<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
Form 10-Q
MARK ONE
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
For the Period Ended October 31, 1995 Commission File Number: 1-8303
___________________
THE HALLWOOD GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
___________________
DELAWARE 51-0261339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3710 RAWLINS, SUITE 1500
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 528-5588
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
1,594,344 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.
================================================================================
<PAGE> 2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PART I - FINANCIAL INFORMATION PAGE
-------- ------------------------------ ----
<S> <C> <C>
1 Financial Statements:
Consolidated Balance Sheets as of October 31, 1995
and July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Three Months Ended October 31, 1995 and 1994 . . . . . . . . . . . . . 5-6
Consolidated Statements of Cash Flows for the
Three Months Ended October 31, 1995 and 1994 . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 8-13
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 14-18
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 19-21
</TABLE>
Page 2
<PAGE> 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1995 1995
----------- ---------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,738 $ 10,517
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,761 7,931
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 378 353
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 84 86
--------- ---------
17,961 18,887
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 9,863 9,856
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 1,996 1,859
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,559 1,415
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,444 1,298
--------- ---------
14,862 14,428
--------- ---------
Total asset management assets . . . . . . . . . . . . . . . . . . . 32,823 33,315
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,140 15,456
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,506 12,126
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,676 8,782
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 938 976
--------- ---------
35,260 37,340
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,807 11,055
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,904 2,198
--------- ---------
12,711 13,253
--------- ---------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 47,971 50,593
ASSOCIATED COMPANY
Investment in ShowBiz Pizza Time, Inc. . . . . . . . . . . . . . . . . 16,590 16,511
OTHER
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5.429 5,429
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 1,552 5,824
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686 570
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 133
--------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 7,697 11,956
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,081 $ 112,375
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE> 4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1995 1995
----------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,764 $ 5,997
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 358 334
-------- --------
6,122 6,331
ENERGY
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 5,350 5,056
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3,726 5,336
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,636 2,357
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 950
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 149 102
-------- --------
13,061 13,801
-------- --------
Total asset management liabilities . . . . . . . . . . . . . . . . 19,183 20,132
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,935 11,315
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 7,738 6,534
-------- --------
15,673 17,849
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,454 5,469
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 2,183 1,977
-------- --------
7,637 7,446
-------- --------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 23,310 25,295
ASSOCIATED COMPANY
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 9,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 82 55
-------- --------
Total associated company liabilities . . . . . . . . . . . . . . . 9,082 9,055
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 25,563 25,703
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 22,902 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 2,611 4,965
-------- --------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 51,076 53,570
-------- --------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 102,651 108,052
REDEEMABLE PREFERRED STOCK
Series B, $.10 par value; 250,000 shares issued and outstanding . . . 1,000 1,000
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; 250,000 shares issued and outstanding. -- --
Common stock, $.10 par value; issued 1,597,204 shares at both dates;
outstanding 1,329,635 and 1,344,910 shares, respectively . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 57,160 57,142
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (49,397) (47,698)
Equity adjustment from foreign currency translation . . . . . . . . . 262 329
Treasury stock, 267,569 and 252,294 shares, respectively, at cost . . (6,755) (6,610)
-------- --------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . 1,430 3,323
-------- --------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,081 $112,375
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE> 5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
------------------------
1995 1994
-------- -------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,066 $ 858
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 171
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 1 71
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (611) (8)
--------- -------
647 1,092
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 311 244
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 243 243
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 182
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . -- 11
--------- -------
705 687
--------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . (58) 405
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 1,465 1,463
Other income (including intercompany amount of $57 in 1994) . . . . . 133 157
--------- -------
1,598 1,620
Depreciation, depletion, amortization and impairment . . . . . . . . . 476 500
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 417 383
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 384 186
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 86
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 50 134
--------- -------
1,467 1,289
--------- -------
Income from energy operations . . . . . . . . . . . . . . . . . . . 131 331
--------- -------
Income from asset management operations . . . . . . . . . . . . . . 73 736
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,918 16,986
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,832 14,888
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 1,383 1,432
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 504
Interest (including intercompany amount of $16 in 1994) . . . . . . . 189 160
--------- -------
17,907 16,984
--------- -------
Income from textile products operations . . . . . . . . . . . . . . 11 2
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE> 6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
-----------------------
1995 1994
-------- --------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,947 $ 5,693
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 4,271 4,813
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 551 648
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 308
------- -------
4,953 5,769
------- -------
Loss from hotel operations . . . . . . . . . . . . . . . . . . . . (6) (76)
------- -------
Income (loss) from operating subsidiaries . . . . . . . . . . . . 5 (74)
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . 61 201
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 181
------- -------
Income (loss) from associated company . . . . . . . . . . . . . . . (137) 20
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 106
Interest on short-term investments and other income . . . . . . . . . 25 46
------- -------
131 152
Interest (net of intercompany amount of $73 in 1994) . . . . . . . . . 1,039 1,070
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 669 468
------- -------
1,708 1,538
------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,577) (1,386)
------- -------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . (1,636) (704)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 558
------- -------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,699) $(1,262)
======= =======
PER COMMON SHARE (PRIMARY)
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.27) $ (0.92)
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE> 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31
-----------------------
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,699) $(1,262)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . (2,304) (2,304)
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 1,543 1,661
Undistributed income from energy affiliate . . . . . . . . . . . . . . (883) (1,084)
Distributions from energy affiliate . . . . . . . . . . . . . . . . . 747 635
Equity in net (income) loss of associated company/affiliate . . . . . 550 (193)
Amortization of deferred gain from debenture exchange . . . . . . . . (140) (136)
Proceeds from collections of mortgage loans . . . . . . . . . . . . . 2 116
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . -- 450
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . -- (12)
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . -- 11
Net change in textile products assets and liabilities . . . . . . . . 3,165 116
Net change in other assets and liabilities . . . . . . . . . . . . . . 361 50
Net change in energy assets and liabilities . . . . . . . . . . . . . (249) (68)
-------- --------
Net cash provided by (used in) operating activities . . . . . . . . 1,093 (2,020)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for real estate and hotels . . . . . . . . . . . . . (319) (556)
Investments in textile products property and equipment . . . . . . . . . (156) (276)
Net change in restricted cash for investing activities . . . . . . . . . 103 (72)
Investments in energy property and equipment . . . . . . . . . . . . . . (32) (34)
Proceeds from sale of real estate and hotel assets . . . . . . . . . . . -- 1,179
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . -- 610
Proceeds from sale of insurance contracts . . . . . . . . . . . . . . . . -- 229
-------- --------
Net cash provided by (used in) investing activities . . . . . . . . (404) 1,080
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . 250 900
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . (3,582) (1,991)
Purchase of capital stock by energy subsidiary for treasury . . . . . . . (1,189) --
Payment of dividends to minority stockholders of energy subsidiary . . . (293) --
Purchase of common stock for treasury . . . . . . . . . . . . . . . . . . (145) --
Net change in restricted cash for financing activities . . . . . . . . . -- 771
-------- --------
Net cash (used in) financing activities . . . . . . . . . . . . . . (4,959) (320)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . (2) 22
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (4,272) (1,238)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 5,824 5,728
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 1,552 $ 4,490
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE> 8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the
information and disclosures required by generally accepted accounting
principles, although, in the opinion of management, all adjustments
considered necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the audited
consolidated financial statements and related disclosures thereto included
in Form 10-K for the fiscal year ended July 31, 1995.
Share and per share amounts have been adjusted to give effect to the
one-for-four reverse stock split effected on June 28, 1995.
2. INVESTMENTS IN AFFILIATE AND ASSOCIATED COMPANY (DOLLAR AMOUNTS IN
THOUSANDS):
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1995 INCOME (LOSS) FROM INVESTMENTS
---------------------- AMOUNT AT WHICH CARRIED AT FOR THE THREE MONTHS ENDED
COST OR -------------------------- OCTOBER 31
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED OCTOBER 31, JULY 31, ---------------------------
DESCRIPTION OF INVESTMENT UNITS OR SHARES VALUE 1995 1995 1995 1994
------------------------- --------------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (A)
- General partner interest . . . -- $ 8,650 $ 5,964 $ 6,166 $ (34) $ (8)
- Limited partner units . . . . 412,844 5,377 3,774 4,351 (577) --
-------- ------ -------- ------ ----
Totals . . . . . . . . . . . $14,027 $ 9,738 $ 10,517 $ (611) $ (8)
======= ======= ======== ====== ====
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock . . . . . . . . . 1,784,193 $ 5,438 $16,590 $ 16,511 $ 61 $201
======= ======= ======== ====== ====
</TABLE>
(A) At October 31, 1995, Hallwood Realty Corporation ("HRC"), a wholly
owned subsidiary of the Company, owned a 1% general partner
interest and the Company owned a 24% limited partner interest in
its Hallwood Realty Partners, L.P. ("HRP") affiliate.
The carrying value of the Company's investment in the general
partner interest of HRP includes the value of intangible rights to
provide asset management and property management services. The
former owner initially retained the property management rights for
a three-year period following the Company's acquisition of the
general partner interest on November 1, 1990. On June 1, 1991,
the Company purchased the retained property management rights from
the former owner for the balance of the three-year period and
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 rights, and for the
three months ended October 31, 1995 and 1994 such amortization was
$168,000, respectively.
Due to recording the pro rata share of losses reported by HRP as
prescribed by equity accounting, the Company's carrying value of
the 89,269 limited partner units acquired prior to the March 1995
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 income on such units in the
future. As further discussed in Note 4, the Company has pledged
these 89,269 limited partner units to collateralize a $500,000
note payable.
During the period March through June 1995, the Company acquired
323,575 additional HRP limited partner units for $4,471,000. The
Company recorded its pro rata share of HRP's losses relating to
these limited partner units in the amount of $577,000 for the
quarter ended October 31, 1995.
Page 8
<PAGE> 9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
(B) The Company accounts for its investment in ShowBiz Pizza Time,
Inc. ("ShowBiz"), on the equity method of accounting. The Company
also records its pro rata share of various stockholders' equity
transactions. The financial impact of ShowBiz's shareholders'
equity transactions resulted in a non-cash increase in the
carrying value of the Company's investment in ShowBiz and a
corresponding increase in additional paid-in capital in the amount
of $18,000 for the three months ended October 31, 1995.
At October 31, 1995, the Company owned approximately 15% of
ShowBiz, of which all are pledged to secure certain loans payable
discussed in Note 4.
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 October 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) . . . . . . . . . . . . $15.00 $9.14
ShowBiz common shares (SHBZ) . . . . . . . . . . . . . . 12.25 9.30
</TABLE>
The general partner interest in HRP is not publicly traded.
3. LITIGATION, CONTINGENCIES AND COMMITMENTS
Reference is made to Note 19 to the consolidated financial statements
contained in Form 10-K for the fiscal year ended July 31, 1995.
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
1995 1995
----------- ---------
<S> <C> <C>
Real Estate
Term loan, libor + 2.5%, due January 1996 . . . . . . . . $ 4,701 $ 4,747
Promissory note, 7.5%, due August 1996 . . . . . . . . . . 563 750
Promissory note, 8%, due March 1998 . . . . . . . . . . . 500 500
------- --------
5,764 5,997
Energy
Term loan, prime + 2%, due September 1999 . . . . . . . . 1,200 950
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . 7,700 11,030
Equipment financing, 10%, due December 1996 . . . . . . . 235 285
------- --------
7,935 11,315
Hotels
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . 5,121 5,136
Non-interest bearing obligation, due March 1997 . . . . . 333 333
------- --------
5,454 5,469
Associated Company
Line of credit, prime + .75%, due April 1996 . . . . . . . 5,000 5,000
Promissory note, 5%, due March 1997 . . . . . . . . . . . 4,000 4,000
------- --------
9,000 9,000
------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $29,353 $ 32,731
======= ========
</TABLE>
Page 9
<PAGE> 10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
Further information regarding loans payable is provided below:
Real Estate
Office-retail property. The Company's United Kingdom office-retail
property is collateral for a term loan in the original amount of
L.3,000,000. At October 31, 1995 the principal balance was L.2,975,000 or
$4,701,000. An amendment was negotiated in August 1995 extending the
maturity date to January 1996. The office-retail property is under
contract to be sold, with a closing expected in December 1995.
HRP litigation settlement. The Company issued a note in the amount of
$1,500,000 to the agent for the plaintiffs in the litigation styled Equitec
Roll-up Litigation, which is discussed in Note 19 to the Company's Form
10-K for the fiscal year ended July 31, 1995. Monthly payments include
$62,500 of principal amortization. The outstanding balance at October 31,
1995 was $563,000. The note is collateralized by 187,500 shares of common
stock of HEC.
Term note. In connection with the resolution of an obligation related
to the Company's Integra Hotels, Inc. subsidiary, the Company issued a
four-year $500,000 term note in March 1994. The note is secured by a
pledge of 89,269 HRP limited partner units.
Energy
During May 1995, HEC entered into a line of credit with a bank in the
maximum commitment amount of $1,500,000. Interest is paid monthly and
principal amortization of $75,000 is paid quarterly. The credit agreement
limits dividends to $3.50 per share per annum. Availability is limited to
50% of the market value of HEC's pledged HEP units at the date additional
borrowings are made, subject to the maximum of $1,500,000. HEC presently
has no additional borrowing capacity under this line of credit. The
outstanding balance at October 31, 1995 was $1,200,000.
Included in the consolidated balance sheets are HEC's share of the
long-term obligations of its affiliated entity, Hallwood Energy Partners,
L.P. ("HEP") in the amount of $5,350,000.
Textile Products
Brookwood revolver. In December 1992, the Company's textile products
subsidiary, Brookwood Companies Incorporated ("Brookwood") established a
revolving line of credit facility with The Chase Manhattan Bank, N.A.
("Chase") in an amount up to $13,500,000 (the "Brookwood Revolver"). The
Brookwood Revolver is collateralized by accounts receivable and the
industrial machinery and equipment located in Kenyon, Rhode Island. In
September 1994, the Brookwood Revolver was amended to extend the expiration
date to August 1997, reduce the interest to one-half percent over prime or
libor plus 2.25%, permit the repayment of the Company's $1,000,000 balance
of bridge financing and change certain of the financial covenants. The
outstanding balance at October 31, 1995 was $7,700,000. Brookwood had
$1,195,000 of availability on its line of credit at October 31, 1995.
Equipment loan. In December 1991, Brookwood entered into a $900,000
equipment financing arrangement with CIT Group/Equipment Financing, Inc.
The loan matures in December 1996, bears a 10% fixed interest rate and is
secured by certain dyeing and finishing equipment. The outstanding balance
at October 31, 1995 was $235,000.
Hotels
Tulsa, Oklahoma Residence Inn by Marriott. In October 1994, the
Company entered into a mortgage loan in the amount of $5,200,000. 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
Page 10
<PAGE> 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
capital expenditures and 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 October 31, 1995 was $5,121,000.
Settlement Note. The $500,000 non-interest bearing obligation to the
former preferred shareholders of Integra was issued in connection with the
Settlement and Supplemental Settlement described in Note 8 of the Company's
1995 Form 10-K and is payable in three equal annual installments in the
amount of $166,667, the first of which was paid on March 8, 1995, with the
remaining two payments due on March 8, 1996 and 1997. The outstanding
balance at October 31, 1995 was $333,000.
Associated Company
Line of Credit. In April 1994, the Company obtained a line of credit
from Merrill Lynch Business Financial Services, Inc. ("MLBFS") in the
maximum commitment amount of $6,000,000, the proceeds of which were used to
repay a former margin loan. Significant terms were (i) initial maturity
date - April 25, 1995; (ii) interest rate - prime plus 0.75%; and (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 connection with an extension of the line of credit to April
25, 1996 the maximum commitment amount was reduced to $5,000,000. All
other terms remain unchanged. The outstanding balance at October 31, 1995
was $5,000,000.
Integra Unsecured Creditors' Trust. 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.
5. 7% COLLATERALIZED SENIOR SUBORDINATED DEBENTURES AND 13.5% SUBORDINATED
DEBENTURES
7% Collateralized Senior Subordinated Debentures. On March 1, 1993,
the Company completed an exchange offer whereby its 13.5% Debentures, as
defined below, in the aggregate principal amount of $27,481,000 were
exchanged for a new issue of 7% Collateralized Senior Subordinated
Debentures due July 31, 2000 (the" 7% Debentures"), and purchased
$14,538,000 of its 13.5% Debentures at 80% of face value. Interest 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 in connection with the aforementioned sale of the hotel and
repurchase of 7% Debentures). The common and preferred stock of Brookwood
are also subject to a prior pledge in favor of Chase.
During fiscal 1994 and 1995, the Company repurchased, at a discount,
7% Debentures having a principal value of $4,672,000. These repurchases
satisfied the Company's obligation to retire 10% of the original issue
($2,748,000) prior to March 1996 and partially satisfied the Company's
obligation to retire an additional 15% of the original issue ($4,122,000)
prior to March 1998.
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.
Page 11
<PAGE> 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
Interest on the 13.5% Debentures is payable annually on August 15,
and, at the Company's option, up to two annual interest payments in any
five-year period may be paid by the issuance of additional 13.5% Debentures
in lieu of cash. Interest due on August 15, 1989 and 1990 was paid in
cash. Interest due on August 15, 1991 was paid in- kind by the issuance of
$6,019,500 additional 13.5% Debentures and $139,200 of cash in lieu of
fractional debentures. Interest due on August 15, 1992 was paid in-kind by
the issuance of $6,792,900 additional 13.5% Debentures and $172,500 of cash
in lieu of fractional debentures. Interest due on August 15, 1993, 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.
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31,
DESCRIPTION 1995 1995
------------------------------------------ ----------- -------
<S> <C> <C>
7% Debentures (face value) . . . . . . . . . . . . . . . . . . . . $22,808 $22,808
Unrecognized gain from purchase and exchange, net of
$1,465 and $1,325 accumulated amortization, respectively . . . 2,755 2,895
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . $25,563 $25,703
======= =======
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>
6. INCOME TAXES
The following is a summary of the income tax provision (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
--------------------
1995 1994
----- -----
<S> <C> <C>
Federal
Deferred . . . . . . . . . . . . . . . . . . . . . . . . $ -- $450
Current . . . . . . . . . . . . . . . . . . . . . . . . . -- 79
----- -----
Sub-total . . . . . . . . . . . . . . . . . . . . . . -- 529
State . . . . . . . . . . . . . . . . . . . . . . . . . . 63 29
----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 558
===== =====
</TABLE>
The federal deferred tax charge in the quarter ended October 31, 1994
is the result of a fluctuation in the valuation allowance arising from
changes in the Company's tax planning strategies, primarily relating to a
reduction in the market price of ShowBiz common stock. No federal deferred
tax charge was recorded for the three months ended October 31, 1995. No
federal current charge for the 1995 quarter was recorded. The federal
current charge in the 1994 quarter related to the alternative minimum tax
payable by HEC which files a separate federal tax return.
State tax expense is an estimate based upon taxable income allocated
to those states in which the Company does business, at their respective tax
rates.
Page 12
<PAGE> 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
The amount of the deferred tax asset (net of the valuation allowance
of $18,161,000) was $5,429,000 at October 31, 1995. The deferred tax asset
arises principally from the anticipated utilization of net operating loss
carryforwards and tax credits at the statutory tax rate and other tax
planning strategies.
7. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS (IN
THOUSANDS)
The following transactions affected recognized assets or liabilities
but did not result in cash receipts or cash payments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
-------------------
DESCRIPTION 1995 1994
----------------------------------------- ------- -------
<S> <C> <C>
Supplemental schedule of noncash investing
and financing activities:
Recording of proportionate share of stockholders'
equity transaction by ShowBiz . . . . . . . . . . . . . . $ 18 $ 47
Supplemental disclosures of cash payments:
Interest paid (including capitalized interest) . . . . . . . $ 4,146 $ 4,118
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 63 82
</TABLE>
8. CHANGE IN YEAR END
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 filed an Annual Report on Form
10-K for its fiscal year ended July 31, 1995, and this 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.
Page 13
<PAGE> 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported a net loss of $1,699,000 for the quarter ended
October 31, 1995, compared to a net loss of $1,262,000 in the 1994 quarter.
Total revenue was $25,302,000, compared to $25,744,000 in the prior-year
quarter.
Following is an analysis of the results of operations by asset
management, operating subsidiaries and associated company divisions and by
the real estate, energy, textile products, hotels and restaurant business
segments within those divisions.
Asset Management. The business segments of the Company's asset
management division consist of real estate and energy.
REAL ESTATE.
Revenue. Fee income of $1,066,000 for the quarter ended October 31,
1995 increased by $208,000 from the $858,000 in the year-ago quarter. The
increase was primarily due to an increase in leasing fees earned from
certain tenant lease renewals. Fee income is principally derived from the
Company's asset management, property management, leasing and construction
services provided to its Hallwood Realty Partners, L.P. affiliate, a real
estate master limited partnership ("HRP").
Rental income from the United Kingdom office-retail property in the
amount of $191,000 in the current-year quarter increased 12% from $171,000
in the prior-year quarter due to higher occupancy of the retail space.
Interest and discounts from mortgage loans for the quarter ended
October 31, 1995 declined to $1,000, from the 1994 quarter amount of
$71,000. The decline was a result of the sale or assignment of
substantially all of the mortgage loan portfolio in the prior fiscal year.
The loss from investments in HRP represents the Company's recognition
of its pro-rata share of the loss as reported by HRP. For the quarter
ended October 31, 1995, the Company reported a $611,000 loss compared to an
$8,000 loss in the quarter a year ago. The increased loss is due to
recording a pro-rata share of losses in respect to the Company's additional
investment in HRP limited partner units acquired in the prior fiscal year.
Between March and July 1995, the Company acquired 323,575 additional
limited partner units pursuant to HRP's reverse unit split and odd-lot
buyback programs.
Due to recording the Company's pro-rata share of losses reported by
HRP as prescribed by equity accounting, the Company's carrying value of the
89,269 limited partner units acquired prior to March 1995 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 income on
such units in the future. See Note 2 to the Company's consolidated
financial statements.
Expenses. Administrative expenses increased 27% to $311,000 in the
quarter ended October 31, 1995, compared to $244,000 in the year-ago
quarter. The increase was primarily attributable to an increase in leasing
commissions resulting from the aforementioned increased level of leasing
activities.
Depreciation and amortization expense of $243,000 for the quarter
ended October 31, 1995 was the same as the year-ago quarter. Depreciation
expense relates to the office-retail property. Amortization expense
relates to the cost of HRC's general partner interest in HRP to the extent
allocated to management rights.
Page 14
<PAGE> 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
Interest expense decreased to $133,000 from $182,000 in the quarter
ended October 31, 1995, due to lower interest costs from the term loan and
lower interest costs on the reduced outstanding principal amount of the
promissory note due in August 1996.
The provision for losses and operating expenses were immaterial for
the quarters ended October 31, 1995 and 1994, respectively.
ENERGY.
Revenue. The Company owns 78% of the common stock (on a fully diluted
basis) of Hallwood Energy Corporation ("HEC"). HEC's general partner
interest in Hallwood Energy Partners, L.P. ("HEP") entitles it to a share
of net revenues derived from HEP's properties ranging from 2% to 25%, and
HEC also holds approximately 6.5% of HEP's limited partner units. HEC
accounts for its ownership of HEP using the proportionate consolidation
method of accounting, whereby HEC records its proportionate share of HEP's
revenue and expenses, current assets, current liabilities, noncurrent
assets, long-term obligations and fixed assets.
For the quarter ended October 31, 1995, oil and gas revenues of
$1,465,000 increased slightly, compared to $1,463,000 in the year-ago
quarter. Oil revenue for the three months increased $36,000 to $623,000,
due to an increase in production to 35,000 barrels from 34,000 barrels,
combined with an increase in the average price per barrel to $17.80 from
$17.26. Gas revenue for the three months decreased $34,000 to $842,000,
primarily as a result of a decrease in the average gas price to $1.88 from
$2.00 per mcf, partially offset by an increase in production to 449,000 mcf
from 438,000 mcf. The increase in oil and gas production is a due to
increased production from developmental drilling projects in West Texas,
partially offset by normal production declines.
The decrease in other income to $133,000 for the quarter ended October
31, 1995 from $157,000 in the prior-year quarter is comprised of numerous
miscellaneous items, none of which are individually significant.
Expenses. Depreciation, depletion, amortization and impairment
expenses were $476,000 for the quarter ended October 31, 1995 compared to
$500,000 in the year-ago quarter. The decrease is the result of lower
capitalized costs in the fiscal 1996 period.
Operating expenses increased $34,000 to $417,000 for the three months
compared to $383,000 for the year-ago period due to increased maintenance
activity during the current-year period.
Administrative expenses increased by $198,000 to $384,000 for the
three months compared to $186,000 for the year-ago period, due to increased
insurance premiums and increased allocated internal overhead.
Interest expense increased by $54,000 to $140,000 for the three months
compared to $86,000 for the year-ago period as a result of HEC's borrowings
under its line of credit acquired in May 1995.
Minority interest, which represents the interest of other common and
preferred shareholders in the net income (loss) of HEC, decreased in the
current-year quarter, due to HEC's repurchase of its own shares from
minority shareholders for treasury since the year-ago quarter and lower net
income from energy operations.
Page 15
<PAGE> 16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
OPERATING SUBSIDIARIES.
Textile products.
Revenue. Sales increased $932,000 in the quarter ended October 31,
1995 to $17,918,000, compared to $16,986,000 in the year-ago quarter. The
increase in sales was due to continued growth in the textile distribution
business, partially offset by a decrease of Kenyon finishing plant revenues
due to weak market conditions.
Expenses. Cost of sales increased by $944,000 or 6.3%, compared to
the 5.5% increase in sales for the quarter ended October 31, 1995 from the
prior year quarter. The lower gross profit margin for the quarter (11.6%
versus 12.4% for the quarters ended October 31, 1995 and 1994,
respectively) was principally the result of competitive pressures in a
weakening market and a change in product mix with lower gross profits in
the distribution businesses.
Administrative and selling expenses decreased $50,000 in the quarter
to $1,886,000 from the year-ago quarter, as a result of cost control
efforts. The $29,000 increase in interest expense for the quarter ended
October 31, 1995 to $189,000 was the result of higher average borrowings
and lower interest income than in the prior-year period.
Hotels
Revenue. Hotel revenues of $4,947,000 in the quarter ended October
31, 1995 decreased by $746,000, from the year-ago quarter amount of
$5,693,000. The decrease is primarily attributable to the January 1995
sale of the Lido Beach Holiday Inn hotel. Considering only the five hotels
operated by the Company which were owned during both the 1995 and 1994
quarters, revenues increased by $172,000. This increase reflects the
Company's election to aggressively pursue higher average daily rates,
resulting in higher revenue and lower operating costs as a percentage of
revenues. The higher rates were made possible by the Company's intensive
capital expenditure program begun in fiscal 1993.
Expenses. Operating expenses of $4,271,000 for the quarter ended
October 31, 1995 decreased by $542,000 from the year-ago quarter amount of
$4,813,000. The decrease was also due to the aforementioned sale of the
Lido Beach Holiday Inn hotel. On a comparable basis, operating expenses
increased $150,000 for the quarter. Depreciation and amortization expense
decreased $97,000 during the quarter, reflecting the sale of the Lido Beach
Holiday Inn hotel, partially offset by additional depreciation from recent
capital expenditures at the remaining properties. Interest expense during
the quarter decreased by $177,000 compared to the year-ago quarter, due to
the payoff of the term loan.
ASSOCIATED COMPANY
Revenue. Associated company income for the quarter ended October 31,
1995 was $61,000 compared to income of $201,000 in the prior-year quarter.
The decrease is due to a 1.9% decline in comparable store sales and lower
operating margins for ShowBiz's Chuck E. Cheese restaurants. The Company
records its pro-rata share of ShowBiz results using the equity accounting
method.
Expenses. Interest expense of $198,000 for the quarter ended October
31, 1995 increased from the year-ago amount of $181,000, due to an increase
in rate on the line of credit, offset by a decline in the average
outstanding balance.
Other
Revenue. Fee income in the current year quarter of $106,000 was the
same as the prior-year quarter amount. Interest on short-term investments
and other income of $25,000 for the current-year quarter, compares
Page 16
<PAGE> 17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
to the prior year quarter amount of $46,000. The level of interest income
varies dependent on the average level of invested cash balances and the
average interest rate.
Expenses. The Company's net interest expense in the amount of
$1,039,000 for the quarter ended October 31, 1995 decreased from the
prior-year quarter amount of $1,070,000, due to the repurchase and
retirement of approximately $2,500,000 principal amount of 7% Debentures in
the prior fiscal year.
Administrative expenses, of $669,000 for the quarter increased from
the comparable quarter amount of $468,000. The $201,000 increase is
attributable to various professional fees.
Income taxes. The prior-year quarter's federal deferred tax charge
was the result of a fluctuation in the valuation allowance arising from
changes in the Company's tax planning strategies, relating to a reduction
in the market price of ShowBiz common stock. No federal deferred or
current tax charge was recorded for the current-year quarter. The
prior-year quarter's federal current charge relates to amounts payable by
HEC for the alternative minimum tax.
State tax expense is an estimate based upon taxable income allocated
to those states in which the Company does business at their respective tax
rates.
As of July 31, 1995, the Company had approximately $67,000,000 of tax
net operating loss carryforwards ("NOLs") and temporary differences to
reduce future federal income tax liability. Based upon the Company's
expectations and available tax planning strategies, management has
determined that taxable income will more likely than not be sufficient to
utilize approximately $16,000,000 of the NOLs prior to their ultimate
expiration in the year 2010.
Management believes that the Company has certain tax planning
strategies available, which include the potential sale of its ShowBiz
shares, hotel properties and certain other assets, that could be
implemented, if necessary, to supplement income from operations to fully
realize the recorded tax benefits before their expiration. Management has
considered such strategies in reaching its conclusion that, more likely
than not, taxable income will be sufficient to utilize a significant
portion of the NOLs before expiration; however, future levels of operating
income and taxable gains are dependent upon general economic conditions and
other factors beyond the Company's control. Accordingly, no assurance can
be given that sufficient taxable income will be generated for significant
utilization of the NOLs. Although the use of such carryforwards could,
under certain circumstances, be limited, the Company is presently unaware
of the occurrence of any event which would result in the imposition of such
limitations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at October 31,
1995 totaled $1,552,000.
Although the Company's ShowBiz shares, having a market value of
approximately $21,856,000 at October 31, 1995 (based upon the closing price
on such date of $12.25 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 line of credit and the $4,000,000 promissory note.
The Company's real estate segment generates funds principally from
its property management activities, without significant additional capital
costs. At October 31, 1995, the Company's remaining office-retail property
was fully 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 amount outstanding, if the property is not sold as
anticipated in December 1995. Management expects that the sale will add
significant liquidity to working capital and will not adversely effect
future operations of the Company.
Page 17
<PAGE> 18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995
(UNAUDITED)
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 $5,350,000 at October 31, 1995. HEP's
borrowings are secured by a first lien on approximately 80% in value of
HEP's oil and gas properties. In May 1995, HEC obtained a $1,500,000 line
of credit from a bank and subsequently borrowed $1,200,000. The line of
credit is secured by the publicly-traded limited partner units it holds in
HEP. HEC has no unused borrowing capacity under its line of credit at
October 31, 1995.
Brookwood maintains a $13,500,000 revolving line of credit facility
with The Chase Manhattan Bank, N.A., which is collateralized by accounts
receivable and equipment. At October 31, 1995, Brookwood had $1,195,000 of
unused borrowing capacity on its line of credit.
The Company's hotel segment generates cash flow from operating five
hotels (one Holiday Inn in Florida, one Embassy Suites and one Residence
Inn in Oklahoma, and one Residence Inn each in Alabama and South Carolina).
The sale of hotel properties may also provide a source of liquidity;
however, sales transactions may be impacted by the inability of prospective
purchasers to obtain equity capital or suitable financing.
The Company has no availability under its line of credit secured by
ShowBiz common stock which has been extended until April 1996. Management
believes that the line of credit can be extended prior to maturity on
comparable financial terms.
The Company hopes to be able to reinvest the proceeds of asset sales
to increase profits and cash flows, and also to retire debentures and /or
equity from time to time through open market purchases or negotiated
transactions.
Page 18
<PAGE> 19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item
- ----
<S> <C> <C>
1 Legal Proceedings
Reference is made to Note 3 to the Company's consolidated financial statements
for discussion of pending litigation matters.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission to Matter to a Vote of Security Holders None
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits:
(i) 11 Statement Regarding Computation of Per Share Earnings
(ii) 27 Financial Data Schedule
(b) Reports on Form 8-K None
</TABLE>
Page 19
<PAGE> 20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
Dated: December 13, 1995 By: /s/ Melvin J. Melle
-----------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 20
<PAGE> 21
INDEX TO EXHIBITS
Exhibit Description
------- -----------
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OCTOBER 31,
-----------------------
1995 1994
--------- --------
<S> <C> <C>
PRIMARY:
Average common share outstanding . . . . . . . . . . . . . . . . . . . 1,332 1,372
Dilutive stock options based on the treasury stock method
using the period end market price . . . . . . . . . . . . . . . . . 6 --
-------- --------
Average common and common share equivalents outstanding . . . . . . . . 1,338 1,372
======== ========
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,699) $ (1,262)
======== ========
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.27) $ (0.92)
======== ========
FULLY DILUTED:
Average common and common share equivalents
outstanding - primary . . . . . . . . . . . . . . . . . . . . . . . 1,338 1,372
======== ========
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,699) $ (1,262)
======== ========
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.27) $ (0.92)
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 1,552
<SECURITIES> 26,328
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 15,140
<CURRENT-ASSETS> 0
<PP&E> 157,642
<DEPRECIATION> 120,535
<TOTAL-ASSETS> 105,081
<CURRENT-LIABILITIES> 0
<BONDS> 48,465
<COMMON> 160
1,000
0
<OTHER-SE> 1,270
<TOTAL-LIABILITY-AND-EQUITY> 105,081
<SALES> 0
<TOTAL-REVENUES> 25,302
<CGS> 0
<TOTAL-COSTS> 25,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,830
<INCOME-PRETAX> (1,636)
<INCOME-TAX> 63
<INCOME-CONTINUING> (1,699)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,699)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
