<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
MARK ONE
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
FOR THE FISCAL YEAR ENDED JULY 31, 1995 COMMISSION FILE NUMBER: 1-8303
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
51-0261339
(I.R.S. Employer
Identification Number)
3710 RAWLINS, SUITE 1500
DALLAS, TEXAS
(Address of principal executive offices)
75219
(Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------------------------------- ------------------------
<S> <C>
Common Stock ($.10 par value) New York Stock Exchange
13.5% Subordinated Debentures Due July 31, 2009 New York Stock Exchange
7% Collateralized Senior Subordinated Debentures Due July 31, 2000 New York Stock Exchange
</TABLE>
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 IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN, DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. /X/
THE AGGREGATE MARKET VALUE OF THE COMMON STOCK, $.10 PAR VALUE PER SHARE,
HELD BY NON-AFFILIATES OF THE REGISTRANT, BASED ON THE CLOSING PRICE OF $10.25
PER SHARE ON SEPTEMBER 30, 1995 ON THE NEW YORK STOCK EXCHANGE, WAS $8,475,000.
1,594,344 SHARES OF COMMON STOCK, $.10 PAR VALUE PER SHARE, WERE
OUTSTANDING AT SEPTEMBER 30, 1995, INCLUDING 264,709 SHARES OWNED BY THE
COMPANY'S HALLWOOD ENERGY CORPORATION SUBSIDIARY.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be filed with the Securities and Exchange Commission not later than 120 days
after July 31, 1995.
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<PAGE> 2
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 4
Item 3. Legal Proceedings........................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......................... 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 6
Item 6. Selected Financial Data..................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 8
Item 8. Financial Statements and Supplementary Data................................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 14
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 15
Item 11. Executive Compensation...................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 15
Item 13. Certain Relationships and Related Transactions.............................. 15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 16
</TABLE>
<PAGE> 3
PART I
ITEM I. BUSINESS
Upon its formation in 1981, The Hallwood Group Incorporated ("Hallwood" or
the "Company") (NYSE:HWG) became engaged in the ownership, operation and
management of the real estate portfolios of its corporate predecessors and in
the merchant banking business, specializing in assisting troubled companies to
implement plans of financial restructuring. After 1981, the Company disposed of
a substantial portion of its initial real estate portfolio and significantly
expanded the range of its merchant banking activities. The Company has acquired
substantial investment positions in a number of previously unaffiliated
enterprises and has thereby become a diversified holding company engaged in
three principal activities: asset management, operating subsidiaries and
investments in associated companies. The Company, its operating subsidiaries and
associated company are currently engaged in the commercial and industrial real
estate, energy, textile products, hotel and restaurant businesses. For financial
reporting purposes, Hallwood considers itself to operate in five business
segments: real estate, energy, textile products, hotels and restaurants. The
Company is no longer engaged in the merchant banking business, other than in
connection with the businesses in which its operating subsidiaries or associated
company are engaged. Financial information for each industry segment in which
the Company operates is set forth in Note 20 to the Company's consolidated
financial statements.
Asset Management. The Company's asset management division consists of real
estate and energy business segments.
Real Estate. Real estate activities are conducted primarily through the
Company's wholly owned subsidiaries, Hallwood Realty Corporation ("HRC") and
Hallwood Management Company ("HMC"). In addition, the Company's wholly owned
Hallwood Investment Company subsidiary owns and operates an office-retail
property in the United Kingdom. HRC is the sole general partner of Hallwood
Realty Partners, L.P. ("HRP"), a publicly-traded real estate master limited
partnership (AMEX:HRY). HRC owns a 1% general partner interest and Hallwood owns
a 24% limited partner interest in HRP. HRC is responsible for asset management,
financing, acquiring and disposing of HRP properties as it deems appropriate. In
addition, HRC provides general operating and administrative services to HRP. HRP
owns 11 commercial properties, of which 7 are office building properties and 4
are industrial park properties. HMC was formed in June 1991 and acquired the
rights under the property management agreements related to the HRP properties.
HMC is responsible for on-site property management and receives various fees for
the managing and leasing of such properties. See Note 14 to the Company's
consolidated financial statements.
The Company had a significant investment in a mortgage loan portfolio
secured by residential lots and condominiums. Substantially all of the portfolio
was liquidated during fiscal 1995, in connection with various sales and the
assignment of a portion of the portfolio to the plaintiff as a result of the
January 1995 settlement of the lawsuit styled Third National Bank in Nashville,
Trustee, v. The Hallwood Group Incorporated.
In fiscal 1995, real estate accounted for 4% of the Company's total
revenues, compared to 4% in fiscal 1994 and 6% in fiscal 1993.
Energy. Energy operations were established in May 1990, when the Company
increased its common stock ownership of Hallwood Energy Corporation ("HEC")
(AMEX:HWEC) from 11% to 53%, through the conversion of its preferred stock into
common stock and the purchase of additional common stock. Since May 1990, HEC
has been accounted for as a consolidated subsidiary of the Company. As a result
of HEC's subsequent purchases of its own stock for treasury, the Company's
effective percentage ownership of HEC's common stock has increased to 75%. See
Note 15 to the Company's consolidated financial statements.
HEC is engaged in the development, production and sale of oil and gas, and
in the acquisition, exploration, development and operation of additional oil and
gas properties. HEC is the sole general partner of Hallwood Energy Partners,
L.P. ("HEP"), a publicly-traded oil and gas master limited partnership
(AMEX:HEP), and conducts substantially all of its operations through HEP. HEC's
general partner interest in HEP entitles it to a share of net revenues derived
from HEP's properties ranging from 2% to 25% and HEC holds approximately 6.5% of
HEP's limited partner units. In addition, HEP is the general partner of several
1
<PAGE> 4
other affiliated partnerships and a 40% stockholder in Hallwood Consolidated
Resources Corporation ("HCRC") (NASDAQ: HCRC), a publicly-traded oil and gas
company.
HEC accounts for its ownership of HEP using the proportionate consolidation
method, whereby HEC records its proportional share of HEP's revenues and
expenses, current assets, current liabilities, noncurrent assets, long-term
obligations and fixed assets.
In fiscal 1995, energy accounted for 5% of the Company's total revenues,
compared to 6% in fiscal 1994 and 7% in fiscal 1993.
Operating Subsidiaries. The Company's operating subsidiaries division
consists of textile products and hotels business segments.
Textile Products. Textile products operations are conducted through the
Company's wholly-owned Brookwood Companies Incorporated ("Brookwood")
subsidiary. Brookwood is a complete textile service firm that develops and
produces innovative fabrics and related products through specialized finishing,
treating and coating processes. See Note 16 to the Company's consolidated
financial statements.
In fiscal 1995, textile products accounted for 69% of the Company's total
revenues, compared to 67% in fiscal 1994 and 60% in fiscal 1993.
Hotels. Hotel operations are conducted through the Company's wholly-owned,
Hallwood Hotels, Inc. ("Hallwood Hotels") and Hallwood-Integra Holding Company,
Inc. ("Integra Hotels") subsidiaries, and consist of (i) leasehold interests in
two hotel properties, the Longboat Key Holiday Inn, Sarasota, Florida (the
"Longboat Key Property"), and the Airport Embassy Suites, Oklahoma City,
Oklahoma, both of which were purchased from Integra in June 1991 and; (ii) a fee
interest in a Residence Inn in Tulsa, Oklahoma and leasehold interests in two
Residence Inns in Greenville, South Carolina and Huntsville, Alabama. The
Company previously owned the Lido Beach Holiday Inn hotel in Sarasota, Florida,
which was sold in January 1995.
All of the hotels are operated under license agreements with Holiday Inns
Franchising, Inc., Embassy Suites, Inc. or Marriott International, Inc. The
license agreements permit the licensor to prescribe, at such times as it
determines, standards for the operation and maintenance of the various
properties and their furnishings, equipment and facilities. Substantial capital
expenditures may be required from time to time to comply with license standards.
The Company is in compliance with all current requirements.
In fiscal 1995, hotel revenues accounted for 22% of the Company's total
revenues, compared to 20% in fiscal 1994 and 15% in fiscal 1993. Revenues and
average daily room rates for the two properties which were owned during all of
both fiscal 1995 and 1994, increased by 3.8% and 4.6%, respectively.
Associated Companies. Hallwood's investment in an associated company
consists of its 15% common stock investment in ShowBiz Pizza Time, Inc.
("ShowBiz") (NASDAQ:SHBZ).
ShowBiz operates a system of 323 Chuck E. Cheese's children's specialty
restaurants in 45 states, of which 227 are company-operated. The Company sold
425,000 ShowBiz shares during fiscal 1993 for $13,500,000 resulting in a
$9,705,000 gain. No sales occurred in fiscal 1994 or 1995. The latest financial
statements of ShowBiz are included elsewhere in this document. The Company
accounts for its investment in ShowBiz on the equity basis.
The Company formerly owned a 15% interest in Oakhurst Capital, Inc.
("Oakhurst") (20% assuming exercise of warrants). In February 1994, the Company
completed a cash sale of its entire investment for $1,250,000, resulting in a
gain of $30,000.
In fiscal 1995, the Company's investment in ShowBiz reported a loss,
compared to 1% of the Company's total revenues in fiscal 1994 and 11% in fiscal
1993.
Competition. The Company's real estate operations are subject to
competition from other entities, many of which have more experience and
substantially greater financial resources.
2
<PAGE> 5
The energy industry is highly competitive. Major oil and gas companies,
independent drilling and production programs and individual producers and
operators are active bidders for oil and gas properties, as well as for the
equipment and labor required to operate such properties. The market for oil and
gas depends on a number of factors, including the level of domestic production,
pace of the general economy, supply of imported oil and gas, actions of foreign
oil-producing nations and the extent of governmental regulation and taxation.
Textile products operations encounter competition in all regions in which
they are conducted. In the volume areas of the textile business, competition is
sometimes based on price, particularly during a soft economy.
Hotel operations are subject to competition from similar types of
properties in the vicinities in which they are located. The sale of hotels may
be impacted by the inability of prospective purchasers to obtain equity capital
or suitable financing.
The business of the ShowBiz associated company is subject to competition
from major national and regional chains, some of which have capital resources as
great or greater than ShowBiz, that are expanding into the family restaurant and
entertainment markets.
Environmental Compliance. A number of jurisdictions in which the Company
operates have adopted laws and regulations relating to environmental matters.
Such laws and regulations may require the Company to secure governmental permits
and approvals and undertake measures to comply therewith. Compliance with the
requirements imposed may be time-consuming and costly. While environmental
considerations, by themselves, have not materially affected the Company's
business to date or that of its associated companies, it is possible that such
considerations may have a material and adverse impact in the future. The Company
actively monitors its environmental compliance and is not aware of any material
compliance issues.
Number of Employees. The Company had 995 and 1,152 employees as of
September 30, 1995 and 1994, respectively, comprised as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1995 1994
---- -----
<S> <C> <C>
Hallwood...................................................... 5 5
Brookwood..................................................... 380 377
Hotel Subsidiaries............................................ 375 513
HEC........................................................... 134 153
HMC........................................................... 81 82
HRC........................................................... 18 20
Other......................................................... 2 2
--- -----
Total............................................... 995 1,152
=== =====
</TABLE>
A substantial portion of the salaries and related costs of HEC, HMC and HRC
employees are reimbursed by the respective energy and real estate partnership
affiliates.
3
<PAGE> 6
ITEM 2. PROPERTIES
Real Properties
The general character, location and nature of the significant real
properties owned by the Company and its subsidiaries and the encumbrances
against such properties are described below and/or in Schedule III hereto.
Cost of real estate owned by property type and geographic distribution (in
thousands of dollars):
<TABLE>
<CAPTION>
JULY 31, 1995
-------------------------------------------------------
OPERATING NON-OPERATING
DESCRIPTION PROPERTIES PROPERTIES TOTAL PERCENTAGE
-------------------------------------- ---------- ------------- ------- ----------
<S> <C> <C> <C> <C>
Real Estate
Office-retail -- United
Kingdom(2)....................... $ 10,743 $-- $10,743 33%
Textile Products
Dyeing and finishing
plant -- Kenyon, RI(2)........... 4,654 -- 4,654 14
Hotels
Longboat Key Holiday
Inn -- Sarasota, FL(1),(2)....... 7,087 -- 7,087 22
Residence Inn -- Tulsa, OK(2)....... 5,437 -- 5,437 17
Embassy Suites -- Oklahoma City,
OK(1),(2)........................ 2,823 -- 2,823 9
Residence Inn -- Huntsville,
AL(1)............................ 1,110 -- 1,110 3
Residence Inn -- Greenville,
SC(1)............................ 596 -- 596 2
Parking lot -- Irving, TX........... -- 50 50 *
-------- --- ------- ---
Subtotal.................... 17,053 50 17,103 53
-------- --- ------- ---
Total....................... $ 32,450 $50 $32,500 100%
======== === ======= ===
</TABLE>
- ---------------
* Less than 1%.
(1) Cost represents purchased leasehold interest in hotel property and capital
improvements.
(2) Property is pledged as collateral under loan or bond indenture agreements.
<TABLE>
<CAPTION>
JULY 31, 1995
--------------------------------------
NUMBER OF
INVESTMENTS AMOUNT PERCENTAGE
----------- ------- ----------
<S> <C> <C> <C>
United States
Oklahoma.......................................... 2 $ 8,260 26%
Florida........................................... 1 7,087 22
Rhode Island...................................... 1 4,654 14
Alabama........................................... 1 1,110 3
South Carolina.................................... 1 596 2
Texas............................................. 1 50 *
--- ------- ---
Subtotal.................................. 7 21,757 67
United Kingdom...................................... 1 10,743 33
--- ------- ---
Total..................................... 8 $32,500 100%
=== ======= ===
</TABLE>
- ---------------
* Less than 1%.
As of July 31, 1995, no single real estate property constituted 10% or more
of the Company's consolidated assets.
Construction of the office-retail property was completed in 1989 in an
upscale commercial section of Brighton. The building is unique in the area and
well-suited to the needs of its principal office tenant, which
4
<PAGE> 7
provides additional traffic for retail tenants. As the building is relatively
new, only minimal maintenance has been required to date. The Company is
currently marketing the office-retail property for sale.
Hotel properties are operated under license and, as such, must meet and
maintain standards established by licensor. At any time during the term of the
license, the licensor may require modernization, renovation and other upgrading
of the hotel. The Company is in compliance with all current requirements.
The textile products' dyeing and finishing plant was custom-built and is
well-suited for that particular business. The development of new products
requires the plant to be constantly upgraded, along with various levels of
utilization. The plant is a multi-shift facility, which can be fully-utilized
for a particular operation at any given time.
Oil and Gas Properties
The Company's oil and gas properties consist primarily of HEC's indirect
interest in properties owned through its investment in HEP. Quantities and
values presented in the financial statements attached hereto related to HEP's
properties are shown net to HEC's interest in HEP. The supplemental oil and gas
reserve information appended to the consolidated financial statements represents
estimated quantities of proved oil and gas reserves. These reserves are located
in principally six areas located in the United States. The determination of oil
and gas reserves is based on estimates which are highly complex and
interpretive. The estimates are subject to continuing change as additional
information becomes available. See Note 5 to the Company's consolidated
financial statements and Supplemental Oil and Gas Reserve Information.
The following tables summarize certain oil and gas information related to
HEC's direct interests and its share of HEP's oil and gas activities (in
thousands of dollars):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1995 1994
------ -------
<S> <C> <C>
Net mineral interests, includes $40 and $361 of unproved
mineral interests at June 30, 1995 and 1994, respectively....... $9,478 $10,608
Net other property and equipment.................................. 378 397
------ -------
Oil and gas properties, net....................................... $9,856 $11,005
====== =======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
1995 1994 1993
------ ---- ----
<S> <C> <C> <C>
Development cost.............................................. $1,142 $835 $513
Property acquisition cost..................................... 442 831 351
Exploration cost.............................................. 206 287 281
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company, certain of its affiliates and others were named as defendants
in several lawsuits relating to various transactions in which it or its
affiliated entities participated. In addition, in connection with a formal
investigation by the Securities and Exchange Commission, the Company and certain
of its officers and directors have provided testimony and produced documents
regarding the Company's sale of shares of ShowBiz in June 1993. The Company is
also a defendant in a separate lawsuit relating to these sales. The majority of
these matters have been settled and negotiations with respect to the settlement
of certain of the other matters are in process. Nevertheless, the remaining
lawsuits seek or may seek substantial damages from the Company and the other
defendants, and there can be no assurances as to the ultimate outcome of these
actions. The Company intends to defend, or in some cases negotiate to settle,
the remaining actions and does not currently anticipate that such actions will
have a material adverse effect on its financial condition, results of operations
or cash flows beyond the reserves the Company has established for such purposes.
See Note 19 to the Company's consolidated financial statements.
5
<PAGE> 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders of the Company held on June 27, 1995,
stockholders of the Company voted on two amendments to the Company's Certificate
of Incorporation as follows:
<TABLE>
<CAPTION>
VOTES VOTES
DESCRIPTION OF PROPOSED AMENDMENT FOR WITHHELD
------------------------------------------------------------ --------- --------
<C> <S> <C> <C>
1) To effect a one-for-four reverse stock split of the
Company's common stock...................................... 5,719,694 214,358
2) To restrict certain transfers of the Company's common stock
in an attempt to protect certain of the Company's federal
income tax benefits......................................... 4,354,653 146,135
</TABLE>
As a result of the above, both of the amendments to the Company's
Certificate of Incorporation were approved, with an effective date of June 28,
1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares of common stock, $.10 par value per share ("Common
Stock"), are traded on the New York Stock Exchange under the symbol HWG. There
were 3,027 stockholders of record as of September 30, 1995.
The following table sets forth, for the fiscal periods indicated, a
two-year record of high and low sales prices on the New York Stock Exchange,
adjusted for the one-for-four reverse split of Common Stock effective June 28,
1995.
<TABLE>
<CAPTION>
FISCAL
----------------------------------
1995 1994
-------------- ---------------
QUARTERS HIGH LOW HIGH LOW
----------------------------------------- ----- ---- ----- -----
<S> <C> <C> <C> <C>
First.................................... $13 $ 8 $23 1/2 $19 1/2
Second................................... 9 1/2 7 21 1/2 17 1/2
Third.................................... 14 1/2 6 1/2 18 11 1/2
Fourth................................... 13 1/2 9 7/8 13 1/2 10
</TABLE>
The Company has not paid cash dividends since fiscal 1989 and, at present,
does not intend to pay cash dividends in the foreseeable future.
The closing price per share of the Common Stock on the New York Stock
Exchange on September 30, 1995 was $10.25.
6
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES
Asset Management
Real estate(a)............................ $ 4,595 $ 4,399 $ 6,586 $ 6,160 $ 2,192
Energy(b)................................. 5,359 6,234 8,455 7,112 8,049
Operating Subsidiaries
Textile products.......................... 77,808 71,624 70,185 71,393 69,960
Hotels(c)................................. 24,898 20,896 17,818 19,325 6,595
Associated Companies........................ (171) 1,356 12,232 9,547 3,437
Other....................................... 737 2,193 854 1,618 1,245
-------- -------- -------- -------- --------
113,226 106,702 116,130 115,155 91,478
EXPENSES
Asset Management
Real estate (a)........................... 3,244 4,287 3,969 6,107 2,999
Energy(b)................................. 5,575 5,412 6,763 7,044 7,597
Operating Subsidiaries
Textile products.......................... 77,604 70,761 68,678 71,062 69,896
Hotels(c)................................. 22,075 20,330 17,583 19,846 6,743
Associated Companies........................ 687 486 5,057 25,061 104
Other....................................... 8,158 7,737 10,007 14,608 9,544
-------- -------- -------- -------- --------
117,343 109,013 112,057 143,728 96,883
-------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary gain and cumulative effect
of SFAS No. 109 adoption.................. (4,117) (2,311) 4,073 (28,573) (5,405)
Income taxes (benefit)...................... 830 2,727 5,498 (1,702) 160
-------- -------- -------- -------- --------
Loss before extraordinary gain and
cumulative effect of SFAS No. 109
adoption.................................. (4,947) (5,038) (1,425) (26,871) (5,565)
Extraordinary gain from extinguishment of
debt...................................... 143 648 -- 452 196
-------- -------- -------- -------- --------
Loss before cumulative effect of SFAS No.
109 adoption.............................. (4,804) (4,390) (1,425) (26,419) (5,369)
Cumulative effect of SFAS No. 109
adoption.................................. -- -- -- 12,133 --
-------- -------- -------- -------- --------
NET LOSS.................................... $ (4,804) $ (4,390) $ (1,425) $(14,286) $ (5,369)
======== ======== ======== ======== ========
PER COMMON SHARE (PRIMARY)
Net loss per common share(d).............. $ (3.50) $ (3.20) $ (1.04) $ (10.11) $ (3.50)
DIVIDENDS PER COMMON SHARE.................. -- -- -- -- --
FINANCIAL CONDITION
Total assets.............................. $112,375 $127,325 $138,378 $152,019 $151,455
Subordinated debentures................... 48,605 49,768 52,513 49,518 52,720
Loans payable............................. 32,731 38,054 29,323 43,426 27,330
Redeemable preferred stock................ 1,000 -- -- -- --
Common stockholders' equity............... 3,323 7,977 13,760 16,919 33,840
</TABLE>
- ---------------
(a) The Company's real estate operations increased in June 1991 with the
purchase of property management contracts related to the properties owned by
Hallwood Realty Partners, L.P.
(b) The Company acquired a 53% majority interest in HEC and commenced reporting
of its consolidated energy operations in May 1990. Its majority interest was
subsequently increased to 63% in December 1993, 70% in April 1995 and to 75%
in July 1995.
(c) The Company's hotel operations commenced in December 1989, as a result of
the purchase of a fee-owned hotel, which was sold in January 1995, and the
purchase of three leased properties in June 1991, one of which was sold in
January 1993. Hotel operations were also increased by the March 1994
acquisition of the fee interest, two leasehold interests and two management
contracts for Residence Inns. The two management contracts were sold during
fiscal 1995.
(d) Per share information has been adjusted for the one-for-four reverse split
of the Company's Common Stock effective June 28, 1995.
7
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations. The Company recorded a net loss of $4,804,000 for
fiscal 1995, compared to net losses of $4,390,000 and $1,425,000 for fiscal 1994
and 1993, respectively.
Total revenue for fiscal 1995 was $113,226,000, compared to $106,702,000
and $116,130,000 for fiscal 1994 and 1993, respectively.
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 restaurant business segments:
Asset Management. The business segments of the Company's asset management
division consist of real estate and energy.
Real Estate
Revenues. Real estate revenues of $4,595,000 for fiscal 1995, $4,399,000
for fiscal 1994 and $6,586,000 for fiscal 1993, include fee income, rentals,
equity loss from the Company's investments in HRP and interest and discounts on
the mortgage loan portfolio.
Fee income of $3,906,000 in fiscal 1995 decreased slightly compared to
$3,924,000 for fiscal 1994 and $5,939,000 for fiscal 1993. The Company's HRC
subsidiary became general partner of HRP on November 1, 1990, upon completion of
the consolidation of eight real estate limited partnerships originally sponsored
and managed by Equitec Financial Group, Inc. ("Equitec") into HRP. HRC earns an
asset management fee and certain related fees from HRP properties, which
amounted to $436,000 for fiscal 1995, $435,000 for fiscal 1994 and $472,000 for
fiscal 1993. Effective June 1, 1991, the Company's HMC subsidiary purchased the
property management contracts relating to the HRP properties from Equitec for
$2,475,000. Equitec had retained the rights to manage the HRP properties for a
three-year period after the consolidation. The property management contracts
encompass day-to-day property management responsibilities, for which HMC
receives management fees, leasing commissions and certain other fees. HMC earned
fees and commissions from HRP and certain third parties of $3,470,000 for fiscal
1995, $3,489,000 for fiscal 1994 and $5,467,000 for fiscal 1993. The volatility
of revenues during the three years ended July 31, 1995 was due to the
significant level of leasing and construction fees earned by HMC in fiscal 1993
in combination with the disposition of certain HRP properties.
Rental income of $702,000 for fiscal 1995 increased $135,000 or 24%, from
$567,000 in fiscal 1994 due to higher retail occupancy levels at the Company's
office-retail property, a $51,000 tenant receivable writeoff recorded in fiscal
1994 and a favorable currency exchange rate fluctuation. Fiscal 1994 rentals
decreased slightly from the 1993 amount of $572,000.
Interest and discounts from mortgage loans decreased by 44%, to $198,000 in
fiscal 1995, compared to $354,000 in fiscal 1994, from the sale of a portion of
the mortgage loan portfolio and the January 1995 settlement of the lawsuit
styled Third National Bank in Nashville, Trustee, v. The Hallwood Group
Incorporated, whereby the Company directly assigned a portion of the portfolio
to the plaintiff as part of a negotiated settlement. The fiscal 1994 amount
decreased by 24%, compared to $468,000 in fiscal 1993 as a result of continuing
amortization and early loan repayments.
The loss from investments in HRP represents the Company's recognition of
its pro-rata share of the loss recorded by HRP. The Company recorded equity
accounting losses of $211,000 for fiscal 1995, $446,000 for fiscal 1994 and
$393,000 for fiscal 1993. The reduced loss in fiscal 1995 is due to (i) the
recording of a pro rata share of losses with respect to the Company's investment
in HRP limited partner units of $121,000 in fiscal 1995, compared to $159,000 in
fiscal 1994 and $283,000 in fiscal 1993 and (ii) the recording of a pro-rata
share of losses with respect to the general partner interest of $90,000 in
fiscal 1995, compared to $287,000 in fiscal 1994 and $110,000 in fiscal 1993.
HRP's losses include litigation and settlement costs of $20,922,000, partially
offset by a gain from extinguishment of debt of $11,377,000. Due to recording
the pro-rata share of losses reported by HRP as prescribed by equity accounting,
the carrying value of the Company's limited
8
<PAGE> 11
partner units acquired prior to March 1995 (89,269 units) had been reduced to
zero; therefore, the Company no longer records its pro rata share of HRP's
losses with respect to such units. Between March 1 and July 31, 1995, the
Company acquired 323,539 additional limited partner units pursuant to HRP's
reverse split and commission-free offer to purchase less than 100 units. HRP
purchased odd lot units from its unitholders and resold such units to the
Company at the same price under a previously announced intention. The Company
commenced recording its pro rata share of losses during the fourth quarter
relating to the newly-acquired units. Unrecognized losses, which have occurred
since the carrying value of the 89,269 units was reduced to zero, must be
recovered before the Company would be able to recognize income on such units in
the future. See Note 3 to the Company's consolidated financial statements.
Expenses. Real estate expenses were $3,244,000 for fiscal 1995 compared to
$4,287,000 for fiscal 1994, including $1,500,000 for litigation settlement, and
$3,969,000 for fiscal 1993. This category also includes administrative expenses,
depreciation and amortization, interest, provision for losses and operating
expenses.
Administrative expenses of $1,174,000 for fiscal 1995 represent an increase
of $151,000, or 15%, from $1,023,000 for fiscal 1994. This increase was
attributable to higher leasing commissions paid during fiscal 1995, which
corresponds with the increased leasing fee income earned by HMC. The decrease of
$496,000, or 33% in fiscal 1994 from $1,519,000, in fiscal 1993, was
attributable to the disposition of properties by HRP and the October 31, 1993
expiration of HRC's guarantee to absorb general and administrative expenses of
HRP in excess of $2,500,000 per annum.
Depreciation and amortization of $972,000 for fiscal 1995 decreased
$88,000, or 8%, compared to $1,060,000 for fiscal 1994. The fiscal 1994 amount
decreased $264,000, or 20%, compared to $1,324,000 for fiscal 1993. Depreciation
expense relates to the office-retail property. Amortization expense relates to
the cost of former property management contracts acquired by HMC and, beginning
November 1993, of HRC's general partner interest in HRP to the extent allocated
to management rights. The declines between the periods are attributable to the
full amortization of the acquired property management contracts in October 1993.
Interest expense of $639,000, $672,000 and $713,000 for fiscal years 1995,
1994 and 1993, respectively, relate primarily to borrowings from The First
National Bank of Boston ("FNBB") secured by the office-retail property, and the
$1,500,000 promissory note, issued in connection with settlement of the Equitec
Rollup litigation in August 1994. The fiscal 1995 decrease of $33,000 was due to
lower interest costs from the August 1994 extension of the FNBB loan, offset by
the interest on the promissory note. The fiscal 1994 decrease was primarily
attributable to a decline in the foreign currency exchange rate. See Note 7 to
the Company's consolidated financial statements.
In April 1994, the Company entered into a settlement agreement to resolve
the Equitec Roll-up Litigation, and recorded the expense relating to the
issuance of a $1,500,000 promissory note. See Note 19 to the Company's
consolidated financial statements.
The fiscal 1995 provision for losses of $431,000 is comprised of (i) a
$221,000 loss on disposition of a portion of the mortgage loan portfolio; (ii) a
$200,000 write-down on the carrying value of the office-retail property located
in the United Kingdom; and (iii) a $10,000 loss on the disposition of a
developed land parcel in Flint, Michigan. No provision for loss was recorded in
fiscal 1994. The fiscal 1993 provision for losses of $340,000 is comprised of
(i) a $200,000 loss on disposition of the last commercial real estate mortgage
loan; (ii) a $40,000 provision for uncollectible resort time-share loans and;
(iii) a $100,000 write-down of the aforementioned land parcel.
Operating expenses declined to $28,000 for fiscal 1995, compared to $32,000
for fiscal 1994 and $73,000 for fiscal 1993. The declines were due to reduced
professional fees associated with the office-retail property.
Energy
Revenue. The Company owns approximately 75% (on a fully diluted basis) of
the common stock of HEC as of July 31, 1995 (63% as of July 31, 1994 and 57% as
of July 31, 1993). HEC's general partner interest in HEP entitles it to
interests in HEP's properties ranging from 2% to 25%, and HEC holds
approximately 6.5%
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<PAGE> 12
of HEP's limited partner units. HEC accounts for its ownership of HEP using the
proportionate consolidation method of accounting, whereby HEC records its
proportional share of HEP's revenues and expenses, current assets, current
liabilities, noncurrent assets, long-term obligations and fixed assets.
Oil and gas revenues of $5,343,000 for fiscal 1995 compares to $5,983,000
for fiscal 1994 and $6,714,000 for fiscal 1993. Fiscal 1995 production volumes
increased 2% from 1994 and decreased 11% in fiscal 1994 from fiscal 1993. The
increase in production volume in 1995 is due to increased production from
developmental drilling projects in West Texas, partially offset by normal
production declines. The decline in production in 1994 is the result of normal
production declines. Oil prices averaged $16.45 per barrel in fiscal 1995,
compared to an average price of $16.28 in fiscal 1994 and $19.20 in 1993. Gas
prices averaged $1.70 per mcf in fiscal 1995, compared to $2.13 in fiscal 1994
and $1.97 in fiscal 1993.
Other income of $16,000 for fiscal 1995, compares to $251,000 for fiscal
1994 and $1,741,000 for fiscal 1993. The decrease in fiscal 1995 is attributable
to HEC's equity loss in its HCRC affiliate due to an impairment of oil and gas
properties. The decrease in 1994 from 1993 is the result of HEC's share of a
favorable litigation settlement received by HEP recorded in fiscal 1993.
Expenses. Energy expenses increased 3% to $5,575,000 for fiscal 1995 from
$5,412,000 for fiscal 1994 and decreased 20% in fiscal 1994 from $6,763,000 for
fiscal 1993.
Depreciation, depletion, amortization and impairment of properties
increased 19% in fiscal 1995 to $2,403,000 from $2,018,000 in fiscal 1994, as a
result of a $464,000 impairment charge, representing HEC's pro-rata share of
HEP's write-off of its Indonesian operations. The 5% decrease in fiscal 1994
from $2,115,000 in fiscal 1993 was due to the decrease in production previously
discussed.
Administrative expenses for fiscal 1995 increased $476,000, or 45%, to
$1,525,000 from the fiscal 1994 amount of $1,049,000. This increase was a result
of HEC's share of various lawsuit settlements made by HEP. Administrative
expenses in fiscal 1994 decreased slightly from the fiscal 1993 amount of
$1,058,000.
Operating expenses, which are comprised of the costs of operating wells and
production-related taxes, for fiscal 1995 decreased by $220,000 or 14% to
$1,336,000 from the fiscal 1994 amount of $1,556,000. The decrease is comprised
of lower production taxes resulting from the 11% decrease in oil and gas revenue
discussed above combined with general operating cost reductions in West Texas.
Fiscal 1994 operating expenses decreased $235,000, or 13%, from $1,791,000 in
fiscal 1993 for the same reason.
Interest expense decreased slightly, to $375,000 for fiscal 1995 from
$378,000 in fiscal 1994 and $186,000, or 33%, from $564,000 for fiscal 1993, due
primarily to HEP's lower average debt balance.
Minority interest, which represents the interest of other common and
preferred shareholders in the net income (loss) of HEC, of $(64,000), $411,000
and $1,235,000 for fiscal years 1995, 1994 and 1993, respectively, fluctuates
depending upon HEC's net income (loss) and percentage of minority ownership.
Operating Subsidiaries. The business segments of the Company's operating
subsidiaries division consists of textile products and hotels.
Textile Products
Revenue. Textile products revenue increased 9% to $77,808,000 for fiscal
1995, compared to $71,624,000 for fiscal 1994. This increase of $6,184,000
resulted from growth in all of Brookwood's divisions except the Kenyon finishing
plant. The increase in revenues was principally from continued growth in the
Brookwood Consumer and Brookwood Roll Goods divisions. The 2% increase in
revenues from $70,185,000 in fiscal 1993 to $71,624,000 in fiscal 1994 resulted
principally from growth in the Brookwood Consumer and Brookwood Roll Goods
divisions, partially offset by a decrease of the Kenyon finishing plant's
revenues due to weak market conditions.
Expenses. Textile products expenses increased 10% to $77,604,000 for fiscal
1995 from $70,761,000 for fiscal 1994. The increase in cost of sales was
principally the result of a 9% increase of sales revenue. The lower gross profit
margin for 1995 was the result of manufacturing inefficiencies at the Kenyon
finishing plant. Gross
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<PAGE> 13
margins were 11.6%, 12.5% and 13.8% in fiscal 1995, 1994 and 1993, respectively.
Administrative expenses increased $503,000 in fiscal 1995 to $5,835,000 from the
fiscal 1994 amount of $5,332,000, due to increased operating expenses associated
with previously mentioned sales growth in distribution divisions and the
increased use of consultants on special projects. The $232,000 increase in
interest expense to $834,000 from the 1994 amount of $602,000 was the result of
higher average borrowings and higher interest rates in fiscal 1995. Expenses
increased $2,083,000 in fiscal 1994 from fiscal 1993. The increase in cost of
sales and the resultant deterioration in textile products gross profits were
principally the result of weak market conditions experienced by the Kenyon
finishing plant during fiscal 1994. Interest expense decreased $69,000 in fiscal
1994 from 1993 as a result of lower average borrowings and lower interest rates.
Hotels
Revenues. Sales of $22,502,000 increased by $1,606,000 for fiscal 1995, or
8%, compared to $20,896,000 for fiscal 1994. Such increase was due to the
inclusion of a full year of operations of the Integra Hotels' properties,
acquired in March 1994, offset by the January 1995 sale of the Lido Beach
Holiday Inn hotel. For the two properties which were owned during all of both
fiscal 1995 and 1994, revenues increased $494,000, or 3.8%, and the average
daily rate increased by 4.6% between the periods. Revenues for fiscal 1994
increased 17% from fiscal 1993 revenues of $17,818,000, primarily due to the
aforementioned inclusion of the Integra Hotels properties. For properties which
were owned during all of both fiscal 1994 and 1993, revenue increased $153,000,
or 0.9%, and the average daily rate increased by 6.4% between the periods.
During fiscal 1995 the Company sold both its fee interest in the Lido Beach
Holiday Inn hotel resulting in a gain of $2,164,000 and two management contracts
resulting in a gain of $232,000.
Expenses. Hotel expenses were $22,075,000, $20,330,000 and $17,583,000 in
fiscal years 1995, 1994 and 1993, respectively.
Operating expenses of $18,744,000 for fiscal 1995 increased by $1,406,000,
or 8%, from the fiscal 1994 expenses of $17,338,000. The increase was primarily
due to the inclusion of a full year for the Integra Hotels properties and the
sale of the Lido Beach Holiday Inn hotel. For properties which were owned during
all of both 1995 and 1994 operating expenses increased $196,000, or 1.7% between
the periods. For properties which were owned during all of both fiscal 1994 and
1993 operating expenses increased by $2,055,000 from $15,283,000, or 13% between
the periods, due primarily to the inclusion of the Integra Hotels properties.
Depreciation and amortization increased to $2,429,000 in fiscal 1995 from
$2,104,000 in fiscal 1994 and $1,610,000 in fiscal 1993, due to significant
capital improvements completed during the last several fiscal years and the
acquisition of Integra Hotels properties. Amortization expense for all three
years relates principally to the Longboat Key Holiday Inn, Oklahoma City Embassy
Suites and two Residence Inn leaseholds.
Interest expense of $902,000 for fiscal 1995 increased $4,000 from $888,000
in fiscal 1994. The interest expense relates to a term loan on the Lido Beach
Holiday Inn hotel, which amounted to $360,000, $673,000 and $690,000 in fiscal
years 1995, 1994 and 1993, respectively, and a mortgage on the Residence Inn
hotel located in Tulsa, Oklahoma in the amount of $542,000 in fiscal 1995 and
$215,000 in fiscal 1994. The term loan was paid off in January 1995 in
connection with the sale of the hotel.
Associated Companies
Revenues. Associated companies' (loss) for fiscal 1995 in the amount of
$(171,000) compares to income of $1,356,000 for fiscal 1994 and $12,232,000 for
fiscal 1993. Substantially all income is derived from ShowBiz in all three
years. The declines between the years are due to a substantial decline in
ShowBiz results, which was attributable to lower operating margins and certain
non-cash charges that negatively impacted results, including a reduction in
deferred tax credits, a charge for new store pre-opening costs, a reserve for
asset impairment and a reserve for legal settlements. Included in the 1993
amount is a gain of $9,705,000, from the sale of 425,000 ShowBiz shares. The
fiscal 1993 amount is net of a write-down of the carrying value of the Company's
investment in Oakhurst in the amount of $275,000. See Note 3 to the Company's
consolidated financial statements.
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<PAGE> 14
Expenses. Interest expense of $687,000 for fiscal 1995 increased by
$201,000, or 41%, from $486,000 in fiscal 1994. The interest expense during the
three years relates to borrowings under a line of credit facility from Merrill
Lynch Business Financial Services, Inc. ("MLBFS"), former margin loans and the
issuance of a $4,000,000 note to Integra's Unsecured Creditors' Trust ("IUCT")
in March 1994. The fiscal 1995 increase was attributable to an increase in rate
on the MLBFS line of credit, offset by a decline in the average outstanding
balance, and the issuance of the 5% fixed interest note to IUCT. The decrease in
the fiscal 1994 period of $453,000, or 48%, from $939,000 in fiscal 1993 was
attributable to lower average borrowings and lower interest rates. All of the
Company's shares of ShowBiz common stock are presently pledged as collateral
under the MLBFS and IUCT loan obligations.
The Company recorded a provision for loss of $4,118,000 in fiscal 1993 with
respect to its investment in Integra. In July 1992, Integra filed for chapter 11
bankruptcy protection and during fiscal 1993, Integra continued to operate in
bankruptcy while it developed an amended plan of reorganization. The amended
plan provided for payments by the Company to a proposed bankruptcy-created trust
and, as a result, the Company recorded a provision for loss in fiscal 1993 in
excess of the previously reserved amount for such payments and legal fees. The
Plan was confirmed by the court and was consummated in March 1994. See Note 8 to
the Company's consolidated financial statements.
Other
Revenue. Fiscal 1995 and 1994 fee income of $425,000 and $150,000,
respectively, was received from financial consulting contracts with an HEP
affiliate and ShowBiz. Fiscal 1993 fee income of $472,000, included fees of
$354,000 that were derived from financial consulting contracts with ShowBiz and
Oakhurst. The consulting contract with the HEP affiliate, which was effective
July 1994, provides for a $300,000 annual fee and the ShowBiz consulting
contract provides for a $125,000 annual fee. The Oakhurst contract in the annual
amount of $250,000 was terminated in June 1994.
Interest and other income, principally from interest on short-term
investments, decreased by $28,000, or 8%, to $312,000 in fiscal 1995, compared
to $340,000 for fiscal 1994, as a result of lower cash available for investment.
Fiscal 1994 interest revenues decreased by $42,000 from the fiscal 1993 amount
of $382,000 for the same reason.
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 fiscal 1994.
Expenses. The interest expense during the three years ended July 31, 1995
primarily relates to the Company's 13.5% Subordinated Debentures and 7%
Collateralized Senior Subordinated Debentures. The Company's net interest
expense in fiscal 1995 was $4,304,000, a slight decrease from the fiscal 1994
amount of $4,322,000. The Company's net interest expense for fiscal 1994
represents a 33% decrease in such expense compared to the fiscal 1993 amount of
$6,413,000, principally due to the favorable effect of the bond exchange program
concluded in March 1994. See Note 9 to the Company's consolidated financial
statements.
Other administrative expenses of $3,841,000 in fiscal 1995 compares to
$3,268,000 for fiscal 1994, and to $3,629,000 for fiscal 1993. The increase in
fiscal 1995 of $573,000, or 18%, is attributable to increased costs related to
litigation matters, offset by lower personnel and office expenses. The decrease
in expense of $361,000 or 10% for fiscal 1994 compared to fiscal 1993 is due to
lower personnel and office expenses, offset by increased litigation costs.
In fiscal 1995, the Company recorded a $13,000 provision for loss due to an
unfavorable foreign currency exchange rate fluctuation. In fiscal 1994, the
Company recorded a $147,000 provision for loss from an investment in a
marketable security. In fiscal 1993, the Company recorded a $35,000 recovery
from a marketable security investment.
Income Taxes. Effective August 1, 1991, the Company accounts for income
taxes in accordance with Statement of Financial Accounting Standards No.
109 -- Accounting for Income Taxes ("SFAS No. 109").
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<PAGE> 15
Among other things this standard requires the recognition of future tax
benefits, measured by enacted tax rates, attributable to net deductible
temporary differences between financial statement and income tax bases of assets
and liabilities (approximately $8,303,000 at July 31, 1995) and tax net
operating loss carryforwards (approximately $57,679,000 at July 31, 1995)
("NOLs") and capital loss carryforwards (approximately $1,515,000 at July 31,
1995), to the extent that realization of such benefits is "more likely than
not", as defined in SFAS No. 109. In its consolidated financial statements for
the fiscal year ended July 31, 1992, the Company adopted the provisions of SFAS
No. 109 and changed its accounting method for income taxes by recording its
cumulative effect, as of the beginning of the fiscal year, resulting in a
one-time $12,133,000 increase to stockholders' equity. See Note 12 to the
Company's consolidated financial statements.
The Company's NOLs expire as follows: 1996 -- $191,000, 1997 to
2000 -- $2,422,000 and 2006 to 2010 -- $55,066,000. SFAS No. 109 requires that
the tax benefit of such NOLs be recorded as an asset to the extent that
management assesses the utilization of such NOLs to be "more likely than not".
Based upon the Company's expectations and available tax planning strategies,
management has determined that taxable income will more likely than not be
sufficient to utilize approximately $16,261,000 of the NOLs prior to their
ultimate expiration in the year 2010.
Management believes that the Company has certain tax planning strategies
available, which include the potential sale of its ShowBiz shares, the hotel
properties and certain other assets, that could be implemented, if necessary, to
supplement income from operations to fully realize the recorded tax benefits
before their expiration. Management has considered such strategies in reaching
its conclusion that it is more likely than not taxable income will be sufficient
to utilize a significant portion of the NOLs before expiration, however, future
levels of operating income and taxable gains are dependent upon general economic
conditions and other factors beyond the Company's control. Accordingly, no
assurance can be given that sufficient taxable income will be generated for
significant utilization of the NOLs.
Extraordinary Item. In fiscal 1995, the Company repurchased 7% Debentures
from its HEC subsidiary having a principal value of $1,894,000 for $1,385,000.
Since this transaction was with a consolidated subsidiary, no gain was recorded.
Additionally, during 1995 the Company purchased 7% Debentures having a principal
value of $604,000 for a discounted amount of $461,000, which resulted in an
extraordinary gain from extinguishment of debt in the amount of $143,000. During
fiscal 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 a gain of
$648,000.
Liquidity and Capital Resources. Cash and cash equivalents at July 31, 1995
totaled $5,824,000.
The Company's real estate segment generates funds principally from its
property management activities without significant additional capital costs. At
July 31, 1995 the Company's office-retail property was substantially leveraged.
Although the term loan has been extended to January 1996, management believes it
can be further extended or refinanced for at least the present outstanding
amount if the property is not sold prior to that date.
The Company's energy segment generates funds from operating and financing
activities. Cash flow is subject to fluctuating oil and gas production and
prices. In accordance with the proportionate consolidation method of accounting,
HEC reports its share of the long-term obligations of its HEP affiliate totaling
$5,056,000 at June 30, 1995. HEP's borrowings are secured by a first lien on
approximately 80% in value of HEP's oil and gas properties. In fiscal 1995, HEC
obtained a $1,500,000 line of credit from a bank, of which $950,000 was borrowed
as of June 30, 1995. Subsequent to June 30, 1995, HEC borrowed an additional
$250,000. The line of credit is secured by the publicly-traded limited partner
units it holds in HEP. Due to collateral constraints, HEC has no unused
borrowing capacity under its line of credit at September 30, 1995. The line of
credit limits dividends paid by HEC to $3.50 per share each fiscal year. At
September 30, 1995, HEP had $12,857,000 outstanding under a note purchase
agreement which matures in April 1998, and $24,700,000 outstanding under a
revolving credit agreement which matures in February 2001. HEP's unused
borrowing capacity under the revolving credit agreement was $1,000,000 at
September 30, 1995.
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At July 31, 1995, Brookwood maintained a $13,500,000 revolving line of
credit facility (the "Brookwood Revolver") with The Chase Manhattan Bank, N.A.
("Chase"), which is collateralized by accounts receivable and equipment. At
September 30, 1995, Brookwood had $1,001,000 of unused borrowing capacity.
The Company's hotels have benefitted from the upturn in occupancy and
average daily rates experienced by the lodging industry. Although capital
expenditures are periodically required under franchise agreements, funds
generated from hotel operations have contributed significantly to the Company's
working capital. The sale of hotels is also a source of liquidity; however, it
may be impacted by the inability of prospective purchasers to obtain equity
capital or suitable financing.
Although the Company's ShowBiz shares, having a market value of
approximately $23,640,000 at September 30, 1995 (based upon the closing price of
$13.25 per share), are presently unregistered, and may be subject to some
limitations on sale, management believes there is a ready market to sell such
shares without adversely affecting market price. All of the Company's 1,784,193
ShowBiz shares are pledged as collateral for the $5,000,000 MLBFS line of credit
and the $4,000,000 note payable to the IUCT.
Management believes that it will have sufficient funds derived from
operations and the potential sale of ShowBiz shares, hotel properties or other
assets to satisfy its obligations.
As described in Note 19 to the Company's consolidated financial statements,
the Company had outstanding contingencies and commitments of approximately
$13,918,000 (excluding operating lease commitments of $11,143,000).
Inflationary Factors. Typically, inflation has the effect on real estate
operations of increasing revenue based on percentage rentals and allowing rent
increases on lease renewals as rental rates rise, generally to reflect higher
construction costs on new properties. This positive effect, if any, on the
Company's revenues may be offset by increasing operating expenses. Higher
construction costs and rental rates, if any, may make the Company's existing
rental properties more valuable in terms of both replacement cost and income
expectation, two significant factors in any valuation of real estate on a
current basis. However, due to the volatility in the real estate industry, there
can be no expectation that any of these factors will materialize.
The market for and prices of oil and gas depend on a number of factors,
including the level of domestic production, pace of the general economy, supply
of imported oil and gas, actions of foreign oil-producing nations and extent of
governmental regulation and taxation. HEP has entered into numerous financial
contracts to hedge the price of its oil and natural gas. The purpose of the
hedges is to provide protection against price drops and to provide a measure of
stability in the volatile environment of oil and natural gas spot pricing. The
revenue associated with these contracts is recognized as oil or gas revenue at
the time the hedged volumes are sold. HEP has entered into financial contracts
for hedging transactions of between 3% and 45% of its forecasted oil production
for the years 1996 through 1999 at prices ranging from $15.08 per barrel to
$17.12 per barrel. HEP has also entered into hedging contracts of between 4% and
55% of its forecasted gas production for the years 1996 through 1999 at prices
ranging from $1.49 per mcf to $2.05 per mcf.
Increased costs of the textile products operations resulting from
inflationary factors are, to the extent possible, passed on to customers of the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements, together with the
independent auditors' report, are included elsewhere herein. Reference is made
to Item 14, "Exhibits, Financial Statement Schedules, and Reports on Form 8-K".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain of the information required by this Item 10 is contained in the
definitive proxy statement of the Company for its Annual Meeting of Stockholders
(the "Proxy Statement") under the heading "Election of Directors," and such
information is incorporated herein by reference. The Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
July 31, 1995.
In addition to certain directors of the Company who serve as executive
officers, the following individuals also serve as executive officers of the
Company:
William L. Guzzetti, age 52, has served as Executive Vice President of the
Company since October 1989. Mr. Guzzetti has served as President, Chief
Operating Officer and a Director of HEC since February 1985 and as President,
Chief Operating Officer and a Director of HCRC since May 1991. Prior to that,
Mr. Guzzetti served as Senior Vice President, Secretary and General Counsel of
HEC from November 1980 until February 1985. Since November 1990 and May 1991,
Mr. Guzzetti has served as the President, Chief Operating Officer and a Director
of HRC and HMC, respectively.
Melvin J. Melle, age 53, has served as Vice President and Chief Financial
Officer of the Company since December 1984 and as Secretary of the Company since
October 1987. Mr. Melle served as Assistant Secretary of the Company from
December 1984 to October 1987. Mr. Melle had served as Secretary and Principal
Financial and Accounting Officer of Alliance Bancorporation from April 1989
until its liquidation in February 1994. From June 1980 through June 1986, Mr.
Melle served as Chief Financial Officer of The Twenty Seven Trust. Mr. Melle is
a member of the American Institute of Certified Public Accountants and of the
Ohio Society of Certified Public Accountants.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is contained in the
Proxy Statement under the headings "Executive Compensation," "Compensation of
Directors" and "Certain Relationships and Related Transactions," and such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of certain of the Company's outstanding
securities is contained in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
contained in the Proxy Statement under the headings "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions," and such information is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Reference is made to the "Index to Financial Statements and Schedules"
appearing after the signature page hereof.
1. Financial Statements.
Included in Part II, Item 8 of this report are the following:
Independent Auditors' Report
Consolidated Balance Sheets, July 31, 1995 and 1994
Consolidated Statements of Operations, Years ended July 31, 1995,
1994 and 1993
Consolidated Statements of Changes in Stockholders' Equity, Years
ended July 31, 1993, 1994 and 1995
Consolidated Statements of Cash Flows, Years ended July 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements
Supplemental Oil and Gas Reserve Information (Unaudited)
2. Financial Statement Schedules.
Independent Auditors' Report on Schedules
<TABLE>
<C> <S>
I Condensed Financial Information of Registrant
II Valuation and Qualifying Accounts and Reserves
III Real Estate and Accumulated Depreciation
</TABLE>
All other schedules are omitted since the required information is not
applicable or is included in the financial statements or related notes.
Financial Statements of ShowBiz Pizza Time, Inc.
Form 10-K, for the year ended December 30, 1994
Form 10-Q, for the period ended June 30, 1995 (Unaudited)
3. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<C> <S>
3.1 -- Second Restated Certificate of Incorporation of The Hallwood Group
Incorporated, is incorporated herein by reference to Exhibit 4.2 to
the Company's Form S-8 Registration Statement, File No. 33-63709.
3.2 -- Restated Bylaws of the Company, as currently in effect, including
all amendments thereto, is incorporated herein by reference to
Exhibit 3.4 to the Company's Form 10-K for the fiscal year ended
July 31, 1993, File No. 1-8303.
4.1 -- Indenture Agreement, dated as of April 14, 1983, among Atlantic
Metropolitan Corporation, Atlantic Metropolitan (U.K.) plc and The
Law Debenture Trust Corporation plc, as Trustee, relating to the
12% Convertible Notes due July 31, 1997 of Anglo Metropolitan
(U.K.) plc is incorporated herein by reference to Exhibit 4.4 to
Atlantic Metropolitan Corporation's Form 10-K for the fiscal year
ended July 31, 1983, File No. 1-8303.
</TABLE>
16
<PAGE> 19
<TABLE>
<C> <S>
4.2 -- Indenture Agreement, and related Pledge Agreement, dated as of
March 2, 1994, among Norwest Bank Minnesota, National Association,
Trustee, and the Company, regarding 7% Collateralized Subordinated
Debentures due July 31, 2000, is incorporated herein by reference
to Exhibit 4.2 to the Company's Form 10-Q for the fiscal quarter
ended January 31, 1994, File No. 1-8303.
4.3 -- Indenture, dated as of May 1, 1989, between the Company and The
Bank of New York, as Trustee, is incorporated herein by reference
to Exhibit T3C to the Company's Application for Qualification of
Indenture on Form T-3, Registration No. 22-19326.
10.1 -- Consulting Agreement with Robert L. Lynch is incorporated herein by
reference to Exhibit 10.2 to Umet Properties Corporation's
Registration Statement on Form S-11, File No. 2-73345.
10.2 -- Amendment to Consulting Agreement with Robert L. Lynch, effective
October 1, 1982, is incorporated herein by reference to Exhibit
10.4 to Umet Properties Corporation's Form 10-K for the fiscal year
ended November 30, 1982, File No. 1-8384.
10.3 -- Amended and Restated Agreement, dated March 30, 1990, between the
Company and Stanwick Management Company, Inc. (subsequently merged
into its parent, Stanwick Holdings, Inc.) concerning the allocation
of costs and expenses incurred in connection with the operation and
management of their common offices is incorporated herein by
reference to Exhibit 10.30 to the Company's Form 10-Q for the
fiscal quarter ended April 30, 1990, File No. 1-8303.
10.4 -- Amended 1985 Stock Option Plan is incorporated herein by reference
to Exhibit 10.9 to the Company's Form 10-K for the fiscal year
ended July 31, 1987, File No. 1-8303.
10.5 -- Employment Agreement, dated January 1, 1994, between the Company
and Melvin John Melle, File No. 1-8303.
10.6 -- Agreement, dated December 18, 1987, between the Company, Grainger
Trust plc, Atlantic Metropolitan (U.K.) plc and Alan George Crisp,
relating to the sale by the Company of Atlantic Metropolitan (U.K.)
plc is incorporated herein by reference to Exhibit 2.1 to the
Company's Form 8-K dated January 6, 1988, File No. 1-8303.
10.7 -- Tax Sharing Agreement, dated as of March 15, 1989, between the
Company and Brookwood Companies Incorporated is incorporated herein
by reference to Exhibit 10.25 to the Company's Form 10-K for the
fiscal year ended July 31, 1989, File No. 1-8303.
10.8 -- Amended Tax-Favored Savings Plan Agreement of the Company,
effective as of February 1, 1993, incorporated by reference to
Exhibit 10.33 to the Company's Form 10-K for the fiscal year ended
July 31, 1993, File No. 1-8303.
10.9 -- Hallwood Special Bonus Agreement, dated as of August 1, 1994,
between the Company and all members of its control group that now,
or hereafter, participate in the Hallwood Tax Favored Savings Plan
and its related trust, and those employees who, during the plan
year of reference are highly-compensated eligible employees of the
Company, File No. 1-8303.
10.10 -- Consulting Agreement, dated as of August 1, 1989, between the
Company and Atlantic Management Associates, Inc. is incorporated by
reference to Exhibit 10.28 to the Company's Form 10-Q for the
fiscal quarter ended January 31, 1990, File No. 1-8303.
10.11 -- Services Agreement, dated September 29, 1993 between the Company
and Hallwood Securities Limited, incorporated by reference to
Exhibit 10.43 to the Company's Form 10-K for the fiscal year ended
July 31, 1993, File No. 1-8303.
</TABLE>
17
<PAGE> 20
<TABLE>
<C> <S>
10.12 -- Consulting Agreement, dated June 2, 1993, between the Company and
Hallwood Monaco S.A.M, incorporated by reference to Exhibit 10.47
to the Company's Form 10-K for the fiscal year ended July 31, 1993,
File No. 1-8303.
10.13 -- Credit Agreement and Guaranty, dated as of December 9, 1993, among
Brookwood Companies Incorporated as Borrower, the Guarantor
signatory hereto, the Banks signatory hereto and The Chase
Manhattan Bank, N.A., as Agent; and the First Amendment to Credit
Agreement and Guaranty, dated as of March 31, 1994, incorporated by
reference to Exhibit 10.55 to the Company's Form 10-Q for the
quarter ended April 30, 1994, File No. 1-8303.
10.14 -- Second Amendment to Credit and Guaranty, dated as of September 27,
1995, among Brookwood Companies Incorporated as Borrower, Kenyon
Industries, Inc. as Guarantor and The Chase Manhattan Bank, N.A. as
Bank and as agent for the Banks, File No. 1-8303.
10.15 -- Third Amendment to Credit and Guaranty, dated as of September 27,
1995, among Brookwood Companies Incorporated as Borrower, Kenyon
Industries, Inc. as Guarantor and The Chase Manhattan Bank, N.A. as
Bank and as agent for the Banks, filed herewith.
10.16 -- WCMA Note and Loan Agreement and Pledge and Collateral Assignment
of Securities Account and Securities, dated as of April 19, 1995
between the Company and Merrill Lynch Business Financial Services,
Inc.; and Amendment to Loan Documents, dated September 8, 1994,
File No. 1-8303.
10.17 -- Employment Agreement, dated as of April 1, 1993, between the
Company's Hallwood Monaco SAM subsidiary and Anthony J. Gumbiner,
File No. 1-8303.
10.18 -- Financial Consulting Agreement, dated as of August 1, 1994, between
the Company and Hallwood Financial Corporation, File No. 1-8303.
10.19 -- Financial Consulting Agreement, dated as of June 30, 1994, between
the Company and Hallwood Petroleum, Inc., File No. 1-8303.
10.20 -- Agreement, dated as of January 1, 1993, between Hallwood Investment
Company and Brian Michael Troup, filed herewith.
10.21 -- Financial and Management Consulting Services Agreement, between
ShowBiz Pizza Time, Inc. and the Company, dated December 1988,
filed herewith.
10.22 -- 1995 Stock Option Plan For The Hallwood Group Incorporated is
incorporated herein by reference to Exhibit 4.1 of the Company's
Form S-8 Registration Statement, File No. 33-63709.
11 -- Statement Regarding Computation of Per Share Earnings.
22 -- Active Subsidiaries of the Registrant as of September 30, 1995.
27 -- Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
On October 26, 1995 the Company filed a Form 8-K reporting a change in the
Company's fiscal year end from July 31 to December 31, to be effective beginning
December 31, 1995, which is incorporated herein by reference. File No. 1-8303.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ MELVIN J. MELLE
---------------------------------
Melvin J. Melle
Vice President -- Finance
(Principal Financial and
Accounting Officer)
Dated: October 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant on the 27th day of October 1995.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------------------- --------------------------------------------
<C> <S>
/s/ MELVIN J. MELLE Vice President -- Finance (Principal
- ----------------------------------------------- Financial and Accounting Officer)
(Melvin J. Melle)
/s/ ANTHONY J. GUMBINER Chairman of the Board and Director
- ----------------------------------------------- (Principal Executive Officer)
(Anthony J. Gumbiner)
/s/ ROBERT L. LYNCH Vice Chairman and Director
- -----------------------------------------------
(Robert L. Lynch)
/s/ BRIAN M. TROUP President and Director (Principal Operating
- ----------------------------------------------- Officer)
(Brian M. Troup)
/s/ CHARLES A. CROCCO, JR. Director
- -----------------------------------------------
(Charles A. Crocco, Jr.)
/s/ J. THOMAS TALBOT Director
- -----------------------------------------------
(J. Thomas Talbot)
</TABLE>
19
<PAGE> 22
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Independent Auditors' Report......................................................... 21
Financial Statements:
Consolidated Balance Sheets, July 31, 1995 and 1994................................ 22-23
Consolidated Statements of Operations, Years ended July 31, 1995, 1994 and 1993.... 24-25
Consolidated Statements of Changes in Stockholders' Equity, Years ended July 31,
1993, 1994 and 1995............................................................. 26
Consolidated Statements of Cash Flows, Years ended July 31, 1995, 1994 and 1993.... 27
Notes to Consolidated Financial Statements......................................... 28-56
Supplemental Oil and Gas Reserve Information (Unaudited)........................... 57-59
Schedules:
Independent Auditors' Report on Schedules............................................ 60
I Condensed Financial Information of Registrant............................... 61-65
II Valuation and Qualifying Accounts and Reserves.............................. 66
III Real Estate and Accumulated Depreciation.................................... 67
All other schedules are omitted since the required information is not applicable
or is included in the financial statements or related notes.
Financial Statements of ShowBiz Pizza Time, Inc.
Form 10-K, for the year ended December 30, 1994
Form 10-Q, for the period ended June 30, 1995 (Unaudited)
</TABLE>
20
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors of
The Hallwood Group Incorporated
We have audited the accompanying consolidated balance sheets of The
Hallwood Group Incorporated and its subsidiaries as of July 31, 1995 and 1994,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the three years in the period ended July 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The Hallwood Group Incorporated
and its subsidiaries as of July 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 12, 1995
21
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JULY 31
--------------------
1995 1994
-------- --------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE (NOTES 2, 3, 4, 7 AND 14)
Investments in HRP................................................. $ 10,517 $ 6,927
Properties, net.................................................... 7,931 8,119
Receivables and other assets....................................... 353 406
Mortgage loans, net................................................ 86 2,021
-------- --------
18,887 17,473
ENERGY (NOTES 5, 7 AND 15)
Oil and gas properties, net........................................ 9,856 11,005
Current assets of HEP.............................................. 1,859 2,976
Noncurrent assets of HEP........................................... 1,415 1,868
Receivables and other assets....................................... 1,298 1,437
-------- --------
14,428 17,286
-------- --------
Total asset management assets................................. 33,315 34,759
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTES 7 AND 16)
Inventories........................................................ 15,456 12,910
Receivables........................................................ 12,126 12,723
Property, plant and equipment, net................................. 8,782 8,301
Other.............................................................. 976 982
-------- --------
37,340 34,916
HOTELS (NOTES 2 AND 7)
Properties, net.................................................... 11,055 22,784
Receivables and other assets....................................... 2,198 3,671
-------- --------
13,253 26,455
-------- --------
Total operating subsidiaries assets........................... 50,593 61,371
ASSOCIATED COMPANIES (NOTES 3 AND 7)
Investment in ShowBiz Pizza Time, Inc.............................. 16,511 16,444
OTHER (NOTES 6 AND 12)
Cash and cash equivalents.......................................... 5,824 5,728
Deferred tax asset, net............................................ 5,429 5,900
Other.............................................................. 5,429 5,900
Restricted cash.................................................... 133 1,482
Investment in insurance contracts.................................. -- 229
-------- --------
Total other assets............................................ 11,956 14,751
-------- --------
TOTAL ASSETS.................................................. $112,375 $127,325
======== ========
</TABLE>
22
<PAGE> 25
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JULY 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE (NOTE 7)
Loans payable...................................................... $ 5,997 $ 7,399
Accounts payable and accrued expenses.............................. 334 492
-------- --------
6,331 7,891
ENERGY (NOTE 7)
Minority interest.................................................. 5,336 7,153
Long-term obligations of HEP....................................... 5,056 4,858
Current liabilities of HEP......................................... 2,357 2,470
Loan payable....................................................... 950 --
Accounts payable and accrued expenses.............................. 102 148
-------- --------
13,801 14,629
-------- --------
Total asset management liabilities............................ 20,132 22,520
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTE 7)
Loans payable...................................................... 11,315 8,451
Accounts payable and accrued expenses.............................. 6,534 6,079
-------- --------
17,849 14,530
HOTELS (NOTE 7)
Loans payable...................................................... 5,469 12,204
Accounts payable and accrued expenses.............................. 1,977 4,460
-------- --------
7,446 16,664
-------- --------
Total operating subsidiaries liabilities...................... 25,295 31,194
ASSOCIATED COMPANIES (NOTES 7 AND 8)
Loans payable......................................................... 9,000 10,000
Accounts payable and accrued expenses................................. 55 26
-------- --------
Total associated companies liabilities........................ 9,055 10,026
OTHER (NOTES 7 AND 9)
7% Collateralized Senior Subordinated Debentures...................... 25,703 26,866
13.5% Subordinated Debentures......................................... 22,902 22,902
Interest and other accrued expenses................................... 4,965 5,840
-------- --------
Total other liabilities....................................... 53,570 55,608
-------- --------
TOTAL LIABILITIES............................................. 108,052 119,348
REDEEMABLE PREFERRED STOCK (NOTE 10)
Series B, $.10 par value; 250,000 shares issued and outstanding....... 1,000 --
CONTINGENCIES AND COMMITMENTS (NOTE 19)
STOCKHOLDERS' EQUITY (NOTE 11)
Preferred stock, $.10 par value; authorized 500,000 shares; 250,000
shares issued in 1995.............................................. -- --
Common stock, $.10 par value; authorized 10,000,000 shares; issued
1,597,204 and 1,598,677 shares, respectively; outstanding 1,344,910
and 1,371,816 shares, respectively................................. 160 639
Additional paid-in capital............................................ 57,142 56,442
Accumulated deficit................................................... (47,698) (42,894)
Equity adjustment from foreign currency translation................... 329 86
Treasury stock, 252,294 and 226,860 shares, respectively; at cost..... (6,610) (6,296)
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................... 3,323 7,977
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $112,375 $127,325
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
ASSET MANAGEMENT
REAL ESTATE (NOTES 3, 4, 7 AND 14)
Fees....................................................... $ 3,906 $ 3,924 $ 5,939
Rentals.................................................... 702 567 572
Interest and discounts from mortgage loans................. 198 354 468
Loss from investments in HRP............................... (211) (446) (393)
------- ------- -------
4,595 4,399 6,586
Administrative expenses.................................... 1,174 1,023 1,519
Depreciation and amortization.............................. 972 1,060 1,324
Interest................................................... 639 672 713
Provision for losses....................................... 431 -- 340
Operating expenses......................................... 28 32 73
Litigation settlement...................................... -- 1,500 --
------- ------- -------
3,244 4,287 3,969
------- ------- -------
Income from real estate operations.................... 1,351 112 2,617
ENERGY (NOTES 5, 7 AND 15)
Oil and gas revenues....................................... 5,343 5,983 6,714
Other income (including intercompany amounts of $181, $202
and $88 in 1995, 1994 and 1993, respectively)............ 16 251 1,741
------- ------- -------
5,359 6,234 8,455
Depreciation, depletion, amortization and impairment....... 2,403 2,018 2,115
Administrative expenses.................................... 1,525 1,049 1,058
Operating expenses......................................... 1,336 1,556 1,791
Interest................................................... 375 378 564
Minority interest.......................................... (64) 411 1,235
------- ------- -------
5,575 5,412 6,763
------- ------- -------
Income (loss) from energy operations.................. (216) 822 1,692
------- ------- -------
Income from asset management operations............... 1,135 934 4,309
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS (NOTES 7 AND 16)
Sales...................................................... 77,808 71,624 70,185
Cost of sales.............................................. 68,797 62,705 60,518
Administrative expenses.................................... 5,835 5,332 5,354
Selling expenses........................................... 2,138 2,122 2,135
Interest (including intercompany amounts of $16, $83 and
$160 in 1995, 1994 and 1993, respectively)............... 834 602 671
------- ------- -------
77,604 70,761 68,678
------- ------- -------
Income from textile products operations............... 204 863 1,507
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS (NOTES 2 AND 7)
Sales...................................................... $22,502 $20,896 $17,818
Gain from sale of hotel and management contracts........... 2,396 -- --
------- ------- -------
24,898 20,896 17,818
Operating expenses......................................... 18,744 17,338 15,283
Depreciation and amortization.............................. 2,429 2,104 1,610
Interest................................................... 902 888 690
------- ------- -------
22,075 20,330 17,583
------- ------- -------
Income from hotel operations.......................... 2,823 566 235
------- ------- -------
Income from operating subsidiaries.................... 3,027 1,429 1,742
ASSOCIATED COMPANIES (NOTES 3, 7 AND 8)
Income (loss)................................................. (171) 1,356 12,232
Interest...................................................... 687 486 939
Loss from asset held for sale................................. -- -- 4,118
------- ------- -------
687 486 5,057
------- ------- -------
Income (loss) from associated companies............... (858) 870 7,175
OTHER (NOTE 9)
Fee income.................................................... 425 150 472
Interest on short-term investments and other income........... 312 340 382
Recovery from investment in Alliance Bancorporation........... -- 1,703 --
------- ------- -------
737 2,193 854
Interest, net of $197, $285 and $248 in 1995, 1994 and 1993,
respectively, from other segments.......................... 4,304 4,322 6,413
Administrative expenses....................................... 3,841 3,268 3,629
Provision for losses (recovery)............................... 13 147 (35)
------- ------- -------
8,158 7,737 10,007
------- ------- -------
Other loss, net....................................... (7,421) (5,544) (9,153)
------- ------- -------
Income (loss) before income taxes and extraordinary gain...... (4,117) (2,311) 4,073
Income taxes (Note 12)........................................ 830 2,727 5,498
------- ------- -------
Loss before extraordinary gain................................ (4,947) (5,038) (1,425)
Extraordinary gain from extinguishment of debt (Note 9)....... 143 648 --
------- ------- -------
NET LOSS........................................................ $(4,804) $(4,390) $(1,425)
======= ======= =======
PER COMMON SHARE (PRIMARY)
Loss before extraordinary gain................................ $ (3.60) $ (3.67) $ (1.04)
Extraordinary gain from extinguishment of debt................ 0.10 0.47 --
------- ------- -------
Net loss...................................................... $ (3.50) $ (3.20) $ (1.04)
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FROM
COMMON STOCK ADDITIONAL FOREIGN TREASURY STOCK TOTAL
------------------ PAID-IN ACCUMULATED CURRENCY ---------------- STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT TRANSLATION SHARES COST EQUITY
------ --------- ---------- ----------- ---------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1992............. 6,395 $ 639 $ 58,088 $ (36,999) $ 1,661 932 $(6,470) $16,919
Net loss -- year ended July 31,
1993............................ (1,425) (1,425)
Foreign currency translation
loss............................ (1,828) (1,828)
Exercise of stock options......... (80) (25) 174 94
------ ---- ------- -------- ------ --- ------- -------
BALANCE, JULY 31, 1993.............. 6,395 639 58,088 (38,504) (167) 907 (6,296) 13,760
Net loss -- year ended July 31,
1994............................ (4,390) (4,390)
Foreign currency translation
gain............................ 253 253
Proportionate share of
stockholders' equity
transactions of ShowBiz......... (1,646) (1,646)
------ ---- ------- -------- ------ --- ------- -------
BALANCE, JULY 31, 1994.............. 6,395 639 56,442 (42,894) 86 907 (6,296) 7,977
Net loss -- year ended July 31,
1995............................ (4,804) (4,804)
Purchase of treasury stock........ 102 (314) (314)
Foreign currency translation
gain............................ 243 243
Proportionate share of
stockholders' equity
transactions of ShowBiz......... 238 238
Reverse split
Change in number of shares...... (4,796) (479) 479 -- -- (757) -- --
Cash payment in lieu of
fractional shares............. (2) (17) (17)
------ ---- ------- -------- ------ --- ------- -------
BALANCE, JULY 31, 1995.............. 1,597 $ 160 $ 57,142 $ (47,698) $ 329 252 $(6,610) $ 3,323
====== ==== ======= ======== ====== === ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................... $(4,804) $(4,390) $ (1,425)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities
Depreciation, depletion, amortization and impairment.............. 6,846 6,252 6,161
Distributions from energy affiliate............................. 2,892 2,743 2,748
Undistributed income from energy affiliate...................... (2,567) (3,543) (5,276)
Gain from sale of hotel and hotel management contracts.......... (2,396) -- --
Proceeds from collections of mortgage loans..................... 1,144 638 1,318
Issuance of redeemable preferred stock.......................... 1,000 -- --
Mortgage loans assigned to plaintiff in litigation settlement... 592 -- --
Amortization of deferred gain from debenture exchange........... (517) (571) (196)
Net change in deferred tax asset................................ 471 2,633 5,449
(Recovery of) provision for losses, net......................... 423 (1,556) 580
Equity in net (income) loss of associated
companies/affiliates......................................... 382 (880) (2,325)
Gain from extinguishment of debt................................ (143) (648) --
Amortization of mortgage loan discounts......................... (29) (51) (79)
Increase in mortgage loans from sale of real estate............. (18) -- (76)
Accrued interest on 13.5% Debentures............................ 8 8 5,855
Issuance of note payable to plaintiff in litigation
settlement................................................... -- 1,500 --
Gain on sale of investment in associated company................ -- (30) (9,705)
Loss from asset held for sale................................... -- -- 4,118
Net change in other assets and liabilities...................... (3,000) 250 1,267
Net change in textile products assets and liabilities........... (1,547) 351 (627)
Net change in energy assets and liabilities..................... 49 (380) 1,285
------- ------- --------
Net cash provided by (used in) operating activities........ (1,214) 2,326 9,072
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of hotel and real estate assets................ 14,132 5 97
Investments in associated companies/affiliates.................... (4,473) (8) (427)
Investments in textile products property and equipment............ (1,465) (1,193) (795)
Capital expenditures and acquisition of hotels and real estate.... (1,106) (1,332) (1,158)
Proceeds from sale of marketable securities....................... 610 -- --
Proceeds from sale of (investment in) insurance contracts, net.... 229 858 (1,016)
Net change in restricted cash for investing activities............ (83) 450 (153)
Investments in energy property and equipment...................... (36) (147) (94)
Disbursements related to Integra -- asset held for sale........... -- (7,421) (1,818)
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 companies.......... -- 1,250 13,504
Repayment of investment in associated company..................... -- -- 4,768
Investments in marketable securities.............................. -- -- (776)
------- ------- --------
Net cash provided by (used in) investing activities........ 7,808 (3,758) 12,132
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable................... 4,005 6,100 22,400
Repayment of bank borrowings and loans payable.................... (9,447) (7,922) (34,965)
Net change in restricted cash for financing activities............ 1,432 144 1,973
Purchase of capital stock by energy subsidiary for treasury....... (1,042) (1,454) (2,118)
Payment of dividends to minority stockholders of energy
subsidiary...................................................... (661) -- --
Repurchase of 7% Debentures....................................... (460) (1,526) --
Purchase of common stock for treasury............................. (314) -- --
Purchase of fractional shares -- reverse split.................... (17) -- --
Repurchase of 13.5% Debentures.................................... -- -- (6,461)
Proceeds from exercise of stock options........................... -- -- 94
------- ------- --------
Net cash (used in) financing activities.................... (6,504) (4,658) (19,077)
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................. 6 (19) (249)
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ 96 (6,109) 1,878
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................ 5,728 11,837 9,959
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR.............................. $ 5,824 $ 5,728 $ 11,837
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ACCOUNTING POLICIES
The significant accounting policies of the Company are as follows:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and the following subsidiaries:
Brookwood Companies Incorporated and subsidiary
Hallwood Energy Corporation and subsidiaries
Hallwood Hotels, Inc.
Hallwood-Integra Holding Company and subsidiaries
Hallwood Investment Company
Hallwood Management Company
Hallwood Monaco SAM
Hallwood Realty Corporation
HSC Securities Corporation
HWG Realty Investors, Inc.
NJ Portfolio Limited
The Lido Beach Hotel, Inc.
The Company fully consolidates all subsidiaries and records a minority
interest in those less than wholly owned. All significant intercompany balances
and transactions have been eliminated in consolidation. Hallwood Energy
Corporation is included on the basis of a June 30 fiscal year end.
(b) Recognition of Income
Fee income. Fee income from real estate operations is generally received in
cash and is recognized as the services (e.g. management, leasing, acquisition,
construction) are performed in accordance with various service agreements.
Interest income. Interest on mortgage loans is recognized as earned. The
general policy is to discontinue accruing interest when management believes
collection is unlikely or if foreclosure proceedings are imminent or in process.
Previously accrued interest deemed uncollectible is written off.
Textile products sales. Sales are recognized upon shipment or release of
product or when title passes to the customer.
(c) Carrying Value of Investments
Common shares and other securities are recorded at fair value determined as
of the date acquired. Thereafter, equity accounting is utilized where the
Company is able to exercise significant influence over the issuer's operating
and financial policies.
Investments in other marketable securities are stated at the lower of cost
or market value. Temporary declines in the market value of significant
non-current marketable securities are recorded as a reduction of stockholders'
equity.
Mortgage loans are stated at cost, less allowance for losses.
Real estate is carried at cost including interest costs associated with
properties under development or renovation.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Oil and Gas Properties
Hallwood Energy Corporation ("HEC") and its affiliated entity, Hallwood
Energy Partners, L.P. ("HEP"), follow the accounting policy known as "full cost
accounting," whereby all the costs of exploration for and development of oil and
gas reserves, including both productive and nonproductive costs, are capitalized
as incurred. The capitalized costs applicable to evaluated oil and gas
properties and related future development costs are amortized on a
unit-of-production method based on reserve estimates prepared by in-house
petroleum engineers. A portion of these reserves have been reviewed by
independent petroleum engineers.
The full cost method of accounting also provides that capitalized costs of
oil and gas properties shall not exceed the "cost center ceiling." The cost
center ceiling is a function of the present value, discounted at 10%, of future
net revenues from estimated production of proved oil and gas reserves. Future
net revenues are estimated using prices currently in effect, except in instances
where a future price reduction is known.
Unproved property costs are excluded from the amortization base until the
related properties are evaluated. Such unproved property costs are assessed
periodically, and a provision for impairment is made to the full cost
amortization base when appropriate.
HEP has entered into numerous financial contracts to hedge the price of its
oil and natural gas. The purpose of the hedges is to provide protection against
price drops and to provide a measure of stability in the volatile environment of
oil and natural gas spot pricing. The revenue associated with these contracts is
recognized as oil or gas revenue at the time the hedged volumes are sold.
(e) Investment in Energy Affiliate
HEC accounts for its ownership of HEP using the proportionate consolidation
method of accounting, whereby HEC records its proportional share of HEP's
revenues and expenses, current assets, current liabilities, noncurrent assets,
long-term obligations and fixed assets.
(f) Purchase Price in Excess of Fair Value of Net Assets Acquired
The purchase price in excess of fair value of the net assets acquired in
business acquisitions is amortized over the expected period of benefit.
(g) Allowance for Losses
Adjustments to the allowance for losses are based on periodic reviews of
the investment portfolio by management, including, where necessary,
determination of estimated net realizable values by current appraisals of the
underlying properties and such other significant factors as, in the judgment of
management, result in a reasonable allowance for possible losses.
(h) Depreciation and Amortization
Depreciation of fee-owned real estate is computed on the straight-line
method over periods of twenty to forty years, five to thirty years for
improvements, and three to ten years for furniture and equipment. Amortization
of hotel leasehold interests is computed on the straight-line method over the
remaining lease term and varies from 6 to 10 years.
Expenditures for maintenance and repairs are charged to operations;
renewals and betterments are capitalized and depreciated over the estimated
useful lives of the assets.
(i) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have been
translated to United States dollars. All balance sheet accounts are translated
at the year-end exchange rate, and statement of operations
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
items are translated at the average exchange rate for the year. Resulting
translation adjustments are made directly to a separate component of
stockholders' equity.
(j) Income Taxes
The Company files a consolidated federal income tax return. Deferred tax
assets and liabilities are recorded based on the difference between the tax
bases of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences, and net operating
losses, tax credits and capital loss carryforward reduced by a valuation
allowance. Provision is made for deferred taxes relating to temporary
differences in the recognition of income and expense for financial reporting.
(k) Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
(l) Statement of Cash Flows
The Company considers its holdings of highly liquid debt and money market
instruments to be cash equivalents if such securities mature within ninety days
from the date of acquisition.
(m) Anticipated Adoption Dates of New Accounting Pronouncements
The Company has not adopted Statement of Financial Accounting Standards No.
114 -- Accounting by Creditors for Impairment of a Loan ("SFAS No. 114"),
Statement of Financial Accounting Standards No. 118 -- Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures ("SFAS No. 118") and
SFAS No. 121 -- Impairment of Long-Lived Assets ("SFAS No. 121") and does not
anticipate adopting any of these new standards until the mandatory adoption
date, which for the Company is the year ending July 31, 1996. The Company does
not expect that the statements will have a material effect on the Company's
results of operations.
Also, the Company has not adopted Statement of Financial Accounting
Standards No. 107 -- Disclosure About Fair Value of Financial Information ("SFAS
No. 107"). The Company is not required to adopt SFAS No. 107 until the year
ending July 31, 1996. As SFAS No. 107 relates to disclosure only, the Company's
results of operations will not be impacted upon adoption.
(n) Reclassifications
Certain prior period amounts within the accompanying statements have been
reclassified for comparability.
(o) Common Stock
Share and per share amounts have been adjusted to give effect to the
one-for-four reverse stock split effected on June 28, 1995.
(p) Earnings Per Common Share
Primary earnings per common share are based on the weighted average number
of common shares outstanding during each year presented. Average common and
common share equivalents used in the computation of loss per share are
approximately 1,374,000 in fiscal 1995, 1,372,000 in fiscal 1994 and 1,371,000
in fiscal 1993.
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- REAL ESTATE AND HOTEL PROPERTIES
The following table summarizes the cost, accumulated depreciation and
amortization and allowance for losses of the real estate and hotel segments as
of the balance sheet dates (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Real Estate.
Office-retail property........................................... $10,743 $10,314
Non-operating properties......................................... -- 290
------- -------
10,743 10,604
Less: Accumulated depreciation................................... (1,775) (1,475)
Allowance for losses....................................... (1,037) (1,010)
------- -------
Total.................................................. $ 7,931 $ 8,119
======= =======
Hotels.
Building improvements and equipment.............................. $ 8,118 $16,649
Leasehold acquisition costs...................................... 8,026 8,026
Land............................................................. 959 3,715
------- -------
17,103 28,390
Less: Accumulated depreciation and amortization.................. (6,048) (5,606)
------- -------
Total.................................................. $11,055 $22,784
======= =======
</TABLE>
The increase in the cost of the office-retail property is principally due
to the increase in the foreign currency exchange rate.
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVESTMENTS IN AFFILIATE AND ASSOCIATED COMPANIES (DOLLAR AMOUNTS IN
THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, 1995 AMOUNT AT WHICH INCOME (LOSS) FROM
-------------------- CARRIED AT JULY INVESTMENTS FOR THE YEARS
NUMBER OF COST OR 31, ENDED JULY 31,
BUSINESS SEGMENTS AND SHARES OR ASCRIBED ------------------ --------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 1995 1994 1995 1994 1993
- ---------------------------- --------- -------- ------- ------- ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS,
L.P.(A)
-- General partner
interest............... $ 8,650 $ 6,166 $ 6,927 $ (90) $ (287) $ (110)
-- Limited partner
units.................. 412,808 5,377 4,351 -- (121) (159) (283)
-------- ------- ------- ----- ------ -------
Totals............ $ 14,027 $10,517 $ 6,927 $(211) $ (446) $ (393)
======== ======= ======= ===== ====== =======
ASSOCIATED COMPANIES
SHOWBIZ PIZZA TIME,
INC.(B)
-- Common stock........... 1,784,193 $ 5,438 $16,511 $16,444 -- -- --
Equity in earnings
(loss)............... $(171) $1,326 $ 2,718
Gain on sale of
shares............... -- -- -- -- -- 9,705
-- Floating rate
subordinated bond...... -- -- -- -- -- 84
-------- ------- ------- ----- ------ -------
5,438 16,511 16,444 (171) 1,326 12,507
======== ======= ======= ===== ====== =======
OAKHURST CAPITAL, INC.(C)
-- Common stock........... -- -- -- -- -- --
Gain on sale of
shares............... -- -- -- -- 30 --
Writedown to net
realizable value..... -- -- -- -- -- (192)
-- Warrants to purchase
common stock........... -- -- -- -- -- --
Writedown to net
realizable value..... -- -- -- -- -- (83)
-------- ------- ------- ----- ------ -------
-- -- -- -- 30 (275)
-------- ------- ------- ----- ------ -------
Totals............ $ 5,438 $16,511 $16,444 $(171) $1,356 $12,232
======== ======= ======= ===== ====== =======
</TABLE>
The ownership percentages reported below assume conversion/exercise of all
convertible securities owned by the Company but no conversion/exercise of any of
the convertible securities owned by any other holder of such securities.
(A) On November 1, 1990, the Company, through its wholly-owned subsidiary
Hallwood Realty Corporation ("HRC"), acquired from Equitec Financial Group, Inc.
("Equitec") the general partnership interests in eight Equitec sponsored and
managed limited partnerships for $8,650,000 and consummated the consolidation of
such limited partnerships into Hallwood Realty Partners, L.P. ("HRP"). See Note
14. The Company has subsequently acquired additional limited partner units of
HRP in open market purchases. The Company accounts for its investments on the
equity method of accounting.
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. Equitec 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 Equitec for the balance of the three-year period, and has
fully amortized the $2,475,000 cost. Beginning November 1, 1993 the Company
commenced amortization of that portion of the general partner interest ascribed
to the management
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rights, and for the years ended July 31, 1995 and 1994 such amortization was
$672,000 and $504,000, respectively.
Due to the recording of the pro rata share of losses reported by HRP as
prescribed by equity accounting, the carrying value of the Company's limited
partner units acquired prior to March 1995 (89,269 units) had been reduced to
zero; therefore, the Company no longer records its pro rata share of HRP's
losses with respect to such units. Unrecognized losses which have occurred since
the carrying value of the 89,269 units was reduced to zero must be recovered
before the Company would be able to recognize a pro rata share of income in the
future. As further discussed in Note 7, the Company has pledged these 89,269
units to collateralize a $500,000 note payable
In March 1995, HRP completed a one-for-five reverse split of its limited
partner units. The Company purchased 30,000 post reverse split limited partner
units (estimated to be the number of fractional units to be purchased by HRP)
for a price of $356,000.
In June 1995, HRP announced a commission-free program for its limited
partner unitholders to sell their less than round lot holdings of 99 or fewer
units as of the May 31, 1995 record date. As a result of this program, which
expired on July 10, 1995, HRP acquired 293,539 limited partner units. These
units were resold to the Company for $4,115,000, which was the same price that
HRP paid for such units.
The Company commenced recording its pro rata share of losses relating to
the newly-acquired HRP limited partner units, which amounted to $121,000 for the
year ended July 31, 1995.
As of July 31, 1995, the Company owned a 1% general partner and a 24%
limited partner interest in HRP.
(B) The Company acquired its investment in ShowBiz Pizza Time, Inc.
("ShowBiz") in 1988 as a result of (i) a spin-off of ShowBiz, formerly a
90%-owned subsidiary of Integra-A Hotel and Restaurant Company ("Integra"), (ii)
common stock warrants it received as consideration for providing a subordinated
loan to ShowBiz and for arranging and guaranteeing a $10,000,000 five-year
secured senior loan to ShowBiz from The First National Bank of Boston ("FNBB"),
and (iii) common stock warrants it received in connection with the conversion of
its subordinated loan into a floating rate subordinated bond, bearing interest
at FNBB's prime rate, which was called in November 1993. A portion of the
Company's investment in Integra, which was based upon the average of the quoted
market values of Integra and ShowBiz following the spin-off, was ascribed to the
initial investment in ShowBiz.
During fiscal 1990, ShowBiz accelerated the exercise period for all of the
common stock warrants. In June 1990, the Company exercised its warrants to
purchase 808,122 shares of common stock of ShowBiz at $4.00 per share for an
aggregate purchase price of $3,232,488.
On October 15, 1990, the Company consented to an assignment by Integra to
the Company of a ShowBiz promissory note in the amount of $4,971,000 (the
"ShowBiz Note") in connection with the satisfaction of obligations under
Integra's 13.5% Bonds. The ShowBiz Note provided for interest at the FNBB base
rate, quarterly principal repayments of $177,358 and was due and payable on
September 30, 1994. On November 1, 1990, the Company purchased another ShowBiz
note from Integra in the amount of $255,327 upon terms similar to the ShowBiz
Note. On April 10, 1991, ShowBiz repaid both of the aforementioned notes, having
a combined remaining principal balance of $4,862,079, less a pre-payment
discount of $50,000.
On March 26, 1991 and again on March 20, 1992, ShowBiz completed 3-for-2
common stock splits in the form of 50% stock dividends, which increased the
number of ShowBiz shares owned by the Company from 1,204,086 to 2,709,193. The
Company's percentage ownership was unaffected by these stock dividends.
In June 1992, the Company completed the sale of 500,000 common shares of
ShowBiz for $10,687,000 ($21.375 per share) to a mutual fund managed by Fidelity
Management & Research Company and certain institutional accounts managed by
Fidelity Management Trust Company. The net gain from the transaction was
$6,316,000, after $333,000 of related expenses.
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1992, the Company received $4,851,567, including accrued and
unpaid interest, in full satisfaction of the ShowBiz floating rate subordinated
bonds.
During fiscal 1993, the Company sold 425,000 shares of ShowBiz for
aggregate proceeds of $13,546,000 (average price of $31.87 per share). The net
gain from the various sales was $9,705,000, after $43,000 of related expenses.
The Company utilizes the equity method of accounting for its investment in
ShowBiz because the Company maintains significant influence by virtue of having
five company directors sitting on the nine-member board of ShowBiz. The
Company's proportionate share of the underlying equity in net assets of ShowBiz
exceeds its investment by $2,304,000, which is being amortized on the
straight-line basis over a period of 15 years.
In accordance with the principles of equity accounting, the Company records
a proportionate share of the ShowBiz shareholders' equity transactions. These
transactions result principally from the purchase of treasury stock at prices in
excess of book value and the exercise of warrants and options at prices below
book value, the effect of which is a non-cash reduction in the carrying value of
the Company's investment in ShowBiz and a corresponding increase (decrease) in
additional paid-in capital in the amount of $238,000 and $(1,646,000) for the
years ended July 31, 1995 and 1994, respectively.
As of July 31, 1995, the Company owned approximately 15% of the common
stock of ShowBiz and all of its ShowBiz shares are pledged to secure certain
loans payable, as discussed in Note 7.
(C) During fiscal 1989, the Company provided financial advisory services
and a financing guaranty to Hallwood Industries Incorporated ("HII"), which
later changed its name to Oakhurst Capital, Inc. ("Oakhurst"). The financial
advisory fee was paid by the issuance of shares of common stock and warrants to
purchase additional shares of common stock of HII.
Subsequently, the Company made an additional investment in Oakhurst and
assisted Oakhurst through a chapter 11 bankruptcy and provided other services to
assist Oakhurst in recovering as a viable operating entity, which supplies
automotive products and accessories to independent retailers. In July 1993, the
Company evaluated its investment in Oakhurst and recorded a writedown to
realizable net value of $275,000. In February 1994, the Company completed the
all cash sale of its entire investment in Oakhurst (15% of the common stock of
Oakhurst -- 20% assuming exercise of warrants) for $1,250,000, which resulted in
a gain of $30,000.
The quoted market price per unit/share and the Company's carrying value per
unit/share of the limited partner units of HRP and the common shares of ShowBiz
at July 31, 1995 were:
<TABLE>
<CAPTION>
AMOUNT PER SHARE
-------------------
SECURITY DESCRIPTION MARKET CARRYING
AND (QUOTRON SYMBOL) PRICE VALUE
------------------------------------------------------------------ ------ --------
<S> <C> <C>
HRP limited partner units (HRY)................................... $14.75 $10.54
ShowBiz common shares (SHBZ)...................................... 12.37 9.25
</TABLE>
The general partner interest in HRP is not publicly traded.
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth certain summarized (unaudited) financial
data as of and for the years ended June 30, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
SHOWBIZ HALLWOOD
PIZZA REALTY
TIME, INC. PARTNERS, L.P.
---------- --------------
<S> <C> <C>
1995
Balance Sheet Data Current assets............................ $ 15,897 $ 10,058
Non-current assets......................................... 176,819 209,278
Total assets............................................... 192,716 219,336
Current liabilities........................................ 29,615 13,436
Non-current liabilities.................................... 35,750 159,033
Total liabilities.......................................... 65,365 172,469
Total stockholders' equity/partners' capital............... 127,351 46,867
Statement of Operations Data
Revenue.................................................... $ 262,396 $ 49,256
Net (loss)................................................. (2,612) (8,575)
1994
Balance Sheet Data
Current assets............................................. $ 18,942 $ 8,442
Non-current assets......................................... 171,771 226,894
Total assets............................................... 190,713 235,336
Current liabilities........................................ 25,667 18,163
Non-current liabilities.................................... 36,191 161,915
Total liabilities.......................................... 61,858 180,078
Total stockholders' equity/partners' capital............... 128,855 55,258
Statement of Operations Data
Revenue.................................................... $ 274,337 $ 48,827
Net income (loss).......................................... 8,182 (26,040)
</TABLE>
- ---------------
The data used to compile the above table was obtained from published reports,
including Securities and Exchange Commission filings on Forms 10-Q and 10-K.
NOTE 4 -- MORTGAGE LOANS
The Company's mortgage loan portfolio consists of various loans on real
estate properties, including residential lots and condominiums. Mortgage loans
outstanding as of the balance sheet dates are as follows (in thousands):
<TABLE>
<CAPTION>
JULY 31,
---------------
1995 1994
---- ------
<S> <C> <C>
Face amount of mortgages............................................ $109 $2,583
Less: Allowance for losses.......................................... (23) (226)
Unamortized discounts.......................................... -- (336)
---- ------
Total..................................................... $ 86 $2,021
==== ======
</TABLE>
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- OIL AND GAS PROPERTIES
The following tables summarize certain oil and gas information by category
(full cost method), cost and unproved mineral interest (at cost). The tables
relate to all of HEC and its proportionate share of HEP's oil and gas
properties. Amounts are as of June 30, 1995 and 1994 and for the years then
ended (in thousands):
(a) Category:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1994
--------- ---------
<S> <C> <C>
Proved mineral interests..................................... $ 112,373 $ 111,476
Unproved mineral interests................................... 40 361
--------- ---------
112,413 111,837
Less: Accumulated depreciation, depletion, amortization and
property impairment.................................... (102,935) (101,229)
--------- ---------
Net mineral interests.............................. 9,478 10,608
--------- ---------
Other property and equipment................................. 3,745 3,733
Less: Accumulated depreciation............................... (3,367) (3,336)
--------- ---------
Net other property and equipment................... 378 397
--------- ---------
Oil and gas properties, net........................ $ 9,856 $ 11,005
========= =========
</TABLE>
(b) Cost:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Development.............................................. $1,142 $ 835 $ 513
Exploration.............................................. 206 287 281
Property acquisition -- proved........................... 259 676 247
Property acquisition -- unproved......................... 183 155 104
------ ------ ------
Total.......................................... $1,790 $1,953 $1,145
====== ====== ======
</TABLE>
Depreciation, depletion, amortization and impairment per equivalent barrel
of production for the years ended 1995, 1994 and 1993, was $5.41, $4.62 and
$4.17, respectively.
(c) Unproved mineral interests (at cost):
<TABLE>
<CAPTION>
JUNE 30,
-------------
1995 1994
---- ----
<S> <C> <C>
Exploration acreage................................................... $12 $104
Foreign............................................................... -- 243
Other................................................................. 28 14
---- ----
-- -
Total....................................................... $40 $361
=== ====
</TABLE>
NOTE 6 -- CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of the balance sheet dates are as follows (in
thousands):
<TABLE>
<CAPTION>
JULY 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Cash equivalents................................................... $5,238 $4,804
Cash............................................................... 586 924
------ ------
Total.................................................... $5,824 $5,728
====== ======
</TABLE>
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash equivalents consisted of secured bank repurchase agreements,
commercial paper, treasury bills, Eurodollar investments and interest-bearing
demand deposits, all of which had original maturities as of the date of purchase
of 90 days or less.
NOTE 7 -- LOANS PAYABLE
Loans payable at the balance sheet dates (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Real Estate.
Term loan, libor +2.50%, due January 1996...................... $ 4,747 $ 5,399
Promissory note, 7.50%, due August 1996........................ 750 1,500
Promissory note, 8%, due March 1998............................ 500 500
------- -------
5,997 7,399
Energy.
Term loan, prime +2%, due September 1999....................... 950 --
Textile Products.
Revolving credit facility, prime +1%, due August 1997.......... 11,030 7,975
Equipment financing, 10%, due December 1996.................... 285 476
------- -------
11,315 8,451
Hotels.
Term loan, 10%, due May 2001................................... 5,136 5,200
Non-interest bearing obligation, due March 1997................ 333 500
Term loan, base +2%, repaid January 1995....................... -- 6,504
------- -------
5,469 12,204
Associated Companies.
Line of credit, prime +.75%, due April 1996.................... 5,000 6,000
Promissory note, 5%, due March 1997............................ 4,000 4,000
------- -------
9,000 10,000
------- -------
Total.................................................. $32,731 $38,054
======= =======
</TABLE>
Further information regarding loans payable is provided below:
Real Estate. At July 31, 1995 the Company's Hallwood Investment Company
subsidiary was obligated under a term loan to FNBB's London branch for
$4,747,000 (L3,000,000) secured by the office-retail property with a net
carrying value of $7,931,000. The original loan was scheduled to mature on
August 31, 1994, bore interest at a 10.73% fixed rate and required a $743,000
(L500,000) cash deposit in a restricted account as additional collateral. An
extension of the term loan was completed in August 1994. Significant terms
include: (i) an interest rate equal to libor plus 2.5% (9.4% at July 31, 1995),
(ii) maturity date of August 1995, and (iii) reduction of the loan to L3,000,000
by application of the aforementioned restricted cash deposit. The maturity date
was extended to January 1996.
The Company issued a promissory note in the amount of $1,500,000 to the
agent for the plaintiffs in the litigation styled Equitec Roll-up Litigation,
referred to in Note 19. The note is payable in twenty-four installments ending
in August 1996. The note is guaranteed as to payment by Smith Barney Shearson
Holding, Inc. ("Smith Barney"), a co-defendant in the litigation. The Company
has agreed to reimburse Smith Barney for any payment 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 HEC to secure this reimbursement agreement.
The Company has agreed to maintain a 150% value-to-loan ratio throughout the
term of the note,
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and has agreed to grant a security interest in additional shares of HEC held or
acquired by the Company if necessary to maintain this ratio. The outstanding
balance at July 31, 1995 was $750,000.
In January 1992, the Company issued a $1,613,350 promissory note to Integra
bearing interest at the FNBB Base Rate. On March 8, 1994, 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 four-year, eight
percent, interest only $500,000 promissory note, secured by a pledge of 89,269
HRP limited partner units pursuant to a settlement agreement.
The settlement agreement also provides that the pledgee will have the right
to receive from the Company a payment 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 an additional $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 $11.25 as adjusted, 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 $45.00 per unit as quoted in The Wall Street
Journal.
Energy. During May 1995, HEC entered into a credit agreement with a bank
that has committed to loan HEC up to $1,500,000. As of June 30, 1995 HEC had
borrowed $950,000 against the credit line. Subsequent to June 30, 1995, HEC
borrowed an additional $250,000. Borrowings against the credit line bear
interest at the bank's prime rate plus 2% (11% at June 30, 1995). Interest is
payable monthly and quarterly principal payments of $75,000, as adjusted for the
borrowings subsequent to June 30, 1995, commence December 1, 1995. The credit
line is secured by the HEP units owned by HEC. The credit agreement limits
aggregate dividends paid by HEC to $3.50 per share each fiscal year.
Included in the consolidated balance sheet are long-term obligations of HEP
in the amount of $5,056,000. This amount represents HEC's share of HEP's
outstanding long-term obligations which consist primarily of $21,700,000 under a
line of credit and $12,857,000 under a note purchase agreement. HEP's borrowings
are secured by a first lien on approximately 80% in value of HEP's oil and gas
properties.
Textile Products. In December 1992, Brookwood established a revolving line
of credit facility in an amount up to $13,500,000 (the" Brookwood Revolver")
with The Chase Manhattan Bank, N.A. ("Chase"). Borrowings under the facility are
collateralized by accounts receivable and certain industrial machinery and
equipment located in Kenyon, Rhode Island. The remaining balance of 1992 bridge
financing provided by the Company was subordinate to the Brookwood Revolver. In
September 1994, the Brookwood Revolver was amended to extend the expiration date
to August 31, 1997, reduce the interest rate at Brookwood's option from one
percent over prime to one-half percent over prime (8.75% at July 31, 1995) or
LIBOR (6.04% at July 31, 1995) plus 2.25%, permit repayment of $1,000,000
balance of bridge financing to the Company and change certain of the financial
covenants. The outstanding balance at July 31, 1995 was $11,030,000.
In June 1995, the Brookwood Revolver was further amended to increase the
amount available to $15,500,000 for ninety days and waive compliance of a
financial ratio covenant at April 30, 1995.
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 certain dyeing
and finishing equipment. The outstanding balance at July 31, 1995 was $285,000.
The loan agreements contain covenants, which include maintenance of certain
financial ratios, restrictions on dividends and restrictions on repayment of
debt or cash transfers to the Company. Brookwood is in substantial compliance
with the Chase loan covenants, and is currently discussing modifications to the
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
covenants to accommodate its long range financial plans. Chase has indicated its
willingness to modify the covenants, although such modifications have not yet
been completed.
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 was secured by the pledge of all the capital stock of a
special-purpose subsidiary, The Lido Beach Hotel, Inc. The principal assets of
the subsidiary were the aforementioned hotel and three residential mortgage loan
portfolios. Concurrent with the sale of the hotel in January 1995, the loan was
repaid in full and the pledge was released.
In October 1994, the Company entered into a mortgage loan in the amount of
$5,200,000 to replace a loan obligation that the Company assumed as part of
Integra's emergence from bankruptcy in March 1994. The loan is secured by the
Tulsa, Oklahoma Residence Inn hotel and includes the following significant
terms: (i) fixed interest rate of 10%; (ii) loan payments based upon a 20-year
amortization schedule with a call after seven years; (iii) participation by
lender of 15% of net cash flow (as defined) after debt service and 15% of
residual value at maturity or upon sale or refinancing; (iv) maintenance of a 4%
capital reserve; and (v) repayment prohibition until after June 30, 1996. The
outstanding balance at July 31, 1995 was $5,136,000.
The $500,000 non-interest bearing obligation to the former preferred
shareholders of Integra was issued in connection with the Settlement and
Supplemental Settlement further described in Note 8 and is payable in three
equal annual installments in the amount of $166,667, the first of which was paid
on March 8, 1995 with the remaining two payments due on March 8, 1996 and 1997.
The outstanding balance at July 31, 1995 was $333,000.
Associated Companies. In July 1993, the Company obtained a margin loan in
the amount of $6,000,000 which bore interest at .5% in excess of the broker call
rate, as defined, and was secured by the Company's 1,784,193 shares of ShowBiz
common stock. Proceeds from this loan and $6,000,000 of working capital were
used to fully satisfy the previously outstanding $12,000,000 margin loan.
In April 1994, the Company obtained a line of credit from Merrill Lynch
Business Financial Services ("MLBFS") in the maximum commitment amount of
$6,000,000 which replaced the July 1993 margin loan. Significant terms of the
line of credit were (i) initial maturity date -- April 25, 1995; (ii) interest
rate -- prime plus 0.75% (9.5% and 8% at July 31, 1995 and 1994, respectively);
(iii) collateral -- 1,439,365 shares of ShowBiz common stock; and (iv)
availability limited to 50% of the market value of the pledged shares of
ShowBiz. In fiscal 1995, the Company reduced the line of credit to $5,000,000,
and in connection with an extension to April 25, 1996, the maximum commitment
amount was reduced to $5,000,000. All other terms remain unchanged. The
outstanding balance at July 31, 1995 was $5,000,000.
As discussed in Note 8, 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.
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Schedule of Maturities. Maturities of aggregate loans payable and
debentures for the next five years, are as follows (in thousands):
<TABLE>
<CAPTION>
BUSINESS SEGMENT
-------------------------------------------------------------------
YEARS ENDED REAL TEXTILE ASSOCIATED
JULY 31, ESTATE ENERGY(A) PRODUCTS HOTELS COMPANIES OTHER(B) TOTAL
------------------- ------ --------- -------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1996............. $5,497 $ 178 $ 6,240 $259 $5,000 $ -- $17,174
1997............. -- 238 75 269 4,000 -- 4,582
1998............. 500 238 5,000 113 -- 1,927 7,778
1999............. -- 237 -- 125 -- -- 362
2000............. -- 59 -- 138 -- 20,881 21,078
------ ---- ------- ---- ------ -------- -------
Total.... $5,997 $ 950 $ 11,315 $904 $9,000 $ 22,808 $50,974
====== ==== ======= ==== ====== ======== =======
</TABLE>
- ---------------
(a) HEP's long-term indebtedness of $34,692,000 is not a direct obligation of
HEC or of the Company. HEP's debt maturities are as follows: $96,000 in
1996; $5,949,000 in 1997; $10,783,000 in 1998; $6,496,000 in 1999 and
$6,496,000 in 2000.
(b) Sinking fund requirement and maturity for only the 7% Debentures. There is
no sinking fund requirement and the maturity of the 13.5% Debentures is
July 31, 2009.
NOTE 8 -- ANTICIPATORY LOSS -- ASSET HELD FOR SALE
The Company acquired its investment in 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 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, 1993 chapter 11 bankruptcy protection filing. During fiscal 1993 the
Company recognized a loss on its asset held for sale in the amount of
$4,118,000. 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 canceled
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. was obligated to pay the
administrative and priority tax 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 $1,000,000 and all
potential litigation claims which Integra had 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. In addition, the Company
issued a non-interest bearing promissory note in the amount of $500,000 to the
former preferred shareholders of Integra in full satisfaction of their claims.
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
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 had been asserted in certain state court proceedings identified as
the Reese, European American and Hermitage Hotel lawsuits). See also Notes 10
and 19.
NOTE 9 -- 13.5% SUBORDINATED DEBENTURES, EXCHANGE OFFER AND OFFERS TO PURCHASE
FOR CASH 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 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, 1994 and 1995 was also paid in cash. Under the terms of
its Trust Indenture, the Company is not obligated to pay future cash interest
until August 15, 1998 and has no present intention of paying interest in cash
until that time.
Since the issuance of the 13.5% Debentures in 1989, the Company has
repurchased at various discounts and retired 13.5% Debentures with a face value
of $2,230,000. No such repurchases occurred in the three year period ended July
31, 1995.
Exchange Offer and Offers to Purchase for Cash. On March 1, 1993, the
Company completed an Exchange Offer with respect to its 13.5% Debentures
(Original Series), and Offers to Purchase for Cash its 13.5% Debentures (1991
Series and 1992 Series). 13.5% Debentures (Original Series) in an aggregate
principal amount equal to $27,481,000 (60% of the total issue) were exchanged
for a new issue of 7% Debentures, and the Company purchased $8,077,000 of its
13.5% Debentures 1991 Series and 1992 Series (63% of the total issues) for 80%
of face value, or $6,461,000, pursuant to the Offers to Purchase for Cash.
7% Collateralized Senior Subordinated Debentures. Interest on the
$27,481,000 principal amount of new 7% Collateralized Senior Subordinated
Debentures due July 31, 2000 (the "7% Debentures") 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
shares consisted 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. (which has been released, as discussed below). The common and preferred
stock of Brookwood are also subject to a prior pledge in favor of Chase.
Pursuant to the Trust Indenture, the Company is obligated to redeem or
repurchase 10% of the original issue of 7% Debentures ($2,748,000) prior to
March 1996 and an additional 15% of the issue ($4,122,000) prior to March 1998.
During fiscal 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. During
fiscal 1995, the Company repurchased (i) 7% Debentures
41
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from its HEC subsidiary having a principal value of $1,894,000 for $1,385,000
and, (ii) additional 7% Debentures having a principal value of $604,000 for
$461,000. The 1995 repurchase resulted in an extraordinary gain from debt
extinguishment of $143,000. These repurchases totaling $4,672,000 satisfied the
Company's obligation to retire 10% of the issue prior to March 1996 and
partially satisfied the Company's obligation to retire an additional 15% of the
issue prior to March 1998. The fiscal 1995 repurchases were made using a portion
of the net proceeds from the sale of the Lido Beach Holiday Inn hotel. The
repurchases exceeded the $2,360,000 aggregate carrying value ascribed to the
common stock of The Lido Beach Hotel, Inc. subsidiary at the original issue
date, therefore the trustee has released its pledge over the stock of the
subsidiary. The Company intends to liquidate The Lido Beach Hotel, Inc.
subsidiary in fiscal 1996 since it has no further business purpose.
The Company accounted for the Exchange Offer and Offers to Purchase For
Cash in accordance with Statement of Financial Accounting Standards No.
15 -- Accounting by Debtors and Creditors for Troubled Debt Restructuring ("SFAS
No. 15"). SFAS No. 15 requires that concessions given the Company by
debentureholders should be accounted for as a modification of an existing
obligation and no current period gain should be recognized.
The amount of unrecognized gain, which is being amortized, using the
constant effective interest rate method over the 7 years and 5 months term of
the 7% Debentures, is composed of the following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
---------------------------------------------------------------------------- ------
<S> <C>
Gain on purchase of 1991 Series and 1992 Series Debentures at 80% of face
value..................................................................... $2,207
Gain on exchange of Original Series Debentures resulting from the waiver of
interest for the period August 15, 1993 through March 1, 1994............. 2,013
------
Totals............................................................ $4,220
======
</TABLE>
The total unrecognized gain was recorded as an increase to the carrying
value of the 7% Debentures, and is being amortized as a reduction of interest
expense. This amortization results in an effective interest rate of
approximately 4.2% for the 7% Debentures. The amortization of such unrecognized
gain for fiscal 1995, 1994 and 1993 was $517,000, $571,000 and $196,000,
respectively.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
JULY 31,
------------------
DESCRIPTION 1995 1994
------------------------------------------------------------------ ------- -------
<S> <C> <C>
7% Debentures (face value)........................................ $22,808 $25,306
Unrecognized gain from purchase and exchange, net of $1,325 and
$766 accumulated amortization................................... 2,895 3,454
Elimination of debentures owned by HEC............................ -- 1,894)
------- -------
Totals.................................................. $25,703 $26,866
======= =======
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>
42
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- REDEEMABLE PREFERRED STOCK
In connection with the settlement of the following lawsuits: (i) Louis G.
Reese, Inc., et al, v. The Hallwood Group Incorporated, et al; (ii) European
American Reinsurance Corporation v. The Hallwood Group Incorporated, et al, and
(iii) Hermitage Hotel, Ltd. L.P. v. The Hallwood Group Incorporated, et al, as
further discussed in Note 19, the Company agreed to issue 250,000 shares of a
newly-designated series of preferred stock (the "Series B Preferred Stock") to
the plaintiffs in these lawsuits in exchange for the dismissal of all of these
actions with prejudice. The holders of Series B Preferred Stock are entitled to
dividends in an annual amount of $0.20 per share. For the first five years,
dividends are cumulative and the payment of cash dividends on any common stock
is prohibited before the full payment of any accrued dividends. Thereafter,
dividends will accrue and be payable only if and when declared by the Board of
Directors. The Series B Preferred Stock also has dividend and liquidation
preferences to the Company's common stock. The shares are subject to mandatory
redemption 15 years from the date of issuance, at 100% of the liquidation
preference of $4.00 per share plus all accrued and unpaid dividends, and may be
redeemed at any time on the same terms at the option of the Company. The holders
of the shares of Series B Preferred Stock are not entitled to vote on matters
brought before the Company's stockholders, except as otherwise provided by law.
NOTE 11 -- STOCKHOLDERS' EQUITY
Reverse Stock Split and Stock Transfer Restrictions. At a Special Meeting
of Stockholders held on June 27, 1995, stockholders voted to amend the Company's
Certificate of Incorporation to (i) effect a one-for-four reverse stock split
(the "Reverse Split") of the Company's common stock and (ii) restrict certain
transfers of the Company's common stock in an attempt to protect certain of the
Company's federal income tax benefits.
Common Stock. The number of outstanding shares of common stock does not
include shares of common stock held as treasury stock. See "Treasury Stock"
below.
Preferred Stock. Under its Second Restated Certificate of Incorporation the
Company is authorized to issue 500,000 shares of preferred stock, par value $.10
per share, and did issue 250,000 shares of a newly designated Series B Preferred
Stock, which is described in Note 10.
Treasury Stock. As of July 31, 1995 the Company's HEC subsidiary purchased
249,434 shares of the Company's outstanding common stock (approximately 16% of
the total outstanding shares) in open market transactions at a cost of
$6,139,000. Since the shares were acquired by a consolidated subsidiary of the
Company, the shares are treated as treasury stock. The remaining 2,860 treasury
shares are held by the Company at a cost of $471,000.
43
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options. The Company has adopted several stock option plans for
members of the Board of Directors, executive officers and other key employees of
the Company. Two types of options may be granted pursuant to the 1985 Plan: (i)
options intended to qualify as incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended; and (ii) those not
intended to satisfy the requirements for incentive options, i.e. nonqualified
stock options. All options issued under the 1994 and 1995 Plans are nonqualified
stock options. The exercise prices of all options granted under the plans were
at the fair market value of the Company's common stock on the date of grant.
Below is the status of the various stock option plans as of July 31, 1995:
<TABLE>
<CAPTION>
PLAN
------------------------------
1985 1994 1995 TOTALS
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total options authorized...................... 75,000 50,000 68,000 193,000
Less: Options granted, and exercised......... (6,250) -- -- (6,250)
Options granted, not exercised
Fiscal 1995......................... -- (50,000) (10,750) (60,750)
Fiscal 1994......................... -- -- -- --
Fiscal 1993......................... -- -- -- --
Prior to fiscal 1993................ (18,750) -- -- (18,750)
------- ------- ------- -------
(18,750) (50,000) (10,750) (79,500)
------- ------- ------- -------
Options available for grant................... 50,000 -- 57,250 107,250
======= ======= ======= =======
Exercise price................................ $ 24.00 $ 9.00 $ 11.50
Expiration.................................... March December June
1996 1995 2005
</TABLE>
All options granted under the 1985 and 1995 Plans are fully vested. Options
granted under the 1994 Plan are not currently exercisable and are subject to
certain vesting restrictions.
NOTE 12 -- INCOME TAXES
The following is a summary (in thousands) of the income tax provision:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------
1995 1994 1993
---- ------ ------
<S> <C> <C> <C>
State........................................................ $226 $ 98 $ 208
Federal
Current tax (refund)....................................... 133 (4) 220
Deferred tax............................................... 471 2,633 5,070
---- ------ ------
Total.............................................. $830 $2,727 $5,498
==== ====== ======
</TABLE>
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliations of the expected tax or (benefit) at the statutory tax rate
to the effective tax are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Expected tax or (benefit) at the statutory tax rate....... $(1,351) $ (565) $1,385
Increase in deferred tax asset valuation allowance........ 1,565 3,663 3,005
State taxes............................................... 226 98 208
Alternative minimum tax................................... 133 -- 220
Foreign (gain) loss not taxable........................... 331 (411) 240
Capital loss carryover.................................... (515) -- --
Net (increase) decrease in tax credits.................... (133) 103 638
Other..................................................... 574 (161) (198)
------ ------ ------
Effective tax................................... $ 830 $2,727 $5,498
====== ====== ======
</TABLE>
The Company paid only a federal alternative minimum tax of $133,000 and
$220,000 for fiscal year 1995 and 1993, respectively, due to the utilization of
net operating loss carryforwards ("NOLs") to offset taxable income. The Company
did not incur any actual federal income tax or alternative minimum tax for
fiscal year 1994.
A schedule of the types and amounts of existing temporary differences and
NOLs, at the blended statutory tax rate of 34%, tax credits and valuation
allowance as of the balance sheet dates are as follows (in thousands):
<TABLE>
<CAPTION>
DEFERRED TAX
-----------------------------------------------
1995 1994
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Net operating loss carryforward................ $ 19,611 $ -- $ 18,127 $ --
Reserves recorded for financial statement
purposes and not for tax purposes............ 1,000 -- 869 --
Equity in losses or earnings of unconsolidated
affiliates................................... 664 4,129 623 3,629
Original issue discounts and cancellation of
debt income on 7% and 13.5% Debentures....... 3,252 -- 3,426 --
Basis differences.............................. 696 -- 693 --
Tax credits.................................... 641 -- 548 --
Litigation costs deferred for tax purposes..... 340 -- 1,870 --
Other temporary differences.................... 805 121 392 327
Capital loss carryforward...................... 515 -- -- --
Depreciation and amortization.................. 316 -- 233 329
-------- ----------- -------- -----------
Deferred tax assets and liabilities............ 27,840 $ 4,250 26,781 $ 4,285
======= =======
Less deferred tax liabilities.................. (4,250) (4,285)
-------- --------
23,590 22,496
Less valuation allowance....................... (18,161) (16,596)
-------- --------
Deferred tax asset, net.............. $ 5,429 $ 5,900
======== ========
</TABLE>
45
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Below is a schedule of expiring NOLs and capital loss carryforward by
fiscal year (in thousands):
<TABLE>
<CAPTION>
FISCAL CAPITAL LOSS
YEARS NOLS CARRYFORWARD
-------------------------------------------------------------- ------- ------------
<S> <C> <C>
1996.......................................................... $ 191 $ --
1997.......................................................... 354 --
1998.......................................................... 1,461 --
1999.......................................................... -- 1,515
2000.......................................................... 607 --
2006.......................................................... 6,584 --
2007.......................................................... 29,809 --
2009.......................................................... 12,896 --
2010.......................................................... 5,777 --
------- ------
Total............................................... $57,679 $1,515
======= ======
</TABLE>
The Company also has approximately $641,000 of alternative minimum tax
credits which have no expiration date.
Current tax laws and regulations relating to specified changes in ownership
may limit the availability of the Company's utilization of its NOLs and tax
credit carryforwards. As of July 31, 1995, management was not aware of any
ownership changes which would limit the utilization of the NOLs and tax credit
carryforwards.
46
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of non-cash 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>
YEARS ENDED JULY 31,
------------------------------
DESCRIPTION 1995 1994 1993
------------------------------------------------------- ------ ------- -------
<S> <C> <C> <C>
Issuance of Redeemable Preferred Stock................. $1,000 $ -- $ --
Effect of reverse split on common stock/additional paid
in capital........................................... 479 -- --
Recording of proportionate share of stockholders'
equity transactions of ShowBiz....................... 238 1,646 --
Real estate acquired through foreclosure............... 23 -- --
Issuance of promissory note payable in connection with
Integra bankruptcy................................... -- 4,000 --
Issuance of note payable in connection with litigation
settlement........................................... -- 1,500 --
Renegotiate loan payable to reduced amount............. -- 901 --
Deed back to lender of hotel property acquired from
Integra.............................................. -- 435 --
Exchange of 13.5% Debentures for 7% Debentures......... -- -- 25,587
Payment in kind of annual interest on 13.5%
Debentures........................................... -- -- 6,792
Unrecognized gain from completion of Bond Exchange and
Offers to Purchase for Cash.......................... -- -- 4,220
Assets (liabilities) acquired in connection with the
emergence of Integra from bankruptcy
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 --
Supplemental disclosures of cash payments (in
thousands):
Interest paid (including capitalized interest)......... $8,010 $ 7,360 $ 3,956
Income taxes paid...................................... 280 130 210
</TABLE>
NOTE 14 -- ORGANIZATION AND OPERATIONS OF HALLWOOD REALTY PARTNERS, L.P.
On November 1, 1990, Hallwood Realty Partners, L.P., a publicly traded
Delaware limited partnership ("HRP"), consummated an exchange through a series
of mergers (the "Exchange"), of 8,662,298 newly issued units of limited
partnership interest in HRP ("Units") for outstanding limited partnership
interests in eight limited partnerships originally formed by Equitec Financial
Group, Inc. ("EFG") (the "Participating Equitec Partnerships"). The Exchange was
consummated pursuant to a proxy statement/prospectus, dated June 29, 1990, as
supplemented.
In connection with the Exchange, HRC, a wholly-owned subsidiary of the
Company, purchased the general partner interests in the Participating Equitec
Partnerships from EFG for $5,155,000. This purchase was pursuant to the terms of
the Amended and Restated Agreement among EFG, Equitec Properties Company ("EPC")
and the Company, dated as of October 17, 1989, as amended (EFG, EPC and its
affiliates are collectively referred to as "Equitec"). HRC contributed such
general partner interests, plus $13,118 in cash, to HRP in exchange for a 1%
general partner interest in HRP. HWG Realty Investors, Inc., a wholly-owned
subsidiary of the Company, purchased a 0.1% partnership interest in each of the
Participating Equitec Partnerships by making capital contributions to the
Participating Equitec Partnerships aggregating
47
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$131,177 in cash on November 1, 1990. The total acquisition cost of the general
partner interest, which aggregates $8,650,000, includes other capitalized costs
of $3,351,000. In addition, the Participating Equitec Partnerships paid EFG an
aggregate of $8,073,080 in connection with the Exchange.
As a result of the foregoing, HRP acquired 99.9% of the equity interests
in, and thereby became the indirect owner of, all of the real estate and other
assets of the Participating Equitec Partnerships.
As general partner, HRC earns an asset management fee and certain related
fees from HRP properties, which amounted to $436,000, $435,000 and $472,000
during fiscal years 1995, 1994 and 1993, respectively.
HRC agreed to pay, at its own expense, the amount, if any, by which the
aggregate amount of recurring general and administrative expenses of HRP exceed
$2,500,000 per year (the "Expense Limitation") in the initial 24 months of HRP's
operations (November 1, 1990 through October 31, 1992), such period commencing
on the date of the Exchange. The Expense Limitation did not apply with respect
to expenses incurred that were non-recurring in nature. Based on general and
administrative expenses incurred during fiscal year 1993, HRC recorded an
expense of $129,000 pursuant to such Expense Limitation.
On June 1, 1991, the Company's HMC subsidiary purchased the property
management contracts from Equitec which related to the HRP properties for
$2,475,000. Equitec had retained the rights to manage the HRP properties for a
three-year period after the Exchange. The property management contracts
encompass day-to-day property management responsibilities, for which HMC
receives management fees, leasing commissions and certain other fees. HMC earned
fees and commissions from HRP and certain third parties during fiscal years
1995, 1994 and 1993 of $3,470,000, $3,489,000 and $5,467,000, respectively.
NOTE 15 -- ORGANIZATION AND OPERATIONS OF HALLWOOD ENERGY CORPORATION
Organization. Effective May 4, 1990, and prior to the completion of a
consolidation of various partnership interests by HEP on May 9, 1990, the
Company acquired a majority interest in Hallwood Energy Corporation ("HEC")
through a step acquisition (as that concept is referred to in Accounting
Principles Bulletin No. 16). As of July 31, 1989, the Company owned
approximately 11% of HEC (38% assuming conversion of preferred stock) and
accounted for the investment under the equity method. On May 4, 1990, the
Company converted its 44,846 shares of HEC's Series D preferred stock into
17,938,400 shares of common stock. No consideration was paid by the Company in
connection with the conversion other than the surrender of its Series D
preferred stock. The Company also purchased 8,000,000 shares of HEC common stock
in consideration for the cancellation of the principal amount of the $1,500,000
note receivable from HEC, all pursuant to the terms of a letter agreement dated
May 3, 1990. As a result of (i) the stock issuance from these two transactions,
(ii) an additional purchase of a small amount of shares, (iii) a 1-for-50
reverse split, and (iv) a conversion of 356,000 shares of its common stock for
356,000 shares of Series E preferred stock, the Company now owns 240,605 shares
of common stock and 356,000 shares of Series E preferred stock of HEC. As a
result of subsequent purchases by HEC of its own stock for treasury, the Company
owns approximately 55% of the issued and outstanding shares of common stock of
HEC (75% on a fully diluted basis) as of July 31, 1995.
The $1,164,000 excess of the Company's investment over its proportionate
share of the net assets acquired is being amortized on the straight-line basis
over 15 years. HEC's results of operations have been included in the
consolidated statements of operations since May 1990, including recognition of
the minority interest portion of net income (loss) in the statement of
operations.
Operations. HEP has entered into financial contracts for hedging
transactions of between 3% and 45% of its forecasted oil production for the
years 1996 through 1999 at prices ranging from $15.08 per barrel to $17.12 per
barrel. HEP has also entered into hedging contracts of between 4% and 55% of its
forecasted gas production for the years 1996 through 1999 at prices ranging from
$1.49 per mcf to $2.05 per mcf.
48
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16 -- ORGANIZATION AND OPERATIONS OF BROOKWOOD COMPANIES INCORPORATED
Organization. Brookwood Companies Incorporated, a wholly owned subsidiary
of the Company ("Brookwood"), was formed to acquire certain assets and assume
certain liabilities of Coated Sales, Inc., a nylon textile converting and
finishing company, which had filed for protection on June 17, 1988 under chapter
11 of the Bankruptcy Code. Brookwood is a complete textile service firm that
develops and produces innovative fabrics and related products through
specialized finishing, treating and coating processes.
Operations. Brookwood maintains factoring agreements which provide that
receivables resulting from credit sales to customers, excluding the U.S.
Government, may be sold to the factor without recourse, subject to a commission
of 7/10% and the factor's prior approval. A significant majority of the
receivables are factored. Commissions paid to the factors were approximately
$335,000, $312,000 and $311,000 for the years ended July 31, 1995, 1994 and
1993, respectively.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Raw materials.................................................... $ 3,850 $ 2,641
Work in process.................................................. 3,398 4,055
Finished goods................................................... 8,208 6,214
------- -------
Total.................................................. $15,456 $12,910
======= =======
</TABLE>
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------
1995 1994
------- -------
<S> <C> <C>
Land............................................................. $ 391 $ 391
Buildings and improvements....................................... 4,263 4,234
Machinery and equipment.......................................... 6,239 5,739
Furniture, fixtures and fittings................................. 1,086 1,042
Construction in progress......................................... 1,872 994
------- -------
13,851 12,400
Less: Accumulated depreciation................................... (5,069) (4,099)
------- -------
Total.................................................. $ 8,782 $ 8,301
======= =======
</TABLE>
NOTE 17 -- RENTAL INCOME FROM OPERATING LEASES
The following is a schedule of minimum future rental income from
noncancelable operating leases as of July 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
JULY 31, AMOUNT
- ------------ -------
<S> <C> <C>
1996................................................................ $ 750
1997................................................................ 750
1998................................................................ 750
1999................................................................ 750
2000................................................................ 750
Thereafter.......................................................... 10,240
-------
Total..................................................... $13,990
=======
</TABLE>
49
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental income is derived from the leasing of space in commercial real
estate properties. The leases are operating leases expiring in various years
through 2015. A portion of the leases contain provisions for tenant
reimbursements of certain real estate and operating costs.
NOTE 18 -- RELATED PARTY TRANSACTIONS
Hallwood Securities Limited. Pursuant to an agreement dated September 29,
1992 (the "1992 Consulting Agreement"), Hallwood Securities Limited ("Limited"),
a corporation with which Anthony J. Gumbiner, the Company's chairman and chief
executive officer and Brian M. Troup, the Company's president and chief
operating officer, are associated, provided consulting services to the Company
with respect to strategic and tactical advice regarding the Company's assets and
investments and proposed transactions involving the Company and its affiliates.
As compensation for its services under the 1992 Consulting Agreement, Limited
was paid a fee of $600,000 (excluding reimbursement for out-of-pocket and other
reasonable expenses of Limited) for each of the fiscal years ended July 31, 1994
and 1993. The 1992 Consulting Agreement terminated July 31, 1994.
HSC Financial Corporation. Effective August 1, 1994, the Company entered
into an agreement (the "1994 Consulting Agreement"), with HSC Financial
Corporation ("HSC"), formerly Hallwood Financial Corporation, a corporation with
which Messrs. Gumbiner and Troup are associated, pursuant to which HSC agreed to
provide international consulting and advisory services to the Company and its
affiliates for an annual fee of $350,000, excluding reimbursement for
out-of-pocket and other reasonable expenses. The initial term of the 1994
Consulting Agreement expired July 31, 1995, but is automatically extended for
successive one-year terms, unless notice of termination is provided by either
party no less than thirty-one days prior to the expiration of the end of its
term or an extension thereof.
Also effective August 1, 1994, Hallwood Petroleum, Inc. ("HPI"), a wholly
owned subsidiary of HEP, entered into a Compensation Agreement with Mr.
Gumbiner, pursuant to which Mr. Gumbiner is to consult with and assist HPI and
its energy affiliates in connection with their present and future international
activities. HPI is to pay Mr. Gumbiner annual compensation of $250,000. The
Compensation Agreement is to continue in effect until terminated by either party
on not less than six month's notice.
In July 1993, the Company renewed a financial consulting agreement with
HEC, pursuant to which the Company or Limited furnished consulting and advisory
services to HEC and its affiliates, including HEP. The Company assigned this
contract to Limited at its inception. Under the terms of the financial
consulting agreement, HEC and its affiliates paid $300,000 to the Company in
June 1993 and 1992, of which approximately $7,000 in each fiscal year was paid
by HEC, and the remainder by HEP and other affiliates of HEC. This agreement was
terminated June 30, 1994.
The Company entered into a new financial consulting agreement with HPI,
dated as of June 30, 1994, which provides that the Company or its agent shall
provide consulting services to HPI for compensation at the rate of $300,000 per
year. The Compensation Committee determined that these services would be most
appropriately provided by HSC, acting as the Company's agent, through the
services of Mr. Gumbiner and Mr. Troup, and that as consideration for these
services the Company would pay to HSC the fee to which the Company is entitled
under the agreement. Of the $300,000 payments made in June 1995 and 1994,
approximately $9,000 and $7,000, respectively, was paid by HEC, and the
remainder by HEP and other affiliates of HEC.
Pursuant to an existing agreement, the Company reimburses HSC for
reasonable and necessary expenses in providing office space and administrative
services used by Mr. Gumbiner. For the fiscal years ended July 31, 1995, 1994
and 1993, the Company reimbursed HSC in the amount of $275,000, $271,000 and
$259,000, respectively. Of the amounts paid in fiscal 1995, approximately
$69,000 was paid by the Company, $3,000 was paid by HEC and the remainder by HEP
and other affiliates of HEC. Of the amounts paid in fiscal 1994, approximately
$65,000 was paid by the Company, $3,000 by HEC and the balance by HEP and other
affiliates of HEC.
50
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other. The Company shares common offices, facilities and staff with
Stanwick Holdings, Inc. ("Stanwick"). The Company pays the common general and
administrative expenses of the two entities and charges Stanwick a management
fee for its allocable share of the expenses. For the fiscal years ended July 31,
1995, 1994 and 1993, Stanwick reimbursed the Company $25,000, $25,000 and
$31,000, respectively. The Company was owed $6,000 from Stanwick at July 31,
1995 and 1994, respectively. Stanwick is a subsidiary of Luxembourg-based
Hallwood Holdings S.A. ("HHSA"). Anthony J. Gumbiner and Brian M. Troup are
directors of HHSA. Melvin J. Melle, is chief financial officer of HHSA and
Stanwick.
NOTE 19 -- LITIGATION, CONTINGENCIES AND COMMITMENTS
Litigation. The Company, certain of its affiliates and others were named as
defendants in several lawsuits relating to various transactions, in which it or
its affiliated entities participated. In addition, in connection with a formal
investigation by the Securities and Exchange Commission, the Company and certain
of its officers and directors have provided testimony and produced documents
regarding the Company's sale of shares of ShowBiz in June 1993. The Company is
also a defendant in a separate lawsuit relating to these sales. The majority of
these matters have been settled and negotiations with respect to the settlement
of certain of the other matters are in process, as described below.
Nevertheless, the remaining lawsuits seek or may seek substantial damages from
the Company and the other defendants, and there can be no assurances as to the
ultimate outcome of these actions. The Company intends to defend, or in some
cases negotiate to settle, the remaining actions and does not currently
anticipate that such actions will have a material adverse effect on its
financial condition, results of operations or cash flows beyond the reserves the
Company has established for such purposes.
In August 1995, the United States District Court for the Southern District
of New York issued a Final Order approving the settlement of the purported class
action entitled In Re: Hallwood Energy Partners, L.P. Securities Litigation. The
consolidated complaint asserted claims for alleged violations of securities laws
based on alleged misstatements and omissions in the prospectus and supplemental
proxy material relating to the merger of Energy Development Partners, Ltd. into
HEP. The terms of the settlement include payments by HEP of $2,870,000 in cash
and units of HEP with a market value of $5,330,000. In September 1995, HCRC
exercised an option to purchase all of the units issued in the settlement for
$5,330,000.
In February 1995, the Company entered into agreements to settle the
following three lawsuits styled: (1) Louis G. Reese, Inc. et al v. The Hallwood
Group Incorporated et al, which was filed in the Fourteenth District Court of
Dallas County, Texas; (2) European American Reinsurance Corporation v. The
Hallwood Group Incorporated et al, which was also filed in the Fourteenth
District Court of Dallas County, Texas; and (3) Hermitage Hotel, Ltd, L.P. v.
The Hallwood Group Incorporated et al, which was filed in the 101st District
Court of Dallas County, Texas. Pursuant to these settlement agreements, the
Company paid an aggregate of $425,000 in cash and issued 250,000 shares of a
newly designated series of preferred stock (the "Series B Preferred Stock") to
the plaintiffs in these lawsuits in exchange for the dismissal of all of these
actions with prejudice. The holders of Series B Preferred Stock are entitled to
dividends in an annual amount of $0.20 per share. For the first five years,
dividends are cumulative and the payment of cash dividends on any common stock
is prohibited before the full payment of any accrued dividends. Thereafter,
dividends will accrue and be payable only if and when declared by the Board of
Directors. The Series B Preferred Stock also has dividend and liquidation
preferences to the Company's common stock. The shares are subject to mandatory
redemption fifteen years from the date of issuance at 100% of the liquidation
preference of $4.00 per share plus all accrued and unpaid dividends, and may be
redeemed at any time on the same terms at the option of the Company. The holders
of the Series B Preferred Stock are not entitled to vote on matters brought
before the Company's stockholders, except as otherwise provided by law.
In January 1995, the Company settled the lawsuit styled Third National Bank
in Nashville, Trustee v. The Hallwood Group Incorporated filed in the United
States District Court for the Middle District of Tennessee. The court dismissed
this action with prejudice, the terms of which are confidential. The Company did
not incur any additional charge in excess of the amount previously reserved for
this matter.
51
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is a named defendant in Nitti v. Frank, et al, No. 93-06753, in
the 68th District Court of Dallas County, Texas, in which the plaintiff,
purporting to act derivatively on behalf of ShowBiz, contends that the
defendants 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 1993. Plaintiffs
demand restitution and/or unspecified damages and punitive and exemplary
damages. A Notice of Proposed Settlement of Derivative Action, including a
settlement of all the claims in this matter at no cost to the Company, was filed
with the court on September 23, 1995 and is awaiting final court approval.
On September 28, 1994 the Court in the In re Equitec Rollup Litigation and
Aaberg, et al. v. Equitec Financial Group, Inc., et al. actions entered a final
order approving the settlement of these actions. In connection with the
settlement, the Company issued a promissory note in the principal amount of
$1,500,000 to an agent for the plaintiffs. The note is payable over a period of
two years in equal monthly installments and bears interest at the fixed rate of
7 1/2% per annum. The note is guaranteed by Smith Barney Shearson Holding, Inc.
("Smith Barney"). The Company has agreed to reimburse Smith Barney for any
payment 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
HEC to secure this reimbursement agreement. The Company 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 HEC held or acquired by the
Company if necessary to maintain this ratio.
On April 23, 1993, a unitholder of Hallwood Consolidated Partners, L.P.
filed a class action styled Tappe v. Hallwood Consolidated Resources
Corporation, el al., in the Court of Chancery of the State of Delaware
challenging the fairness and legality of the conversion of Hallwood Consolidated
Partners, L.P. ("HCP") into Hallwood Consolidated Resources Corporation
("HCRC"), a publicly-traded oil and gas company of which HEP is a 40%
stockholder. In general terms, plaintiff alleges that defendants HCRC, HCP,
Hallwood Oil and Gas, Inc., HEP and Hallwood Petroleum, Inc., sought to convert
HCP into HCRC on terms that are unfair to HCP unitholders. The complaint alleges
that Hallwood Oil and Gas, Inc. ("HOG"), the general partner of HCP,
misappropriated to itself a disproportionate allocation of common stock and
unfairly converted a revenue interest into equity. In addition, the suit alleges
that HOG had a conflict of interest that placed it at odds with the interests of
the limited partners and that it failed to appoint a special committee or
unaffiliated entity to negotiate on behalf of the limited partners or review the
conversion. Plaintiff also claims that the Consent Statement/Prospectus dated
February 14, 1993 relating to the conversion is materially misleading and fails
to disclose certain information. Defendants answered the consolidated complaint
on May 27, 1993, denying the material allegations thereof. Discovery is
proceeding in the action.
The Company and its subsidiaries are from time to time involved in various
other legal proceedings in the ordinary course of their respective businesses.
Management believes that the resolution of these matters will not have a
material adverse effect on the financial position, results of operations or cash
flows of the Company.
Contingencies. The Company has committed to make additional contributions
to the capital of HRC, the general partner of HRP, upon demand, up to a maximum
aggregate amount of $13,118,000, subject to the terms of a subscription
agreement, to the extent HRC has insufficient capital to satisfy creditors of
HRP. As of the date of this report no such demands have been made.
The Company remains contingently liable for L501,103 ($800,000 at July 31,
1995) plus interest at the rate of 12% to maturity (July 31, 1997) on the 12%
Convertible Notes ("Notes") issued by the Company's former wholly owned
subsidiary, Atlantic Metropolitan (U.K.) plc ("Atlantic"). Grainger Trust plc
("Grainger") assumed the obligations to make payment of interest and principal
on the Notes in connection with its purchase of the Company's investment in
Atlantic in fiscal 1988. The indenture under which the Notes were originally
issued limits the amount of borrowings or the issuance of other indebtedness by
the Company or its subsidiaries to two and one-half times the Adjusted
Stockholders' Equity (as defined in such indenture). The Company has notified
the indenture trustee that it is in default of this covenant. The
52
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company believes that this default is not materially prejudicial to the holders
of the Notes, since it is acting solely as a guarantor. The trustee has not
indicated what action, if any, it may take in response to this default.
Commitments. Total lease expense was $4,991,000, $4,095,000 and $3,665,000
for fiscal 1995, 1994 and 1993, respectively. The Company leases certain hotel
property, including land, buildings and equipment, executive office facilities
at several locations, and certain textile manufacturing equipment. The leases
generally require the Company to pay property taxes, insurance and maintenance
of the leased assets. Lease expense on certain office facilities is incurred on
behalf of partnerships, of which the Company is general partner and is
substantially reimbursed by such partnerships. Certain of the hotel property
leases requires the payment of rent contingent upon hotel revenue. For fiscal
1995, 1994 and 1993, the contingent rent was $689,000, $451,000 and $303,000,
respectively.
At July 31, 1995, aggregate net minimum annual rental commitments under
noncancelable operating leases having an initial or remaining term of more than
one year, were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
JULY 31, AMOUNT
- ------------ -------
<S> <C> <C>
1996................................................................ $ 4,410
1997................................................................ 3,718
1998................................................................ 1,857
1999................................................................ 934
2000................................................................ 224
-------
Total..................................................... $11,143
=======
</TABLE>
53
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20 -- BUSINESS BY INDUSTRY SEGMENT
The Company's business by industry segment is summarized below (in
thousands):
<TABLE>
<CAPTION>
REAL TEXTILE ASSOCIATED
ESTATE ENERGY PRODUCTS HOTELS COMPANIES OTHER CONSOLIDATED
------- ------- -------- ------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
Total revenue........................ $ 4,595 $ 5,359 $77,808 $24,898 $ (171) $ 737 $113,226
======= ======= ======= ======= ======== ======= ========
Operating income (loss)*............. $ 1,351 $ (216) $ 204 $ 2,823 $ (858) $ -- $ 3,304
======= ======= ======= ======= ======== ======= ========
Unallocable expenses, net............ $(7,421) (7,421)
=======
--------
Loss before income taxes............. $ (4,117)
========
Identifiable assets, July 31, 1995... $18,887 $14,428 $37,340 $13,253 $ 16,511 $ -- $100,419
Cash allocable with segment.......... 253 2,022 226 322 -- 3,134 5,957
------- ------- ------- ------- -------- ------- --------
$19,140 $16,450 $37,566 $13,575 $ 16,511 $ 3,134 $106,376
======= ======= ======= ======= ======== =======
Corporate assets..................... $ 5,999 5,999
=======
--------
Total assets, July 31, 1995.......... $112,375
========
Depreciation, depletion, amortization
and impairment..................... $ 972 $ 2,402 $ 1,043 $ 2,429 $ -- $ -- $ 6,846
======= ======= ======= ======= ======== ======= ========
Capital expenditures/acquisitions.... $ 12 $ 36 $ 1,465 $ 1,094 $ -- $ -- $ 2,607
======= ======= ======= ======= ======== ======= ========
1994
Total revenue........................ $ 4,399 $ 6,234 $71,624 $20,896 $ 1,356 $ 2,193 $106,702
======= ======= ======= ======= ======== ======= ========
Operating income*.................... $ 112 $ 822 $ 863 $ 566 $ 870 $ -- $ 3,233
======= ======= ======= ======= ======== ======= ========
Unallocable expenses, net............ $(5,544) (5,544)
=======
--------
Loss before income taxes............. $ (2,311)
========
Identifiable assets, July 31, 1994... $17,473 $17,286 $34,916 $26,455 $ 16,444 $ -- $112,574
Cash allocable with segment.......... 1,188 804 170 1,559 -- 3,489 7,210
------- ------- ------- ------- -------- ------- --------
$18,661 $18,090 $35,086 $28,014 $ 16,444 $ 3,489 $119,784
======= ======= ======= ======= ======== =======
Corporate assets..................... $ 7,541 7,541
=======
--------
Total assets, July 31, 1994.......... $127,325
========
Depreciation, depletion, amortization
and impairment..................... $ 1,060 $ 2,018 $ 1,070 $ 2,104 $ -- $ -- $ 6,252
Capital expenditures/acquisitions.... $ 44 $ 147 $ 1,193 $ 1,288 $ -- $ -- $ 2,672
======= ======= ======= ======= ======== ======= ========
1993
Total revenue........................ $ 6,586 $ 8,455 $70,185 $17,818 $ 12,232 $ 854 $116,130
======= ======= ======= ======= ======== ======= ========
Operating income*.................... $ 2,617 $ 1,692 $ 1,507 $ 235 $ 7,175 $ -- $ 13,226
======= ======= ======= ======= ======== =======
Unallocable expenses, net............ $(9,153) $ (9,153)
=======
--------
Income before income taxes........... $ 4,073
========
Identifiable assets, July 31, 1993... $19,104 $21,710 $36,055 $18,459 $ 17,983 $ -- $113,311
Cash allocable with segment.......... 80 1,850 615 1,545 -- 9,795 13,885
------- ------- ------- ------- -------- ------- --------
$19,184 $23,560 $36,670 $20,004 $ 17,983 $ 9,795 $127,196
======= ======= ======= ======= ======== =======
Corporate assets..................... $11,182 $ 11,182
=======
--------
Total assets, July 31, 1993.......... $138,378
========
Depreciation, depletion, amortization
and impairment..................... $ 1,324 $ 2,115 $ 1,112 $ 1,610 $ -- $ -- $ 6,161
======= ======= ======= ======= ======== ======= ========
Capital expenditures/acquisitions.... $ 110 $ 94 $ 795 $ 1,048 $ -- $ -- $ 2,047
======= ======= ======= ======= ======== ======= ========
</TABLE>
- ---------------
* Operating income of the textile products industry segment is net of $16, $83
and $160 of intercompany interest expense in fiscal 1995, 1994 and 1993,
respectively.
54
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 21 -- SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The results of operations for the quarters ended in fiscal 1995 and 1994
are summarized below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTERS ENDED IN FISCAL 1995
---------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1994 1995 1995 1995
----------- ----------- --------- --------
<S> <C> <C> <C> <C>
Operating revenues.......................... $25,744 $27,659 $ 31,117 $ 28,706
Gross profit................................ 2,130 3,021 3,067 2,178
Net loss.................................... (1,262) (2,419) (73) (1,050)
Net loss per share.......................... (0.92) (1.76) (0.05) (0.77)
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED IN FISCAL 1994
---------------------------------------------------
OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1993 1994 1994 1994
----------- ----------- --------- --------
<S> <C> <C> <C> <C>
Operating revenues.......................... $25,541 $22,864 $ 29,645 $ 28,652
Gross profit................................ 2,749 2,701 2,703 2,364
Net income (loss)........................... (1,340) (447) 540 (3,143)
Net income (loss) per share................. (0.96) (0.36) 0.40 (2.28)
</TABLE>
Fiscal 1995. Significant transactions which resulted in the fiscal 1995
fourth quarter net loss of $1,050,000 were: (i) a $200,000 write-down on the
office-retail property and (ii) a $143,000 extraordinary gain from debt
extinguishment.
Fiscal 1994. Significant transactions which resulted in the fiscal 1994
fourth quarter net loss of $3,143,000 were: (i) a deferred tax charge of
$1,550,000, which was primarily a result of a significant decline in the value
of certain assets considered in the Company's SFAS No. 109 tax planning
strategies, and (ii) additional accrual in the amount of $1,100,000 related to
pending litigation matters.
NOTE 22 -- EMPLOYEE BENEFIT RETIREMENT PLANS
In August 1989, the Company established a contributory, tax-deferred 401(k)
tax favored savings plan covering substantially all of its non-union employees.
The original plan provided that eligible employees may contribute up to 15% of
their compensation to the plan, and the Company would match 50% of its
employees' contributions up to the first 6% contributed. Amounts contributed by
employees are 100% vested and non-forfeitable. The plan was amended on February
1, 1992 and August 1, 1993 to (i) modify eligibility requirements; (ii) make the
Company's matching contribution discretionary, to be determined annually by the
Company's Board of Directors; (iii) exclude the Company's hotel hourly employees
from a matching contribution; (iv) exclude highly compensated employees from a
matching contribution, although this group receives a compensatory bonus in lieu
of such contribution and diminution of related benefits; and (v) spin-out
Brookwood employees into a separate plan. The Company matching contributions
vest at a rate of 20% per year of service and become fully vested after five
years. Employees of the HRC, HMC and various hotel subsidiaries also participate
in the Company's 401(k) plan. HEC has a separate 401(k) plan which is similar to
the Company's plan. Employer contributions paid on behalf of HRC and HEC
employees are substantially paid by the respective real estate and energy master
limited partnerships. The Company's contributions to the plan for the fiscal
years ended July 31, 1995, 1994 and 1993, excluding contributions from the HRC
and HEC subsidiaries to the extent paid by the master limited partnership, were
$150,000, $126,000 and $133,000, respectively.
Brookwood's union employees belong to a pension fund maintained by their
union. The Company contributes $75 per month per employee to the fund. Total
contributions for the fiscal years ended 1995, 1994 and 1993 were $198,000,
194,000 and $186,000, respectively. At September 30, 1994, the date of the
latest
55
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
actuarial valuation, Brookwood was not subject to a withdrawal liability upon
termination of the pension plan because it was fully funded.
NOTE 23 -- SUBSEQUENT EVENT
On October 12, 1995, the Board of Directors of the Company approved a
change in the Company's fiscal year end from July 31 to December 31 to be
effective December 31, 1995. The Company will file its Annual Report on Form
10-K for its fiscal year ended July 31, 1995, and a Quarterly Report on Form
10-Q for the quarter ending October 31, 1995. Its next periodic report to be
filed with the Securities and Exchange Commission will be a transition report on
Form 10-Q to be filed with respect to the period ending December 31, 1995.
56
<PAGE> 59
THE HALLWOOD GROUP INCORPORATED
SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION
DECEMBER 31, 1994
(UNAUDITED)
The following reserve quantity and future net cash flow information for the
Company's share of HEC's and HEP's oil and gas properties represents proved
reserves which are located in the United States. The reserve estimates presented
have been prepared by in-house petroleum engineers and the majority of these
reserves have been reviewed by independent petroleum engineers. The
determination of oil and gas reserves is based on estimates which are highly
complex and interpretive. The estimates are subject to continuing change as
additional information becomes available.
The standardized measure of discounted future net cash flows provides a
comparison of HEC's proved oil and gas reserves from year to year. No
consideration has been given to future income taxes since HEC's tax basis and
net operating loss carryforwards exceed future net cash flows. Under the
guidelines set forth by the Securities and Exchange Commission, the calculation
is performed using year-end prices. At December 31, 1994, oil and gas prices
averaged $15.81 per bbl of oil and $1.82 per mcf of gas for HEC, including its
interest in HEP. Future production costs are based on year-end costs and include
severance taxes. This standardized measure is not necessarily representative of
the market value of HEC's properties.
As of December 31, 1994, HEC no longer includes its share of internal
overhead charges attributable to wells operated by Hallwood Petroleum, Inc. in
lease operating expense for reserve calculation purposes. These overhead costs
are now included in general and administrative expenses in HEC's financial
statements. This change resulted in an upward revision of HEC's reserves during
1994 of 65,000 barrels of oil, 796,000 mcf of gas and $895,000 of discounted
future net cash flows. This change was implemented to conform HEC's reserve
calculation methodology to what management believes is a more accurate
representation of reserves and is the most common practice of HEC's industry
peers.
HEC's standardized measure of discounted future net cash flows has been
increased by $394,000 at December 31, 1994 for its share of the effect of HEP's
hedge contracts. This amount represents the difference between year-end oil and
gas and the hedge contract prices multiplied by the quantities subject to
contract, discounted 10%.
Updated information relating to reserve quantity and future net cash flow
information was not available at July 31, 1995, the Company's year-end,
accordingly, the reserve quantity and future net cash flow information is
presented as of December 31, 1994, HEC's year-end and the most recent date for
which information is presented. During the period from December 31, 1994 to July
31, 1995 gas prices decreased. While this decline in gas prices will negatively
impact the future net cash flow information contained herein, management
evaluated this impact and determined that as no cost center ceiling problem
would result from this decline in gas prices the impact to the consolidated
financial statements of the Company would not be material.
57
<PAGE> 60
THE HALLWOOD GROUP INCORPORATED
RESERVE QUANTITIES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
GAS OIL
MCF BBLS
------ -----
<S> <C> <C>
PROVED RESERVES:
Balance, December 31, 1991................................................ 21,281 1,115
Extensions and discoveries................................................ 2,385 156
Revision of previous estimates............................................ (468) 51
Sales of reserves in place................................................ (1,657) (82)
Purchases of reserves in place............................................ 40 4
Production................................................................ (2,354) (137)
Effect of conversion(a)................................................... (1,854) (169)
------ -----
Balance, December 31, 1992................................................ 17,373 938
Extensions and discoveries................................................ 774 66
Revision of previous estimates(b)......................................... (1,993) (205)
Sales of reserves in place................................................ (460) (37)
Purchases of reserves in place............................................ 737 70
Production................................................................ (2,005) (110)
------ -----
Balance, December 31, 1993................................................ 14,426 722
Extensions and discoveries................................................ 636 104
Revision of previous estimates............................................ (412) 105
Sales of reserves in place................................................ (96) (9)
Purchases of reserves in place............................................ 74 14
Production................................................................ (1,932) (128)
------ -----
Balance, December 31, 1994................................................ 12,696 808
====== =====
PROVED DEVELOPED RESERVES:
Balance, December 31, 1992................................................ 15,954 874
====== =====
Balance, December 31, 1993................................................ 12,779 666
====== =====
Balance, December 31, 1994................................................ 12,061 752
====== =====
</TABLE>
- ---------------
(a) HEP's 40% owned affiliate, Hallwood Consolidated Resources Corporation
("HCRC") was converted from a limited partnership to a corporation (the
"Conversion") during 1992. The effect of the Conversion was to change HEP's
method of accounting for its investment in HCRC from the proportionate
consolidation method to the equity method, which reduces HEP's reserves by
its 40% ownership interest in HCRC.
(b) The majority of these revisions in 1993 relate to the G.S. Boudreaux Estate
#1 Well which, throughout 1993, produced an increasing amount of water,
resulting in higher operating costs and less consistent production rates.
58
<PAGE> 61
THE HALLWOOD GROUP INCORPORATED
STANDARDIZED MEASURE
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
DESCRIPTION 1994 1993 1992
- ------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Future cash flows............................................ $ 37,000 $ 44,000 $ 52,000
Future production and development costs...................... (13,000) (13,000) (14,000)
-------- -------- --------
Future net cash flows before discount........................ 24,000 31,000 38,000
10% discount to present value................................ (7,000) (10,000) (13,000)
-------- -------- --------
Standardized measure of discounted future net cash flows..... $ 17,000 $ 21,000 $ 25,000
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
DESCRIPTION 1994 1993 1992
- ---------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Standardized measure of discounted future net cash flows at
beginning of year............................................. $21,000 $25,000 $26,000
Sales of oil and gas produced, net of
production costs.............................................. (4,323) (4,528) (5,047)
Net changes in prices and production costs...................... (3,757) 1,150 3,374
Extensions, discoveries and other additions, net of future
production costs.............................................. 1,239 1,361 3,632
Changes in estimated future development costs................... (575) (643) (623)
Development costs incurred...................................... 599 585 704
Revisions of previous quantity estimates(a)..................... 214 (3,750) (167)
Purchases of reserves in place.................................. 155 1,346 70
Sales of reserves in place...................................... (148) (793) (2,350)
Effect of Conversion(b)......................................... -- -- (4,676)
Accretion of discount........................................... 2,100 2,500 2,600
Changes in production rates and other........................... 496 (1,228) 1,483
------- ------- -------
Standardized measure of discounted future net cash flows at end
of year....................................................... $17,000 $21,000 $25,000
======= ======= =======
</TABLE>
- ---------------
(a) See Note (b) to the Reserve Quantities Schedule.
(b) See Note (a) to the Reserve Quantities Schedule.
59
<PAGE> 62
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
We have audited the consolidated financial statements of The Hallwood Group
Incorporated and its subsidiaries at July 31, 1995 and 1994 and for each of the
three years in the period ended July 31, 1995 and have issued our report thereon
dated October 12, 1995, which report is included elsewhere in this Form 10-K.
Our audits also included the financial statement schedules of The Hallwood Group
Incorporated and its subsidiaries, listed in the accompanying index at Item
14(a)2. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 12, 1995
60
<PAGE> 63
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JULY 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Investments in subsidiaries............................................. $ 38,843 $ 51,295
Investments in associated companies..................................... 16,511 16,444
Deferred tax asset, net................................................. 5,429 5,900
Investment in real estate affiliate..................................... 4,351 --
Cash and cash equivalents............................................... 2,964 3,304
Receivables and other assets............................................ 423 1,187
Mortgage loans, net..................................................... 61 69
Real estate properties, net............................................. -- 90
-------- --------
Total Assets.................................................. $ 68,582 $ 78,289
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
7% Collateralized Senior Subordinated Debentures........................ $ 25,703 $ 28,718
13.5% Subordinated Debentures........................................... 22,902 22,902
Loans payable........................................................... 10,250 12,000
Accounts payable, accrued interest and other accrued expenses........... 5,404 6,692
-------- --------
Total Liabilities............................................. 64,259 70,312
Redeemable preferred stock.............................................. 1,000 --
Common stock............................................................ 160 639
Additional paid-in capital.............................................. 57,142 56,442
Accumulated deficit..................................................... (47,698) (42,894)
Foreign currency translation adjustment................................. 329 86
Treasury stock.......................................................... (6,610) (6,296)
-------- --------
Total Stockholders' Equity.................................... 3,323 7,977
-------- --------
Total Liabilities and Stockholders' Equity.................... $ 68,582 $ 78,289
======== ========
</TABLE>
The "Notes To Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant".
61
<PAGE> 64
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
INCOME
Intercompany income from subsidiaries
Dividends.................................................. $ 2,292 $ 1,814 $ 2,500
Management fees............................................ 1,988 1,596 2,187
Interest income............................................ 1,797 2,132 1,205
Equity in net income (loss) of subsidiaries................... (2,607) (27) 490
Fee income.................................................... 425 150 354
Income from investments in associated companies/affiliates.... (292) 1,197 11,949
Interest on short-term investments............................ 113 114 290
Other income.................................................. 47 18 --
Interest and discounts from mortgage loans.................... 6 17 218
Hotel and real estate revenues................................ -- -- 1,743
------- ------- -------
Total income.......................................... 3,769 7,011 20,936
EXPENSES
Interest expense.............................................. 5,116 4,892 7,588
Administrative expenses....................................... 3,332 2,775 3,025
Intercompany expenses of subsidiaries
Management fees............................................ 300 300 300
Interest expense........................................... 38 38 38
Provision for losses.......................................... 11 1,647 305
Hotel and real estate operating expenses...................... 11 120 1,478
Loss from asset held for sale................................. -- -- 4,118
Depreciation.................................................. -- -- 165
------- ------- -------
Total expenses........................................ 8,808 9,772 17,017
------- ------- -------
Income (loss) before income taxes and extraordinary gain...... (5,039) (2,761) 3,919
Income taxes.................................................. 418 2,277 5,344
------- ------- -------
Loss before extraordinary gain................................ (5,457) (5,038) (1,425)
Extraordinary gain from extinguishment of debt................ 653 648 --
------- ------- -------
NET LOSS........................................................ $(4,804) $(4,390) $(1,425)
======= ======= =======
</TABLE>
The "Notes To Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
62
<PAGE> 65
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ $(2,718) $ (572) $ 3,639
CASH FLOWS FROM INVESTING ACTIVITIES
Return of (additional) investment in subsidiaries............ 9,774 1,480 (4,118)
Investments in associated companies/affiliates............... (4,473) (8) (427)
Proceeds from sale of marketable securities.................. 610 -- --
Proceeds from sale of real estate............................ 79 5 97
Disbursements related to asset held for sale................. -- (5,721) (1,818)
Proceeds from sale of investments in associated companies.... -- 1,250 13,504
Repayment of investments in associated companies............. -- -- 4,768
Investments in marketable securities......................... -- -- (776)
Capital expenditures and acquisition of real estate and
hotels.................................................... -- -- (96)
------- ------- --------
Net cash provided by (used in) investing
activities......................................... 5,990 (2,994) 11,134
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of 7% Debentures.................................. (1,845) (1,526) --
Repayment of bank borrowings and loans payable............... (1,750) (6,150) (24,158)
Purchase of fractional shares -- reverse split............... (17) -- --
Proceeds from bank borrowings and loans payable.............. -- 6,000 14,000
Repurchase of 13.5% Debentures............................... -- -- (6,461)
Net change in restricted cash for financing activities....... -- -- 3,000
Proceeds from exercise of stock options...................... -- -- 94
------- ------- --------
Net cash provided by (used in ) financing
activities......................................... (3,612) (1,676) (13,525)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... (340) (5,242) 1,248
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................... 3,304 8,546 7,298
------- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR......................... $ 2,964 $ 3,304 $ 8,546
======= ======= ========
</TABLE>
The "Notes To Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
63
<PAGE> 66
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Supplemental schedule of non-cash 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>
YEARS ENDED JULY 31,
---------------------------
DESCRIPTION 1995 1994 1993
- ------------------------------------------------------------------ ------ ------ -------
<S> <C> <C> <C>
Effect of reverse split on common stock/additional paid in
capital......................................................... $ 479 $ -- $ --
Recording of proportionate share of stockholders' equity
transactions of ShowBiz......................................... 238 1,646 --
Issuance of promissory note payable in connection with Integra
bankruptcy...................................................... -- 4,000 --
Issuance of note payable in connection with litigation
settlement...................................................... -- 1,500 --
Renegotiate loan payable to reduced amount........................ -- 901 --
Exchange of 13.5% Debentures for 7% Debentures.................... -- -- 27,481
Payment in-kind of annual interest on 13.5% Debentures............ -- -- 6,792
Transfer of non-cash assets to subsidiary, net of liabilities..... -- -- 5,787
Unrecognized gain from completion of Bond Exchange and
Offers to Purchase for Cash..................................... -- -- 4,220
Supplemental disclosures of cash payments (in thousands):
Interest paid (including capitalized interest).................... $5,591 $5,452 $ 2,205
Income taxes paid................................................. 15 31 142
</TABLE>
The "Notes to Consolidated Financial Statements of The Hallwood Group
Incorporated and Subsidiaries" are an integral part of these statements.
See accompanying "Notes to Condensed Financial Information of Registrant."
64
<PAGE> 67
SCHEDULE I
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE 1 -- BASIS OF PRESENTATION
Pursuant to the rules and regulations of the Securities and Exchange
Commission, the condensed financial statements of the Registrant do not include
all of the information and notes normally included with financial statements
prepared in accordance with generally accepted accounting principles. In
addition, for purposes of this schedule, the investments in majority owned
subsidiaries are accounted for using the equity method of accounting which is
not in accordance with generally accepted accounting principles. It is,
therefore, suggested that these condensed financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Registrant's annual report as referenced in Form 10-K, Part II,
Item 8.
NOTE 2 -- DEBENTURE ISSUES AND LOANS PAYABLE
As further referenced to Notes 7 and 9 in the Consolidated Financial
Statements, the Registrant's debenture issues and loans payable are comprised of
the following:
<TABLE>
<CAPTION>
JULY 31,
------------------
DESCRIPTION 1995 1994
------------------------------------------------------------------ ------- -------
<S> <C> <C>
Debenture Issues
7% Debentures................................................... $25,703 $28,718
13.5% Debentures................................................ 22,902 22,902
------- -------
48,605 51,620
Loans Payable
Associated companies............................................ 9,000 10,000
Real estate..................................................... 1,250 2,000
------- -------
10,250 12,000
------- -------
Totals.................................................. $58,855 $63,620
======= =======
</TABLE>
Maturities over the next five years are as follows (in thousands):
1996 -- $5,750; 1997 -- $4,000; 1998 -- $2,427; 1999 -- $-0-; 2000 -- $20,881.
NOTE 3 -- LITIGATION, CONTINGENCIES AND COMMITMENTS
See Note 19 to the consolidated financial statements.
65
<PAGE> 68
SCHEDULE II
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE, CHARGED TO CHARGED BALANCE,
BEGINNING COSTS AND TO OTHER END OF
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
--------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
REAL ESTATE
Allowance for losses -- real estate:
Years ended July 31,
1995.......................... $ 1,010 $ 211 $ -- $ 184 (a)(b) $1,037
1994.......................... 980 -- -- 30 (a) 1,010
1993.......................... 1,111 100 -- (231)(a) 980
Allowance for losses -- mortgage
loans:
Years ended July 31,
1995.......................... 226 220 -- (446)(b) --
1994.......................... 442 -- -- (216)(b) 226
1993.......................... 1,334 240 -- (1,132)(b) 442
TEXTILE PRODUCTS
Allowance for losses -- accounts
receivable:
Years ended July 31,
1995.......................... 467 104 -- (110)(c) 461
1994.......................... 365 232 -- (130)(c) 467
1993.......................... 513 89 (69) (168)(c) 365
ASSOCIATED COMPANIES
Allowance for losses -- investments in
associated companies:
Years ended July 31,
1995.......................... -- -- -- -- --
1994.......................... 925 (30)(d) -- (895)(b) --
1993.......................... 650 275 -- -- 925
OTHER
Allowance for losses -- marketable
securities:
Years ended July 31,
1995.......................... 277 -- -- (147)(b) 130
1994.......................... 718 (1,556)(d) -- 1,115 (b) 277
1993.......................... 1,038 (35)(e) -- (285)(b) 718
</TABLE>
- ---------------
Notes:
(a) Change in foreign currency exchange rate
(b) Write-off upon disposition/foreclosure
(c) Write-off, net of recoveries
(d) Gain from disposition in excess of net book value, net of additional
expense
(e) Net recovery
66
<PAGE> 69
SCHEDULE III
THE HALLWOOD GROUP INCORPORATED (PARENT COMPANY)
REAL ESTATE AND ACCUMULATED DEPRECIATION
JULY 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT WHICH
INITIAL COST CARRIED AT CLOSE
TO COMPANY COSTS CAPI- OF PERIOD
----------------------------- TALIZED SUB- ---------------------------
BUILD- SEQUENT TO BUILD- ACCUMU- DEPRE-
INGS AND ACQUISITION INGS AND ULATED CIABLE
ENCUM- IMPROVE (IMPROVE- IMPROVE- DEPRECIA- DATE LIFE IN
BRANCES LAND MENTS MENTS) LAND MENTS TOTAL TION ACQUIRED YEARS
------- ------ -------- ------------- ------ -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE
OPERATIONS
Office-retail
United
Kingdom...... $4,747 $1,677 $ -- $ 9,066 $1,677 $ 9,066 $10,743 $ 1,775 1/86 40
HOTEL OPERATIONS
Sarasota,
Florida(a)..... (b) -- 5,100 1,987 -- 7,087 7,087 3,658 6/91 7
Tulsa,
Oklahoma....... 5,136 909 4,285 243 909 4,528 5,437 657 3/94 10
Oklahoma City,
Oklahoma(a).... (b) -- 1,525 1,298 -- 2,823 2,823 1,475 6/91 6
Miscellaneous
investments.... -- 50 1,401 305 50 1,706 1,756 258 3/94 various
------ ------- ------- ------ ------- ------- ------
Subtotal... 959 12,311 3,833 959 16,144 17,103 6,048
TEXTILE PRODUCTS
OPERATIONS
Industrial plant
Kenyon, Rhode
Island....... (b) 391 2,355 1,908 391 4,263 4,654 1,092 3/89 20
------ ------- ------- ------ ------- ------- ------
Totals.... $3,027 $14,666 $14,807 $3,027 $29,473 $32,500 $ 8,915
====== ======= ======= ====== ======= ======= ======
</TABLE>
Changes in real estate owned and accumulated depreciation for the years
ended July 31, 1995, 1994 and 1993 are summarized below (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------------------------------------------------------
1995 1994 1993
----------------------- ---------------------- ----------------------
REAL ACCUMULATED REAL ACCUMULATED REAL ACCUMULATED
ESTATE DEPRECIATION ESTATE DEPRECIATION ESTATE DEPRECIATION
-------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR......................... $ 43,619 $ 7,964 $35,307 $ 5,411 $37,582 $ 3,296
Additions during the year
Costs capitalized.............................. 1,135 -- 7,876 -- 1,295 --
Foreclosures................................... -- -- -- -- -- --
Depreciation................................... -- 2,893 -- 2,553 -- 2,115
Foreign exchange adjustment.................... 417 -- 441 -- (3,423) --
Deductions during the year
Sales.......................................... (12,671) (1,942) (5) -- (147) --
-------- ------- ------- ------- ------- -------
BALANCE, END OF YEAR............................... $ 32,500 $ 8,915 $43,619 $ 7,964 $35,307 $ 5,411
======== ======= ======= ======= ======= =======
</TABLE>
- ---------------
Notes:
See Note 1(g) to the Company's consolidated financial statements and Schedule
II for information regarding the allowance for possible losses.
The aggregate cost basis for real estate owned, for federal income tax
purposes, was approximately $1.9 million higher than the basis for financial
reporting purposes.
(a) Leasehold interest. Cost represents price paid for leasehold interest,
plus furnishings and equipment.
(b) The stock of the subsidiary which holds this asset is pledged as
collateral for the 7% Debentures as described in Note 9 to the Company's
consolidated financial statements.
67
<PAGE> 70
================================================================================
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 1994.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER 0-15782
SHOWBIZ PIZZA TIME, INC.
(Exact name of registrant as specified in its charter)
KANSAS 48-0905805
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4441 WEST AIRPORT FREEWAY
P.O. BOX 152077
IRVING, TEXAS 75015
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 258-8507
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.10 each
(Title of Class)
Class A Preferred Stock, par value $60.00 each
(Title of Class)
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 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At March 17, 1995, an aggregate of 12,275,177 shares of the
registrant's Common Stock, par value of $.10 each (being the registrant's only
class of common stock), were outstanding, and the aggregate market value
thereof (based upon the last reported sale price on March 17, 1995) held by
non-affiliates of the registrant was $ 91,521,632.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed
pursuant to Section 14(a) of the Act in connection with the registrant's 1995
annual meeting of shareholders, have been incorporated by reference in Part III
of this report.
================================================================================
<PAGE> 71
P A R T I
Item 1. Business
GENERAL
ShowBiz Pizza Time, Inc. (the "Company"), was incorporated in the State of
Kansas in 1980 and is engaged in the family restaurant/entertainment center
business. The Company considers this to be its sole industry segment.
The Company operated, as of March 17, 1995, 227 Chuck E. Cheese's Pizza (R)
("Chuck E. Cheese's") restaurants (including six restaurants managed by the
Company for others). In addition, as of March 17, 1995, franchisees of the
Company operated 101 Chuck E. Cheese's restaurants. Effective May 5, 1994, BHC
Acquisition Corporation ("BAC"), a wholly owned subsidiary of the Company, sold
its Monterey's Tex-Mex Cafe restaurants.
CHUCK E. CHEESE'S RESTAURANTS
BUSINESS DEVELOPMENT
Chuck E. Cheese's restaurants offer a variety of pizza, a salad bar, and
selected sandwiches and desserts and feature musical and comic entertainment by
life-size, computer-controlled robotic characters, family oriented games, rides
and arcade-style activities. The restaurants are intended to appeal to
families with children between the ages of 2 and 12. The Company opened its
first restaurant in March 1980.
The Company and its franchisees operate in a total of 44 states and the
Company has concentrated its ownership and operation of Chuck E. Cheese's
restaurants within a 28-state area. See "Item 2. Properties."
The following table sets forth certain information with respect to the
Chuck E. Cheese's restaurants owned by the Company (excludes restaurants
managed by the Company for others and franchised restaurants):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Average annual revenues
per restaurant (1) $1,206,000 $1,259,000 $1,354,000
Number of restaurants open at end
of period 220 209 176
Percent of total restaurant revenues:
Food and beverage sales 71.0% 71.6% 71.9%
Game sales 25.8% 25.3% 25.3%
Merchandise sales 3.2% 3.1% 2.8%
</TABLE>
- ---------------
(1) In computing these averages, only restaurants which were open for a
period greater than one year at the beginning of each respective year
were included (159, 139 and 129 restaurants in 1994, 1993, and 1992,
respectively). Fiscal year 1992 consisted of 53 weeks while each of
fiscal years 1994 and 1993 consisted of 52 weeks.
2
<PAGE> 72
Revenues from Chuck E. Cheese's restaurants owned by the Company increased
by 3.4% during 1994 over 1993, due to new restaurant openings during both
years.
The revenues from Chuck E. Cheese's restaurants are seasonal in nature.
The restaurants tend to generate more revenues during the first and third
fiscal quarters as compared to the second and fourth fiscal quarters.
Each Chuck E. Cheese's restaurant generally employs a general manager, one
or two managers, an electronic specialist who is responsible for repair and
maintenance of the robotic characters and games, and 45 to 75 food preparation
and service employees, most of whom work only part-time.
To maintain a unique and exciting environment in the restaurants, the
Company believes it is essential to reinvest capital through the evolution of
its games, rides and entertainment packages and continuing enhancement of the
facilities. The Company initiated a remodel program in 1986 under which all
Company operated restaurants were remodeled by the end of 1992. In 1994, the
Company initiated a "repositioning" program to evolve and expand its efforts to
significantly enhance its Chuck E. Cheese's restaurants. The Company completed
22 restaurants under this program in 1994 and currently intends to reposition
approximately 140 additional restaurants by the end of 1996.
The Company opened 12 and 33 new Chuck E. Cheese's restaurants in 1994 and
1993, respectively. The Company plans to open two to three new Chuck E.
Cheese's restaurants during 1995. The reduction of expected new store openings
in 1995 and 1994 compared to 1993, is intended to create an appropriate
commitment of capital and human resources between existing restaurants and new
development.
In the event certain site characteristics considered essential for the
success of a restaurant deteriorate, the Company will consider relocating the
restaurant to a more desirable site. The Company relocated two restaurants in
1993.
The Company believes its ownership of trademarks to the names and character
likenesses featured in the robotic animation stage show (and other in-store
entertainment) in its restaurants to be an important competitive advantage.
Restaurant Design and Entertainment
Chuck E. Cheese's restaurants are typically located in shopping centers or
in free-standing buildings and are generally 7,500 to 14,000 square feet in
area. Depending primarily on the demographic characteristics of a specific
site, the building design of new restaurants developed by the Company range
from 8,000 to 10,000 square feet in area.
The dining area of each Chuck E. Cheese's restaurant features a variety of
comic and musical entertainment by computer-controlled robotic characters,
together with various animated props, located on various stage type settings.
The dining area typically provides table and chair seating for 250 to 375
customers.
Each Chuck E. Cheese's restaurant typically contains a separate
family-oriented playroom area offering approximately 40 coin- and
token-operated attractions, including arcade-style games, kiddie rides, video
games, skill oriented games and other similar entertainment. Certain games
dispense tickets that can be redeemed by the guests for prizes. Also included
in the playroom area is a ball-crawl or other free attraction for young
children. The playroom area normally occupies approximately 40% of the
restaurant's public area and contributes significantly to its revenues. A
limited number of free tokens are furnished with food orders. Additional
tokens may be purchased.
3
<PAGE> 73
Food and Beverage Products
Each Chuck E. Cheese's restaurant offers varieties of pizza, a salad bar
and selected sandwiches and desserts. Standard beverages are also served,
along with beer and wine where permitted by local laws. The Company believes
that the quality of its food compares favorably with that of its competitors.
The majority of food, beverages and other supplies used in the
Company-operated restaurants is currently distributed under a system-wide
agreement with a major food distributor. The Company believes that this
distribution system creates certain cost and operational efficiencies for the
Company.
Marketing
The primary customer base for the Company's restaurants consists of
families having children between 2 and 12 years old. The Company runs
advertising campaigns which target families with young children and features
the family entertainment experiences available at Chuck E. Cheese's
restaurants, and is primarily aimed at increasing the frequency of return
visits. The primary advertising medium continues to be television, due to its
broad access to family audiences and its ability to communicate the Chuck E.
Cheese's experience. The television advertising campaigns are supplemented by
select radio campaigns, promotional offers in newspapers and direct mail
advertisements.
Franchising
The Company began franchising its restaurants in October 1981 and the first
franchised restaurant opened in June 1982. At March 17, 1995, 101 Chuck E.
Cheese's restaurants were operated by a total of 58 different franchisees, as
compared to 109 of such restaurants at March 18, 1994. The Company sold four
franchises in 1994.
The Company opened a franchise restaurant in Chile during the third quarter
of 1994. Opportunities for further international franchise development are
being reviewed by the Company.
The Chuck E. Cheese's standard franchise agreements grant to the franchisee
the right to develop and operate a restaurant and use the associated trademarks
within the standards and guidelines established by the Company. The franchise
agreement presently offered by the Company has an initial term of 15 years and
includes a 15-year renewal option. The earliest expiration dates of
outstanding Chuck E. Cheese's franchises are in 1997.
The franchise agreements governing existing franchised Chuck E. Cheese's
restaurants currently require each franchisee to pay: (i) to the Company, in
addition to an initial franchise fee of $50,000, a continuing monthly royalty
fee equal to 3.8% of gross sales; (ii) to the Advertising Fund [an independent
fund established and managed by an association of the Company and its
franchisees to pay costs of system-wide advertising (the "Association")] an
amount equal to 0.9% of gross sales; and (iii) to the Entertainment Fund (an
independent fund established and managed by such Association to further develop
and improve entertainment attractions) an amount equal to 0.4% of gross sales.
The Chuck E. Cheese's franchise agreements also require franchisees to expend
at least 3% of gross sales for local advertising. Under the Chuck E. Cheese's
franchise agreements, the Company is required, with respect to Company-operated
restaurants, to spend for local advertising and to contribute to the
Advertising Fund and the Entertainment Fund at the same rates as franchisees.
4
<PAGE> 74
Competition
The restaurant and entertainment industries are highly competitive, with a
number of major national and regional chains being engaged in the pizza
restaurant or entertainment business. Although there are few other restaurant
chains presently utilizing the concept of combining robotic characters and
restaurant operations, there are several competitors presently combining family
entertainment and restaurant operations. The Company believes that it will
continue to encounter competition in the future. Major national and regional
chains, some of which have capital resources as great or greater than the
Company, are expanding into the family restaurant and entertainment markets.
The Company believes that the principal competitive factors affecting Chuck E.
Cheese's restaurants are the relative quality of food and service, quality
and variety of offered entertainment, and location and attractiveness of the
restaurants as compared to its competitors in the restaurant or entertainment
industries.
MONTEREY'S TEX-MEX CAFE RESTAURANTS
The Company, through its wholly owned subsidiary BAC, operated 27
Monterey's Tex-Mex Cafe restaurants. Effective May 5, 1994, the Company sold
its Monterey's Tex-Mex Cafe restaurants for an aggregate purchase price
consisting of approximately $6.7 million in cash, $4.7 million in subordinated
promissory notes and the retention of a 12 1/2% equity interest in the
acquiring company.
TRADEMARKS
The Company owns various trademarks, including "Chuck E. Cheese" and
"ShowBiz Pizza" that are used in connection with the restaurants and have been
registered with the United States Patent and Trademark Office. The duration of
such trademarks is unlimited, subject to continued use. The Company believes
that it holds the necessary rights for protection of the marks essential to the
conduct of their present restaurant operations.
GOVERNMENT REGULATION
The development and operation of Chuck E. Cheese's restaurants are subject
to various federal, state and local laws and regulations, including but not
limited to those that impose restrictions, levy a fee or tax, or require a
permit or license on the service of alcoholic beverages and the operation of
games and rides. The Company is subject to the Fair Labor Standards Act, the
Americans With Disabilities Act, and family leave mandates. A significant
portion of the Company's restaurant personnel are paid at rates related to the
minimum wage established by federal and state law. Increases in such minimum
wage result in higher labor costs to the Company, which may be partially offset
by price increases and operational efficiencies.
If certain mandated health care legislation is passed, it could negatively
impact the business community by increasing costs. The Company would attempt
to minimize the impact of increased costs by operational efficiency
improvements and increased menu prices as permitted within the competitive
market.
WORKING CAPITAL PRACTICES
The Company attempts to maintain only sufficient inventory of supplies in
the restaurants which it operates to satisfy current operational needs. The
Company's accounts receivable consist primarily of credit card receivables,
franchise royalties, management fees and advances to managed properties.
EMPLOYEES
The number of persons employed by the Company varies seasonally, with the
greatest number being employed during the summer months. On March 17, 1995,
the Company had approximately 13,500 employees, including 13,325 in the
operation of Chuck E. Cheese's restaurants and 175 employed by the Company in
the Company's executive offices. None of the Company's employees is a member
of any union or collective bargaining group. The Company considers its
employee relations to be good.
5
<PAGE> 75
Item 2. Properties
The following table sets forth certain information regarding the Chuck E.
Cheese's restaurants operated by the Company (excluding six restaurants managed
by the Company for others) as of March 17, 1995.
<TABLE>
<CAPTION>
Chuck E.
State Cheese's
----- ----------
<S> <C>
Alabama 5
Arkansas 2
California 47
Colorado 4
Connecticut 5
Florida 15
Georgia 7
Illinois 14
Indiana 7
Kansas 1
Kentucky 1
Louisiana 4
Maryland 10
Massachusetts 10
Michigan 11
Missouri 7
Nevada 1
Nebraska 2
New Hampshire 2
New Jersey 9
New York 5
North Carolina 2
Ohio 11
Pennsylvania 7
Tennessee 2
Texas 24
Virginia 3
Wisconsin 3
---
221
===
</TABLE>
6
<PAGE> 76
Of the 227 Chuck E. Cheese's restaurants operated by the Company as of
March 17, 1995, 212 were leased by the Company and 15 were owned by the
Company. The leases of these restaurants will expire at various times from
1995 to 2009, as described in the table below.
<TABLE>
<CAPTION>
Year of Number of Range of Renewal
Expiration Restaurants Options (Years)
---------- ----------- ----------------
<S> <C> <C>
1995 10 None to 10
1996 14 None to 20
1997 27 None to 20
1998 23 None to 20
1999 and thereafter 138 None to 20
</TABLE>
The leases of Chuck E. Cheese's restaurants contain terms which vary from
lease to lease, although a typical lease provides for a primary term of 10
years, with two additional five-year options to renew, and provides for annual
minimum rent payments of approximately $6.00 to $22.00 per square foot, subject
to periodic adjustment. Most of the restaurant leases require the Company to
pay the cost of repairs, insurance and real estate taxes and, in most
instances, provide for additional rent equal to the amount by which a
percentage (typically 6%) of gross revenues exceeds the minimum rent.
Item 3. Legal Proceedings.
In December 1991, the Company, The Hallwood Group Incorporated,
("Hallwood"), Integra-A Hotel and Restaurant Company ("Integra"), and their
individual directors were named defendants in two separate but related lawsuits
brought in the 14th and 134th District Courts of Dallas County, Texas. In
April 1993, the Company and its two directors who are also employees of the
Company, were dismissed as defendants in the lawsuit brought in the 134th
District Court by an Integra common stockholder. Integra owned approximately
90% of the outstanding Common Stock of the Company prior to Integra's
distribution of such Common Stock in December 1988 (the "1988 Distribution") to
its shareholders of record. The plaintiffs in the remaining lawsuit constitute
certain holders of warrants, options and preferred stock of Integra who seek to
serve as representatives of proposed classes of other holders of such
securities. The plaintiffs allege that the Company has (i) violated Texas
statutes related to securities fraud and the fraudulent transfer of assets,
(ii) committed common law fraud, and (iii) breached fiduciary and other duties
to the plaintiffs. As amended, this suit seeks recision of the 1988
distribution actual damages in excess of $184 million, and punitive damages in
excess of $500 million. To date, no class has been certified as against the
Company. The case is set for trial on May 1, 1995. The Company believes that
the claims made against it in this suit are without merit and intends to
vigorously defend this lawsuit. However, the Company is actively pursuing
negotiations for settlement of the lawsuit.
In May 1994, Hermitage Hotel, Ltd., L. P., filed a lawsuit against the
Company, Hallwood and certain directors of the Company in the 101st District
Court of Dallas County, Texas. The lawsuit seeks recovery on behalf of
plaintiff under theories of successor liability, tortious interference with
contract, fraud, negligent representation and breach of contract. The
plaintiff is seeking approximately $10.2 million in actual damages, $30 million
in exemplary damages, attorneys' fees and court costs. The Company believes
that the claims made against it in this suit are without merit and intends to
vigorously defend this lawsuit. However, the Company is actively pursuing
negotiations for settlement of the lawsuit.
In June 1993, the Company was named as a nominal defendant in a
shareholders' derivative action in the 68th Judicial District Court in Dallas
County, Texas in which three of the Company's executive officers, four of the
Company's outside directors and Hallwood were named defendants. The plaintiffs
in this lawsuit have alleged the individual defendants (i) breached their
fiduciary duties to stockholders, (ii) committed constructive fraud and (iii)
unjustly enriched themselves as a result of alleged violations of federal
securities laws and illegal insider trading between July 13, 1992 and June 11,
1993. The Company does not believe that this action will result in any
significant damages to the Company.
7
<PAGE> 77
In July 1993, the Company was named a defendant in a lawsuit brought in the
Circuit Court for Davidson County, Nashville, Tennessee by Third National Bank
in Nashville, as Trustee pursuant to a municipal bond issuance of $6.4 million
made in 1980, for which Integra executed a guaranty. The plaintiff has alleged
that Integra's guaranty of the municipal bond issuance was binding on
successors of Integra and that the Company is the legal successor to Integra.
The plaintiff is seeking to recover a judgement against the Company in the full
amount of its claim against Integra, which is unspecified, as well as
attorneys' fees and costs. In April 1994, the court dismissed the plaintiff's
complaint for failure to state a claim upon which relief can be granted.
Plaintiff has appealed the dismissal to the 6th Circuit Court of Appeals. The
Company believes the allegations made in this suit to be without merit and will
offer a vigorous defense in this lawsuit.
In January 1994, the Company was named a defendant in a lawsuit brought in
the Supreme Court of the State of New York, County of Queens, by Big Six
Towers, Inc., in its purported capacity as a landlord to the Company with
regard to a restaurant/entertainment center location in Queens County, New York
which the Company had contracted to lease from the plaintiff. The plaintiff
has alleged that the Company has breached the lease and is seeking total
damages in excess of $4.0 million against the Company. The Company believes it
validly terminated the lease in question pursuant to an agreement with the
plaintiff and believes the allegations made in this suit to be without merit
and therefore intends to vigorously defend this lawsuit.
Certain other pending legal proceedings exist against the Company which the
Company believes are not material in amount or have arisen in the ordinary
course of its business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of 1994.
8
<PAGE> 78
P A R T I I
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
As of March 17, 1995, there were an aggregate of 12,275,177 shares of the
Company's Common Stock outstanding and approximately 5,489 stockholders of
record.
The Company's Common Stock is listed on the National Market System of the
National Association of Securities Dealers Automated Quotation ("NASDAQ")
system under the symbol "SHBZ". The following table sets forth the highest and
lowest prices per share of the Common Stock during each quarterly period within
the two most recent years, as reported on the National Market System of NASDAQ:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1994 - 1st quarter $ 15 1/4 $ 11 3/4
- 2nd quarter 14 9 1/4
- 3rd quarter 11 1/4 7 1/4
- 4th quarter 9 1/8 7 1/4
1993 - 1st quarter 35 1/2 25 1/2
- 2nd quarter 34 1/2 16
- 3rd quarter 17 1/2 12 1/4
- 4th quarter 15 12 1/2
</TABLE>
The Company may not pay any dividends to holders of its Common Stock
(except in shares of Common Stock) unless an amount equal to all dividends then
accrued on its Class A Preferred Stock par value $60.00 per share ("the
Preferred Stock") has been paid or set aside to be paid. A dividend to holders
of record of Preferred Stock as of December 28, 1994 in the amount of $1.20 per
share will be paid on March 28, 1995. The Company also may not pay any
dividend or make any other distribution on its Common Stock (except in shares
of Common Stock or rights to acquire capital stock of the Company) so long as
any amount is outstanding under the terms of its revolving loan agreement.
The Company has not paid any dividends on its Common Stock, has no present
intention of paying cash dividends thereon in the future and is currently
restricted from paying cash dividends under the terms of its current revolving
loan agreement. The Company plans to retain any earnings to finance
anticipated capital expenditures and reduce its long-term debt. Future
dividend policy with respect to the Common Stock will be determined by the
Board of Directors of the Company, taking into consideration factors such as
future earnings, capital requirements, potential loan agreement restrictions
and the financial condition of the Company.
9
<PAGE> 79
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating results (1):
Revenues . . . . . . . . . . . . . . . . . . . . . $267,827 $271,998 $253,124 $208,118 $181,558
Costs and expenses . . . . . . . . . . . . . . . . 263,541 253,300 226,686 187,295 164,305
-------- -------- -------- -------- --------
Operating income . . . . . . . . . . . . . . . . . 4,286 18,698 26,438 20,823 17,253
Other income (expenses) . . . . . . . . . . . . . (1,173) (451) (1,188) (1,890) (3,354)
-------- -------- -------- -------- --------
Income before income taxes . . . . . . . . . . . 3,113 18,247 25,250 18,933 13,899
Income taxes:
Current expense . . . . . . . . . . . . . . . . 869 1,751 1,161 1,050 678
Deferred expense . . . . . . . . . . . . . . . 1,568 4,605 8,586 6,285 4,769
-------- -------- -------- -------- --------
2,437 6,356 9,747 7,335 5,447
-------- -------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . $ 676 $ 11,891 $ 15,503 $ 11,598 $ 8,452
======== ======== ======== ======== ========
Per Share (2):
Primary:
Net income . . . . . . . . . . . . . . . . . . . $ .03 $ .86 $ 1.11 $ .82 $ .61
Weighted average shares outstanding . . . . . . 12,127 13,455 13,662 13,700 13,254
Fully diluted:
Net income . . . . . . . . . . . . . . . . . . . $ .03 $ .86 $ 1.11 $ .82 $ .61
Weighted average shares outstanding . . . . . . 12,127 13,464 13,713 13,728 13,367
Cash flow data:
Cash provided by operations . . . . . . . . . . . $ 30,819 $ 44,905 $ 44,246 $ 36,097 $ 29,884
Purchases of property and equipment . . . . . . . 29,421 44,600 33,903 25,088 21,471
Balance sheet data:
Total assets . . . . . . . . . . . . . . . . . . . $188,308 $193,649 $173,217 $158,563 $146,435
Long-term obligations (including current portion
and redeemable preferred stock) . . . . . . . . . 33,223 29,816 17,743 21,360 26,929
Shareholders' equity . . . . . . . . . . . . . . . 125,515 136,647 132,167 115,500 99,973
Number of restaurants at year end:
Chuck E. Cheese's:
Company operated . . . . . . . . . . . . . . . . 226 215 182 159 144
Franchise . . . . . . . . . . . . . . . . . . . 106 110 113 113 123
-------- -------- -------- -------- --------
332 325 295 272 267
Monterey's Tex-Mex Cafe's . . . . . . . . . . . . 27 28 27 27
-------- -------- -------- -------- --------
332 352 323 299 294
======== ======== ======== ======== ========
</TABLE>
- ----------------------
(1) Fiscal year 1992 was 53 weeks in length while fiscal years 1994, 1993,
1991, and 1990 were 52 weeks in length.
(2) No cash dividends on common stock were paid in any of the years presented.
10
<PAGE> 80
Item 7. Management's Discussion and Analysis of Financial Condition and
Results Of Operations.
RESULTS OF OPERATIONS
1994 Compared to 1993
Revenues declined 1.5% to $267.8 million in 1994 from $272.0 million in 1993
due to the sale of the Company's Monterey's Tex-Mex Cafe restaurants effective
May 5, 1994. Revenue generated by the Company's Chuck E. Cheese's restaurants
increased by 3.4% to $261.6 million in 1994 from $253.0 million in 1993 due to
the net addition of 11 Company restaurants in 1994 and 33 Company restaurants
in 1993. Sales from the Company's Chuck E. Cheese's restaurants which were
open during all of 1994 and 1993 ("comparable store sales") declined 5.8%
between the years. Revenues from the Company's Monterey's Tex-Mex Cafe
restaurants declined to $6.2 million in 1994 from $19.0 million in 1993 due to
the sale of the Monterey's restaurants mentioned above.
Operating income decreased to $4.3 million in 1994 from $18.7 million in
1993. Included in operating income for 1994 is a gain of $5.5 million related
to the sale of the Company's Monterey's Tex-Mex Cafe restaurants and a $2.3
million loss associated with the impairment in fair value of certain Chuck E.
Cheese's restaurants. Operating income in 1994 was also reduced by
approximately $900,000 due to a write-off of all unamortized preopening
expenses resulting from a change in the estimated future benefit of such
expenses. The decline in operating income is primarily due to the decline in
comparable store sales and operating margins in the Company's Chuck E. Cheese's
restaurants. A material portion of operating costs are fixed resulting in an
erosion of operating margins at lower sales levels.
A summary of the results of operations of the Company as a percentage of
revenues for the last three fiscal years is shown below.
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
----- ----- -----
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . 51.4% 50.5% 49.5%
Selling, general and administrative . . . . . . . . 17.7% 15.5% 15.7%
Depreciation and amortization . . . . . . . . . . . 9.7% 8.5% 7.6%
(Gain) loss on property transactions . . . . . . . (1.0%) 0.2% 0.3%
Other operating expenses . . . . . . . . . . . . . 20.6% 18.4% 16.5%
----- ----- -----
98.4% 93.1% 89.6%
----- ----- -----
Operating income . . . . . . . . . . . . . . . . . . 1.6% 6.9% 10.4%
===== ===== =====
</TABLE>
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants increased by 3.4%
to $261.6 million in 1994 from $253.0 million in 1993 due to sales from new
restaurants opened throughout 1994 and 1993. Comparable store sales of Chuck
E. Cheese's restaurants which were open during all of both 1994 and 1993
declined by 5.8% between the years. Average annual sales per restaurant
decreased to approximately $1,206,000 in 1994. Menu prices were comparable
between the two years.
Management believes that several factors may have contributed to the
comparable store sales decline, including increased competition and to a lesser
extent, a decrease in the number of restaurants remodeled since 1992 and the
impact of newly opened restaurants on comparable store sales of existing
restaurants in certain markets. Some of the factors impacting comparable store
sales are believed to be negatively impacting sales volumes of newer
restaurants opened since 1990. During 1994, the average sales volume of the 70
new Chuck E. Cheese's restaurants opened in 1991 through 1993 was 3.0% lower
than the average sales volume of existing restaurants during the same period.
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<PAGE> 81
Revenues from franchise fees and royalties decreased by 5.6% from 1993 to
1994 primarily due to a 6.4% decline in comparable franchise store sales for
restaurants open all of 1994 and 1993, and a decline in the number of
restaurants operated each year. During 1994, two new franchise restaurants
opened and six franchise restaurants closed.
Revenues from Monterey's Tex-Mex Cafe restaurants were $6.2 million in 1994
compared to $19.0 million in 1993 due to the sale of the Company's Monterey's
Tex-Mex Cafe restaurants effective May 5, 1994.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 98.4% in 1994
from 93.1% in 1993.
Cost of sales increased as a percentage of revenues to 51.4% in 1994 from
50.5% in 1993. Cost of food, beverage, prize and merchandise items for Chuck
E. Cheese's restaurants as a percentage of restaurant sales increased to 18.2%
in 1994 from 18.0% in 1993 primarily due to increases in cheese costs and in
costs relating to the enhancement of certain prize and merchandise items.
Labor expenses for Chuck E. Cheese's restaurants as a percentage of restaurant
sales increased to 30.0% in 1994 from 29.0% in 1993 primarily due to the
decline in comparable store sales and enhancements in services provided to
guests, including child security.
Selling, general and administrative expenses as a percentage of revenues
increased to 17.7% in 1994 from 15.5% in 1993 due primarily to increased
advertising expense as a percentage of revenues. Corporate overhead costs were
impacted by an increase of approximately $1.2 million primarily during the
first three quarters of 1994 as a result of increasing the number of
operational regional and district managers. Overhead costs were also impacted
in 1994 by an allowance for potential legal settlements.
Depreciation and amortization expense as a percentage of revenues increased
to 9.7% in 1994 from 8.5% in 1993 primarily due to a write-off of all
unamortized preopening expenses of approximately $900,000 resulting from a
change in the estimated future benefit of such expenses, the higher
depreciation and amortization expense of new restaurants relative to older
restaurants and the decline in comparable store sales.
The Company had a net gain on property transactions of $2.6 million in 1994
compared to a loss on property transactions of $675,000 in 1993. The Company
recognized a gain of $5.5 million from the sale of its Monterey's Tex-Mex Cafe
restaurants effective May 5, 1994. The gain was partially offset by a loss of
approximately $2.3 million in 1994. The loss was a result of the Company's
decision to close one Chuck E. Cheese's restaurant and the impairment in fair
value of the fixed assets of ten Chuck E. Cheese's restaurants due to the
Company's decision not to renew the leases as a result of the deterioration of
site characteristics or the inability to renew the leases at acceptable rental
terms. The Company will consider possible relocation of some of the
restaurants. The Company provided for an additional loss on property
transactions of approximately $597,000 in 1994 compared to $675,000 in 1993 due
to the replacement of certain assets in conjunction with the enhancement of
facilities and entertainment packages of restaurants.
Other operating expenses increased as a percentage of revenues to 20.6% in
1994 from 18.4% in 1993 primarily due to increased rent, utility and property
tax expenses as a percentage of revenues and the decline in comparable store
sales.
Operating Income
As a result of the changes in revenues and expenses discussed above,
operating income declined to $4.3 million in 1994 from $18.7 million in 1993.
Included in operating income are the operations of Monterey's Tex-Mex Cafe
restaurants through May 5, 1994. Operating income in 1994 for Monterey's
Tex-Mex Cafe restaurants was $6.0 million, including a gain on property
transactions of $5.5 million, compared to operating income of $652,000 in 1993.
12
<PAGE> 82
Net Income
Interest expense increased to $1.9 million in 1994 from $797,000 in 1993 due
primarily to an increase in long-term debt of $18.5 million since the third
quarter of 1993 primarily to fund the Company's repurchase of its common stock
and an increase in interest rates. In the fourth quarter of 1994, the Company
established an allowance of approximately $1.1 million related to deferred tax
credit carryforwards which are estimated to expire in 1997. Income tax expense
was increased by approximately $1.1 million as a result of this allowance. In
the third quarter of 1993, income tax expense was reduced approximately
$971,000 primarily due to a non-recurring tax gain resulting from the increased
valuation of the Company's deferred tax asset due to an increase in federal
corporate income tax rates enacted in 1993. The Company's net income decreased
to $676,000 in 1994 from $11.9 million in 1993 due to the changes in revenues
and expenses as discussed above. The Company's primary and fully diluted
earnings per share decreased to $.03 per share in 1994 from $.86 per share in
1993.
1993 Compared to 1992
Revenues increased 7.5% to $272.0 million in 1993 from $253.1 million in
1992. Revenue generated by the Company's Chuck E. Cheese's restaurants
increased by 8.1% to $253.0 million in 1993 from $234.0 million in 1992 due to
the net addition of 33 Company restaurants in 1993 and 23 Company restaurants
in 1992. Sales from the Company's Chuck E. Cheese's restaurants which were
open during all of 1993 and 1992 declined 5.3% between the years. Revenues
from the Company's Monterey's Tex-Mex Cafe restaurants declined slightly to
$19.0 million in 1993 from $19.1 million in 1992 primarily due to a decline in
comparable store sales of .6% between the years. Fiscal years 1993 and 1992
consisted of 52 and 53 weeks, respectively.
Operating income decreased to $18.7 million in 1993 from $26.4 million in
1992 due primarily to declines in comparable store sales and operating margins
in both restaurant concepts. A material portion of operating costs are fixed
resulting in an erosion of operating margins at lower sales levels.
Chuck E. Cheese's Restaurants
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants increased by 8.1%
to $253.0 million in 1993 from $234.0 million in 1992 due to sales from new
restaurants opened throughout 1993 and 1992. Comparable store sales of Chuck
E. Cheese's restaurants which were open during all of both 1993 and 1992
declined by 5.3% between the years. Average annual sales per restaurant
decreased to approximately $1,259,000 in 1993. Menu prices were increased
approximately 1.1% between the two years.
Management believes that several factors may have contributed to the
comparable store sales decline, including generally severe winter weather and a
March snowstorm which caused the brief closing of numerous restaurants,
ineffective advertising and the decrease in number and apparent effectiveness
of restaurants remodeled during 1992 and 1993. Other factors that management
believes contributed to the decline in comparable store sales include increased
competition and the impact of newly opened restaurants on comparable store
sales of existing restaurants in certain markets. Some of the factors
impacting comparable store sales are believed to be negatively impacting sales
volumes of newer restaurants opened since 1988. New restaurants opened from
1988 through 1992 averaged approximately $1,341,000 in sales during 1993, which
is slightly in excess of the sales volume of the average Company restaurant.
This compares to the prior year in which new restaurants had sales volumes
significantly higher than the average Company restaurant.
Revenues from franchise fees and royalties decreased by 11.1% from 1992 to
1993 primarily due to 52 weeks of revenue in 1993 compared to 53 weeks of
revenue in 1992, a 1.0% decline in comparable franchise store sales for
restaurants open all of 1993 and 1992, and a decline in the number of franchise
restaurants operated each year. During 1993, the Company purchased two
franchise restaurants, one new franchise restaurant opened and two franchise
restaurants closed.
13
<PAGE> 83
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 92.9% in 1993
from 89.1% in 1992.
Cost of sales increased as a percentage of revenues to 49.7% in 1993 from
48.5% in 1992. Cost of food, beverage, prize and merchandise items as a
percentage of restaurant sales remained constant at 18.0% in both 1993 and
1992. Labor expenses as a percentage of restaurant sales increased slightly to
29.0% in 1993 from 28.0% in 1992 primarily due to the decline in comparable
store sales.
Selling, general and administrative expenses as a percentage of revenues
declined to 15.6% in 1993 from 15.9% in 1992 due primarily to a decrease in
management bonus expense and other corporate overhead expenses as a percentage
of revenues which was partially offset by an increase in advertising expense as
a percentage of revenues.
Depreciation and amortization expense as a percentage of revenues increased
to 8.5% in 1993 from 7.6% in 1992 primarily due to the higher depreciation and
amortization expense of new restaurants relative to older restaurants and the
decline in comparable store sales.
Other operating expenses increased as a percentage of revenues to 18.9% in
1993 from 16.9% in 1992 primarily due to increased rent, utility and insurance
expenses as a percentage of revenues and the decline in comparable store sales.
The Company provided for a loss on property transactions of $585,000 in
1993 compared to $654,000 in 1992 primarily due to closing three restaurants in
1993 and to the replacement of certain assets in conjunction with the
remodeling of restaurants.
Operating Income
As a result of the changes in revenues and expenses discussed above,
operating income decreased to $18.0 million in 1993 from $25.4 million in 1992.
Monterey's Tex-Mex Cafe Restaurants
Revenues
Revenues decreased to $19.0 million in 1993 from $19.1 million in 1992 due
primarily to a .6% decline in comparable store sales between the two years.
One restaurant was opened in the third quarter of 1992 and was subsequently
sold in the fourth quarter of 1993. Menu prices were increased approximately
2.0% between the periods.
Costs and Expenses
Costs and expenses increased as a percentage of revenues to 96.6% in 1993
from 94.5% in 1992.
Cost of sales declined slightly to 61.3% in 1993 from 61.8% in 1992. The
cost of food and beverage items as a percentage of restaurant sales decreased
slightly to 27.4% in 1993 compared to 27.7% in 1992 due primarily to lower food
prices on certain items resulting from a change in food distributors in the
third quarter of 1992 and the increase in menu prices implemented in the second
quarter of 1993. These factors were slightly offset by a change in product
ingredients which was implemented in the third quarter of 1992. Labor expenses
as a percentage of restaurant sales increased slightly to 31.7% in 1993 from
31.6% in 1992 primarily as a result of the decline in comparable store sales.
Selling, general and administrative expenses as a percentage of revenues
increased to 14.1% in 1993 from 13.6% in 1992 primarily due to an increase in
advertising expense and in corporate overhead expenses including an increase in
research and development costs.
Other operating expenses increased as a percentage of revenues to 12.5% in
1993 from 11.3% in 1992 primarily due to an increase in rent and utility
expenses as a percentage of revenues and the decline in comparable store sales.
The Company provided for a loss on property transactions of $90,000 from
the sale of one restaurant in the fourth quarter of 1993.
14
<PAGE> 84
Operating Income
Operating income declined to $652,000 in 1993 from $1,049,000 in 1992 as a
result of the changes in revenues and expenses discussed above.
Consolidated Income
Interest expense declined to $797,000 in 1993 from $1.5 million in 1992 due
primarily to reductions in long-term debt of $1.8 million in the first three
quarters of 1993 and $4.6 million in 1992 and reduced interest rates between
the years. Income taxes were decreased approximately $971,000 in the third
quarter of 1993 due to a non-recurring tax gain resulting from the increased
valuation of the Company's deferred tax asset due to an increase in federal
corporate income tax rates enacted in 1993. The Company's net income decreased
to $11.9 million in 1993 from $15.5 million in 1992 due to the changes in
revenues and expenses as discussed above. The Company's primary and fully
diluted earnings per share decreased to $.86 per share in 1993 from $1.11 per
share in 1992.
INFLATION
The Company's costs of operations, including but not limited to, labor,
supplies, utilities, financing and rental costs, are significantly affected by
inflationary factors. The Company pays most of its part-time employees rates
that are related to federal and state mandated minimum wage requirements.
Increases in any such costs would result in higher costs to the Company, which
the Company expects would be partially offset by menu price increases and
increased efficiencies in operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations declined to $30.8 million in 1994 from $44.9
million in 1993. The Company's primary requirements for cash relate to planned
capital expenditures and debt service. During 1994, the Company made
approximately $29.4 million in capital expenditures primarily related to the
opening of 12 new Chuck E. Cheese's restaurants and the enhancement of
facilities and entertainment packages at 27 restaurants, including 22
restaurants completed under the "repositioning" program described below.
The Company previously announced that it planned to repurchase shares of
the Company's common stock at an aggregate purchase price of up to $30 million.
As of December 30, 1994, the Company had repurchased shares of its common stock
in the open market for an aggregate purchase price of approximately $24.9
million. The Company has purchased treasury shares up to the limit permitted
under its revolving loan agreement and intends to use its future cash flow for
the enhancement of existing facility and entertainment packages and new store
development. The ability of the Company to satisfy its capital expenditure and
debt service requirements depends on the availability of sufficient funds for
such purpose. The Company expects that it will satisfy such requirements from
cash provided by operations and funds available under its revolving loan
agreement or from refinancing.
In 1994, the Company's revolving loan agreement was amended to provide a
credit facility of up to $30.8 million due on January 31, 1996. Beginning July
1, 1995, available borrowings under the credit line reduce each month to $18.3
million by January 1, 1996. Available borrowings are reduced by outstanding
letters of credit which totaled $1.5 million at December 30, 1994. The
Company is required to comply with certain financial ratio tests during the
term of the revolving loan agreement. The Company is currently considering
refinancing alternatives and believes it will complete such refinancing prior
to the maturity of its current credit facility. If the Company is unable to
complete such refinancing, it would impair the Company's ability to fully
execute its capital expenditure enhancement plans.
15
<PAGE> 85
The Company believes that the success of its facility and enhancement
program in addition to new restaurant development will continue to be
significant factors in its ability to generate increased revenues over the
foreseeable future. The Company continues to evolve and expand its efforts to
significantly enhance its Chuck E. Cheese's locations. This "repositioning"
program is being carried out on a market by market basis and involves: an
improved exterior identity, a facility upgrade, an expanded free ball-crawl
with tubes and tunnels suspended from or reaching to the ceiling, and an
enhancement of the variety and number of games and rides offered to its guests.
The Company has completed 22 restaurants under this program in 1994. Although
the Company has had limited time to evaluate the results of these 22
repositioned restaurants, average sales of these restaurants for the periods
following their repositioning have increased over 12% compared to the same
periods of the previous year. Sales in these restaurants during the three
months immediately prior to their repositioning averaged 6% less than the sales
during the comparable three month periods of the prior year resulting in an
improvement in sales trends of approximately 18%. Based on the early sales
results of these repositioned restaurants, the Company currently intends to
reposition approximately 140 additional Chuck E. Cheese's restaurants by the
end of 1996. The Company anticipates that the repositioning of the remaining
restaurants will cost on the average approximately $300,000 per restaurant.
However, this amount can vary significantly at a particular restaurant
depending on several factors, including the restaurant's square footage, date
of most recent remodel and the existing assets at the restaurant. The Company
plans to open two to three new Chuck E. Cheese's restaurants in 1995. In the
event certain site characteristics considered essential for the success of a
restaurant deteriorate, the Company will consider closing the restaurant or
relocating the restaurant to a more desirable site.
The Company is implementing several strategies designed to strengthen the
sales vitality of its existing restaurant base in what management believes is a
competitive market. The Company appointed a new advertising agency during the
fourth quarter of 1993; the Company has accelerated its commitment of capital
to existing stores; and the Company is limiting its 1995 new restaurant
development to ensure that the sales vitality of the Company's existing
restaurant base and new restaurant growth are both given appropriate priority.
The Company believes that certain operating costs will increase as a result of
implementing these strategies designed to strengthen existing restaurant sales.
If the declines in comparable store sales of the Company's Chuck E. Cheese's
restaurants experienced in 1994 and 1993 continue to be experienced over a
longer term, an adverse impact on the Company's operating margins and results
of operations could continue.
The Company is involved in a number of lawsuits. The Company presently
believes that it will continue to incur expense to defend against and resolve
such litigation, and anticipates that it will satisfy such expense with cash
flow from operations.
The Company believes it will realize substantial benefit from utilization
of approximately $74 million in net operating loss carryforwards to reduce
federal income tax liability. Such net operating loss carryforwards expire
from years 1999 through 2002. 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. The Company has adopted an amendment to its Restated Articles of
Incorporation which is intended to prevent changes in ownership of its common
stock that would cause such limitation. In addition, the Company has
investment tax credit, job tax credit and alternative minimum tax credit
carryforwards of approximately $7 million. The investment tax credit and the
job tax credit carryforwards expire in years 1997 through 2002. Tax credit
carryforwards can be utilized by the Company only after all net operating loss
carryforwards have been realized. At December 30, 1994, the deferred tax asset
was reduced approximately $1.1 million due to an allowance for the estimated
expiration of tax credit carryforwards in 1997. If the Company's results of
operations continue to decline or fail to timely achieve levels necessary to
utilize the net operating loss carryforwards, the investment tax credit and job
credit carryforwards and net operating loss carryforwards could expire prior to
utilization, resulting in a charge against income.
16
<PAGE> 86
Item 8. Financial Statements and Supplementary Data
SHOWBIZ PIZZA TIME, INC.
YEARS ENDED DECEMBER 30, 1994, DECEMBER 31, 1993
AND JANUARY 1, 1993
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditors' report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Consolidated financial statements:
Consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Consolidated statements of earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated statements of shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
17
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShowBiz Pizza Time, Inc.
Irving, Texas
We have audited the accompanying consolidated balance sheets of ShowBiz Pizza
Time, Inc. and subsidiary as of December 30, 1994 and December 31, 1993 and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years (52 or 53 weeks) in the period ended December
30, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ShowBiz Pizza Time, Inc. and
subsidiary as of December 30, 1994 and December 31, 1993 and the results of
their operations and their cash flows for each of the three years in the period
ended December 30, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for preopening costs in 1994.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 3, 1995
18
<PAGE> 88
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1994 AND DECEMBER 31, 1993
(THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS DECEMBER 30, DECEMBER 31,
1994 1993
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 2,381 $ 4,511
Accounts receivable, including receivables from related parties
of $416 and $309, respectively . . . . . . . . . . . . . . . . . . . . . 3,361 3,694
Current portion of notes receivable, including receivables from
related parties of $300 and $368, respectively . . . . . . . . . . . . . 529 521
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,107 2,909
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900 2,771
Current portion of deferred tax asset . . . . . . . . . . . . . . . . . . 3,583 6,013
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 15,861 20,419
---------- ----------
Investments in related parties . . . . . . . . . . . . . . . . . . . . . . 699 237
---------- ----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 130,190 133,007
---------- ----------
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,414 29,479
---------- ----------
Other assets:
Notes receivable, less current portion, including receivables from
related parties of $1,708 and $1,676, respectively . . . . . . . . . . 6,705 2,886
Deferred charges, less amortization . . . . . . . . . . . . . . . . . . 2,083 4,357
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,356 3,264
---------- ----------
12,144 10,507
---------- ----------
$ 188,308 $ 193,649
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . $ 10,060 $ 51
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 26,545 24,762
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 36,605 24,813
---------- ----------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . 19,947 26,846
---------- ----------
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,025 2,424
---------- ----------
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,314 1,120
---------- ----------
Commitments and contingencies
Redeemable preferred stock, $60 par value, redeemable for
$2,974 in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,902 1,799
---------- ----------
Shareholders' equity:
Common stock, $.10 par value; authorized 30,000,000 shares;
14,337,235 and 14,282,520 shares issued, respectively . . . . . . . . 1,434 1,428
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 156,532 157,226
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,012 4,677
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . (7,200) (9,934)
Less treasury shares of 2,072,784 and 1,045,984, respectively,
at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,263) (16,750)
---------- -------
125,515 136,647
---------- ----------
$ 188,308 $ 193,649
========== ==========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 89
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Food and beverage revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $189,257 $197,090 $183,798
Games and merchandise revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 74,331 70,242 64,033
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,078 4,321 4,863
Joint venture income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 345 430
-------- -------- --------
267,827 271,998 253,124
-------- -------- --------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,729 137,343 125,279
Selling, general and administrative expenses, including related
party expenses of $125 in each year . . . . . . . . . . . . . . . . . . . . . 47,263 42,129 39,733
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 26,032 23,058 19,249
(Gain) loss on property transactions . . . . . . . . . . . . . . . . . . . . . . (2,597) 675 654
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,114 50,095 41,771
-------- -------- --------
263,541 253,300 226,686
-------- -------- --------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,286 18,698 26,438
-------- -------- --------
Other income (expenses):
Interest income, including related party income of $209, $177, and $219,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688 346 320
Interest expense, including related party expense of $99 and $376,
in 1993 and 1992, respectively . . . . . . . . . . . . . . . . . . . . . . . . (1,861) (797) (1,508)
-------- -------- --------
(1,173) (451) (1,188)
-------- -------- --------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,113 18,247 25,250
Income taxes:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 869 1,751 1,161
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,568 4,605 8,586
-------- -------- --------
2,437 6,356 9,747
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 676 $ 11,891 $ 15,503
======== ======== ========
Earnings per common and common equivalent share:
Primary:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .03 $ .86 $ 1.11
======== ======== ========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 12,127 13,455 13,662
======== ======== ========
Fully diluted:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .03 $ .86 $ 1.11
======== ======== ========
Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 12,127 13,464 13,713
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 90
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON TREASURY
STOCK CAPITAL IN RETAINED DEFERRED STOCK
------------------- EXCESS OF EARNINGS COMPEN- ---------------
SHARES PAR VALUE PAR VALUE (DEFICIT) SATION SHARES COST
------ --------- ---------- --------- ---------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 27, 1991 . . . . . . . . 12,538 $ 1,254 $136,358 $(22,034) 28 $ (78)
Net income . . . . . . . . . . . . . . . 15,503
Redeemable preferred stock accretion . . (103)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . . 353 35 1,324
Warrants exercised . . . . . . . . . . . 74 8 124
Stock grant plan . . . . . . . . . . . . 2 1,040 $ (999)
Tax benefit from exercise of stock options
and stock grants . . . . . . . . . . . 4,436
Treasury stock acquired . . . . . . . . . 184 (4,733)
Amortization of deferred compensation . . 333
Stock split costs . . . . . . . . . . . . (17)
Cancellation of fractional shares . . . . (2) (46)
------ ------- -------- -------- -------- ----- -------
Balances, January 1, 1993 . . . . . . . . . 12,965 1,297 143,219 (6,872) (666) 212 (4,811)
Net income . . . . . . . . . . . . . . . 11,891
Redeemable preferred stock accretion . . (104)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . . 48 5 573
Warrants exercised . . . . . . . . . . . 855 85 1,435
Stock grant plan . . . . . . . . . . . . 414 41 12,000 (12,000)
Tax expense from exercise of stock options
and stock grants . . . . . . . . . . . (37)
Treasury stock acquired . . . . . . . . . 834 (11,939)
Amortization of deferred compensation . . 2,732
Stock issued under 401(k) plan . . . . . 1 36
------ ------- -------- -------- -------- ----- --------
Balances, December 31, 1993 . . . . . . . . 14,283 1,428 157,226 4,677 (9,934) 1,046 (16,750)
Net income . . . . . . . . . . . . . . . 676
Redeemable preferred stock accretion . . (103)
Redeemable preferred stock dividends,
$4.80 per share . . . . . . . . . . . . (238)
Stock options exercised . . . . . . . . . 54 6 234
Tax expense from exercise of stock options
and stock grants . . . . . . . . . . . (928)
Treasury stock acquired . . . . . . . . . 1,027 (13,513)
Amortization of deferred compensation . . 2,734
------ ------- -------- -------- -------- ----- --------
Balances, December 30, 1994 . . . . . . . . 14,337 $ 1,434 $156,532 $ 5,012 $ (7,200) 2,073 $(30,263)
====== ======= ======== ======== ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 91
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
(THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 676 $ 11,891 $ 15,503
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . 26,032 23,058 19,249
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 1,568 4,605 8,586
(Gain) loss on property transactions . . . . . . . . . . . . . (2,597) 675 654
Compensation expense under stock grant plan . . . . . . . . . . 2,734 2,756 418
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 399 756
Net change in receivables, inventories, prepaids, payables and
accrued liabilities . . . . . . . . . . . . . . . . . . . . . 1,787 1,521 (920)
-------- -------- --------
Cash provided by operations . . . . . . . . . . . . . . . . 30,819 44,905 44,246
-------- -------- --------
Investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . (29,421) (44,600) (33,903)
Proceeds from disposition of property and equipment . . . . . . . 6,725 250
Payments received on notes receivable . . . . . . . . . . . . . . 2,992 978 1,041
Additions to notes receivable . . . . . . . . . . . . . . . . . . (2,169) (724) (928)
Change in deferred charges, investments and other assets . . . . . (703) (1,813) (2,082)
-------- -------- --------
Cash used in investing activities . . . . . . . . . . . . . (22,576) (45,909) (35,872)
-------- -------- --------
Financing activities:
Proceeds from line of credit . . . . . . . . . . . . . . . . . . . 8,535 24,050 16,650
Payments on line of credit . . . . . . . . . . . . . . . . . . . . (5,235) (10,550) (8,650)
Reduction of debt and capital lease obligations, including
payments to related parties of $1,658 and $6,447 in 1993
and 1992, respectively . . . . . . . . . . . . . . . . . . . . . (47) (1,692) (12,231)
Redeemable preferred stock dividends . . . . . . . . . . . . . . . (238) (238) (238)
Acquisition of treasury stock . . . . . . . . . . . . . . . . . . (13,513) (11,939) (4,733)
Exercise of stock options and warrants, including exercise by a
related party of $1,488 and $130 in 1993 and 1992, respectively 240 2,098 1,491
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) 324 80
-------- -------- --------
Cash used in financing activities . . . . . . . . . . . . . (10,373) 2,053 (7,631)
-------- -------- --------
Increase in cash and cash equivalents . . . . . . . . . . . . . . . . (2,130) 1,049 743
Cash and cash equivalents, beginning of year . . . . . . . . . . . . 4,511 3,462 2,719
-------- -------- --------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . $ 2,381 $ 4,511 $ 3,462
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 92
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations:
ShowBiz Pizza Time, Inc. (the "Company") operates and franchises family
restaurant entertainment centers as Chuck E. Cheese's restaurants, and through
BHC Acquisition Corporation ("BAC"), its wholly owned subsidiary, also operated
Monterey's Tex-Mex Cafe restaurants. The Monterey's Tex-Mex Cafe restaurants
were sold effective May 5, 1994.
Fiscal year:
The Company's fiscal year is 52 or 53 weeks and ends on the Friday
nearest December 31. References to 1994, 1993 and 1992 are for the fiscal
years ended December 30, 1994, December 31, 1993 and January 1, 1993,
respectively. Fiscal year 1992 was 53 weeks in length, while 1994 and 1993
were each 52 weeks in length.
Basis of consolidation:
The consolidated financial statements include the accounts of the
Company and BAC. All significant intercompany accounts and transactions have
been eliminated.
Cash and cash equivalents:
Cash and cash equivalents of the Company are composed of demand deposits
with banks and short-term cash investments with remaining maturities of less
than three months from the date of purchase by the Company.
Inventories:
Inventories of food, paper products and supplies are stated at the lower
of cost or market on a first-in, first- out basis.
Property and equipment, depreciation and amortization:
Property and equipment are stated at cost. Depreciation and
amortization are provided by charges to operations over the estimated useful
lives of the assets, or the lease term if less, by the straight-line method.
Deferred charges and related amortization:
Loan costs are deferred and amortized over the term of the respective
agreements. Franchise rights are amortized over the remaining life of the
franchise agreements. In the fourth quarter of 1994, the Company revised its
estimate of the future benefit for preopening expenses. As a result, the
Company expensed all unamortized preopening expenses of approximately $900,000.
The Company will now expense all preopening expenses as incurred. Previously,
preopening expenses were amortized over a two year period. Other deferred
charges are amortized over various periods of up to five years. All
amortization is provided by the straight-line method.
Franchise fees and royalties:
The Company recognizes initial franchise fees upon fulfillment of all
significant obligations to the franchisee. Royalties from franchisees are
accrued as earned.
23
<PAGE> 93
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
2. SIGNIFICANT TRANSACTIONS:
Effective May 5, 1994, the Company sold its Monterey's Tex-Mex Cafe
restaurants for an aggregate purchase price consisting of approximately $6.7
million in cash, $4.7 million in subordinated promissory notes and the
retention of a 12 1/2% equity interest in the acquiring company. Due to the
Company's substantial equity interest, the acquiring company is a related party
subsequent to the transaction. Revenues from the Company's Monterey's Tex-Mex
Cafe restaurants were $6.2 million in 1994. Operating income was $6.0 million
in 1994. Operating income includes a gain of $5.5 million from the sale.
The Company provided for a loss of approximately $2.3 million in 1994 as
a result of the Company's decision to close one Chuck E. Cheese's restaurant
and the impairment in fair value of the fixed assets of ten Chuck E. Cheese's
restaurants. The impairment in fair value of the ten restaurants is due to the
Company's decision not to renew the leases as a result of the deterioration of
site characteristics or the inability to renew the leases at acceptable rental
terms.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
1994 1993
-------- -------
(THOUSANDS)
<S> <C> <C>
Trade . . . . . . . . . . . . . . . . . . . . . . . $ 382 $ 309
Other . . . . . . . . . . . . . . . . . . . . . . . 3,454 3,651
------- -------
3,836 3,960
Less allowance for doubtful collection . . . . . . (475) (266)
------- -------
$ 3,361 $ 3,694
======= =======
</TABLE>
4. NOTES RECEIVABLE:
The Company's notes receivable at December 30, 1994 and December 31,
1993 arose principally as a result of the sale of restaurants, advances to
franchisees, joint ventures and managed properties and lines of credit
established with the International Association of ShowBiz Pizza Time
Restaurants, Inc., a related party (Note 19). The notes have various terms,
but most are payable in monthly installments of principal and interest through
2000, with interest rates ranging from 8.5% to 13.5%. Substantially all notes
are collateralized by the related property and equipment. Balances of notes
receivable are net of an allowance for doubtful collection of $139,000 at
December 30, 1994. There was no allowance at December 31, 1993.
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
ESTIMATED
LIVES 1994 1993
--------- -------- ---------
(IN YEARS) (THOUSANDS)
<S> <C> <C> <C>
Land and improvements . . . . . . . . . . . . . . . 0 - 10 $ 4,650 $ 5,538
Leasehold improvements . . . . . . . . . . . . . . 4 - 15 107,928 109,445
Buildings and improvements . . . . . . . . . . . . 4 - 25 8,789 9,061
Furniture, fixtures and equipment . . . . . . . . . 2 - 10 87,756 80,562
Property leased under capital leases (Note 8) . . . 10 - 15 1,328 1,486
--------- ---------
210,451 206,092
Less accumulated depreciation and amortization . . (81,805) (77,142)
--------- ---------
128,646 128,950
Construction in progress . . . . . . . . . . . . . 1,544 4,057
--------- ---------
$ 130,190 $ 133,007
========= =========
</TABLE>
24
<PAGE> 94
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
6. DEFERRED CHARGES:
<TABLE>
<CAPTION>
1994 1993
------- -------
(THOUSANDS)
<S> <C> <C>
Franchise rights . . . . . . . . . . . . . $ 5,000 $ 5,000
Loan costs . . . . . . . . . . . . . . . . 434 370
Preopening expenses (Note 1) . . . . . . . 4,088
Consulting contracts . . . . . . . . . . . 643
Other . . . . . . . . . . . . . . . . . . . 557 563
------- -------
5,991 10,664
Less accumulated amortization . . . . . . . (3,908) (6,307)
------- -------
$ 2,083 $ 4,357
======= =======
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
1994 1993
------- -------
(THOUSANDS)
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . $10,819 $10,683
Salaries and wages . . . . . . . . . . . . 3,990 3,367
Insurance . . . . . . . . . . . . . . . . . 7,670 6,291
Taxes, other than income . . . . . . . . . 2,528 2,941
Other . . . . . . . . . . . . . . . . . . . 1,538 1,480
------- -------
$26,545 $24,762
======= =======
</TABLE>
8. LEASES:
The Company leases certain restaurants and related property and
equipment under operating and capital leases. All leases require the Company
to pay property taxes, insurance and maintenance of the leased assets. The
leases generally have initial terms of seven to 30 years with various renewal
options.
Following is a summary of property leased under capital leases:
<TABLE>
<CAPTION>
1994 1993
------- -------
(THOUSANDS)
<S> <C> <C>
Buildings and improvements . . . . . . . . . $ 1,328 $ 1,486
Less accumulated depreciation . . . . . . . (771) (735)
------- -------
$ 557 $ 751
======= =======
</TABLE>
25
<PAGE> 95
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
8. LEASES (CONTINUED):
Scheduled annual maturities of the obligations for capital and operating
leases as of December 30, 1994, are:
<TABLE>
<CAPTION>
YEARS CAPITAL OPERATING
- -------- ------- ---------
(THOUSANDS)
<S> <C> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . $ 275 $ 26,157
1996 . . . . . . . . . . . . . . . . . . . . . . . 292 25,194
1997 . . . . . . . . . . . . . . . . . . . . . . . 292 22,869
1998 . . . . . . . . . . . . . . . . . . . . . . . 256 19,701
1999 . . . . . . . . . . . . . . . . . . . . . . . 184 17,467
2000-2009 (aggregate payments) . . . . . . . . . . . 1,238 53,259
------- --------
Minimum future lease payments . . . . . . . . . . . 2,537 $164,647
========
Less amounts representing interest . . . . . . . . . (1,330)
-------
Present value of future minimum lease payments . . . 1,207
Less current portion . . . . . . . . . . . . . . . . (60)
-------
$ 1,147
=======
</TABLE>
Certain of the Company's real estate leases, both capital and operating,
require payment of contingent rent in the event defined revenues exceed
specified levels.
The Company's rent expense is comprised of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Minimum . . . . . . . . . . . . . . . . $28,003 $25,305 $20,485
Contingent . . . . . . . . . . . . . . 216 185 525
------- ------- -------
$28,219 $25,490 $21,010
======= ======= =======
</TABLE>
26
<PAGE> 96
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994
DECEMBER 31, 1993 AND JANUARY 1, 1993
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(THOUSANDS)
<S> <C> <C>
Revolving bank loan, due January 1996 . . . . . . . $ 28,800 $ 25,500
Obligations under capital leases (Note 8) . . . . . 1,207 1,397
-------- --------
30,007 26,897
Less current portion . . . . . . . . . . . . . . . . (10,060) (51)
-------- --------
$ 19,947 $ 26,846
======== ========
</TABLE>
The Company's revolving loan agreement was amended to provide the
Company with a credit line of up to $30.8 million due on January 31, 1996.
Beginning July 1, 1995, available borrowings under the credit line reduce each
month to $18.3 million by January 1, 1996. Available borrowings are further
reduced by outstanding letters of credit which totaled $1.5 million at December
30, 1994. Interest is provided at a rate equal to prime, 8.5% at December 30,
1994, plus 1%, increasing to 2.75% by January 1996. A 1/5% annual commitment
fee is payable on any unused credit line.
Under the terms of the revolving loan agreement, the Company is
prohibited from paying dividends on its common stock and must achieve certain
profitability levels.
The Company has a substantial portion of its assets pledged as
collateral for the bank loan, including $7,234,000 in notes receivable and
property and equipment with a net book value of $70,862,000.
10. COMMITMENTS AND CONTINGENCIES:
The Company has guaranteed certain obligations related to restaurant
building and equipment leases. The underlying assets are collateral for the
leases and the makers or assignees of all of the obligations are required to
perform thereunder before the Company is required to fulfill its guarantee. In
the event of default by the maker or assignee, the Company, in almost all
cases, may make payment under the guarantees in accordance with the original
payment schedule and has the right to locate potential buyers or subtenants for
the assets. As of December 30, 1994, such guarantees aggregated approximately
$ 1,126,000.
11. LITIGATION:
The Company has been named a defendant in litigation brought by
plaintiffs as individuals and as representatives of a purported class who are
holders of securities issued by Integra - A Hotel and Restaurant Company
("Integra") which has sought protection from creditors under Chapter 11 of the
Federal Bankruptcy Code. This suit has alleged that the Company, Integra and
The Hallwood Group, Incorporated ("Hallwood") violated state securities laws,
committed common law fraud and breached fiduciary duties to the plaintiffs in
connection with the Integra securities acquired by the plaintiffs from 1986
through 1988 and that the 1988 Integra distribution of 90% of the common stock
of the Company to holders of Integra common stock constituted a fraudulent
transfer under Texas law. The plaintiffs have sought actual damages in an
amount equal to the alleged loss of value of their Integra securities,
recission of the Company's 1988 spin-off and punitive damages.
27
<PAGE> 97
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
11. LITIGATION (CONTINUED):
The Company has been named a defendant in litigation brought by the
trustee of a municipal bond issuance made in 1980 upon which Integra executed a
guaranty. The plaintiff in this suit has alleged that Integra's guaranty of
the municipal bond issuance was binding on successors of Integra and that the
Company is a legal successor to Integra. The plaintiff in this action seeks to
recover judgement in the full amount of its claim against Integra.
The Company is a nominal defendant in a shareholders' derivative action
in which three of the Company's executive officers, four of the Company's
outside directors and Hallwood were named defendants. The plaintiffs in this
lawsuit have alleged the individual defendants breached fiduciary duties to
shareholders and unjustly enriched themselves as a result of alleged violations
of federal securities laws. The plaintiffs in this action have sought
unspecified damages.
The Company has been named a defendant in litigation brought by a
partnership alleging that the Company tortiously interfered with a contract
between the partnership and Integra and that the Company has successor
liability on the contract. The plaintiff in this action has sought damages.
The Company has also been named a defendant in a suit alleging that the
Company breached a restaurant lease, which the Company contends it has
rightfully terminated.
The Company presently believes that the ultimate resolution of these
lawsuits will not have a material adverse impact on the Company. Certain other
suits are pending against the Company which involve claims for damages which
are not material and which have arisen in the ordinary course of business.
12. REDEEMABLE PREFERRED STOCK:
As of December 30, 1994, the Company had 49,570 shares of its redeemable
preferred stock authorized and outstanding. The stock pays dividends at $4.80
per year, subject to a minimum cash flow test. As of December 30, 1994, one
quarterly dividend, totaling $59,484 or $1.20 per share, was accrued but not
yet paid. The redeemable preferred stock has been recorded at the net present
value and is being accreted on the straight-line basis. The Company's restated
articles of incorporation provide for the redemption of such shares at $60 per
share in 2005. During the continuation of any event of default by the Company,
the preferred shareholders shall be able to elect a majority of the directors
of the Company.
28
<PAGE> 98
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
13. EARNINGS PER COMMON SHARE:
Earnings per common and common equivalent share were computed based on
the weighted average number of common and common equivalent shares outstanding
during the period. Net income available per common share has been adjusted for
the items indicated.
Earnings per common and common equivalent share were computed as follows
(thousands, except per share data):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . $ 676 $11,891 $15,503
Accretion of redeemable preferred stock . . . . . . . . (103) (104) (103)
Redeemable preferred stock dividends . . . . . . . . . (238) (238) (238)
------- ------- -------
Adjusted income applicable to common shares . . . . . . $ 335 $11,549 $15,162
======= ======= =======
Primary:
Weighted average common shares outstanding . . . . . . 12,078 12,816 12,666
Common stock equivalents:
Stock purchase warrants . . . . . . . . . . . . . . 426 839
Other . . . . . . . . . . . . . . . . . . . . . . . . 49 213 157
------- ------- -------
Weighted average shares outstanding . . . . . . . . . 12,127 13,455 13,662
======= ======= =======
Earnings per common and common equivalent share . . . $ .03 $ .86 $ 1.11
======= ======= =======
Fully Diluted:
Weighted average common shares outstanding . . . . . 12,078 12,816 12,666
Common stock equivalents:
Stock purchase warrants . . . . . . . . . . . . . . 426 852
Other . . . . . . . . . . . . . . . . . . . . . . . 49 222 195
------- ------- -------
Weighted average shares outstanding . . . . . . . . . 12,127 13,464 13,713
======= ======= =======
Earnings per common and common equivalent share . . . $ .03 $ .86 $ 1.11
======= ======= =======
</TABLE>
14. FRANCHISE FEES AND ROYALTIES:
At December 30, 1994, 106 Chuck E. Cheese's restaurants were operated by
a total of 58 different franchisees. The standard franchise agreements grant to
the franchisee the right to develop and operate a restaurant and use the
associated trade names, trademarks, and service marks within the standards and
guidelines established by the Company.
Initial franchise fees included in revenues were $315,000, $82,500 and
$197,000 in 1994, 1993 and 1992, respectively.
15. COST OF SALES:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
(THOUSANDS)
Food, beverage and related supplies . . . . . . . . . . $ 46,328 $ 48,435 $ 45,881
Games and merchandise . . . . . . . . . . . . . . . . . 12,369 11,375 10,202
Labor . . . . . . . . . . . . . . . . . . . . . . . . . 79,032 77,533 69,196
-------- -------- --------
$137,729 $137,343 $125,279
======== ======== ========
</TABLE>
29
<PAGE> 99
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
16. INCOME TAXES:
The significant components of income tax expense are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Current expense . . . . . . . . . . . . . . . . . . . . . . . $ 869 $ 1,751 $ 1,161
Deferred expense:
Utilization of operating loss carryforwards . . . . . . . . 2,204 6,078 4,441
Tax (benefits) expense from exercise of stock
options and stock grants . . . . . . . . . . . . . . . . (928) (37) 4,436
Increase in valuation of deferred tax asset . . . . . . . . (971)
Allowance for tax credit carryforwards expiring in 1997 . . 1,104
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . (237) (465) (291)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (575)
------- ------- -------
$ 2,437 $ 6,356 $ 9,747
======= ======= =======
</TABLE>
The Company's deferred tax asset of approximately $33.0 million at
December 30, 1994 is primarly due to a $26.4 million tax effect of $74.0
million unused net operating loss carryforwards ("NOL's"), $7.1 million in tax
credit carryforwards and tax effected net taxable deductions of $575,000. In
1994, the Company recorded a valuation allowance of $1.1 million for deferred
tax credit carryforwards which are estimated to expire in 1997.
In August 1993, new federal tax legislation was enacted that increased
the Company's federal tax rate to 35% effective January 1, 1993. As a result,
the Company's deferred tax asset and net income were increased by
approximately $971,000 and deferred tax expense decreased in the same amount.
As of December 30, 1994, the Company has NOL's of approximately $74.0
million for federal income tax purposes. While the Company believes that it is
likely that it will realize these carryforwards, there can be no assurance that
they will be available to such extent and be fully realized. In addition, as
of December 30, 1994, the Company has investment tax credit and jobs tax credit
carryforwards totaling $5,258,000 and $495,000, respectively, and alternative
minimum tax credits of $1,369,000.
A schedule of expiring NOL's and tax credits by fiscal year are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------------------
YEARS NOL'S TAX CREDITS
- -------- ------ -----------
(THOUSANDS)
<S> <C> <C>
1997 . . . . . . . . . . . . . . . . . . . . . $ 1,104
1998 . . . . . . . . . . . . . . . . . . . . . 4,007
1999 . . . . . . . . . . . . . . . . . . . . . $39,000 395
2000 . . . . . . . . . . . . . . . . . . . . . 20,000 149
2001 . . . . . . . . . . . . . . . . . . . . . 14,000 19
2002 - 2008 . . . . . . . . . . . . . . . . . . 1,000 79
------- -------
$74,000 $ 5,753
======= =======
</TABLE>
The Company's alternative minimum tax credits have no expiration date.
30
<PAGE> 100
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
16. INCOME TAXES (CONTINUED):
Current tax laws and regulations relating to substantial changes in
control may limit the utilization of net operating loss and tax credit
carryforwards in any one year. As of December 30, 1994, no limitation of such
carryforwards has occurred.
A reconciliation of the statutory rate to taxes provided is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Statutory rate . . . . . . . . . . . . . . . . . . 34.0% 35.0% 34.0%
State income taxes . . . . . . . . . . . . . . . . 14.8% 5.1% 4.6%
Increase in valuation of deferred tax asset . . . . (5.3%)
Allowance for tax credit carryforwards . . . . . . 35.5%
Other . . . . . . . . . . . . . . . . . . . . . . . (6.0%)
----- ----- ----
Income taxes provided . . . . . . . . . . . . . . . 78.3% 34.8% 38.6%
===== ===== ====
</TABLE>
17. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company has certain financial instruments consisting primarily of
cash, cash equivalents, notes receivable, notes payable and redeemable
preferred stock. The carrying amount of cash and cash equivalents approximates
fair value because of the short maturity of those instruments. The carrying
amount of the Company's notes receivable, notes payable and redeemable
preferred stock approximates fair value based on the interest rates charged on
instruments with similar terms and risks. The estimated fair value of the
Company's redeemable preferred stock is $3.0 million. The carrying values of
all other financial instruments approximate the fair values.
18. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,781 $ 912 $1,416
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,389 1,769 935
Supplemental schedule of noncash investing and financing activities:
Other assets cancelled in connection with the acquisition of
property and equipment . . . . . . . . . . . . . . . . . . . . . . . 24
Liabilities assumed or incurred in connection with the acquisition
of property and equipment . . . . . . . . . . . . . . . . . . . . . . . 674
Notes received in connection with the disposition of property and
equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,650
Investment received in connection with the disposition of
property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 438
</TABLE>
31
<PAGE> 101
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
19. RELATED PARTY TRANSACTIONS:
Hallwood is the beneficial owner of approximately 14.5% of the
outstanding common stock of the Company. The directors of Hallwood serve as a
majority of the directors of the Company and Integra.
In December 1993, the Company fully repaid approximately $1.7 million in
a term loan payable to a third party assigned by Integra. In February 1992,
the Company prepaid $1,583,000 in a term loan payable to Hallwood which had
been assigned to them by Integra. In November 1992, the Company redeemed
$4,768,300 in floating rate subordinated bonds held by Hallwood.
The Company made annual payments to Hallwood of $125,000 for consulting
services in 1994, 1993, and 1992. In addition, the Company made interest
payments to Hallwood of $261,000 in 1992. In consideration for rent reductions
resulting from Hallwood's negotiation of the Company's home office lease
agreement in December 1990, the Company assigned to Hallwood its sublease
interest in the home office building subleased to Integra with a fair value of
approximately $120,000 per year.
The Company paid $99,000 and $115,000 in interest to Integra for 1993
and 1992, respectively.
In 1993 and 1992, Hallwood and its affiliate exercised warrants to
purchase 835,873 and 73,263 shares of common stock, respectively. The exercise
price of the warrants was $1.78 per share.
During 1993 and 1992, the Company advanced $30,000 and $437,000,
respectively, to joint ventures in which the Company has a 50% interest or
less. Principal and interest are payable in monthly installments, with
interest at various rates from prime to 12%. The Company also has
miscellaneous accounts receivable from the joint ventures of approximately
$393,000 and $279,000 at December 30, 1994 and December 31, 1993, respectively.
In September 1990, the Company entered into an agreement to grant the
International Association of ShowBiz Pizza Time Restaurants, Inc. (the
"Association") a $2.0 million line of credit, at prime, which allowed the
Association to accelerate the conversion of all robotic characters into Chuck
E. Cheese's characters and to begin improvements to existing Chuck E. Cheese's
characters. In December 1993, the Company granted the Association a $1.0
million line of credit, at prime, for advertising production. In November
1994, available borrowings under the lines of credit were reduced to a total of
$2.4 million at an annual interest rate of prime plus 1/2%. The Association
was established to develop and improve entertainment attractions and produce
system wide advertising. Two officers of the Association are also officers of
the Company. At December 30, 1994, $1,372,000 was outstanding under these
lines of credit. The Company also had a miscellaneous account receivable from
the Association of $22,000 and $30,000 at December 30, 1994 and December 31,
1993, respectively.
20. EMPLOYEE BENEFIT PLANS:
The Company has employee benefit plans that include: a) executive bonus
compensation plans based on the performance of the Company; b) a non-statutory
stock option plan and c) a stock grant plan.
32
<PAGE> 102
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECMBBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
20. EMPLOYEE BENEFIT PLANS (CONTINUED):
The number of shares of the Company's common stock which may be issued
under the stock option plan is 1,348,025 shares. All shares must be granted
before December 31, 1998. The exercise price for options granted under the
plan may not be less than the fair market value of the Company's common stock
at date of grant. Options may not be exercised until the employee has been
continuously employed at least one year after the date of grant. Options which
expire or terminate may be regranted under the plan.
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Options outstanding, beginning of year . . . . 372,662 276,297 445,388
Granted . . . . . . . . . . . . . . . . . . . 341,500 158,800 162,030
Exercised . . . . . . . . . . . . . . . . . . (51,714) (47,885) (321,369)
Terminated . . . . . . . . . . . . . . . . . . (155,813) (14,550) (9,752)
-------- ------- --------
Options outstanding, end of year
($2.45-$33.50 per share) . . . . . . . . . . 506,635 372,662 276,297
======== ======= ========
Options:
Exercisable . . . . . . . . . . . . . . . . . 175,317 261,490 114,267
Available for grant . . . . . . . . . . . . . 171,871 357,558 251,808
</TABLE>
The options granted in 1994 are at exercise prices ranging from $8.13 to
$13.75 per share. In January and March 1995, the Stock Option Committee of the
Board of Directors granted 191,540 additional options at an exercise price of
$8.50 per share, subject to the surrender of certain options granted in 1994.
The number of shares of the Company's common stock which may be awarded
to senior executives of the Company under the Stock Grant Plan is 1,145,758
shares. An aggregate of 414,508 shares were awarded pursuant to the plan in
1993. None were awarded in 1994 and 1992. Compensation expense recognized by
the Company pursuant to this plan was $2,734,000, $2,756,000 and $418,000, in
1994, 1993, and 1992, respectively. All shares are subject to forfeiture upon
termination of the participant's employment by the Company over vesting periods
ranging from 2 years to 6 years. The shares are nontransferable during the
vesting periods.
As a result of shares awarded to the Company's Chairman of the Board and
Chief Executive Officer, the Company recognized deferred compensation of $12.0
million in 1993. The deferred compensation is amortized over the compensated
periods of service through 1997.
In January 1992, the Board of Directors accelerated the vesting
provisions of 350,955 shares of common stock granted in 1989 to the Company's
Chairman of the Board and Chief Executive Officer. Concurrently, 112,053
shares were surrendered to the Company to satisfy federal income tax
withholding obligations. Shares were held in an irrevocable trust to secure
his continuing obligations to the Company under his employment and consulting
agreements.
The Company has adopted the ShowBiz 401(k) Retirement and Savings Plan,
to which it may at its discretion make an annual contribution out of its
current or accumulated earnings of up to the lesser of 50% of employee
contributions or $750 per employee. Contributions by the Company may be made
in the form of its common stock or in cash. In 1993, the Company made a
contribution of approximately $36,000 in common stock for the 1992 plan year.
No contributions were made for the 1993 plan year and it is anticipated that
approximately $30,000 will be made for 1994.
33
<PAGE> 103
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 30, 1994,
DECEMBER 31, 1993 AND JANUARY 1, 1993
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following summarizes the unaudited quarterly results of operations
for the years ended December 30, 1994 and December 31, 1993 (thousands, except
per share data).
<TABLE>
<CAPTION>
Fiscal year ended December 30, 1994
----------------------------------------------
April 1 July 1 Sept. 30 Dec. 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $ 76,370 $ 64,019 $ 68,285 $ 59,153
Gross operating profit . . . . . . . . . . . . 38,377 30,858 33,789 27,074
Operating income (loss) . . . . . . . . . . . . 5,744 2,529 1,982 (5,969)
Net income (loss) . . . . . . . . . . . . . . . 3,425 1,248 1,024 (5,021)
Per Share:
Primary and fully diluted:
Net income (loss) . . . . . . . . . . . . . $ .27 $ .10 $ .08 $ (.42)
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended December 31, 1993
----------------------------------------------
April 2 July 2 Oct. 1 Dec. 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $ 73,381 $ 64,669 $ 71,636 $ 62,312
Gross operating profit . . . . . . . . . . . . 38,235 31,542 35,985 28,893
Operating income (loss) . . . . . . . . . . . . 10,854 2,962 5,366 (484)
Net income (loss) . . . . . . . . . . . . . . . 6,583 1,799 3,895 (386)
Per Share:
Primary and fully diluted:
Net income (loss) . . . . . . . . . . . . . $ .48 $ .13 $ .28 $ (.04)
</TABLE>
In the second quarter of 1994, the Company recognized a gain of $5.5
million from the sale of its Monterey's Tex- Mex Cafe restaurants. This was
partially offset by a $2.0 million loss associated with the impairment in fair
value of certain Chuck E. Cheese's restaurants.
The fourth quarter of 1994 includes a $1.1 million increase in income
tax expense due to a reduction in deferred tax credit carryforwards which are
estimated to expire in 1997, a write-off of approximately $900,000 for
preopening expenses due to a change in the estimated future benefit of such
expenses and a reserve of approximately $400,000 for the impairment in fair
value of certain Chuck E. Cheese's restaurants.
34
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
ShowBiz Pizza Time, Inc.
Irving, Texas
We have audited the consolidated financial statements of ShowBiz Pizza Time,
Inc. and subsidiary as of December 30, 1994 and December 31, 1993, and for each
of the three years (52 or 53 weeks) in the period ended December 30, 1994 and
have issued our report thereon dated March 3, 1995; such report which discloses
a change in the method of accounting for preopening expenses in 1994, is
included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of ShowBiz Pizza Time, Inc. and
subsidiary, listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Dallas, Texas
March 3, 1995
35
<PAGE> 105
SCHEDULE II
SHOWBIZ PIZZA TIME, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING OF AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
==============================================================================================================
(THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Years ended:
December 30, 1994 . . . $ 266 $ 209 $ 475
======== ======== =======
December 31, 1993 . . . $ 150 $ 116 $ 266
======== ======== =======
January 1, 1993 . . . . $ 234 $ 84 (A) $ 150
======== ======== =======
Accumulated amortization -- deferred charges:
Years ended:
December 30, 1994 . . . $ 6,307 $ 2,854 $ 5,252 (B) $ 3,909
======== ======== ======== =======
December 31, 1993 . . . $ 7,789 $ 2,110 $ 3,592 (B) $ 6,307
======== ======== ======== =======
January 1, 1993 . . . . $ 6,424 $ 1,784 $ 419 (B) $ 7,789
======== ======== ======== =======
Reserve for uncollectible notes receivable:
Years ended:
December 30, 1994 . . . $ 139 $ 139
======= =======
December 31, 1993 . . . $ 320 $ 320 (C)
======= ========
January 1, 1993 . . . . $ 320 $ 320
======= =======
</TABLE>
________________
(A) Settlement of previously reserved accounts.
(B) Write-off of deferred charges.
(C) Adjustment to notes receivable reserve.
36
<PAGE> 106
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
P A R T I I I
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item regarding the directors and
executive officers of the Company shall be included in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1995 annual meeting of stockholders and is incorporated herein by
reference thereto.
Item 11. Executive Compensation.
The information required by this Item regarding the directors and
executive officers of the Company shall be included in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A in connection with the
Company's 1995 annual meeting of stockholders and is incorporated herein by
reference thereto.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item shall be included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with Company's 1995 annual meeting of stockholders and is incorporated herein
by reference thereto.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item shall be included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's 1995 annual meeting of stockholders and is incorporated
herein by reference thereto.
37
<PAGE> 107
P A R T I V
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) Financial Statements and Supplementary Data:
Independent auditors' report. ShowBiz Pizza Time, Inc. and
Subsidiary consolidated financial statements:
Consolidated balance sheets as of December 30, 1994 and
December 31, 1993.
Consolidated statements of earnings for the years ended December
30, 1994, December 31, 1993, and December 27, 1991.
Consolidated statements of shareholders' equity for the years
ended December 30, 1994, December 31, 1993, and January 1,
1993.
Consolidated statements of cash flows for the years ended
December 30, 1994, December 31, 1993, and January 1, 1993.
Notes to consolidated financial statements.
(2) Financial Statement Schedules:
ShowBiz Pizza Time, Inc. and Subsidiary
II --- Valuation and qualifying accounts and reserves.
38
<PAGE> 108
(3) Exhibits:
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
3(a) --- Restated Articles of Incorporation of the Company, as amended to date (Filed as Exhibit
3(a) to the Company's Annual Report on Form 10-K for the year ended January 1, 1993 and
incorporated herein by reference).
3(b) --- Bylaws of the Company, as amended to date (filed as Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by
reference).
4(a) --- Specimen form of certificate representing $.10 par value Common Stock (filed as Exhibit
4(a) to the Company's Annual Report on Form 10-K for the year ended December 28, 1990 and
incorporated herein by reference).
4(b) --- Specimen form of certificate representing $60 par value Class A Preferred Stock (filed as
Exhibit 4(b) to the Company's Annual Report on Form 10-K for the year ended December 28,
1990 and incorporated herein by reference).
4(c) --- Fourth Amended and Restated Revolving Credit Note in the stated amount of $50,000,000 dated
December 15, 1993 from the Company to The First National Bank of Boston (filed as Exhibit
4(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference).
10(a)(1) --- Amended and Restated Employment Agreement dated April 14, 1993 between the Company and
Richard M. Frank (filed as Exhibit 10(a)(8) to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 2, 1993 and incorporated herein by reference).
10(a)(2) --- Consulting Agreement dated January 5, 1989 between the Company and Richard M. Frank (filed
as Exhibit 10(a)(5) to the Company's Annual Report on Form 10-K for the year ended December
27, 1991 and incorporated herein by reference).
10(a)(3) --- Amendment to Consulting Agreement dated January 29, 1992, amending the Consulting Agreement
dated January 5, 1989 between the Company and Richard M. Frank (filed as Exhibit 10(a)(6)
to the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and
incorporated herein by reference).
10(a)(4) --- Stock Grant Trust Agreement dated January 29, 1992 among the Company, Richard M. Frank,
Ronald F. Saupe and Kevin J. Shepherd (filed as Exhibit 10(a)(7) to the Company's Annual
Report on Form 10-K for the year ended December 27, 1991 and incorporated herein by
reference).
10(b) --- Employment Agreement dated January 4, 1994 between the Company and Michael H. Magusiak.
(filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference).
</TABLE>
39
<PAGE> 109
<TABLE>
<S> <C>
10(c)(1) --- Non-Statutory Stock Option Plan of the Company, as amended to date (filed as Exhibit
10(a)(1) to Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1994 and incorporated herein by reference).
10(c)(2) --- Specimen form of Contract under the Non-Statutory Stock Option Plan of the Company, as
amended to date (filed as Exhibit 10(a)(2) to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994 and incorporated herein by reference).
10(d)(1) --- Stock Grant Plan of the Company, as amended to date (filed as Exhibit 10(d)(1) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated
herein by reference).
10(d)(2) --- Specimen form of Certificate of Participation to certain participants under the Stock Grant
Plan of the Company (filed as Exhibit 10(e)(3) to Company's Annual Report on Form 10-K for
the year ended December 29, 1989 and incorporated herein by reference).
10(e)(1) --- Specimen current form of the Company's Franchise Agreement (filed as Exhibit 10(d)(1) to
the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and herein by
reference).
10(e)(2) --- Specimen current form of the Company's Development Agreement (filed as Exhibit 10(d)(2) to
the Company's Annual Report on Form 10-K for the year ended December 27, 1991 and herein by
reference).
10(f)(1) --- Second Amended and Restated Revolving Credit Agreement dated as of November 19, 1992
between The First National Bank of Boston and the Company (filed as Exhibit 10(e)(1) to the
Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated
herein by reference).
10(f)(2) --- First Amendment to Second Amended and Restated Revolving Credit Agreement dated as of
December 15, 1993 between The First National Bank of Boston, the Company and BHC
Acquisition Corporation ("BAC") (filed as Exhibit 10(f)(2) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 and incorporated herein for all
purposes).
10(f)(3) --- Second Amendment to Second Amended and Restated Revolving Credit Agreement dated as of July
1, 1994 between the Company, BAC and The First National Bank of Boston, BAC (filed as
Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended July 1,
1994 and incorporated herein by reference).
10(f)(4) --- Third Amendment Agreement dated as of December 29, 1994 between the Company, BAC and The
First National Bank of Boston.
10(f)(5) --- Letter agreement dated as of July 1, 1994 between the Company, BAC and the First National
Bank of Boston (filed as Exhibit 10(b)(1) to the Company's Quarterly report on Form 10-Q
and incorporated herein by reference).
</TABLE>
40
<PAGE> 110
<TABLE>
<S> <C>
10(f)(6) --- Second Amended and Restated ShowBiz Security Agreement dated as of November 19, 1992
between the Company and The First National Bank of Boston (filed as Exhibit 10(e)(2) to the
Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated
herein by reference).
10(f)(7) --- Second Amended and Restated Monterey Security Agreement dated as of November 19, 1992
between BAC and The First National Bank of Boston (filed as Exhibit 10(e)(3) to the
Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated
herein by reference).
10(f)(8) --- Second Amended and Restated Guaranty Agreement dated November 19, 1992 between BAC and The
First National Bank of Boston (filed as Exhibit 10(e)(4) to the Company's Annual Report on
Form 10-K for the year ended January 1, 1993 and incorporated herein by reference).
10(f)(9) --- Second Amended and Restated Stock Pledge Agreement dated as of November 19, 1992 between
the Company and The First National Bank of Boston (filed as Exhibit 10(e)(5) to the
Company's Annual Report on Form 10-K for the year ended January 1, 1993 and incorporated
herein by reference).
10(g) --- Financial and Management Consulting Services Agreement between the Company and The Hallwood
Group Incorporated (filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for
the year ended December 30, 1988 and incorporated herein by reference).
10(h) --- Stock Purchase and Registration Agreement dated as of May 5, 1992 among the Company, The
Hallwood Group Incorporated and certain shareholders of the Company (filed as Exhibit 28 to
the Company's Registration Statement on Form S-3 (No. 33-48307) and incorporated herein by
reference).
10(i)(1) --- Entertainment Operating Fund Line of Credit dated as of November 17, 1994 between the
Company and the International Association of ShowBiz Pizza Time Restaurants, Inc. (the
"Association").
10(i)(2) --- Entertainment Operating Fund Promissory Note dated as of November 17, 1994 in the original
principal amount of $750,000 executed by the Association payable to the order of the
Company.
10(i)(3) --- National Advertising Production Line of Credit dated as of November 17, 1994 between the
Company and the Association.
</TABLE>
41
<PAGE> 111
<TABLE>
<S> <C>
10(i)(4) --- National Advertising Production Promissory Note dated as of November 17, 1994 in the
original principal amount of $750,000 executed by the Association payable to the order of
the Company.
10(i)(5) --- Concept Unification Fund Line of Credit dated as of November 17, 1994 between the Company
and the Association.
10(i)(6) --- Concept Unification Fund Promissory Note dated as of November 17, 1994 in the original
principal amount of $500,000 executed by the Association payable to the order of the
Company.
10(i)(7) --- National Media Fund Line of Credit as of November 17, 1994 between the Company and the
Association.
10(i)(8) --- National Media Fund Promissory Note dated as of November 17, 1994 in the original principal
amount of $400,000 executed by the Association payable to the order of the Company.
18 --- Letter of Deloitte & Touche LLP
21 --- List of subsidiaries.
23 --- Independent Auditors' Consent.
</TABLE>
________________
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed in the fourth quarter of 1994.
(c) EXHIBITS PURSUANT TO ITEM 601 OF REGULATION S-K:
Pursuant to Item 601(b)(4) of Regulation S-K, there have been
excluded from the exhibits filed pursuant to this report
instruments defining the rights of holders of long-term debt of
the Company where the total amount of the securities authorized
under each such instrument does not exceed 10% of the total
assets of the Company. The Company hereby agrees to furnish a
copy of any such instruments to the Commission upon request.
(d) FINANCIAL STATEMENTS EXCLUDED FROM THE ANNUAL REPORT TO
SHAREHOLDERS BY RULE 14A-3(B): No financial statements are
excluded from the annual report to the Company's shareholders by
Rule 14a- 3(b).
42
<PAGE> 112
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Dated: March 29, 1995 SHOWBIZ PIZZA TIME, INC.
By: /r/Richard M. Frank
-------------------------
Richard M. Frank
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C>
/r/ Richard M. Frank Chairman of the Board, March 29, 1995
- ------------------------------------- Chief Executive Officer,
Richard M. Frank and Director (Principal
Executive Officer)
/r/ Michael H. Magusiak President and Director March 29, 1995
- -------------------------------------
Michael H. Magusiak
/r/ Larry G. Page Executive Vice President, March 29, 1995
- ------------------------------------- Treasurer, (Principal Financial
Larry G. Page Officer and Principal Accounting
Officer)
/r/ Charles A. Crocco, Jr. Director March 29, 1995
- -------------------------------------
Charles A. Crocco, Jr.
/r/ Anthony J. Gumbiner Director March 29, 1995
- -------------------------------------
Anthony J. Gumbiner
/r/ Robert L. Lynch Director March 29, 1995
- -------------------------------------
Robert L. Lynch
/r/ J. Thomas Talbot Director March 29, 1995
- -------------------------------------
J. Thomas Talbot
/r/ Brian M. Troup Director March 29, 1995
- -------------------------------------
Brian M. Troup
/r/ Louis P. Neeb Director March 29, 1995
- -------------------------------------
Louis P. Neeb
/r/ Cynthia I. Pharr Director March 29, 1995
- -------------------------------------
Cynthia I. Pharr
</TABLE>
43
<PAGE> 113
================================================================================
UNITED STATES
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 for the quarterly period ended
June 30, 1995.
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
_____________ to _______________.
Commission File Number 0-15782
SHOWBIZ PIZZA TIME, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-0905805
(State or other jurisdiction of (I.R. S. Employer
incorporation or organization) Identification No.)
P.O. Box 152077
4441 West Airport Freeway
Irving, Texas 75015
(Address of principal executive offices,
including zip code)
(214) 258-8507
(Registrant's telephone number,
including area code)
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 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 [ ]
At June 30, 1995, an aggregate of 12,215,177 shares of the registrant's
Common Stock, par value of $.10 each (being the registrant's only class of
common stock), were outstanding.
================================================================================
<PAGE> 114
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SHOWBIZ PIZZA TIME, INC.:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated balance sheets as of June 30, 1995 (unaudited)
and December 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated statements of earnings for the three months
ended June 30, 1995 and July 1, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated statements of earnings for the six months
ended June 30, 1995 and July 1, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated statement of shareholders' equity for the six
months ended June 30, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated statements of cash flows for the six months
ended June 30, 1995 and July 1, 1994 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
1
<PAGE> 115
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 30, 1994
(THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 30,
ASSETS 1995 1994
----------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,733 $ 2,381
Accounts receivable, including receivables
from related parties
of $311 and $416, respectively . . . . . . . . . . . . . . . . . . . . . . 2,985 3,361
Current portion of notes receivable, including
receivables from related parties of $364
and $300, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792 529
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,274 3,107
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,029 2,900
Current portion of deferred tax asset . . . . . . . . . . . . . . . . . . . . 1,084 3,583
--------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,897 15,861
--------- ----------
Investments in related parties . . . . . . . . . . . . . . . . . . . . . . . . . 778 699
--------- ----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,408 130,190
--------- ----------
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,168 29,414
--------- ----------
Other assets:
Notes receivable, less current portion, including
receivables from related parties of $2,358
and $1,708, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . 7,272 6,705
Deferred charges, less amortization . . . . . . . . . . . . . . . . . . . . . 2,787 2,083
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,406 3,356
--------- ----------
13,465 12,144
--------- ----------
$ 192,716 $ 188,308
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . $ 77 $ 10,060
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . 29,538 26,545
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 29,615 36,605
--------- ---------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . 29,102 19,947
--------- ---------
Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,284 3,025
--------- ---------
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,411 1,314
--------- ---------
Redeemable preferred stock, $60 par value, redeemable for $2,974 in 2005 . . . . 1,953 1,902
--------- ---------
Shareholders' equity:
Common stock, $.10 par value; authorized 30,000,000 shares; 14,287,961
and 14,337,235 shares issued, respectively . . . . . . . . . . . . . . . 1,429 1,434
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . 154,512 156,532
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,226 5,012
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,553) (7,200)
Less treasury shares of 2,072,784 at both dates, at cost . . . . . . . . . . . (30,263) (30,263)
--------- ---------
127,351 125,515
--------- ---------
$ 192,716 $ 188,308
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 116
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1995 JULY 1, 1994
--------------- --------------
<S> <C> <C>
Food and beverage revenues . . . . . . . . . . . . . . . . . . . . . $ 42,862 $ 45,421
Games and merchandise revenues . . . . . . . . . . . . . . . . . . . 18,773 17,487
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . 807 1,087
Joint venture income (loss) . . . . . . . . . . . . . . . . . . . . . (6) 24
--------- ---------
62,436 64,019
--------- ---------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 33,553 33,161
Selling, general and administrative expenses, including related
party expenses of $32 in both periods . . . . . . . . . . . . . 11,163 12,225
Depreciation and amortization . . . . . . . . . . . . . . . . . . 5,487 6,148
(Gain) loss on property transactions . . . . . . . . . . . . . . . 110 (3,504)
Other operating expenses . . . . . . . . . . . . . . . . . . . . . 13,553 13,460
--------- ---------
63,866 61,490
--------- ---------
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . (1,430) 2,529
--------- ---------
Other income (expenses):
Interest income, including related party income of $48 and $52,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 207 156
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (740) (430)
--------- ---------
(533) (274)
--------- ---------
Income (loss) before income taxes . . . . . . . . . . . . . . . . . (1,963) 2,255
---------- ---------
Income taxes:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . 137 198
Deferred (benefit) expense . . . . . . . . . . . . . . . . . . . . (920) 809
--------- ---------
(783) 1,007
--------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,180) $ 1,248
========= =========
Earnings per common and common equivalent share:
Primary:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ (.10) $ .10
========= =========
Weighted average shares outstanding . . . . . . . . . . . . . . . 12,079 11,989
========= =========
Fully diluted:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ (.10) $ .10
========= =========
Weighted average shares outstanding . . . . . . . . . . . . . . . 12,091 11,989
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 117
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1995 JULY 1, 1994
--------------- --------------
<S> <C> <C>
Food and beverage revenues . . . . . . . . . . . . . . . . . . . . . $ 92,728 $ 100,567
Games and merchandise revenues . . . . . . . . . . . . . . . . . . . 40,323 37,391
Franchise fees and royalties . . . . . . . . . . . . . . . . . . . . 1,853 2,320
Joint venture income . . . . . . . . . . . . . . . . . . . . . . . . 54 111
--------- ---------
134,958 140,389
--------- ---------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 70,954 71,154
Selling, general and administrative expenses, including related
party expenses of $63 in both periods . . . . . . . . . . . . . 22,460 24,315
Depreciation and amortization . . . . . . . . . . . . . . . . . . 10,851 12,432
(Gain) loss on property transactions . . . . . . . . . . . . . . . 39 (3,494)
Other operating expenses . . . . . . . . . . . . . . . . . . . . . 27,334 27,709
--------- ---------
131,638 132,116
--------- ---------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 3,320 8,273
--------- ---------
Other income (expenses):
Interest income, including related party income of $97 and $99,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . 436 255
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (1,453) (792)
--------- ---------
(1,017) (537)
--------- ---------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 2,303 7,736
--------- ---------
Income taxes:
Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . 525 696
Deferred expense . . . . . . . . . . . . . . . . . . . . . . . . . 393 2,367
--------- ---------
918 3,063
--------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,385 $ 4,673
========= =========
Earnings per common and common equivalent share:
Primary:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .10 $ .37
========= =========
Weighted average shares outstanding . . . . . . . . . . . . . . . 12,094 12,280
========= =========
Fully diluted:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .10 $ .37
========= =========
Weighted average shares outstanding . . . . . . . . . . . . . . . 12,112 12,280
========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 118
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Common Treasury
Stock Capital in Deferred Stock
------------------- Excess of Retained Compen- ----------------
Shares Par Value Par Value Earnings sation Shares Cost
-------- --------- --------- -------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 30, 1994 . . . . . 14,337 $ 1,434 $ 156,532 $ 5,012 $ (7,200) 2,073 $(30,263)
Net income . . . . . . . . . . . . 1,385
Redeemable preferred stock accretion (52)
Redeemable preferred stock dividends,
$2.40 per share . . . . . . . . . (119)
Stock options exercised . . . . . . 11 1 68
Tax expense from the exercise of
stock options and stock grants. . (351)
Stock grants forfeited . . . . . . (60) (6) (1,737) 1,737
Amortization of deferred
compensation . . . . . . . . . . . 910
------ ------- --------- ------- -------- ----- --------
Balances, June 30, 1995 . . . . . . . 14,288 $ 1,429 $ 154,512 $ 6,226 $ (4,553) 2,073 $(30,263)
====== ======= ========= ======= ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 119
SHOWBIZ PIZZA TIME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1995 JULY 1, 1994
------------- ------------
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,385 $ 4,673
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 10,851 12,432
Deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . 393 2,367
(Gain) loss on property transactions . . . . . . . . . . . . . . . 39 (3,494)
Compensation expense under stock grant plan . . . . . . . . . . . . 910 1,367
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 347
Net change in receivables, inventory, prepaids, payables and
accrued liabilities . . . . . . . . . . . . . . . . . . . . . . 3,075 617
--------- ---------
Cash provided by operations . . . . . . . . . . . . . . . . 16,913 18,309
--------- ---------
Investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . (11,866) (15,365)
Proceeds from disposition of property and equipment . . . . . . . . 6,725
Additions to notes receivable . . . . . . . . . . . . . . . . . . . (2,046) (1,109)
Payments received on notes receivable . . . . . . . . . . . . . . . 1,215 1,476
Change in investments, deferred charges and other assets . . . . . (1,064) (1,097)
--------- ---------
Cash used in investing activities . . . . . . . . . . . . (13,761) (9,370)
--------- ---------
Financing activities:
Payments on line of credit . . . . . . . . . . . . . . . . . . . . (29,200) (4,360)
Proceeds from debt and line of credit . . . . . . . . . . . . . . . 28,400 7,910
Reduction of capital lease obligations . . . . . . . . . . . . . . (28) (21)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . 69 238
Treasury stock acquired . . . . . . . . . . . . . . . . . . . . . . (13,513)
Redeemable preferred stock dividends . . . . . . . . . . . . . . . (119) (119)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 13
--------- ---------
Cash used in financing activities . . . . . . . . . . . . . (800) (9,852)
--------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . 2,352 (913)
Cash and cash equivalents, beginning of period . . . . . . . . . . . 2,381 4,511
--------- ---------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . $ 4,733 $ 3,598
========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 120
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995 AND JULY 1, 1994
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the accompanying financial statements for the
periods ended June 30, 1995 and July 1, 1994 reflect all adjustments
(consisting only of normal recurring adjustments except as referred to in Note
5) necessary to present fairly the Company's financial condition, results of
operations and cash flows.
Certain information and footnote disclosures normally included in the
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The unaudited consolidated
financial statements referred to above should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K
filed with the Securities and Exchange Commission for the year ended December
30, 1994. Results of operations for the periods ended June 30, 1995 and July 1,
1994 are not necessarily indicative of the results for the year.
2. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Earnings per common and common equivalent share were computed based on the
weighted average number of common and common equivalent shares outstanding
during the period. Net income available per common share has been adjusted for
the items indicated below, and earnings per common and common equivalent share
were computed as follows (thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
JUNE 30, JULY 1, JUNE 30, JULY 1,
1995 1994 1995 1994
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . $ (1,180) $ 1,248 $ 1,385 $ 4,673
Accretion of redeemable preferred stock . . . . . (27) (26) (52) (51)
Redeemable preferred stock dividends . . . . . . (59) (59) (119) (119)
-------- --------- -------- ---------
Adjusted income (loss) applicable to common
and common equivalent shares . . . . . . . . . $ (1,266) $ 1,163 $ 1,214 $ 4,503
======== ========= ======== =========
Primary:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . 12,026 11,887 12,056 12,169
Common stock equivalents:
Stock purchase options . . . . . . . . . . 53 102 38 111
-------- --------- -------- ---------
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . 12,079 11,989 12,094 12,280
======== ========= ======== =========
Earnings (loss) per common and common
equivalent share . . . . . . . . . . . . . $ (.10) $ .10 $ .10 $ .37
======== ========= ======== =========
Fully diluted:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . 12,026 11,887 12,056 12,169
Common stock equivalents:
Stock purchase options . . . . . . . . . . 65 102 56 111
-------- --------- -------- ---------
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . 12,091 11,989 12,112 12,280
======== ========= ======== =========
Earnings (loss) per common and common
equivalent share . . . . . . . . . . . . $ (.10) $ .10 $ .10 $ .37
======== ========= ======== =========
</TABLE>
7
<PAGE> 121
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995 AND JULY 1, 1994
(UNAUDITED)
3. INCOME TAXES:
Income taxes have been provided at the expected annual federal tax rate
during the year (35% for 1995) plus an estimated provision for state income
taxes and state franchise taxes.
4. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1995 JULY 1, 1994
------------- ------------
<S> <C> <C>
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,433 $ 736
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 353 1,053
Supplemental schedule of noncash investing and
financing activities:
Notes received in connection with the disposition
of property and equipment . . . . . . . . . . . . . . . . . 4,650
Investment received in connection with the disposition
of property and equipment . . . . . . . . . . . . . . . . . 438
</TABLE>
5. SIGNIFICANT TRANSACTIONS:
During the second quarter of 1995, the Company refinanced its previous
credit facility of $30.8 million expiring January 1996 with an increased
facility of $33 million. The new credit facility consists of certain term
notes totalling $18 million with annual interest of 10.02% maturing in 2001,
and certain term notes totalling $10 million with annual interest equal to the
London Interbank Offered Rate ("LIBOR") plus 3.5% maturing in 2000. In
addition, the Company has a $5 million line of credit with annual interest
provided at prime plus 1/2 %, or at the Company's option, LIBOR plus 3% and
matures June 1997. No amount is outstanding under the line of credit at June
30, 1995. The Company is required to comply with certain ratio tests during
the terms of the loan agreements.
During the first quarter of 1995, the Company changed its estimate of the
useful lives of certain fixed assets as follows:
<TABLE>
<CAPTION>
Previous New
Lives Lives
--------- -----
<S> <C> <C>
Land and improvements . . . . . . . . . . . . . . . . 0-10 0-20
Leasehold improvements . . . . . . . . . . . . . . . 4-15 4-20
Buildings and improvements . . . . . . . . . . . . . 4-25 4-25
Furniture, fixtures and improvements . . . . . . . . 2-10 2-15
Property based under capital leases . . . . . . . . . 10-15 10-15
</TABLE>
8
<PAGE> 122
SHOWBIZ PIZZA TIME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1995 AND JULY 1, 1994
(UNAUDITED)
5. SIGNIFICANT TRANSACTIONS (CONT.):
As a result of this change, income before income taxes increased $576,000,
net income was increased $346,000 and earnings per share increased $.03 in the
second quarter of 1995. In the first six months of 1995, income before income
taxes increased approximately $1.1 million, net income increased $685,000 and
earnings per share increased $.05.
During the first quarter of 1995, the Company's Chairman of the Board and
Chief Executive Officer forfeited 60,000 shares of unvested common stock of the
Company previously awarded to him under the Company's stock grant plan. As a
result of this forfeiture, deferred compensation and capital in excess of par
value were reduced by approximately $1.7 million. Amortization of the
remaining deferred compensation is provided by the straight-line method over
the remaining term of the employment agreement.
9
<PAGE> 123
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Second Quarter 1995 Compared to Second Quarter 1994
Revenues for the second quarter of 1995 decreased 2.5% to $62.4 million from
$64.0 million in the second quarter of 1994 primarily due to the sale of the
Company's Monterey's Tex-Mex Cafe restaurants effective May 5, 1994. Revenues
from the Company's Monterey's Tex-Mex Cafe restaurants were $1.5 million in the
second quarter of 1994. Revenue generated by the Company's Chuck E. Cheese's
restaurants declined slightly to $62.4 million in the second quarter of 1995
from $62.5 million in 1994 due to a decline in comparable store sales of 2.4%
between the periods.
The Company incurred an operating loss of $1.4 million in the second quarter
of 1995 compared to operating income of $2.5 million in the second quarter of
1994. Included in operating income in 1994 is a gain of $5.5 million related
to the sale of the Company's Monterey's Tex-Mex Cafe restaurants and a $1.9
million loss associated with the valuation of fixed assets used in certain
Chuck E. Cheese's restaurants. The decline in comparable store sales and
operating margins in the Company's Chuck E. Cheese's restaurants also
contributed to the decline in operating income. A material portion of
operating costs are fixed resulting in an erosion of operating margins at lower
sales levels.
A summary of the results of operations of the Company as a percentage of
revenues for the two quarters is shown below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
JUNE 30, 1995 JULY 1, 1994
------------- ------------
<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . 100.0% 100.0%
------- -------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . 53.7 51.8
Selling, general and administrative . . 17.9 19.1
Depreciation and amortization . . . . . 8.8 9.6
(Gain) loss on property
transactions . . . . . . . . . . . . .2 (5.5)
Other operating expenses . . . . . . . 21.7 21.0
------- -------
102.3 96.0
------- -------
Operating income (loss) . . . . . . . . . (2.3)% 4.0%
======= =======
</TABLE>
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants declined to $62.4
million in the second quarter of 1995 from $62.5 million in the second quarter
of 1994 primarily due to a decline of 2.4% in comparable store sales of such
restaurants which were opened during all of the second quarters of both 1995
and 1994. The Company opened one new restaurant in the first quarter of 1995
and 12 new restaurants throughout 1994. Management believes that several
factors may have contributed to the comparable store sales decline including
increased competition and to a lesser extent, the impact of newly opened
Company restaurants on comparable store sales of existing restaurants in
certain markets. Menu prices were comparable between the two periods.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 102.3% in the
second quarter of 1995 from 96.0% in the second quarter of 1994.
10
<PAGE> 124
Cost of sales increased as a percentage of revenues to 53.7% in the second
quarter of 1995 from 51.8% in the comparable period of 1994. Cost of food,
beverage, prize and merchandise items for Chuck E. Cheese's restaurants as a
percentage of restaurant sales decreased to 18.4% in the second quarter of 1995
from 18.5% in the second quarter of 1994 primarily due to an increase in game
sales as a percentage of total restaurant sales. Labor expenses for Chuck E.
Cheese's restaurants as a percentage of restaurant sales increased to 32.1%
during the second quarter of 1995 from 30.3% in the second quarter of 1994
primarily due to increased labor rates, reduced management turnover and the
decline in the comparable store sales.
Selling, general and administrative expenses as a percentage of revenues
decreased to 17.9% in the second quarter of 1995 from 19.1% in the comparable
period of 1994 primarily due to a decline in corporate overhead costs.
Depreciation and amortization expenses as a percentage of revenues decreased
to 8.8% in the second quarter of 1995 from 9.6% in the second quarter of 1994.
Preopening expense declined due to the write-off of all unamortized preopening
expense in the fourth quarter of 1994 resulting from a change in the estimated
future benefit of such expenses. Depreciation expense declined due to the sale
of Monterey's Tex-Mex Cafe restaurants in May 1994 and a change effected in the
first quarter of 1995 in the estimated useful lives of certain fixed assets
based on a review of historical asset utilization. As a result of this change,
depreciation expense decreased approximately $576,000 in the second quarter of
1995.
Other operating expenses increased as a percentage of revenues to 21.7% in
the second quarter of 1995 from 21.0% in the second quarter of 1994 primarily
due to increased rent costs as a percentage of revenues and the decline in
comparable store sales.
The Company had a loss on property transactions of $110,000 in the second
quarter of 1995 compared to a net gain on property transactions of $3.5 million
in the second quarter of 1994. In the second quarter of 1994, the Company
recognized a gain of $5.5 million from the sale of substantially all of the
assets of its Monterey's Tex-Mex Cafe restaurants on May 5, 1994. The gain
was partially offset by a loss of approximately $1.9 million in the second
quarter of 1994. The loss was a result of the Company's decision to close one
Chuck E. Cheese's restaurant and the decline in fair value of the fixed assets
of eight Chuck E. Cheese's restaurants due to the Company's decision not to
renew the leases as a result of the deterioration of site characteristics. The
Company will consider possible relocation of some of the restaurants. The
Company provided for a loss on property transactions of approximately $110,000
in the second quarter of 1995 compared to a loss of $100,000 in the second
quarter of 1994 due to the replacement of certain assets in conjunction with
the enhancement of facilities and entertainment packages of restaurants.
Operating Income (Loss)
As a result of the changes in revenues and expenses discussed above, the
Company had an operating loss of $1.4 million in the second quarter of 1995
compared to operating income of $2.5 million in the second quarter of 1994.
Included in operating income are the operations of Monterey's Tex-Mex Cafe
restaurants through May 5, 1994. Operating income in the second quarter of
1994 for Monterey's Tex-Mex Cafe restaurants was $5.6 million, including a gain
on property transactions of $5.5 million.
Net Income (Loss)
Interest expense increased to $740,000 in the second quarter of 1995 from
$430,000 in the second quarter of 1994 due primarily to an increase in interest
rates and the Company's average outstanding debt since the second quarter of
1994. The Company had a net loss of $1.2 million in the second quarter of 1995
compared to net income of $1.2 million in the second quarter of 1994 due to the
changes in revenues and expenses discussed above. The Company's primary and
fully diluted loss per share was $.10 per share in the second quarter of 1995
compared to earnings per share of $.10 per share in the second quarter of 1994.
11
<PAGE> 125
First Six Months of 1995 Compared to First Six Months of 1994
Revenues decreased 3.9% to $135.0 million in the first six months of 1995
from $140.4 million in the comparable period of 1994. Revenues generated by
the Company's Chuck E. Cheese's restaurants increased to $135.0 million in the
first six months of 1995 from $134.2 million in the first six months of 1994
due to the net addition of one Company restaurant in the first six months of
1995 and 12 new restaurants in 1994. Comparable store sales from the Company's
Chuck E. Cheese's restaurants declined 2.8% between the periods. Revenues from
the Company's Monterey's Tex-Mex Cafe restaurants were $6.2 million in the
first six months of 1994.
Operating income decreased to $3.3 million in the first six months of 1995
from $8.3 million in the first six months of 1994. Included in operating
income in 1994 is a gain of $5.5 million related to the sale of the Company's
Monterey's Tex-Mex Cafe restaurants and a $1.9 million loss associated with the
valuation of fixed assets used in certain Chuck E. Cheese's restaurants. The
decline in comparable store sales and operating margins in the Company's Chuck
E. Cheese's restaurants also contributed to the decline in operating income. A
material portion of operating costs are fixed resulting in an erosion of
operating margins at lower sales levels.
A summary of the results of operations of the Company as a percentage of
revenues for the six month periods is shown below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, 1995 JULY 1, 1994
------------- ------------
<S> <C> <C>
Revenue . . . . . . . . . . . . . . . . . 100.0% 100.0%
------- -------
Costs and expenses:
Cost of sales . . . . . . . . . . . . . 52.6 50.7
Selling, general and administrative . . 16.6 17.3
Depreciation and amortization . . . . . 8.0 8.9
(Gain) loss on property
transactions . . . . . . . . . . . . (2.5)
Other operating expenses . . . . . . . 20.3 19.7
------- -------
97.5 94.1
------- -------
Operating income . . . . . . . . . . . . 2.5% 5.9%
======= =======
</TABLE>
Revenues
Revenues from the Company's Chuck E. Cheese's restaurants increased to
$135.0 million in the first six months of 1995 from $134.2 million in the first
six months of 1994 primarily due to new restaurant development which occurred
throughout 1994 and January 1995. Comparable store sales of such restaurants
which were open during all of the first six months of both 1995 and 1994
declined by 2.8% between the two periods. Management believes that several
factors may have contributed to the comparable store sales decline including
increased competition and to a lesser extent, the impact of newly opened
restaurants on comparable store sales of existing restaurants in certain
markets. Menu prices were comparable between the two periods.
Costs and Expenses
Costs and expenses as a percentage of revenues increased to 97.5% in the
first six months of 1995 from 94.1% in the first six months of 1994.
12
<PAGE> 126
Cost of sales increased as a percentage of revenues to 52.6% in the first
six months of 1995 from 50.7% in the comparable period of 1994. Cost of food,
beverage, prize and merchandise items for Chuck E. Cheese's restaurants as a
percentage of restaurant sales decreased to 18.2% in the first six months of
1995 from 18.3% in the first six months of 1994 primarily due to an increase in
game sales as a percentage of total restaurant sales. Labor expenses for Chuck
E. Cheese's restaurants as a percentage of restaurant sales increased to 31.2%
during the first six months of 1995 from 29.1% in the first six months of 1994
primarily due to increased labor rates, reduced management turnover and the
decline in the comparable store sales.
Selling, general and administrative expenses as a percentage of revenues
decreased to 16.6% in the first six months of 1995 from 17.3% in the comparable
period of 1994 primarily due to a reduction in corporate overhead expenses.
Depreciation and amortization expenses as a percentage of revenues decreased
to 8.0% in the first six months of 1995 from 8.9% in the comparable period of
1994. Preopening expense declined due to the write-off of all unamortized
preopening expense in the fourth quarter of 1994 resulting from a change in the
estimated future benefit of such expenses. Depreciation expense declined due
to the sale of Monterey's Tex-Mex Cafe restaurants in May 1994 and a change
effected in the first quarter of 1995 in the estimated useful lives of certain
fixed assets based on a review of historical asset utilization. As a result of
this change, depreciation expense decreased approximately $1.1 million in the
first six months of 1995.
Other operating expenses increased as a percentage of revenues to 20.3% in
the first six months of 1995 from 19.7% in the first six months of 1994
primarily due to increased rent as a percentage of revenues and the decline in
comparable store sales. This was slightly offset by a decrease in insurance
costs as a percentage of revenues between the periods.
The Company had a net loss on property transactions of $39,000 in the first
six months of 1995 compared to a net gain on property transactions of $3.5
million in the first six months of 1994. In the first six months of 1994, the
Company recognized a gain of $5.5 million from the sale of substantially all of
the assets of its Monterey's Tex-Mex Cafe restaurants on May 5, 1994. The gain
was partially offset by a loss of approximately $1.9 million in the first six
months of 1994. The loss was a result of the Company's decision to close one
Chuck E. Cheese's restaurant and the decline in fair value of the fixed assets
of eight Chuck E. Cheese's restaurants due to the Company's decision not to
renew the leases as a result of the deterioration of site characteristics.
The Company will consider possible relocation of some of the restaurants. The
Company provided for a loss on property transactions of approximately $139,000
in the first six months of 1995 compared to a loss of $100,000 in the first six
months of 1994 due to the replacement of certain assets in conjunction with the
enhancement of facilities and entertainment packages of restaurants. In the
first six months of 1995, the Company recognized a gain of $100,000 related to
the sale of assets held for resale.
Operating Income
As a result of the changes in revenues and expenses discussed above,
operating income declined to $3.3 million in the first six months of 1995 from
$8.3 million in the first six months of 1994. Included in operating income are
the operations of Monterey's Tex-Mex Cafe restaurants through May 5, 1994.
Operating income in the first six months of 1994 for Monterey's Tex-Mex Cafe
restaurants was $5.9 million, including a gain on property transactions of $5.5
million.
Net Income
Interest expense increased to $1.5 million in the first six months of 1995
from $792,000 in the first six months of 1994 due primarily to an increase in
interest rates and the Company's average outstanding debt between the periods.
The Company's net income decreased to $1.4 million in the first six months of
1995 from $4.7 million in the first six months of 1994 due to the changes in
revenues and expenses discussed above. The Company's primary and fully diluted
earnings per share decreased to $.10 per share in the first six months of 1995
from $.37 per share in the first six months of 1994.
13
<PAGE> 127
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations decreased to $16.9 million in the first six
months of 1995 from $18.3 million in the comparable period of 1994. Cash
outflows from investing and financing activities for the first six months of
1995 were $13.8 million and $800,000, respectively. The Company's primary
requirements for cash relate to planned capital expenditures and debt service.
The Company expects that it will satisfy such requirements from cash provided
by operations and funds available under its line of credit or additional
borrowings.
In June 1995, the Company refinanced its previous credit facility of $30.8
million expiring in January 1996 with an increased facility of $33 million.
The new credit facility consists of certain term notes totalling $18 million
with annual interest of 10.02% maturing in 2001, and certain term notes
totalling $10 million with annual interest equal to the London Interbank
Offered Rate ("LIBOR") plus 3.5% maturing in 2000. In addition, the Company
has obtained a $5 million line of credit due June 1997 with interest provided
at prime plus 1/2%, or at the Company's option, LIBOR plus 3%. The Company is
currently in negotiations for additional borrowings between $5 and $7 million.
The Company is required to comply with certain financial ratio tests during the
terms of the loan agreements.
The Company believes that the success of its facility and entertainment
enhancement program in addition to new restaurant development will continue to
be significant factors in its ability to generate increased revenues over the
foreseeable future. The Company continues to evolve and expand its efforts to
significantly enhance its Chuck E. Cheese's locations. This "repositioning"
program is being carried out on a market by market basis and involves: an
improved exterior identity, a facility upgrade, an expanded free ball-crawl
with tubes and tunnels suspended from or reaching to the ceiling, and an
enhancement of the variety and number of games and rides offered to its guests.
The Company completed 21 restaurants under this program in 1994 and has
currently completed an additional 27 restaurants during 1995. The average
sales growth in these restaurants during the periods following their
repositioning compared to the same periods of the prior year has increased
approximately 20% after giving effect to average sales trends experienced
during the three month periods prior to their repositioning. The Company
currently intends to reposition substantially all of the Company restaurants by
the end of 1996. The Company anticipates that the repositioning of the
remaining restaurants will cost on the average approximately $300,000 per
restaurant. However, this amount can vary significantly at a particular
restaurant depending on the several factors, including the restaurant's square
footage, date of the most recent remodel and the existing assets at the
restaurant. In the event certain site characteristics considered essential to
the success of a restaurant deteriorate, the Company will consider closing the
restaurant or relocating the restaurant to a more desirable site.
The Company is implementing several strategies designed to strengthen the
sales vitality of its existing unit base in what management believes is a
competitive market. The Company is refining its marketing plan; the Company
has accelerated its commitment of capital to existing stores; and the Company
is currently limiting its 1995 new restaurant development to ensure that the
sales vitality of the Company's existing restaurant base is given immediate
priority. The Company believes that certain operating costs could increase as
a result of implementing its strategies designed to strengthen existing unit
sales. If the declines in comparable store sales of the Company's Chuck E.
Cheese's restaurants experienced since 1992 continue to be experienced over a
longer term, an adverse impact on the Company's operating margins and results
of operations could continue.
The Company is involved in a number of lawsuits. The Company presently
believes that it will continue to incur expense to defend against and resolve
such litigation, and anticipates that it will satisfy such expense with cash
flow from operations. (Refer to Item 1. Legal Proceedings).
14
<PAGE> 128
The Company believes it will realize substantial benefit from utilization of
approximately $73 million in net operating loss carryforwards to reduce its
federal income tax liability. Such net operating loss carryforwards expire
from years 1999 through 2002. 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. The Company has adopted an amendment to its Restated Articles of
Incorporation which is intended to prevent changes in ownership of its common
stock that would cause such limitation. In addition, the Company has
investment tax credit, job tax credit and alternative minimum tax credit
carryforwards of approximately $7 million expiring from years 1997 through
2008. Tax credit carryforwards can be utilized by the Company only after all
net operating loss carryforwards have been realized. If the Company's results
of operations continue to decline, a portion of the net operating loss and tax
credit carryforwards could expire prior to utilization resulting in a charge
against income. Taxable income for the five years ending December 30, 1994 was
$62 million. Based on the early results of the repositioned restaurants and
the Company's current plans to reposition substantially all of its Company
owned restaurants by the end of 1996, the Company projects future taxable
income levels sufficient to realize its net operating loss and tax credit
carryforwards prior to their expiration after considering an allowance of $1.1
million for the estimated expiration of tax credit carryforwards in 1997.
15
<PAGE> 129
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In December 1991, the Company, The Hallwood Group Incorporated,
("Hallwood"), Integra-A Hotel and Restaurant Company ("Integra"), and their
individual directors were named defendants in two separate but related lawsuits
brought in the 14th and 134th District Courts of Dallas County, Texas. In
April 1993, the Company and its two directors who are also employees of the
Company, were dismissed as defendants in the lawsuit brought in the 134th
District Court by an Integra common stockholder. Integra owned approximately
90% of the outstanding Common Stock of the Company prior to Integra's
distribution of such Common Stock in December 1988 (the "1988 Distribution") to
its shareholders of record. The plaintiffs in the remaining lawsuit
constituted certain holders of warrants, options and preferred stock of Integra
who sought to serve as representatives of proposed classes of other holders of
such securities. The plaintiffs alleged that the Company (i) violated Texas
statutes related to securities fraud and the fraudulent transfer of assets,
(ii) committed common law fraud, and (iii) breached fiduciary and other duties
to the plaintiffs. As amended, this suit sought recision of the 1988
distribution actual damages in excess of $184 million, and punitive damages in
excess of $500 million. Although, the Company believes that the claims made
against it were without merit, the Company has settled the lawsuit. The Court
on June 26, 1995 issued an order for final judgement that approved the
settlement of the suit and dismissed it with prejudice.
In May 1994, Hermitage Hotel, Ltd., L. P., filed a lawsuit against the
Company, Hallwood and certain directors of the Company in the 101st District
Court of Dallas County, Texas. The lawsuit sought recovery on behalf of
plaintiff under theories of successor liability, tortious interference with
contract, fraud, negligent representation and breach of contract. The
plaintiff was seeking approximately $10.2 million in actual damages, $30
million in exemplary damages, attorneys' fees and court costs. Although, the
Company believes that the claims made against it in this suit were without
merit, the Company settled this suit and on June 28, 1995, the Court issued an
agreed order of dismissal, with prejudice.
In June 1993, the Company was named as a nominal defendant in a
shareholders' derivative action in the 68th Judicial District Court in Dallas
County, Texas in which three of the Company's executive officers, four of the
Company's outside directors and Hallwood were named defendants. The plaintiffs
in this lawsuit have alleged the individual defendants (i) breached their
fiduciary duties to stockholders, (ii) committed constructive fraud and (iii)
unjustly enriched themselves as a result of alleged violations of federal
securities laws and illegal insider trading between July 13, 1992 and June 11,
1993. The Company has agreed in principle to the settlement of this lawsuit
subject to final documentation and court approval.
In July 1993, the Company was named a defendant in a lawsuit brought in the
Circuit Court for Davidson County, Nashville, Tennessee by Third National Bank
in Nashville, as Trustee pursuant to a municipal bond issuance of $6.4 million
made in 1980, for which Integra executed a guaranty. The plaintiff has alleged
that Integra's guaranty of the municipal bond issuance was binding on
successors of Integra and that the Company is the legal successor to Integra.
The plaintiff is seeking to recover a judgement against the Company in the full
amount of its claim against Integra, which is unspecified, as well as
attorneys' fees and costs. In April 1994, the court dismissed the plaintiff's
complaint for failure to state a claim upon which relief can be granted.
Plaintiff has appealed the dismissal to the 6th Circuit Court of Appeals, which
affirmed the dismissal, by an order and opinion dated June 27, 1995. The
Company believes the allegations made in this suit to be without merit and will
offer a vigorous defense in in any further appeal by the plaintiff.
16
<PAGE> 130
In January 1994, the Company was named a defendant in a lawsuit brought in
the Supreme Court of the State of New York, County of Queens, by Big Six
Towers, Inc., in its purported capacity as a landlord to the Company with
regard to a restaurant/entertainment center location in Queens County, New York
which the Company had contracted to lease from the plaintiff. The plaintiff
has alleged that the Company has breached the lease and is seeking total
damages in excess of $4.0 million against the Company. The Company believes it
validly terminated the lease in question pursuant to an agreement with the
plaintiff and believes the allegations made in this suit to be without merit
and therefore intends to vigorously defend this lawsuit.
Certain other pending legal proceedings exist against the Company which the
Company believes are not material in amount or have arisen in the ordinary
course of its business.
Item 2. Changes in Securities.
None to report during quarter for which this report is filed.
Item 3. Defaults Upon Senior Securities.
None to report during quarter for which this report is filed.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 8, 1995, at the Company's annual meeting of shareholders, the
Company's shareholders re-elected Richard M. Frank (7,163,648 shares in favor
and 68,509 shares withheld) and Anthony J. Gumbiner (7,163,647 shares in favor
and 68,509 shares withheld) as Class I Directors. The Company's shareholders
also allegedly elected Joshua S. Friedman (7,205,370 shares in favor and 5,184
shares withheld) as a Class I Director, replacing Michael H. Magusiak
(7,163,646 shares in favor and 68,509 shares withheld). The outcome of the
alleged election of Joshua S. Friedman has been challenged in a lawsuit filed
in a District Court located in Jefferson County, Kansas. The claims raised in
this lawsuit assert that there were voting irregularities and inconsistent
positions taken by the inspectors of election regarding the counting of
proxies. Charles A. Crocco, Jr., Robert L. Lynch, Louis P. Neeb, Cynthia I.
Pharr, J. Thomas Talbot, and Brian M. Troup continue to serve as Directors.
Also, on June 8, 1995, at the Company's annual meeting of shareholders, the
Company's shareholders approved an increase in the number of shares available
for grant under the 1988 Option Plan from 1,348,025 to 1,848,025 (5,604,951
shares in favor, 2,897,772 shares against and 1,135,361 shares abstaining).
Finally, on June 8, 1995, at the Company's annual meeting of shareholders,
the Company's shareholders approved the adoption of a Formula Stock Option Plan
(6,625,052 shares in favor, 1,865,551 shares against and 1,147,481 shares
abstaining). The Formula Stock Option Plan provides for the granting of
nonqualified stock options to non-employee directors of the Company or its
Affiliates (as defined in the Formula Stock Option Plan).
17
<PAGE> 131
Item 5. Other Information.
None to report during quarter for which this report is filed.
Item 6. Exhibits and Reports on Form 8-K.
a) EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<S> <C>
3 -- Amendment to the Bylaws, dated May 5, 1995.
10 (a)(1) -- Note Purchase Agreement dated June 15, 1995, between Allstate Life
Insurance Company, Connecticut Mutual Life Insurance Company, C M Life
Insurance Company, MassMutual Corporate Value Partners Limited,
Massachusetts Mutual Life Insurance Company, Modern Woodmen of America,
and the Company.
10 (b)(1) -- 10.02% Series A Senior Note Due 2001, in the stated amount of
$10,000,000.00, dated June 15, 1995, between Allstate Life Insurance
Company and the Company.
10 (c)(1) -- 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between Connecticut Mutual Life
Insurance Company and the Company.
10 (c)(2) -- 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between Connecticut Mutual Life
Insurance Company and the Company.
10 (c)(3) -- 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between Connecticut Mutual Life
Insurance Company and the Company.
10 (d)(1) -- 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between C M Life Insurance Company
and the Company.
10 (d)(2) -- 10.02% Series A Senior Note Due 2001, in the stated amount of
$1,000,000.00, dated June 15, 1995, between C M Life Insurance Company
and the Company.
10 (e)(1) -- Floating Rate Series B Senior Note Due 2000, in the stated amount of
$2,000,000.00, dated June 15, 1995, between Massachusetts Mutual Life
Insurance Company and the Company.
</TABLE>
18
<PAGE> 132
<TABLE>
<S> <C>
10 (e)(2) -- Floating Rate Series B Senior Note Due 2000, in the stated amount of
$2,000,000.00, dated June 15, 1995, between Massachusetts Mutual Life
Insurance Company and the Company.
10 (e)(3) -- Floating Rate Series B Senior Note Due 2000, in the stated amount of
$2,000,000.00, dated June 15, 1995, between Massachusetts Mutual Life
Insurance Company and the Company.
10 (f)(1) -- Floating Rate Series B Senior Note Due 2000, in the stated amount of
$4,000,000.00, dated June 15, 1995, between MassMutual Corporate Value
Partners Limited (I/N/O Webell & Co.) and the Company.
10 (g)(1) -- 10.02% Series A Senior Note Due 2001, in the stated amount of
$3,000,000.00, dated June 15, 1995, between Modern Woodmen of America and
the Company.
10 (h)(1) -- Loan Agreement in the stated amount of $5,000,000.00, dated June 27,
1995, between Bank One, Texas, N.A. and the Company.
10 (h)(2) -- Revolving Credit Note in the stated amount of $5,000,000, dated June 27,
1995, between Bank One, Texas, N.A. and the Company.
10 (i)(1) -- Non-statutory Stock Option Plan (filed as Exhibit A to the Company's
Proxy Statement for Annual Meeting of Stockholders to be held on June 8,
1995, and incorporated herein by reference).
10 (j)(1) -- Non-Employee Directors Stock Option Plan (filed as Exhibit B to the
Company's Proxy Statement for Annual Meeting of Stockholders to be held
on June 8, 1995, and incorporated herein by reference).
</TABLE>
B) REPORTS ON FORM 8-K
The Company filed a Form 8-K dated May 5, 1995, reporting that its Board
of Directors had adopted amendments to the Company's Bylaws requiring
that advance notice be given to the Company in the event a stockholder
desires to nominate a person for election to the Board of Directors or
to transact any other business at an annual meeting of stockholders.
Included in such Form 8-K was the announcement that the Company's Board
of Directors determined to notify the recordholders of more than 4.75%
of the Company's common stock that the Company intends to enforce,
prospectively, the existing provisions in its Restated Articles of
Incorporation generally restricting the transfer of any shares of the
Company's common stock to a holder of more than 4.75% of the value of
the outstanding capital stock or the transfer of shares of common stock
which would result in the intended transferee owning in excess of 4.75%
of the value of the outstanding capital stock.
19
<PAGE> 133
SIGNATURES
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.
SHOWBIZ PIZZA TIME, INC.
Dated: August 14, 1995 By:/s/ Larry G. Page
--------------------------
Larry G. Page
Executive Vice President
and Chief Financial Officer
20
<PAGE> 134
EXHIBIT INDEX
<TABLE>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 -- Second Restated Certificate of Incorporation of The Hallwood Group
Incorporated, is incorporated herein by reference to Exhibit 4.2 to
the Company's Form S-8 Registration Statement, File No. 33-63709.
3.2 -- Restated Bylaws of the Company, as currently in effect, including
all amendments thereto, is incorporated herein by reference to
Exhibit 3.4 to the Company's Form 10-K for the fiscal year ended
July 31, 1993, File No. 1-8303.
4.1 -- Indenture Agreement, dated as of April 14, 1983, among Atlantic
Metropolitan Corporation, Atlantic Metropolitan (U.K.) plc and The
Law Debenture Trust Corporation plc, as Trustee, relating to the
12% Convertible Notes due July 31, 1997 of Anglo Metropolitan
(U.K.) plc is incorporated herein by reference to Exhibit 4.4 to
Atlantic Metropolitan Corporation's Form 10-K for the fiscal year
ended July 31, 1983, File No. 1-8303.
4.2 -- Indenture Agreement, and related Pledge Agreement, dated as of
March 2, 1994, among Norwest Bank Minnesota, National Association,
Trustee, and the Company, regarding 7% Collateralized Subordinated
Debentures due July 31, 2000, is incorporated herein by reference
to Exhibit 4.2 to the Company's Form 10-Q for the fiscal quarter
ended January 31, 1994, File No. 1-8303.
4.3 -- Indenture, dated as of May 1, 1989, between the Company and The
Bank of New York, as Trustee, is incorporated herein by reference
to Exhibit T3C to the Company's Application for Qualification of
Indenture on Form T-3, Registration No. 22-19326.
10.1 -- Consulting Agreement with Robert L. Lynch is incorporated herein by
reference to Exhibit 10.2 to Umet Properties Corporation's
Registration Statement on Form S-11, File No. 2-73345.
10.2 -- Amendment to Consulting Agreement with Robert L. Lynch, effective
October 1, 1982, is incorporated herein by reference to Exhibit
10.4 to Umet Properties Corporation's Form 10-K for the fiscal year
ended November 30, 1982, File No. 1-8384.
10.3 -- Amended and Restated Agreement, dated March 30, 1990, between the
Company and Stanwick Management Company, Inc. (subsequently merged
into its parent, Stanwick Holdings, Inc.) concerning the allocation
of costs and expenses incurred in connection with the operation and
management of their common offices is incorporated herein by
reference to Exhibit 10.30 to the Company's Form 10-Q for the
fiscal quarter ended April 30, 1990, File No. 1-8303.
10.4 -- Amended 1985 Stock Option Plan is incorporated herein by reference
to Exhibit 10.9 to the Company's Form 10-K for the fiscal year
ended July 31, 1987, File No. 1-8303.
10.5 -- Employment Agreement, dated January 1, 1994, between the Company
and Melvin John Melle, File No. 1-8303.
10.6 -- Agreement, dated December 18, 1987, between the Company, Grainger
Trust plc, Atlantic Metropolitan (U.K.) plc and Alan George Crisp,
relating to the sale by the Company of Atlantic Metropolitan (U.K.)
plc is incorporated herein by reference to Exhibit 2.1 to the
Company's Form 8-K dated January 6, 1988, File No. 1-8303.
10.7 -- Tax Sharing Agreement, dated as of March 15, 1989, between the
Company and Brookwood Companies Incorporated is incorporated herein
by reference to Exhibit 10.25 to the Company's Form 10-K for the
fiscal year ended July 31, 1989, File No. 1-8303.
10.8 -- Amended Tax-Favored Savings Plan Agreement of the Company,
effective as of February 1, 1993, incorporated by reference to
Exhibit 10.33 to the Company's Form 10-K for the fiscal year ended
July 31, 1993, File No. 1-8303.
10.9 -- Hallwood Special Bonus Agreement, dated as of August 1, 1994,
between the Company and all members of its control group that now,
or hereafter, participate in the Hallwood Tax Favored Savings Plan
and its related trust, and those employees who, during the plan
year of reference are highly-compensated eligible employees of the
Company, File No. 1-8303.
10.10 -- Consulting Agreement, dated as of August 1, 1989, between the
Company and Atlantic Management Associates, Inc. is incorporated by
reference to Exhibit 10.28 to the Company's Form 10-Q for the
fiscal quarter ended January 31, 1990, File No. 1-8303.
10.11 -- Services Agreement, dated September 29, 1993 between the Company
and Hallwood Securities Limited, incorporated by reference to
Exhibit 10.43 to the Company's Form 10-K for the fiscal year ended
July 31, 1993, File No. 1-8303.
</TABLE>
<PAGE> 135
<TABLE>
<C> <S>
10.12 -- Consulting Agreement, dated June 2, 1993, between the Company and
Hallwood Monaco S.A.M, incorporated by reference to Exhibit 10.47
to the Company's Form 10-K for the fiscal year ended July 31, 1993,
File No. 1-8303.
10.13 -- Credit Agreement and Guaranty, dated as of December 9, 1993, among
Brookwood Companies Incorporated as Borrower, the Guarantor
signatory hereto, the Banks signatory hereto and The Chase
Manhattan Bank, N.A., as Agent; and the First Amendment to Credit
Agreement and Guaranty, dated as of March 31, 1994, incorporated by
reference to Exhibit 10.55 to the Company's Form 10-Q for the
quarter ended April 30, 1994, File No. 1-8303.
10.14 -- Second Amendment to Credit and Guaranty, dated as of September 27,
1995, among Brookwood Companies Incorporated as Borrower, Kenyon
Industries, Inc. as Guarantor and The Chase Manhattan Bank, N.A. as
Bank and as agent for the Banks, File No. 1-8303.
10.15 -- Third Amendment to Credit and Guaranty, dated as of September 27,
1995, among Brookwood Companies Incorporated as Borrower, Kenyon
Industries, Inc. as Guarantor and The Chase Manhattan Bank, N.A. as
Bank and as agent for the Banks, filed herewith.
10.16 -- WCMA Note and Loan Agreement and Pledge and Collateral Assignment
of Securities Account and Securities, dated as of April 19, 1995
between the Company and Merrill Lynch Business Financial Services,
Inc.; and Amendment to Loan Documents, dated September 8, 1994,
File No. 1-8303.
10.17 -- Employment Agreement, dated as of April 1, 1993, between the
Company's Hallwood Monaco SAM subsidiary and Anthony J. Gumbiner,
File No. 1-8303.
10.18 -- Financial Consulting Agreement, dated as of August 1, 1994, between
the Company and Hallwood Financial Corporation, File No. 1-8303.
10.19 -- Financial Consulting Agreement, dated as of June 30, 1994, between
the Company and Hallwood Petroleum, Inc., File No. 1-8303.
10.20 -- Agreement, dated as of January 1, 1993, between Hallwood Investment
Company and Brian Michael Troup, filed herewith.
10.21 -- Financial and Management Consulting Services Agreement, between
ShowBiz Pizza Time, Inc. and the Company, dated December 1988,
filed herewith.
10.22 -- 1995 Stock Option Plan For The Hallwood Group Incorporated is
incorporated herein by reference to Exhibit 4.1 of the Company's
Form S-8 Registration Statement, File No. 33-63709.
11 -- Statement Regarding Computation of Per Share Earnings.
22 -- Active Subsidiaries of the Registrant as of September 30, 1995.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.15
THIRD AMENDMENT TO CREDIT AGREEMENT AND GUARANTY, WAIVER
AND LINE LETTER
THIRD AMENDMENT TO CREDIT AGREEMENT AND GUARANTY, WAIVER AND LINE
LETTER, dated as of June 23, 1995 ("Amendment Agreement") among BROOKWOOD
COMPANIES INCORPORATED, a Delaware corporation (the "Borrower") KENYON
INDUSTRIES, INC., a Delaware corporation (the "Guarantor"), and THE CHASE
MANHATTAN BANK, N.A. ("Chase"), as Bank, and Chase, as Agent for the Banks (as
defined in the Credit Agreement referred to below) (in such capacity, together
with its successors in such capacity, the "Agent").
PRELIMINARY STATEMENT. The Borrower, the Guarantor, Chase and the
Agent have entered into a Credit Agreement and Guaranty dated as of December 9,
1992, as amended by the First Amendment to Credit Agreement and Guaranty dated
as of March 31, 1993, and as further amended by the Second Amendment to Credit
Agreement and Guaranty dated as of September 27, 1994 (as so amended, the
"Credit Agreement"). Any term used in this Amendment Agreement and not
otherwise defined in this Amendment Agreement shall have the meaning assigned
to such term in the Credit Agreement.
The Borrower, the Guarantor, Chase and the Agent have agreed to amend
the Credit Agreement and to waive compliance with certain provisions thereof as
hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and
<PAGE> 2
subject to the satisfaction of the conditions precedent set forth in Section 5
hereof, hereby amended as follows:
(a) The following definitions are added in their proper
alphabetical order:
"Amendment Agreement" means the Third Amendment to
Credit Agreement and Guaranty, Waiver and Line Letter dated as
of June 23, 1995 among the Borrower, the Guarantor, Chase and
the Agent.
"Line of Credit" means the line of credit provided by
Chase under and pursuant to the terms of the Amendment and
Agreement.
(b) The definition of "Borrowing Base" is amended by adding after
"Equipment" in the last line thereof the following:
"plus, for the period from June 23, 1995 to and including
September 23, 1995 Nine Hundred Thousand Dollars ($900,000)."
(c) The definition of "Obligations" is amended by (i) deleting
"and" before clause "(4)" thereof, and (ii) adding after "foregoing" in the
last line thereof the following:
", and (5) the obligation to repay Chase any and all
obligations of the Borrower and each Guarantor under or
pursuant to, or related to, the Line of Credit, whether for
principal, interest, fees or any other obligation."
(d) Section 2.01, The Loans, is amended by adding after "Loans" in
the tenth line thereof the following:
"and the outstanding loans under the Line of Credit".
(e) Section 3.01, Trade Letters of Credit, is amended by adding
after "Credit" in the tenth line thereof the following:
"and the outstanding loans under the Line of Credit".
2
<PAGE> 3
(f) Section 3.02, Standby Letters of Credit, is amended by adding
after "Credit" in the eleventh line thereof the following:
"and the outstanding loans under the Line of Credit".
(g) Section 4.01, Bankers' Acceptances, is amended by adding after
"Loans" in the sixteenth line thereof the following:
"and the outstanding loans under the Line of Credit".
SECTION 2. Waiver. Because the Borrower and the Guarantors had a
ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth of
1.26 to 1.00 as at April 30, 1995, there is an Event of Default under Section
11.03, Consolidated Leverage Ratio, of the Credit Agreement.
The Borrower has requested that the Bank waive such Event of Default.
Upon the satisfaction of the conditions precedent set forth in Section 5
hereof, the Bank waives such Event of Default. The Bank does not waive any
future noncompliance with Section 11.03.
SECTION 3. Line of Credit. Chase will offer to the Borrower a
line of credit ("Line of Credit") of up to the maximum amount stated below upon
the terms and conditions outlined below (any term used in this Line of Credit
Agreement and not otherwise defined in this Line of Credit Agreement shall have
the meaning assigned to such term in the Credit Agreement):
Borrower: Brookwood Companies Incorporated
Bank: The Chase Manhattan Bank, N.A.
3
<PAGE> 4
Amount and Availability
of Facility: An aggregate principal amount outstanding at any
time not to exceed the lesser of (1) Two Million
Dollars ($2,000,000) or (2) the Borrowing Base
minus the Outstanding Credit Facilities.
Type of Credit
Facility: Loans.
Interest on Loans: The rate of interest on the Loans will be the
Prime Rate plus one-half of one percent (1/2%).
Interest based on the Prime Rate will be
calculated on the basis of a 360 day year for
the actual days elapsed.
Interest is payable, in arrears, on the first
day of every month.
Chase's Obligation
Under Line of Credit: With respect to the Line of Credit, Chase will
perform an ongoing credit review to enable it to
respond promptly to any request for credit
Borrower may make; provided, however, that if
Chase fails to so respond to such a request it
means that Chase has decided not to make the
requested Loan. The Loans under the Line of Credit
are provided in the sole discretion of Chase. This
Line of Credit is not a commitment and does not in
any way obligate Chase to make loans or grant any
credit. Without limiting Chase's discretion as to
whether or not to make a Loan or demand payment of
a Loan at any time, the continuance of the Line of
Credit is subject to the Borrower's and the
Guarantor's economic and financial condition
remaining acceptable to Chase and the
4
<PAGE> 5
Borrower's maintenance of a satisfactory
relationship with Chase. Also, without limiting
the foregoing discretion, the Borrower recognizes
that the Line of Credit may be cancelled if there
is a material adverse change in the financial
condition, business or operations of the Borrower
or the Guarantor on or after the date of
this Amendment Agreement.
Demand Obligations: Loans are due and payable on demand.
Purpose: Loan proceeds will be used by the Borrower for
working capital.
Term: The Line of Credit will terminate upon the earlier
of (i) September 23, 1995, or (ii) when Chase
gives the Borrower notice that it is no longer
willing to consider requests for credit or the
Borrower advises Chase that it will no longer
request that Chase consider making loans.
Collateral: The Borrower's obligations under the Line of
Credit are secured by certain assets of the
Borrower under and pursuant to the terms of the
Security Documents.
SECTION 4. Acknowledgement by Guarantor. Guarantor hereby
acknowledges and agrees that the Guaranty Obligations include the Borrower's
obligation to repay Chase under or pursuant to, or related to, the Line of
Credit, whether for principal, interest, fees or any other obligation related
thereto.
SECTION 5. Conditions of Effectiveness. This Amendment Agreement
shall become effective as of the date of this Amendment Agreement when and if
the Agent shall have received on or before such date each of the following
5
<PAGE> 6
documents, in form and substance satisfactory to the Agent and its counsel, and
each of the following conditions has been fulfilled:
(1) Amendment Agreement. This Amendment Agreement duly executed by
the Borrower, the Guarantor, Chase and the Agent;
(2) Grid Demand Promissory Note. A Grid Demand Promissory Note in
substantially the form of Exhibit A hereto executed by the Borrower and
delivered to Chase.
(3) Payment of Amendment Agreement Fee. The payment to Chase of an
amendment fee of Ten Thousand Dollars ($10,000).
(4) Officer's Certificate. The following statements shall be true
and the Agent shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof stating that, after giving effect
to this Amendment Agreement and the transactions contemplated hereby:
(a) The representations and warranties contained in each
of the Loan Documents are correct in all material
respects on and as of the date hereof as though made
on and as of such date; and
(b) No Default or Event of Default has occurred and is
continuing; and
(5) Other Documents. The Agent shall have received such other
approvals, opinions or documents as the Agent may reasonably request.
6
<PAGE> 7
SECTION 6. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan
Documents to the Credit Agreement, shall mean and be a reference to the Credit
Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement and
all other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment
Agreement shall not operate as a waiver of any right, power or remedy of the
Banks or the Agent under any of the Loan Documents, nor constitute a waiver of
any provision of any of the Loan Documents, and, except as specifically
provided herein, the Credit Agreement and each other Loan Document shall remain
in full force and effect and are hereby ratified and confirmed.
SECTION 7. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent on demand for all out-of-pocket costs, expenses and
charges (including, without limitation, all fees and charges of external legal
counsel for the Agent) incurred by the Agent in connection with the
preparation, reproduction, execution and delivery of this Amendment Agreement
and any other instruments and documents to be delivered hereunder. In addition,
the Borrower shall pay any and all stamp and other taxes and
7
<PAGE> 8
fees payable or determined to be payable in connection with the execution and
delivery, filing or recording of this Amendment Agreement and the other
instruments and documents to be delivered hereunder, and agrees to save the
Banks and the Agent harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
or fees.
SECTION 8. Governing Law. This Amendment Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 9. Headings. Section headings in this Amendment
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Amendment Agreement for any other purpose.
SECTION 10. Counterparts. This Amendment Agreement may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any party hereto may execute this
Amendment Agreement by signing any such counterpart.
[INTENTIONALLY LEFT BLANK.]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
Agreement to be duly executed as of the day and year first above written.
BROOKWOOD COMPANIES INCORPORATED
By /s/ DUANE O. SCHMIDT
-----------------------------------
Name: DUANE O. SCHMIDT
Title: VP FINANCE
KENYON INDUSTRIES, INC.
By /s/ DUANE O. SCHMIDT
-----------------------------------
Name: DUANE O. SCHMIDT
Title: TREASURER
THE CHASE MANHATTAN BANK, N.A.,
as Agent
By /s/ JO ZALON MEER
-----------------------------------
Name: JO ZALON MEER
Title: VICE PRESIDENT
THE CHASE MANHATTAN BANK, N.A.,
as Bank
By /s/ JO ZALON MEER
-----------------------------------
Name: JO ZALON MEER
Title: VICE PRESIDENT
9
<PAGE> 1
EXHIBIT 10.20
AGREEMENT
THIS AGREEMENT is made the 1st day of January, 1993 between HALLWOOD INVESTMENT
COMPANY (hereinafter called "the COMPANY") having its administrative office at
Broadcasting House, Rouge Bouillon, St. Helier, Jersey JE2 3ZA Channel Islands,
of the one part and BRIAN MICHAEL TROUP (hereinafter called "the EMPLOYEE"),
having an office at Bridge of Allan, Stirlingshire FK94LZ Scotland, of the
other part.
WHEREAS
(A) The Company carries on business worldwide.
(B) The Employee is willing to undertake to perform duties for the Company
in territories outside the United States and the United Kingdom.
(C) The Company is desirous of remunerating the Employee for the duties so
undertaken by him and generally to retain him upon the terms and conditions
hereinafter set forth.
NOW IT IS AGREED as follows:
1. The Company shall employ the Employee as a senior business and
investment consultant of the Company and the Employee shall serve the Company
in that capacity.
2. As a senior business and investment consultant of the Company, the
Employee shall in relation to the Company and its business and also in relation
to such holding, subsidiary or associated companies of the Company situated
outside the United States and the United Kingdom and such client or customer
companies of the Company there situated as the Board of Directors for the time
being of the Company (hereinafter called "the Board") may designate and;
2.1 undertake such duties outside the United States and the United Kingdom
and there exercise such powers in relation to the Company and its business as
the Board shall from time to time assign to or vest in him;
2.2 in the discharge of such duties and in the exercise of such powers
observe and comply with all resolutions regulations and directions from time to
time made or given by the Board;
2.3 devote substantially the whole of his time and attention during
business hours to the discharge of his duties hereunder;
(1)
<PAGE> 2
2.4 conform to such hours of work as may from time to time reasonably be
required of him and not be entitled to receive any remuneration for work
performed outside his normal working hours;
2.5 in pursuance of his duties hereunder and without further remuneration,
unless otherwise agreed, accept such offices in such other holding, subsidiary
and associated companies of the Company as the Board may reasonably require
from time to time;
2.6 report to the Company, keep it informed on new developments in
business management and investment strategy, policy and practice and
investigate, analyze and evaluate potential opportunities for the sale of
Company's goods and services, the acquisition of other companies and businesses
and investment opportunities for the Company in such areas;
2.7 engage in whatever travel outside and periods of absence from the
United Kingdom as may be required of him by the Board in order to properly
carry out his duties hereunder and, if requested to do so, move his home out of
the United Kingdom to a place mutually agreed between the parties hereto which
shall be more conducive to the effective performance of his duties hereunder;
2.8 undertake such other duties relating to the management of the
activities of the Company and its subsidiary and associated companies as may be
assigned to him from time to time by a duly authorized officer of the Company;
3. The Company shall pay to the Employee by way of salary a sum of
$100,000 per annum. This salary shall be paid monthly in arrears together with
the reimbursement in full of all expenses properly laid out by him wholly,
exclusively and necessarily in the performance of his duties hereunder.
4. Subject to clause 5. hereof, the term of this agreement shall commence
on January 1, 1993 and terminate on December 31, 1995.
5. This agreement may be determined forthwith by the Company at is sole
discretion upon the happening of any of the following events:
(i) if the Employee is guilty of any breach or non performance of
any of his obligations hereunder;
(ii) if the Employee is guilty of any misconduct which in the
opinion of the Company is likely to adversely affect the
business of the Company;
(iii) if the Employee becomes of unsound mind or infirm or becomes
insolvent or becomes subject to
(2)
<PAGE> 3
or takes advantages of a bankruptcy or insolvency action or
any similar legislation or if distress or execution is levied
upon any of his goods or property;
5.1 The employment governed by this agreement may be terminated upon the
expiry of one month's notice in writing given by one party to the other.
6. The Employee shall unless prevented by ill health and except during
such holiday or long service leave to which he shall be entitled pursuant to
this agreement or otherwise or pursuant to any statutory enactment relating to
holidays or long service leave devote such of his time attention and abilities
to the affairs of the Company and its subsidiaries and associated companies in
places outside the United States and the United Kingdom and shall use such of
his best endeavors to promote the Company's interests as aforesaid as shall be
required from time to time by the Board.
7. During the continuance of this agreement the Employee shall not accept
any directorship or be concerned directly or indirectly with any company,
business or venture carrying on a business similar to the business of the
Company or any of its subsidiaries and associated companies other than as
authorized hereunder or by the Board.
8. Any notice to be given hereunder is to be given in writing by either
party to the other and delivered or sent by prepaid airmail post or facsimile
transmission addressed to the address of the addresses shown at the head of
this agreement or such other address as may be notified by one party to the
other for such purposes and shall be deemed to be served in the case of airmail
post three days after posting and in the case of facsimile transmission
immediately upon successfully transmission.
9. The Employee shall not at any time during the currency of this
agreement or after its determination either on his own account or with any
other person, firm or corporation interfere with or endeavor to entice away
from the Company or any subsidiary or associated company any individual firm or
corporation who at any time during or at the date of the determination of this
agreement was an employee or customer or dealing with the Company or any
subsidiary or associated company.
10. The parties hereto agree that the proper law of this agreement shall
be the law of Island of Jersey, Channel Islands and agree to submit themselves
to the jurisdiction of the Island of Jersey, Channel Islands courts.
(3)
<PAGE> 4
IN WITNESS WHEREOF the parties hereto have hereunto set their hands the day and
year first above written
/s/ TIMOTHY N. SCOTT-WARREN
- --------------------------------------------------------------------------------
SIGNED for and on behalf of HALLWOOD INVESTMENT COMPANY
by its duly authorized representative
Timothy N. Scott-Warren, Director
/s/ BRIAN MICHAEL TROUP
- --------------------------------------------------------------------------------
SIGNED by the said BRIAN MICHAEL TROUP
by himself personally
(4)
<PAGE> 1
EXHIBIT 10.21
FINANCIAL AND MANAGEMENT CONSULTING SERVICES AGREEMENT
WHEREAS, ShowBiz Pizza Times Inc., a Kansas corporation ("ShowBiz")
desires to retain The Hallwood Group Incorporated, a Delaware corporation
("Hallwood"), to provide certain financial and managerial consultation services
to ShowBiz; and
WHEREAS, Hallwood has agreed to provide a variety of financial and
managerial consultation to ShowBiz in consideration for the payment by ShowBiz
to Hallwood of $125,000 per annum, and ShowBiz and Hallwood hove agreed to the
following terms and conditions related to provision of such services by
Hallwood; and
WHEREAS, certain officers of Hallwood, Messrs. Anthony J. Gumbiner and
Brian M. Troup, have waived fees to which they might otherwise be entitled as
Directors of ShowBiz.
NOW, THEREFORE, ShowBiz and Hallwood hereby agree as follows:
1. Term. This Agreement shall become effective upon the
distribution by Integra - A Hotel and Restaurant Company ("Integra")
to its shareholders of substantially all the Common Stock of ShowBiz
owned by Integra, and shall remain in full force and effect for an
indefinite term until such time as the Board of Directors of either
ShowBiz or Hallwood shall, in the sole discretion of either, serve
notice of its intent to terminate this Agreement. Such termination
shall be effective 30 days from the date of receipt of such notice
pursuant to the provisions hereof.
2. Nature of Services. Hallwood shall, on a nonexclusive basis,
Provide financial and managerial consulting services in areas
including, but not limited to, corporate finance and acquisition
analysis. Such services will be provided by Hallwood on an "as
requested" basis only. ShowBiz and Hallwood agree that Hallwood shall
have no right or obligation to provide any services other than as
specifically requested by ShowBiz. Such services to be rendered by
Hallwood shall be beyond the scope of services rendered by members of
the Board of Directors of Hallwood serving as directors of ShowBiz.
Hallwood also agrees to permit Messrs. Gumbiner and Troup to be
reasonably available for consultation with ShowBiz and its officers
upon reasonable request and prior notice from ShowBiz.
3. Payment of ShowBiz. In consideration for the retention of
Hallwood and the provision of such services by Hallwood, ShowBiz
agrees to pay Hallwood the aggregate sum of $125,000 per annum,
payable in quarterly installments of $31,250, each
1
<PAGE> 2
January 1, April 1, July 1 and October 1 during the term of Agreement.
Should this Agreement be terminated prior to end of any quarter during
the term hereof, the most quarterly installment paid to Hallwood shall
be deemed to been fully earned and not refundable to ShowBiz. Amounts
to Hallwood by ShowBiz as a fee in connection with the securities by
ShowBiz which are not allocated and paid to parties or which do not
constitute a for reimbursement expenses incurred by Hallwood in such
an offering shall credited against payments due from ShowBiz to
Hallwood hereunder.
4. Notice. Any and all notices required hereunder shall be
provided to either ShowBiz or Hallwood at the current registered
address of the headquarters of such corporation and shall be effective
upon mailing of such notice with the United States Postal Service,
Certified Mail Return Receipt Requested.
5. Full and Complete Agreement. This Agreement represents the
full and complete agreement of the parties hereto. Any amendments,
extensions, or modifications to this Agreement or any representations
or covenants not contained herein shall be of no force or affect
unless the same shall be memorialized in a fully executed amendment to
this Agreement.
EXECUTED as of the 1st day of December, 1988.
SHOWBIZ PIZZA TIME, INC.
/s/ RICHARD M. FRANK
-----------------------------------
Richard M. Frank
Chairman and Chief Executive Officer
THE HALLWOOD GROUP INCORPORATED
/s/ ROBERT M. DAVIES
-----------------------------------
2
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
----------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
PRIMARY
Average common shares outstanding . . . 1,374 1,372 1,371
Net Loss . . . . . . . . . . . . . . . . $(4,804) $(4,390) $(1,425)
Per common share amount . . . . . . . . $(3.50) $(3.20) $(1.04)
</TABLE>
FULLY DILUTED
The dilutive effect of stock options under the treasury stock method is less
than 3%.
<PAGE> 1
EXHIBIT 22
ACTIVE SUBSIDIARIES OF THE REGISTRANT
AS OF SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
NAME STATE OR COUNTRY
------------------------------------------------------ ----------------------
<S> <C>
Brookwood Companies Incorporated and subsidiary . . . . . . . . . Delaware
Hallwood Energy Corporation and subsidiaries . . . . . . . . . . Delaware
Hallwood Hotels, Inc. . . . . . . . . . . . . . . . . . . . . . . Delaware
Hallwood-Integra Holding Company and subsidiaries . . . . . . . . Delaware
Hallwood Investment Company . . . . . . . . . . . . . . . . . . . Grand Cayman Island
Hallwood Management Company . . . . . . . . . . . . . . . . . . . Delaware
Hallwood Realty Corporation . . . . . . . . . . . . . . . . . . . Delaware
HSC Securities Corporation . . . . . . . . . . . . . . . . . . . Delaware
HWG Realty Investors, Inc. . . . . . . . . . . . . . . . . . . . Delaware
Integra Resort Management, Inc. . . . . . . . . . . . . . . . . . Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for Form 10-K
Year Ended July 31, 1995
</LEGEND>
<CIK> 0000355766
<NAME> HALLWOOD GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-START> AUG-01-1994
<PERIOD-END> JUL-31-1995
<CASH> 5,824
<SECURITIES> 27,028
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 15,456
<CURRENT-ASSETS> 0
<PP&E> 156,818
<DEPRECIATION> 119,194
<TOTAL-ASSETS> 112,375
<CURRENT-LIABILITIES> 0
<BONDS> 48,605
<COMMON> 160
1,000
0
<OTHER-SE> 3,163
<TOTAL-LIABILITY-AND-EQUITY> 112,375
<SALES> 0
<TOTAL-REVENUES> 113,226
<CGS> 0
<TOTAL-COSTS> 109,158
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 444
<INTEREST-EXPENSE> 7,741
<INCOME-PRETAX> (4,117)
<INCOME-TAX> 830
<INCOME-CONTINUING> (4,947)
<DISCONTINUED> 0
<EXTRAORDINARY> 143
<CHANGES> 0
<NET-INCOME> (4,804)
<EPS-PRIMARY> (3.50)
<EPS-DILUTED> (3.50)
</TABLE>
