<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
Form 10-Q
MARK ONE
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD from August 1, 1995 TO December 31, 1995
For the Period Ended December 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 January 31, 1996, including 267,709 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 December 31, 1995
and July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Five Months Ended December 31, 1995 and 1994 . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Two Months Ended December 31, 1995 and 1994 . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the Five Months
Ended December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 10-16
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 17-22
PART II - OTHER INFORMATION
---------------------------
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 23-53
</TABLE>
Page 2
<PAGE> 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1995
-------------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,406 $ 10,517
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 455 353
Mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . 59 86
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7,931
--------- ---------
9,920 18,887
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 9,839 9,856
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,236 1,859
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,407 1,415
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,122 1,298
--------- ---------
14,604 14,428
--------- ---------
Total asset management assets . . . . . . . . . . . . . . . . . . . 24,524 33,315
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,735 15,456
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,938 12,126
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,709 8,782
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092 976
--------- ---------
34,474 37,340
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,498 11,055
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 2,195 2,198
--------- ---------
12,693 13,253
--------- ---------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 47,167 50,593
ASSOCIATED COMPANY
Investment in ShowBiz. . . . . . . . . . . . . . . . . . . . . . . . . 16,490 16,511
OTHER
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 5,929 5,429
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 3,339 5,824
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688 570
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 133
--------- ---------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 10,052 11,956
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,233 $ 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 STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1995
-------------- ----------
ASSET MANAGEMENT (UNAUDITED) (AUDITED)
<S> <C> <C>
REAL ESTATE
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,037 $ 5,997
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 240 334
--------- ---------
1,277 6,331
ENERGY
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 5,366 5,056
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 3,293 5,336
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,857 2,357
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125 950
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 106 102
--------- ---------
12,747 13,801
--------- ---------
Total asset management liabilities . . . . . . . . . . . . . . . . 14,024 20,132
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,300 11,315
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 6,586 6,534
--------- ---------
14,886 17,849
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,432 5,469
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 2,238 1,977
--------- ---------
7,670 7,446
--------- ---------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 22,556 25,295
ASSOCIATED COMPANY
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 9,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 63 55
--------- ---------
Total associated company liabilities . . . . . . . . . . . . . . . 9,063 9,055
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 25,469 25,703
13.5% Subordinated Debentures . . . . . . . . . . . . . . . . . . . . 22,855 22,902
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 3,657 4,965
--------- ---------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 51,981 53,570
--------- ---------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 97,624 108,052
REDEEMABLE PREFERRED STOCK
Series B, $.10 par value; 250,000 shares issued and outstanding;
stated at redemption value . . . . . . . . . . . . . . . . . . . . 1,000 1,000
STOCKHOLDERS' EQUITY (DEFICIT)
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 1,326,635 and 1,344,910 shares, respectively . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 57,210 57,142
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (50,963) (47,698)
Equity adjustment from foreign currency translation . . . . . . . . . -- 329
Treasury stock, 270,569 and 252,294 shares, respectively, at cost . . (6,798) (6,610)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) . . . . . . . . . . . . . . . (391) 3,323
--------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,233 $ 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>
FIVE MONTHS ENDED
DECEMBER 31,
----------------------------
1995 1994
------------ -----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,744 $ 1,409
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 292
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 2 122
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (833) (30)
--------- --------
1,211 1,793
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 517 384
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 405 405
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 301
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . 101 11
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9
--------- --------
1,343 1,110
--------- --------
Income (loss) from real estate operations . . . . . . . . . . . . . (132) 683
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 2,980 2,816
Other income (including intercompany amount of $115 in 1994) . . . . . 169 97
--------- --------
3,149 2,913
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 887 1,058
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 801 694
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 704 1,025
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289 171
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 192 (13)
--------- --------
2,873 2,935
--------- --------
Income (loss) from energy operations . . . . . . . . . . . . . . . 276 (22)
--------- --------
Income from asset management operations . . . . . . . . . . . . . . 144 661
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,229 28,721
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,824 25,222
Administrative and selling expenses . . . . . . . . . . . . . . . . . 3,091 3,254
Interest (including intercompany amount of $16 in 1994) . . . . . . . 307 270
--------- --------
28,222 28,746
========= ========
Income (loss) from textile products operations . . . . . . . . . . 7 (25)
</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>
FIVE MONTHS ENDED
DECEMBER 31,
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,073 $ 9,391
Management fee income . . . . . . . . . . . . . . . . . . . . . . . . -- 101
--------- -------
8,073 9,492
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 7,163 8,057
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 943 1,089
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 527
--------- -------
8,326 9,673
--------- -------
Loss from hotel operations . . . . . . . . . . . . . . . . . . . . (253) (181)
--------- -------
Loss from operating subsidiaries . . . . . . . . . . . . . . . . . (246) (206)
ASSOCIATED COMPANY
Loss from investment in ShowBiz . . . . . . . . . . . . . . . . . . . (88) (477)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 284
--------- -------
Loss from associated company . . . . . . . . . . . . . . . . . . . (398) (761)
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 177
Interest on short-term investments and other income . . . . . . . . . 56 84
--------- -------
233 261
Interest (net of intercompany amount of $131 in 1994) . . . . . . . . 1,728 1,851
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 1,594 2,516
--------- -------
3,322 4,367
--------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (3,089) (4,106)
--------- -------
Loss before income taxes and extraordinary gain . . . . . . . . . . . (3,589) (4,412)
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . (299) 617
--------- -------
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . (3,290) (5,029)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 25 --
--------- -------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,265) $(5,029)
========= =======
PER COMMON SHARE (PRIMARY)
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . $ (2.47) $ (3.67)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 0.02 --
--------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.45) $ (3.67)
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE> 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
DECEMBER 31,
--------------------------
1995 1994
----------- ----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 678 $ 551
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 121
Interest and discounts from mortgage loans . . . . . . . . . . . . . . 1 51
Loss from investments in HRP . . . . . . . . . . . . . . . . . . . . . (222) (22)
------- -------
564 701
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 206 140
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 119
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 162 162
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . 101 --
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 2
------- -------
638 423
------- -------
Income (loss) from real estate operations . . . . . . . . . . . . . (74) 278
ENERGY
Oil and gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . 1,515 1,353
Other income (loss) (including intercompany amount of $57 in 1994) . . 36 (60)
------- -------
1,551 1,293
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 411 558
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 384 311
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 320 839
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 85
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . 142 (147)
------- -------
1,406 1,646
------- -------
Income (loss) from energy operations . . . . . . . . . . . . . . . 145 (353)
------- -------
Income (loss) from asset management operations . . . . . . . . . . 71 (75)
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,311 11,735
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,992 10,334
Administrative and selling expenses . . . . . . . . . . . . . . . . . 1,205 1,318
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 110
------- -------
10,315 11,762
------- -------
Loss from textile products operations . . . . . . . . . . . . . . . (4) (27)
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE> 8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWO MONTHS ENDED
DECEMBER 31,
----------------------------
1995 1994
------------ -----------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,126 $ 3,768
Management fee income . . . . . . . . . . . . . . . . . . . . . . . . -- 31
---------- -------
3,126 3,799
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,892 3,244
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 392 441
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 219
---------- -------
3,373 3,904
---------- -------
Loss from hotel operations . . . . . . . . . . . . . . . . . . . . (247) (105)
---------- -------
Loss from operating subsidiaries . . . . . . . . . . . . . . . . . (251) (132)
ASSOCIATED COMPANY
Loss from investment in ShowBiz . . . . . . . . . . . . . . . . . . . (149) (678)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 102
---------- -------
Loss from associated company . . . . . . . . . . . . . . . . . . . (261) (780)
OTHER
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 71
Interest on short-term investments and other income . . . . . . . . . 31 37
---------- -------
102 108
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 925 2,047
Interest (net of intercompany amount of $57 in 1994) . . . . . . . . . 689 781
---------- -------
1,614 2,828
---------- -------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (1,512) (2,720)
---------- -------
Loss before income taxes and extraordinary gain . . . . . . . . . . . (1,953) (3,707)
Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . (362) 60
---------- -------
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . (1,591) (3,767)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 25 --
---------- -------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,566) $(3,767)
========== =======
PER COMMON SHARE (PRIMARY)
Loss before extraordinary gain . . . . . . . . . . . . . . . . . . . . $ (1.20) $ (2.75)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 0.02 --
---------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.18) $ (2.75)
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 8
<PAGE> 9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
DECEMBER 31,
-----------------------------
1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,265) $(5,029)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 2,705 3,014
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . (1,789) (1,787)
Undistributed income from energy affiliate . . . . . . . . . . . . . . (1,592) (1,242)
Distributions from energy affiliate . . . . . . . . . . . . . . . . . 1,332 1,338
Equity in net loss of real estate affiliate and associated company . 921 507
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . (500) 450
Amortization of deferred gain from debenture exchange . . . . . . . . (234) (227)
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . 101 11
Gain from extinguishment of debt . . . . . . . . . . . . . . . . . . . (25) --
Proceeds from collections of mortgage loans . . . . . . . . . . . . . 2 176
Amortization of mortgage loan discounts . . . . . . . . . . . . . . . -- (20)
Net change in textile products assets and liabilities . . . . . . . . 2,817 883
Net change in energy assets and liabilities . . . . . . . . . . . . . (287) (222)
Net change in other assets and liabilities . . . . . . . . . . . . . . 226 397
------- -------
Net cash provided by (used in) operating activities . . . . . . . . 412 (1,751)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of real estate and hotel assets . . . . . . . . . . . 7,610 1,464
Capital expenditures for hotels and real estate . . . . . . . . . . . . . (402) (819)
Investments in textile products property and equipment . . . . . . . . . (371) (590)
Investments in energy property and equipment . . . . . . . . . . . . . . (126) (17)
Net change in restricted cash for investing activities . . . . . . . . . 37 28
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . (1) --
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . -- 610
Proceeds from sale of insurance contracts . . . . . . . . . . . . . . . . -- 229
------- -------
Net cash provided by investing activities . . . . . . . . . . . . . 6,747 905
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . 250 245
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . (8,066) (2,477)
Purchase of capital stock by energy subsidiary for treasury . . . . . . . (1,189) --
Payment of dividends to minority stockholders of energy subsidiary . . . (429) --
Purchase of common stock for treasury . . . . . . . . . . . . . . . . . . (188) --
Repurchase of 13.5% Debentures . . . . . . . . . . . . . . . . . . . . . (22) --
Net change in restricted cash for financing activities . . . . . . . . . -- 693
------- -------
Net cash (used in) financing activities . . . . . . . . . . . . . . (9,644) (1,539)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . -- (48)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (2,485) (2,433)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 5,824 5,728
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 3,339 $ 3,295
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 9
<PAGE> 10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 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.
In October 1995 the Company announced its intention to change its
fiscal year end from July 31 to December 31, effective December 31,1995.
This Form 10-Q is a transition report and covers the transition period for
the Company's five month period from August 1, 1995 through December 31,
1995, and the six month period from July 1, 1995 through December 31, 1995
for its HEC subsidiary and ShowBiz affiliate. The Company's next filing
with the Securities and Exchange Commission will be on Form 10-Q for the
quarter ended March 31, 1996.
Share and per share amounts have been adjusted for 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 DECEMBER 31, 1995 LOSS FROM INVESTMENTS
---------------------------- AMOUNT AT WHICH CARRIED AT FOR THE FIVE MONTHS ENDED
COST OR -------------------------- DECEMBER 31,
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED DECEMBER 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 $ 5,841 $ 6,166 $ (47) $ (30)
- Limited partner units . . . 412,844 5,377 3,565 4,351 (786) --
-------- -------- -------- ------ -----
Totals . . . . . . . . . . $ 14,027 $ 9,406 $ 10,517 $ (833) $ (30)
======== ======== ======== ====== =====
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock . . . . . . . . 1,784,193 $ 5,438 $ 16,490 $ 16,511 $ (88) $(477)
======== ======== ======== ====== =====
</TABLE>
(A) At December 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 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 rights, and for the
five months ended December 31, 1995 and 1994 such amortization was
$280,000, 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 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
Page 10
<PAGE> 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
limited partner units to collateralize the promissory note, due
March 1998, in the original principal amount of $500,000.
During the period March through July 1995, the Company acquired
323,575 additional HRP limited partner units for $4,472,000. The
Company recorded its pro rata share of HRP's losses relating to
these limited partner units in the amount of $786,000 for the five
months ended December 31, 1995.
(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 $67,000 for the five months ended December 31, 1995.
At December 31, 1995, the Company owned approximately 15% of
ShowBiz, all of which is 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 December 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) . . . . . . . . . . . . $16.50 $8.64
ShowBiz common shares (SHBZ) . . . . . . . . . . . . . . 12.12 9.24
</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.
Page 11
<PAGE> 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by business
segment (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1995
------------- -------------
<S> <C> <C>
Real Estate
Promissory note, 8%, due March 1998 . . . . . . . . . . . $ 600 $ 500
Promissory note, 7.5%, due August 1996 . . . . . . . . . . 437 750
Term loan, libor + 2.5%, due January 1996 . . . . . . . . -- 4,747
-------- --------
1,037 5,997
Energy
Line of credit, prime + 2%, due September 1999 . . . . . . 1,125 950
Textile Products
Revolving credit facility, prime + .5%, due August 1997 . 8,100 11,030
Equipment loan, 10%, due December 1996 . . . . . . . . . . 200 285
-------- --------
8,300 11,315
Hotels
Term loan, 10%, due May 2001 . . . . . . . . . . . . . . . 5,099 5,136
Non-interest bearing obligation, due March 1997 . . . . . 333 333
-------- --------
5,432 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 . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,894 $ 32,731
======== ========
</TABLE>
Further information regarding loans payable is provided below:
Real Estate
Promissory note. In connection with the settlement of an obligation
related to the Company's Integra Hotels, Inc. subsidiary, the Company
issued a four-year, $500,000, promissory note in March 1994. The note is
secured by a pledge of 89,269 HRP limited partner units. The settlement
agreement also provided that the pledgee has the right to receive an
additional payment in an amount equal to 25% of the increase in the value
of the HRP units over the base amount of $11.25 per unit, but in no event
more than an additional $500,000 (the "Participation Amount"). As the per
unit price was $16.50 at December 31, 1995, the Company has increased the
term note by $100,000 for this contingent obligation by a corresponding
charge to interest expense.
Promissory Note. The Company issued a promissory note in the amount
of $1,500,000 to the agent for plaintiffs in the litigation styled Equitec
Roll-up Litigation, 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 December 31, 1995 was
$437,000. The note is collateralized by 187,500 shares of common stock of
HEC.
Term Loan. The term loan was paid off upon sale of the office-retail
property in December 1995.
Energy
Line of credit. In May 1995, Hallwood Energy Corporation ("HEC")
entered into a line of credit facility 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 interest rate was 10.5% at
December 31, 1995. The facility limits dividends to $3.50 per share per
annum. Availability is limited to 50% of the market value of HEC's
Page 12
<PAGE> 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
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 facility. The outstanding balance at December 31, 1995
was $1,125,000.
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 $5,366,000.
Textile Products
Revolving credit facility. 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 interest rate and outstanding balance at December
31, 1995 were 8.20% and $8,100,000, respectively. Brookwood had $1,440,000
of additional borrowing capacity at December 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 December 31, 1995 was $200,000.
Hotels
Term loan. 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 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 December
31, 1995 was $5,099,000.
Non-interest bearing obligation. A $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 installment was
paid on March 8, 1995, with the remaining two installments due on March 8,
1996 and 1997. The outstanding balance at December 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%; (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. Management believes that the line of credit
will be extended prior to maturity on comparable financial terms. The
interest rate and outstanding balance at December 31, 1995 were 9.25% and
$5,000,000, respectively.
Promissory note. 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)
Page 13
<PAGE> 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
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 $27,481,000 of its 13.5%
Debentures were exchanged for a new issue of 7% Collateralized Senior
Subordinated Debentures due July 31, 2000 (the" 7% Debentures"), and
purchased for cash $14,538,000 of its 13.5% Debentures at 80% of face
value. Interest is payable quarterly in arrears, in cash, and the 7%
Debentures are secured by a pledge of the capital stock of the Brookwood
and Hallwood Hotels, Inc. subsidiaries. The common and preferred stock of
Brookwood are subject to a prior pledge in favor of Chase.
Since 1994, the Company has repurchased 7% Debentures having a
principal value of $4,673,000. These repurchases satisfied the Company's
obligation to retire 10% of the original issue ($2,748,000) prior to March
1996 and partially satisfied the Company's obligation to retire an
additional 15% of the original issue ($4,122,000) prior to March 1998.
13.5% Subordinated Debentures. On May 15, 1989, the Company
distributed to its stockholders $46,318,600 aggregate principal amount of
an original issue (the "1989 Series") of its 13.5% Subordinated Debentures,
due July 31, 2009 (the "13.5% Debentures"). The Company had authorized the
issuance of up to $100,000,000 aggregate principal amount of 13.5%
Debentures. The 13.5% Debentures are subordinate to bank borrowings,
guarantees of the Company and other "Senior Indebtedness" (as defined in
the indenture relating to the 13.5% Debentures).
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 (the "1991 Series") and $139,200 of
cash in lieu of fractional debentures. Interest due on August 15, 1992 was
paid in-kind by the issuance of $6,792,900 additional 13.5% Debentures (the
"1992 Series") and $172,500 of cash in lieu of fractional debentures.
Interest due on August 15, 1993, 1994 and 1995 was 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.
In December 1995, the Company repurchased 13.5% Debentures having a
principal value of $46,700 for $21,100, resulting in an extraordinary gain
from debt extinguishment of $25,600.
Page 14
<PAGE> 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 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
$1,559 and $1,325 accumulated amortization, respectively 2,661 2,895
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $25,469 $25,703
======= =======
13.5% Debentures (face value)
1989 Series . . . . . . . . . . . . . . . . . . . . . . . $18,203 $18,203
1991 Series . . . . . . . . . . . . . . . . . . . . . . . 2,292 2,310
1992 Series . . . . . . . . . . . . . . . . . . . . . . . 2,360 2,389
------- -------
Totals . . . . . . . . . . . . . . . . . . . . . . . $22,855 $22,902
======= =======
</TABLE>
6. INCOME TAXES
The following is a summary of the income tax expense (benefit) (in
thousands):
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
DECEMBER 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Federal
Deferred (benefit) . . . . . . . . . . . . . . . . . . . $ (500) $ 450
Current . . . . . . . . . . . . . . . . . . . . . . . . . 6 33
------- ------
Sub-total . . . . . . . . . . . . . . . . . . . . . . (494) 483
State . . . . . . . . . . . . . . . . . . . . . . . . . . 195 134
------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ (299) $ 617
======= ======
</TABLE>
The federal deferred tax (benefit) of $500,000 in 1995 was recorded by
the Company's HEC subsidiary, primarily as a result of a reduction in the
valuation allowance. T he federal deferred tax charge of $450,000 in 1994
was recorded by the Company, and was 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. The federal current charge in the 1995 and 1994
periods relate to the alternative minimum tax payable by HEC which was
required to file a separate federal tax return.
As a result of the Company's purchase of approximately 37,000
additional HEC common shares in the October through December 1995 period,
and the December 31, 1995 conversion of 356,000 shares of HEC preferred
stock into 356,000 shares of common stock, the Company owns 80% of the
common stock of HEC. Beginning January 1, 1996 HEC will be included in the
consolidated income tax returns of the Company. Prior to January 1, 1996,
HEC was an independent entity for tax reporting purposes, although it has
been a consolidated subsidiary for financial reporting purposes since May
1990. As of December 31, 1995, HEC had estimated net operating loss
carryforwards ("NOLs") of $108,000,000, in addition to various other tax
credits and carryforwards. A related valuation allowance was recorded,
based upon HEC's expectations regarding the utilization of such NOLs, to
reduce the value of the reported tax benefit to $500,000. In accordance
with federal tax laws and regulations governing consolidated groups, these
NOLs and tax carryforwards must remain at the subsidiary level.
Page 15
<PAGE> 16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
State tax expense is an estimate based upon taxable income allocated
to those states in which the Company does business, at their respective tax
rates.
The amount of the consolidated deferred tax asset (net of valuation
allowance) was $5,929,000 at December 31, 1995. The deferred tax asset
arises principally from the anticipated utilization of NOLs and tax credits
from the implementation of various 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>
FIVE MONTHS ENDED
DECEMBER 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 . . . . . . . . . . . . . . $ 67 $ 96
Real estate acquired through foreclosure . . . . . . . . . . 25 --
Supplemental disclosures of cash payments:
Interest paid (including capitalized interest) . . . . . . . $ 4,645 $ 5,143
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 95 185
</TABLE>
Page 16
<PAGE> 17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported a net loss of $1,566,000 for the two months ended
December 31, 1995, compared to a net loss of $3,767,000 in the 1994 period.
Total revenue was $15,505,000, compared to $16,958,000 in the prior-year
period. The net loss of $3,265,000 for the five months in 1995, compares
to a net loss of $5,029,000 in the prior- year period.
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 $678,000 for the two months ended December 31,
1995 increased by $127,000, or 23%, from the $551,000 in the prior-year
period. Fee income of $1,744,000 for the five months increased by $335,000
from the prior-year period. 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"). The increases were primarily
due to an increase in leasing fees.
Rental income from the United Kingdom office-retail property in the
1995 two-month period decreased to $107,000 or 12% from $121,000 in the
1994 period, due to a tenant receivable write-off in fiscal 1995. Rental
income for the five month period increased slightly to $298,000 from
$292,000 in the comparable 1994 period. The office-retail property was
sold on December 28, 1995.
Interest and discounts from mortgage loans for the two months ended
December 31, 1995 declined to $1,000, from the 1994 amount of $51,000. The
comparative five month amounts were $2,000 and $122,000, respectively. The
declines were 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 two months
ended December 31, 1995, the Company reported a $222,000 loss compared to a
$22,000 loss in the period a year ago. The comparative five month loss was
$833,000 and $30,000, respectively. The increased losses result from 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 commission-free, odd-lot buyback programs. The Company will
continue to recognize significant non-cash, equity losses from its HRP
investment, until the book value of the limited partner units is reduced to
zero.
Similarly, the Company's carrying value of the 89,269 HRP 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 47% to $206,000 in the
two months ended December 31, 1995, compared to $140,000 in the year-ago
period. Administrative expenses for the fiscal 1995 five month period
increased to $517,000 from $384,000 in the comparable prior-year period.
The increases were primarily attributable to additional leasing commission
expense.
Page 17
<PAGE> 18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Interest expense increased to $170,000 from $119,000 in the two months
ended December 31, 1995. The comparative five month amounts were $303,000
and $301,000 for the 1995 and 1994 periods, respectively. The increase is
due to recording $100,000 of contingent interest on the $500,000 promissory
note due March 1998 (see also Note 4), partially offset by lower costs for
the office-retail property.
Depreciation and amortization expense of $162,000 for the two months
ended December 31, 1995 and $405,000 for the five month period were the
same as the corresponding fiscal 1994 periods. 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.
On December 28, 1995, the Company completed the sale of the
office-retail property located in the United Kingdom for $7,543,000
(L.4,850,000). A provision for loss of $101,000 was recorded in connection
with the sale. The provision for loss of $11,000 in the 1994 period is a
result of the August 1994 sale of a land parcel in Flint, Michigan.
Operating expenses were immaterial in both the two and five month
periods ended December 31, 1995 and 1994.
ENERGY.
Revenue. Following the December 1995 conversion of its HEC preferred
stock investment into common stock, the Company owns 80% of the common
stock of 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 it 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 two months ended December 31, 1995, oil and gas revenues of
$1,515,000 increased 12%, compared to $1,353,000 in the year-ago period.
For the five months, the comparison of oil and gas revenues was $2,980,000
in the current year and $2,816,000 in the year-ago period. Oil revenue for
the five months increased $106,000 to $1,191,000, due to an increase in
production to 68,000 barrels from 63,000 barrels, combined with an increase
in the average price per barrel to $17.51 from $16.19. Gas revenue for the
five months increased $58,000 to $1,789,000, primarily as a result of an
increase in the average gas price to $1.93 from $1.71 per mcf, partially
offset by a decrease in production to 928,000 mcf from 1,010,000 mcf. The
changes in oil and gas production are due to increased production from
developmental drilling projects in West Texas, partially offset by normal
production declines.
Other income increased to $36,000 for the two months ended December
31, 1995 from the $60,000 loss in the prior-year period, and for the five
months increased to $169,000, from $97,000. The increase in both periods
is due to HEC's share of HEP's monetization of its Section 29 tax credits.
Expenses. Depreciation, depletion and amortization expenses were
$411,000 for the two months ended December 31, 1995 compared to $558,000 in
the year-ago period. For the five-month periods they were $887,000 and
$1,058,000, respectively. The decreases are the result of lower
capitalized costs in 1995.
Operating expenses increased to $384,000 for the two months ended
December 31, 1995 from $311,000 in the prior- year period and increased to
$801,000 for the five months from $694,000 in the prior-year period, as a
result of increased maintenance activity during the current-year periods.
Administrative expenses decreased by $519,000 to $320,000 for the two
months ended December 31, 1995 and decreased $321,000 to $704,000 for the
five month period, primarily due to the litigation settlement of an
affiliate in the amount of $308,000 recorded in 1994.
Page 18
<PAGE> 19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Interest expense increased by $64,000 to $149,000 for the two months
ended December 31, 1995 compared to $85,000 for the year-ago period, and
increased $118,000 to $289,000 for the five month period, primarily from
HEC's utilization of its line of credit.
Minority interest, which represents the interest of other common
shareholders in the net income (loss) of HEC, increased in the current-year
periods, due to higher net income from energy operations, partially offset
by a lower minority interest ownership percentage, resulting from HEC's
repurchase of its own shares from minority shareholders for treasury and
the Company's purchase of additional HEC shares in the October through
December 1995 period.
OPERATING SUBSIDIARIES.
Textile products.
Revenue. Sales decreased $1,424,000 in the two months ended December
31, 1995 to $10,311,000, compared to $11,735,000 in the year-ago period.
The comparative five month sales decreased to $28,229,000, from
$28,721,000. The decreases in sales were due to weak market conditions in
both the textile distribution businesses and the Kenyon finishing plant.
Expenses. Cost of sales decreased by $1,342,000 or 13.0%, compared to
the 12.1% decrease in sales for the two month period ended December 31,
1995 from the comparable prior year period. The higher gross profit margin
for the two-month period (12.8% versus 11.9% for the two-month periods
ended December 31, 1995 and 1994, respectively) was principally the result
of a change in product mix with higher gross profits in the distribution
business. The comparable gross profit margins for the five-month periods
were 12.1% in 1995 and 12.2% in 1994.
Administrative and selling expenses decreased $113,000 in the two
months ended December 31, 1995 to $1,205,000 and decreased $163,000 for the
five-month period to $3,091,000 from the comparable 1994 periods, as a
result of cost control efforts. The $8,000 increase in interest expense
for the two months ended December 31, 1995 to $118,000 and $37,000 increase
for the five months to $307,000 was the result of higher average borrowings
outstanding.
Hotels
Revenue. Sales of $3,126,000 in the two month period ended December
31, 1995 decreased by $642,000 from the year-ago amount of $3,768,000. The
1995 five month period hotel revenues of $8,073,000 decreased by $1,318,000
from the 1994 amount of $9,371,000. The decreases are primarily
attributable to the January 1995 sale of the Lido Beach Holiday Inn hotel.
Considering only the five hotels owned during both the 1995 and 1994
periods, revenues increased by $75,000 for the two month period and
$317,000 for the five months. This increase reflects the Company's
decision 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. Management fee income of $31,000
and $101,000, for the two month and five month periods in 1994,
respectively, relates to managed properties, both of which were sold in the
prior fiscal year.
Expenses. Operating expenses of $2,892,000 for the two month period
ended December 31, 1995 decreased by $352,000 from the year-ago amount of
$3,244,000. For the five month period, operating expenses of $7,163,000 in
1995 decreased by $894,000 from the year-ago amount of $8,057,000. The
decreases were also due to the aforementioned sale of the Lido Beach
Holiday Inn hotel. On a comparable basis, considering only the five hotels
owned during both 1995 and 1994, operating expenses increased $161,000 for
the two-month period and $310,000 for the five-month period. Depreciation
and amortization expense decreased by $49,000 for the two month period and
$146,000 for the five months, 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 decreased by
$130,000 to $89,000 for the two months from $219,000 in the 1994 period,
and decreased by $307,000 to $220,000 for the five months, from $527,000 in
1994 to, due to the payoff of the term loan upon sale of The Lido Beach
Holiday Inn hotel.
Page 19
<PAGE> 20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
ASSOCIATED COMPANY
Revenue. The Company records its pro-rata share of ShowBiz results
using the equity accounting method. The Company recorded a loss of $149,000
from its investment in ShowBiz for the two months ended December 31, 1995,
compared to a loss of $678,000 in the prior-year period. The comparable
five-month amounts were losses of $88,000 and $477,000, respectively. The
improvement in ShowBiz results for 1995 is attributable to (i) an increase
in comparable same store sales and in operating margins in the 1995 periods
and (ii) a $2.0 million loss associated with the valuation of fixed assets
recorded in December 1994.
Expenses. Interest expense of $112,000 for the two months ended
December 31, 1995 increased from the year-ago amount of $102,000, due to an
increase in rate on the line of credit, offset by a decline in the average
outstanding balance. Interest expense for the five months ended December
31, 1995 increased to $310,000 from the year-ago amount of $284,000 for the
same reasons.
OTHER
Revenue. Fee income in the 1995 two month period and five month
period of $71,000 and $177,000, respectively, was the same as the
prior-year amounts. Interest on short-term investments and other income of
$31,000 for the 1995 two month period and $56,000 for the five month
period, compares to the prior year amounts of $37,000 and $84,000,
respectively. The level of interest income varies dependent on the average
level of invested cash balances and the average interest rate.
Expenses. Interest expense in the amount of $689,000 for the two
months ended December 31, 1995 decreased by $92,000 from the prior-year
amount of $781,000. Interest expense for the five month period of
$1,728,000 decreased $123,000 from the prior-year amount of $1,851,000.
The decreases are due to the repurchase of approximately $2,500,000
principal amount of 7% Debentures, and additional interest costs from the
settlement of a state tax audit in the prior-year period.
Administrative expenses of $925,000 for the two months ended December
31, 1995, and $1,594,000 for the five months, were significantly decreased
from the comparable 1994 amounts of $2,047,000 and $2,516,000,
respectively. The decreases are primarily attributable to a reduction of
$1,450,000 in litigation charges, partially offset by increased
professional fees.
Income taxes. The federal deferred tax (benefit) of $500,000 in 1995
was recorded by the Company's HEC subsidiary, primarily as a result of a
reduction in the valuation allowance. T he federal deferred tax charge of
$450,000 in 1994 was recorded by the Company, and was 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. The federal current charge in the
1995 and 1994 periods relate to the alternative minimum tax payable by HEC
which was required to file 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.
As of December 31, 1995, the Company had approximately $67,000,000 of
tax net operating loss carryforwards ("NOLs") and temporary differences
(excluding separate return losses of HEC) 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
Page 20
<PAGE> 21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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.
As a result of the Company's purchase of approximately 37,000
additional HEC common shares in the October through December 1995 period,
and the December 31, 1995 conversion of 356,000 shares of HEC preferred
stock into 356,000 shares of common stock, the Company owns 80% of the
common stock of HEC. Beginning January 1, 1996 HEC will be included in the
consolidated income tax returns of the Company. Prior to January 1, 1996,
HEC was an independent entity for tax reporting purposes, although it has
been a consolidated subsidiary for financial reporting purposes since May
1990. As of December 31, 1995, HEC had estimated net operating loss
carryforwards ("NOLs") of $108,000,000, in addition to various other tax
credits and carryforwards. A related valuation allowance was recorded,
based upon HEC's expectations regarding the utilization of such NOL's, to
reduce the value of the reported tax benefit to $500,000. In accordance
with federal tax laws and regulations governing consolidated groups, these
NOLs and tax carryforwards must remain at the subsidiary level.
Extraordinary gain from extinguishment of debt. In December 1995, the
Company retired 13.5% Debentures having a principal value of $46,700 for
$21,100, resulting in an extraordinary gain from debt extinguishment of
$25,600.
Page 21
<PAGE> 22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
Item 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at December 31,
1995 totaled $3,339,000.
Although the Company's ShowBiz shares, having a market value of
approximately $29,207,000 at February 29, 1996 (based upon the closing
price on such date of $16.37 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.
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 December 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, which has been
reduced to $1,125,000 at December 31, 1995. 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 December 31, 1995.
The line of credit limits HEC's dividends to $3.50 in each calendar year.
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 December 31, 1995, Brookwood had $1,440,000
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, the maturity of which is April 1996. Management
believes that the line of credit can be extended 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 22
<PAGE> 23
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 of this Form 10-Q
for discussion of pending litigation matters.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on January 26, 1996, stockholders of the
Company voted on one issue:
(a) To elect one director to hold office for three years and until his successor
is elected and qualified:
Nominee Director Votes For Votes Withheld
---------------- --------- --------------
Brian M. Troup 1,206,185 52,916
As a result of the above, the nominee director was re-elected for an additional
three-year term. The continuing directors are Messrs. Charles A. Crocco, Jr.,
Anthony J. Gumbiner, Robert L. Lynch and J. Thomas Talbot.
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits:
(i) 10.16 - Fourth Amendment and Waiver of Credit Agreement and Guaranty,
dated as of December 11, 1995, among Brookwood Companies Incorporated,
the Borrower, Kenyon Industries, Inc., Brookwood Laminating, Inc., as
Guarantors and The Chase Manhattan Bank, N.A., as Bank and Agent for
the Banks; and related First Amendment to Stock Pledge Agreement and
Security Agreement, both dated as of December 11, 1995, filed herewith. Pages 25-52
(ii) 11 - Statement Regarding Computation of Per Share Earnings Pages 53
(b) Reports on Form 8-K None
</TABLE>
Page 23
<PAGE> 24
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
Dated: March 4, 1996 By: /s/ Melvin J. Melle
--------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
Exhibit 10.16 Fourth Amendment and Waiver of Credit Agreement and Guaranty, dated as of December 11, 1995,
among Brookwood Companies Incorporated, the Borrower, Kenyon Industries, Inc., Brookwood
Laminating, Inc., as Guarantors and The Chase Manhattan Bank, N.A., as Bank and Agent for the
Banks; and related First Amendment to Stock Pledge Agreement and Security Agreement, both dated
as of December 11, 1995, filed herewith.
Exhibit 11 Statement Regarding Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.16
FOURTH AMENDMENT AND WAIVER OF
CREDIT AGREEMENT AND GUARANTY
FOURTH AMENDMENT AND WAIVER OF CREDIT AGREEMENT AND GUARANTY dated as
of December 11, 1995 ("Fourth Amendment and Waiver") among BROOKWOOD COMPANIES
INCORPORATED, a Delaware corporation (the "Borrower"), KENYON INDUSTRIES, INC.,
a Delaware corporation ("Kenyon"), BROOKWOOD LAMINATING, INC., a Delaware
corporation ("Brookwood Laminating"), (Kenyon Industries and Brookwood
Laminating each a "Guarantor" and collectively, the "Guarantors"), and THE
CHASE MANHATTAN BANK, N.A. ("Chase"), as a 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, Kenyon, 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, as further amended by the Second Amendment to Credit Agreement
and Guaranty dated as of September 27, 1994, and as further amended by the
Third Amendment to Credit Agreement and Guaranty, Waiver and Line Letter dated
as of June 23, 1995 (as so amended, the "Credit Agreement"). Any term used in
this Fourth Amendment and Waiver and not otherwise defined in this Fourth
Amendment and Waiver shall
Page 25
<PAGE> 2
have the meaning assigned to such term in the Credit Agreement.
The Borrower, each Guarantor, Chase and the Agent have agreed to amend
and waive certain provisions of the Credit Agreement as hereinafter set forth.
SECTION 1. Amendments to Credit Agreement. The Credit
Agreement is, effective as of the date hereof and subject to the satisfaction
of the conditions precedent set forth in Section 4 hereof, hereby amended as
follows:
(a) The following definitions are added in their proper
alphabetical order:
"Fourth Amendment and Waiver" means the Fourth
Amendment and Waiver the Credit and Guaranty dated as of
December 11, 1995 among the Borrower, each Guarantor, Chase
and the Agent.
"Brookwood Laminating Security Agreement" means the
Brookwood Laminating Security Agreement in the form of Exhibit
A to the Fourth Amendment and Waiver.
(b) The definitions of "Guarantor" and "Security Agreements" are
each amended in their entirety to read as follows:
"Guarantor(s)" means Kenyon or Brookwood
Laminating, or both as the context may require.
"Security Agreements" means, collectively, the
Borrower Pledge Agreement, the Borrower Security Agreement,
the Hallwood Pledge Agreement, the Kenyon Security Agreement,
and the Brookwood Laminating Security Agreement.
2 Page 26
<PAGE> 3
(c) Section 10.04, Investments, is amended by adding after
"Kenyon" in the last line thereof the following: "or Brookwood Laminating".
SECTION 2. Guaranty. Brookwood Laminating agrees to be and is,
effective as of the date hereof, and subject to the satisfaction of the
conditions precedent set forth in Section 3 hereof, a Guarantor under the
Credit Agreement and, as such, agrees to be bound by the terms and provisions
of the Credit Agreement applicable to a Guarantor. In addition, the Borrower
also agrees that Brookwood Laminating is a Guarantor.
SECTION 3. Waiver. Because the Borrower failed to deliver the
consolidated and consolidating balance sheet of the Borrower and its
Consolidated Subsidiaries as of the July 31, 1995 Fiscal Year end and the
consolidated and consolidating statement of income and retained earnings,
statement of changes in stockholder's equity and statement of cash flows of the
Borrower and its Consolidated Subsidiaries for such Fiscal Year, there is an
Event of Default under Section 9.08(1), Annual Financial Statements, 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
4 hereof, the Bank waives such Event of Default. The Bank does not waive any
future noncompliance with Section 9.08(1).
3 Page 27
<PAGE> 4
SECTION 4. Conditions of Effectiveness. This Fourth Amendment
and Waiver shall become effective as of the date of this Fourth Amendment and
Waiver when and if the Agent shall have received on or before such date each
of the following documents, in form and substance satisfactory to the Agent and
its counsel, and each of the following conditions has been fulfilled:
(1) Fourth Amendment and Waiver. This Fourth Amendment and Waiver
duly executed by the Borrower, each Guarantor, Chase and the Agent;
(2) Evidence of Due Organization of Brookwood Laminating.
Certified copies, dated the date hereof, of the Certificate of Incorporation
and By-Laws of Brookwood Laminating and all amendments thereto;
(3) Evidence of All Corporate Action of Brookwood Laminating.
Certified copies, dated the date hereof, of all corporate action taken by
Brookwood Laminating, including resolutions of its Board of Directors,
authorizing the execution, delivery, and performance of this Fourth Amendment
and Waiver and each of the other documents Brookwood Laminating is delivering
in connection with this Fourth Amendment and Waiver;
(4) Incumbency and Signature Certificate of Brookwood Laminating.
A certificate, dated the date hereof, of the Secretary of Brookwood Laminating,
certifying the names and true signatures of the officers of Brookwood
Laminating, authorized to sign the Loan Documents to which it is a party
4 Page 28
<PAGE> 5
and the other documents to be delivered pursuant to this Fourth Amendment and
Waiver;
(5) Good Standing Certificates. A certificate, dated within ten
(10) days of the date hereof, from the Secretary of State (or other appropriate
official) of the jurisdiction of incorporation of Brookwood Laminating
certifying as to the due incorporation and good standing of Brookwood
Laminating and certificates, dated within ten (10) days of the date hereof,
from the Secretary of State (or other appropriate official) of each other
jurisdiction where Brookwood Laminating is required to be qualified to conduct
business, certifying that Brookwood Laminating is duly qualified to do such
business and is in good standing in such state;
(6) Brookwood Laminating Security Agreement. The Brookwood
Laminating Security Agreement duly executed by Brookwood Laminating together
with (a) financing statements (UCC-1) to be filed under the Uniform Commercial
Code of all jurisdictions necessary or, in the opinion of the Agent or any
Bank, desirable to perfect the Lien created by the Brookwood Laminating
Security Agreement; (b) duly executed copies of financing statements (UCC-3) to
be filed under the Uniform Commercial Code of all jurisdictions necessary, or
in the opinion of the Agent or any Bank, desirable to terminate any Liens in
favor or any party other than the Agent; and (c) Uniform Commercial Code
searches identifying all of the financing statements on file with respect to
the
5 Page 29
<PAGE> 6
Borrower in all jurisdictions referred to under (a), including the financing
statements filed by the Agent against the Borrower, indicating that no party
other than the Agent claims an interest in any of the Collateral;
(7) Amendment to Borrower Pledge Agreement. The execution and
delivery of a second amendment to the Borrower Pledge Agreement pursuant to
which the Borrower grants a Lien on the stock of Brookwood Laminating, together
with the certificates representing the shares pledged by the Borrower pursuant
to such amendment and undated stock powers executed in blank for each such
certificate;
(8) 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 Fourth Amendment and Waiver 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
(9) Other Documents. The Agent shall have received such other
approvals, opinions or documents as the Agent may reasonably request.
SECTION 5. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof,
6 Page 30
<PAGE> 7
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 Fourth
Amendment and Waiver 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 6. 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 Fourth Amendment and
Waiver and any other instruments and documents to be delivered hereunder. In
addition, the Borrower shall pay any and all stamp and other taxes and fees
payable or determined to be payable in connection with the execution and
delivery, filing or
7 Page 31
<PAGE> 8
recording of this Fourth Amendment and Waiver 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 7. Governing Law. This Fourth Amendment and Waiver
shall be governed by and construed in accordance with the laws of the State of
New York.
SECTION 8. Headings. Section headings in this Fourth Amendment
and Waiver are included herein for convenience of reference only and shall not
constitute a part of this Fourth Amendment and Waiver for any other purpose.
SECTION 9. Counterparts. This Fourth Amendment and Waiver 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
Fourth Amendment and Waiver by signing any such counterpart.
[INTENTIONALLY LEFT BLANK.]
8 Page 32
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment and Waiver to be duly executed as of the day and year first above
written.
BROOKWOOD COMPANIES INCORPORATED
By /s/ DUANE O. SCHMIDT
-----------------------------
Name: Duane 0. Schmidt
Title: Vice President Finance
KENYON INDUSTRIES, INC.
By /s/ DUANE O. SCHMIDT
-----------------------------
Name: Duane 0. Schmidt
Title: Treasurer and
Secretary
BROOKWOOD LAMINATING, INC.
By /s/ DUANE O. SCHMIDT
-----------------------------
Name: Duane 0. Schmidt
Title: Treasurer and
Secretary
9 Page 33
<PAGE> 10
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
10 Page 34
<PAGE> 11
FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT
FIRST AMENDMENT TO STOCK PLEDGE AGREEMENT, dated as of
December 11, 1995, made by BROOKWOOD COMPANIES INCORPORATED, a Delaware
corporation, (the "Borrower") to each of the Banks (as defined below) party to
the Credit Agreement (as defined below) and THE CHASE MANHATTAN BANK, N.A., as
Agent for the Banks (in such capacity, together with its successors in such
capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to each of (1) the
Credit Agreement and Guaranty dated as of December 9, 1992 among the Borrower,
Kenyon Industries, Inc., and The Chase Manhattan Bank, N.A. ("Chase"), as a
Bank, and the Agent, as amended by the First Amendment to Credit Agreement and
Guaranty dated as of March 31, 1993, as further amended by the Second Amendment
to Credit Agreement and Guaranty dated as of September 27, 1994, as further
amended by the Third Amendment to Credit Agreement and Guaranty, Waiver and
Line Letter dated as of June 23, 1995, and as further amended by the Fourth
Amendment and Waiver of Credit Agreement and Guaranty dated as of December
11, 1995 (the Credit Agreement and Guaranty, as it may be further amended or
otherwise modified from time to time, being the "Credit Agreement") and (2) the
Stock Pledge Agreement dated as of December 9, 1992 made by the Borrower to
each of the Banks and the Agent (the "Pledge Agreement") Any term used
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herein and not otherwise defined herein shall have the meaning assigned to such
term in the Pledge Agreement.
The Borrower hereby advises the Banks and the Agent that it
owns all the issued and outstanding stock of Brookwood Laminating, Inc.
("Brookwood Laminating") and agrees to amend the Pledge Agreement as
hereinafter set forth to pledge all of such stock to each Bank and to the
Agent.
SECTION 1. Amendments to Pledge Agreement. The Pledge
Agreement is, effective as of the date hereof and subject to the satisfaction
of the conditions precedent set forth in Section 2 hereof, hereby amended by
deleting Schedule I thereto in its entirety and replacing it with Schedule I
hereto to reflect both the Borrower's ownership of the stock of Brookwood
Laminating and the Borrower's pledge thereof pursuant to the Pledge Agreement.
SECTION 2. Conditions of Effectiveness. This First Amendment
shall become effective as of the date of this First Amendment when and if the
Agent shall have received on or before such date each of the following
documents, in form and substance satisfactory to the Agent and its counsel, and
each of the following conditions has been fulfilled:
(1) First Amendment. This First Amendment duly executed
by the Borrower;
(2) Resolutions of the Borrower. Resolutions of the
Borrower's Board of Directors, authorizing the
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execution, delivery, and performance of this First Amendment; and
(3) Other Documents. The Agent shall have received such
other approvals, opinions or documents as the Agent may reasonably request.
SECTION 3. 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 Pledge Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan
Documents to the Pledge Agreement, shall mean and be a reference to the Pledge
Agreement as amended hereby.
(b) Except as specifically amended above, the Pledge
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
First Amendment 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 Pledge Agreement and each other Loan Document shall remain
in full force and effect and are hereby ratified and confirmed.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Agent on demand for all out-of-pocket costs, expenses and
charges (including,
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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 First Amendment and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any
and all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this First
Amendment 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 5. Governing Law. This First Amendment shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 6. Headings. Section headings in this First Amendment
are included herein for convenience of reference only and shall not constitute
a part of this First Amendment for any other purpose.
IN WITNESS WHEREOF, the party hereto has caused this First
Amendment 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: Vice President - Finance
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SECURITY AGREEMENT dated as of December 11, 1995 ("Security
Agreement"), made by BROOKWOOD LAMINATING, INC., a Delaware corporation (the
"Guarantor"), to each of the Banks (as defined below) party to the Credit
Agreement (as defined below) and The Chase Manhattan Bank, N.A., as agent for
the Banks (in such capacity, together with its successors in such capacity, the
"Agent").
PRELIMINARY STATEMENTS. 1. Reference is made to the Credit
Agreement and Guaranty dated as of December 9, 1992, among the Brookwood
Companies Incorporated (the "Borrower"), Kenyon Industries, Inc. and the other
guarantors signatory thereto, the banks party thereto (each a "Bank" and,
collectively, the "Banks") and the Agent, as amended by the First Amendment to
Credit Agreement and Guaranty dated as of March 31, 1993, as further amended by
the Second Amendment to Credit Agreement and Guaranty dated as of September 27,
1994, as further amended by the Third Amendment to Credit Agreement and
Guaranty, Waiver and Line Letter dated as of June 23, 1995, and as further
amended by the Fourth Amendment and waiver of Credit Agreement and Guaranty
dated as of December 11, 1995 (Credit Agreement and Guaranty, as it may
hereafter be amended or otherwise modified from time to time, being the "Credit
Agreement"). The terms defined in the Credit Agreement and not otherwise defined
in this Security Agreement which are used in this Security Agreement shall
have the meanings set forth in the Credit Agreement.
2. It is a condition precedent to the obligation of
Chase and the Banks to continue to provide the Credit Facilities to the
Borrower as provided in the Credit Agreement that the Guarantor shall have
granted the security interest contemplated by this Security Agreement.
NOW, THEREFORE, in consideration of the premises and in order
to induce Chase and the Banks to continue to provide the Credit Facilities to
the Borrower as provided in the Credit Agreement, the Guarantor hereby agrees
as follows:
SECTION 1. Grant of Security. The Guarantor hereby grants to
each Bank and hereby grants to the Agent for the benefit of each Bank a Lien
in and on all of the Guarantor's right, title and interest in and to all of the
following, whether now owned or hereafter acquired or existing (the
"Collateral"):
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(a) All accounts, accounts receivable, contract rights,
chattel paper, instruments, acceptances, drafts, and other obligations of any
kind, whether or not arising out of or in connection with the sale or lease of
goods or the rendering of services, together with all ledger sheets, files,
records and documents relating to any of the foregoing including all computer
records, programs, storage media and computer software useful or required in
connection therewith, and all rights now or hereafter existing in and to all
security agreements, leases, and other contracts securing or otherwise relating
to any such Receivables, and any and all such leases, security agreements and
other contracts (the "Receivables");
(b) All monies and claims for money due or to become due
to the Guarantor under any agreement pursuant to which the Guarantor sells,
assigns or transfers any of its Receivables to a factor under or pursuant to a
factoring agreement, including, without limitation, all Factoring Agreements
(any and all such monies and claims for money being the "Factor Credit
Balances");
(c) All equipment in all of its forms, wherever located,
including, without limitation, all machinery and other goods, furniture,
furnishings, fixtures, office supplies and all other tangible personal property
and all parts thereof and all accessions thereto, together with all parts,
fittings, special tools, alterations, substitutions, replacements and
accessions thereto (any and all such equipment, parts and accessions being the
"Equipment");
(d) Any and all documents, documents of title, shipping
documents, warehouse receipts, policies or certificates of insurance and other
documents accompanying or relating to any instrument (including, without
limitation, drafts, receipts, acceptances, teletransmissions and other written
demands for payment) drawn under any Letter of Credit, and any and all
inventory or other property or assets shipped under or pursuant to or in
connection with any such Letter of Credit or in any way relative thereto or to
any of such instruments drawn thereunder or documents or documents of title in
any way relative to or referred to in any such Letter of Credit (any and all
such documents, inventory and property being the "Inventory");
(e) All rights under all contracts or agreements to which
the Guarantor is a party (other than contracts or agreements which by their
terms expressly prohibit the granting of a Lien thereon);
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(f) All general intangibles, including but not limited to
good will and tax refunds, (the "General Intangibles); and
(g) All proceeds of any and all of the foregoing
Collateral (including, without limitation, proceeds which constitute property
of the types described in clauses (a) through (f) of this Section 1) and, to
the extent not otherwise included, all payments under insurance (whether or not
the Agent is the loss payee thereof), or any indemnity, warranty or guaranty,
payable by reason of loss or damage to or otherwise with respect to any of the
foregoing items.
SECTION 2. Security for Guaranty Obligations. The Collateral
secures the prompt and complete payment when due of its Guaranty Obligations.
SECTION 3. Guarantor Remains Liable. Anything herein to the
contrary notwithstanding, (a) the Guarantor shall remain liable under the
contracts and agreements included in the Collateral to the extent set forth
therein to perform all of its duties and obligations thereunder to the same
extent as if this Security Agreement had not been executed, (b) the exercise by
the Agent or any Bank of any of the rights hereunder shall not release the
Guarantor from any of its duties or obligations under the contracts and
agreements included in the Collateral, and (c) neither the Agent nor any
Bank shall have any obligation liability under the contracts and agreements
included in the Collateral by reason of this Security Agreement, nor shall the
Agent or any Bank be obligated to perform any of the obligations or duties of
the Guarantor thereunder or to take any action to collect or enforce any claim
for payment assigned hereunder.
SECTION 4. Representations and Warranties. The Guarantor
represents and warrants to the Agent and each Bank as follows:
(a) All of the Equipment and Inventory are located at the
places specified in Schedule I hereto. The chief place of business and chief
executive office of the Guarantor and the office where the Guarantor keeps its
records concerning Receivables and Factor Credit Balances are located at the
addresses specified on Schedule I hereto. All originals of all chattel paper
which evidence Receivables and Factor Credit Balances have been delivered to
the Agent. None of the Receivables or Factor Credit Balances is evidenced by a
promissory note or other instrument.
(b) The Guarantor owns the Collateral free and clear of
any Lien, except for (1) the Lien created by this
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Security Agreement and (2) Liens permitted pursuant to Section 10.03 of the
Credit Agreement. No effective financing statement or other instrument similar
in effect covering all or any part of the Collateral is on file in any
recording office, except such as may have been filed in favor of the Agent
relating to this Security Agreement.
(c) The Guarantor conducts no business under any names or
trade names other than Brookwood Laminating, Inc., and the Guarantor conducts
no business through or under the name of any Subsidiary, division or Affiliate.
(d) The Guarantor has exclusive possession and control of
the Equipment and Inventory.
(e) This Security Agreement creates a valid first
priority Lien in the Collateral, securing the payment of the Guaranty
Obligations, and except for the filing of financing statements under the
Uniform Commercial Code or comparable law of any jurisdiction necessary to
perfect such Lien, all other actions necessary or desirable to perfect and
protect such Lien have been duly taken.
(f) Except as referred to in Subsection (e) above, no
authorization, approval or other action by, and no notice to or filling with,
any Governmental Authority is required either (1) for the grant by the
Guarantor of the Lien granted hereby or for the execution, delivery or
performance of this Security Agreement by the Guarantor or of (2) for the
perfection of or the exercise by the Agent or any Bank of their respective
rights and remedies hereunder.
SECTION 5. Further Assurances. (a) The Guarantor agrees that
from time to time, at the expense of the Guarantor, the Guarantor will promptly
execute and deliver all further instruments and documents, and take all further
action, that may be necessary or desirable, or that the Agent or any of the
Banks may request, in order to perfect and protect any Lien granted or
purported to be granted hereby or to enable the Agent or any of the Banks to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral. Without limiting the generality of the foregoing, the Guarantor
will: (1) mark conspicuously each document and agreement included in the
Collateral and, at the request of the Agent or any of the Banks, each of its
records pertaining to the Collateral with a legend, in form and substance
satisfactory to the Agent and all of the Banks indicating that such Collateral
is subject to the Lien granted hereby; (2) if any Receivable or Factor Credit
Balance shall be evidenced by a promissory note or other instrument or chattel
paper deliver such to the Agent duly endorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and
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substance satisfactory to the Agent and all of the Banks; and (3) execute and
file such financing or continuation statements, or amendments thereto, and such
other instruments or notices, as may be necessary or desirable, or as the Agent
or any Bank may request, in order to perfect and preserve the Lien granted or
purported to be granted hereby.
(b) The Guarantor hereby authorizes the Agent and each of
the Banks to file one or more financing or continuation statements, and
amendments thereto, relative to all or any part of the Collateral without the
signature of the Guarantor where permitted by law. A carbon, photographic or
other reproduction of this Security Agreement or any financing statement
covering the Collateral or any part thereof shall be sufficient as a financing
statement where permitted bylaw.
(c) The Guarantor will furnish to the Agent and each of
the Banks from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Agent or any or the Banks may request, all in reasonable
detail.
(d) The Guarantor will defend the Collateral against all
claims and demands of all Persons (other than the Agent and the Banks) claiming
an interest therein. The Guarantor will pay promptly when due all property and
other taxes, assessments and governmental charges or levies imposed upon, and
all claims (including claims for labor, materials and supplies) against, the
Collateral, except to the extent where there is a Good Faith Contest to the
validity thereof. In connection with any such Good Faith Contest the Guarantor
will, at the request of the Agent or any Bank, promptly provide a bond, cash
deposit or other security reasonably satisfactory to protect the Lien of
the Agent and the Banks should such Good Faith Contest be unsuccessful.
SECTION 6. As to Receivables and Factor Credit Balances. (a)
The Guarantor shall keep its chief place of business and chief executive office
and the office where it keeps its records concerning the Receivables and Factor
Credit Balances at the location therefor specified in Schedule I hereto or,
upon 30 days' prior written notice to the Agent and each Bank, at such other
locations in a jurisdiction where all action required by Section 5 shall have
been taken with respect to Receivables and Factor Credit Balances. The
Guarantor will hold and preserve such records and will permit representatives
of the Agent or any Bank to inspect and make abstracts from such records.
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(b) Except as otherwise provided in this subsection (b),
the Guarantor shall continue to collect, at its own expense, all amounts due or
to become due to the Guarantor under the Receivables. In connection with such
collections, the Guarantor may take (and, at the Agent's discretion, shall
take) such action as the Guarantor or the Agent may deem necessary or advisable
to enforce collection of the Receivables; provided, however, that the Agent
shall have the right at any time, upon the occurrence of a Default or Event of
Default upon written notice to the Guarantor of its intention to do so, to
notify the account debtors or obligors under any Receivables of the assignment
of such Receivables to the Agent and each of the Banks and to direct such
account debtors or obligor to make payment of all amounts due or to become due
to the Guarantor thereunder directly to the Agent and, upon such notification
and at the expense of the Guarantor, to enforce collection of any such
Receivables and to adjust, settle or compromise the amount or payment thereof,
in the same manner and to the same extent as the Guarantor might have done.
After receipt by the Guarantor of the notice from the Agent referred to in the
proviso to the preceding sentence, (i) all amounts and proceeds (including
instruments) received by the Guarantor in respect of the Receivables shall be
received in trust for the benefit of the Agent and all the Banks hereunder,
shall be segregated from other funds of the Guarantor and shall be forthwith
paid over to the Agent in the same form as so received (with any necessary
endorsement) to be held as Cash Collateral, or be applied as provided by
Section 13 (b), as determined by the Required Banks, and (2) the Guarantor
shall not adjust, settle or compromise the amount or payment of any Receivable
or release wholly or partly any account debtor or obligor thereof, or allow any
credit or discount thereon, other than any discount allowed for prompt payment.
(c) The Guarantor shall notify the account debtors or
obligors under any Factor Credit Balances of the assignment of such Factor
Credit Balances to the Agent and each of the Banks and shall direct such
account debtors or obligors to make payment of all amounts due or to become due
to the Guarantor thereunder directly to the Agent. The Agent shall have the
right, at the expense of the Guarantor, to enforce collection of any such
Factor Credit Balances and to adjust, settle or compromise the amount or
payment thereof, in the same manner and to the same extent as the Guarantor
might have done. All amounts and proceeds (including instruments) received by
the Guarantor in respect of the Factor Credit Balances shall be received in
trust for the benefit of the Agent and all the Banks hereunder, shall be
segregated from other funds of the Guarantor and shall be forthwith paid over
to the Agent in the same form as so received (with any necessary endorsement)
to be held as Cash Collateral, or be applied as provided by Section 13(b), as
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determined by the Required Banks. The Guarantor shall not adjust, settle or
compromise the amount or payment of any Factor Credit Balance or release wholly
or partly any account debtor or obligor thereof, or allow any credit or
discount thereon.
SECTION 7. As to Equipment and Inventory. The Guarantor shall:
(a) Keep the Equipment at the places therefor specified
in Schedule I hereto; import the Inventory only into the ports of entry
specified in Schedule I hereto; keep the Inventory at the places therefor
specified in Schedule I hereto (or, in each case, upon 30 days; prior written
notice to the Agent and each of the Banks, at such other places in
jurisdictions where all action required by Section 5 shall have been taken with
respect to the Equipment or Inventory, as applicable);
(b) Cause the Equipment to be maintained and preserved in
the same condition, repair and working order as when new, ordinary wear and
tear excepted, and shall forthwith, or in the case of any loss or damage to any
of the Equipment as quickly as practicable after the occurrence thereof, make
or cause to be made all repairs, replacements, and other improvements in
connection therewith which are necessary or desirable to such end;
(c) Permit the Agent or any Bank or any agent thereof to
have access to the Inventory and Equipment for purposed of inspection;
(d) Promptly notify the Agent and each Bank in writing of
any material loss or damage to the Inventory or Equipment;
(e) Not sell, assign, lease, mortgage, transfer or
otherwise dispose of any interest in the Inventory or Equipment, except as
permitted in the Credit Agreement;
(f) Not use or permit the Inventory or Equipment to be
used for any unlawful purpose or in violation of any Law or for hire; and
(g) Not permit the Equipment to become a part of or to
be affixed to any real property of any Person.
SECTION 8. Insurance. (a) The Guarantor shall, at its own
expense, maintain insurance with respect to the Equipment and Inventory in such
amounts, against such risks, in such form and with such insurers, as shall be
satisfactory to the Agent and each of the Banks from time to time. Each policy
for: (1) liability insurance shall
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provide for all losses to be paid on behalf of the Agent and the Guarantor as
their respective interests may appear; and (2) property damage insurance shall
provide for all losses to be paid directly to the Agent. Each such policy shall
in addition: (1) name the Banks and the Agent as insured parties thereunder
(without any representation or warranty by or obligation upon the Agent or the
Banks) as their interests may appear; (2) contain the agreement by the insurer
that any loss thereunder shall be payable to the Agent notwithstanding any
action, inaction or breach of representation and warranty by the Guarantor; (3)
provide that there shall be no recourse against the Agent or any Bank for
payment of premiums or other amounts with respect thereto; and (4) provide that
at least thirty (30) days; prior written notice of amendment to, cancellation
of or lapse shall be given to the Agent and each Bank by the insurer. The
Guarantor shall, if so requested by the Agent or any Bank, deliver to the Agent
and the Banks original or duplicate policies of such insurance and, as often as
the Agent or any Bank may request, a report of a reputable insurance broker
with respect to such insurance. Further, the Guarantor shall, at the request of
the Agent or any Bank, duly execute and deliver instruments of assignment of
such insurance policies to comply with the requirements of Section 5 and cause
the respective insurers to acknowledge notice of such assignment.
(b) Reimbursement under any liability insurance
maintained by the Guarantor pursuant to this Section 8 may be paid directly to
the Person who shall have incurred liability covered by such insurance. In case
of any loss involving damage to Equipment or Inventory when subsection (c) of
this Section 8 is not applicable, the Guarantor shall make or cause to be made
the necessary repairs to or replacements of such Equipment or Inventory, and
any proceeds of insurance maintained by the Guarantor pursuant to this Section
8 shall be paid to the Guarantor as reimbursement for the costs of such repairs
or replacements.
(c) Upon the occurrence of any Event of Default all
insurance payments in respect of such Equipment or Inventory shall be paid to
and applied by the Agent and the Banks as specified in Section 13(b).
SECTION 9. Transfer and Other Liens. The Guarantor shall not:
(a) Sell, assign (by operation of law or otherwise) or
otherwise dispose of any of the Collateral, except as permitted in the Credit
Agreement.
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(b) Except as permitted in the Credit Agreement, create
or suffer to exist any Lien upon or with respect to any of the Collateral to
secure Debt of any Person.
SECTION 10. Agent Appointed Attorney-in-Fact. The Guarantor
hereby irrevocably appoints the Agent the Guarantor's attorney-in-fact, with
full authority in the place and stead of the Guarantor and in the name of the
Guarantor, the Agent or otherwise, after the occurrence of a Default or Event
of Default, from time to time in the Agent's discretion, to take any action and
to execute any instrument which the Agent may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation:
(a) to obtain and adjust insurance required to be paid to
the Agent pursuant to Section 8;
(b) to ask, demand, collect, sue for, recover,
compromise, receive and give acquittance and receipts for moneys due and to
become due under or in respect of any of the Collateral;
(c) to receive, endorse, assign, and collect any and all
checks, notes, drafts and other negotiable and non-negotiable instruments,
documents and chattel paper, in connection with clause (a) or (b) above, and the
Guarantor waives notice of presentment, protest and non-payment of any
instrument, document or chattel paper so endorsed or assigned;
(d) to file any claims or take any action or institute
any proceedings which the Agent or any Bank may deem necessary or desirable for
the collection of any of the Collateral or otherwise to enforce the rights of
any Bank with respect to any of the Collateral; and
(e) to sell, transfer, assign or otherwise deal in or
with the Collateral or the proceeds or avails thereof, as fully and effectually
as if the Agent were the absolute owner thereof.
The Guarantor hereby ratifies and approves all acts of the
Agent, as its attorney in-fact, pursuant to this Section 10, and the Agent, as
its attorney in-fact, will not be liable for any acts of commission or
omission, nor for any error of judgment or mistake of fact or law. This power,
being coupled with an interest, is irrevocable so long as this Security
Agreement remains in effect.
The Guarantor also authorizes the Agent, at any time and from
time to time, to communicate in its own name with any party to any contract,
agreement or instrument
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included in the Collateral with regard to the assignment of such contract,
agreement or instrument and other matters relating thereto.
SECTION 11. Agent May Perform. If the Guarantor fails to
perform any agreement contained herein, the Agent may itself perform, or cause
performance of, such agreement, and the expenses of the Agent incurred in
connection therewith shall be payable by the Guarantor under Section 14(b).
SECTION 12. The Agent's Duties. The powers conferred on the
Agent and each of the Banks hereunder are solely to protect its interest in the
Collateral and shall not impose any duty upon it to exercise any such powers.
Except For the safe custody of any Collateral in its possession and the
accounting for moneys actually received by it hereunder, the Agent and the
Banks shall not have any duty as to any Collateral or as to the taking of any
necessary steps to preserve rights against prior parties or any other rights
pertaining to any Collateral.
SECTION 13. Remedies. If any Event of Default shall have
occurred and be continuing:
(a) The Agent may exercise in respect of the Collateral,
in addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party on default
under the Uniform Commercial Code (the "Code") in effect at that time (whether
or not the Code applies to the affected Collateral) and also may (i) require
the Guarantor to, and the Guarantor hereby agrees that it will at its expense
and upon the request of the Agent forthwith, assemble all or part of the
Collateral as directed by the Agent and make it available to the Agent at a
place to be designated by the Agent which is reasonably convenient to both
parties and (ii) to enter the premises where any of the Collateral is located
and take and carry away the same, by any of its representatives, with or
without legal process, to Agent's place of storage, and (iii) without notice
except as specified below, sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any of the Agent's offices or
elsewhere, for cash, on credit or for future delivery and upon such other terms
as the Agent may deem commercially reasonable. The Guarantor agrees that, to
the extent notice of sale shall be required by law, at least five (5) days
notice to the Guarantor of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. The Agent shall not be obligated to make any sale of Collateral
regardless of notice of sale having been given. The Agent may adjourn any
public or private sale from time to time by announcement
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at the time and place fixed therefor, and such sale may, without further
notice, be made at the time and place to which it was so adjourned.
(b) Any cash held by the Agent as Collateral and all cash
proceeds received by the Agent in respect or any sale of, collection from, or
other realization upon all or any part of the Collateral may, in the discretion
of the Agent, be held by the Agent as collateral for, and/or then or at any
time thereafter applied (after payment of any amounts payable to the Agent
and each of the Banks pursuant to Section 14) in whole or in part by the Agent
against, all or any part of the Guaranty Obligations in such order as the Agent
shall elect. Any surplus of such cash or cash proceeds held by the Agent and
remaining after payment in full of all the Guaranty Obligations to the Agent
and all of the Banks shall be paid over to the Guarantor or to whomsoever may
be lawfully entitled to receive such surplus. If the proceeds of the sale of
the Collateral are insufficient to pay all the Guaranty Obligations the
Guarantor agrees to pay upon demand any deficiency to the Agent and each of the
Banks.
SECTION 14. Indemnity and Expenses. (a) The Guarantor agrees
to indemnify the Agent and each of the Banks from and against any and all
claims, losses and liabilities growing out of or resulting from this Security
Agreement (including, without limitation, enforcement of this Security
Agreement), except claims, losses or liabilities resulting from the Agent's or
such Bank's gross negligence or willful misconduct.
(b) The Guarantor will upon demand pay to the Agent and
each of the Banks the amount of any and all expenses, including the fees and
out of pocket disbursements of their counsel and of any experts and agents,
which the Agent or any of the Banks may incur in connection with (1) the
administration of this Security Agreement, (2) filing or recording fees
incurred in connection with this Security Agreement, (3) the custody,
preservation, use or operation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (4) the exercise or enforcement of any
of the rights of the Agent or any of the Banks hereunder, or (5) the failure by
the Guarantor to perform or observe any of the provisions hereof. Neither the
Agent nor any Bank shall be liable to Guarantor for damages as a result of
delays, temporary withdrawals of the Equipment from service or other causes.
SECTION 15. Amendments; Etc. No amendment or waiver of any
provision of this Security Agreement nor consent to any departure by the
Guarantor herefrom shall in any event be effective unless the same shall be in
writing
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and signed by the Agent and the Required Banks, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.
SECTION 16. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing and, if to the
Guarantor, mailed or delivered by messenger or sent by facsimile, addressed to
it at the address of the Guarantor specified on the signature page hereof; if
to a Bank, mailed or delivered by messenger or sent by facsimile to it,
addressed to it at the address of such Bank specified in the Credit Agreement;
if to the Agent, mailed or delivered by messenger or sent by facsimile to it,
addressed to it at the address of the Agent specified in the Credit Agreement;
or as to any other party at such other address as shall be designated by such
party in a written notice to each other party complying as to delivery with the
terms of this Section. All such notices and other communications shall, when
mailed or delivered by messenger or sent by facsimile, respectively, be
effective when received in the mails or delivered to the messenger or sent by
facsimile, respectively, addressed as aforesaid.
SECTION 17. Continuing Lien; Transfer of Notes. This Agreement
shall create a continuing Lien in the Collateral and shall (1) remain in full
force and effect until payment in full of the Obligations (after the
Termination Date), (2) be binding upon the Guarantor, its successors and
assigns, and (3) inure to the benefit of the Agent and each Bank and their
respective successors, transferees and assigns. Without limiting the generality
of the foregoing clause (3), subject to the terms of the Credit Agreement the
Agent and each Bank may assign or otherwise transfer all or a portion of its
rights and obligations under the Credit Agreement and the Credit Facility to
any other Person, and such other Person shall thereupon become vested with all
the benefits in respect thereof granted to the Agent or such Bank herein or
otherwise. Upon the payment in full of the Obligations (after the Termination
Date), the Lien granted hereby shall terminate and all rights to the Collateral
shall revert to the Guarantor. Upon any such termination, the Agent will, at
the Guarantor's expense, execute and deliver to the Guarantor such documents as
the Guarantor shall reasonably request to evidence such termination.
SECTION 18. Governing Law; Terms. This Security Agreement
shall be governed by and construed in accordance with the laws of the State of
New York, except as required by mandatory provisions of law and except to the
extent that the validity or perfection of the Liens hereunder, or remedies
hereunder, in respect of any particular Collateral
12 Page 50
<PAGE> 27
are governed by the laws of a jurisdiction other than the State of New York.
Unless otherwise defined herein or in the Credit Agreement, terms used in
Article 9 of the Uniform Commercial Code in the State of New York are used
herein as therein defined.
SECTION 19. Miscellaneous. This Security Agreement is in
addition to and not in other rights and remedies the Agent or any of the Banks
may have by virtue of any other instrument or agreement heretofore,
contemporaneously herewith or hereafter executed by Guarantor or by Law or
otherwise. If any provision of this Security Agreement is contrary to
applicable Law, such provision shall be deemed ineffective without invalidating
the remaining provisions hereof. If and to the extent that applicable Law
confers any rights or imposes any duties inconsistent with or in addition to
any of the provisions of this Security Agreement, the affected provision shall
be considered amended to conform thereto. Neither the Agent nor any Bank shall
by any act, delay, omission or otherwise be deemed to have waived any of its
rights or remedies hereunder. A waiver by the Agent or any Bank of any right or
remedy hereunder on any one occasion shall not be construed as a bar to or
waiver of any such right or remedy which the Agent or such Bank would have had
on any future occasion, nor shall the Agent or any Bank be liable for
exercising or failing to exercise any such right or remedy.
IN WITNESS WHEREOF, the Guarantor has caused this Security
Agreement to be duly executed and delivered by its officer thereunto duly
authorized as of the date first above written.
BROOKWOOD LAMINATING, INC.
By /s/ DUANE O. SCHMIDT
-------------------------------
Name: Duane O. Schmidt
Title: Treasurer and Secretary
Address for Notices:
36 Sherman Avenue
Kenyon, Rhode Island 02836
13 Page 51
<PAGE> 28
SCHEDULE I
to Security Agreement
Place of Business and Locations of Collateral
Chief Place of Business
and Chief Executive Office:
1425 Kingston Road
Peacedale, Rhode Island 02883
Locations of Records
Evidencing Receivables
and Factor Credit Balances:
36 Sherman Avenue
Kenyon, Rhode Island 02836
Locations of Equipment:
1425 Kingston Road
Peacedale, Rhode Island 02833
Locations of inventory:
1425 Kingston Road
Peacedale, Rhode Island 02883
Ports of Entry for Inventory:
Los Angeles, California
Boston, Massachusetts
New York, New York
Providence, Rhode Island
Page 52
<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>
Five Months Ended Two Months Ended
December 31, December 31,
-------------------- --------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY:
Average common share outstanding . . . . . . . . . . . . 1,331 1,372 1,328 1,372
Dilutive stock options based on the treasury stock method
using the period end market price . . . . . . . . . . -- -- -- --
------- ------- ------- -------
Average common and common share equivalents
outstanding . . . . . . . . . . . . . . . . . . . . . 1,331 1,372 1,328 1,372
======= ======= ======= =======
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(3,265) $(5,029) $(1,566) $(3,767)
======= ======= ======= =======
Net loss per share . . . . . . . . . . . . . . . . . . . $ (2.45) $ (3.67) $ (1.18) $ (2.75)
======= ======= ======= =======
FULLY DILUTED:
Average common and common share equivalents
outstanding - primary . . . . . . . . . . . . . . . . 1,331 1,372 1,328 1,372
======= ======= ======= =======
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(3,265) $(5,029) $(1,566) $(3,767)
======= ======= ======= =======
Net loss per share . . . . . . . . . . . . . . . . . . . $ (2.45) $ (3.67) $ (1.18) $ (2.75)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> AUG-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 3,339
<SECURITIES> 25,896
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,735
<CURRENT-ASSETS> 0
<PP&E> 148,707
<DEPRECIATION> 119,661
<TOTAL-ASSETS> 98,233
<CURRENT-LIABILITIES> 0
<BONDS> 48,324
<COMMON> 160
1,000
0
<OTHER-SE> (551)
<TOTAL-LIABILITY-AND-EQUITY> 98,233
<SALES> 0
<TOTAL-REVENUES> 40,807
<CGS> 0
<TOTAL-COSTS> 40,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 101
<INTEREST-EXPENSE> 3,460
<INCOME-PRETAX> (3,589)
<INCOME-TAX> (299)
<INCOME-CONTINUING> (3,290)
<DISCONTINUED> 0
<EXTRAORDINARY> 25
<CHANGES> 0
<NET-INCOME> (3,265)
<EPS-PRIMARY> (2.45)
<EPS-DILUTED> (2.45)
</TABLE>
