<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
MARK ONE
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
FOR THE PERIOD ENDED JUNE 30, 1997 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 ___
1,261,757 shares of Common Stock, $.10 par value per share, were
outstanding at July 31, 1997.
===============================================================================
<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 (unaudited):
Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996...................................................... 3-4
Consolidated Statements of Operations for the
Six Months Ended June 30, 1997 and 1996.................................... 5-6
Consolidated Statements of Operations for the
Three Months Ended June 30, 1997 and 1996.................................. 7-8
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996.................................... 9
Notes to Consolidated Financial Statements..................................... 10-19
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 20-25
PART II - OTHER INFORMATION
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page............................... 26-35
</TABLE>
Page 2
<PAGE> 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Investments in HRP......................................................... $ 7,076 $ 7,007
Receivables and other assets............................................... 531 1,220
--------- ---------
7,607 8,227
ENERGY
Oil and gas properties, net................................................ 9,021 8,928
Current assets of HEP...................................................... 1,956 2,426
Noncurrent assets of HEP................................................... 1,808 1,664
Receivables and other assets............................................... 323 548
--------- ---------
13,108 13,566
--------- ---------
Total asset management assets........................................... 20,715 21,793
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories................................................................ 18,442 17,188
Receivables................................................................ 18,043 13,094
Property, plant and equipment, net......................................... 8,716 8,791
Other...................................................................... 981 1,037
--------- ---------
46,182 40,110
HOTELS
Properties, net............................................................ 14,810 15,568
Receivables and other assets............................................... 2,006 2,076
--------- ---------
16,816 17,644
--------- ---------
Total operating subsidiaries assets..................................... 62,998 57,754
ASSOCIATED COMPANY
Investment in ShowBiz Pizza Time, Inc...................................... -- 16,945
OTHER
Cash and cash equivalents.................................................. 14,494 7,495
Deferred tax asset, net.................................................... 2,040 11,000
Other...................................................................... 1,126 1,236
Restricted cash............................................................ 518 573
--------- ---------
Total other assets...................................................... 18,178 20,304
--------- ---------
TOTAL................................................................... $101,891 $116,796
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE> 4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- -------------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Accounts payable and accrued expenses...................................... $ 617 $ 490
Loan payable............................................................... 500 500
---------- -----------
1,117 990
ENERGY
Long-term obligations of HEP............................................... 4,111 4,432
Current liabilities of HEP................................................. 2,328 2,531
Loan payable............................................................... 1,027 2,361
Accounts payable and accrued expenses...................................... 460 1,223
---------- -----------
7,926 10,547
---------- -----------
Total asset management liabilities...................................... 9,043 11,537
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loan payable............................................................... 15,300 11,200
Accounts payable and accrued expenses...................................... 10,235 8,678
---------- -----------
25,535 19,878
HOTELS
Loans payable.............................................................. 11,644 12,281
Accounts payable and accrued expenses...................................... 1,711 1,976
---------- -----------
13,355 14,257
---------- -----------
Total operating subsidiaries liabilities................................ 38,890 34,135
ASSOCIATED COMPANY
Accounts payable and accrued expenses...................................... -- 870
Loans payable.............................................................. -- 11,000
---------- -----------
Total associated company liabilities.................................... -- 11,870
OTHER
7% Collateralized Senior Subordinated Debentures........................... 24,595 24,892
13.5% Subordinated Debentures.............................................. 12,825 25,672
Interest and other accrued expenses........................................ 2,612 1,906
---------- -----------
Total other liabilities................................................. 40,032 52,470
---------- -----------
TOTAL LIABILITIES....................................................... 87,965 110,012
REDEEMABLE PREFERRED STOCK
Series B, 250,000 shares issued and outstanding;
stated at redemption value............................................. 1,000 1,000
STOCKHOLDERS' EQUITY
Preferred stock, 250,000 shares issued and outstanding as Series B......... -- --
Common stock, issued 1,597,204 shares at both dates;
outstanding 1,261,757 and 1,298,509 shares, respectively................ 160 160
Additional paid-in capital................................................. 54,823 57,306
Accumulated deficit........................................................ (32,938) (44,490)
Treasury stock, 335,447 and 298,695 shares, respectively, at cost.......... (9,119) (7,192)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY.............................................. 12,926 5,784
---------- -----------
TOTAL................................................................... $101,891 $116,796
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE> 5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
--------- ------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees....................................................................... $ 2,518 $ 2,095
Equity income (loss) from investments in HRP............................... 406 (949)
--------- -------
2,924 1,146
Administrative expenses.................................................... 1,114 657
Depreciation and amortization.............................................. 336 336
Interest................................................................... 80 30
Provision for loss (recovery).............................................. -- (22)
--------- -------
1,530 1,001
--------- -------
Income from real estate operations...................................... 1,394 145
ENERGY
Gas revenues............................................................... 1,710 2,239
Oil revenues............................................................... 1,020 1,345
Other income............................................................... 224 64
--------- -------
2,954 3,648
Operating expenses......................................................... 660 732
Depreciation, depletion and amortization................................... 627 855
Administrative expenses.................................................... 508 434
Interest................................................................... 224 254
Minority interest.......................................................... -- 228
--------- -------
2,019 2,503
--------- -------
Income from energy operations........................................... 935 1,145
--------- -------
Income from asset management operations................................. 2,329 1,290
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales...................................................................... 50,484 40,087
Cost of sales.............................................................. 43,548 34,354
Administrative and selling expenses........................................ 4,658 4,279
Interest .................................................................. 528 322
--------- -------
48,734 38,955
--------- -------
Income from textile products operations................................. 1,750 1,132
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE> 6
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- -------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales...................................................................... $ 11,436 $ 11,061
Operating expenses......................................................... 9,029 8,949
Depreciation and amortization.............................................. 1,374 1,175
Interest................................................................... 732 423
-------- --------
11,135 10,547
-------- --------
Income from hotel operations............................................ 301 514
-------- --------
Income from operating subsidiaries...................................... 2,051 1,646
ASSOCIATED COMPANY
Income from investment in ShowBiz.......................................... 19,416 3,203
Interest................................................................... 607 340
-------- --------
Income from associated company.......................................... 18,809 2,863
OTHER
Interest on short-term investments and other income........................ 574 231
Fee income................................................................. 285 212
-------- --------
859 443
Interest................................................................... 2,220 2,051
Administrative expenses.................................................... 1,377 1,066
-------- --------
3,597 3,117
-------- --------
Other loss, net......................................................... (2,738) (2,674)
-------- --------
Income before income taxes and extraordinary gain......................... 20,451 3,125
Income taxes............................................................... 9,726 421
-------- --------
Income before extraordinary gain........................................... 10,725 2,704
Extraordinary gain from extinguishment of debt............................. 877 --
-------- --------
NET INCOME........................................................................ $ 11,602 $ 2,704
======== ========
PER COMMON SHARE (PRIMARY AND FULLY DILUTED)
Income before extraordinary gain........................................... $ 6.77 $ 2.04
Extraordinary gain from extinguishment of debt............................. 0.55 --
-------- --------
Net income................................................................. $ 7.32 $ 2.04
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE> 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- -------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees....................................................................... $ 1,545 $ 1,086
Equity income (loss) from investments in HRP............................... 316 (455)
-------- -------
1,861 631
Administrative expenses.................................................... 579 327
Depreciation and amortization.............................................. 168 168
Interest................................................................... 40 13
Provision for loss (recovery).............................................. -- (22)
------- ------
787 486
------- ------
Income from real estate operations...................................... 1,074 145
ENERGY
Gas revenues............................................................... 648 1,057
Oil revenues............................................................... 395 673
Other income............................................................... 146 36
------- ------
1,189 1,766
Operating expenses......................................................... 332 350
Depreciation, depletion and amortization................................... 318 386
Administrative expenses.................................................... 233 187
Interest................................................................... 104 113
Minority interest.......................................................... -- 113
------- ------
987 1,149
------- ------
Income from energy operations........................................... 202 617
------- ------
Income from asset management operations................................. 1,276 762
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales...................................................................... 26,979 21,917
Cost of sales.............................................................. 23,178 18,752
Administrative and selling expenses........................................ 2,397 2,169
Interest .................................................................. 286 166
------- ------
25,861 21,087
------- ------
Income from textile products operations................................. 1,118 830
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
<PAGE> 8
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1997 1996
-------- -------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales...................................................................... $ 5,579 $ 5,491
Operating expenses......................................................... 4,501 4,398
Depreciation and amortization.............................................. 684 612
Interest .................................................................. 368 285
------- -------
5,553 5,295
------- -------
Income from hotel operations............................................ 26 196
------- -------
Income from operating subsidiaries...................................... 1,144 1,026
ASSOCIATED COMPANY
Income from investment in ShowBiz.......................................... 89 2,395
Interest (recovery)........................................................ (1,256) 174
------- -------
Income from associated company.......................................... 1,345 2,221
OTHER
Interest on short-term investments and other income........................ 382 157
Fee income................................................................. 179 106
------- -------
561 263
Interest................................................................... 1,114 1,025
Administrative expenses.................................................... 737 572
------- -------
1,851 1,597
------- -------
Other loss, net......................................................... (1,290) (1,334)
------- -------
Income before income taxes and extraordinary gain.......................... 2,475 2,675
Income taxes............................................................... 131 279
------- -------
Income before extraordinary gain........................................... 2,344 2,396
Extraordinary gain from extinguishment of debt............................. 877 --
------- -------
NET INCOME........................................................................ $ 3,221 $ 2,396
======= =======
PER COMMON SHARE (PRIMARY AND FULLY DILUTED)
Income before extraordinary gain........................................... $ 1.49 $ 1.81
Extraordinary gain from extinguishment of debt............................. 0.55 --
------- -------
Net income................................................................. $ 2.04 $ 1.81
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 8
<PAGE> 9
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................... $ 11,602 $ 2,704
Adjustments to reconcile net income to net cash
used in operating activities:
Gain from sale of investment in ShowBiz.................................... (18,277) (2,040)
Net change in deferred tax asset........................................... 8,960 158
Depreciation, depletion and amortization................................... 2,945 2,945
Undistributed income from HEP.............................................. (1,762) (2,397)
Payment of ShowBiz Participation Amount.................................... (1,256) --
Equity in net (income) of ShowBiz......................................... (1,139) (1,163)
Extraordinary gain from extinguishment of debt............................. (877) --
Distributions from HEP..................................................... 841 1,355
Net change in accrued interest on 13.5% Debentures......................... 762 1,538
Equity in net (income) loss of HRP......................................... (406) 949
Amortization of deferred gain from debenture exchange...................... (297) (285)
Net change in textile products assets and liabilities...................... (4,624) (2,971)
Net change in other assets and liabilities................................. 1,964 (1,626)
Net change in energy assets and liabilities................................ 156 (65)
--------- --------
Net cash used in operating activities................................... (1,408) (898)
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of investment in ShowBiz............................... 40,323 3,498
Purchase of minority shares of HEC............................................ (648) --
Capital expenditures for hotels and real estate............................... (613) (793)
Investments in textile products property and equipment........................ (497) (455)
Net change in restricted cash for investing activities........................ (320) (8)
Investments in energy property and equipment.................................. (44) (101)
Acquisition of fee interest in hotel.......................................... -- (6,550)
Investment in HRP............................................................. -- (55)
--------- --------
Net cash provided by (used in) investing activities..................... 38,201 (4,464)
CASH FLOWS FROM FINANCING ACTIVITIES
Self-tender offer for 13.5% Debentures........................................ (12,875) --
Repayment of bank borrowings and loans payable................................ (12,596) (855)
Self-tender offer for common stock............................................ (8,373) (55)
Proceeds from bank borrowings and loans payable............................... 4,100 10,700
Payment of dividends to Series B preferred stockholders....................... (50) --
Purchase of capital stock by energy subsidiary for treasury................... -- (158)
--------- --------
Net cash provided by (used in) financing activities..................... (29,794) 9,632
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 6,999 4,270
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................... 7,495 3,339
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 14,494 $ 7,606
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 9
<PAGE> 10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING POLICIES
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 year ended December 31,
1996.
Accounting Policies. Statement of Financial Standards No. 128,
"Earnings Per Share," specifies new computation, presentation and
disclosure requirements. The statement will be effective for both interim
and annual periods ending after December 15, 1997. Management believes
that the adoption of this statement will not have a material impact on the
earnings per share presented herein.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" and No. 131 "Disclosures About Segments of an
Enterprise and Related Information" were issued during June 1997 which may
require additional disclosures by the Company. These statements are
effective for the Company's year ending December 31, 1998.
2. INVESTMENTS IN REAL ESTATE AFFILIATE AND ASSOCIATED COMPANY (DOLLAR
AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997 AMOUNT AT INCOME (LOSS) FROM INVESTMENTS
---------------------- WHICH CARRIED AT FOR THE SIX MONTHS ENDED
COST OR ---------------------- JUNE 30,
BUSINESS SEGMENTS AND NUMBER OF ASCRIBED JUNE 30, DECEMBER 31, ------------------------------
DESCRIPTION OF INVESTMENT UNITS VALUE 1997 1996 1997 1996
------------------------- ---------- -------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
ASSET MANAGEMENT
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (A)
- General partner interest...... -- $ 8,650 $ 4,793 $ 5,117 $ 13 $ (52)
- Limited partner interest...... 413,040 5,381 2,283 1,890 393 (897)
------- ------- -------- ------- --------
Totals....................... $14,031 $ 7,076 $ 7,007 $ 406 $ (949)
======= ======= ======== ======= ========
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock.................. $16,945 $ -- $ --
Equity in earnings........... -- 1,139 1,163
Gain on sale of shares....... -- 18,277 2,040
------- ------- --------
Totals....................... $16,945 $ 19,416 $ 3,203
======= ======== ========
</TABLE>
(A) At June 30, 1997, 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 Company
accounts for its investment in HRP by the equity method of
accounting. In addition to recording its share of net income
(loss), the Company also records its pro rata share of partner
capital transactions. On a cumulative basis, the Company's
carrying value of its investment in HRP has been decreased by
$49,000 for its share of such capital transactions through June
30, 1997, with corresponding adjustments to paid-in capital.
The carrying value of the Company's general partner interest
includes the value of intangible rights to provide asset
management and property management services. The Company
amortizes that portion of the general partner interest ascribed
to the management rights. For the six months ended June 30, 1997
and 1996 such amortization was $336,000 in each period.
As discussed in Note 4, the Company pledged 89,269 limited
partner units to collateralize a promissory note, due March 1998,
in the principal amount of $500,000.
Page 10
<PAGE> 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
The quoted market price and the Company's carrying value per
limited partner unit (Quotron symbol HRY) at June 30, 1997 were
$29.25 and $5.53, respectively.
The general partner interest is not publicly traded.
(B) The Company accounted for its investment in ShowBiz Pizza Time,
Inc. ("ShowBiz") by the equity method of accounting. The Company
also recorded its pro rata share of stockholders' equity
transactions with corresponding adjustments to paid-in capital.
On January 3, 1997, the Company's Board of Directors authorized
the issuance of 267,709 treasury shares in exchange for 219,194
common shares of ShowBiz from the Alpha and Epsilon Trusts, which
are associated with Messrs. Anthony J. Gumbiner and Brian M.
Troup, chairman and president of the Company, respectively. For
purposes of the exchange, the shares of both companies were
valued at their average closing price for the month of December
1996.
On February 24, 1997, ShowBiz filed a registration statement with
the Securities and Exchange Commission covering a proposed public
offering of 3,200,000 shares of common stock (2,305,371 shares of
which were sold by the Company and 894,629 shares of which were
sold by the Alpha and Epsilon Trusts). The underwriters were also
granted, and did exercise their option to purchase an additional
454,746 shares of common stock from the Company and the Trusts to
cover over-allotments. The Company had determined to sell its
shares to repay debt, utilize expiring federal income tax loss
carryforwards and to focus on core investments. On March 26,
1997, the Company completed the sale of its entire 2,632,983
ShowBiz shares at $15.68 per share, net of underwriting
commissions. A portion of the proceeds from the sale were used to
repay the $7,000,000 MLBFS line of credit and the $4,000,000
promissory note as discussed in Note 4. The Company reported a
gain of $18,277,000 from the transaction. Concurrent with the
sale, all five directors of the Company who were also directors
of ShowBiz resigned from the ShowBiz board.
3. LITIGATION, CONTINGENCIES AND COMMITMENTS
Reference is made to Note 17 to the consolidated financial statements
contained in Form 10-K for the year ended December 31, 1996.
During the period ended June 30, 1997 the litigation matter styled
Marc P. Malcuit, et al, Plaintiffs vs. Howard Johnson International, Inc.,
et al, Defendants, and numerous Third Party Defendants (including Integra
Hotels Incorporated), No. 96-C1-00049, has been settled, and Integra's
contribution is being paid by its insurance carrier. However, this
settlement did not resolve Integra's potential exposure to one of the
Third Party Defendants, Holiday Inns, Inc., under an indemnity provision
contained in a former franchise agreement. Integra does not agree with
Holiday Inns, Inc.'s position on this issue. Among other things, the
contractual indemnity provision predates Integra's bankruptcy proceeding;
therefore, if an action is brought hereafter the Company will assert this
and other factors as defenses.
As further discussed in Note 4, the Company entered into a Compromise
and Settlement Agreement, whereby the Company and the Integra Unsecured
Creditors' Trust agreed to equally divide a $2,513,000 escrow account
which had been established in connection with the Company's sale of its
ShowBiz investment.
On February 27, 1997, a lawsuit was filed in the Chancery Court for New
Castle County, Delaware, styled Gotham Partners, L.P. v. Hallwood Realty
Partners, L.P. and Hallwood Realty Corporation (C.A. No. 105578). The
complaint sought access to certain books and records of HRP, a list of the
limited partners and reimbursement of the plaintiff's expenses. On June
25, 1997, plaintiff filed a motion to amend its complaint to add as
additional defendants the Company and directors of HRC, the general
partner of HRP, and to include claims that HRC had breached its fiduciary
duties by not providing access to the books and records as
Page 11
<PAGE> 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
requested, that HRC, its directors and the Company had breached the
partnership agreement and their fiduciary duties by causing HRP to engage
in certain transactions including a reverse unit split, an odd-lot tender
offer, grants of unit options and sales of units to the Company on terms
that plaintiff alleged were not fair to HRP and, that the defendants did
not disclose to HRP and its partners the value of HRP's assets and the
reasons for the various transactions complained of. The complaint as
requested to be amended seeks production of the requested documents,
rescission of sales of units to the Company, removal of HRC as general
partner, unspecified damages and reimbursement to HRP of its expenses in
connection with the transactions and payment of plaintiff's fees and
expenses. At the same time as the filing of the motion to amend the first
complaint, plaintiff filed a separate action in the same court, styled
Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., et al, (C.A. No.
15754), alleging the same facts and demanding the same relief as plaintiff
sought to be included in the amended complaint in the first action. On
June 27, 1997, the parties entered into a Stipulation and Order under
which HRP provided to plaintiff copies of certain of the documents
requested. The other claims in the two actions remain outstanding.
Defendants believe that the claims are without merit and intend to defend
the cases vigorously, but because of its early stages, cannot predict the
outcome of the claims or any possible effect an adverse outcome might
have.
In May 1997, a case was filed in United States District Court for the
District of Colorado styled Wayland E. Noland v. Hallwood Energy
Corporation, The Hallwood Group Incorporated, et al, (C.A. No.
96-WM-2665). At the same time, the plaintiff asked that this case be
consolidated with the Ravenswood Investment Company, L.P. vs. Hallwood
Energy Corporation, Hallwood Group, Inc. case described in the Company's
annual Report on Form 10-K for the year ended December 31, 1996. Unlike
the plaintiff in the Ravenswood case, the plaintiff in the Noland case
tendered his shares pursuant to the tender offer made by the Company to
the shareholders of HEC, but the allegations are substantially identical
as those made in the Ravenswood case. The plaintiff in Noland seeks
damages of an unspecified amount, and seeks class certification to
represent similarly situated former shareholders of HEC. The defendants
believe that they fully considered and disclosed all material information
in connection with the tender offer and merger and that the price paid for
the HEC shares was fair, and that the Noland case, like the Ravenswood
case, is without merit. The Company plans to vigorously defend this case,
but because of its early stage, cannot predict the outcome of this matter
or any possible effect an adverse outcome might have.
The Company had been contingently liable for the 12% Convertible Notes
(the "Notes") due July 31, 1997, issued by the Company's former wholly
owned subsidiary, Atlantic Metropolitan (U.K.) plc. Obligations under the
Notes were assumed by Grainger Trust plc ("Grainger") in connection with
its purchase of Atlantic Metropolitan (U.K.) plc in fiscal 1988; however,
the Company remained a guarantor as to the repayment of the Notes in the
event Grainger defaulted. The Notes were paid in full on July 31, 1997,
therefore, the Company has no further obligation.
Page 12
<PAGE> 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by
business segment (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Real Estate
Promissory note, 8%, due March 1998........................... $ 500 $ 500
Energy
Term loan, prime + 1%, due May 1998........................... 1,027 2,361
Textile Products
Revolving credit facility, prime + .25%, due January 2000..... 15,300 --
Revolving credit facility, prime + .5%, repaid January 1997... -- 11,200
--------- --------
15,300 11,200
Hotels
Term loan, prime + 3.5%, due May 2001......................... 6,695 6,739
Term loan, 10%, due October 2001.............................. 4,949 5,001
Promissory note, certificate of deposit rate,
repaid January 1997....................................... -- 375
Non-interest bearing obligation, repaid March 1997............ -- 166
--------- --------
11,644 12,281
Associated Company
Line of credit, prime + .75%, repaid March 1997............... -- 7,000
Promissory note, 5%, repaid March 1997........................ -- 4,000
--------- --------
-- 11,000
--------- --------
Total..................................................... $27,444 $37,342
========= ========
</TABLE>
Further information by business segment 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 due March 1998. 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 $8.44 per unit, but in no event
more than an additional $500,000 (the "HRP Participation Amount"). As the
HRP per unit price was $29.25 at June 30, 1997, the Company has accrued
the cumulative amount of $390,000 for this HRP Participation Amount as a
charge to interest expense, of which $60,000 and $-0- were recorded in the
six months ended June 30, 1997 and 1996, respectively.
Energy
Term loan. In December 1996, the Company's HEPGP Ltd. partnership
("HEPGP") entered into a $2,500,000 term loan agreement. The loan is
collateralized by the Company's HEP limited partner units and its
investment in HEPGP and Hallwood GP, Inc. HEPGP has also pledged its
direct interests in certain oil and gas properties. Other significant
terms include: (i) maturity date of May 31, 1998; (ii) monthly principal
payments of $139,000, plus interest; (iii) interest rate of prime plus 1%
(9.50% at June 30, 1997); (iv) a negative pledge relating to a portion of
the Company's ShowBiz common shares, which was released in March 1997 as a
result
Page 13
<PAGE> 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
of a $500,000 principal payment from proceeds of sale of the ShowBiz
shares; and (v) restrictions on the declaration of distributions or
redemptions of partnership interests.
Included in the consolidated balance sheets are the Company's share of
the long-term obligations of its affiliated entity, Hallwood Energy
Partners, L.P. ("HEP") in the amount of $4,111,000 and $4,432,000 at June
30, 1997 and December 31, 1996, respectively.
Textile Products
Revolving credit facility (former). 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
facility was collateralized by accounts receivable and the industrial
machinery and equipment located in Kenyon, Rhode Island.
Revolving credit facility (current). The Chase facility was replaced
by a new revolving credit facility in an amount of up to $14,000,000
($17,500,000 between April 1, 1997 and December 31, 1997 and $15,000,000
April through June of any other year) on January 7, 1997 with The Bank of
New York ("BNY"). Borrowings under the BNY facility, as amended, are
collateralized by accounts receivable, inventory imported under trade
letters of credit, certain finished goods inventory and the machinery and
equipment of Brookwood's subsidiaries. The BNY facility expires on January
7, 2000 and bears interest, at Brookwood's option, of one-quarter percent
over prime (8.75% at June 30, 1997) or LIBOR plus 2.25%. The facility
contains covenants, which include maintenance of certain financial ratios,
restrictions on dividends and repayment of debt or cash transfers to the
Company. Brookwood is in compliance with the BNY loan covenants. The
outstanding balance at June 30, 1997 was $15,300,000.
Hotels
Term loan. In May 1996, a newly-formed, wholly-owned special purpose
subsidiary, Brock Suite Greenville, Inc., acquired the fee interest in the
Residence Inn By Marriott hotel in Greenville, South Carolina for
$6,550,000. Prior to the acquisition, the Company held a leasehold
interest in the hotel. The acquisition was financed by a $6,800,000 term
loan. The loan is secured by the hotel and includes the following
significant terms: (i) interest rate of prime plus 3.50% (minimum rate
12%, maximum rate 17%); (ii) loan payments based upon a 19-year
amortization schedule with a maturity date of May 2001; (iii) loan may be
prepaid, subject to a prepayment premium which declines from 4% to 1% of
the loan balance, depending on the prepayment date; and (iv) various
financial and non-financial covenants, including a minimum debt service
coverage ratio, as defined, of 1.25. The outstanding balance at June 30,
1997 was $6,695,000.
Term loan. In October 1994, the Company's Integra Hotels, Inc.
subsidiary entered into a mortgage loan in the amount of $5,200,000. The
loan is secured by the Residence Inn By Marriott hotel in Tulsa, Oklahoma
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; and (iv)
maintenance of a 4% capital reserve. The outstanding balance at June 30,
1997 was $4,949,000.
Promissory note. In connection with the acquisition of the fee
interest of the Greenville Residence Inn, the Company issued a promissory
note to the former owner in the amount of $375,000. The promissory note
bore interest at the same rate as the related $375,000 certificate of
deposit, which secured the repayment of the note. The certificate of
deposit was included in restricted cash at December 31, 1996. The
promissory note was repaid in full from proceeds of the certificate of
deposit, which matured in January 1997.
Page 14
<PAGE> 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
Non-interest bearing obligation. The $500,000 non-interest bearing
obligation to the former preferred shareholders of Integra was issued in
connection with a Settlement and Supplemental Settlement and was payable
in three equal annual installments in the amount of $166,667. The third
and final payment was made on March 8, 1997.
Associated Company
Line of credit. In April 1994, the Company obtained a line of credit
from Merrill Lynch Business Financial Services Inc. ("MLBFS") which
replaced a former margin loan. Significant terms of the line of credit
were (i) interest rate - prime plus 0.75%; (ii) collateral - 2,159,047
shares of ShowBiz common stock; and (iii) availability limited to 50% of
the market value of the pledged shares of ShowBiz. The maturity date of
the line of credit was extended to April 30, 1997, and the maximum
commitment amount was increased to $7,000,000. The Company drew down the
additional funds under this line of credit in June 1996. In May 1996,
MLBFS consented to the release and sale of 262,500 shares, which were
sold. The line of credit was repaid in March 1997 from proceeds of sale of
the Company's ShowBiz investment as discussed in Note 2.
Promissory note. The Company issued a $4,000,000 promissory note to
the Integra Unsecured Creditors' Trust in connection with the consummation
of the Integra Plan of Reorganization. Significant terms were (i) maturity
date - March 8, 1997; (ii) interest rate - 5% fixed; (iii) collateral -
517,242 shares of ShowBiz common stock; and (iv) the Trust was entitled to
an additional payment at the "Payment Date", as defined, in an amount
equal to 100% of the increase in the market value of the ShowBiz shares,
as defined, over the base amount of $16.67 per share (the " ShowBiz
Participation Amount"). As the ShowBiz per share price was $18.12 at
December 31, 1996, the Company accrued $755,000 for the ShowBiz
Participation Amount as a charge to interest expense in the year ended
December 31, 1996. Although the Company had accrued the ShowBiz
Participation Amount, it contended that a proper tender of payment and
accrued interest was made on October 11, 1996, and therefore no ShowBiz
Participation Amount was owed. As the Trust contended that the promissory
note did not provide for prepayment, and that both the promissory note and
ShowBiz Participation Amount were owing, the Company filed suit to resolve
the matter.
In connection with the disposition of the Company's entire ShowBiz
investment in March 1997, the Company and the Trust entered into a Partial
Compromise and Settlement Agreement, whereby the Trust consented to the
sale of the 517,242 shares of ShowBiz in exchange for (i) the repayment of
the $4,000,000 principal amount of the note and accrued interest through
October 11, 1996 and (ii) the deposit of $2,513,000 the "Full Escrowed
Amount" into an escrow account, which was a combination of the $2,431,000
disputed ShowBiz Participation Amount, including an additional accrual of
$1,675,000 as a charge to interest expense in the quarter ended March 31,
1997, and the $82,000 balance of accrued interest to the maturity date.
On July 30, 1997 the Company entered into a Compromise and Settlement
Agreement, whereby (i) the parties agreed that the Full Escrowed Amount
would be equally divided between the Trust and Hallwood and (ii) mutual
releases would be executed, in respect to the civil action in the United
States District Court, Case No. 3-96CV309DG, for the Northern District of
Texas, Dallas Division. Accordingly, $1,256,500 has been recorded as a
reduction of interest expense in the quarter ended June 30, 1997 as an
offset to the interest expense that had been accrued in the March 31, 1997
quarter. Settlement proceeds plus accrued interest was received on July
31, 1997.
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,
Page 15
<PAGE> 16
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
Inc. subsidiaries. The common and preferred stock of Brookwood are subject
to a prior pledge in favor of BNY.
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.
Accordingly, the Company must retire an additional $2,197,000 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 in-kind 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 paid in cash. Interest
due on August 15, 1996 was paid in-kind by the issuance of $2,817,000
additional 13.5% Debentures (the "1996 Series") and $260,000 of cash in
lieu of fractional debentures. The 1996 Series did not meet the $5,000,000
minimum listing requirement on a recognized exchange and therefore was not
listed. On May 12, 1997, the Company announced its intention to pay annual
interest in-kind on August 15, 1997, resulting in the issuance of a new
series of unlisted debentures (the "1997 Series") and the payment of cash
in lieu of fractional debentures.
Results of Tender Offer for 13.5% Debentures. In June 1997, pursuant
to a self-tender offer for up to $20,000,000 of its 13.5% Debentures,
debentureholders tendered $12,875,000 principal value of 13.5% Debentures
(50.1% of the total $25,672,000 outstanding at the beginning of the offer)
during the offer period. The breakdown by series is listed below:
<TABLE>
<CAPTION>
PRINCIPAL
SERIES AMOUNT TENDERED
---------- ---------------
<S> <C>
1989........................ $ 8,485,000
1991........................ 1,208,000
1992........................ 1,218,000
1996........................ 1,965,000
----------
$12,875,000
==========
</TABLE>
The price offered for the 13.5% Debentures was $105 per $100 principal
amount, and aggregated $13,519,000 for all debentures properly tendered.
Terms of the offer stipulated that no interest would be paid to
debentureholders accepting the offer. As a result, the Company recognized
an extraordinary gain from debt extinguishment of $877,000 attributable to
the over accrual of interest up to the date the self-tender offer expired.
Page 16
<PAGE> 17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
Balance sheet amounts for the 7% Debentures and 13.5% Debentures are
detailed below (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
DESCRIPTION 1997 1996
-------------------------------------------- ---------- ------------
<S> <C> <C>
7% Debentures (face amount).................................... $ 22,808 $ 22,808
Unrecognized gain from purchase and exchange, net of
$2,433 and $2,136 accumulated amortization,
respectively............................................. 1,787 2,084
-------- --------
Totals................................................... $ 24,595 $ 24,892
======== ========
13.5% Debentures (face amount)
1989 Original Series........................................ $ 9,745 $ 18,203
1991 Series................................................. 1,086 2,292
1992 Series................................................. 1,142 2,360
1996 Series................................................. 852 2,817
-------- --------
Totals................................................... $ 12,825 $ 25,672
======== ========
</TABLE>
Page 17
<PAGE> 18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
6. INCOME TAXES
The following is a summary of the income tax expense (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Federal
Deferred..................................... $ -- $ 95 $ 8,960 $158
Current...................................... 25 -- 525 54
------- ------ ------- -----
Sub-total................................. 25 95 9,485 212
State .......................................... 106 184 241 209
------- ------ ------- -----
Total..................................... $ 131 $ 279 $ 9,726 $ 421
======= ====== ======= =====
</TABLE>
As a result of the substantial tax gain from the of ShowBiz, the
Company recorded a related non-cash deferred federal tax charge of
$8,960,000 in the 1997 first quarter, which reflects the realization of
tax benefits from the utilization of the Company's tax net operating loss
carryforwards ("NOLs") and a current federal tax charge of $525,000 for
alternative minimum tax.
State tax expense is an estimate based upon taxable income allocated
to those states in which the Company does business, at their respective
tax rates.
The amount of the deferred tax asset (net of valuation allowance) was
$2,040,000 at June 30, 1997. The deferred tax asset arises principally
from the anticipated utilization of the Company's NOLs and tax credits
from the implementation of various tax planning strategies.
7. SUPPLEMENTAL DISCLOSURES TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
The following transactions affected recognized assets or liabilities
but did not result in cash receipts or cash payments (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
DESCRIPTION 1997 1996
------------------------------------------- ------ ------
<S> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Issuance of treasury stock in exchange for common shares of
ShowBiz:
Investment in ShowBiz........................................ $ 3,820 $ --
Reduction of additional paid-in capital...................... 2,626 --
Reduction in treasury stock.................................. 6,446 --
Repayment of note payable from funds held in
restricted cash.............................................. 375 --
Recording of proportionate share of stockholders'
equity transaction of equity investments..................... 143 53
Supplemental disclosures of cash payments:
Interest paid................................................... $ 3,030 $ 1,998
Income taxes paid............................................... 404 151
</TABLE>
Page 18
<PAGE> 19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
8. COMMON STOCK
On January 3, 1997, the Company's Board of Directors authorized the
issuance of 267,709 treasury shares in exchange for 219,194 common shares
of ShowBiz. See Note 2.
On April 30, 1997, the Company announced a self-tender offer for up to
300,000 shares of its common stock at $27.50 per share, terms and
conditions of which were discussed in the offering document dated May 12,
1997. The self-tender offer expired on June 16, 1997. Stockholders
tendered a total of 328,346 shares. The Company accepted 4,461 additional
shares as permitted by the offering documents for a total purchase price
of $8,373,000. The 304,461 shares purchased represented 92.7% of the
properly tendered shares.
For accounting purposes, the cost of the shares has been recorded as
treasury stock in the stockholders equity section of the balance sheet.
Page 19
<PAGE> 20
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 net income of $3,221,000 for the second quarter
ended June 30, 1997, compared to net income of $2,396,000 in the 1996
period. The six-month net income of $11,602,000, compares to net income of
$2,704,000 in the 1996 period. Total revenue for the 1997 second quarter
was $36,258,000, compared to $32,463,000 in the prior-year period. For the
six months revenue was $88,073,000 compared to $59,588,000 in the
prior-year period. The 1997 six month results included a gain of $18.3
million from the March 1997 sale of the Company's investment in ShowBiz,
partially offset by a related non-cash deferred federal tax charge of
$8,960,000 and current federal tax charge of $525,000.
Following is an analysis of the results of operations by asset
management, operating subsidiaries and associated company divisions; and
by the real estate, energy, textile products, hotels and restaurant
business segments within those divisions.
Asset Management. The business segments of the Company's asset
management division consist of real estate and energy.
REAL ESTATE.
Revenue. Fee income of $1,545,000 for the quarter ended June 30, 1997
increased by $459,000, or 42%, from $1,086,000 in the prior-year period.
Fee income of $2,518,000 for the six months increased by $423,000 from
$2,095,000 for the similar period a year ago. Fees are derived from the
Company's asset management, property management, leasing and construction
supervision services provided to its Hallwood Realty Partners, L.P.
affiliate, a real estate master limited partnership ("HRP") and to third
party real estate property owners. The increases were due primarily to
increased leasing fees from third party owners in the 1997 periods.
The equity income (loss) from investments in HRP represents the
Company's recognition of its pro rata share of the earnings (loss)
reported by HRP and amortization of negative goodwill. For the 1997 second
quarter, the Company reported income of $316,000 compared to a $455,000
loss in the period a year ago. The comparative six month amounts were
income of $406,000 in 1997 and a loss of $949,000 in 1996. The improvement
resulted principally from HRP's substantially lower depreciation expense,
as a result of an extension of the useful economic lives of certain
building costs, effective January 1, 1997.
Expenses. Administrative expenses increased to $579,000 and $1,114,000
in the 1997 second quarter and six-month periods, compared to $327,000 and
$657,000 in the comparable year-ago periods, due to the increased leasing
commissions in connection with the leasing fees earned from third party
owners and increased payments under the management company's incentive
plan.
Amortization expense of $168,000 for the second quarter and $336,000
for the six months in both the 1997 and 1996 periods relates to HRC's
general partner investment in HRP to the extent allocated to management
rights.
Interest expense increased to $40,000 from $13,000 in the 1997 second
quarter and to $80,000 from $30,000 in the six-month period, due to the
recording of a $30,000 charge in each of the 1997 first and second
quarters for the HRP Participation Amount discussed in Note 4.
ENERGY.
Revenue. After the Company's successful completion of the tender offer
for the minority shares of Hallwood Energy Corporation ("HEC") and the
subsequent merger of HEC, it effectively acquired ownership of the assets
formerly held by HEC. Following the merger, certain HEC assets were
transferred to two wholly owned entities. These two entities, in addition
to the three classes of limited partner units (or 6.5%) of HEP
Page 20
<PAGE> 21
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
which remain with the Company, constitute the Company's investment in the
energy industry. The Company's general partner interest in HEP entitles it
to interests in HEP's properties ranging from 2% to 25%. The Company and
its energy subsidiaries account for their ownership of HEP using the
proportionate consolidation method of accounting, whereby they record
their proportionate share of HEP's revenues and expenses, current assets,
current liabilities, noncurrent assets, long-term obligations and fixed
assets. HEP owns approximately 46% of its affiliate, Hallwood Consolidated
Resources Corporation ("HCRC"), which HEP accounts for under the equity
method.
Gas revenue for the 1997 second quarter decreased $409,000 to $648,000
from $1,057,000. For the six months, gas revenue declined to $1,710,000
from $2,239,000. The decrease in gas revenue for the six months was due
primarily to a decrease in production to 703,000 mcf from 928,000 mcf,
partially offset by an increase in the average gas price to $2.43 from
$2.41 per mcf. Oil revenue for the 1997 second quarter decreased $278,000
to $395,000 from $673,000. For the six months, oil revenue declined to
$1,020,000 from $1,345,000. The decrease for the six months was
attributable to a decline in production to 50,000 barrels from 71,000
barrels, partially offset by an increase in the average price per barrel
to $20.40 from $18.94. The decrease in oil and gas production is primarily
due to the temporary shut-in of two wells in Louisiana while workover
procedures are performed, as well as steep production declines on wells
located in the West Texas area.
Other income consists primarily of acquisition fee and interest
income, as well as a share of HEP's interest income, facilities income
from two gathering systems in New Mexico, pipeline revenue, equity in
income of affiliates and miscellaneous income or expense. The increase in
other income to $146,000 for the 1997 second quarter from $36,000 in the
1996 period and to $224,000 for the 1997 six month period from $64,000 in
the 1996 period are primarily due to an increase in HEP's equity in
earnings of HCRC.
Expenses. Operating expenses decreased by $18,000 to $332,000 for the
1997 second quarter from $350,000 in the prior-year quarter and decreased
$72,000 to $660,000 for the six months from $732,000 as a result of
decreased production taxes resulting from the lower production described
above.
Depreciation, depletion and amortization decreased to $318,000 for the
1997 second quarter and $627,000 for the six months compared to $386,000
and $855,000 in the year-ago periods. The decreases are attributable to
lower depletion in 1997 due to the decline in production.
Administrative expenses increased by $46,000 for the 1997 second
quarter to $233,000 from $187,000 in the 1996 quarter and increased by
$74,000 to $508,000 for the 1997 six-month period from $434,000, due to an
increase in allocated internal overhead.
Interest expense decreased by $9,000 to $104,000 for the 1997 second
quarter compared to $113,000 in 1996 and decreased by $30,000 to $224,000
for the 1997 six months compared to $254,000 for the year ago period,
primarily due to a decrease in the Company's pro rata share of HEP's
interest expense resulting from a lower debt balance during 1997.
Minority interest, which represents the interest of other common
shareholders in the net income of HEC, was $113,000 and $228,000 in the
1996 second quarter and six-month periods, respectively. The minority
interest was eliminated in November 1996 as a result of the merger of HEC
into the Company.
Operating Subsidiaries. The business segments of the Company's
operating subsidiaries consist of textile products and hotels.
Page 21
<PAGE> 22
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
TEXTILE PRODUCTS.
Revenue. Sales increased $5,062,000, or 23%, in the 1997 second
quarter to $26,979,000, compared to $21,917,000 in the same quarter a year
ago. The comparative six months sales increased by 26% to $50,484,000 in
1997 from $40,087,000 in 1996. The sales increases occurred in all
divisions, but principally in the distribution businesses. Demand for
Brookwood's products is much higher in 1997, compared to the weak market
conditions experienced in 1996.
Expenses. Cost of sales increased $4,426,000, or 24%, to $23,178,000
from $18,752,000 in the second quarter last year and increased
$10,397,000, or 26%, to $50,484,000 from $40,087,000 for the six months.
The increase in cost of sales was principally the result of the increase
in sales. The lower gross profit margins for the 1997 second quarter
(14.1% versus 14.4%) and the six-month periods (13.7% versus 14.3%)
resulted from competitive market pressures in the distribution businesses.
Administrative and selling expenses increased $227,000 in the 1997
second quarter to $2,397,000 from $2,169,000 for the comparable 1996
period, and increased $379,000 for the six-month period to $4,658,000 from
$4,279,000 for the comparable 1996 period, due to increased operating
expenses associated with the 26% increase in sales revenue.
The $120,000 increase in interest expense to $286,000 for the 1997
second quarter from $166,000 in the prior-year period and the $206,000
increase to $528,000 for the six months from $322,000 were the result of
higher average borrowings than in the prior-year period.
HOTELS
Revenue. Sales of $5,579,000 in the 1997 second quarter increased by
$88,000, or 1.6% from the year-ago amount of $5,491,000. The 1997 six
month hotel sales of $11,436,000 increased by $375,000, compared to
$11,061,000 for the 1996 period. Improved sales were reported at all five
of the Company's hotel properties and were attributable to higher average
daily rates, which averaged a 4.32% increase, and higher occupancy levels,
which averaged a 0.77% increase.
Expenses. Operating expenses of $4,501,000 for the 1997 second quarter
increased by 2.3% from $4,398,000 in 1996. The 1997 six month hotel
operating expenses increased by $80,000 to $9,029,000, compared to
$8,949,000 for the 1996 period. The 3.4% increase on a comparable basis is
offset by the lack of rent expense since May 1996 for the Greenville,
South Carolina Residence Inn, which was formerly a leasehold interest.
Depreciation and amortization expense increased by $72,000 to $684,000
for the 1997 second quarter from $612,000 in the prior-year period,
reflecting the May 1996 purchase of the fee interest in the Greenville
Residence Inn hotel and recent capital expenditures at the remaining
properties. Depreciation and amortization for the 1997 and 1996 six month
periods were $1,374,000 and $1,175,000, respectively.
Interest expense increased by $83,000 to $368,000 for the 1997 second
quarter from $285,000 in the 1996 period and increased by $309,000 to
$732,000 for the six month period from $423,000, due to the procurement of
the $6,800,000 term loan on the Greenville Residence Inn hotel.
ASSOCIATED COMPANY
Revenue. Results for the 1997 six month period include the Company's
pro-rata share of ShowBiz results using the equity method of accounting
and a substantial gain on the sale of the Company's entire ShowBiz
investment. For the six months, the Company recorded equity income of
$1,139,000 from its investment in ShowBiz compared to equity income of
$1,163,000 in the prior-year period. On March 26,
Page 22
<PAGE> 23
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1997 the Company completed the sale of its entire 2,632,983 ShowBiz shares
at $15.68 per share, net of underwriting commissions. The Company sold its
shares to repay debt, utilize expiring federal income tax loss
carryforwards and to focus on core investments. The Company reported a
gain of $18,277,000 from the transaction. The prior year income included a
gain on sale of 225,000 ShowBiz shares in the amount of $2,040,000 in the
1996 second quarter. See Note 2.
Expenses. Interest expense (recovery) of $(1,256,000) for the 1997
second quarter compared to $174,000 from the year-ago quarter. The
recovery in the 1997 second quarter is attributable to the settlement of
litigation involving the ShowBiz Participation Amount with the Integra
Unsecured Creditors' Trust, as further discussed in Note 4. Interest
expense of $607,000 for the 1997 six month period increased by $267,000
from the 1996 amount of $340,000. The Company had recorded the potential
amount of $1,675,000 in the 1997 first quarter for the ShowBiz
Participation Amount, which was adjusted to the settlement amount in the
1997 second quarter.
OTHER
Revenue. Interest on short-term investments and other income increased
by $225,000 to $382,000 for the 1997 second quarter and increased by
$343,000 to $574,000 for the 1997 six month period from the comparable
prior year amounts. The increases were primarily attributable to higher
interest income earned on the Company's short-term investments, and higher
rental income from the subleasing of executive office space formerly
occupied by the Company's affiliated entity - Integra-A Hotel and
Restaurant Company. Fee income for the 1997 second quarter and six month
periods of $179,000 and $285,000, respectively, compared to $106,000 and
$212,000 in the 1996 periods. The increases were due to a modification of
a consulting agreement with one of the Company's affiliated companies.
Expenses. Interest expense in the amount of $1,114,000 for the 1997
second quarter and $2,220,000 for the six months increased from the prior
year amounts of $1,025,000 and $2,051,000, respectively. The increases
were primarily due to the August 1996 issuance of additional 13.5%
Debentures in the amount of $2,817,000 in connection with the payment of
annual interest in-kind. The 13.5% Debenture self-tender offer was not
completed until June 24, 1997, and did not have a material effect on the
six-month interest expense. See Note 5.
Administrative expenses of $737,000 for the 1997 second quarter and
$1,377,000 for the six months were increased from the comparable 1996
amounts of $572,000 and $1,066,000, respectively. The increases were due
to higher consulting, legal and accounting fees.
Income taxes. Income taxes were $131,000 for the 1997 second quarter
and $279,000 in the 1996 quarter. The income taxes for the 1997 and 1996
six month periods were $9,726,000 and $421,000, respectively. The 1997 six
months included an $8,960,000 non-cash federal deferred tax charge and a
federal current charge of $525,000 for alternative minimum tax (both
charges relating to the ShowBiz sale). The 1996 six months included a
non-cash federal deferred tax charge of $158,000 and a $54,000 federal
current charge. The balance of the expense in the quarter and six month
periods was for state taxes, which is an estimate based upon taxable
income allocated to those states in which the Company does business at
their respective tax rates. See Note 6.
As of June 30, 1997, the Company had approximately $115,000,000 of tax
net operating loss carryforwards ("NOLs") and temporary differences to
reduce future federal income tax liability. The estimated tax gain from
the sale of the Company's ShowBiz investment will be offset by utilization
of the Company's NOL's. 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
$6,000,000 of the NOLs prior to their ultimate expiration in the year
2011.
Page 23
<PAGE> 24
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management believes that the Company has certain tax planning
strategies available, which include the potential sale of 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 portion of the NOLs before
expiration; however, future levels of operating income and taxable gains
are dependent upon general economic conditions and other factors beyond
the Company's control. Accordingly, no assurance can be given that
sufficient taxable income will be generated for significant utilization of
the NOLs. Although the use of such carryforwards could, under certain
circumstances, be limited, the Company is presently unaware of the
occurrence of any event which would result in the imposition of such
limitations.
Page 24
<PAGE> 25
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's unrestricted cash and cash equivalents at June 30, 1997
totaled $14,494,000. The increase from the December 31, 1996 amount of
$7,495,000 is attributable to the sale of the Company's entire ShowBiz
investment, after the payment of certain related liabilities, and payments
in connection with the self-tender offers for the 13.5% Debentures and
common stock.
The Company's real estate segment generates funds principally from its
property management and leasing activities, without significant additional
capital costs. The majority of its investment in HRP is presently
unencumbered.
The Company's energy segment generates funds from its operating and
financing activities, and is subject to fluctuating oil and gas production
and prices. In accordance with the proportionate consolidation method of
accounting, the Company reports its share of the long-term obligations of
its HEP affiliate totaling $4,111,000 at June 30, 1997. HEP's borrowings
are secured by a first lien on approximately 80% in value of HEP's oil and
gas properties. In December 1996, the Company's HEPGP entity obtained a
$2,500,000 term loan, which has been reduced to $1,027,000 at June 30,
1997. The loan contains a provision which prohibits HEPGP from making any
distribution, directly or indirectly, to the Company during the term of
the loan.
Brookwood maintains a revolving line of credit facility with The Bank
of New York, which is collateralized by accounts receivable, certain
inventory and equipment. At June 30, 1997, Brookwood had $1,573,000 of
unused borrowing capacity on its line of credit. In January 1997, the
Company received a $1,000,000 cash dividend from Brookwood on its
preferred stock. Future dividends will be paid as permitted by the new
revolver, which allows for dividends to be paid to the extent of 80% of
cash flow after capital expenditures.
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
hotels are operated under various licensing agreements which require
periodic franchise mandated modernization programs, the cost of which can
be substantial.
Management believes that it will have sufficient funds derived from
operations and the potential sale of hotel properties or other assets to
satisfy its obligations.
Page 25
<PAGE> 26
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
Item
<S> <C>
1 Legal Proceedings
Reference is made to Note 3 to the Company's consolidated
financial statements of this Form 10-Q.
2 Changes in Securities None
3 Defaults upon Senior Securities None
4 Submission of Matters to a Vote of Security Holders None
5 Other Information None
6 Exhibits and Reports on Form 8-K
(a) Exhibits
(i) 10.25 - Amendment No. 2, dated as of May 23, 1997 to Credit Agreement dated as of
January 7, 1997, among Brookwood Companies Incorporated, Kenyon Industries,
Inc., Brookwood Laminating, Inc., as Borrowers and The Bank of New York,
filed herewith. Pages 28-30
10.26 Amendment No. 3, dated as of June 25, 1997 to Credit Agreement dated as of
January 7, 1997, among Brookwood Companies Incorporated, Kenyon Industries,
Inc., Brookwood Laminating, Inc., as Borrowers and The Bank of New York,
filed herewith. Pages 31-33
(ii) 11 - Statement Regarding Computation of Per Share Earnings Page 34
(iii) 27 - Financial Data Schedule Page 35
(b) Reports on Form 8-K None
</TABLE>
Page 26
<PAGE> 27
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 hereunto duly authorized.
THE HALLWOOD GROUP INCORPORATED
Dated: August 13, 1997 By: /s/ Melvin J. Melle
--------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
(i)10.25 Amendment No. 2, dated as of May 23, 1997 to Credit Agreement dated as of
January 7, 1997, among Brookwood Companies Incorporated, Kenyon Industries,
Inc., Brookwood Laminating, Inc., as Borrowers and The Bank of New York,
filed herewith. Pages 28-30
10.26 Amendment No. 3, dated as of June 25, 1997 to Credit Agreement dated as of
January 7, 1997, among Brookwood Companies Incorporated, Kenyon Industries,
Inc., Brookwood Laminating, Inc., as Borrowers and The Bank of New York,
filed herewith. Pages 31-33
(ii) 11 Statement Regarding Computation of Per Share Earnings Page 34
(iii) 27 Financial Data Schedule Page 35
(b) Reports on Form 8-K None
</TABLE>
<PAGE> 1
EXHIBIT 10.25
EXECUTION COPY
AMENDMENT NO. 2 TO
CREDIT AGREEMENT
AMENDMENT NO. 2 dated as of May 23, 1997 (this "Amendment") to Credit
Agreement dated as of January 7, 1997 (the "Credit Agreement") among Brookwood
Companies Incorporated, Kenyon Industries, Inc., and Brookwood Laminating, Inc.,
as Borrowers, and The Bank of New York, as Bank.
WHEREAS, the parties hereto desire to amend the Credit Agreement as set
forth herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Definitions. Capitalized terms used but not defined herein will
have the respective meanings given to such terms in the Credit Agreement.
2. Amendments to Credit Agreement.
(a) Section 6.1(b) of the Credit Agreement is hereby amended to
read in its entirety as follows:
"Consolidated Total Liabilities to Consolidated Tangible Net
Worth. Permit the ratio of Consolidated Total Liabilities to
Consolidated Tangible Net Worth at any time to be greater than
1.50:1.00."
(b) Section 6.1(c) of the Credit Agreement is hereby amended to
read in its entirety as follows:
"Consolidated EBITDA to Consolidated Fixed Charges. Permit the
ratio of Consolidated EBITDA to Consolidated Fixed Charges for
(i) any period of four consecutive, fiscal quarters ending on
or prior to December 31, 1997 to be less than 0.80:1.00 and
(ii) any period of four consecutive quarters ending thereafter
to be less than 1.00:1.00"
3. References. From the date hereof, references in the Credit
Agreement to "this Agreement" or in any other Loan Document to the "Credit
Agreement" will be a reference to the Credit Agreement as amended hereby.
28
<PAGE> 2
4. Representations and Warranties. Each of the Borrowers hereby
represents and warrants that each of the representations and warranties made
under Section 3 of the Credit Agreement is true and correct with the same
force and effect as though made on as of the date of this Amendment, except to
the extent that such representations and warranties expressly relate to an
earlier date, in which case such representations and warranties were true and
correct on and as of such earlier date. As of the date of this Amendment, no
Default or Event of Default has occurred and is continuing or would result from
the transactions contemplated hereby.
5. Credit Agreement Remains in Effect. Except as expressly modified
and amended hereby, the Credit Agreement remains unchanged and in full force
and effect in all material respects.
6. Conditions to Effectiveness. This Amendment will become
effective as of March 31, 1997 upon receipt by the Bank of an original
counterpart of this Amendment executed by each of the Borrowers.
7. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT
OF LAW PRINCIPLES.
8. Counterparts. This Amendment may be executed by one or more of
the parties hereto on any number of separate counterparts (including by
facsimile transmission), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
[balance of page intentionally left blank]
29
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
THE BORROWERS:
-------------
BROOKWOOD COMPANIES INCORPORATED
By: /s/ DUANE O. SCHMIDT
---------------------------
Name: DUANE O. SCHMIDT
Title: V. P. FINANCE
KENYON INDUSTRIES, INC.
By: /s/ DUANE O. SCHMIDT
---------------------------
Name: DUANE O. SCHMIDT
Title: TREASURER
BROOKWOOD LAMINATING, INC,
By: /s/ DUANE O. SCHMIDT
---------------------------
Name: DUANE O. SCHMIDT
Title: TREASURER
THE BANK:
--------
THE BANK OF NEW YORK
By: /s/ RONALD R. REEDY
---------------------------
Name: RONALD R. REEDY
Title: V. P.
30
<PAGE> 1
EXHIBIT 10.26
EXECUTION COPY
AMENDMENT NO. 3 TO
CREDIT AGREEMENT
AMENDMENT NO. 3 dated as of June 25, 1997 (this "Amendment") to Credit
Amendment") to Credit Agreement dated as of January 7, 1997 (the "Credit
Agreement" among Brookwood Companies Incorporated, Kenyon Industries, Inc.
and Brookwood Laminating, Inc., as Borrowers, and The Bank of New York, as Bank.
WHEREAS, the parties hereto desire to amend the Credit Agreement as set
forth herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Definitions. Capitalized terms used but not defined herein will
have the respective meanings given to such terms in the Credit Agreement.
2. Amendment to Credit Agreement. Section 1.1 of the Credit
Agreement is hereby amended by amending the definition of "Maximum Amount" to
read in its entirety as follows:
"'Maximum Amount: $14,000,000; except that (i) between April 1,
1997 and December 31, 1997, such amount will be $17,500,000 and
(ii) between April 1st and June 30th of any other year, such
amount will be $15,000,000."
3. References. From the date hereof, references in the Credit
Agreement to "this Agreement" or in any other Loan Document to the "Credit
Agreement" will be a reference to the Credit Agreement as amended hereby.
4. Representations and Warranties. Each of the Borrowers hereby
represents and warrants that each of the representations and warranties made
under Section 3 of the Credit Agreement is true and correct with the same
force and effect as though made on as of the date of this Amendment, except to
the extent that such representations and warranties expressly relate to an
earlier date, in which case such representations and warranties were true and
correct on and as of such earlier date. As of the date of this Amendment, no
Default or Event of Default has occurred and is continuing or would result from
the transactions contemplated hereby.
5. Credit Agreement Remains in Effect. Except as expressly modified
and amended hereby, the Credit Agreement
31
<PAGE> 2
remains unchanged and in full force and effect in all material respects.
6. Conditions to Effectiveness. This Amendment will become
effective as of the date first above written upon receipt by the Bank of (a) an
original counterpart of this Amendment executed by each of the Borrowers and
(b) an original Endorsement No. 2 to Revolving Credit Note in the form of
Exhibit A hereto executed by each of the Borrowers.
7. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED
IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO
CONFLICT OF LAW PRINCIPLES.
9. Counterparts. This Amendment may be executed by one or more of
the parties hereto on any number of separate counterparts (including by
facsimile transmission), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
[balance of page intentionally left blank]
32
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
THE BORROWERS:
-------------
BROOKWOOD COMPANIES INCORPORATED
By: /s/ DUANE O. SCHMIDT
----------------------------
Name: DUANE O. SCHMIDT
Title: V.P. FINANCE
KENYON INDUSTRIES, INC.
By: DUANE O. SCHMIDT
----------------------------
Name: DUANE O. SCHMIDT
Title: TREASURER
BROOKWOOD LAMINATING, INC.
By: /s/ DUANE O. SCHMIDT
----------------------------
Name: DUANE O. SCHMIDT
Title: TREASURER
THE BANK:
--------
THE BANK OF NEW YORK
By: /s/ RONALD R. REEDY
----------------------------
Name: RONALD R. REEDY
Title: V.P.
33
<PAGE> 1
EXHIBIT 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- ------- ------
<S> <C> <C> <C> <C>
PRIMARY:
Average common shares outstanding ............................... 1,546 1,325 1,553 1,326
Dilutive stock options based on the treasury stock method
using the period end market price ............................ 32 2 32 2
------ ------ ------- ------
Average common and common share equivalents
outstanding .................................................. 1,578 1,327 1,585 1,328
====== ====== ======= ======
Net income ...................................................... $3,221 $2,396 $11,602 $2,704
====== ====== ======= ======
Net income per share ............................................ $ 2.04 $ 1.81 $ 7.32 $ 2.04
====== ====== ======= ======
FULLY DILUTED:
Average common and common share equivalents
outstanding - primary ........................................ 1,578 1,327 1,585 1,328
====== ====== ======= ======
Net income ...................................................... $3,211 $2,396 $11,602 $2,704
====== ====== ======= ======
Net income per share ............................................ $ 2.04 $ 1.81 $ 7.32 $ 2.04
====== ====== ======= ======
34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,494
<SECURITIES> 7,076
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 18,442
<CURRENT-ASSETS> 0
<PP&E> 156,421
<DEPRECIATION> 123,835
<TOTAL-ASSETS> 101,891
<CURRENT-LIABILITIES> 0
<BONDS> 37,420
1,000
0
<COMMON> 160
<OTHER-SE> 12,766
<TOTAL-LIABILITY-AND-EQUITY> 101,891
<SALES> 0
<TOTAL-REVENUES> 88,073
<CGS> 0
<TOTAL-COSTS> 63,231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,391
<INCOME-PRETAX> 20,451
<INCOME-TAX> 9,726
<INCOME-CONTINUING> 10,725
<DISCONTINUED> 0
<EXTRAORDINARY> 877
<CHANGES> 0
<NET-INCOME> 11,602
<EPS-PRIMARY> 7.32
<EPS-DILUTED> 7.32
</TABLE>
