<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, 1998 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
--- ---
1,255,000 shares of Common Stock, $.10 par value per share,
were outstanding at July 31, 1998.
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<PAGE> 2
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PAGE
-------- ----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
1 Financial Statements (Unaudited):
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Operations for the
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . 5-6
Consolidated Statements of Operations for the
Three Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . 7-8
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 10-15
2 Managements's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 16-21
PART II - OTHER INFORMATION
1 thru 6 Exhibits, Reports on Form 8-K and Signature Page . . . . . . . . . . . . 22-28
</TABLE>
Page 2
<PAGE> 3
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- -----------
ASSET MANAGEMENT (unaudited)
<S> <C> <C>
REAL ESTATE
Investments in HRP . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,227 $ 7,197
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,127 1,063
------- -------
8,354 8,260
ENERGY
Oil and gas properties, net . . . . . . . . . . . . . . . . . . . . . 10,099 9,589
Current assets of HEP . . . . . . . . . . . . . . . . . . . . . . . . 2,536 2,657
Noncurrent assets of HEP . . . . . . . . . . . . . . . . . . . . . . . 1,615 1,859
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 86 434
------- -------
14,336 14,539
------- -------
Total asset management assets . . . . . . . . . . . . . . . . . . . 22,690 22,799
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,444 17,935
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,864 14,296
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 8,657 9,057
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903 938
------- -------
39,868 42,226
HOTELS
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,919 14,168
Receivables and other assets . . . . . . . . . . . . . . . . . . . . . 1,906 1,742
------- -------
15,825 15,910
------- -------
Total operating subsidiaries assets . . . . . . . . . . . . . . . . 55,693 58,136
OTHER
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . 2,937 4,737
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . . . . 2,040 2,040
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,144 1,557
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 647 489
------- -------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . 6,768 8,823
------- -------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,151 $89,758
======= =======
</TABLE>
Page 3
<PAGE> 4
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- -----------
(unaudited)
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . $ 1,263 $ 1,295
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 500
---------- ----------
1,763 1,795
ENERGY
Long-term obligations of HEP . . . . . . . . . . . . . . . . . . . . . 4,787 4,731
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,067 3,867
Current liabilities of HEP . . . . . . . . . . . . . . . . . . . . . . 2,803 2,793
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 608 548
---------- ----------
11,265 11,939
---------- ----------
Total asset management liabilities . . . . . . . . . . . . . . . . 13,028 13,734
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,100 13,800
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 6,909 7,771
---------- ----------
19,009 21,571
HOTELS
Loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,942 12,019
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 1,526 1,607
---------- ----------
13,468 13,626
---------- ----------
Total operating subsidiaries liabilities . . . . . . . . . . . . . 32,477 35,197
OTHER
7% Collateralized Senior Subordinated Debentures . . . . . . . . . . . 21,770 24,292
Interest and other accrued expenses . . . . . . . . . . . . . . . . . 756 1,364
---------- ----------
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . 22,526 25,656
---------- ----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 68,031 74,587
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 1,254,751 and 1,261,757 shares, respectively . . . . . 160 160
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 54,823 54,823
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (29,494) (31,693)
Treasury stock, 342,453 and 335,447 shares, respectively, at cost . . (9,369) (9,119)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . 16,120 14,171
---------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,151 $ 89,758
========== ==========
</TABLE>
Page 4
<PAGE> 5
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
-------- ---------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,635 $ 2,518
Equity income from investments in HRP . . . . . . . . . . . . . . . . 366 406
-------- -------
3,001 2,924
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 1,015 1,114
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 336 336
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 80
-------- -------
1,409 1,530
-------- -------
Income from real estate operations . . . . . . . . . . . . . . . . 1,592 1,394
ENERGY
Gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,845 1,710
Oil revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743 1,020
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 224
-------- -------
2,662 2,954
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 800 660
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 686 627
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 446 508
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 224
-------- -------
2,207 2,019
-------- -------
Income from energy operations . . . . . . . . . . . . . . . . . . . 455 935
-------- -------
Income from asset management operations . . . . . . . . . . . . . . 2,047 2,329
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,612 50,484
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,442 43,548
Administrative and selling expenses . . . . . . . . . . . . . . . . . 4,532 4,658
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548 528
-------- -------
44,522 48,734
-------- -------
Income from textile products operations . . . . . . . . . . . . . . 1,090 1,750
</TABLE>
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,
------------------------
1998 1997
-------- ---------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,346 $ 11,436
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 8,980 9,029
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 1,338 1,374
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501 732
-------- --------
10,819 11,135
-------- --------
Income (loss) from hotel operations . . . . . . . . . . . . . . . . (473) 301
-------- --------
Income from operating subsidiaries . . . . . . . . . . . . . . . . 617 2,051
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . -- 19,416
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 607
-------- --------
Income from associated company . . . . . . . . . . . . . . . . . . -- 18,809
OTHER
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . 1,025 --
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275 285
Interest on short-term investments and other income . . . . . . . . . 204 574
-------- --------
1,504 859
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 1,360 1,377
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459 2,220
-------- --------
1,819 3,597
-------- --------
Other loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . (315) (2,738)
-------- --------
Income before income taxes and extraordinary gain . . . . . . . . . . 2,349 20,451
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 9,726
-------- --------
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . 2,142 10,725
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 107 877
-------- --------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,249 $ 11,602
======== ========
PER COMMON SHARE
BASIC
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . $ 1.67 $ 6.87
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 0.08 0.57
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.75 $ 7.44
======== ========
ASSUMING DILUTION
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . $ 1.60 $ 6.74
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . 0.08 0.56
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 7.30
======== ========
</TABLE>
Page 6
<PAGE> 7
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
-------- ----------
<S> <C> <C>
ASSET MANAGEMENT
REAL ESTATE
Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,393 $ 1,545
Equity income from investments in HRP . . . . . . . . . . . . . . . . 428 316
-------- --------
1,821 1,861
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 460 579
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 168 168
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 40
-------- --------
628 787
-------- --------
Income from real estate operations . . . . . . . . . . . . . . . . 1,193 1,074
ENERGY
Gas revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982 648
Oil revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 395
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 146
-------- --------
1,323 1,189
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 401 332
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 309 318
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 221 233
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 104
-------- --------
1,060 987
-------- --------
Income from energy operations . . . . . . . . . . . . . . . . . . . 263 202
-------- --------
Income from asset management operations . . . . . . . . . . . . . . 1,456 1,276
OPERATING SUBSIDIARIES
TEXTILE PRODUCTS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,297 26,979
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,284 23,178
Administrative and selling expenses . . . . . . . . . . . . . . . . . 2,269 2,397
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 286
-------- --------
21,832 25,861
-------- --------
Income from textile products operations . . . . . . . . . . . . . . 465 1,118
</TABLE>
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,
----------------------
1998 1997
------- -------
<S> <C> <C>
OPERATING SUBSIDIARIES (CONTINUED)
HOTELS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,348 $ 5,579
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 4,555 4,501
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 669 684
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 368
------- -------
5,473 5,553
------- -------
Income (loss) from hotel operations . . . . . . . . . . . . . . . . (125) 26
------- -------
Income from operating subsidiaries . . . . . . . . . . . . . . . . 340 1,144
ASSOCIATED COMPANY
Income from investment in ShowBiz . . . . . . . . . . . . . . . . . . -- 89
Interest (recovery) . . . . . . . . . . . . . . . . . . . . . . . . . -- (1,256)
------- -------
Income from associated company . . . . . . . . . . . . . . . . . . -- 1,345
OTHER
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . 1,025 --
Fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 179
Interest on short-term investments and other income . . . . . . . . . 73 382
------- -------
1,236 561
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . 795 737
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 1,114
------- -------
1,015 1,851
------- -------
Other income (loss), net . . . . . . . . . . . . . . . . . . . . . 221 (1,290)
------- -------
Income before income taxes and extraordinary gain . . . . . . . . . . 2,017 2,475
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 131
------- -------
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . 1,905 2,344
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . -- 877
------- -------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,905 $ 3,221
======= =======
PER COMMON SHARE
BASIC
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . $ 1.48 $ 1.48
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . -- 0.57
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.48 $ 2.05
======= =======
ASSUMING DILUTION
Income before extraordinary gain . . . . . . . . . . . . . . . . . . . $ 1.42 $ 1.45
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . -- 0.56
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.42 $ 2.01
------- -------
</TABLE>
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,
-------------------------
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,249 $ 11,602
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization . . . . . . . . . . . . . . . 3,088 2,945
Undistributed income from HEP . . . . . . . . . . . . . . . . . . . . (1,378) (1,762)
Distributions from HEP . . . . . . . . . . . . . . . . . . . . . . . . 984 841
Equity in net (income) of HRP . . . . . . . . . . . . . . . . . . . . (366) (406)
Amortization of deferred gain from debenture exchange . . . . . . . . (269) (297)
Extraordinary gain from extinguishment of debt . . . . . . . . . . . . (107) (877)
Equity in net (income) of ShowBiz . . . . . . . . . . . . . . . . . . -- (1,139)
Gain from sale of investment in ShowBiz . . . . . . . . . . . . . . . -- (18,277)
Net change in deferred tax asset . . . . . . . . . . . . . . . . . . . -- 8,960
Payment of ShowBiz Participation Amount . . . . . . . . . . . . . . . -- (1,256)
Net change in accrued interest on 13.5% Debentures . . . . . . . . . . -- 762
Net change in textile products assets and liabilities . . . . . . . . 1,067 (4,624)
Net change in other assets and liabilities . . . . . . . . . . . . . . (628) 1,964
Net change in energy assets and liabilities . . . . . . . . . . . . . 339 156
------- --------
Net cash provided by (used in) operating activities . . . . . . . . 4,979 (1,408)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for hotels . . . . . . . . . . . . . . . . . . . . . (997) (613)
Investments in textile products property and equipment . . . . . . . . . (299) (497)
Investment in HEP by general partner . . . . . . . . . . . . . . . . . . (171) --
Net change in restricted cash for investing activities . . . . . . . . . (158) (320)
Investments in energy property and equipment . . . . . . . . . . . . . . (131) (44)
Net proceeds from sale of investment in ShowBiz . . . . . . . . . . . . . -- 40,323
Purchase of minority shares of HEC . . . . . . . . . . . . . . . . . . . -- (648)
------- --------
Net cash provided by (used in) investing activities . . . . . . . . (1,756) 38,201
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank borrowings and loans payable . . . . . . . . . . . . . (2,577) (12,596)
Repurchase of 7% Debentures . . . . . . . . . . . . . . . . . . . . . . . (2,146) --
Purchase of common stock for treasury . . . . . . . . . . . . . . . . . . (250) (8,373)
Payment of preferred stock dividends . . . . . . . . . . . . . . . . . . (50) (50)
Repurchase of 13.5% Debentures . . . . . . . . . . . . . . . . . . . . . -- (12,875)
Proceeds from bank borrowings and loans payable . . . . . . . . . . . . . -- 4,100
------- --------
Net cash used in financing activities . . . . . . . . . . . . . . . (5,023) (29,794)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . (1,800) 6,999
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . 4,737 7,495
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . $ 2,937 $ 14,494
======= ========
</TABLE>
Page 9
<PAGE> 10
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND ACCOUNTING POLICIES
Interim Consolidated Financial Statements. The interim consolidated
financial statements of The Hallwood Group Incorporated (the "Company")
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, 1997.
Accounting Policies. The Company has adopted Statement of Financial
Accounting Standards No. 130 - Reporting Comprehensive Income, effective
January 1, 1998. The Company had no items of comprehensive income for the
periods presented herein.
In June 1998, SFAS No. 133 - Accounting for Derivative Instruments
and Hedging Activities was issued, which requires companies to recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The changes in the fair value of
a derivative depends on the intended use of the derivative. The Company
currently has hedging contracts in its energy segments as related to oil
and gas activities. The statement is effective for all fiscal quarters for
fiscal years beginning after June 15, 1999. The Company has not fully
assessed the impact of the statement.
2. INVESTMENTS IN REAL ESTATE AFFILIATE AND ASSOCIATED COMPANY (DOLLAR AMOUNTS
IN THOUSANDS):
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AMOUNT AT INCOME 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 1998 1997 1998 1997
------------------------- --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE AFFILIATE
HALLWOOD REALTY PARTNERS, L.P. (A)
- General partner interest . . . . . -- $ 8,650 $ 4,110 $ 4,435 $ 11 $ 13
- Limited partner interest . . . . . 413,040 5,381 3,117 2,762 355 393
-------- -------- --------- -------- --------
Totals . . . . . . . . . . . . . . $ 14,031 $ 7,227 $ 7,197 $ 366 $ 406
======== ======== ========= ======== ========
ASSOCIATED COMPANY
SHOWBIZ PIZZA TIME, INC. (B)
- Common stock
Equity in earnings . . . . . . . . $ 1,139
Gain on sale of shares . . . . . . 18,277
--------
Totals . . . . . . . . . . . . . . $ 19,416
========
</TABLE>
(A) At June 30, 1998, Hallwood Realty Corporation ("HRC"), a wholly
owned subsidiary of the Company, owned a 1% general partner
interest and the Company owned a 25% limited partner interest in
its Hallwood Realty Partners, L.P. ("HRP") affiliate. The Company
accounts for its investment in HRP using the equity method of
accounting. In addition to recording its share of net income
(loss), the Company also records its pro rata share of any partner
capital transactions reported by HRP. The carrying value of the
Company's investment in HRP includes such non-cash adjustments for
its pro-rata share of HRP's capital transactions with
corresponding adjustments to additional paid-in capital. The
cumulative amount of such adjustments from the original date of
investment through June 30, 1998, resulted in a $49,000 decrease
in the carrying value of the HRP investment.
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, 1998 and
1997 such amortization was $336,000 in each period.
Page 10
<PAGE> 11
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
As discussed in Note 4, the Company has pledged 89,269 limited
partner units to collateralize a promissory note in the principal
amount of $500,000 and issued a limited negative pledge on all of
the HRP units, including the 89,269 pledged units, to secure the
energy term loan.
The quoted market price and the Company's carrying value per
limited partner unit (Quotron symbol HRY) at June 30, 1998 were
$70.00 and $7.55, respectively. The general partner interest is
not publicly traded.
(B) The Company accounted for its investment in ShowBiz Pizza Time,
Inc. ("ShowBiz") using the equity method of accounting. For the
1997 six month period the equity income was $1,139,000.
In March 1997, the Company completed the sale of its entire
2,632,983 shares of ShowBiz common stock at $15.68 per share, net
of underwriting commissions. A portion of the proceeds from the
sale were used to repay a $7,000,000 line of credit and a
$4,000,000 promissory note. The Company reported a gain of
$18,277,000 from the transaction.
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, 1997. There has
been no significant change since that time.
4. LOANS PAYABLE
Loans payable at the balance sheet dates are detailed below by
business segment (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ---------
<S> <C> <C>
Real Estate
Promissory note, 8%, due March 1998 . . . . . . . . . . . $ 500 $ 500
Energy
Term loan, libor + 3.5%, due May 2000 . . . . . . . . . . 3,067 3,867
Textile Products
Revolving credit facility, prime + .25%, due January 2000 12,100 13,800
Hotels
Term loan, 7.86% fixed, due January 2008 . . . . . . . . . 6,706 6,750
Term loan, 8.20% fixed, due November 2007 . . . . . . . . 5,236 5,269
---------- ---------
11,942 12,019
---------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,609 $ 30,186
========== =========
</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 8, 1998. The note
is secured by a pledge of 89,269 HRP limited partner units. The settlement
agreement also provided that the noteholder had 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
Page 11
<PAGE> 12
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(the "HRP Participation Amount"). The Company accrued the full amount of
$500,000 as a charge to interest expense, of which $50,000 and $60,000 were
recorded in the six months ended June 30, 1998 and 1997, respectively.
The Company tendered full payment, including the HRP Participation
Amount totaling $1,000,000, in March 1998, although it reserved its rights
to litigate the validity of an earlier tender that was rejected by the
noteholder. The noteholder refused acceptance of the tendered payment and
returned it to the Company and instituted litigation in the State of
Delaware. The litigation is currently in the discovery phase and a trial
date has been scheduled for September 1998.
Energy
Term loan. In November 1997, the Company's HEPGP Ltd. partnership
("HEPGP") amended, restated and increased its term loan to $4,000,000 from
the First Union Bank of North Carolina. The term loan is collateralized by
all of 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 15, 2000; (ii) monthly principal payments of $133,000,
plus interest; (iii) interest rate of libor plus 3.5% (9.16% at June 30,
1998); (iv) a limited negative pledge relating to the Company's HRP limited
partner units; and (v) restrictions on the declaration of distributions or
redemptions of partnership interests. The outstanding balance at June 30,
1998 was $3,067,000.
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 $4,787,000 and $4,731,000 at June
30, 1998 and December 31, 1997, respectively.
Textile Products
Revolving credit facility. In January 1997, the Company's Brookwood
subsidiary entered into a new revolving credit facility in an amount of up
to $14,000,000 ($15,000,000 between April and June 1997) with The Bank of
New York ("BNY"). The facility was amended on April 30, 1998 to
temporarily increase the facility to $17,500,000 for the period between
March and August 1998, and to permanently increase the amount to
$15,000,000 thereafter. Borrowings are collateralized by accounts
receivable, inventory imported under trade letters of credit, certain
finished goods inventory, the machinery and equipment of Brookwood's
subsidiaries and all of the issued and outstanding capital stock of
Brookwood and its subsidiaries. The BNY facility expires on January 7,
2000 and bears interest, at Brookwood's option, at one-quarter percent over
prime (8.75% at June 30, 1998) or libor plus 2.25%. Availability for
direct borrowings and letter of credit obligations under the facility are
limited to the lesser of the facility or the formula borrowing base, as
defined in the agreement. The facility contains covenants, which include
maintenance of certain financial ratios, restrictions on dividends and
repayment of debt or cash transfers to the Company. The outstanding
balance at June 30, 1998 was $12,100,000.
Hotels
Term loan. In December 1997, the Company's Brock Suite Greenville,
Inc. subsidiary entered into a new $6,750,000 mortgage loan, collateralized
by the Residence Inn hotel located in Greenville, South Carolina, which
replaced the former term loan. Significant terms include: (i) fixed
interest rate of 7.86%; (ii) monthly loan payments of $51,473 based upon
25-year amortization schedule with a maturity date of January 2008; (iii)
prepayment permitted after December 1999, subject to yield maintenance
provisions and (iv) various other financial and non- financial covenants.
The outstanding balance at June 30, 1998 was $6,706,000.
Term loan. In October 1997, the Company's Brock Suite Tulsa, Inc.
subsidiary entered into a new $5,280,000 mortgage loan collateralized by
the Residence Inn hotel in Tulsa, Oklahoma, which replaced the
Page 12
<PAGE> 13
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
former term loan. Significant terms include: (i) fixed interest rate of
8.20%; (ii) monthly loan payments of $41,454, based upon 25-year
amortization schedule, with a maturity date of November 2007; (iii)
prepayment permitted after October 2001, subject to yield maintenance
provisions and; (iv) various other financial and non-financial covenants.
The outstanding balance at June 30, 1998 was $5,236,000.
5. 7% COLLATERALIZED SENIOR SUBORDINATED DEBENTURES
In March 1993, the Company completed an exchange offer whereby
$27,481,000 of its former 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 all 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 BNY.
Between 1994 and 1997, the Company 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. In
January 1998, the Company repurchased 7% Debentures with a face amount of
$2,253,000 for $2,146,000, to fully satisfy the balance of the sinking fund
requirement contained in the indenture. The repurchase resulted in an
extraordinary gain from debt extinguishment of $107,000 in the 1998 first
quarter.
Balance sheet amounts are detailed below (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
DESCRIPTION 1998 1997
------------------------------------------ -------- ------------
<S> <C> <C>
7% Debentures (face amount) . . . . . . . . . . . . . . . . $ 20,555 $ 22,808
Unrecognized gain from purchase and exchange, net of
$3,005 and $2,736 accumulated amortization,
respectively . . . . . . . . . . . . . . . . . . . . . . 1,215 1,484
-------- --------
Totals . . . . . . . . . . . . . . . . . . . . . . . $ 21,770 $ 24,292
======== ========
</TABLE>
Exchange Offer. On June 17, 1998, the Company announced a
commission-free exchange offer (the "Exchange Offer") to all holders of its
7% Debentures. The Company offered to exchange the 7% Debentures for a new
issue of 8.5% Collateralized Subordinated Debentures due July 31, 2005 in
the ratio of $100 principal amount of 8.5% Debentures for each $100
principal amount of 7% Debentures tendered for exchange. The original
expiration date for the Exchange Offer was Friday July 31, 1998. On that
date, the Company announced that it has extended the expiration date to
August 28, 1998, and increased the interest rate from 8.5% to 10.0% for the
new issue of Collateralized Subordinated Debentures due July 31, 2005 (the
"10.0% Debentures"). Tendering debenture holders will be entitled to
receive accrued interest from July 31, 1998, the date of the last interest
payment.
The 10.0% Debentures will be secured by a first and senior lien on the
capital stock of the Company's Brock Suites Hotel, Inc. subsidiary and by a
subordinate and junior lien on the capital stock of the Brookwood and
Hallwood Hotels, Inc. subsidiaries which are pledged to secure the 7%
Debentures.
Terms and conditions of the Exchange Offer are described in an
Exchange Offer Circular dated June 22, 1998, and a supplemental
modification letter dated July 31, 1998, both of which were mailed to all
holders of the 7% Debentures.
Page 13
<PAGE> 14
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
6. INCOME TAXES
The following is a summary of income tax expense (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
----- ----- ----- --------
<S> <C> <C> <C> <C>
Federal
Current . . . . . . . . . . . . $ 20 $ 25 $ 30 $ 525
Deferred . . . . . . . . . . . -- -- -- 8,960
----- ----- ----- --------
Sub-total . . . . . . . . . 20 25 30 9,485
State . . . . . . . . . . . . . 92 106 177 241
----- ----- ----- --------
Total . . . . . . . . . . . $ 112 $ 131 $ 207 $ 9,726
===== ===== ===== ========
</TABLE>
As a result of the substantial tax gain from the March 1997 sale of
ShowBiz, the Company recorded a related non-cash deferred federal tax
charge of $8,960,000 in the 1997 first quarter, which reflected 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
$500,000 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, 1998. 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
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
DESCRIPTION 1998 1997
----------------------------------------- ------ -----
<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
Supplemental disclosures of cash payments:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 1,995 $3,030
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . 371 404
</TABLE>
Page 14
<PAGE> 15
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
8. COMPUTATION OF EARNINGS PER SHARE
The following table reconciles the Company's net income to net income
available to common stockholders, and the number of equivalent common
shares used in the calculation of net income for the basic and assumed
dilution methods (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ------------------
DESCRIPTION 1998 1997 1998 1997
----------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME
Net income, as reported . . . . . . . . . . . . . . $1,905 $3,221 $2,249 $11,602
Less: Dividends on preferred stock . . . . . . . . . 50 50 50 50
------ ------ ------ -------
Net income available to common stockholders . . . . $1,855 $3,171 $2,199 $11,552
====== ====== ====== =======
AVERAGE SHARES OUTSTANDING
Outstanding shares - basic . . . . . . . . . . . . . 1,255 1,546 1,255 1,553
Stock options . . . . . . . . . . . . . . . . . . . 55 33 53 30
------ ------ ------ -------
Outstanding shares - assuming dilution . . . . . . . 1,310 1,579 1,308 1,583
====== ====== ====== =======
NET INCOME PER COMMON SHARE
Basic . . . . . . . . . . . . . . . . . . . . . . . $1.48 $2.05 $1.75 $7.44
Assuming dilution . . . . . . . . . . . . . . . . . $1.42 $2.01 $1.68 $7.30
</TABLE>
9. SUBSEQUENT EVENT
In July 1998, the Company purchased the owner's rental contracts,
real estate and certain other assets for $2.1 million at The Enclave
Suites resort condominium hotel located in Orlando, Florida.
Page 15
<PAGE> 16
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 $1,905,000 for the second quarter
ended June 30, 1998, compared to net income of $3,221,000 in the 1997
period. The six month net income of $2,249,000 compared to net income of
$11,602,000 in the 1997 period. Total revenue for the 1998 second quarter
was $32,025,000, compared to $36,258,000 in the prior-year period. For the
six months, revenue was $63,125,000, compared to $88,073,000 in the
prior-year period. The 1997 six months results included a gain of
$18,277,000 from the sale of the Company's investment in ShowBiz, partially
offset by a related tax charge of $9,485,000.
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 $1,393,000 for the quarter ended June 30, 1998
decreased by $152,000, or 10%, from $1,545,000 in the prior-year period.
Fee income of $2,635,000 for the six months increased by $117,000 from
$2,518,000 for the similar period a year ago. Fees are derived from 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 various third parties. The
fluctuations are due primarily to the timing of leasing fees earned from
third party owners, partially offset by a decline in fees for construction
supervision services.
The equity income from investments in HRP represents the Company's
recognition of its pro rata share of the income reported by HRP and
amortization of negative goodwill. For the 1998 second quarter, the
Company reported income of $428,000 compared to income of $316,000 in the
period a year ago. The comparative six month amounts were income of
$366,000 in 1998 and $406,000 in 1997. The six month decline resulted
principally from HRP's recognition of an extraordinary loss from early debt
extinguishment in the 1998 first quarter.
Expenses. Administrative expenses of $460,000 and $1,015,000 , in the
1998 second quarter and six month periods, decreased from $579,000 and
$1,114,000 in the comparable year-ago periods, due to lower leasing
commissions paid in connection with the reduced leasing fees earned from
third party owners.
Amortization expense of $168,000 for the second quarter and $336,000
for the six months in both the 1998 and 1997 periods relate to HRC's
general partner investment in HRP to the extent allocated to management
rights.
Interest expense decreased to $-0- from $40,000 in the 1998 second
quarter and to $58,000 from $80,000 in the six month period, due to reduced
charges in the 1998 periods for the HRP Participation Amount discussed in
Note 4 on the related $500,000 promissory note pending the outcome of
litigation.
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 in November 1996, it effectively acquired
ownership of the assets formerly held by HEC. Following the merger,
certain HEC assets were transferred to two wholly owned entities. The two
entities, in addition to other energy assets which remain with the Company,
constitute the Company's investment in the energy industry. The general
partner interest in HEP entitles the general partner to interests in HEP's
properties ranging from 2% to 25%. The Company also owns an approximate
6.5% interest in HEP limited partner units. 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
Page 16
<PAGE> 17
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 1998 second quarter increased $334,000, or 52%, to
$982,000 from $648,000. For the six months, gas revenue increased
$135,000, or 8%, to $1,845,000 from $1,710,000. The increase in gas
revenue for the six months was due primarily to an increase in production
to 879,000 mcf from 703,000 mcf, partially offset by a decrease in the
average gas price to $2.10 from $2.43 per mcf. Oil revenue for the 1998
second quarter decreased $78,000, or 20%, to $317,000 from $395,000. For
the six months, oil revenue declined by $277,000, or 27%, to $743,000 from
$1,020,000. The decrease for the six months was attributable to a decrease
in the average price per barrel to $13.27 from $20.40, partially offset by
an increase in production to 56,000 barrels from 50,000 barrels. The
increase in oil and gas production is primarily due to the shut-in of two
wells in Louisiana while workover procedures were performed during the
second quarter of 1997.
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 decreases in other
income to $24,000 for the 1998 quarter from $146,000 in the 1997 period and
to $74,000 for the 1998 six month period from $224,000 in the 1997 period
are primarily due to a decrease in HEP's equity in earnings of affiliate
due to a property impairment taken by HEP's affiliate during the 1998
second quarter.
Expenses. Operating expenses increased by $69,000 to $401,000 for the
1998 second quarter from $332,000 in the prior-year quarter and increased
by $140,000 to $800,000 for the six months from $660,000 as a result of
increased production taxes resulting from the increased production
described above.
Depreciation, depletion and amortization decreased to $309,000 for the
1998 second quarter and increased to $686,000 for the six months compared
to $318,000 and $627,000 in the year-ago periods. The increase for the six
month period is attributable to higher depletion in 1998 due to the
increase in production.
Administrative expenses decreased by $12,000 for the 1998 second
quarter to $221,000 from $233,000 in the 1997 quarter and decreased by
$62,000 to $446,000 for the 1998 six month period from $508,000 due to a
decrease in allocated internal overhead.
Interest expense increased by $25,000 to $129,000 for the 1998 second
quarter compared to $104,000 in 1997 and increased by $51,000 to $275,000
for the 1998 six month period, compared to $224,000 in 1997, due to an
increase in the Company's term loan in November 1997 and an increase in the
pro rata share of HEP's interest expense due to HEP's higher outstanding
debt in 1998.
Operating Subsidiaries. The business segments of the Company's
operating subsidiaries consist of textile products and hotels.
TEXTILE PRODUCTS.
Revenue. Sales of $22,297,000 decreased $4,682,000, or 17%, in the
1998 second quarter, compared to $26,979,000 in the 1997 quarter. The
comparative six month sales decreased $4,872,000, or 10%, to $45,612,000
from $50,484,000 in 1997. Sales of the distribution businesses were lower
in the 1998 periods than in 1997, due to decreased demand for textile
products in consumer markets, which was partially offset by increased sales
of industrial products. This appears to be the result of a high level of
U.S. consumer spending on durable goods versus nondurable, unusual weather
patterns affecting outerwear sales and availability of lower priced Asian
imports. The decrease in sales at the processing plants was less than 1%.
Expenses. Cost of sales of $19,284,000 decreased $3,894,000, or 17%,
from $23,178,000 in the 1998 second quarter and decreased $4,106,000, or 9%,
to $39,442,000 from $43,548,000 for the six months. The decrease in cost
of sales was
Page 17
<PAGE> 18
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
principally the result of the decrease of sales revenue. The lower gross
profit margin for the 1998 second quarter (13.5% versus 14.1%) and the
six-month periods (13.5% versus 13.7%) resulted from lower gross profit
margin in distribution businesses due to competitive market pressures
experienced in 1998.
Administrative and selling expenses of $2,269,000 decreased by
$128,000 in the 1998 second quarter from $2,397,000 for the comparable 1997
period, and decreased $126,000 for the six-month period to $4,532,000 from
$4,658,000 for the comparable 1997 period.
Interest expense decreased by $7,000 to $279,000 for the 1998 second
quarter from $286,000 in 1997, and increased by $20,000 for the six months
to $548,000 from $528,000 due to fluctuating average borrowings during the
periods.
HOTELS
Revenue. Sales of $5,348,000 in the 1998 second quarter decreased by
$231,000, or 4% from the year-ago amount of $5,579,000. The 1998 six-month
hotel sales of $10,346,000 decreased by $1,090,000, or 10%, compared to
$11,436,000 for the 1997 period. The Longboat Key Holiday Inn revenues for
the six months declined by $836,000, as a result of an extensive renovation
project, which began in October 1997 and was completed in April 1998, and
adverse weather conditions. For the remaining hotel properties, the
average daily rate declined 3.2% and the average occupancy level was
unchanged in the 1998 six months compared to the prior-year period.
Expenses. Operating expenses of $4,555,000 for the 1998 second
quarter were up $54,000 from $4,501,000 in 1997. The 1998 six month hotel
operating expenses decreased by $49,000 to $8,980,000, compared to
$9,029,000 for the 1997 period. The reduction for the six months was
attributable to minor decreases at the various properties, partially offset
by an increase of $57,000 at the Residence Inn hotel in Greenville, South
Carolina.
Depreciation and amortization expense decreased by $15,000 to $669,000
for the 1998 second quarter from $684,000 in the prior-year period.
Depreciation and amortization for the 1998 and 1997 six month periods were
$1,338,000 and $1,374,000, respectively. The decrease is attributable to
the full amortization of the leasehold interest for the Oklahoma City
Embassy Suite in June 1997, offset by additional depreciation from recent
capital expenditures at the remaining properties.
Interest expense decreased by $119,000 to $249,000 for the 1998 second
quarter from $368,000 in 1997 and decreased by $231,000 to $501,000 for the
six month period from $732,000, principally due to the refinancing of the
mortgage loans in the 1997 fourth quarter on the Residence Inn hotels in
Tulsa, Oklahoma and Greenville, South Carolina at more favorable interest
rates.
ASSOCIATED COMPANY
Revenue. The 1997 six month period includes income of $1,139,000 from
the Company's pro-rata share of ShowBiz results using the equity method of
accounting prior to the sale. In March 1997 the Company completed the sale
of its entire 2,632,983 ShowBiz shares at $15.68 per share, net of
underwriting commissions, and reported a gain of $18,277,000 from the
transaction. See Note 2.
Expenses. Interest recovery of $1,256,000 for the 1997 second quarter
was primarily attributable to the settlement of litigation involving the
ShowBiz Participation Amount with the Integra Unsecured Creditors Trust.
The Company had recorded the potential amount of $1,675,000 for the ShowBiz
Participation Amount provisions associated with the $4,000,000 promissory
note in the 1997 first quarter, which was adjusted to the settlement amount
in the 1997 second quarter.
Page 18
<PAGE> 19
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OTHER
Revenue. In May 1998, the Company favorably settled a 1996 litigation
claim involving its former merchant banking activities for $1,025,000 in
cash, which has been reported as income in the 1998 second quarter. Fee
income in the 1998 second quarter of $138,000 and $275,000 for the six
months compares to the 1997 amounts of $179,000 and $285,000, respectively.
The decreases are primarily due to a modification of a consulting agreement
with one of the Company's affiliated companies. Interest on short-term
investments and other income decreased by $309,000 to $73,000 for the 1998
second quarter and decreased by $370,000 to $204,000 for the 1998 six
months from $382,000 and $574,000, respectively. The decreases were
primarily attributable to lower interest income earned on the Company's
short-term investments, and lower rental income from the subleasing of
executive office space formerly occupied by the Company's affiliated entity
- Integra-A Hotel and Restaurant Company, which lease expired in May 1998.
Expenses. Administrative expenses of $795,000 for the 1998 second
quarter increased by $58,000, or 8%, from the prior year amount of
$737,000, and declined in the 1998 six month period by $17,000, or 1%, to
$1,360,000, compared to the prior year amount of $1,377,000. The 1998
second quarter and six month expenses included a payment of $145,000 for
the value of retiring unexercised stock options.
Interest expense in the amount of $220,000 for the 1998 second quarter
decreased by $894,000 from the prior year amount of $1,114,000 and
decreased $1,761,000 for the six months to $459,000 from the prior year
amount of $2,220,000. The decreases were primarily due to the Company's
repurchase of $12,875,000 of its 13.5% Debentures pursuant to a self-tender
offer completed in June 1997 and the redemption of the remaining
$14,287,000 balance of its outstanding 13.5% Debentures completed in
December 1997. Additionally, the Company repurchased 7% Debentures with a
face amount of $2,253,000 in January 1998, to satisfy the balance of a
sinking fund requirement contained in the indenture. See Note 5.
Income taxes. Income taxes were $112,000 for the 1998 second quarter
and $131,000 in the 1997 quarter. The 1998 quarter included a $20,000
federal current charge and $92,000 for state taxes compared to the 1997
second quarter which included a $25,000 federal current charge and $106,000
for state taxes. The 1998 six month period included a $30,000 federal
current charge and $177,000 for state taxes. The 1997 six month period
included an $8,960,000 non-cash federal deferred tax charge, a federal
current charge of $525,000 for alternative minimum tax (both charges
primarily relating to the ShowBiz sale) and $241,000 for state taxes. The
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. See Note 6.
As of June 30, 1998, the Company had approximately $115,000,000 of tax
net operating loss carryforwards ("NOLs") and temporary differences to
reduce future federal income tax liability, including $42,944,000 of NOLs
which expire in the 1998 calendar year. 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.
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 utilization of the NOLs. Management
periodically re- evaluates its tax planning strategies based upon changes
in facts and circumstances and, accordingly, considers potential
adjustments to the valuation allowance of the deferred tax asset. 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 19
<PAGE> 20
THE HALLWOOD GROUP INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Extraordinary gain from extinguishment of debt. The Company
recognized an extraordinary gain from debt extinguishment of $107,000 in
the 1998 first quarter from the purchase of 7% Debentures having a face
amount of $2,253,000 for a discounted amount of $2,146,000. During the
1997 second quarter, the Company recognized an extraordinary gain of
$877,000, which was attributable to the partial repurchase of 13.5%
Debentures pursuant to the self-tender offer completed in June 1997.
Page 20
<PAGE> 21
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, 1998
totaled $2,937,000.
The Company's real estate segment generates funds principally from
its property management and leasing activities, without significant
additional capital costs. All of the HRP limited partnership units are
subject to a limited negative pledge on the Company's energy term loan. If
the Company pledges designated HRP units, as defined, having a market value
up to $2,000,000, the negative pledge can be released.
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, the Company reports its share of the long-term
obligations of its HEP affiliate which was $4,787,000 at June 30, 1998.
HEP's borrowings are secured by a first lien on approximately 80% in value
of HEP's oil and gas properties. HEP's unused borrowing capacity under the
revolving credit agreement was $22,800,000 at June 30, 1998. HEPGP
amended, restated and increased its term loan to $4,000,000 in November
1997 which had a balance of $3,067,000 at June 30, 1998. The term loan
contains a provision which prohibits HEPGP from making any distribution to
the Company during the term of the loan which matures in May 2000.
In February 1998, HEP closed its public offering of 1.8 million Class
C units priced at $10.00 per unit. Proceeds to HEP, net of underwriting
discounts and expenses, were approximately $16,315,000. HEP used
$14,000,000 of the net proceeds to repay borrowings and applied the
remaining amount towards the repayment of HEP's outstanding contract
settlement obligation.
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, 1998, Brookwood had $3,708,000 of
unused borrowing capacity on its line of credit. In April 1998, the
Company received a $500,000 cash dividend from Brookwood on its preferred
stock and is expected to receive an additional $284,000 in September 1998.
Future dividends will be paid as permitted by the 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 Company has
recently renovated the Longboat Key Holiday Inn hotel with part of the
financing provided by the owner, and has been informed by Marriott that
substantial renovations will have to be made to each of the three Residence
Inn hotels prior to the renewal of their franchise in January 2000. In
July 1998, the Company acquired the owner's rental contracts to manage a
hotel condominium resort in Orlando, Florida, for which it will receive
monthly management fees.
Management believes that it will have sufficient funds for operations
and to satisfy its obligations.
Information Systems and the Year 2000. As the year 2000 approaches,
there are uncertainties concerning whether computer systems will properly
recognize date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or fail. The Company's primary software package has been
developed and is continually updated by a third-party provider, who has
provided assurances that timely updates will be made available to ensure
full Year 2000 compliance of the software package. The Company expects to
receive the fully tested and updated software package in 1998 and
anticipates that it will incur nominal costs associated with its software
or hardware operating systems for this process. Additionally, the Company
is currently in the process of verifying that its affiliated entities,
service providers and other external parties are addressing and resolving
their Year 2000 compliance. Failure by the Company, or its affiliates,
vendors or customers, to complete Year 2000 compliance work in a timely
manner could have a material adverse effect on the Company's operations.
Page 21
<PAGE> 22
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.
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) 10.30 -Amendment No. 4, dated as of March 18, 1998, to Credit Agreement
dated as of January 7, 1997, among Brookwood Companies Incorporated,
Kenyon Industries, Inc. and Brookwood Laminating, Inc., as Borrowers
and The Bank of New York, filed herewith Page 24-27
(ii) 27 - Financial Data Schedule Page 28
(b) Reports on Form 8-K None
</TABLE>
Page 22
<PAGE> 23
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: August 12, 1998 By: /s/ Melvin J. Melle
----------------------------------
Melvin J. Melle, Vice President
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Page 23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.30 Amendment No. 4 to Credit Agreement
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.30
EXECUTION COPY
AMENDMENT NO. 4 TO
CREDIT AGREEMENT
AMENDMENT NO. 4 dated as of March 18, 1998 (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, which Credit Agreement was
amended by (a) Amendment No. 1 to Credit Agreement, dated as of April 1, 1997,
(b) Amendment No. 2 dated as of May 23, 1997 and (c) Amendment No. 3 dated as of
June 25, 1997 (the "Prior Amendments").
WHEREAS, the parties hereto desire to further 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 (A) for the period
March 18, 1998 through April 28, 1998 - $15,000,000; (B) for the
period April 29, 1998 through August 31, 1998 - $17,500,000, and
(C) commencing September 1, 1998 - $15,000,000, and thereafter
$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 and by the Prior
Amendments, and references in any other Loan Documents to the Maximum Amount of
the Loans will be a reference to the Maximum Amount, as herein defined.
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 and 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
<PAGE> 2
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 be deemed effective
as of March 18, 1998 upon receipt by the Bank of (a) an original counterpart of
this Amendment executed by each of the Borrowers, (b) an original Endorsement
No. 3 to Revolving Credit Note in the form of Exhibit A hereto executed by each
of the Borrowers, and (c) a modification fee relative to this Amendment in the
amount of $10,000.
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.
2
<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: VP 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/ JAMES J. DUCEY
----------------------------
Name: James J. Ducey
Title: Vice President
3
<PAGE> 4
Exhibit A
As of March 18, 1998
ENDORSEMENT NO. 3
BROOKWOOD COMPANIES INCORPORATED, a Delaware corporation, KENYON
INDUSTRIES, INC., a Delaware corporation, BROOKWOOD LAMINATING, INC., a Delaware
corporation, and THE BANK OF NEW YORK hereby agree that the Revolving Credit
Note to which this Endorsement is attached (the "Note") be and hereby is amended
as follows:
A. Delete the dollar amount $15,000,000 appearing in the upper left
hand comer of the Note and substitute therefor the dollar amount $17,500,000.
B. Delete the dollar amount stated as "FIFTEEN MILLION AND 00/100
DOLLARS" appearing in the first paragraph of the Note and substitute therefor
the following: "SEVENTEEN MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS."
This Endorsement will become effective as of March 18, 1998.
THE BORROWERS:
BROOKWOOD COMPANIES INCORPORATED
By: /s/ DUANE O. SCHMIDT
----------------------------
Name: Duane O. Schmidt
Title: VP Finance
KENYON INDUSTRIES, INC.
By: /s/ DUANE O. SCHMIDT
----------------------------
Name: Duane O. Schmidt
Title: Treasurer
BROOKWOOD LAMINATING, INC.
By: /s/ DUANE O. SCHMIDT
----------------------------
Name: Duane O. Schmidt
Title: Treasurer
THE BANK:
THE BANK OF NEW YORK
By: /s/ JAMES J. DUCEY
----------------------------
Name: James J. Ducey
Title: Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,937
<SECURITIES> 7,227
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 15,444
<CURRENT-ASSETS> 0
<PP&E> 163,699
<DEPRECIATION> (130,984)
<TOTAL-ASSETS> 85,151
<CURRENT-LIABILITIES> 0
<BONDS> 21,770
1,000
0
<COMMON> 160
<OTHER-SE> 15,960
<TOTAL-LIABILITY-AND-EQUITY> 85,151
<SALES> 0
<TOTAL-REVENUES> 63,125
<CGS> 0
<TOTAL-COSTS> 58,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,841
<INCOME-PRETAX> 2,349
<INCOME-TAX> 207
<INCOME-CONTINUING> 2,142
<DISCONTINUED> 0
<EXTRAORDINARY> 107
<CHANGES> 0
<NET-INCOME> 2,249
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.68
</TABLE>
