000, compared to a fiscal 1993
six-month income tax benefit of $2,983,000, which includes a current provision
for federal taxes of $75,000, a provision for state income and franchise taxes
$257,000 and a deferred federal tax benefit of $3,315,000.
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.
Page 18 of 22
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at January 31, 1994
totaled $6,564,000. Additionally, $1,429,000 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 $22,748,000 at January 31, 1994 (based upon the closing price on
such date of $12.75 per share), are presently unregistered, and may be subject
to some limitations on sale, management believes there is a ready market to
sell such shares without adversely affecting market price. At January 31, 1994
all of the Company's 1,784,193 ShowBiz shares were pledged as collateral for
the $6,000,000 Prudential Margin Loan. However, in connection with the
Settlement discussed in Note 4, Prudential released 344,828 shares of ShowBiz
stock which were then pledged to secure the $4.0 million promissory note issued
by the Company pursuant to the terms of the Settlement. An additional limited
number of the Company's ShowBiz shares (dependent on the ShowBiz share price)
may be released under the Prudential Margin Loan's 250% margin requirement.
The Company's real estate segment generates funds principally from its
property 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 hotel Term Loan.
At January 31, 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 January
31, 1994 are net long-term obligations of affiliate of $3,669,000. This amount
represents HEC's share of HEP's outstanding long-term obligations net of HEC's
share of HEP's non-current assets. 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 January 31, 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 at January 31, 1994 of $3,382,000.
The Company's hotel segment generates cash flow from operating two hotels in
Florida and one hotel in Oklahoma.
Page 19 of 22
<PAGE> 20
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.
---------------------------------------------------
At its Annual Meeting of Stockholders on January 10, 1994, the
stockholders of the Company voted on one issue:
(a) To elect two directors to hold office for three years and until
their successors are elected and qualified.
Votes Votes
Nominee Directors For Withheld
----------------- ------------- --------
Anthony J. Gumbiner 5,023,692 81,760
Robert L. Lynch 5,035,218 70,234
As a result of the above, each of the two nominee directors were
re-elected for an additional three-year term.
The continuing directors are Messrs. Charles A. Crocco, Jr., Brian M. Troup
and J. Thomas Talbot.
5 Other Information. None.
------------------
6 Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
(i) 11 - Statement Regarding Computation of Per Share Earnings.Page 22
(b) Reports on Form 8-K None.
</TABLE>
Page 20 of 22
<PAGE> 21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
Dated: March 16, 1994 By: /s/ MELVIN J. MELLE
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 21 of 22
<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>
Six Months Ended Three Months Ended
January 31, January 31,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Average common shares outstanding . . . . . . . . . . . . . 5,487 5,462 5,487 5,462
Dilutive stock options based on the treasury stock method
using the period end market price . . . . . . . . . . . . . -- 70 -- 70
------- ------ ------ ------
Average common and common share equivalents outstanding . . 5,487 5,532 5,487 5,532
======= ====== ====== ======
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(1,788) $6,105 $ (447) $6,321
======= ====== ====== ======
Per share amount . . . . . . . . . . . . . . . . . . . . . $ (0.33) $ 1.10 $(0.09) $ 1.14
======= ====== ====== ======
FULLY DILUTED:
Average common and common share equivalents
outstanding - primary . . . . . . . . . . . . . . . . . . . 5,487 5,532 5,487 5,532
======= ====== ====== ======
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $(1,788) $6,105 $ (447) $6,321
======= ====== ====== ======
Per share amount . . . . . . . . . . . . . . . . . . . . . $ (0.33) $ 1.10 $(0.09) $ 1.14
======= ====== ====== ======
</TABLE>
NOTE: Since dilution under fully diluted method is less than 3%, dual
presentation on consolidated statements of operations is not required.
Page 22 of 22
